================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 1-3970
--------------------
HARSCO CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-1483991
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(State of incorporation) (I.R.S. Employer Identification No.)
Camp Hill, Pennsylvania 17001-8888
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number (717) 763-7064
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [_]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2004
----- ----------------------------
Common stock, par value $1.25 per share 41,140,727
================================================================================
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2004 2003
===================================================================================================================================
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 440,700 $ 374,119 $ 846,607 $ 721,722
Product sales 176,877 162,341 327,243 302,640
------------------------------------------------------------------- ----------- ----------- ----------- -----------
TOTAL REVENUES 617,577 536,460 1,173,850 1,024,362
------------------------------------------------------------------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 326,594 272,486 631,386 534,223
Cost of products sold 141,284 131,356 265,480 245,293
Selling, general and administrative expenses 89,455 81,453 177,459 161,965
Research and development expenses 676 800 1,381 1,672
Other expenses 1,953 1,399 3,573 2,337
------------------------------------------------------------------- ----------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES 559,962 487,494 1,079,279 945,490
------------------------------------------------------------------- ----------- ----------- ----------- -----------
OPERATING INCOME FROM CONTINUING OPERATIONS 57,615 48,966 94,571 78,872
Equity in income of unconsolidated entities, net 74 99 172 261
Interest income 488 379 1,201 1,076
Interest expense (10,038) (10,259) (20,320) (20,526)
------------------------------------------------------------------- ----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST 48,139 39,185 75,624 59,683
Income tax expense (14,942) (12,135) (23,469) (18,485)
------------------------------------------------------------------- ----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 33,197 27,050 52,155 41,198
Minority interest in net income (2,217) (1,596) (4,318) (3,274)
------------------------------------------------------------------- ----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 30,980 25,454 47,837 37,924
------------------------------------------------------------------- ----------- ----------- ----------- -----------
DISCONTINUED OPERATIONS:
Income/(loss) from operations of discontinued business (426) 3 (416) (209)
Gain/(loss) on disposal of discontinued business 59 233 (88) 528
Income related to discontinued defense business -- -- 224 --
Income tax benefit (expense) 132 (85) 112 (115)
------------------------------------------------------------------- ----------- ----------- ----------- -----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (235) 151 (168) 204
------------------------------------------------------------------- ----------- ----------- ----------- -----------
NET INCOME $ 30,745 $ 25,605 $ 47,669 $ 38,128
=================================================================== =========== =========== =========== ===========
Average shares of common stock outstanding 41,080 40,615 41,009 40,579
Basic earnings per common share:
Continuing operations $ 0.75 $ 0.63 $ 1.17 $ 0.93
Discontinued operations (0.01) -- -- 0.01
------------------------------------------------------------------- ----------- ----------- ----------- -----------
BASIC EARNINGS PER COMMON SHARE $ 0.75(a) $ 0.63 $ 1.16(a) $ 0.94
=================================================================== =========== =========== =========== ===========
Diluted average shares of common stock outstanding 41,525 40,872 41,493 40,764
Diluted earnings per common share:
Continuing operations $ 0.75 $ 0.62 $ 1.15 $ 0.93
Discontinued operations (0.01) 0.01 -- 0.01
------------------------------------------------------------------- ----------- ----------- ----------- -----------
DILUTED EARNINGS PER COMMON SHARE $ 0.74 $ 0.63 $ 1.15 $ 0.94
=================================================================== =========== =========== =========== ===========
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.275 $ 0.2625 $ 0.55 $ 0.525
=================================================================== =========== =========== =========== ===========
(a) Does not total due to rounding.
See accompanying notes to consolidated financial statements.
-2-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30 DECEMBER 31
(IN THOUSANDS) 2004 2003(a)
=============================================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 71,534 $ 80,210
Accounts receivable, net 499,376 446,875
Inventories 216,378 190,221
Other current assets 49,371 47,045
- -------------------------------------------------------------------------------- ----------- -----------
TOTAL CURRENT ASSETS 836,659 764,351
- -------------------------------------------------------------------------------- ----------- -----------
Property, plant and equipment, net 869,159 866,332
Goodwill, net 409,164 407,846
Other assets 96,921 97,483
Assets held for sale 1,563 2,023
- -------------------------------------------------------------------------------- ----------- -----------
TOTAL ASSETS $ 2,213,466 $ 2,138,035
================================================================================ =========== ===========
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 16,452 $ 14,854
Current maturities of long-term debt 19,897 14,252
Accounts payable 199,385 188,430
Accrued compensation 47,416 46,034
Income taxes 43,489 45,116
Dividends payable 11,314 11,238
Other current liabilities 197,338 175,151
- -------------------------------------------------------------------------------- ----------- -----------
TOTAL CURRENT LIABILITIES 535,291 495,075
- -------------------------------------------------------------------------------- ----------- -----------
Long-term debt 593,972 584,425
Deferred income taxes 69,880 66,855
Insurance liabilities 48,709 47,897
Retirement plan liabilities 116,716 115,190
Other liabilities 49,782 50,707
Liabilities associated with assets held for sale 589 898
- -------------------------------------------------------------------------------- ----------- -----------
TOTAL LIABILITIES 1,414,939 1,361,047
- -------------------------------------------------------------------------------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock 84,529 84,197
Additional paid-in capital 129,277 120,070
Accumulated other comprehensive expense (182,672) (169,427)
Retained earnings 1,370,864 1,345,787
Treasury stock (603,471) (603,639)
- -------------------------------------------------------------------------------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 798,527 776,988
- -------------------------------------------------------------------------------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,213,466 $ 2,138,035
================================================================================ =========== ===========
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2003 information has been reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
-3-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30
(IN THOUSANDS) 2004 2003
========================================================================= ==========================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47,669 $ 38,128
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 88,401 80,773
Amortization 1,189 718
Equity in income of unconsolidated entities, net (171) (262)
Dividends or distributions from unconsolidated entities 544 1,335
Other, net 5,770 2,498
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (56,854) (36,460)
Inventories (26,686) 335
Accounts payable 11,606 (10,880)
Net disbursements related to discontinued defense business (154) (434)
Other assets and liabilities 25,644 14,577
- ------------------------------------------------------------------------- --------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 96,958 90,328
========================================================================= ==========================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (99,156) (62,789)
Purchase of businesses, net of cash acquired (5,165) (23,486)
Proceeds from sales of assets 2,748 12,957
- ------------------------------------------------------------------------- --------------------------
NET CASH USED BY INVESTING ACTIVITIES (101,573) (73,318)
========================================================================= ==========================
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 2,339 (10,968)
Current maturities and long-term debt:
Additions 99,004 82,292
Reductions (85,910) (81,107)
Cash dividends paid on common stock (22,518) (21,286)
Common stock issued-options 7,975 4,047
Other financing activities (2,596) (3,552)
- ------------------------------------------------------------------------- --------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,706) (30,574)
========================================================================= ==========================
Effect of exchange rate changes on cash (2,355) 7,407
- ------------------------------------------------------------------------- --------------------------
Net decrease in cash and cash equivalents (8,676) (6,157)
Cash and cash equivalents at beginning of period 80,210 70,132
- ------------------------------------------------------------------------- --------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 71,534 $ 63,975
========================================================================= ==========================
See accompanying notes to consolidated financial statements.
-4-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN THOUSANDS) 2004 2003 2004 2003
- -------------------------------------------------------------------------------- -------- -------- -------- --------
Net income $ 30,745 $ 25,605 $ 47,669 $ 38,128
- -------------------------------------------------------------------------------- -------- -------- -------- --------
Other comprehensive income (expense):
Foreign currency translation adjustments (8,566) 28,442 (11,757) 33,098
Net losses on cash flow hedging instruments, net of deferred
income taxes -- (8) (25) (5)
Pension liability adjustments, net of deferred income taxes 1,494 (5,616) (1,567) 17,074
Reclassification adjustment for loss on cash flow hedging
instruments, net of deferred income taxes included in net
income -- -- 104 --
Reclassification adjustment for loss on marketable securities,
net of deferred income taxes included in net income -- -- -- 2
- -------------------------------------------------------------------------------- -------- -------- -------- --------
Other comprehensive income (expense) (7,072) 22,818 (13,245) 50,169
- -------------------------------------------------------------------------------- -------- -------- -------- --------
TOTAL COMPREHENSIVE INCOME $ 23,673 $ 48,423 $ 34,424 $ 88,297
================================================================================ ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-5-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
A. OPINION OF MANAGEMENT
Financial information furnished herein, which is unaudited, in the opinion of
management reflects all adjustments (all of which are of a normal recurring
nature) that are necessary to present a fair statement of the interim period.
This unaudited interim information should be read in conjunction with the
Company's annual Form 10-K filing for the year ended December 31, 2003.
B. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform with
current year classifications. These reclassifications relate principally to
segment information, which has been reclassified to conform to the current
presentation as described in Note D, "Review of Operations by Segment."
Additional reclassifications have been made between the property, plant and
equipment accounts and the assets held for sale account to reflect assets
currently classified as held for sale as permitted by SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."
As a result of these reclassifications, certain 2003 amounts presented for
comparative purposes will not individually agree with previously filed Forms
10-K or 10-Q.
C. OPTIONS FOR COMMON STOCK
The Company uses the intrinsic value method to account for options granted to
employees for the purchase of common stock. No compensation expense is
recognized on the grant date, since at that date, the option price equals the
market price of the underlying common stock.
The Company's net income and net income per common share would have been reduced
to the pro forma amounts indicated below if compensation cost for the Company's
stock option plan had been determined based on the fair value at the grant date
for awards in accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN THOUSANDS, EXCEPT PER SHARE) 2004 2003 2004 2003
- ---------------------------------------- ---------------------------------------------------
Net income:
As reported $ 30,745 $ 25,605 $ 47,669 $ 38,128
Compensation expense (a) -- (353) (96) (834)
---------------------------------------------------
Pro forma $ 30,745 $ 25,252 $ 47,573 $ 37,294
===================================================
Basic earnings per share:
As reported $ 0.75 $ 0.63 $ 1.16 $ 0.94
Pro forma 0.75 0.62 1.16 0.92
Diluted earnings per share:
As reported 0.74 0.63 1.15 0.94
Pro forma 0.74 0.62 1.15 0.92
- ---------------------------------------- ---------------------------------------------------
(a) Total stock-based employee compensation expense determined under fair
value-based method for all awards, net of related tax effects.
D. REVIEW OF OPERATIONS BY SEGMENT
In June 2004, the Company announced a new identity for its Gas and Fluid Control
Segment and renamed the Gas and Fluid Control Segment to Gas Technologies.
Additionally, the Other Infrastructure Products and Services ("all other")
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Category has been renamed Engineered Products and Services ("all other")
Category. Except as noted below, there have been no changes to the components of
this Segment or Category.
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
OPERATING
OPERATING INCOME
(IN THOUSANDS) SALES (a) INCOME (b) SALES (a) (LOSS) (b)
----------------------------------------------------------------------------------------
Mill Services Segment $ 242,249 $ 24,849 $ 203,770 $ 25,663
Access Services Segment 183,127 14,322 157,902 10,726
Gas Technologies Segment (c) 82,954 5,266 69,739 3,601
----------------------------------------------------------------------------------------
Segment Totals 508,330 44,437 431,411 39,990
Engineered Products & Services
("all other") Category (c) 109,247 13,177 105,049 9,613
General Corporate -- 1 -- (637)
----------------------------------------------------------------------------------------
Consolidated Totals $ 617,577 $ 57,615 $ 536,460 $ 48,966
========================================================================================
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
OPERATING
INCOME OPERATING
(IN THOUSANDS) SALES (a) (LOSS) (b) SALES (a) INCOME (b)
----------------------------------------------------------------------------------------
Mill Services Segment $ 478,542 $ 50,099 $ 392,016 $ 42,393
Access Services Segment 340,934 17,722 305,306 15,353
Gas Technologies Segment (c) 160,516 8,354 137,932 6,928
----------------------------------------------------------------------------------------
Segment Totals 979,992 76,175 835,254 64,674
Engineered Products & Services
("all other") Category (c) 193,858 19,340 189,108 13,458
General Corporate -- (944) -- 740
----------------------------------------------------------------------------------------
Consolidated Totals $ 1,173,850 $ 94,571 $ 1,024,362 $ 78,872
========================================================================================
(a) Sales from continuing operations.
(b) Operating income (loss) from continuing operations.
(c) Segment information for prior periods has been reclassified to
conform with the current presentation. Due to management changes,
effective January 1, 2004, the air-cooled heat exchangers business,
which was previously classified in the Gas and Fluid Control
Segment, is classified in the Engineered Products & Services ("all
other") category.
