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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 1-3970
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HARSCO CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 23-1483991
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
350 Poplar Church Road, Camp Hill, Pennsylvania 17011
----------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 717-763-7064
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Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange on which registered
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Common stock, par value $1.25 per share New York Stock Exchange and
Preferred stock purchase rights Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [_]
The aggregate market value of the Company's voting stock held by non-affiliates
of the Company as of June 30, 2004 was $1,933,614,169.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Classes Outstanding at February 28, 2005
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Common stock, par value $1.25 per share 41,503,990
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 2005 Proxy Statement are incorporated by reference into
Part III of this Report.
The Exhibit Index (Item No. 15) located on pages 90 to 94 incorporates several
documents by reference as indicated therein.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Harsco Corporation ("the Company") is a diversified, multinational provider of
market-leading industrial services and engineered products. The Company's
operations fall into three reportable segments: Mill Services, Access Services
and Gas Technologies, plus an "all other" category labeled Engineered Products
and Services. The Company has locations in 42 countries, including the United
States. The Company was incorporated in 1956.
The Company's executive offices are located at 350 Poplar Church Road, Camp
Hill, Pennsylvania 17011. The Company's main telephone number is (717) 763-7064.
The Company's Internet website address is www.harsco.com. Through this Internet
website (found in the "Investors" link) the Company makes available, free of
charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K and all amendments to those reports, as soon as
reasonably practicable after these reports are electronically filed or furnished
to the Securities and Exchange Commission. Information contained on the
Company's website is not incorporated by reference into this Annual Report, and
you should not consider information contained on the Company's website as part
of this Annual Report.
The Company's principal lines of business and related principal business drivers
are as follows:
Principal Lines of Business Principal Business Drivers
--------------------------- --------------------------
o Outsourced, on-site mill services o Steel mill production and capacity utilization
o Outsourcing of services by mills
------------------------------------------------------- -----------------------------------------------------------------------
o Scaffolding, forming, shoring and other o Non-residential construction
access-related services o Annual industrial and building maintenance cycles
------------------------------------------------------- -----------------------------------------------------------------------
o Gas control and containment products
- Cryogenic containers and industrial cylinders o General industrial production and industrial gas production
- Valves o Use of industrial, fuel and refrigerant gases
o Respiratory care
o Consumer barbeque grills
- Propane Tanks o Use of propane as a primary and/or backup fuel
- Filament-wound composite cylinders o Self-contained breathing apparatus (SCBA) market
o Natural gas vehicle (NGV) market
------------------------------------------------------- -----------------------------------------------------------------------
o Railway track maintenance services and o Domestic and international railway track maintenance-of-way
equipment capital spending
o Outsourcing of track maintenance and new track
construction by railroads
------------------------------------------------------- -----------------------------------------------------------------------
o Industrial grating products o Industrial production
o Non-residential construction
------------------------------------------------------- -----------------------------------------------------------------------
o Industrial abrasives and roofing granules o Industrial and infrastructure surface preparation and
restoration
o Residential roof replacement
------------------------------------------------------- -----------------------------------------------------------------------
o Powder processing equipment and heat o Pharmaceutical, food and chemical production
transfer products o Commercial and institutional boiler requirements
------------------------------------------------------- -----------------------------------------------------------------------
-2-
Principal Lines of Business Principal Business Drivers
--------------------------- --------------------------
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o Air-cooled heat exchangers o Natural gas drilling and transmission
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The Company reports segment information using the "management approach" in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The management approach is based on the way management
organizes and reports the segments within the enterprise for making operating
decisions and assessing performance. The Company's reportable segments are
identified based upon differences in products, services and markets served. Due
to management changes, effective January 1, 2004, the air-cooled heat exchangers
business was reclassified from the Gas and Fluid Control Segment to the Other
Infrastructure Products and Services ("all other") Category. 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 was renamed the Engineered Products and Services
("all other") Category. These segments and the types of products and services
offered are more fully described below. Historical information has been
reclassified for comparative purposes.
In 2004, 2003 and 2002, the United States contributed sales of $1.0 billion,
$0.9 billion and $0.9 billion, equal to 42%, 43% and 46% of total sales,
respectively. In 2004, 2003 and 2002, the United Kingdom contributed sales of
$0.5 billion, $0.5 billion and $0.4 billion, equal to 21% of total sales for
each year. No single customer represented 10% or more of the Company's sales
during 2004, 2003 and 2002. There were no significant inter-segment sales.
(b) Financial Information about Segments
Financial information concerning industry segments is included in Note 14,
Information by Segment and Geographic Area, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
(c) Narrative Description of Business
(1) A narrative description of the businesses by reportable segment is as
follows:
MILL SERVICES SEGMENT - 40% OF CONSOLIDATED SALES FOR 2004
The Mill Services Segment, which consists of the MultiServ Division, is the
Company's largest operating segment in terms of revenues and operating
income. MultiServ is the world's largest provider of outsourced, on-site
mill services to the global steel and metals industries. MultiServ provides
its services on a long-term contract basis, supporting each stage of the
metal-making process from initial raw material handling to post-production
by-product processing and on-site recycling. Working as a specialized,
high-value-added services provider, MultiServ rarely trades steel or scrap,
or takes ownership of its customers' raw materials or finished products.
Similar services are provided to the producers of non-ferrous metals, such
as aluminum, copper and nickel. The Company's multi-year Mill Services
contracts had estimated future revenues of $3.7 billion at December 31,
2004. This provides the Company with a substantial base of long-term
revenues. Approximately 59% of these revenues are expected to be recognized
by December 31, 2007. The remaining revenues are expected to be recognized
principally between January 1, 2008 and December 31, 2013.
MultiServ's geographic reach to approximately 160 locations in over 30
countries, and its increasing range of services, enhance the Company's
financial and operating balance. In 2004, this Segment's revenues were
generated in the following regions:
MILL SERVICES SEGMENT
-----------------------------------------------
2004 PERCENTAGE
REGION OF REVENUES
-----------------------------------------------
Continental Europe 31%
United States 20%
United Kingdom 18%
Latin America 10%
Other 21%
For 2004, 2003 and 2002, the Mill Services Segment's percentage of
consolidated sales was 40%, 39% and 35%, respectively.
-3-
ACCESS SERVICES SEGMENT - 28% OF CONSOLIDATED SALES FOR 2004
The Access Services Segment includes the Company's SGB Group and Patent
Construction Systems Divisions. The Company's Access Services Segment leads
the access industry as one of the world's most complete providers of
scaffolding, shoring, forming and other access solutions. The U.K.-based
SGB Group Division supports requirements throughout Europe, the Middle East
and the Pacific, while the U.S.-based Patent Construction Systems Division
serves North and South America. Major products and services include the
rental and sale of scaffolding, powered access equipment, shoring and
concrete forming products. The Company also provides access design
engineering services, on-site installation and dismantling services, and a
variety of other access equipment services. These businesses serve
principally the non-residential construction and industrial plant
maintenance markets.
The Company's access services are provided in approximately 20 countries of
operation. In 2004, this Segment's revenues were generated in the following
regions:
ACCESS SERVICES SEGMENT
-----------------------------------------------
2004 PERCENTAGE
REGION OF REVENUES
-----------------------------------------------
United Kingdom 47%
Continental Europe 22%
United States 20%
Other 11%
For 2004, 2003 and 2002, the Access Services Segment's percentage of
consolidated sales was 28%, 29% and 30%, respectively.
GAS TECHNOLOGIES SEGMENT - 14% OF CONSOLIDATED SALES FOR 2004
The Gas Technologies Segment includes the Company's Harsco GasServ
Division. The Segment's manufacturing and service facilities in the United
States, Europe, Australia, Malaysia and China comprise an integrated
manufacturing network for gas containment and control products. This global
operating presence and product breadth provide economies of scale and
multiple code production capability, enabling Harsco GasServ to serve as a
single source to the world's leading industrial gas producers and
distributors, as well as regional and local customers. In 2004,
approximately 87% of this Segment's revenues were generated in the United
States.
