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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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
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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 October 31, 2004
----- -------------------------------
Common stock, par value $1.25 per share 41,265,409
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2004 2003
==================================================================================================================================
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 439,956 $ 376,951 $ 1,286,563 $ 1,098,673
Product sales 177,332 153,234 504,575 455,874
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 617,288 530,185 1,791,138 1,554,547
==================================================================================================================================
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 325,453 277,994 956,839 812,217
Cost of products sold 145,292 121,991 410,772 367,284
Selling, general and administrative expenses 90,594 81,553 268,053 243,518
Research and development expenses 590 695 1,971 2,367
Other expenses 907 2,172 4,480 4,509
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TOTAL COSTS AND EXPENSES 562,836 484,405 1,642,115 1,429,895
==================================================================================================================================
OPERATING INCOME FROM CONTINUING OPERATIONS 54,452 45,780 149,023 124,652
Equity in income of unconsolidated entities, net 38 10 210 271
Interest income 454 482 1,655 1,558
Interest expense (10,092) (10,271) (30,412) (30,797)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST 44,852 36,001 120,476 95,684
Income tax expense (12,147) (10,781) (35,616) (29,266)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 32,705 25,220 84,860 66,418
Minority interest in net income (2,031) (1,846) (6,349) (5,120)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 30,674 23,374 78,511 61,298
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DISCONTINUED OPERATIONS:
Loss from operations of discontinued business (203) (206) (619) (415)
Gain/(loss) on disposal of discontinued business (36) 106 (124) 634
Income related to discontinued defense business 12,529 8,030 12,753 8,030
Income tax expense (4,411) (2,838) (4,298) (2,953)
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INCOME FROM DISCONTINUED OPERATIONS 7,879 5,092 7,712 5,296
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NET INCOME $ 38,553 $ 28,466 $ 86,223 $ 66,594
==================================================================================================================================
Average shares of common stock outstanding 41,165 40,752 41,061 40,637
Basic earnings per common share:
Continuing operations $ 0.75 $ 0.57 $ 1.91 $ 1.51
Discontinued operations 0.19 0.12 0.19 0.13
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BASIC EARNINGS PER COMMON SHARE $ 0.94 $ 0.70(a) $ 2.10 $ 1.64
==================================================================================================================================
Diluted average shares of common stock outstanding 41,589 41,100 41,525 40,877
Diluted earnings per common share:
Continuing operations $ 0.74 $ 0.57 $ 1.89 $ 1.50
Discontinued operations 0.19 0.12 0.19 0.13
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DILUTED EARNINGS PER COMMON SHARE $ 0.93 $ 0.69 $ 2.08 $ 1.63
==================================================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.275 $ 0.2625 $ 0.825 $ 0.7875
==================================================================================================================================
(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)
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2004 2003(A)
=======================================================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 93,459 $ 80,210
Accounts receivable, net 526,977 446,875
Inventories 244,201 190,221
Other current assets 58,869 47,045
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 923,506 764,351
=======================================================================================================================
Property, plant and equipment, net 884,576 865,374
Goodwill, net 409,596 407,846
Other assets 101,660 97,483
Assets held for sale 1,884 2,981
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TOTAL ASSETS $ 2,321,222 $ 2,138,035
=======================================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 15,950 $ 14,854
Current maturities of long-term debt 18,557 14,252
Accounts payable 204,712 188,430
Accrued compensation 53,805 46,034
Income taxes 56,952 45,116
Dividends payable 11,335 11,238
Other current liabilities 212,617 175,151
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TOTAL CURRENT LIABILITIES 573,928 495,075
=======================================================================================================================
Long-term debt 612,671 584,425
Deferred income taxes 74,568 66,855
Insurance liabilities 52,465 47,897
Retirement plan liabilities 118,183 115,190
Other liabilities 51,233 50,707
Liabilities associated with assets held for sale 617 898
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TOTAL LIABILITIES 1,483,665 1,361,047
=======================================================================================================================
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock 84,624 84,197
Additional paid-in capital 131,875 120,070
Accumulated other comprehensive expense (173,560) (169,427)
Retained earnings 1,398,082 1,345,787
Treasury stock (603,464) (603,639)
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TOTAL SHAREHOLDERS' EQUITY 837,557 776,988
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,321,222 $ 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)
NINE MONTHS ENDED
SEPTEMBER 30
(IN THOUSANDS) 2004 2003
=======================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 86,223 $ 66,594
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 133,448 123,433
Amortization 1,859 1,262
Equity in income of unconsolidated entities, net (210) (271)
Dividends or distributions from unconsolidated entities 544 1,335
Other, net (5,823) (3,908)
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (67,015) (53,637)
Inventories (54,079) (3,151)
Accounts payable 16,710 (5,921)
Net disbursements related to discontinued defense business (220) (1,039)
Other assets and liabilities 54,388 29,717
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NET CASH PROVIDED BY OPERATING ACTIVITIES 165,825 154,414