-7-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME
BEFORE INCOME TAXES AND MINORITY INTEREST
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN THOUSANDS) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
Segment Operating Income $ 44,437 $ 39,990 $ 76,175 $ 64,674
Engineered Products & Services
("all other") Category 13,177 9,613 19,340 13,458
General Corporate 1 (637) (944) 740
- ------------------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations 57,615 48,966 94,571 78,872
Equity in income of unconsolidated entities, net 74 99 172 261
Interest income 488 379 1,201 1,076
Interest expense (10,038) (10,259) (20,320) (20,526)
- ------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interest $ 48,139 $ 39,185 $ 75,624 $ 59,683
==============================================================================================================================
E. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable are net of an allowance for doubtful accounts of $21.6
million and $24.6 million at June 30, 2004 and December 31, 2003, respectively.
The decrease in the allowance for doubtful accounts is due principally to the
write-off of previously reserved accounts receivable. The provision for doubtful
accounts was $2.5 million and $(0.2) million for the six months ended June 30,
2004 and 2003, respectively.
Inventories consists of:
JUNE 30 DECEMBER 31
(IN THOUSANDS) 2004 2003
- ---------------------------------------------------------------------------------------
Finished goods $ 58,307 $ 59,739
Work-in-process 45,449 32,121
Raw materials and purchased parts 88,332 74,231
Stores and supplies 24,290 24,130
- ---------------------------------------------------------------------------------------
Total Inventory $ 216,378 $ 190,221
=======================================================================================
Inventories increased $26.2 million due to the following factors: increased raw
material prices (e.g., steel) across all of the Company's manufacturing
operations; increases at Gas Technologies due to normal increases from seasonal
low levels at the end of December 2003; and increased work-in-process
inventories due to long-lead-time orders currently being manufactured at the
railway track services and equipment business but not scheduled for delivery
until mainly the fourth quarter of 2004 or later.
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
JUNE 30 DECEMBER 31
(IN THOUSANDS) 2004 2003 (a)
- ---------------------------------------------------------------------------------------------------------------------
Land and improvements $ 39,471 $ 39,554
Buildings and improvements 177,161 176,168
Machinery and equipment 1,795,778 1,803,867
Uncompleted construction 55,034 37,505
- ---------------------------------------------------------------------------------------------------------------------
Gross property, plant and equipment 2,067,444 2,057,094
Less accumulated depreciation and facilities valuation allowance (1,198,285) (1,190,762)
- ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 869,159 $ 866,332
=====================================================================================================================
(a) As permitted by the Financial Accounting Standards Board (FASB)
Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," 2003 information has been reclassified for
comparative purposes.
G. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in carrying amounts of goodwill for the
six months ended June 30, 2004:
ENGINEERED
PRODUCTS &
SERVICES
MILL ACCESS GAS ("ALL OTHER") CONSOLIDATED
(IN THOUSANDS) SERVICES SERVICES TECHNOLOGIES CATEGORY TOTALS
- --------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003, net of
accumulated amortization $ 208,718 $ 154,298 $ 36,693 $ 8,137 $ 407,846
Goodwill acquired during year -- 1,474 -- -- 1,474
Other (principally foreign currency
translation) (1,570) 1,414 -- -- (156)
- --------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 2004, NET OF
ACCUMULATED AMORTIZATION $ 207,148 $ 157,186 $ 36,693 $ 8,137 $ 409,164
==============================================================================================================
Goodwill is net of accumulated amortization of $104.3 million and $105.2 million
at June 30, 2004 and December 31, 2003, respectively.
Intangible assets, which are included principally in Other assets on the
Condensed Consolidated Balance Sheet, totaled $10.7 million, net of accumulated
amortization of $9.2 million at June 30, 2004 and $10.4 million, net of
accumulated amortization of $8.4 million at December 31, 2003. The following
chart reflects these intangible assets by major category.
JUNE 30, 2004 DECEMBER 31, 2003
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- -------------------------------------------------------------------------------------------------------
Customer Relationships $ 6,937 $ 361 $ 6,373 $ 196
Non-compete agreements 4,888 3,847 4,863 3,671
Patents 4,295 3,507 4,304 3,351
Other 3,798 1,515 3,313 1,197
- -------------------------------------------------------------------------------------------------------
Total $ 19,918 $ 9,230 $ 18,853 $ 8,415
=======================================================================================================
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The increase in intangible assets is due principally to the acquisitions
discussed in Note H, "Acquisitions and Dispositions." As part of these
transactions, the Company acquired the following intangible assets (by major
class) which are subject to amortization:
ACQUIRED INTANGIBLE ASSETS
- ----------------------------------------------------------------------------------------------
(IN THOUSANDS) GROSS CARRYING RESIDUAL VALUE WEIGHTED-AVERAGE
AMOUNT AMORTIZATION PERIOD
- ----------------------------------------------------------------------------------------------
Customer relationships $ 584 None 5 years
Non-compete agreements 29 None 3 years
Other 471 None 6 years
--------------
Total $ 1,084
==============
There were no research and development assets acquired and written off in 2004
or 2003.
Amortization expense for intangible assets was $0.8 million and $0.4 million for
the six months ended June 30, 2004 and 2003, respectively. The following chart
shows the estimated amortization expense for the next five fiscal years based on
current intangible assets.
(IN THOUSANDS) 2004 2005 2006 2007 2008
- ---------------------------------------------------------------------------------------------------------
Estimated Amortization Expense $ 1,700 $ 1,500 $ 1,300 $ 1,100 $ 800
H. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
In April 2004, the Company's Access Services Segment acquired the Australian
distributor, Raffia Contracting Pty, and Raffia's sister company, Tower
International Pty. Both businesses are based in Sydney, New South Wales. Raffia
Contracting is involved in the supply and erection of scaffolding, working with
many of the major contractors in and around the state capital, while Tower
International provides light access sales and rentals throughout the area. The
combined businesses will be known as SGB Raffia. Additionally, in May 2004 the
Company acquired a small business in Holland to expand its international mill
services operations. The proforma impact of these acquisitions was not material.
DISPOSITIONS - ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
In management's ongoing strategic efforts to increase the Company's focus on
core industrial services, certain manufacturing operations have been divested.
Effective March 21, 2002, the Board of Directors authorized the sale of the
Capitol Manufacturing business, a business unit of the Gas Technologies Segment.
A significant portion of the Capitol Manufacturing business was sold on June 28,
2002. The Company continues to recognize income from inventory consigned to the
buyer in accordance with the sale agreement and when all revenue recognition
criteria have been met. This business has been included in discontinued
operations and the assets and liabilities have been separately identified on the
Balance Sheet as "held for sale" for all periods presented. There were no sales
from discontinued operations for the six months ended June 30, 2004 and 2003 as
the business was sold during 2002. The income (loss) from discontinued
operations does not include any charges to reduce the book value of the business
held for sale to its fair market value less cost to sell, since the fair value
of the business exceeded the book value.
Throughout 2003 and 2004, management approved the sale of certain long-lived
assets (primarily land and buildings) of the Access Services and Mill Services
Segments. Accordingly, these assets have been separately identified on the
Balance Sheet as "held for sale" for all periods presented.
-10-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The major classes of assets and liabilities "held for sale" included in the
Condensed Consolidated Balance Sheet are as follows:
JUNE 30 DECEMBER 31
(IN THOUSANDS) 2004 2003
- ------------------------------------------------------------------------------------------------------
ASSETS
Accounts receivable, net $ 19 $ 411
Inventories 166 222
Other current assets 23 20
Property, plant and equipment, net 1,355 1,370
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS "HELD FOR SALE" $ 1,563 $ 2,023
======================================================================================================
LIABILITIES
Accounts payable $ 14 $ 512
Other current liabilities 440 386
Other liabilities 135 --
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES ASSOCIATED WITH ASSETS "HELD FOR SALE" $ 589 $ 898
======================================================================================================
I. COMMITMENTS AND CONTINGENCIES
FEDERAL EXCISE TAX AND OTHER MATTERS RELATED TO THE FIVE-TON TRUCK CONTRACT
In 1995, the Company, the United States Army ("Army"), and the United States
Department of Justice concluded a settlement of Harsco's previously reported
claims against the Army relating to Federal Excise Tax ("FET") arising under a
completed 1986 contract for the sale of five-ton trucks to the Army. On
September 27, 1995, the Army paid the Company $49 million in accordance with the
settlement terms. The Company released the Army from any further liability for
those claims, and the Department of Justice released the Company from a
threatened action for damages and civil penalties based on an investigation
conducted by the Department's Commercial Litigation Branch that had been pending
for several years.
The settlement preserves the rights of the parties to assert claims and defenses
under the Internal Revenue Code, and rights of the Army and the Company to claim
certain amounts that may be owed by either party to reconcile possible
underpayments or overpayments on the truck contract as part of the formal
contract close-out process.
The settlement does not resolve the claim by the Internal Revenue Service
("IRS") that, contrary to the Company's position, certain cargo truck models
sold by the Company should be considered to have gross vehicle weights in excess
of the 33,000 pound threshold under FET law, are not entitled to an exemption
from FET under any other theory, and therefore are taxable. In 1999, the IRS
assessed an increase in FET of $30.4 million plus penalties and applicable
interest currently estimated to be $12.4 million and $73.3 million,
respectively, as of June 30, 2004. In October 1999, the Company posted an $80
million bond required as security by the IRS. This increase in FET takes into
account offsetting credits of $9.2 million, based on a partial allowance of the
Company's $31.9 million claim that certain truck components are exempt from FET.
The IRS disallowed in full the Company's additional claim that it is entitled to
the entire $52 million of FET (plus applicable interest estimated by the Company
to be $62.5 million as of June 30, 2004) the Company has paid on the five-ton
trucks, on the grounds that such trucks qualify for the FET exemption applicable
to certain vehicles specially designed for the primary function of off-highway
transportation. In August 2000, the Company filed legal action against the
Government in the U.S. Court of Federal Claims challenging the assessment and
seeking a refund of all FET that the Company has paid on five-ton trucks.
The settlement agreement with the Army preserved the Company's right to seek
reimbursement of after-imposed tax from the Army in the event that the cargo
trucks are determined to be taxable, but the agreement limited the reimbursement
to a maximum of $21 million. Additionally, in an earlier contract modification,
the Army accepted responsibility for $3.6 million of the potential tax, bringing
its total potential responsibility up to $24.6 million. As of September 30,
2000, the
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Army paid the Company this entire amount and the Company paid those funds to the
IRS, subject to its pending refund claim plus applicable interest. Thus, the
Company has satisfied a portion of the disputed tax assessment.
Even if the cargo trucks are ultimately held to be taxable, the Army's
contribution of $24.6 million toward payment of the tax (but not interest or
penalty, if any), would result in a net maximum liability for the Company of
$5.8 million plus penalties and applicable interest estimated as of June 30,
2004, to be $12.4 million and $73.3 million, respectively. The Company believes
it is unlikely that resolution of this matter will have a material adverse
effect on the Company's financial position; however, it could have a material
effect on quarterly or annual results of operations and cash flows.
As a result of developments in the case that occurred during the third and
fourth quarters of 2003, the Company has adjusted an accrual related to this
matter. These adjustments were included as income related to discontinued
defense business on the Company's Consolidated Statements of Income for the
three months ended September 30, 2003 and the three month period ended March 31,
2004. The Company's current expectation is that its future obligations for
finalizing this matter will approximate $0.4 million.
The Company, by letter dated August 2, 2004, received formal notice that the
Government had accepted a settlement proposal submitted by the Company. Pursuant
to the settlement, the Company will receive a refund of an estimated $12 million
to $13 million in taxes and interest. Payment of the refund is expected to be
received in the next four to six weeks. No recognition has been given in the
accompanying financial statements for the settlement.
ENVIRONMENTAL
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its financial
exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 include
accruals of $3.2 million and $3.3 million, respectively, for environmental
matters. The amounts charged against pre-tax income related to environmental
matters totaled $1.0 million and $0.6 million for the first six months of 2004
and 2003, respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position,
results of operations or cash flows.
In January 2002, the New Jersey Department of Environmental Protection ("NJDEP")
issued Notices of Civil Administrative Penalty Assessment to the Company for
violations of the New Jersey Air Pollution Control Act. The Notices allege that
the Company operated a slag processing plant in violation of the emission permit
for control of slag dust. The Agency assessed civil administrative penalties
totaling approximately $311,000 and the Company filed an appeal with the Agency.
In March 2003, NJDEP amended its assessment and reduced the proposed penalty to
$146,000. This amended order has been appealed. The Company ceased operations at
the plant in the fourth quarter of 2001 for unrelated reasons.
CUSTOMER RESTRUCTURING
On January 29, 2004, a customer of the Company announced that it had obtained an
order to initiate a Court-supervised restructuring under Canada's Companies'
Creditors Arrangement Act (the Act). The Company is actively monitoring this
restructuring to determine the Company's potential loss exposure, if any. The
Company's pre-petition net receivable balance with the customer as of June 30,
2004 was approximately $5.3 million. The Company intends to vigorously pursue
collection of the entire receivable balance pursuant to our rights and
obligations under the Act. The Company has been successful in collecting
substantially all of the pre-petition receivable amounts in several similar
non-Canadian cases where the customer has filed for bankruptcy court protection.
Accordingly, no reserve has been recognized as of June 30, 2004.