The Company's gas containment products include cryogenic gas storage tanks;
high pressure and acetylene cylinders; propane tanks; and composite vessels
for industrial and commercial gases, natural gas vehicle (NGV) products and
other products. The Company's gas control products include valves and
regulators serving a variety of markets, including the industrial gas,
commercial refrigeration, life support and outdoor recreation industries.
For 2004, 2003 and 2002, the Gas Technologies Segment's percentage of
consolidated sales was 14%, 14% and 16%, respectively.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - 18% OF
CONSOLIDATED SALES FOR 2004
The Engineered Products and Services ("all other") Category includes the
Harsco Track Technologies, Reed Minerals, IKG Industries, Patterson-Kelley
and Air-X-Changers Divisions. Approximately 89% of this category's revenues
originate in the United States.
Export sales for this Category totaled $101.2 million, $71.1 million and
$36.2 million in 2004, 2003 and 2002, respectively. In 2004, export sales
for the Harsco Track Technologies Division were $76.3 million which
included sales to China, the United Kingdom, Canada, Germany and India.
Harsco Track Technologies is a global provider of equipment and services to
maintain, repair and construct railway track. The Company's railway track
maintenance services provide high-technology comprehensive track
maintenance and new track construction support to railroad customers
worldwide. The railway track maintenance equipment product class includes
specialized track maintenance equipment used by private and
government-owned railroads and urban transit systems worldwide.
-4-
Reed Minerals' roofing granules and industrial abrasives are produced from
utility coal slag at a number of locations throughout the United States.
The Company's Black Beauty(R) abrasives are used for industrial surface
preparation, such as rust removal and cleaning of bridges, ship hulls and
various structures. Roofing granules are sold to residential roofing
shingle manufacturers, primarily for the replacement market. This Division
is the United States' largest manufacturer of slag abrasives and third
largest manufacturer of residential roofing granules.
IKG Industries manufactures a varied line of industrial grating products at
several plants in North America. These products include a full range of
riveted, pressure-locked and welded grating configurations, which are used
mainly in industrial flooring, safety and security applications in the
power, paper, chemical, refining and processing industries.
Patterson-Kelley is a leading manufacturer of powder processing equipment
such as blenders, dryers and mixers for the chemical, pharmaceutical and
food processing industries and heat transfer products such as water heaters
and boilers for commercial and institutional applications.
Air-X-Changers is a leading international supplier of custom-designed and
manufactured air-cooled heat exchangers for the natural gas industry. The
Company's heat exchangers are the primary apparatus used to condition
natural gas during recovery, compression and transportation from
underground reserves through the major pipeline distribution channels.
For 2004, 2003 and 2002, the Engineered Products and Services ("all other")
Category's percentage of consolidated sales was 18%, 18% and 19%,
respectively.
(1)(i) The products and services of the Company include a number of
product groups. These product groups are more fully discussed in
Note 14, Information by Segment and Geographic Area, to the
Consolidated Financial Statements under Part II, Item 8,
"Financial Statements and Supplementary Data." The product groups
that contributed 10% or more as a percentage of consolidated
sales in any of the last three fiscal years are set forth in the
following table:
PERCENTAGE OF CONSOLIDATED SALES
----------------------------------
PRODUCT GROUP 2004 2003 2002
----------------------------------------------------------------
Mill Services 40% 39% 35%
Access Services 28% 29% 30%
Industrial Gas Products 14% 14% 16%
================================================================
(1)(ii) New products and services are added from time to time; however,
in 2004 none required the investment of a material amount of the
Company's assets.
(1)(iii) The manufacturing requirements of the Company's operations are
such that no unusual sources of supply for raw materials are
required. The raw materials used by the Company include
principally steel and, to a lesser extent, aluminum, which are
usually readily available. During 2004, the Company experienced
significant increases in the cost of steel compared with prior
years. Continued increases in steel prices and worldwide demand
for steel could have an adverse effect on raw material costs, and
the Company's ability to obtain the necessary raw materials. If
this situation continues long-term and the Company is unable to
recover increased costs through price increases, it could have a
material impact on the Company's financial position, results of
operations and cash flows. Also, the Company uses coal slag for
its roofing granule and abrasives manufacturing. Although this
raw material has limited availability, the Company has an
adequate supply for the foreseeable future. Additionally, the
Company uses carbon fiber to produce filament-wound composite
cylinders, a product line of the Gas Technologies Segment. This
material currently has limited availability. If this situation
continues, it could result in increased costs to the Company. The
Company believes that it will be able to recover increased costs
through price increases which would mitigate the impact on the
Company's financial position, results of operations and cash
flows.
(1)(iv) While the Company has a number of trademarks, patents and patent
applications, it does not consider that any material part of its
business is dependent upon them.
-5-
(1)(v) The Company furnishes products and materials and certain
industrial services within the Access Services and Gas
Technologies Segments and the Engineered Products and Services
("all other") Category that are seasonal in nature. As a result,
the Company's sales and net income for the first quarter ending
March 31 are normally lower than the second, third and fourth
quarters. The Company's historical revenue patterns and cash
provided by operating activities were as follows:
HISTORICAL REVENUE PATTERNS
(IN MILLIONS) 2004 2003 2002 2001
------------------------------------------------------------------------------
First Quarter Ended March 31 $556.3 $487.9 $458.6 $505.0
Second Quarter Ended June 30 617.6 536.4 510.3 510.1
Third Quarter Ended September 30 617.3 530.2 510.5 510.3
Fourth Quarter Ended December 31 710.9 564.0 497.3 499.7
HISTORICAL CASH PROVIDED BY OPERATIONS
(IN MILLIONS) 2004 2003 2002 2001
------------------------------------------------------------------------------
First Quarter Ended March 31 $ 32.4 $ 31.2 $ 9.0 $ 2.6
Second Quarter Ended June 30 64.6 59.2 71.4 65.1
Third Quarter Ended September 30 68.9 64.1 83.3 66.1
Fourth Quarter Ended December 31 104.6 108.4 90.1 106.9
(1)(vi) The practices of the Company relating to working capital are
similar to those practices of other industrial service providers
or manufacturers servicing both domestic and international
industrial services and commercial markets. These practices
include the following:
o Standard accounts receivable payment terms of 30 days to 60
days, with progress payments required for certain
long-lead-time or large orders.
o Standard accounts payable payment terms of 30 days to 90 days.
o Inventories are maintained in sufficient quantities to meet
forecasted demand. Due to the time required to manufacture
certain railway maintenance equipment to customer
specifications, inventory levels of this business tend to
increase during the production phase and then decline when the
equipment is sold.
(1)(vii) The Company as a whole is not dependent upon any one customer for
10% or more of its revenues. However, the Mill Services Segment
is dependent largely on the global steel industry and has two
European-based customers that each provided in excess of 10% of
this Segment's revenues for the years 2002 to 2004 under multiple
long-term contracts at several mill sites. The loss of any one of
the contracts would not have a material adverse effect upon the
Company's financial position or cash flows; however, it could
have a material adverse effect on quarterly or annual results of
operations of the Segment. Further consolidation is expected in
the global steel industry. This could result in additional
customers exceeding 10% of revenues for this Segment.
(1)(viii)Backlog of orders was $243.0 million and $186.2 million as of
December 31, 2004 and 2003, respectively. It is expected that
approximately 22% of the total backlog at December 31, 2004 will
not be filled during 2005. The Company's backlog is seasonal in
nature and tends to follow in the same pattern as sales and net
income which is discussed in section (1) (v) above. Backlog for
scaffolding, shoring and forming services and for roofing
granules and slag abrasives is not included in the total backlog
because it is generally not quantifiable, due to the nature of
the products and services provided. Contracts for the Mill
Services Segment are also excluded from the total backlog. These
contracts have estimated future revenues of $3.7 billion at
December 31, 2004. For additional information regarding backlog,
see the Backlog section included in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
-6-
(1)(ix) At December 31, 2004, the Company had no material contracts that
were subject to renegotiation of profits or termination at the
election of the U.S. Government.