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (153,883) (96,827)
Purchase of businesses, net of cash acquired (5,165) (23,529)
Proceeds from sales of assets 3,564 14,218
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NET CASH USED BY INVESTING ACTIVITIES (155,484) (106,138)
=======================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 1,610 (14,078)
Current maturities and long-term debt:
Additions 152,829 264,879
Reductions (121,409) (273,862)
Cash dividends paid on common stock (33,831) (31,971)
Common stock issued-options 10,350 7,485
Other financing activities (4,778) (4,160)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 4,771 (51,707)
=======================================================================================================
Effect of exchange rate changes on cash (1,863) 9,864
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Net increase in cash and cash equivalents 13,249 6,433
Cash and cash equivalents at beginning of period 80,210 70,132
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 93,459 $ 76,565
=======================================================================================================
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS) 2004 2003 2004 2003
================================================================================================================================
Net income $ 38,553 $ 28,466 $ 86,223 $ 66,594
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Other comprehensive income (expense):
Foreign currency translation adjustments 8,552 4,231 (3,205) 37,329
Net gains (losses) on cash flow hedging instruments, net of
deferred income taxes 22 9 (3) 4
Pension liability adjustments, net of deferred income taxes 537 (1,326) (1,030) 15,748
Reclassification adjustment for loss on cash flow hedging
instruments, net of deferred income taxes included in net
income -- -- 104 --
Marketable securities, unrealized gain net of deferred income
taxes 1 -- 1 --
Reclassification adjustment for loss on marketable securities,
net of deferred income taxes included in net income -- -- -- 2
- --------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense) 9,112 2,914 (4,133) 53,083
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TOTAL COMPREHENSIVE INCOME $ 47,665 $ 31,380 $ 82,090 $119,677
================================================================================================================================
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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS, EXCEPT PER SHARE) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
Net income:
As reported $ 38,553 $ 28,466 $ 86,223 $ 66,594
Compensation expense (a) -- (466) (96) (1,300)
---------------------------------------------------------
Pro forma $ 38,553 $ 28,000 $ 86,127 $ 65,294
=========================================================
Basic earnings per share:
As reported $ 0.94 $ 0.70 $ 2.10 $ 1.64
Pro forma 0.94 0.69 2.10 1.61
Diluted earnings per share:
As reported 0.93 0.69 2.08 1.63
Pro forma 0.93 0.68 2.07 1.60
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(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 it Gas Technologies. Additionally, the Other Infrastructure
Products and Services ("all other") Category has been renamed
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Engineered Products and Services ("all other") Category. Except as noted below,
there have been no changes to the components of the aforementioned Segment or
Category.
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (a) (LOSS) (b) SALES (a) (LOSS) (b)
- ----------------------------------------------------------------------------------------------------
Mill Services Segment $ 244,904 $ 24,958 $ 208,591 $ 20,681
Access Services Segment 176,338 13,446 154,771 11,008
Gas Technologies Segment (c) 84,448 2,444 74,193 2,952
- ----------------------------------------------------------------------------------------------------
Segment Totals 505,690 40,848 437,555 34,641
Engineered Products & Services
("all other") Category (c) 111,598 13,667 92,630 11,224
General Corporate -- (63) -- (85)
- ----------------------------------------------------------------------------------------------------
Consolidated Totals $ 617,288 $ 54,452 $ 530,185 $ 45,780
====================================================================================================
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
OPERATING
INCOME OPERATING
(IN THOUSANDS) SALES (a) (LOSS) (b) SALES (a) INCOME (b)
- ----------------------------------------------------------------------------------------------------
Mill Services Segment $ 723,445 $ 75,056 $ 600,607 $ 63,074
Access Services Segment 517,273 31,168 460,077 26,361
Gas Technologies Segment (c) 244,964 10,799 212,125 9,880
- ----------------------------------------------------------------------------------------------------
Segment Totals 1,485,682 117,023 1,272,809 99,315
Engineered Products & Services
("all other") Category (c) 305,456 33,007 281,738 24,683
General Corporate -- (1,007) -- 654
- ----------------------------------------------------------------------------------------------------
Consolidated Totals $ 1,791,138 $ 149,023 $ 1,554,547 $ 124,652
====================================================================================================
(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 Technologies 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Segment Operating Income $ 40,848 $ 34,641 $ 117,023 $ 99,315
Engineered Products & Services
("all other") Category 13,667 11,224 33,007 24,683
General Corporate (63) (85) (1,007) 654
- ----------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations 54,452 45,780 149,023 124,652
Equity in income of unconsolidated entities, net 38 10 210 271
Interest income 454 482 1,655 1,558
Interest expense (10,092) (10,271) (30,412) (30,797)
- ----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interest $ 44,852 $ 36,001 $ 120,476 $ 95,684
======================================================================================================================
E. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable are net of an allowance for doubtful accounts of $20.1
million and $24.6 million at September 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 $4.2 million and $1.5 million for the nine
months ended September 30, 2004 and 2003, respectively. The increase in
provision for doubtful accounts includes the effect of a $1.8 million reserve
reversal in 2003 for a Mill Services customer. Also, increased provisions of
approximately $0.8 million in 2004 are due principally to Access Services
customers.