OTHER
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos over the past several decades. In their suits, the plaintiffs
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
have named as defendants many manufacturers, distributors and installers of
numerous types of equipment or products that allegedly contained asbestos.
The Company believes that the claims against it are without merit. The Company
has never been a producer, manufacturer or processor of asbestos fibers. Any
component within a Company product which may have contained asbestos would have
been purchased from a supplier. Based on scientific and medical evidence, the
Company believes that any asbestos exposure arising from normal use of any
Company product never presented any harmful airborne asbestos exposure, and
moreover, the type of asbestos contained in any component that was used in those
products is protectively encapsulated in other materials and is not associated
with the types of injuries alleged. Finally, in most of the depositions taken of
plaintiffs to date in the litigation against the Company, plaintiffs have failed
to identify any Company products as the source of their asbestos exposure.
The majority of the asbestos complaints have been filed in either New York or
Mississippi. Almost all of the New York complaints contain a standard claim for
damages of $20 million or $25 million against the approximately 90 defendants,
regardless of the individual's alleged medical condition, and without
identifying any Company product as the source of plaintiff's asbestos exposure.
With respect to the Mississippi complaints, most contain a standard claim for an
unstated amount of damages against the numerous defendants (typically 240 to
270), without identifying any Company product as the source of plaintiff's
asbestos exposure.
The Company has not paid any amounts in settlement of these cases, with the
exception of two settlements totaling less than $10,000 paid in 1998 from
insurance proceeds. The Company's insurance carrier has paid all legal costs and
expenses to date. The Company has liability insurance coverage available under
various primary and excess policies that the Company believes will be available
if necessary to substantially cover any liability that might ultimately be
incurred on these claims.
During the second quarter of 2004, there was a slight decrease in the total
number of pending cases, with the number of New York cases decreasing and the
number of Mississippi cases increasing by a smaller amount. Currently, there are
approximately 36,400 pending asbestos personal injury claims filed against the
Company. Approximately 26,200 of these cases were pending in the New York
Supreme Court for various counties in New York State and approximately 9,600 of
the cases were pending in state courts of various counties in Mississippi. The
other claims totaling approximately 600 are filed in various counties in a
number of state courts, and in U.S. Federal District Court for the Eastern
District of Pennsylvania, and those complaints assert lesser amounts of damages
than the New York cases or do not state any amount claimed.
As of June 30, 2004, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in all cases that have proceeded to trial. To
date, the Company has been dismissed from approximately 4,000 suits.
In view of the persistence of asbestos litigation nationwide, which has not yet
been sufficiently addressed either politically or legally, the Company expects
to continue to receive additional claims. However, there were developments
during the fourth quarter of 2002 that could have a favorable effect for the
Company regarding the pending claims and the number of future claims filed in
counties within New York City and in Mississippi state courts after 2002. On
December 19, 2002, the New York Supreme Court responsible for managing all
asbestos cases pending in the counties within New York City issued an Order
which created a Deferred or Inactive Docket for all pending and future asbestos
claims filed by plaintiffs who cannot demonstrate that they have a malignant
condition or discernible physical impairment, and an Active Docket for
plaintiffs who are able to show such medical conditions. The Court is reviewing
cases for docketing based on their date of filing, with the older pending cases
reviewed first. Cases designated as Active are then assigned to a "FIFO" trial
group, which groups are scheduled for trial in the designated months of either
February or August. For cases in which there has been a recent death or a
diagnosis of cancer, the Court reviews such cases on an expedited basis and, if
medically supported, such cases are transferred to an "In Extremis" trial group,
which groups are scheduled for trial in the designated months of either May or
November. As of June 30, 2004, the Company was listed as a defendant in 467
pending cases in New York that the Court has designated as Active and assigned
to trial groups. To date, the Company has been dismissed as a defendant prior to
trial in all New York cases that have proceeded to trial. The number of these
dismissals is currently 1,017.
Also, in the fourth quarter of 2002, Mississippi enacted tort reform legislation
that made various changes in the law favorable to the Company's defense and that
will apply to all cases filed on or after January 1, 2003. The majority of the
claims pending against the Company in Mississippi were filed in the fourth
quarter of 2002, in advance of the effective date of this more restrictive
legislation.
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The Company intends to continue its practice of vigorously defending these cases
as they are listed for trial and expects the insurance carriers to continue to
pay the legal costs and expenses. Management believes that the outcome of these
cases will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
The Company is subject to various other claims and legal proceedings covering a
wide range of matters that arose in the ordinary course of business. In the
opinion of management, all such matters are adequately covered by insurance or
by accruals, and if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
J. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
As described in Note 15, "Other (Income) and Expenses," to the Company's Form
10-K for the year ended December 31, 2003, the Company adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," (SFAS 146)
on January 1, 2003. SFAS 146 addresses significant issues regarding the
recognition, measurement and reporting of costs that are associated with exit
and disposal activities. These activities include restructuring activities that
were previously accounted for pursuant to the guidance that the Emerging Issues
Task Force (EITF) had set forth in EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," (EITF 94-3). The scope
of SFAS 146 also includes (1) costs related to terminating a contract that is
not a capital lease and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract.
Costs associated with exit or disposal activities are included as a component of
Other expenses on the Company's Condensed Consolidated Statements of Income.
This income statement classification principally includes impaired asset
write-downs, employee termination benefit costs and costs to exit activities,
offset by net gains on the disposal of non-core assets and is more fully
described in Note 15, "Other (Income) and Expenses," to the Company's Form 10-K
for the year ended December 31, 2003.
During the first six months of 2004 and 2003, the Company continued its strategy
to streamline operations. This strategy principally included continued staff
reductions in both administrative and operating positions. Under these
reorganization actions, the Company and its management have established and
approved specific plans of termination. During the six months ended June 30,
2004 and 2003, the Company initiated reorganization actions in several
operations, including, but not limited to, certain operations located in the
U.S., the U.K., Holland, Mexico and Germany (2003 only). There were no
individually material reorganization actions initiated during the six months
ended June 30, 2004 and 2003; however, the following table summarizes these
actions in aggregate for the Company:
EMPLOYEE TERMINATION BENEFITS COSTS AND PAYMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004
=================================================================================================================================
FIRST SECOND YEAR-TO-DATE
Original reorganization action period QUARTER QUARTER TOTAL
=================================================================================================================================
Employee termination benefits expense $ 630 $ 1,571 $ 2,201
- ---------------------------------------------------------------------------------------------------------------------------------
Payments:
In 1st quarter of 2004 (235) -- (235)
In 2nd quarter of 2004 (226) (608) (834)
- ---------------------------------------------------------------------------------------------------------------------------------
Total payments: (461) (608) (1,069)
Other: -- 41 41
- ---------------------------------------------------------------------------------------------------------------------------------
Remaining payments as of June 30, 2004 $ 169 $ 1,004 $ 1,173
=================================================================================================================================
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2003
- ----------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND SIX MONTHS JULY 1 -
Original reorganization action period QUARTER QUARTER ENDED JUNE 30 DEC 31
==================================================================================================================================
Employee termination benefits expense $ 1,590 $ 915 $ 2,505 $ 3,559
- ----------------------------------------------------------------------------------------------------------------------------------
Payments:
In 2003 (1,595) (852) (2,447) (1,391)
In 2004 (38) (5) (43) (1,286)
- ----------------------------------------------------------------------------------------------------------------------------------
Total payments: (1,633) (857) (2,490) (2,677)
Other: 109 (38) 71 43
- ----------------------------------------------------------------------------------------------------------------------------------
Remaining payments as of June 30, 2004 $ 66 $ 20 $ 86 $ 925
==================================================================================================================================
The total amount of costs expected to be incurred for the components of the
streamlining initiatives which have met the criteria described in SFAS 146 and
the costs incurred to date for the three months and the six months ended June
30, 2004 and 2003 by reportable segment were as follows:
EMPLOYEE TERMINATION BENEFITS COSTS BY SEGMENT
- ---------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) TOTAL COSTS TOTAL COSTS COSTS
EXPECTED TO BE COSTS INCURRED EXPECTED TO BE INCURRED
INCURRED TO DATE INCURRED TO DATE
- ---------------------------------------------------------------------------------------------------------------------------------
Mill Services Segment $ 677 $ 677 $ 406 $ 406
Access Services Segment 506 506 164 164
Gas Technologies Segment(a) 45 45 77 77
Engineered Products & Services ("all
other") Category(a) 343 343 125 125
Corporate -- -- 143 143
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 1,571 $ 1,571 $ 915 $ 915
=================================================================================================================================
(a) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business is classified
in the Engineered Products & Services ("all other") Category.
-15-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
EMPLOYEE TERMINATION BENEFITS COSTS BY SEGMENT
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) TOTAL COSTS TOTAL COSTS COSTS
EXPECTED TO BE COSTS INCURRED EXPECTED TO BE INCURRED
INCURRED TO DATE INCURRED TO DATE
- ---------------------------------------------------------------------------------------------------------------------------------
Mill Services Segment $ 885 $ 885 $ 1,401 $ 1,401
Access Services Segment 734 734 424 424
Gas Technologies Segment (a) 102 102 95 95
Engineered Products & Services ("all other") Category (a) 480 480 375 375
Corporate -- -- 210 210
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 2,201 $ 2,201 $ 2,505 $ 2,505
=================================================================================================================================
(a) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business is classified
in the Engineered Products & Services ("all other") Category.
The following table summarizes employee termination benefit costs and payments
(associated with continuing operations) related to reorganization actions
initiated prior to January 1, 2003 and accounted for under EITF 94-3:
(IN THOUSANDS)
Original reorganization action period 2002 2001
==============================================================================================================
Employee termination benefits expense $ 7,140 $ 10,135
- --------------------------------------------------------------------------------------------------------------
Payments:
In 2001 -- (6,142)
In 2002 (4,438) (1,997)
In 2003 (2,627) (2,215)
In 2004 (31) --
- --------------------------------------------------------------------------------------------------------------
Total payments: (7,096) (10,354)
Other: 42 253
- --------------------------------------------------------------------------------------------------------------
Remaining payments as of June 30, 2004 $ 86 $ 34
==============================================================================================================
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
K. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(IN THOUSANDS, EXCEPT AMOUNTS PER SHARE) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 30,980 $ 25,454 $ 47,837 $ 37,924
==================================================================================================================================
Average shares of common stock outstanding used
to compute basic earnings per common share
from continuing operations 41,080 40,615 41,009 40,579
Additional common shares to be issued assuming
exercise of stock options, net of shares assumed
reacquired 445 257 484 185
- ----------------------------------------------------------------------------------------------------------------------------------
Shares used to compute dilutive effect of stock
options 41,525 40,872 41,493 40,764
==================================================================================================================================
Basic earnings per common share from continuing
operations $ 0.75 $ 0.63 $ 1.17 $ 0.93
==================================================================================================================================
Diluted earnings per common share from continuing
operations $ 0.75 $ 0.62 $ 1.15 $ 0.93
==================================================================================================================================
Options to purchase 12,000 shares and 225,460 shares were outstanding at June
30, 2004 and 2003, respectively, but were not included in the computation of
diluted earnings per share because the effect was antidilutive.
L. EMPLOYEE BENEFIT PLANS
PENSION EXPENSE FOR DEFINED BENEFIT PLANS
THREE MONTHS ENDED
JUNE 30
PENSION EXPENSE (INCOME) U. S. PLANS INTERNATIONAL PLANS
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 653 $ 1,835 $ 2,367 $ 2,630
Interest cost 3,398 3,300 9,379 8,956
Expected return on plan assets (4,490) (3,940) (9,828) (9,682)
Recognized prior service costs 188 181 304 294
Recognized losses 745 1,102 3,294 2,720
Amortization of transition asset (366) (366) (138) (174)
Settlement/Curtailment loss -- -- -- 2
- -----------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 128 $ 2,112 $ 5,378 $ 4,746
=============================================================================================================================
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SIX MONTHS ENDED
JUNE 30
DEFINED BENEFIT PENSION EXPENSE (INCOME)
U. S. PLANS INTERNATIONAL PLANS
- -----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 1,305 $ 3,670 $ 4,825 $ 5,334
Interest cost 6,796 6,600 18,901 16,918
Expected return on plan assets (8,980) (7,879) (19,810) (17,668)
Recognized prior service costs 377 363 617 557
Recognized losses 1,491 2,204 6,654 5,974
Amortization of transition asset (733) (733) (275) (325)
Settlement/Curtailment loss -- -- -- 3
- -----------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 256 $ 4,225 $ 10,912 $ 10,793
=============================================================================================================================
The defined benefit pension expense for the three months ended and six months
ended June 30, 2004, decreased $1.4 million and $3.9 million from the three
months ended and six months ended June 30, 2003, respectively. Increases in the
defined contribution plans expense more than offset the decreases in the defined
benefit pension plans expense for the same periods. This is principally due to
pension plan changes resulting in accrued service no longer being granted for
periods after December 31, 2003 for a majority of the U.S. defined benefit
pension plans and certain international defined benefit pension plans. In place
of these plans, the Company has established, effective January 1, 2004, defined
contribution 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 these new defined contribution plans will provide a more
predictable and less volatile expense than existed under the defined benefit
plans.