(1)(x) The Company encounters active competition in all of its
activities from both larger and smaller companies who produce the
same or similar products or services, or who produce different
products appropriate for the same uses.
(1)(xi) The expense for product development activities was $2.6 million,
$3.3 million and $2.8 million in 2004, 2003 and 2002,
respectively. For additional information regarding product
development activities, see the Research and Development section
included in Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(1)(xii) The Company has become subject, as have others, to stringent air
and water quality control legislation. In general, the Company
has not experienced substantial difficulty complying with these
environmental regulations in the past, and does not anticipate
making any material capital expenditures for environmental
control facilities. While the Company expects that environmental
regulations may expand, and that its expenditures for air and
water quality control will continue, it cannot predict the effect
on its business of such expanded regulations. For additional
information regarding environmental matters see Note 10,
Commitments and Contingencies, to the Consolidated Financial
Statements included in Part II, Item 8, "Financial Statements and
Supplementary Data."
(1)(xiii)As of December 31, 2004, the Company had approximately 18,500
employees.
(d) Financial Information about Geographic Areas
Financial information concerning foreign and domestic operations is included in
Note 14, Information by Segment and Geographic Area, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data." Export sales totaled $139.3 million, $108.5 million and
$76.6 million in 2004, 2003 and 2002, respectively.
(e) Available Information
Information is provided in Part I, Item 1 (a), "General Development of
Business."
ITEM 2. PROPERTIES
Information as to the principal plants owned and operated by the Company is
summarized in the following table:
LOCATION PRINCIPAL PRODUCTS
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Access Services Segment
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Marion, Ohio Access Equipment Maintenance
Dosthill, United Kingdom Access Equipment Maintenance
Gas Technologies Segment
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Lockport, New York Valves
Niagara Falls, New York Valves
Washington, Pennsylvania Valves
Bloomfield, Iowa Propane Tanks
Fremont, Ohio Propane Tanks
Jesup, Georgia Propane Tanks
West Jordan, Utah Propane Tanks
Harrisburg, Pennsylvania High Pressure Cylinders
Huntsville, Alabama High Pressure Cylinders
Beijing, China Cryogenic Storage Vessels
Jesup, Georgia Cryogenic Storage Vessels
Kosice, Slovakia Cryogenic Storage Vessels
Shah Alam, Malaysia Cryogenic Storage Vessels
Theodore, Alabama Cryogenic Storage Vessels
-7-
LOCATION PRINCIPAL PRODUCTS
-----------------------------------------------------------------------------
Engineered Products and Services ("all other") Category
-------------------------------------------------------
Drakesboro, Kentucky Roofing Granules/Abrasives
Gary, Indiana Roofing Granules/Abrasives
Moundsville, West Virginia Roofing Granules/Abrasives
Tampa, Florida Roofing Granules/Abrasives
Brendale, Australia Railroad Equipment
Fairmont, Minnesota Railroad Equipment
Ludington, Michigan Railroad Equipment
West Columbia, South Carolina Railroad Equipment
Channelview, Texas Industrial Grating Products
Leeds, Alabama Industrial Grating Products
Nashville, Tennessee Industrial Grating Products
Queretaro, Mexico Industrial Grating Products
East Stroudsburg, Pennsylvania Process Equipment
Catoosa, Oklahoma Heat Exchangers
=============================================================================
The Company also operates the following plants which are leased:
LOCATION PRINCIPAL PRODUCTS
-----------------------------------------------------------------------------
Access Services Segment
-----------------------
Maldon, United Kingdom Aluminum Access Products
DeLimiet, Netherlands Access Equipment Maintenance
Gas Technologies Segment
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Cleveland, Ohio Brass Castings
Pomona, California Composite Cylinders
Engineered Products and Services ("all other") Category
-------------------------------------------------------
Eastwood, United Kingdom Railroad Equipment
Tulsa, Oklahoma Industrial Grating Products
Catoosa, Oklahoma Heat Exchangers
Sapulpa, Oklahoma Heat Exchangers
=============================================================================
The Company operates from a number of other plants, branches, warehouses and
offices in addition to the above. The Company has approximately 160 locations
related to mill services in over 30 countries; however since these facilities
are on the property of the steel mill being serviced they are not listed. The
Company considers all of its properties at which operations are currently
performed to be in satisfactory condition and suitable for operations.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is included in Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II, Item 8,
"Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
covered by this report.
-8-
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT (PURSUANT TO
INSTRUCTION 3 TO ITEM 401(B) OF REGULATION S-K)
Set forth below, as of March 10, 2005, are the executive officers (this excludes
two corporate officers who are not deemed "executive officers" within the
meaning of applicable Securities and Exchange Commission regulations) of the
Company and certain information with respect to each of them. The executive
officers were elected to their respective offices effective April 27, 2004. All
terms expire on April 26, 2005. There are no family relationships between any of
the executive officers.
NAME AGE PRINCIPAL OCCUPATION OR EMPLOYMENT
EXECUTIVE OFFICERS:
D. C. Hathaway 60 Chairman, President and Chief Executive Officer
of the Corporation since July 31, 2000. Chairman
and Chief Executive Officer from January 1, 1998
to July 31, 2000. Served as Chairman, President
and Chief Executive Officer from April 1, 1994 to
December 31, 1997 and President and Chief
Executive Officer from January 1, 1994 to April
1, 1994. Director since 1991. From 1991 to 1993,
served as President and Chief Operating Officer.
From 1986 to 1991 served as Senior Vice
President-Operations of the Corporation. Served
as Group Vice President from 1984 to 1986 and as
President of the Dartmouth Division of the
Corporation from 1979 until 1984.
G. D. H. Butler 58 Senior Vice President - Operations of the
Corporation effective September 26, 2000 and
Director since January 2002. Concurrently serves
as President of the MultiServ and SGB Divisions.
From September 2000 through December 2003, he was
President of the Heckett MultiServ International
and SGB Divisions. Was President of the Heckett
MultiServ-East Division from July 1, 1994 to
September 26, 2000. Served as Managing Director -
Eastern Region of the Heckett MultiServ Division
from January 1, 1994 to June 30, 1994. Served in
various officer positions within MultiServ
International, N. V. prior to 1994 and prior to
the Company's acquisition of that corporation in
August 1993.
S. D. Fazzolari 52 Senior Vice President, Chief Financial Officer
and Treasurer of the Corporation effective August
24, 1999 and Director since January 2002. Served
as Senior Vice President and Chief Financial
Officer from January 1998 to August 1999. Served
as Vice President and Controller from January
1994 to December 1997 and as Controller from
January 1993 to January 1994. Previously served
as Director of Auditing from 1985 to 1993 and
served in various auditing positions from 1980 to
1985.
M. E. Kimmel 45 General Counsel and Corporate Secretary effective
January 1, 2004. Served as Corporate Secretary
and Assistant General Counsel from May 1, 2003 to
December 31, 2003. Held various legal positions
within the Corporation since he joined the
Company in August 2001. Prior to joining Harsco,
he was Vice President, Administration and General
Counsel, New World Pasta Company from January 1,
1999 to July 2001. Before joining New World
Pasta, Mr. Kimmel spent approximately 12 years in
various legal positions with Hershey Foods
Corporation.
S. J. Schnoor 51 Vice President and Controller of the Corporation
effective May 15, 1998. Served as Vice President
and Controller of the Patent Construction Systems
Division from February 1996 to May 1998 and as
Controller of the Patent Construction Systems
Division from January 1993 to February 1996.
Previously served in various auditing positions
for the Corporation from 1988 to 1993. Prior to
joining Harsco, he served in various auditing
positions for Coopers & Lybrand from September
1985 to April 1988.