Inventories consist of the following:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2004 2003
- -------------------------------------------------------------------------------
Finished goods $ 64,992 $ 59,739
Work-in-process 55,179 32,121
Raw materials and purchased parts 100,100 74,231
Stores and supplies 23,930 24,130
- -------------------------------------------------------------------------------
Total Inventories $ 244,201 $ 190,221
===============================================================================
Inventories increased $54.0 million due to the following factors: increased raw
material costs (e.g., steel) across all of the Company's manufacturing
operations; 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; increases in the Gas Technologies Segment due to normal increases from
seasonal low levels at the end of December 2003; and increases for industrial
grating products as result of an increase in orders and higher steel prices.
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2004 2003 (A)
- -------------------------------------------------------------------------------------------------------
Land and improvements $ 39,574 $ 39,311
Buildings and improvements 177,450 174,581
Machinery and equipment 1,856,190 1,803,867
Uncompleted construction 55,132 37,505
- -------------------------------------------------------------------------------------------------------
Gross property, plant and equipment 2,128,346 2,055,264
Less accumulated depreciation and facilities valuation allowance (1,243,770) (1,189,890)
- -------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 884,576 $ 865,374
=======================================================================================================
(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
nine months ended September 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 $ 211,318 $ 151,698 $ 36,693 $ 8,137 $ 407,846
Goodwill acquired during year -- 1,474 -- -- 1,474
Foreign currency translation (656) 932 -- -- 276
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 2004, NET
OF ACCUMULATED AMORTIZATION $ 210,662 $ 154,104 $ 36,693 $ 8,137 $ 409,596
========================================================================================================================
Goodwill is net of accumulated amortization of $104.8 million and $105.2 million
at September 30, 2004 and December 31, 2003, respectively.
Intangible assets, which are included principally in Other assets on the
Condensed Consolidated Balance Sheet, totaled $10.2 million, net of accumulated
amortization of $9.7 million at September 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.
SEPTEMBER 30, 2004 DECEMBER 31, 2003
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- -------------------------------------------------------------------------------------------------------
Customer Relationships $ 6,957 $ 464 $ 6,373 $ 196
Non-compete agreements 4,890 3,935 4,863 3,671
Patents 4,286 3,576 4,304 3,351
Other 3,756 1,685 3,313 1,197
- -------------------------------------------------------------------------------------------------------
Total $ 19,889 $ 9,660 $ 18,853 $ 8,415
=======================================================================================================
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The increase in gross intangible assets is due principally to the acquisitions
discussed in Note H, "Acquisitions and Dispositions." As part of these
transactions in 2004, the Company acquired the following intangible assets (by
major class) which are subject to amortization:
ACQUIRED INTANGIBLE ASSETS
- ----------------------------------------------------------------------------
GROSS CARRYING RESIDUAL WEIGHTED-AVERAGE
(IN THOUSANDS) AMOUNT VALUE 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 $1.3 million and $0.7 million for
the nine months ended September 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 nine months ended September 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:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2004 2003 (A)
- -------------------------------------------------------------------------------
ASSETS
Accounts receivable, net $ 13 $ 411
Inventories 149 222
Other current assets 23 20
Property, plant and equipment, net 1,699 2,328
- -------------------------------------------------------------------------------
TOTAL ASSETS "HELD FOR SALE" $ 1,884 $ 2,981
===============================================================================
LIABILITIES
Accounts payable $ 8 $ 512
Other current liabilities 480 386
Other liabilities 129 --
- -------------------------------------------------------------------------------
TOTAL LIABILITIES ASSOCIATED WITH ASSETS
"HELD FOR SALE" $ 617 $ 898
===============================================================================
(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.
DISCONTINUED DEFENSE BUSINESS
In January 1994, FMC Corporation and the Company combined certain assets and
liabilities of FMC's Defense Systems Group and the Company's BMY-Combat Systems
Division to form United Defense, L.P. On August 25, 1997, the Company and FMC
Corporation signed an agreement to sell United Defense, L.P. for $850 million,
and the sale was completed on October 6, 1997. Prior to the sale, FMC had been
the managing general partner and 60% owner of United Defense, L.P., while the
Company owned the balance of 40% as the limited partner. United Defense supplies
ground combat and naval weapons systems for the U.S. and military customers
worldwide. These transactions did not include any of the assets or liabilities
of the Company's BMY-Wheeled Vehicles Division, which were retained by the
Company. This division, which was exited by the Company in 1995, sold five-ton
trucks to the United States Army under a completed 1986 contract that was the
subject of a federal excise tax dispute as more fully discussed in Note I,
"Commitments and Contingencies," in Part I, Item 1, Financial Statements.
Income and cash flows related to the discontinued defense business are shown
separately on the Consolidated Statements of Income and Cash Flows,
respectively.
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 preserved 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.