In the quarter ended June 30, 2004, the Company contributed $0.3 million and
$5.6 million for the U.S. and international defined benefit pension plans,
respectively. For the six months ended June 30, 2004, the Company contributed
$0.5 million and $9.7 million for the U.S. and international defined benefit
pension plans, respectively. The Company currently anticipates contributing an
additional $1.2 million and $8.6 million for the U.S. and international plans,
respectively, during the remainder of 2004. These are reductions from the
estimates included in the Company's Form 10-K for the year-ended December 31,
2003 due to updated international estimates and the passage of the Pension
Funding Equity Act of 2004 which impacted domestic plans.
During June 2004, the U.S. pension plans sold 350,000 shares of Harsco
Corporation Common Stock at an average price of $44.48. The sale of Company
shares was approved by the Company's Board of Directors to rebalance the
investments in the U.S. pension fund and further diversify the plan assets. As
of June 30, 2004, 382,640 shares of the Company's common stock with a fair
market value of approximately $18 million are included in U.S. pension plan
assets.
POSTRETIREMENT BENEFITS
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) JUNE 30
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003
- -----------------------------------------------------------------------------------------------------------
Service cost $ 3 $ 3
Interest cost 91 137
Recognized prior service costs 8 8
Recognized losses 7 29
Settlement/Curtailment gain (1,502) (816)
- -----------------------------------------------------------------------------------------------------------
Postretirement benefits income $ (1,393) $ (639)
===========================================================================================================
The income of $1.4 million and $0.6 million for the three months ended June 30,
2004 and 2003, respectively was due principally to the termination of certain
postretirement health care plans.
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SIX MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) JUNE 30
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003
- -----------------------------------------------------------------------------------------------------------
Service cost $ 6 $ 15
Interest cost 198 324
Recognized prior service costs 16 16
Recognized losses 22 44
Settlement/Curtailment gain (2,238) (4,898)
- -----------------------------------------------------------------------------------------------------------
Postretirement benefits income $ (1,996) $ (4,499)
===========================================================================================================
The income of $2.0 million for 2004 was due principally to the termination of
certain postretirement health care plans. The income of $4.5 million for 2003
was due principally to the termination of certain postretirement life insurance
plans and a postretirement health care plan.
In accordance with the provisions of Financial Accounting Standards Board Staff
Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP FAS
106-2), the Company has deferred any re-measurement of its postretirement health
care benefit obligation until December 31, 2004 since the impact is expected to
be immaterial. For a detailed disclosure of the Company's pension and
postretirement benefit plans, see Note 8, "Employee Benefit Plans," to the
Company's Form 10-K for the year ended December 31, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The following management's discussion and analysis describes the principal
factors affecting the Company's results of operations and liquidity. This
discussion should be read in conjunction with the accompanying unaudited
financial statements as well as the Company's annual Form 10-K for the year
ended December 31, 2003 which included additional information about the
Company's critical accounting policies, contractual obligations, practices and
the transactions that support the financial results and provided a more
comprehensive summary of the Company's outlook, trends and strategies for 2004
and beyond.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include statements
about our management confidence and strategies for performance; expectations for
new and existing products, technologies, and opportunities; and expectations
regarding growth, sales, cash flows, earnings and Economic Value Added (EVA(R)).
These statements can be identified by the use of such terms as "may," "could,"
"expect," "anticipate," "intend," "believe," or other comparable terms.
Factors which could cause results to differ include, but are not limited to,
those discussed in Part I, Item 3 "Quantitative and Qualitative Disclosures
About Market Risk." 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 second quarter 2004 revenues were a record $617.6 million. This is
an increase of $81.1 million or 15% over the second quarter of 2003. Income from
continuing operations was $31.0 million for the second quarter 2004 compared
with $25.5 million in the second quarter of 2003, an increase of 22%. Diluted
earnings per share from continuing operations were a record $0.75 in the second
quarter of 2004 compared with $0.62 for the second quarter of 2003, a 21%
increase.
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Revenues for the first six months of 2004 were a record $1,173.9 million. This
is an increase of $149.5 million or 15% over the first six months of 2003.
Income from continuing operations was $47.8 million for the first six months of
2004 compared with $37.9 million in the first six months of 2003, an increase of
26%. Diluted earnings per share from continuing operations were $1.15 in the
first six months of 2004 compared with $0.93 for the first six months of 2003, a
24% increase.
The second quarter and first six months of 2004 results were led by the Mill
Services Segment. This Segment achieved quarter-over-quarter revenue growth of
$38.5 million or 19%, and accounted for 39% of the Company's revenues. Despite
slightly lower operating income in the second quarter of 2004 when compared with
the second quarter of 2003, this Segment still provided 43% of the Company's
operating income for the second quarter of 2004. In comparison with the first
six months of 2003, this Segment achieved period-over-period revenue growth of
$86.5 million or 22%, and accounted for 41% of the Company's revenues and 53% of
the operating income for the first six months of 2004.
The Access Services Segment contributed revenue increases of $25.2 million or
16% for the second quarter and $35.6 million or 12% for the first six months of
2004, compared with the corresponding 2003 periods. The Gas Technologies Segment
contributed revenue increases of $13.2 million or 19% for the second quarter and
$22.6 million or 16% for the first six months of 2004, compared with the
corresponding 2003 periods. The increase in the Access Services Segment was
driven by the international operations as the U.S. operations continue to
experience a lingering softness in the non-residential construction market. The
revenue increases in the Gas Technologies Segment appear to indicate that the
manufacturing recession experienced by this Segment over the last several years
has bottomed out.
Also contributing to the positive performance in both the second quarter and
first six months of 2004, in the "All Other" Category, was a turnaround to
profitability of the industrial grating business. The roofing granules and
abrasives business and the boiler and process equipment business also
contributed higher income and margins compared with the second quarter and first
six months of 2003. The railway track services and equipment business performed
below last year's results, reflecting the timing of product deliveries to its
international customers. A large portion of this business' backlog is expected
to be shipped during the fourth quarter of 2004, which will represent the
strongest quarter of the year for the railway track services and equipment
business. There is a risk that some orders could slip into the first quarter of
2005.
The positive effect of foreign currency translation increased second quarter
2004 consolidated revenues by $20.2 million and pre-tax income by $1.3 million
when compared with the second quarter of 2003.
- -----------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
JUNE 30 2003 TO 2004
(DOLLARS IN MILLIONS) 2004 2003 VOLUME CURRENCY TOTAL
- -----------------------------------------------------------------------------------------------------------
U.S. $ 257.7 $ 229.8 12.1% 0.0% 12.1%
Europe 255.1 221.4 7.2 8.0 15.2
Asia - Pacific 30.6 20.9 40.4 6.0 46.4
Latin America 28.8 26.0 15.6 (4.8) 10.8
Other 45.4 38.4 11.7 6.5 18.2
- -----------------------------------------------------------------------------------------------------------
Total $ 617.6 $ 536.5 11.3% 3.8% 15.1%
===========================================================================================================
The positive effect of foreign currency translation increased consolidated
revenues for the first six months of 2004 by $58.7 million and pre-tax income by
$2.9 million when compared with the first six months of 2003.
- -----------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES
SIX MONTHS ENDED PERCENTAGE GROWTH FROM
JUNE 30 2003 TO 2004
(DOLLARS IN MILLIONS) 2004 2003 VOLUME CURRENCY TOTAL
- -----------------------------------------------------------------------------------------------------------
U.S $ 485.0 $ 433.6 11.9% 0.0% 11.9%
Europe 489.2 428.0 3.3 11.0 14.3
Asia - Pacific 56.4 41.1 26.7 10.5 37.2
Latin America 55.9 47.7 16.7 0.5 17.2
Other 87.4 74.0 8.4 9.7 18.1
- -----------------------------------------------------------------------------------------------------------
Total $ 1,173.9 $ 1,024.4 8.9% 5.7% 14.6%
===========================================================================================================
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
2004 HIGHLIGHTS
The following significant items impacted the Company overall during the second
quarter and first six months of 2004 in comparison with the second quarter and
first six months of 2003, respectively:
Company Wide:
- -------------
o Higher fuel, commodity and other material costs, particularly steel,
increased the Company's operating costs during the second quarter and
first six months of 2004. These increased costs were generally offset by
increased revenues. To the extent that such costs cannot be passed to
customers in the future, operating income may be adversely affected.
o During the second quarter and first six months of 2004, the Company was
favorably affected by pre-tax benefits of $1.5 million and $2.2 million,
respectively, from the termination of certain postretirement benefit
plans. This compares with pre-tax benefits of $0.8 million and $4.9
million during the second quarter and first six months of 2003,
respectively, for similar plan terminations.
o Defined benefit pension expense for the second quarter and first six
months of 2004 decreased approximately $1.4 million and $3.9 million from
the second quarter and first six months of 2003, respectively. During the
second quarter and first six months of 2004, there were offsetting
increases of approximately $2.0 million and $4.6 million, respectively, in
defined contribution plan expenses related to the new defined contribution
plans that commenced January 1, 2004. During 2003, the Company
restructured its pension plans to make them more predictable and
affordable. This is more fully discussed under Part I, Item 1, Footnote L
labeled "Employee Benefit Plans."
o Other than the impact on revenues, and included in the impact on pre-tax
income effect as discussed above, the effect of positive foreign currency
translation in the second quarter and first six months of 2004 resulted in
a pre-tax increase to interest expense of $0.6 million and $1.5 million,
respectively, compared with the corresponding 2003 periods.
Mill Services Segment:
- ----------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- -------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 242.2 $ 203.8 $ 478.5 $ 392.0
Operating income 24.8 25.7 50.1 42.4
===================================================================================================================
THREE MONTHS SIX MONTHS
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED JUNE 30 ENDED JUNE 30
- ---------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 203.8 $ 392.0
Continued strong volume and new business 16.5 29.0
The acquisition of the industrial services unit of C. J. Langenfelder and Sons, Inc.
in June 2003 11.8 24.4
The benefit of positive foreign currency translation 10.2 32.7
Other (0.1) 0.4
- ---------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 242.2 $ 478.5
===========================================================================================================================
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND SIX MONTHS ENDED JUNE 30:
o Continued strong volume and new business increased operating income in the
second quarter and first six months of 2004 by $1.0 million and $6.5
million, respectively, when compared with the same 2003 periods.
o The benefit of positive foreign currency translation in the second quarter
and first six months of 2004 resulted in increased operating income of $1.6
million and $4.2 million, respectively, compared with the second quarter
and first six months of 2003, respectively.
o During the second quarter and first six months of 2003, the Segment was
favorably affected by pre-tax benefits of $1.7 million and $1.8 million,
respectively, from the reversal of bad debt expense, and $0.8 million and
$1.4
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
million, respectively, from the termination of certain postretirement
benefit plans. During the second quarter and first six months of 2004 no
such benefits occurred, negatively impacting the operating margin on a
comparative basis.
o During the second quarter, and to a lesser extent, the first six months of
2004, the Segment's operating income was negatively impacted by increased
maintenance and repair costs; higher start-up costs for new contracts; and
increased general and administrative costs (including Sarbanes-Oxley
Section 404 related costs).
Access Services Segment:
- ------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- -------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 183.1 $ 157.9 $ 340.9 $ 305.3
Operating income 14.3 10.7 17.7 15.4
==================================================================================================================
THREE MONTHS SIX MONTHS
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED JUNE 30 ENDED JUNE 30
- ---------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 157.9 $ 305.3
Net increased volume 13.0 8.9
The benefit of positive foreign currency translation 9.6 24.2
Acquisitions (principally SGB Raffia in Australia) 2.4 2.7
Other 0.2 (0.2)
- ---------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 183.1 $ 340.9
===========================================================================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND SIX MONTHS ENDED JUNE 30:
o In the second quarter and first six months of 2004, the Segment was
positively impacted by the strength of the formwork business, particularly
in the Middle East and United Kingdom. Also, margins on the international
powered-access equipment rentals improved due to cost restructuring actions
implemented during 2003.
o In the second quarter and first six months of 2004, there was a continued
slowdown in the U.S. non-residential construction markets. This slowdown
had a negative effect on volume (particularly equipment rental) which
caused overall margins in the U.S. to decline. Equipment rentals,
particularly in the construction sector, provide the highest margins for
this Segment. The decline in margins in the U.S. was more than offset by
improvements internationally.
o During both the second quarter and first six months of 2004, the Segment
was favorably affected by pre-tax income of $1.3 million from the
termination of certain postretirement benefit plans. This compared with a
pre-tax benefit of $0.5 million from the termination of similar plans in
the first six months of 2003 (first quarter).
o During the first six months of 2003, the Segment was favorably affected by
pre-tax income of $1.7 million from the sale of non-core assets. During the
first six months of 2004, no such benefits occurred.
o The benefit of positive foreign currency translation in the first six
months of 2004 resulted in increased operating income of $0.7 million,
compared with the first six months of 2003.