-9-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Harsco common stock is listed on the New York and Pacific Stock Exchanges, and
also trades on the Boston and Philadelphia Exchanges under the symbol HSC. At
the end of 2004, there were 41,431,249 shares outstanding. In 2004, the
Company's common stock traded in a range of $40.10 to $56.24 and closed at
$55.74 at year-end. At December 31, 2004 there were approximately 16,500
stockholders. There are no significant limitations on the payment of dividends
included in the Company's loan agreements. For additional information regarding
Harsco common stock market price and dividends declared, see Dividend Action
under Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Common Stock Price and Dividend
Information under Part II, Item 8, "Financial Statements and Supplementary
Data." For additional information on the Company's equity compensation plans see
Part III, Item 11, "Executive Compensation."
(c). Issuer Purchases of Equity Securities
TOTAL NUMBER
OF SHARES
PURCHASED MAXIMUM NUMBER
AS PART OF OF SHARES
TOTAL PUBLICLY THAT MAY YET BE
NUMBER OF AVERAGE ANNOUNCED PURCHASED UNDER
SHARES PRICE PAID PLANS OR THE PLANS OR
PERIOD PURCHASED PER 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
July 1, 2004 - July 31, 2004 -- -- -- 1,000,000
August 1, 2004 - August 31, 2004 -- -- -- 1,000,000
September 1, 2004 - September 30, 2004 -- -- -- 1,000,000
October 1, 2004 - October 31, 2004 -- -- -- 1,000,000
November 1, 2004 - November 30, 2004 -- -- -- 1,000,000
December 1, 2004 - December 31, 2004 -- -- -- 1,000,000
- ----------------------------------------------------------------------------------------------
Total -- -- --
- ----------------------------------------------------------------------------------------------
The Company's share repurchase program was extended by Board of Directors in
November 2004. This was announced to the public on November 16, 2004 as part of
a Company-issued press release. The program authorizes the repurchase of up to
1,000,000 shares of the Company's common stock and expires January 31, 2006.
-10-
ITEM 6. SELECTED FINANCIAL DATA (A)
FIVE-YEAR STATISTICAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE, EMPLOYEE INFORMATION AND
PERCENTAGES) 2004 2003 2002 2001 2000(b)
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT INFORMATION
Revenues from continuing operations $ 2,502,059 $ 2,118,516 $ 1,976,732 $ 2,025,163 $ 1,904,691
Income from continuing operations 113,540 86,999 88,410 74,642 94,343
Income (loss) from discontinued operations 7,671 5,218 1,696 (2,917) 2,460
Net income 121,211 92,217 90,106 71,725 96,803
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AND CASH FLOW INFORMATION
Working capital $ 346,527 $ 269,276 $ 228,552 $ 231,156 $ 181,489
Total assets 2,389,756 2,138,035 1,999,297 2,090,766 2,180,948
Long-term debt 594,747 584,425 605,613 720,133 774,448
Total debt 625,809 613,531 639,670 762,115 837,473
Depreciation and amortization 184,371 168,935 155,661 176,531 159,099
Capital expenditures 204,235 143,824 114,340 156,073 180,048
Cash provided by operating activities 270,465 262,788 253,753 240,601 259,448
Cash used by investing activities (209,602) (144,791) (53,929) (125,213) (459,052)
Cash provided (used) by financing activities (56,512) (125,501) (205,480) (99,190) 210,746
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS
Return on sales(c) 4.5% 4.1% 4.5% 3.7% 5.0%
Return on average equity(d) 13.8% 12.2% 12.6% 11.1% 14.4%
Current ratio 1.6:1 1.5:1 1.5:1 1.5:1 1.3:1
Total debt to total capital(e) 40.6% 44.1% 49.8% 52.6% 55.4%
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
Basic - Income from continuing operations $ 2.76 $ 2.14 $ 2.19 $ 1.87 $ 2.36
- Income (loss) from discontinued operations 0.19 0.13 0.04 (0.07) 0.06
---------------------------------------------------------------------------
- Net income $ 2.95 $ 2.27 $ 2.23 $ 1.80 $ 2.42
===========================================================================
Diluted - Income from continuing operations $ 2.73 $ 2.12 $ 2.17 $ 1.86 $ 2.36
- Income (loss) from discontinued operations 0.18 0.13 0.04 (0.07) 0.06
---------------------------------------------------------------------------
- Net income $ 2.91 $ 2.25 $ 2.21 $ 1.79 $ 2.42
===========================================================================
Book value $ 22.07 $ 19.01 $ 15.90 $ 17.16 $ 16.94
Cash dividends declared 1.125 1.0625 1.0125 0.97 0.945
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION
Diluted average number of shares outstanding 41,598 40,973 40,680 40,066 40,022
Number of employees 18,500 17,500 17,500 18,700 19,700
Backlog from continuing operations (f) $ 243,006 $ 186,222 $ 157,777 $ 214,124 $ 256,745
===================================================================================================================================
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2001 and 2000 information has been reclassified for comparative purposes.
(b) Includes SGB Group Plc which was acquired June 16, 2000.
(c) "Return on sales" is calculated by dividing income from continuing
operations by revenues from continuing operations.
(d) "Return on average equity" is calculated by dividing income from continuing
operations by quarterly weighted-average equity.
(e) "Total debt to total capital" is calculated by dividing the sum of debt
(short-term borrowings and long-term debt including current maturities) by
the sum of equity and debt.
(f) Excludes the estimated amount of long-term mill service contracts, which
had estimated future revenues of $3.7 billion at December 31, 2004. Also
excludes backlog of the Access Services Segment and the roofing granules
and slag abrasives business. These amounts are generally not quantifiable
due to the nature and timing of the products and services provided.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a
-11-
number of risks, uncertainties and other factors that could cause actual results
to differ materially, as discussed more fully herein.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include statements
about our management confidence and strategies for performance; expectations for
new and existing products, technologies, and opportunities; and expectations
regarding growth, sales, cash flows, earnings and Economic Value Added (EVA(R)).
These statements can be identified by the use of such terms as "may," "could,"
"expect," "anticipate," "intend," "believe," or other comparable terms.
Factors which could cause results to differ include, but are not limited to: (1)
changes in the worldwide business environment in which the Company operates,
including general economic conditions; (2) changes in currency exchange rates,
interest rates and capital costs; (3) changes in the performance of stock and
bond markets that could affect the valuation of the assets in the Company's
pension plans and the accounting for pension assets, liabilities and expenses;
(4) changes in governmental laws and regulations, including taxes and import
tariffs; (5) market and competitive changes, including pricing pressures, market
demand and acceptance for new products, services and technologies; (6)
unforeseen business disruptions in one or more of the many countries in which
the Company operates due to political instability, civil disobedience, armed
hostilities or other calamities; and (7) other risk factors listed from time to
time in the Company's SEC reports. A further discussion of these, along with
other potential factors can be found in Part II, Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk," of this Form 10-K. 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 2004 revenues were a record $2.5 billion. This is an increase of
$0.4 billion or 18% over 2003. Income from continuing operations was a record
$113.5 million for 2004 compared with $87.0 million in 2003, an increase of 31%.
Diluted earnings per share from continuing operations were a record $2.73 for
2004, a 29% increase.
The 2004 results were led by the Mill Services Segment. Revenues in 2004 for
this Segment were $997.4 million compared with $827.5 million in 2003, a 21%
increase. Operating income for 2004 increased by 23% to $105.5 million, from
$85.9 million in 2003. The Mill Services business accounted for 40% of the
Company's revenues and 50% of the operating income for 2004. Operating margins
for this Segment improved by 20 basis points to 10.6% from 10.4% last year. Mill
Services growth is expected to continue as worldwide steel mill production
volume is expected to remain strong in the near-term, and as the Company invests
substantial cash to grow the business.
The Access Services Segment revenues in 2004 were $706.5 million compared with
$619.1 million in 2003, a 14% increase. Operating income for 2004 increased by
19% to $44.4 million, from $37.4 million in 2003. The Access Services business
accounted for 28% of the Company's revenues and 21% of the operating income.