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The settlement did 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. This
increase in FET took 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 the
Company 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 Company, by letter dated August 2, 2004, received formal notice that the
Government had accepted a settlement proposal submitted by the Company. The
Company has approved the settlement calculations and the Government's refund
check is being processed. The amount of the refund is approximately $12.6
million and is expected to be received by the Company in the fourth quarter of
2004. Income of $12.5 million from the settlement has been recognized in the
Company's financial statements in the third quarter of 2004 in Discontinued
Operations. Approximately $0.1 million in interest related to the period
subsequent to September 30, 2004 has not yet been recognized.
As a result of developments in the case that occurred during the third and
fourth quarters of 2003, the Company adjusted an accrual related to this matter.
These adjustments were included as income related to the discontinued defense
business on the Company's Consolidated Statements of Income for the three months
ended September 30, 2003 and the three month periods ended March 31, 2004 and
September 30, 2004. The Company's current expectation is that its future
obligations for finalizing this matter will approximate $0.3 million.
ENVIRONMENTAL
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its financial
exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheets at September 30, 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 $1.4 million and $0.7 million for the first nine 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. Recently, the NJDEP amended its
reassessment to increase the penalty to $325,400. The Company is continuing to
prosecute its appeal. 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 September
30, 2004 was approximately $5.5 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
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
where the customer has filed for bankruptcy court protection. Accordingly, no
reserve has been recognized as of September 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
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 third quarter of 2004, there was little change in the total number of
pending cases with the current number of pending asbestos personal injury claims
filed against the Company approximating 36,400. Approximately 26,440 of these
cases were pending in the New York Supreme Court for New York County;
approximately 260 cases were pending in the New York Supreme Court for various
counties in New York State (other than New York County); and approximately 9,670
of the cases were pending in state courts of various counties in Mississippi.
Other claims totaling approximately 30 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. Cases that were previously
reported in the "other claims" number have been reclassified within the New York
cases noted above.
As of September 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 4,100 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
the New York Supreme Court for New York County and in Mississippi state courts
after 2002. On December 19, 2002, the New York Supreme Court responsible for
managing all asbestos cases pending within New York County issued an Order which
created a Deferred or Inactive Docket for all pending and future asbestos claims
filed by plaintiffs who cannot demonstrate that they have a malignant condition
or discernible physical impairment, and an Active Docket for plaintiffs who are
able to show such medical conditions. The Court is reviewing cases for docketing
based on their date of filing, with the older pending cases reviewed first.
Cases designated as Active are then assigned to a "FIFO" trial group, which
groups are scheduled for trial in the designated months of either February or
August. For cases in which there has been a recent death or a diagnosis of
cancer, the Court reviews such cases on an expedited basis and, if medically
supported, such cases are transferred to an "In Extremis" trial group, which
groups are scheduled for trial in the designated months of either May or
November. As of September 30, 2004, the Company was listed as a defendant in
approximately 200 pending cases in the New York Supreme Court for New York
County that have been designated as
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Active or "In Extremis" and assigned to trial groups. To date, the Company has
been dismissed as a defendant prior to trial in all New York cases that have
proceeded to trial. The number of these dismissals is currently 1,080.
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.
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 nine 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 nine months ended September
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., the Netherlands, Mexico and Germany (2003 only). There were no
individually material reorganization actions initiated during the nine months
ended September 30, 2004 and 2003; however, the following table summarizes these
actions in aggregate for the Company:
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
EMPLOYEE TERMINATION BENEFITS EXPENSE AND PAYMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) REORGANIZATIONS OCCURRING IN 2004
=================================================================================================================================
FIRST SECOND THIRD
QUARTER QUARTER QUARTER SEPTEMBER 30
ENDED ENDED ENDED YEAR-TO-DATE
Original reorganization action period MARCH 31 JUNE 30 SEPTEMBER 30 TOTAL
=================================================================================================================================
Employee termination benefits expense $ 630 $ 1,571 $ 607 $ 2,808
- ---------------------------------------------------------------------------------------------------------------------------------
Payments:
In first quarter of 2004 (235) -- -- (235)
In second quarter of 2004 (226) (608) -- (834)
In third quarter of 2004 (137) (247) (138) (522)
- ---------------------------------------------------------------------------------------------------------------------------------
Total payments in 2004: (598) (855) (138) (1,591)
Other: (27) 17 -- (10)
- ---------------------------------------------------------------------------------------------------------------------------------
Remaining payments as of September 30,
2004 $ 5 $ 733 $ 469 $ 1,207
=================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) REORGANIZATIONS OCCURRING IN 2003
===================================================================================================================================
FIRST SECOND THIRD NINE DEC 31
QUARTER QUARTER QUARTER MONTHS YEAR-TO-