-22-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Gas Technologies Segment:
- -------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- -------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 2004 2003(a) 2004 2003(a)
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 83.0 $ 69.7 $ 160.5 $ 137.9
Operating income 5.3 3.6 8.4 6.9
===================================================================================================================
(a) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business is classified
in the Engineered Products & Services ("all other") Category.
THREE MONTHS SIX MONTHS
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED JUNE 30 ENDED JUNE 30
- ---------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 69.7 $ 137.9
Increased demand for propane tanks 8.2 18.8
Increased demand for cryogenics equipment and high-pressure cylinders 8.2 11.3
The benefit of positive foreign currency translation 0.3 0.9
Increased competition and decreased demand for certain valves and composite-wrapped cylinders (3.4) (8.5)
Other - 0.1
- ---------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 83.0 $ 160.5
===========================================================================================================================
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND SIX MONTHS ENDED JUNE 30:
o Operating income increased in both the second quarter and first six months
of 2004 compared with the same periods of 2003, due mainly to increased
demand for propane tanks.
o The increased demand for propane tanks as well as high-pressure cylinders
was partially driven by customers accelerating purchases in anticipation of
future price increases. The impact of this accelerated customer purchasing
may result in decreased sales in future quarters of 2004.
o Although steel costs increased during the second quarter and first six
months of 2004, the costs were generally offset by increased revenues. To
the extent that such costs cannot be passed to customers in the future,
operating income may be adversely affected.
o Increased competition and decreased demand for certain valves and
composite-wrapped cylinders negatively impacted operating income for both
the second quarter and first six months of 2004 compared with the same
periods of 2003.
o During the first six months of 2003, the Segment was favorably affected by
a pre-tax benefit of $0.6 million from the termination of certain
postretirement benefit plans. During the first six months of 2004, no such
benefit occurred.
o The benefit of positive foreign currency translation in the second quarter
and first six months of 2004 resulted in decreased operating income of $0.1
million and $0.2 million, respectively, compared with the second quarter
and first six months of 2003, respectively.
-23-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Engineered Products & Services ("all other") Category:
- ------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
- -------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 2004 2003(a) 2004 2003(a)
- -------------------------------------------------------------------------------------------------------------------
Revenues $ 109.2 $ 105.0 $ 193.9 $ 189.1
Operating income 13.2 9.6 19.3 13.5
===================================================================================================================
(a) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business is classified
in the Engineered Products & Services ("all other") Category.
ENGINEERED PRODUCTS & SERVICES ("ALL OTHER") CATEGORY - THREE MONTHS SIX MONTHS
SIGNIFICANT IMPACTS ON REVENUES ENDED JUNE 30 ENDED JUNE 30
- ---------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ---------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 105.0 $ 189.1
Industrial grating products business 6.0 8.5
Air-cooled heat exchangers business 2.7 5.3
Boiler and process equipment business 1.4 3.1
Roofing granules and abrasives business 1.4 1.2
The benefit of positive foreign currency translation 0.1 0.9
Railway track services and equipment business (7.4) (14.2)
- ---------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 109.2 $ 193.9
===========================================================================================================================
ENGINEERED PRODUCTS & SERVICES ("ALL OTHER") CATEGORY - SIGNIFICANT IMPACTS ON
OPERATING INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30:
o Operating income for the industrial grating products business increased
during the second quarter and first six months of 2004 due to: increased
prices; a focus on larger orders; reduced low-margin fabrication orders;
and internal restructuring and cost reductions. This is in comparison with
an operating loss in the second quarter and first six months of 2003 which
included $2.1 million and $2.2 million, respectively, in additional expense
from reorganization costs and an asset write-down.
o Continued and consistent profitable results from the roofing granules and
abrasives business and the boiler and process equipment business were
attained in the second quarter and first six months of 2004.
o Decreased second quarter and first six months of 2004 operating income in
the railway track services and equipment business were due principally to
the timing of international sales during 2004. Sales are expected to
increase as the year progresses, especially in the fourth quarter of 2004.
Should unexpected events delay shipment and/or acceptance of orders
scheduled for the fourth quarter, these revenues may not be recognized
until the first quarter of 2005.
o During the first six months of 2003, this Category was favorably affected
by a pre-tax benefit of $1.1 million from the termination of certain
postretirement benefit plans. This compares with a $0.7 million pre-tax
benefit during the first six months of 2004 for similar plan terminations.
o The benefit of positive foreign currency translation in the second quarter
and first six months of 2004 resulted in increased operating income of $0.6
million and $0.7 million, respectively, when compared with the second
quarter and first six months of 2003.
-24-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
OUTLOOK, TRENDS AND STRATEGIES
Looking to the remainder of 2004 and beyond, the following significant items,
trends and strategies are expected to affect the Company:
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 the provision of additional services to existing customers, new
contracts and strategic acquisitions.
o Continued focus on improving Economic Value Added (EVA(R)).
o A target of $280 million in cash provided by operating activities for 2004,
which would be a record.
o Higher fuel, transportation and material costs, particularly steel, could
increase the Company's operating costs and reduce profitability to the
extent that such costs cannot be passed to customers.
o As discussed in Note I, "Commitments and Contingencies," in Part I, Item 1,
Financial Statements, the Company has received formal notice that the U.S.
Government has accepted a proposed settlement of the FET case. As a result,
the Company expects to receive approximately $12 million to $13 million
pre-tax during the third quarter or early fourth quarter of 2004. This
settlement will have a positive effect on income from discontinued
operations, net income and earnings per share in the third quarter of 2004.
Cash flows will be positively affected in the third or fourth quarter of
2004.
o Cost reductions and Six-Sigma continuous process improvement initiatives
across the Company should further enhance margins. This includes improved
supply chain management and additional 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 the
Sarbanes-Oxley Act of 2002, particularly Section 404.
Mill Services Segment:
- ----------------------
o Global steel demand and production is forecasted to remain strong 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 effect on
the Company's income and cash flows.
Access Services Segment:
- ------------------------
o The outlook for U.S. non-residential construction spending is not expected
to improve significantly until 2005. The benefits of this will likely
affect mid-to-late 2005 results.
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.
Gas Technologies Segment:
- -------------------------
o An overall net improvement in this Segment is expected to be led by the
propane tank, cryogenics and cylinders 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.
o Continued weak market conditions for LPG valves and increased brass costs
(a key valve component) are expected to impact this Segment. This weakness
is expected to be offset by increased demand related to the introduction of
new valves during 2004, increased market share, new markets for the LPG
valve and improved pricing. However, if the current market conditions
persist through the second half of 2004 and beyond, and if the business is
unable to execute its strategy, the valuation of this business could be
negatively impacted.
Engineered Products & Services ("all other") Category:
- ------------------------------------------------------
o A continued positive outlook is anticipated for railway track services and
equipment sales as demand for products and services is expected to grow
throughout the world. However, due to long lead times, the benefits of the
increased orders will gradually affect the second half of 2004, principally
the fourth quarter, and beyond.
o The industrial grating business is expected to sustain continued
profitability for 2004.
o Increases in steel prices and worldwide demand for steel could have an
adverse effect on raw material costs, and the ability to obtain the
necessary raw materials for most businesses in this Category.
-25-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o Consistent, profitable results are expected from the roofing granules and
abrasives business, the boiler and process equipment business and the
air-cooled heat exchangers business.
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Revenues from continuing operations $ 617.6 $ 536.5 $ 1,173.9 $ 1,024.4
Cost of services and products sold 467.9 403.8 896.9 779.5
Selling, general and administrative expenses 89.5 81.5 177.5 162.0
Other expenses 2.0 1.4 3.6 2.3
Operating income from continuing operations 57.6 49.0 94.6 78.9
Income tax expense 14.9 12.1 23.5 18.5
Income from continuing operations 31.0 25.5 47.8 37.9
Income (loss) from discontinued operations (0.2) 0.2 (0.2) 0.2
Net income 30.7 25.6 47.7 38.1
Diluted earnings per common share 0.74 0.63 1.15 0.94
- -----------------------------------------------------------------------------------------------------------------------
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
Second Quarter 2004 vs. Second Quarter 2003
- -------------------------------------------
Record revenues were recorded for the second quarter of 2004, up $81.1 million
or 15% from the second quarter of 2003. This increase was attributable to the
following significant items:
---------------------------------------------------------------------------
CHANGE IN REVENUES
IN MILLIONS SECOND QUARTER 2004 VS. SECOND QUARTER 2003
---------------------------------------------------------------------------
$ 20.2 Effect of positive foreign currency translation.
16.4 Net increased volume, new contracts and sales price changes in
the Mill Services Segment.
14.2 Net effect of business acquisitions resulted in increased
revenues of $11.8 and $2.4 million in the Mill Services and
Access Services Segments, respectively.
13.0 Net increased revenues in the Gas Technologies Segment due
principally to improving market conditions and selling price
increases, partially offset by decreased demand for liquid
propane gas (LPG) valves in the patio grill market and
composite-wrapped cylinders.
12.9 Net increased revenues in the Access Services Segment due
principally to the strength of the international formwork
business, particularly in the Middle East and United Kingdom.
6.0 Increased revenues of the industrial grating products business
due to a focus on larger orders and increased prices.
2.7 Increased revenues of the air-cooled heat exchangers business
due to improving natural gas prices.
(7.4) Net decreased revenues in the railway track services and
equipment business due principally to decreased rail equipment
sales.
3.1 Other (minor changes across the various units not already
mentioned).
---------------------------------------------------------------------------
$ 81.1 Total Change in Revenues - Second Quarter 2004 vs. Second
Quarter 2003
===========================================================================
-26-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Six Months of 2004 vs. Six Months of 2003
- -----------------------------------------
Record revenues were recorded for the first six months of 2004, up $149.5
million or 15% from the first six months of 2003. This increase was attributable
to the following significant items:
---------------------------------------------------------------------------
CHANGE IN REVENUES
IN MILLIONS SIX MONTHS OF 2004 VS. SIX MONTHS OF 2003
---------------------------------------------------------------------------
$ 58.7 Effect of positive foreign currency translation.
29.4 Net increased volume, new contracts and sales price changes in
the Mill Services Segment.
26.9 Net effect of business acquisitions resulted in increased
revenues of $24.2 and $2.7 million in the Mill Services and
Access Services Segments, respectively.
21.7 Net increased revenues in the Gas Technologies Segment due
principally to improving market conditions; selling price
increases; and customers accelerating purchases in
anticipation of future price increases for the propane,
cylinders and cryogenics businesses, partially offset by
decreased demand for liquid propane gas (LPG) valves in the
patio grill market and composite-wrapped cylinders.
8.7 Net increased revenues in the Access Services Segment due to
the strength of the international formwork business,
particularly in the Middle East and United Kingdom, partially
offset by continued slowdown in the U.S. non-residential
construction markets.
8.5 Increased revenues of the industrial grating products business
due to increased demand, customers accelerating purchases in
anticipation of future price increases and a focus on larger
orders.
5.3 Increased revenues of the air-cooled heat exchangers business
due to increased volume as a result of improving natural gas
prices.
3.1 Increased revenues of the boiler and process equipment
business due to increased volume across all product lines.
(14.2) Net decreased revenues in the railway track services and
equipment business due principally to decreased rail equipment
sales.
1.4 Other (minor changes across the various units not already
mentioned).
---------------------------------------------------------------------------
$ 149.5 Total Change in Revenues - Six Months of 2004 vs. Six Months
of 2003
===========================================================================
================================================================================
COST OF SERVICES AND PRODUCTS SOLD
Second Quarter 2004 vs. Second Quarter 2003
- -------------------------------------------
Cost of services and products sold for the second quarter of 2004 increased
$64.0 million or 16% from the second quarter of 2003, slightly above the 15%
increase in revenues. This increase was attributable to the following
significant items:
---------------------------------------------------------------------------
CHANGE IN COST OF SERVICES AND PRODUCTS SOLD
IN MILLIONS SECOND QUARTER 2004 VS. SECOND QUARTER 2003
---------------------------------------------------------------------------
$ 34.0 Increased costs due to increased revenues (exclusive of the
effect of foreign currency translation and business
acquisitions). This includes increased steel and commodity
costs since the Company was generally able to recover these
costs with increased revenues.
14.8 Effect of positive foreign currency translation.
12.8 Effect of business acquisitions.
0.5 Increased costs on a comparative basis due to income generated
by the termination of a postretirement benefit plan in the
second quarter of 2003 that did not recur in the second
quarter of 2004.
1.9 Other (due to product mix and minor changes across the various
units not already mentioned).
---------------------------------------------------------------------------
$ 64.0 Total Change in Cost of Services and Products Sold - Second
Quarter 2004 vs. Second Quarter 2003
===========================================================================
-27-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Six Months of 2004 vs. Six Months of 2003
- -----------------------------------------
Cost of services and products sold for the first six months of 2004 increased
$117.4 million or 15% from the first six months of 2003, consistent with the 15%
increase in revenues. This increase was attributable to the following
significant items:
---------------------------------------------------------------------------
CHANGE IN COST OF SERVICES AND PRODUCTS SOLD
IN MILLIONS SIX MONTHS OF 2004 VS. SIX MONTHS OF 2003
---------------------------------------------------------------------------
$ 48.7 Increased costs due to increased revenues (exclusive of the
effect of foreign currency translation and business
acquisitions). This includes increased steel and commodity
costs since the Company was generally able to recover these
costs with increased revenues.