Operating margins for the Segment improved by 30 basis points to 6.3% from 6.0%
last year. The improved performance of the Access Services Segment was driven by
the international operations.
The Gas Technologies Segment revenues in 2004 were $339.1 million compared with
$294.0 million in 2003, a 15% increase. The increased revenues in 2004 were led
by the domestic propane business; the cryogenics operations, particularly Asia;
and the domestic cylinders business. Although revenue increased, operating
income and operating margins for 2004 declined in comparison with 2003 due to
significant increases in commodity costs, particularly steel. Operating income
was $14.4 million for 2004 compared with $14.5 million for 2003.
All business units of the Engineered Products and Services ("all other")
Category contributed higher revenues in 2004 compared with 2003. The industrial
grating business and the roofing granules and abrasives business also
contributed higher operating income compared with 2003. Operating income for the
boiler and process equipment business and the air-cooled heat exchangers
business was down slightly in 2004 compared with 2003. The railway track
maintenance services and equipment business delivered record revenues in 2004
through increased international sales, but operating income was below 2003 due
to significant increases in commodity costs.
-12-
The Company's continued improvement in net income helped drive record net cash
provided by operating activities of $270.5 million in 2004. A significant
portion of this cash was reinvested in capital investments to grow and maintain
the business. Total 2004 capital investments of $204.2 million were also a
record.
During 2004, the Company received formal notice that the U.S. Government
accepted a proposed settlement of the Federal Excise Tax (FET) case relating to
the Company's former production of U.S. Army five-ton trucks. The Company
recorded pre-tax income of $12.5 million in Discontinued operations as a result
of this settlement in the third quarter of 2004 and received payment during the
fourth quarter of 2004. Additionally, the Company collected substantially all of
its $6.3 million outstanding receivable balance related to a customer's
previously reported Court-supervised restructuring. These are more fully
discussed in Note 10, Commitments and Contingencies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data."
The positive effect of foreign currency translation increased 2004 consolidated
revenues by $108.9 million and pre-tax income by $5.4 million when compared with
2003.
-------------------------------------------------------------------------------------------------
REVENUES BY REGION
-------------------------------------------------------------------------------------------------
TOTAL REVENUES
TWELVE MONTHS ENDED PERCENTAGE GROWTH FROM
DECEMBER 31 2003 TO 2004
(DOLLARS IN MILLIONS) 2004 2003 VOLUME CURRENCY TOTAL
-------------------------------------------------------------------------------------------------
U.S. $ 1,047.4 $ 902.4 16.1% 0.0% 16.1%
Europe 1,018.1 872.3 6.4 10.3 16.7
Latin America 122.9 100.3 21.9 0.6 22.5
Asia-Pacific 119.7 88.1 28.2 7.7 35.9
Middle East 75.9 50.7 50.4 (0.7) 49.7
Other 118.1 104.7 1.4 11.4 12.8
-------------------------------------------------------------------------------------------------
Total $ 2,502.1 $ 2,118.5 13.0% 5.1% 18.1%
=================================================================================================
2004 HIGHLIGHTS
The following significant items impacted the Company overall during 2004 in
comparison with 2003:
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 railway
track maintenance equipment, concrete forming products and cryogenic
equipment; and domestic demand for propane tanks, industrial cylinders,
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 2004.
Included in that increase were higher fuel and energy-related costs. For
the Company's manufacturing businesses, these increased costs were
generally offset by increased revenues during the first six months of 2004;
however, during the second half 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 last-in, first-out (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
first-in, first-out (FIFO) method. Based on economic forecasts, cost
inflation for certain commodities is expected to moderate in 2005. However,
there can be no assurance that will occur.
o Total pension expense for 2004 increased $6.4 million from 2003. Defined
benefit pension expense for 2004 decreased approximately $5.4 million from
2003. During 2004, there were offsetting increases of approximately $9.1
million in defined contribution plan expenses related to the new plans that
commenced January 1, 2004. Additionally, pension expense was increased by
the impact of foreign currency translation. During 2003, the Company
restructured its pension plans to make them more predictable and
affordable. This is more fully discussed in Note 8, Employee Benefit Plans,
to the Consolidated Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data."
o A decrease in the effective income tax rate relating to continuing
operations, from 30.7% in 2003 to 28.6% in 2004, resulted in approximately
$3.5 million in lower income tax expense for 2004. This is more fully
discussed in Note 9, Income Taxes, to the Consolidated Financial Statements
under Part II, Item 8, "Financial Statements and Supplementary Data."
-13-
o During 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 2003 for similar plan
terminations.
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 2004 resulted in a pre-tax increase to interest expense of
approximately $2.7 million compared with 2003.
MILL SERVICES SEGMENT:
- ----------------------
(DOLLARS IN MILLIONS) 2004 2003
---------------------------------------------------------------------------
Revenues $ 997.4 $ 827.5
Operating income 105.5 85.9
Operating margin percent 10.6% 10.4%
===========================================================================
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES:
---------------------------------------------------------------------------
(IN MILLIONS)
---------------------------------------------------------------------------
Revenues - 2003 $ 827.5
Increased volume and new business 83.1
The benefit of positive foreign currency translation 59.3
The acquisition of the industrial services unit of C. J.
Langenfelder and Sons, Inc. in June 2003 27.5
---------------------------------------------------------------------------
Revenues - 2004 $ 997.4
===========================================================================
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o Continued strong volume and new business, particularly in Europe and the
U.S., increased operating income in 2004 by $17.1 million compared with
2003.
o The benefit of positive foreign currency translation in 2004 resulted in
increased operating income of $6.5 million compared with 2003.
o Compared with 2003, the Segment's operating income and margins in 2004
were impacted by significantly increased fuel and energy-related costs.
o The Segment's operating income and margins for 2004 were also negatively
impacted by increased maintenance and repair costs; higher start-up
costs for new contracts; and increased selling, general and
administrative costs (including Sarbanes-Oxley Section 404-related
costs). Selling, general and administrative costs increased $11.9
million or 24% (versus a 21% increase in revenues) for 2004 (including
approximately $4 million related to foreign currency translation)
compared with 2003.
o During 2003, the Segment was unfavorably impacted by $4.7 million in
pre-tax Other expenses. During 2004 (principally the first half), only
$1.5 million in similar expenses were incurred. The decrease of $3.2
million related principally to reduced employee termination benefits
costs and costs to exit activities in 2004. This positively impacted 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 During 2003, the Segment was favorably affected by pre-tax benefits of
$1.9 million from the reversal of bad debt expense, and $1.4 million
from the termination of certain postretirement benefit plans. The
reversal of bad debt expense related to a change in estimate regarding
collectibility of certain accounts receivable. No such benefits occurred
in 2004, negatively impacting the operating margin on a comparative
basis.
ACCESS SERVICES SEGMENT:
- ------------------------
(DOLLARS IN MILLIONS) 2004 2003
--------------------------------------------------------------------------
Revenues $ 706.5 $ 619.1
Operating income 44.4 37.4
Operating margin percent 6.3% 6.0%
==========================================================================
-14-
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES:
--------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------
Revenues - 2003 $ 619.1
The benefit of positive foreign currency translation 45.4
Net increased volume driven by the international operations 33.8
Acquisitions (principally SGB Raffia in Australia) 8.6
Other (0.4)
--------------------------------------------------------------------------
Revenues - 2004 $ 706.5
==========================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o In 2004, the Segment was positively affected by the strength of the
concrete forming business, particularly in the Middle East and United
Kingdom. Also, margins on the international powered-access equipment
rental revenues 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 2004, the international operations outside
of the U.K. had $231.5 million in revenues and $29.9 million in
operating income. This compares with $178.2 million in revenues and
$20.8 million in operating income for 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 revenues) which caused
overall margins in the U.S. to decline. The third and fourth quarters of
2004 showed initial signs of strengthening of the non-residential
construction market. Equipment rental revenues, 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 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's operating income and margins for 2004 were also negatively
impacted by increased selling, general and administrative costs
(including increased pension expense and Sarbanes-Oxley Section
404-related costs).
o During 2003, the Segment was favorably affected by pre-tax income of
$2.5 million from the sale of non-core assets. During 2004, only $1.1
million of similar benefits occurred.
o The benefit of positive foreign currency translation in 2004 for this
Segment resulted in increased operating income of $1.4 million when
compared with 2003.