ENDED ENDED ENDED ENDED OCT 1 - DATE
Original reorganization action period MARCH 31 JUNE 30 SEPT 30 SEPT 30 DEC 31 TOTAL
===================================================================================================================================
Employee termination benefits expense $ 1,590 $ 915 $ 1,230 $ 3,735 $ 2,329 $ 6,064
- -----------------------------------------------------------------------------------------------------------------------------------
Payments:
In 2003 (1,595) (852) (1,064) (3,511) (327) (3,838)
In 2004 (40) (5) (104) (149) (1,485) (1,634)
- -----------------------------------------------------------------------------------------------------------------------------------
Total payments: (1,635) (857) (1,168) (3,660) (1,812) (5,472)
Other: 111 (38) (2) 71 12 83
- -----------------------------------------------------------------------------------------------------------------------------------
Remaining payments as of September 30,
2004 $ 66 $ 20 $ 60 $ 146 $ 529 $ 675
===================================================================================================================================
The total amount of costs expected to be incurred for the streamlining
initiatives and the costs incurred to date for the three months and the nine
months ended September 30, 2004 and 2003 by reportable segment were as follows:
EMPLOYEE TERMINATION BENEFITS COSTS
- ------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------
TOTAL COSTS COSTS TOTAL COSTS COSTS
EXPECTED TO BE INCURRED EXPECTED TO BE INCURRED
(IN THOUSANDS) INCURRED TO DATE INCURRED TO DATE
- ------------------------------------------------------------------------------------------------------------------
Mill Services Segment $ 116 $ 116 $ 702 $ 702
Access Services Segment 394 394 325 325
Gas Technologies Segment (a) 61 61 73 73
Engineered Products & Services ("all
other") Category (a) 36 36 130 130
Corporate -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total $ 607 $ 607 $ 1,230 $ 1,230
==================================================================================================================
(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
- ------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------
TOTAL COSTS COSTS TOTAL COSTS COSTS
EXPECTED TO BE INCURRED EXPECTED TO BE INCURRED
(IN THOUSANDS) INCURRED TO DATE INCURRED TO DATE
- ------------------------------------------------------------------------------------------------------------------
Mill Services Segment $ 1,001 $ 1,001 $ 2,103 $ 2,103
Access Services Segment 1,128 1,128 749 749
Gas Technologies Segment (a) 163 163 168 168
Engineered Products & Services ("all
other") Category (a) 516 516 505 505
Corporate -- -- 210 210
- ------------------------------------------------------------------------------------------------------------------
Total $ 2,808 $ 2,808 $ 3,735 $ 3,735
==================================================================================================================
(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 (39) (33)
- ------------------------------------------------------------------------------
Total payments: (7,104) (10,387)
Other: 42 252
- ------------------------------------------------------------------------------
Remaining payments as of September 30, 2004 $ 78 $ --
==============================================================================
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
K. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS, EXCEPT AMOUNTS PER SHARE) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 30,674 $ 23,374 $ 78,511 $ 61,298
===============================================================================================================================
Average shares of common stock outstanding used
to compute basic earnings per common share
from continuing operations 41,165 40,752 41,061 40,637
Additional common shares to be issued assuming
exercise of stock options, net of shares assumed
reacquired 424 348 464 240
- -------------------------------------------------------------------------------------------------------------------------------
Shares used to compute dilutive effect of stock
options 41,589 41,100 41,525 40,877
===============================================================================================================================
Basic earnings per common share from continuing
operations $ .75 $ .57 $ 1.91 $ 1.51
===============================================================================================================================
Diluted earnings per common share from continuing
operations $ .74 $ .57 $ 1.89 $ 1.50
===============================================================================================================================
Options to purchase 8,000 shares and 172,600 shares were outstanding at
September 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
DEFINED BENEFIT PENSION EXPENSE (INCOME) SEPTEMBER 30
U. S. PLANS INTERNATIONAL PLANS
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 652 $ 1,835 $ 2,113 $ 2,311
Interest cost 3,398 3,300 9,083 7,465
Expected return on plan assets (4,490) (3,940) (9,649) (7,860)
Recognized prior service costs 188 182 301 257
Recognized losses 746 1,102 3,312 2,693
Amortization of transition asset (366) (366) (135) (146)
Settlement/curtailment loss -- -- -- 2
- ---------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 128 $ 2,113 $ 5,025 $ 4,722
=================================================================================================================================
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NINE MONTHS ENDED
DEFINED BENEFIT PENSION EXPENSE (INCOME) SEPTEMBER 30
U. S. PLANS INTERNATIONAL PLANS
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 1,957 $ 5,504 $ 6,938 $ 7,645
Interest cost 10,194 9,900 27,984 24,383
Expected return on plan assets (13,470) (11,819) (29,459) (25,528)
Recognized prior service costs 565 545 918 814
Recognized losses 2,237 3,307 9,966 8,667
Amortization of transition asset (1,099) (1,099) (410) (471)
Settlement/curtailment loss -- -- -- 5
- ---------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 384 $ 6,338 $ 15,937 $ 15,515
=================================================================================================================================
Defined benefit pension expense for the three months and nine months ended
September 30, 2004, decreased $1.7 million and $5.5 million from the three
months and nine months ended September 30, 2003, respectively. Increases in
defined contribution plans pension expense of $2.0 million and $6.6 million,
respectively, more than offset the decreases in defined benefit pension plans
expense for the same periods. This is principally due to pension plan structural
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 pension expense than existed under the defined benefit plans.