43.9 Effect of positive foreign currency translation.
24.7 Effect of business acquisitions.
3.3 Increased costs on a comparative basis due to income generated
by the termination of a postretirement benefit plan in the
first six months of 2003 that did not recur in the first six
months of 2004.
(3.2) Other (due to stringent cost controls, process improvements,
reorganization actions, product mix and minor changes across
the various units not already mentioned).
---------------------------------------------------------------------------
$ 117.4 Total Change in Cost of Services and Products Sold - Six
Months of 2004 vs. Six Months of 2003
===========================================================================
================================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Second Quarter 2004 vs. Second Quarter 2003
- -------------------------------------------
Selling, general and administrative (SG&A) expenses for the second quarter of
2004 increased $8.0 million or 10% from the second quarter of 2003, less than
the 15% increase in revenues. The lower relative increase in SG&A expenses (10%)
as compared with revenues (15%) was due to stringent cost controls, process
improvements and reorganization actions. The increase in SG&A expenses was
attributable to the following significant items:
---------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS SECOND QUARTER 2004 VS. SECOND QUARTER 2003
---------------------------------------------------------------------------
$ 3.5 Effect of positive foreign currency translation.
1.6 Reversal of a provision for uncollectible accounts receivable
in the second quarter of 2003 that did not recur in the second
quarter of 2004.
1.1 Increased professional fees due to higher external auditor
fees (related to Sarbanes-Oxley Section 404) and increased
consulting and legal expenses.
1.0 Increased pension expense.
0.5 Effect of business acquisitions.
(1.0) Decreased costs on a comparative basis due to $0.3 million in
income generated by the termination of a postretirement
benefit plan in the second quarter of 2003 compared with $1.3
million in the second quarter of 2004.
1.3 Other.
---------------------------------------------------------------------------
$ 8.0 Total Change in Selling, General and Administrative Expenses -
Second Quarter 2004 vs. Second Quarter 2003
===========================================================================
-28-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Six Months of 2004 vs. Six Months of 2003
- -----------------------------------------
Selling, general and administrative (SG&A) expenses for the first six months of
2004 increased $15.5 million or 10% from the first six months of 2003, less than
the 15% increase in revenues. The lower relative increase in SG&A expenses (10%)
as compared with revenues (15%) was due to stringent cost controls, process
improvements and reorganization actions. The increase in SG&A expenses was
attributable to the following significant items:
---------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS SIX MONTHS OF 2004 VS. SIX MONTHS OF 2003
---------------------------------------------------------------------------
$ 9.8 Effect of positive foreign currency translation.
2.8 Reversal of a provision for uncollectible accounts receivable
in the second quarter of 2003 that did not recur in the first
six months of 2004 and increased provisions for certain
uncollectible accounts receivable during the first six months
of 2004.
1.4 Increased pension expense.
1.4 Increased professional fees due to higher external auditor
fees (related to Sarbanes-Oxley Section 404) and increased
consulting and legal expenses.
0.6 Effect of business acquisitions.
(1.0) Decreased insurance expense.
(0.5) Decreased costs on a comparative basis due to $1.6 million in
income generated by the termination of a postretirement
benefit plan in the first six months of 2003 compared with
$2.1 million in the first six months of 2004.
1.0 Other.
---------------------------------------------------------------------------
$ 15.5 Total Change in Selling, General and Administrative Expenses -
Six Months of 2004 vs. Six Months of 2003
===========================================================================
================================================================================
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 the first six months of 2004,
the Company continued its strategy to streamline operations. This strategy
included continued headcount reductions in both administrative and operating
positions. These actions resulted in net Other expenses of $2.0 million and $3.6
million in the second quarter and first six months of 2004, respectively,
compared with $1.4 million and $2.3 million in the comparable 2003 periods.
Second Quarter 2004 vs. Second Quarter 2003
- -------------------------------------------
Other expenses for the second quarter of 2004 increased $0.6 million or 40% from
the second quarter of 2003. This increase was attributable to the following
significant items:
---------------------------------------------------------------------------
CHANGE IN OTHER EXPENSES
IN MILLIONS SECOND QUARTER 2004 VS. SECOND QUARTER 2003
---------------------------------------------------------------------------
$ 0.7 Increase in employee termination benefit costs.
0.5 Decrease in net gains on disposals of non-core assets. This
decline was attributable to $0.5 million in net gains that
were realized in the second quarter of 2003 from the sale of
non-core assets within the Mill Services and Access Services
Segments that were not repeated in the second quarter of 2004.
(0.6) Decrease in other expenses.
---------------------------------------------------------------------------
$ 0.6 Total Change in Other Expenses - Second Quarter 2004 vs.
Second Quarter 2003
===========================================================================
-29-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Six Months of 2004 vs. Six Months of 2003
- -----------------------------------------
Other expenses for the first six months of 2004 increased $1.2 million or 53%
from the first six months of 2003. This increase was attributable to the
following significant items:
---------------------------------------------------------------------------
CHANGE IN OTHER EXPENSES
IN MILLIONS SIX MONTHS OF 2004 VS. SIX MONTHS OF 2003
---------------------------------------------------------------------------
$ 2.0 Decrease in net gains on disposals of non-core assets. This
decline was attributable to $2.0 million in net gains that
were realized in the first six months of 2003 from the sale of
non-core assets within the Access Services and Mill Services
Segment that were not repeated in the first six months of
2004.
(0.4) Decrease in costs to exit activities.
(0.3) Decrease in employee termination benefit costs.
(0.1) Other due to rounding.
---------------------------------------------------------------------------
$ 1.2 Total Change in Other Expenses - Six Months of 2004 vs. Six
Months of 2003
===========================================================================
For additional information on employee termination benefits, see Note J, "Costs
Associated with Exit or Disposal Activities," in Part I, Item 1, Financial
Statements.
================================================================================
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
Second Quarter 2004 vs. Second Quarter 2003
- -------------------------------------------
The increase in the second quarter of 2004 of $2.8 million or 23% in income tax
expense from continuing operations was due to increased earnings from continuing
operations for the reasons mentioned above. The effective tax rate relating to
continuing operations for both the second quarter of 2004 and 2003 was 31%.
Six Months of 2004 vs. Six Months of 2003
- -----------------------------------------
The increase in the first six months of 2004 of $5.0 million or 27% in income
tax expense from continuing operations was due to increased earnings from
continuing operations for the reasons mentioned above. The effective tax rate
relating to continuing operations for both the first six months of 2004 and 2003
was 31%.
================================================================================
INCOME FROM CONTINUING OPERATIONS
Second Quarter 2004 vs. Second Quarter 2003
- -------------------------------------------
Income from continuing operations in the second quarter of 2004 was $5.5 million
or 22% above the second quarter of 2003. This increase results from increased
revenues, stringent cost controls, process improvements and reorganization
actions that contained general and administrative expenses growth to a 10%
increase while revenue increased 15%.
Six Months of 2004 vs. Six Months of 2003
- -----------------------------------------
Income from continuing operations in the first six months of 2004 was $9.9
million or 26% above the first six months of 2003. This increase results from
increased revenues, stringent cost controls, process improvements and
reorganization actions that contained general and administrative expenses growth
to a 10% increase while revenue increased 15%.
================================================================================
NET INCOME AND EARNINGS PER SHARE
Second Quarter 2004 vs. Second Quarter 2003
- -------------------------------------------
Net income of $30.7 million and diluted earnings per share of $0.74 in the
second quarter of 2004 exceeded the second quarter of 2003 by $5.1 million and
$0.11, respectively, due to increased income from continuing operations for the
reasons described above.
-30-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Six Months of 2004 vs. Six Months of 2003
- -----------------------------------------
Net income of $47.7 million and diluted earnings per share of $1.15 in the first
six months of 2004 exceeded the first six months of 2003 by $9.5 million and
$0.21, respectively, due to increased income from continuing operations for the
reasons described above.
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
periodically by cash proceeds from asset sales. Principal borrowings for working
capital requirements are commercial paper. During 2003, record net cash provided
by operating activities of $262.8 million enabled the Company to make
substantial payments on its outstanding debt. During the first six months of
2004, cash flows from operations of $97.0 million were 7% higher than in the
first six months of 2003. Due to record capital investments of $99.2 million for
the first six months of the year and the seasonal aspect of the Company's cash
flows in the first half of the year, the Company's net cash borrowings increased
$15.4 million in the first six months of 2004.
The Company's management reaffirms its previously stated strategic objectives
for 2004 that include generating a record $280 million in cash from operations,
augmented by 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. In 2004, the Company has targeted approximately $125
million for growth capital investments and acquisitions and approximately $40
million for debt reduction.
As of June 30, 2004, the Company had approximately $92 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 paying dividends to
shareholders.
The Company has a U.S.-based revolving credit facility in the amount of $350
million through a syndicate of banks that is divided into two parts, a $131.3
million portion that matures on August 12, 2004 and $218.8 million portion that
matures on September 29, 2005. The Company is in the process of replacing both
parts with a new $350 million facility that will mature in August 2007. This
transaction is expected to be completed on or before August 12, 2004.
SOURCES AND USES OF CASH
The primary drivers of the Company's cash flow from operations are the Company's
sales and income, particularly in the services businesses. The Company's
long-term mill services contracts provide predictable cash flows for several
years into the future. Additionally, returns on capital investments made in
prior years, for which no cash is currently required, are a significant source
of operating cash. Depreciation related to these investments is a non-cash
charge. The Company also continues to maintain working capital at a manageable
level.
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 June 30, 2004.
-31-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SUMMARY OF CREDIT FACILITIES AS OF JUNE 30, 2004
- ---------------------------------------------------------------------------------------------------
(IN MILLIONS) FACILITY OUTSTANDING AVAILABLE
LIMIT BALANCE CREDIT
- ---------------------------------------------------------------------------------------------------
U.S. commercial paper program $ 350.0 $ 35.7 $ 314.3
Euro commercial paper program 120.8 18.1 102.7
Revolving credit facility (a) 350.0 -- 350.0
Bilateral credit facility (b) 25.0 1.6 23.4
- ---------------------------------------------------------------------------------------------------
TOTALS AT JUNE 30, 2004 $ 845.8 $ 55.4 $ 790.4(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.
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at June 30, 2004:
U.S.-BASED
LONG-TERM COMMERCIAL
NOTES 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 July 2004, Fitch reaffirmed its A- and F-2 ratings for the Company's
long-term notes and U.S. commercial paper, respectively, and its stable outlook.
S&P and Moody's reaffirmed their stable outlooks for the Company in the third
quarter of 2003. 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.
WORKING CAPITAL POSITION - Changes in the Company's working capital are
reflected in the following table:
JUNE 30 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2004 2003 INCREASE
- -----------------------------------------------------------------------------------------------------------
Current Assets $ 836.7 $ 764.4 $ 72.3
Less: Current Liabilities 535.3 495.1 40.2
- -----------------------------------------------------------------------------------------------------------
Working Capital $ 301.4 $ 269.3 $ 32.1
Current Ratio 1.6:1 1.5:1
===========================================================================================================
Working capital increased 12% in the first six months of 2004 due principally to
the following factors.
o Receivables increased $52.5 million due principally to increased sales and
timing of cash receipts in the Access Services and Mill Services Segments.
o Inventories increased $26.2 million due to the following factors: increased
raw material prices (e.g., steel) across all of the Company's manufacturing
operations; increases at Gas Technologies due to normal increases from
seasonal low levels at the end of December 2003; and increased
work-in-process inventories due to long-lead-time orders currently being
manufactured at railway track services and equipment business but not
scheduled for delivery until mainly the fourth quarter of 2004 or later.
-32-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o Other current liabilities increased $22.2 million including a $12.9 million
increase in accrued interest principally on the 200 million British pound
sterling notes (which is paid annually in October) and increases to accrued
taxes, accrued short-term retirement plan liabilities and short-term
insurance accruals.
o Accounts payable increased $11.0 million due principally to increased
inventory levels at the railway track services and equipment business and
the timing of payments in the Access Services Segment.
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 June 30, 2004, the Company's mill services contracts had estimated
future revenues of $3.1 billion. Of that amount, approximately $400 million is
projected for the remainder of 2004 and approximately 68% is expected to be
recognized by December 31, 2007. In addition, the Company had an order backlog
of $196.5 million for its manufacturing businesses and railway track services at
June 30, 2004. This compares with $186.2 million at December 31, 2003. The
increase from December 31, 2003 is due to new orders for track maintenance
equipment and increased orders in the Gas Technologies Segment, principally in
the cryogenic equipment and high pressure gas cylinder product lines. The
railway track services and equipment business backlog includes a portion that is
long-term which will not be realized until 2005 or later due to the long lead
time necessary to build certain pieces of equipment and the long-term nature of
certain service contracts. The total increase in backlog was partially offset by
a decrease in the railway track services backlog due to the timing of contract
signings.