GAS TECHNOLOGIES SEGMENT:
- -------------------------
(DOLLARS IN MILLIONS) 2004 2003(a)
--------------------------------------------------------------------------
Revenues $ 339.1 $ 294.0
Operating income 14.4 14.5
Operating margin percent 4.2% 4.9%
==========================================================================
(a) Segment information for 2003 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 and Services ("all other") Category.
-15-
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES:
--------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------
Revenues - 2003 $ 294.0
Increased demand for cryogenics equipment and high-pressure
cylinders 28.6
Increased sales of propane tanks 22.4
The benefit of positive foreign currency translation 1.6
Decreased demand for certain valves and composite-wrapped
cylinders (7.2)
Other (0.3)
--------------------------------------------------------------------------
Revenues - 2004 $ 339.1
==========================================================================
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o Operating income decreased slightly in 2004 compared with 2003 despite
increased revenues, due mainly to increased commodity costs, principally
steel.
o Increased revenues for propane tanks and high-pressure cylinders were
due to increased demand and price increases, which partially offset
increased commodity costs.
o The international cryogenics business, principally Asia, contributed
significantly to the increased performance of the Segment during 2004
when compared with 2003.
o Commodity costs, particularly steel, increased during 2004. During the
first six months of 2004, the costs were generally offset by increased
revenues. During the second half of 2004, increased costs resulted in
decreased operating income and margins. To the extent that such costs
cannot be passed to customers in the future, operating income may be
adversely affected.
o Decreased demand for certain valves and composite-wrapped cylinders
negatively impacted operating income for 2004 compared with 2003. A
strategic action plan has been developed to improve the results of the
valves business. This plan is further discussed in the Outlook, Trends
and Strategies section.
o In 2004, foreign currency translation did not have a material impact on
operating income for this Segment when compared with 2003.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY:
- --------------------------------------------------------
(DOLLARS IN MILLIONS) 2004 2003(a)
--------------------------------------------------------------------------
Revenues $ 459.1 $ 377.9
Operating income 47.0 36.5
Operating margin percent 10.2% 9.7%
==========================================================================
(a) Segment information for 2003 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 and Services ("all other") Category.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY -
SIGNIFICANT IMPACTS ON REVENUES:
--------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------
Revenues - 2003 $ 377.9
Railway track services and equipment 33.6
Industrial grating products 20.1
Air-cooled heat exchangers 18.9
Boiler and process equipment 4.1
The benefit of positive foreign currency translation 2.5
Roofing granules and abrasives 2.0
--------------------------------------------------------------------------
Revenues - 2004 $ 459.1
==========================================================================
-16-
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - SIGNIFICANT
IMPACTS ON OPERATING INCOME:
o Operating income for the industrial grating products business increased
during 2004 due to increased demand and prices; increased focus on
high-margin standard product orders; reduced low-margin fabrication
orders; and internal restructuring and cost reductions. This is in
comparison with an operating loss in 2003.
o Continued and consistent profitable results from the roofing granules
and abrasives business were again attained in 2004.
o Despite increased revenues, operating income in the railway track
maintenance services and equipment business decreased in 2004. This was
due principally to increased commodity and manufacturing costs and
increased sales commissions due to a change in product mix.
o The benefit of positive foreign currency translation in 2004 resulted in
increased operating income of $0.9 million for this Category when
compared with 2003.
OUTLOOK, TRENDS AND STRATEGIES
Looking to 2005 and beyond, the following significant items, trends and
strategies are expected to affect the Company in comparison with 2004:
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. Significant capital investments are
expected to be made to grow the Mill Services business.
o Continued focus on improving Economic Value Added (EVA(R)).
o A target of $320 million in net cash provided by operating activities for
2005.
o Higher fuel, energy, transportation and material costs, particularly steel,
encountered during 2004 are expected to moderate during 2005. However, should
these costs continue to rise during 2005, this would increase the Company's
operating costs and reduce profitability to the extent that such costs cannot
be passed to customers.
o The continued growth of the Chinese steel industry could impact the Company
in several ways. Increased steel mill production in China may provide
additional service opportunities for the Mill Services Segment. However,
continued increased Chinese economic activity may result in increased
commodity costs which may adversely affect the Company's manufacturing
businesses. The impact of this risk is currently unknown.
o Foreign currency translation has had a favorable effect on the Company's
sales and income during 2004. However, should the U.S. dollar strengthen,
particularly in relationship to the euro or British pound sterling, the
impact on the Company would be negative.
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 related to external audit
fees and internal costs for compliance with the Sarbanes-Oxley Act of 2002,
particularly Section 404, have been incurred during 2004. The external audit
fees are expected to be reduced during 2005 due to completion of the start-up
phase of the project.
o In 2005, pension expense is expected to approximate 2004 costs. The discount
rate for the U.S. defined benefit pension plans declined from 6.25% in 2004
to 5.75% in 2005; and the discount rate for the U.K. defined benefit pension
plan will remain constant at 5.75%. Cost savings in the U.K. and U.S. plans,
as a result of the structural plan changes made effective January 1, 2004,
are expected to offset the increased U.S. defined benefit plan costs
resulting from the lower discount rate.
o On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into
law. The AJCA includes a deduction of 85% for certain international earnings
that are repatriated, as defined in the AJCA, to the U.S. The Company may
elect to apply this temporary provision to qualifying earnings repatriations
during 2005. On January 13, 2005, the U.S. Treasury Department and the U.S.
Internal Revenue Service (IRS) issued the first in a series of notices that
will provide detailed guidance on the AJCA. The Company is assessing the
effects of the repatriation provision and expects to complete its evaluation
within a reasonable period of time following the publication of additional
guidance by the U.S. Treasury Department and IRS. A specific range of income
tax effects of these repatriations has not been determined; however, the
Company does not expect a significant impact due to the structure of its
international operations as well as the substantial amount of repatriations
to the U.S. in prior years.
Mill Services Segment:
- ----------------------
o Global steel demand and production is expected to remain strong in 2005, and
bidding activity for new mill services contracts and add-on services is
strong.
o The significantly increased energy-related costs this Segment experienced
during 2004 are expected to persist through 2005.
-17-
o The risk remains that certain Mill Services customers may file for bankruptcy
protection, be acquired or consolidate in the future, which could have an
adverse impact on the Company's income and cash flows. Conversely, such
consolidation may provide additional service opportunities for the Company. A
pending merger of two large customers is expected to create the world's
largest steel company. Currently, the effect of this merger on the Company
cannot be estimated.
Access Services Segment:
- ------------------------
o The international access services business is expected to show continued
improvement during 2005.
o U.S. non-residential construction activity is expected to improve throughout
2005. The benefits of this will likely affect the Company's 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 Although cost inflation for certain commodities is expected to moderate in
2005, continued increases in steel prices and worldwide demand for steel
could have an adverse effect on future raw material costs, and this Segment's
ability to obtain the necessary raw materials.
o Weak market conditions for liquid propane gas (LPG) valves; manufacturing
inefficiencies; new product start-up costs; and increased raw material costs
have impacted the valves business during 2004. Several strategic actions have
been and are currently being executed to mitigate these conditions. They
include the following: development and marketing of new products; focus on an
expanded international customer base; outsourcing of certain manufacturing
processes; process improvements within the manufacturing operations; and
optimization of the organizational structure of the business. If the
conditions encountered during 2004 persist despite execution of the strategic
action plan, the valuation of this business could be negatively impacted.