In the quarter ended September 30, 2004, the Company contributed $1.3 million
and $3.7 million for the U.S. and international defined benefit pension plans,
respectively. For the nine months ended September 30, 2004, the Company
contributed $1.8 million and $13.4 million for the U.S. and international
defined benefit pension plans, respectively. The Company currently anticipates
contributing an additional $0.2 million and $5.5 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. However, due to its expected strong future cash flows, the Company is
currently considering making additional cash contributions to its pension plans
in either the fourth quarter of 2004 or in 2005. The additional cash
contributions that are being considered are not material.
In the second quarter of 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. At
this time, no future share sales are scheduled. As of September 30, 2004,
382,640 shares of the Company's common stock with a fair market value of
approximately $17.2 million are included in U.S. pension plan assets.
POSTRETIREMENT BENEFITS
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) SEPTEMBER 30
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003
- -------------------------------------------------------------------------------
Service cost $ 3 $ 3
Interest cost 72 115
Recognized prior service costs 8 8
Recognized losses 8 11
- -------------------------------------------------------------------------------
Postretirement benefits expense $ 91 $ 137
===============================================================================
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NINE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) SEPTEMBER 30
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003
- -------------------------------------------------------------------------------
Service cost $ 9 $ 18
Interest cost 270 439
Recognized prior service costs 24 24
Recognized losses 30 55
Settlement/curtailment gain (2,238) (4,898)
- -------------------------------------------------------------------------------
Postretirement benefits income $ (1,905) $ (4,362)
===============================================================================
Postretirement benefits income of $1.9 million through September 30, 2004 was
due principally to the termination of certain postretirement health care plans.
Postretirement benefits income of $4.4 million through September 30, 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.
M. INCOME TAXES
The effective income tax rate relating to continuing operations was 27.1% and
29.6% in the third quarter and first nine months of 2004, respectively. This
compares with 29.9% and 30.6% in the third quarter and first nine months of
2003, respectively. These decreases in the effective income tax rates in 2004
were primarily a result of a change in estimate of the amount of international
earnings subject to U.S. income tax and favorable tax credits.
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.
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
EXECUTIVE OVERVIEW
The Company's third quarter 2004 revenues were a record $617.3 million. This is
an increase of $87.1 million or 16% over the third quarter of 2003. Income from
continuing operations was a record $30.7 million for the third quarter 2004
compared with $23.4 million in the third quarter of 2003, an increase of 31%.
Diluted earnings per share from continuing operations were a record $0.74 in the
third quarter of 2004 compared with $0.57 for the third quarter of 2003, a 30%
increase.
Revenues for the first nine months of 2004 were a record $1,791.1 million. This
is an increase of $236.6 million or 15% over the first nine months of 2003.
Income from continuing operations was $78.5 million for the first nine months of
2004 compared with $61.3 million in the first nine months of 2003, an increase
of 28%. Diluted earnings per share from continuing operations were $1.89 in the
first nine months of 2004 compared with $1.50 for the first nine months of 2003,
a 26% increase.
The third quarter and first nine months of 2004 results were led by the Mill
Services Segment. Revenues in the third quarter 2004 for this Segment were
$244.9 million compared with $208.6 million in last year's third quarter, a 17%
increase. The Mill Services business accounted for 40% of the Company's revenues
and 46% of the operating income for the third quarter of 2004. The Mill Services
Segment operating income for the quarter increased by 21% to $25.0 million, from
$20.7 million in the same period last year. Operating margins improved by 30
basis points to 10.2% from 9.9% in the third quarter last year. In comparison
with the first nine months of 2003, this Segment achieved period-over-period
revenue growth of $122.8 million or 20%, and accounted for 40% of the Company's
revenues and 50% of the operating income for the first nine months of 2004.
Strong Mill Services performance is expected to continue, as the Company invests
substantial cash to grow the business.
The Access Services Segment revenues in the third quarter were $176.3 million
compared with $154.8 million in last year's third quarter, a 14% increase. The
Access Services business revenue increased $57.2 million or 12% for the first
nine months of 2004, compared with the corresponding 2003 period. Operating
income for the quarter increased by 22% to $13.4 million, from $11.0 million in
the same period last year. Operating margins improved by 50 basis points to 7.6%
from 7.1% in the third quarter last year. The improved performance of the Access
Services Segment was driven by the international operations.
The Gas Technologies Segment revenues in the third quarter were $84.4 million
compared with $74.2 million in last year's third quarter, a 14% increase. This
Segment's revenue increased $32.8 million or 15% for the first nine months of
2004, compared with the corresponding 2003 period. The increase in the third
quarter was led by the international cryogenics operations, particularly Asia,
as well as the domestic propane business. Although revenue increased, operating
income and operating margins for the third quarter of 2004 declined in
comparison with the third quarter of 2003 due to significant increases in
commodity costs.