The types of products and services that the Company provides are not subject to
rapid technological change. This increases the stability of related cash flows.
Additionally, each of the Company's businesses is among the top three companies
(relative to sales) in the industries the Company serves. Due to these factors,
the Company is confident in its future ability to generate positive cash flows
from operations.
CASH FLOW SUMMARY
The Company's cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
SUMMARIZED CASH FLOW INFORMATION
SIX MONTHS ENDED
JUNE 30
- -------------------------------------------------------------------------------
(IN MILLIONS) 2004 2003
- -------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $ 97.0 $ 90.3
Investing activities (101.6) (73.3)
Financing activities (1.7) (30.6)
Effect of exchange rate changes on cash (2.4) 7.4
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents $ (8.7) $ (6.2)
===============================================================================
CASH FROM OPERATING ACTIVITIES - Cash provided by operating activities in
the first six months of 2004 was $97.0 million, an increase of $6.7 million from
the first six months of 2003. Increased net income was the primary reason for
the increase in cash from operations. This was partially offset by the net use
of cash due to the changes in assets and liabilities, net of acquisitions. An
increased use of cash from the change in receivables was due to the timing of
receipts on increased sales volume across all three reportable segments. An
increased use of cash for inventories was due to increased work-in-process
inventories for the railway track services and equipment business to meet
current long-lead-time orders; new international Access Services projects; and
the effects of higher steel prices on the manufacturing businesses. The
increased use of cash for inventories was partially offset by a corresponding
source of cash for accounts payable due principally to the timing of payments
for inventory purchases.
CASH USED IN INVESTING ACTIVITIES - Capital investments of $99.2 million
for the first six months of 2004 were a record for the first six months of a
year. This was an increase of $36.4 million over the first six months of 2003.
Overall, approximately 40% of the 2004 investments were for projects intended to
increase future revenues. Investments were made predominantly in the industrial
services businesses with 58% in the Mill Services Segment and 22% in the Access
Services Segment. A decrease in cash paid for the purchases of businesses was
due principally to the acquisition of the mill services unit of C.J.
Langenfelder and Son, Inc. in June 2003. In the first six months of 2004, cash
paid for acquired businesses was $18.3 million less than the same period of
2003. A decrease in proceeds from sales of assets in the first six months of
2004 was due principally to three significant sales of U.K. properties in the
first quarter of 2003 which did not
-33-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
recur in 2004. Throughout the remainder of 2004, the Company plans to continue
to invest in high-return projects, principally in the industrial services
businesses, and make targeted asset sales.
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions at June 30, 2004 and December 31, 2003.
JUNE 30 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2004 2003
- --------------------------------------------------------------------------
Notes Payable and Current Maturities $ 36.3 $ 29.1
Long-term Debt 594.0 584.4
- --------------------------------------------------------------------------
Total Debt 630.3 613.5
Total Equity 798.5 777.0
- --------------------------------------------------------------------------
Total Capital $ 1,428.8 $ 1,390.5
Total Debt to Total Capital 44.1% 44.1%
==========================================================================
The Company's debt as a percent of total capital as of June 30, 2004 remained
the same as at December 31, 2003. Increased debt due to the Company's increased
capital investments was offset by increased equity due principally to increased
retained earnings.
DEBT COVENANTS
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Based on balances at June 30, 2004, the Company could
increase borrowings by approximately $567 million and still be within its debt
covenants. Alternatively, keeping all other factors constant, the Company's
equity could decrease by approximately $324 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 defined benefit pension expense is included for EVA
purposes). Therefore, value is created when a project or initiative produces a
return above the cost of capital. In the first six months of 2004, seven of the
Company's nine divisions improved their EVA from the comparable 2003 period.
Through the use of EVA, the Company targets its capital investments where
management expects they will create the greatest value. In the first six months
of 2004, the Company made approximately 58% of its capital investments in the
Mill Services Segment. The investments in this Segment continued to show
positive results as the Mill Services Segment generated a significant portion of
the Company's cash from operations in the first six months of 2004. 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 May
2004, the Company paid its 216th consecutive quarterly cash dividend. The
Company also plans to continue paying down debt to the extent possible. The
Company also has authorization to repurchase up to 1,000,000 of its shares
through January 31, 2005.
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
stockholder value.
-34-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
MARKET RISK.
In the normal course of business, the Company is routinely subjected to a
variety of risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE
COMPANY'S BUSINESS.
The Company's businesses are vulnerable to general economic slowdowns and
cyclical conditions in the industries served. In particular,
o The Company's mill services business may be adversely affected by slowdowns
in steel mill production, excess capacity, consolidation or bankruptcy of
steel producers, or a reversal or slowing of current outsourcing trends in
the steel industry;
o The Company's access services business may be adversely affected by
slowdowns in non-residential construction and annual industrial and
building maintenance cycles;
o The Company's gas technologies business may be adversely affected by
reduced industrial production, and lower demand for industrial gases,
slowdowns in demand for medical cylinders, valves and consumer barbecue
grills, or lower demand for natural gas vehicles;
o The industrial grating business may be adversely affected by slowdowns in
non-residential construction and industrial production;
o The railway track maintenance business may be adversely affected by
developments in the railroad industry that lead to lower capital spending
or reduced maintenance spending; and
o The industrial abrasives and roofing granules business may be adversely
affected by slower home resales or economic conditions that slow the rate
of residential roof replacement, or by slowdowns in the industrial and
infrastructure refurbishment industries.
THE COMPANY'S DEFINED BENEFIT PENSION EXPENSE IS DIRECTLY AFFECTED BY THE
EQUITY AND BOND MARKETS AND A DOWNWARD TREND IN THOSE MARKETS COULD
ADVERSELY AFFECT THE COMPANY'S FUTURE EARNINGS.
In addition to the economic issues that directly affect the Company's business,
changes in the performance of equity and bond markets, particularly in the
United Kingdom and the United States, impact actuarial assumptions used in
determining annual pension expense, pension liabilities and the valuation of the
assets in the Company's defined benefit pension plans. The downturn in financial
markets during 2000, 2001 and 2002 negatively impacted the Company's pension
expense and the accounting for pension assets and liabilities. This resulted in
an increase in pre-tax defined benefit pension expense from continuing
operations of approximately $20 million for calendar year 2002 compared with
2001 and $17.7 million for calendar year 2003 compared with 2002. Should another
downward trend in capital markets begin, future unfunded obligations and pension
expense would likely increase. This could result in an additional reduction to
shareholders' equity and increase the Company's statutory funding requirements.
If the financial markets improve, it would most likely have a positive impact on
the Company's pension expense and the accounting for pension assets and
liabilities. This could result in an increase to shareholders' equity and a
decrease in the Company's statutory funding requirements.
In response to dealing with the adverse market conditions, during 2002 and 2003
the Company conducted a comprehensive global review of its pension plans in
order to formulate a plan to make its long-term pension costs more predictable
and affordable. The Company implemented design changes for most of these plans
during 2003. The principal change involved converting future pension benefits
for many of the Company's non-union employees in both the U.K. and U.S. from
defined benefit plans to defined contribution plans as of January 1, 2004. This
conversion is expected to make the Company's pension expense more predictable
and affordable and less sensitive to changes in the financial markets.
-35-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
THE COMPANY'S GLOBAL PRESENCE SUBJECTS IT TO A VARIETY OF RISKS ARISING
FROM DOING BUSINESS INTERNATIONALLY.
The Company operates in over 400 locations in over 40 countries, including the
United States. The Company's global footprint exposes it to a variety of risks
that may adversely affect results of operations, cash flows or financial
position. These include the following:
o periodic economic downturns in the countries in which the Company does
business;
o fluctuations in currency exchange rates;
o customs matters and changes in trade policy or tariff regulations;
o imposition of or increases in currency exchange controls and hard currency
shortages;
o changes in regulatory requirements in the countries in which the Company
does business;
o higher tax rates and potentially adverse tax consequences including
restrictions on repatriating earnings, adverse tax withholding requirements
and "double taxation ";
o longer payment cycles and difficulty in collecting accounts receivable;
o complications in complying with a variety of foreign laws and regulations;
o political, economic and social instability, civil unrest and armed
hostilities in the countries in which the Company does business;
o inflation rates in the countries in which the Company does business;
o laws in various foreign jurisdictions that limit the right and ability of
foreign subsidiaries to pay dividends and remit earnings to affiliated
companies unless specified conditions are met; and,
o uncertainties arising from local business practices, cultural
considerations and international political and trade tensions.
If the Company is unable to successfully manage the risks associated with its
global business, the Company's financial condition, cash flows and results of
operations may suffer.
The Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq and other countries with a continued high risk of
armed hostilities. During the first six months of 2004 and 2003, these countries
contributed approximately $10.9 million and $7.9 million, respectively, to the
Company's operating income. Additionally, the Company has operations in and
sales to countries that have encountered outbreaks of communicable diseases
(e.g., Severe Acute Respiratory Syndrome (SARS) and Acquired Immune Deficiency
Syndrome (AIDS)). Should these outbreaks worsen or spread to other countries,
the Company may be negatively impacted through reduced sales to and within these
countries and other countries affected by such diseases.
EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS.
Fluctuations in foreign exchange rates between the U.S. dollar and the
approximately 35 other currencies in which the Company conducts business may
adversely affect the Company's operating income and income from continuing
operations in any given fiscal period. Approximately 59% and 58% of the
Company's sales and approximately 68% and 64% of the Company's operating income
from continuing operations for the six months ended June 30, 2004 and 2003,
respectively, were derived from operations outside the United States. Given the
structure of the Company's revenues and expenses, an increase in the value of
the U.S. dollar relative to the foreign currencies in which the Company earns
its revenues generally has a negative impact on operating income, whereas a
decrease in the value of the U.S. dollar tends to have the opposite effect. The
Company's principal foreign currency exposures are to the British pound sterling
and the euro.
-36-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Compared with the corresponding period in 2003, the average values of major
currencies changed as follows in relation to the U.S. dollar during 2004,
impacting the Company's sales and income:
o British pound sterling Strengthened by 11%
o euro Strengthened by 9%
o South African rand Strengthened by 16%
o Brazilian real Strengthened by 7%
o Australian dollar Strengthened by 15%
The Company's foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies change
materially in relation to the U.S. dollar, the Company's financial position,
results of operations, or cash flows may be materially affected.
To illustrate the effect of foreign currency exchange rate changes in certain
key markets of the Company, in the first six months of 2004, revenues would have
been approximately 5% or $58.7 million less and income from continuing
operations would have been approximately 6% or $2.9 million less if the average
exchange rates for the first six months of 2003 were utilized. In a similar
comparison for the first six months of 2003 revenues would have decreased
approximately 6% or $62.2 million while income from continuing operations would
have been approximately 7% or $2.7 million less if the average exchange rates
for the first six months of 2003 would have remained the same as the first six
months of 2002. In the first six months of 2004, the U.S. dollar weakened
against the British pound sterling while strengthening against the euro,
compared with rates at December 31, 2003. If the U.S. dollar weakens in relation
to the euro and British pound sterling, the Company would expect to see a
positive impact on future sales and net income as a result of foreign currency
translation.
Currency changes result in assets and liabilities denominated in local
currencies being translated into U.S. dollars at different amounts than at the
prior period end. These currency changes resulted in decreased net assets of
$11.7 million and increased net assets of $33.1 million, at June 30, 2004 and
2003, respectively, when compared with December 31, 2003 and 2002, respectively.
The Company seeks to reduce exposures to foreign currency transaction
fluctuations through the use of forward exchange contracts. At June 30, 2004,
the notional amount of these contracts was $75.9 million, and all will mature in
the third and fourth quarters of 2004. The Company does not hold or issue
financial instruments for trading purposes, and it is the Company's policy to
prohibit the use of derivatives for speculative purposes.
Although the Company engages in forward exchange contracts and other hedging
strategies to mitigate foreign exchange risk, hedging strategies may not be
successful or may fail to offset the risk.
In addition, competitive conditions in the Company's manufacturing businesses
may limit the Company's ability to increase product price in the face of adverse
currency movements. Products manufactured in the United States for the domestic
and export markets may be affected by the value of the U.S. dollar relative to
other currencies. Any long-term strengthening of the U.S. dollar could depress
demand for these products and reduce sales and may cause translation losses due
to the revaluation of accounts payable, accounts receivable and other asset and
liability accounts. Conversely, any long-term weakening of the U.S. dollar could
improve demand for these products and increase sales and may cause translation
gains due to the revaluation of accounts payable, accounts receivable and other
asset and liability accounts.
NEGATIVE ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE ABILITY OF THE
COMPANY'S CUSTOMERS TO MEET THEIR OBLIGATIONS TO THE COMPANY ON A TIMELY
BASIS AND AFFECT THE VALUATION OF THE COMPANY'S ASSETS.