Engineered Products and Services ("all other") Category:
- --------------------------------------------------------
o International demand for the railway track services and equipment business'
products and services is expected to grow. Additionally, Six Sigma process
improvements, new technologies and improved manufacturing efficiencies are
expected to assist in improving margins of this business.
o The industrial grating business is expected to sustain continued
profitability for 2005. However, the ability to pass increased commodity
costs (e.g., steel) to customers may diminish.
o Although cost inflation for certain commodities is expected to moderate in
2005, continued 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.
o Consistent, profitable results are expected from the roofing granules and
abrasives business.
-18-
RESULTS OF OPERATIONS FOR 2004, 2003 AND 2002
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE INFORMATION AND
PERCENTAGES) 2004 2003 2002
----------------------------------------------------------------------------------------------------------
Revenues from continuing operations $ 2,502.1 $ 2,118.5 $ 1,976.7
Cost of services and products sold 1,916.4 1,604.4 1,481.8
Selling, general and administrative expenses 368.4 330.0 312.7
Other expenses 4.9 7.0 3.5
Operating income from continuing operations 209.8 173.9 176.0
Interest expense 41.1 40.5 43.3
Provision for income taxes from continuing operations 49.0 41.7 42.2
Income from continuing operations 113.5 87.0 88.4
Income from discontinued operations 7.7 5.2 1.7
Net income 121.2 92.2 90.1
Diluted earnings per common share 2.91 2.25 2.21
Effective income tax rate for continuing operations 28.6% 30.7% 30.9%
Consolidated effective income tax rate 29.1% 31.0% 31.0%
==========================================================================================================
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
2004 vs. 2003
- -------------
Revenues for 2004 increased $383.5 million or 18% from 2003, to a record level.
This increase was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN REVENUES 2004 VS. 2003
---------------------------------------------------------------------------
$ 108.9 Effect of foreign currency translation.
83.1 Net increased volume, new contracts and price changes
in the Mill Services Segment.
43.5 Net increased revenues in the Gas Technologies Segment
due principally to improved market conditions and
selling price increases partially offset by decreased
demand for liquid propane gas (LPG) valves in the
patio grill market and for composite-wrapped
cylinders.
36.1 Effect of business acquisitions. Increased revenues of
$27.5 and $8.6 million in the Mill Services and Access
Services Segments, respectively.
33.6 Net increased revenues in the railway track
maintenance services and equipment business due
principally to rail equipment sales and, to a lesser
extent, contract services.
33.4 Net increased revenues in the Access Services Segment
due principally to the strength of the concrete
forming business, particularly in the Middle East and
U.K.
20.1 Increased revenues of the industrial grating products
business due to increased demand and a focus on
higher-margin standard product orders.
18.9 Increased revenues of the air-cooled heat exchangers
business due to improving natural gas prices.
5.9 Other (minor changes across the various units not
already mentioned).
---------------------------------------------------------------------------
$ 383.5 Total Change in Revenues 2004 vs. 2003
===========================================================================
-19-
2003 vs. 2002
- -------------
Revenues for 2003 increased $141.8 million or 7% from 2002. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN REVENUES 2003 VS. 2002 (a)
---------------------------------------------------------------------------
$ 126.2 Effect of foreign currency translation.
30.2 Net increased volume, new contracts and price changes
in the Mill Services Segment.
20.4 Net effect of business acquisitions and dispositions.
Increased revenues of $23.1 and $6.4 million in the
Mill Services and Access Services Segments,
respectively, partially offset by decreased revenues
of $9.1 million in the Engineered Products and
Services ("all other") Category.
19.6 Net increased revenues in the railway track
maintenance services and equipment business due
principally to rail equipment sales.
(19.9) Net decreased revenues in the Access Services Segment
due to continued slowdown in the non-residential
construction markets.
(18.3) Decreased revenues of the industrial grating products
business due to decreased demand and, to a lesser
extent, the sale of the bridge decking product line in
January 2002.
(17.7) Net decreased revenues in the Gas Technologies Segment
due to increased competition and decreased demand.
1.3 Other (minor changes across the various units not
already mentioned).
---------------------------------------------------------------------------
$ 141.8 Total Change in Revenues 2003 vs. 2002
===========================================================================
(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,
which was previously classified in the Gas Technologies Segment, is
classified in the Engineered Products and Services ("all other")
Category.
================================================================================
COST OF SERVICES AND PRODUCTS SOLD
2004 vs. 2003
- -------------
Cost of services and products sold for 2004 increased $312.0 million or 19% from
2003, slightly higher than the 18% increase in revenues. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN COST OF SERVICES AND PRODUCTS SOLD
2004 VS. 2003
---------------------------------------------------------------------------
$ 186.2 Increased costs due to increased revenues (exclusive
of effect of foreign currency translation and
including the impact of increased costs included in
increased selling prices).
80.9 Effect of foreign currency translation.
32.8 Effect of business acquisitions.
12.1 Other (due to increased commodity costs, increased
fuel and energy-related costs, product mix and minor
changes across the various units not already
mentioned; partially offset by stringent cost
controls, process improvements, and reorganization
actions).
---------------------------------------------------------------------------
$ 312.0 Total Change in Cost of Services and Products Sold
2004 vs. 2003
===========================================================================
2003 vs. 2002
- -------------
Cost of services and products sold for 2003 increased $122.6 million or 8% from
2002, slightly higher than the 7% increase in revenues. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN COST OF SERVICES AND PRODUCTS SOLD
2003 VS. 2002
---------------------------------------------------------------------------
$ 95.6 Effect of foreign currency translation.
17.5 Net effect of business acquisitions and dispositions.
11.8 Increased costs due to increased revenues (exclusive
of effect of foreign currency translation).
7.8 Increased defined benefit pension expense due to
financial market conditions and lower interest rates
in 2001 and 2002 which affected the SFAS No. 87
pension expense computation for 2003.
(10.1) Other (due to stringent cost controls, process
improvements, reorganization actions and minor changes
across the various units not already mentioned).
---------------------------------------------------------------------------
$ 122.6 Total Change in Cost of Services and Products Sold
2003 vs. 2002
===========================================================================
================================================================================
-20-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2004 vs. 2003
- -------------
Selling, general and administrative expenses for 2004 increased $38.4 million or
12% from 2003, less than the 18% increase in revenues. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2004 VS. 2003
---------------------------------------------------------------------------
$ 17.9 Effect of foreign currency translation.
5.4 Increased professional fees due to higher external
auditor fees (related to Sarbanes-Oxley Section 404)
and increased consulting and legal expense.
4.4 Increased sales commission expense due to increased
revenues and a larger number of orders for the railway
track maintenance equipment business.
4.2 Increased pension expense in the Access Services
Segment
1.7 Effect of business acquisitions - principally SGB
Raffia in Australia
4.8 Other (including energy-related costs partially offset
by process improvements and reorganization efforts).
---------------------------------------------------------------------------
$ 38.4 Total Change in Selling, General and Administrative
Expenses 2004 vs. 2003
===========================================================================
2003 vs. 2002
- -------------
Selling, general and administrative expenses for 2003 increased $17.3 million or
6% from 2002, less than the 7% increase in revenues. This increase was
attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2003 VS. 2002
---------------------------------------------------------------------------
$ 19.7 Effect of foreign currency translation.
9.9 Increased defined benefit pension expense due to
financial market conditions and lower interest rates
in 2001 and 2002 which affected the SFAS No. 87
pension expense computation for 2003. This increased
pension expense was spread across all operations, with
$8.0 million of the increase in the Access Services
Segment.
(3.5) Reduction in provisions for uncollectible accounts
receivable due to significant charges in 2002 for Mill
Services customers that were experiencing financial
difficulties including bankruptcy.
(8.8) Other (due to continuing cost reduction, process
improvement and reorganization efforts).
---------------------------------------------------------------------------
$ 17.3 Total Change in Selling, General and Administrative
Expenses 2003 vs. 2002
===========================================================================
================================================================================
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 2004, the Company continued its
strategy to streamline operations. This strategy included the consolidation,
closure and sale of certain operating locations and continued headcount
reductions in both administrative and operating positions. These actions
resulted in net Other Expenses of $4.9 million in 2004 compared with $7.0
million in 2003 and $3.5 million in 2002.