Contributing to the positive performance in both the third quarter and first
nine 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 air-cooled heat exchangers business also contributed
higher revenues and operating income compared with the third quarter and first
nine months of 2003. Results in the boiler and process equipment business were
down slightly in the quarter from last year due to an unfavorable product mix;
however, for the first nine months of 2004, revenues and operating income have
increased compared with 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 significant portion of this business' backlog
is expected to be shipped during the fourth quarter of 2004, which will
represent the strongest fourth quarter in the history of the railway track
services and equipment business. There is a risk that some orders could slip
into 2005.
The Company has received formal notice that the U.S. Government has accepted a
proposed settlement of the Federal Excise Tax (FET) case. As a result, the
Company expects to receive approximately $12.6 million pre-tax, including
accrued interest, during the fourth quarter of 2004. The Company recorded income
of $12.5 million pre-tax in discontinued operations as a result of this
settlement. This is more fully discussed in Note I, "Commitments and
Contingencies," in Part I, Item 1, Financial Statements.
The positive effect of foreign currency translation increased third quarter 2004
consolidated revenues by $24.3 million and pre-tax income by $0.7 million when
compared with the third quarter of 2003.
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
SEPTEMBER 30 2003 TO 2004
(DOLLARS IN MILLIONS) 2004 2003 VOLUME CURRENCY TOTAL
- -----------------------------------------------------------------------------------------------------------
U.S. $ 252.7 $ 225.1 12.3% 0.0% 12.3%
Europe 252.3 216.7 6.9 9.5 16.4
Latin America 32.2 26.3 24.1 (1.7) 22.4
Asia - Pacific 31.1 22.3 34.4 5.1 39.5
Middle East 19.1 13.2 45.2 (0.5) 44.7
Other 29.9 26.6 1.1 11.3 12.4
- -----------------------------------------------------------------------------------------------------------
Total $ 617.3 $ 530.2 11.8% 4.6% 16.4%
===========================================================================================================
The positive effect of foreign currency translation increased consolidated
revenues for the first nine months of 2004 by $83.0 million and pre-tax income
by $3.6 million when compared with the first nine months of 2003.
- -----------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES
NINE MONTHS ENDED PERCENTAGE GROWTH FROM
SEPTEMBER 30 2003 TO 2004
(DOLLARS IN MILLIONS) 2004 2003 VOLUME CURRENCY TOTAL
- -----------------------------------------------------------------------------------------------------------
U.S $ 737.7 $ 658.7 12.0% 0.0% 12.0%
Europe 741.0 643.9 4.6 10.5 15.1
Latin America 88.0 74.0 19.1 (0.2) 18.9
Asia - Pacific 87.5 63.3 29.6 8.6 38.2
Middle East 51.6 36.8 41.5 (1.3) 40.2
Other 85.3 77.8 (4.1) 13.7 9.6
- -----------------------------------------------------------------------------------------------------------
Total $1,791.1 $1,554.5 9.9% 5.3% 15.2%
===========================================================================================================
2004 HIGHLIGHTS
The following significant items impacted the Company overall during the third
quarter and first nine months of 2004 in comparison with the third quarter and
first nine months of 2003, respectively:
Company Wide:
- -------------
o Strong worldwide economic activity, including increased steel production,
benefited the Company's Mill Services Segment and resulted in strong
demand for the Company's products. This included international demand for
concrete forming products and cryogenic equipment; and domestic demand for
roofing granules and industrial grating products.
o Due to strong worldwide demand, higher commodity and other material costs,
particularly steel, increased the Company's operating costs during the
third quarter and first nine months of 2004. Included in that increase
were higher fuel and energy-related costs of approximately $4 million and
$9 million during the third quarter and first nine months of 2004,
respectively. These increased costs were generally offset by increased
revenues during the first six months of 2004; however, during the third
quarter of 2004 operating income and margins were negatively impacted by
the increased costs, particularly in the Gas Technologies Segment. To the
extent that such costs cannot be passed to customers in the future,
operating income may be adversely affected. The Company uses the LIFO
method of inventory valuation for most of its manufacturing businesses.
LIFO matches the most recently incurred costs with current revenues by
charging cost of goods sold with the costs of goods most recently acquired
or produced. In periods of rising prices, reported costs under LIFO are
generally greater than under the FIFO method.
o During the first nine months of 2004, the Company was favorably affected
by pre-tax benefits of $2.2 million from the termination of certain
postretirement benefit plans. This compares with pre-tax benefits of $4.9
million during the first nine months of 2003 for similar plan
terminations.
o Total pension expense for the third quarter and first nine months of 2004
increased $0.6 million and $3.1 million from the third quarter and first
nine months of 2003, respectively. Defined benefit pension expense for the
third quarter and first nine months of 2004 decreased approximately $1.7
million and $5.5 million from the third quarter and first nine months of
2003, respectively. During the third quarter and first nine months of
2004, there were offsetting increases of approximately $2.0 million and
$6.6 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
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 A decrease in the effective income tax rate, relating to continuing
operations, from 29.9% in the third quarter of 2003 to 27.1% in the third
quarter of 2004 resulted in approximately $1.3 million in lower income tax
expense for both the third quarter and first nine months of 2004. The
decrease in the effective income tax rate was primarily the result of a
change in estimate of the amount of international earnings subject to U.S.
income tax and favorable tax credits.
o Other than the impact on revenues, and included in the impact on pre-tax
income effect as discussed previously, positive foreign currency
translation in the third quarter and first nine months of 2004 resulted in
a pre-tax increase to interest expense of $0.7 million and $2.2 million,
respectively, compared with the corresponding 2003 periods.