If a downturn in the economy occurs, it may adversely affect the ability of the
Company's customers to meet their obligations to the Company on a timely basis
and could result in additional bankruptcy filings by them. If customers are
unable to meet their obligations on a timely basis, it could adversely impact
the realizability of receivables, the valuation of inventories and the valuation
of long-lived assets across the Company's businesses, as well as negatively
affect the forecasts used in performing the Company's goodwill impairment
testing under SFAS No. 142, "Goodwill and Other Intangible Assets." If
management determines that goodwill or assets are impaired or that inventories
or receivables cannot be realized at projected rates, the Company will be
required to record a write-down in the period of determination, which will
reduce net income for that period.
-37-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
A NEGATIVE OUTCOME ON PERSONAL INJURY CLAIMS AGAINST THE COMPANY MAY
ADVERSELY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos. In their suits, the plaintiffs have named as defendants many
manufacturers, distributors and repairers of numerous types of equipment or
products that may involve asbestos. Most of these complaints contain a standard
claim for damages of $20 million or more against the named defendants. The
Company has not paid any amounts in settlement of these cases, with the
exception of two settlements totaling less than $10,000 paid by the insurance
carrier prior to 1998. However, if the Company was found to be liable in any of
these actions and the liability was to exceed the Company's insurance coverage,
results of operations, cash flows and financial condition could be adversely
affected. For more information concerning these litigations, see Note I,
"Commitments and Contingencies," in Part 1, Item 1, Financial Statements.
THE COMPANY MAY LOSE CUSTOMERS OR BE REQUIRED TO REDUCE PRICES AS A RESULT
OF COMPETITION.
The industries in which the Company operates are highly competitive. The
Company's manufacturing businesses compete with companies that manufacture
similar products both internationally and domestically. Certain international
competitors export their products into the United States and sell them at lower
prices due to lower labor costs and government subsidies for exports. Such
prices may limit the prices the Company can charge for its products and
services. Additionally, unfavorable foreign exchange rates can adversely impact
the Company's ability to match the prices charged by foreign competitors. If the
Company is unable to match the prices charged by foreign competitors, it may
lose customers. The Company's strategy to overcome this competition includes Six
Sigma continuous process improvement and cost reduction programs, international
customer focus and the diversification, streamlining and consolidation of
operations.
INCREASES IN ENERGY PRICES COULD INCREASE THE COMPANY'S OPERATING COSTS
AND REDUCE ITS PROFITABILITY.
Worldwide political and economic conditions, among other factors, may result in
an increase in the volatility of energy costs, both on a macro basis and for the
Company specifically. Historically, direct energy costs have approximated
between 2.5% to 3.5% of the Company's revenues. During the first six months of
2004, the Company's direct energy costs have been tracking at the upper end of
this historical range. To the extent that such costs cannot be passed on to
customers, operating income and results of operations may be adversely affected.
INCREASES OR DECREASES IN PURCHASE PRICES OR AVAILABILITY OF STEEL OR
OTHER MATERIALS AND COMMODITIES MAY AFFECT THE COMPANY'S PROFITABILITY.
The profitability of the Company's manufactured products are affected by
changing purchase prices of steel and other materials and commodities. In the
first six months of 2004, the price paid for steel and certain other commodities
has increased significantly. If steel or other material costs associated with
the Company's manufactured products continue to increase and the costs cannot be
passed on to the Company's customers, then operating income will be adversely
affected. Additionally, decreased availability of steel or other materials could
affect the Company's ability to produce manufactured products in a timely
manner. If the Company encounters difficulty in obtaining the necessary raw
materials for its manufactured products, then revenues, operating income and
cash flows will be adversely affected.
THE COMPANY IS SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND THE SUCCESS OF
EXISTING OR FUTURE ENVIRONMENTAL CLAIMS AGAINST IT COULD ADVERSELY AFFECT
THE COMPANY'S RESULTS OF OPERATIONS AND CASH FLOWS.
The Company's operations are subject to various federal, state, local and
foreign laws, regulations and ordinances relating to the protection of health,
safety and the environment, including those governing discharges to air and
water, handling and disposal practices for solid and hazardous wastes, the
cleaning up of contaminated sites and the maintenance of a safe work place.
These laws impose penalties, fines and other sanctions for non-compliance and
liability for response costs, property damages and personal injury resulting
from past and current spills, disposals or other releases of, or exposure to,
hazardous materials. The Company could incur substantial costs as a result of
non-compliance with or liability for cleanup or other costs or damages under
these laws. The Company may be subject to more stringent environmental laws in
the future, and compliance with more stringent environmental requirements may
require the Company to make material expenditures or subject it to liabilities
that the Company currently does not anticipate.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a "potentially responsible party" for certain waste disposal sites
under the federal "Superfund" law. At several sites, the Company is currently
conducting environmental remediation, and it is probable that the Company will
agree to make payments toward funding certain other of these remediation
activities. It also is possible that some of these matters will be decided
unfavorably to the Company and that other sites requiring remediation will be
identified. Each of these matters is subject to various uncertainties and
financial exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Company has evaluated its potential liability and the consolidated balance sheet
at June 30, 2004 and December 31, 2003 includes an accrual of $3.2 million and
$3.3 million, respectively, for environmental matters. The amounts charged
against pre-tax earnings related to environmental matters totaled $1.0 million
and $0.6 million for the six months ended June 30, 2004 and 2003, respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may be greater
than the estimates, given inherent uncertainties in evaluating environmental
exposures.
RESTRICTIONS IMPOSED BY THE COMPANY'S CREDIT FACILITIES AND OUTSTANDING
NOTES MAY LIMIT THE COMPANY'S ABILITY TO OBTAIN ADDITIONAL FINANCING OR TO
PURSUE BUSINESS OPPORTUNITIES.
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. These covenants limit the amount of debt the Company may
incur, which could limit its ability to obtain additional financing or to pursue
business opportunities. In addition, the Company's ability to comply with these
ratios may be affected by events beyond its control. A breach of any of these
covenants or the inability to comply with the required financial ratios could
result in a default under these credit facilities. In the event of any default
under these credit facilities, the lenders under those facilities could elect to
declare all borrowings outstanding, together with accrued and unpaid interest
and other fees, to be due and payable, which would cause an event of default
under the notes. This could in turn trigger an event of default under the
cross-default provisions of the Company's other outstanding indebtedness. At
June 30, 2004, the Company was in compliance with these covenants and $365.6
million in indebtedness containing these covenants was outstanding.
HIGHER THAN EXPECTED CLAIMS UNDER INSURANCE POLICIES, UNDER WHICH THE
COMPANY RETAINS A PORTION OF RISK, COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS AND CASH FLOWS.
The Company retains a significant portion of the risk for property, workers'
compensation, automobile, general and product liability losses. Reserves have
been recorded which reflect the undiscounted estimated liabilities for ultimate
losses including claims incurred but not reported. Inherent in these estimates
are assumptions that are based on the Company's history of claims and losses, a
detailed analysis of existing claims with respect to potential value, and
current legal and legislative trends. At June 30, 2004 and December 31, 2003,
the Company had recorded liabilities of $72.1 million and $69.3 million,
respectively, related to both asserted and unasserted insurance claims. If
actual claims are higher than those projected by management, an increase to the
Company's insurance reserves may be required and would be recorded as a charge
to income in the period the need for the change was determined. Conversely, if
actual claims are lower than those projected by management, a decrease to the
Company's insurance reserves may be required and would be recorded as a
reduction to expense in the period the need for the change was determined.
THE SEASONALITY OF THE COMPANY'S BUSINESS MAY CAUSE ITS QUARTERLY RESULTS
TO FLUCTUATE.
The Company has historically generated the majority of its cash flows in the
third and fourth quarters (periods ending September 30 and December 31). This is
a direct result of traditionally higher sales and income during the second and
third quarters (periods ending June 30 and September 30) of the year, as the
Company's business tends to follow seasonal patterns. Contrary to this
historical pattern, the Company projects fourth quarter 2004 sales and income to
be higher than historical standards. This is principally due to the timing of
certain rail equipment sales and expanded mill services activities. If the
Company is unable to successfully manage the cash flow and other effects of
seasonality on the business, its results of operations may suffer.
THE COMPANY'S CASH FLOWS AND EARNINGS ARE SUBJECT TO CHANGES IN INTEREST
RATES.
The Company's total debt as of June 30, 2004 was $630.3 million. Of this amount,
approximately 14% had variable rates of interest and 86% had fixed rates of
interest. The weighted average interest rate of total debt was approximately
6.0%. At current debt levels, a one-percentage increase/decrease in variable
interest rates would increase/decrease interest expense by approximately $0.9
million per year.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The future financial impact on the Company associated with the above risks
cannot be estimated.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures as of June 30, 2004. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date of their evaluation.
-40-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Information on legal proceedings is included under Part I, Item 1, Footnote I
labeled "Commitments and Contingencies."
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
- ------------------------------------------------------------------------------
Securities
- ----------
(e). Issuer Purchases of Equity Securities
(d) MAXIMUM
(c) TOTAL NUMBER OF NUMBER OF SHARES
(a) TOTAL SHARES PURCHASED THAT MAY YET BE
NUMBER OF (b) AVERAGE AS PART OF PUBLICLY PURCHASED UNDER
SHARES PRICE PAID PER ANNOUNCED PLANS OR THE PLANS OR
PERIOD PURCHASED SHARE PROGRAMS PROGRAMS
- ------------------------------------------------------------ --------------------------------------------------------------------
January 1, 2004 - January 31, 2004 - - - 1,000,000
February 1, 2004 - February 29, 2004 - - - 1,000,000
March 1, 2004 - March 31, 2004 - - - 1,000,000
April 1, 2004 - April 30, 2004 - - - 1,000,000
May 1, 2004 - May 31, 2004 - - - 1,000,000
June 1, 2004 - June 30, 2004 - - - 1,000,000
- ------------------------------------------------------------ --------------------------------------------------------------------
Total - - -
- ------------------------------------------------------------ --------------------------------------------------------------------
The Company's share repurchase program was extended by Board of Directors in
January 2004. This was announced to the public on March 11, 2004 as part of the
Company's Annual Report on Form 10-K. The program authorizes the repurchase of
up to 1,000,000 shares of the Company's common stock and expires January 31,
2005.
ITEM 5. OTHER INFORMATION
- --------------------------
DIVIDEND INFORMATION
- --------------------
On June 22, 2004, the Board of Directors declared a quarterly cash dividend of
27.50 cents per share, payable August 16, 2004, to shareholders of record on
July 15, 2004.
10b5-1 Plan
- -----------
The Chief Financial Officer (CFO) of the Company plans to adopt in the Third
Quarter of 2004, a personal trading plan, as part of a long-term strategy for
asset diversification and liquidity, in accordance with the Securities and
Exchange Commission's Rule 10b5-1. Under the proposed plan, the CFO will
exercise, under pre-arranged terms, up to 40,000 options in open market
transactions, some of which are set to expire in the next seventeen months. The
40,000 options represent approximately 30% of his total holdings. The proposed
trading plan will expire in February 2005.
Rule 10b5-1 allows officers and directors, at a time when they are not in
possession of material nonpublic information, to adopt written plans to sell
shares on a regular basis under pre-arranged terms, regardless of any subsequent
nonpublic information they may receive. Exercises of stock options by the CFO
pursuant to the terms of the plan will be disclosed publicly through Form 144
and Form 4 filings with the Securities and Exchange Commission.
-41-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 6(a). EXHIBITS
- ---------------------
Listing of Exhibits filed with Form 10-Q:
Exhibit
Number Data Required Location
------ ------------- --------
31 (a) Certification Pursuant to Rule 13a-14(a) and Exhibit
15d-14(a) as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31 (b) Certification Pursuant to Rule 13a-14(a) and Exhibit
15d-14(a) as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 (a) Certification Pursuant to 18 U.S.C. Section 1350, Exhibit
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32 (b) Certification Pursuant to 18 U.S.C. Section 1350, Exhibit
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
ITEM 6(b). REPORTS ON FORM 8-K
- -------------------------------
During the second quarter 2004 (and thereafter to the date hereof), the Company
furnished to the Commission the following reports on Form 8-K under Item 12:
(1) A Form 8-K dated April 22, 2004, furnishing a copy of the press release
announcing the Company's first quarter 2004 earnings;
(2) A Form 8-K dated July 27, 2004, furnishing a copy of the press release
announcing the Company's second quarter 2004 earnings;
During the second quarter 2004 (and thereafter to the date hereof), the Company
furnished to the Commission the following reports on Form 8-K under Item 5:
(1) A Form 8-K dated July 29, 2004, furnishing a copy of the press release
announcing that Kathy G. Eddy has been named to the Company's Board of
Directors effective August 1, 2004.
-42-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARSCO CORPORATION
(Registrant)
DATE August 6, 2004 /S/ Salvatore D. Fazzolari
---------------------- -----------------------------------
Salvatore D. Fazzolari
Senior Vice President, Chief
Financial Officer and Treasurer
DATE August 6, 2004 /S/ Stephen J. Schnoor
---------------------- -----------------------------------
Stephen J. Schnoor
Vice President and Controller
-43-