Mill Services Segment:
- ----------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 244.9 $ 208.6 $ 723.4 $ 600.6
Operating income 25.0 20.7 75.1 63.1
Operating margin percent 10.2% 9.9% 10.4% 10.5%
=====================================================================================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 208.6 $ 600.6
Continued strong volume and new business 24.2 52.4
The benefit of positive foreign currency translation 12.2 44.9
The acquisition of the industrial services unit of C. J. Langenfelder and Sons, Inc.
in June 2003 -- 25.6
Other (0.1) (0.1)
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 244.9 $ 723.4
========================================================================================================================
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30:
o Continued strong volume and new business increased operating income in the
third quarter and first nine months of 2004 by $4.0 million and $10.1
million, respectively, when compared with the same 2003 periods.
o The benefit of positive foreign currency translation in the third quarter
and first nine months of 2004 resulted in increased operating income of
$0.8 million and $5.0 million, respectively, compared with the third
quarter and first nine months of 2003, respectively.
o During the third quarter and first nine months of 2003, the Segment was
unfavorably affected by $1.4 million and $3.3 million, respectively, in
pre-tax Other expenses. During the first nine months of 2004 (principally
the first half) only $1.3 million in similar expenses were incurred,
positively impacting the operating margin on a comparative basis. Other
expenses include impaired asset write-downs, employee termination benefit
costs and costs to exit activities, offset by net gains on the disposal of
non-core assets.
o The Segment was favorably affected by pre-tax benefits of $1.8 million
from the reversal of bad debt expense, and $1.4 million from the
termination of certain postretirement benefit plans in the first nine
months of 2003. No such benefits occurred in 2004, negatively impacting
the operating margin on a comparative basis.
o Compared with the third quarter and the first nine months of 2003, the
Segment's operating income in 2004 was negatively impacted by increased
fuel and energy-related costs of approximately $3 million and $7 million,
respectively.
o The Segment's operating income for the third quarter and first nine months
of 2004 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).
General and administrative costs
-22-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
increased $2.5 million and $8.7 million for the third quarter and first
nine months of 2004, respectively (including approximately $1 million and
$3 million, respectively, related to foreign currency translation).
Access Services Segment:
- ------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 176.3 $ 154.8 $ 517.3 $ 460.1
Operating income 13.4 11.0 31.2 26.4
Operating margin percent 7.6% 7.1% 6.0% 5.7%
=====================================================================================================================
THREE MONTHS NINE MONTHS
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 154.8 $ 460.1
The benefit of positive foreign currency translation 11.1 35.4
Net increased volume 7.2 15.7
Acquisitions (principally SGB Raffia in Australia) 3.4 6.1
Other (0.2) --
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 176.3 $ 517.3
========================================================================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30:
o In the third quarter and first nine months of 2004, the Segment was
positively impacted by the strength of the concrete forming 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 The international access services business continued to increase outside
the U.K., predominantly in the Middle East, due to certain large projects
during 2004. During the first nine months of 2004, the international
operations outside of the U.K. had $160.6 million in revenues and $18.4
million in operating income. This compares with $127.3 million in revenues
and $11.7 million in operating income for the first nine months of 2003.
o In the 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. The third quarter of 2004 showed initial
signs of strengthening of the non-residential construction market.
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 The U.S. was also negatively affected by decreased erection and
dismantling labor revenue during both the third quarter and first nine
months of 2004. This decrease was due primarily to delayed industrial
maintenance activities, particularly fewer maintenance outages at power
generation plants. The Company expects to see an increase in industrial
maintenance activities during mid-to-late 2005.
o The Segment was favorably affected by pre-tax income of $1.3 million from
the termination of certain postretirement benefit plans in principally the
second quarter of 2004. This compared with a pre-tax benefit of $0.5
million from the termination of similar plans in principally the first
quarter of 2003.
o During the first nine months of 2003, the Segment was favorably affected
by pre-tax income of $1.8 million from the sale of non-core assets. During
the first nine months of 2004, less than $0.1 million of similar benefits
occurred.
o The benefit of positive foreign currency translation in third quarter and
first nine months of 2004 resulted in increased operating income of $0.5
million and $0.6 million, respectively, when compared with corresponding
periods in 2003.
-23-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Gas Technologies Segment:
- -------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2004 2003(a) 2004 2003(a)
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 84.4 $ 74.2 $ 245.0 $ 212.1
Operating income 2.4 3.0 10.8 9.9
Operating margin percent 2.9% 4.0% 4.4% 4.7%
=====================================================================================================================
(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 NINE MONTHS
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
- ---------------------------------------------