2004 vs. 2003
- -------------
Other Expenses for 2004 decreased $2.1 million or 30% from 2003. This decrease
was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN OTHER EXPENSES 2004 VS. 2003
---------------------------------------------------------------------------
$ (2.2) Decline in employee termination benefit costs. This
decline relates principally to reduced costs in the
Mill Services and Access Services Segments compared
with 2003.
(1.7) Decrease in costs to exit activities.
2.0 Decline in net gains on disposals of non-core assets.
This decline was attributable principally to $3.2
million in net gains that were realized in 2003 from
the sale of non-core assets within the Access Services
and Mill Services Segments compared with $1.5 million
in 2004.
(0.2) Increase in other expenses.
---------------------------------------------------------------------------
$ (2.1) Total Change in Other Expenses 2004 vs. 2003
===========================================================================
-21-
2003 vs. 2002
- -------------
Other Expenses for 2003 increased $3.5 million or 100% from 2002. This increase
was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN OTHER EXPENSES 2003 VS. 2002
---------------------------------------------------------------------------
$ 3.5 Decline in net gains on disposals of non-core assets.
This decline was principally attributable to a $2.7
million net gain that was realized in 2002 from the
sale of an equity investment within the Mill Services
Segment and a $1.9 million gain on the sale of a
product line in the Engineered Products and Services
("all other") Category that were not repeated in 2003.
0.8 Increase in costs to exit activities.
0.3 Increase in other expenses.
(1.1) Decline in employee termination benefit costs.
---------------------------------------------------------------------------
$ 3.5 Total Change in Other Expenses 2003 vs. 2002
===========================================================================
For additional information, see Note 15, Other (Income) and Expenses, to the
Consolidated Financial Statements under Part II, Item 8, "Financial Statements
and Supplementary Data."
================================================================================
INTEREST EXPENSE
2004 vs. 2003
- -------------
Interest expense in 2004 was $0.5 million or 1% higher than in 2003.
Approximately $2.7 million of the increase was due to the effect of foreign
currency translation. This was partially offset by a lower interest rate on the
Company's $150 million notes that were refinanced in the third quarter of 2003,
and lower variable interest rate borrowings.
2003 vs. 2002
- -------------
Interest expense in 2003 was $2.8 million or 6% lower than in 2002. This decline
was primarily due to approximately $58 million in reduced average annual
borrowings and lower average annual interest rates on certain borrowings (e.g.,
commercial paper). This was partially offset by an increase of $2.3 million due
to the effect of foreign currency translation.
================================================================================
PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS
2004 vs. 2003
- -------------
The increase in 2004 of $7.3 million or 18% in the provision for income taxes
from continuing operations was primarily due to increased earnings from
continuing operations for the reasons mentioned above partially offset by a
decreased effective income tax rate. The effective income tax rate relating to
continuing operations for 2004 was 28.6% versus 30.7% for 2003. The decrease in
the effective income tax rate from 2003 to 2004 was primarily the result of the
benefit of foreign tax credits related to the American Jobs Creation Act of 2004
(AJCA) and the result of the settlement of certain tax contingencies. The
settlements of tax contingencies included the adjustment of certain U.S. federal
and state income tax contingencies due to favorable outcomes. Additionally,
during the fourth quarter of 2004, the Company recorded a favorable income tax
expense adjustment of $3.6 million related to prior periods, which was not
material, and which was mostly offset by increases in certain international tax
contingencies, state income taxes and the amount of international earnings
subject to U.S. income taxes.
2003 vs. 2002
- -------------
The decrease in 2003 of $0.5 million or 1% in the provision for income taxes
from continuing operations was primarily due to decreased earnings from
continuing operations for the reasons mentioned above and a decreased effective
income tax rate. The effective tax rate relating to continuing operations for
2003 was 30.7% versus 30.9% for 2002.
================================================================================
INCOME FROM CONTINUING OPERATIONS
2004 vs. 2003
- -------------
Income from continuing operations in 2004 of $113.5 million was $26.5 million or
31% higher than 2003. This increase primarily results from increased revenues, a
decreased effective income tax rate, stringent cost controls, process
improvements and reorganization actions that contained selling, general and
administrative expenses growth to a 12% increase while revenue increased 18%.
-22-
2003 vs. 2002
- -------------
Income from continuing operations in 2003 was slightly below 2002 levels despite
increased revenues. This decrease of $1.4 million or 2% results primarily from
increased pension expense and reduced interest income of $1.5 million. This
reduced interest income related to lower average annual interest rates. These
items were partially offset by the positive impact of foreign currency
translation and the termination of certain postretirement benefit plans.
================================================================================
INCOME FROM DISCONTINUED OPERATIONS
2004 vs. 2003
- -------------
Income from discontinued operations for 2004 increased $2.5 million or 47% from
2003. This increase was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN INCOME FROM DISCONTINUED OPERATIONS
2004 VS. 2003
---------------------------------------------------------------------------
$ 3.1 After-tax income due to the settlement of the
Company's Federal Excise Tax (FET) litigation in 2004
compared with after-tax income due to favorable
developments in the FET litigation in 2003. For
additional information on the FET litigation see Note
10, Commitments and Contingencies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data."
(0.6) Decline in after-tax income related to the sale of the
Company's Capitol Manufacturing business during 2002.
---------------------------------------------------------------------------
$ 2.5 Total Change in Income from Discontinued Operations
2004 vs. 2003
===========================================================================
2003 vs. 2002
- -------------
Income from discontinued operations for 2003 increased $3.5 million or 208% from
2002. This increase was attributable to the following significant items:
---------------------------------------------------------------------------
IN MILLIONS CHANGE IN INCOME FROM DISCONTINUED OPERATIONS
2003 VS. 2002
---------------------------------------------------------------------------
$ 5.2 After-tax income due to favorable developments in the
Company's Federal Excise Tax (FET) litigation. For
additional information on the FET litigation see Note
10, Commitments and Contingencies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data."
(1.7) Decline in after-tax income related to the sale of the
Company's Capitol Manufacturing business during 2002.
---------------------------------------------------------------------------
$ 3.5 Total Change in Income from Discontinued Operations
2003 vs. 2002
===========================================================================
================================================================================
NET INCOME AND EARNINGS PER SHARE
2004 vs. 2003
- -------------
Net income of $121.2 million and diluted earnings per share of $2.91 in 2004
exceeded 2003 by $29.0 million and $0.66, respectively, primarily due to
increased income from both continuing and discontinued operations for the
reasons described above.
2003 vs. 2002
- -------------
Net income of $92.2 million and diluted earnings per share of $2.25 in 2003
exceeded 2002 by $2.1 million and $0.04, respectively, due principally to
increased income from discontinued operations partially offset by decreased
income from continuing operations for the reasons described above.
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. During 2004, the Company
achieved record net cash provided by operating activities of $270.5 million.
Additionally, in 2004, a record $204.2 million was expended for capital
investments including approximately $97 million for growth initiatives. Growth
initiatives are capital investments intended to increase future revenues. Over
50% of the amount expended on growth initiatives in 2004 was in the Mill
Services Segment. During 2004, net cash payments of $22.4 million were made to
reduce debt; the Company paid over
-23-
$45 million in dividends to its stockholders; and the Company was able to
significantly decrease its debt to capital ratio to 40.6% from 44.1% as of
December 31, 2003.
In the fourth quarter of 2004, the Company received a $12.5 million settlement
related to the Federal Excise Tax (FET) litigation described in Note 10,
Commitments and Contingencies, to the Consolidated Financial Statements under
Part II, Item 8, "Financial Statements and Supplementary Data." In anticipation
of the settlement, the Company chose to improve the funded status of the
Company's defined benefit pension plans by making $10.6 million in discretionary
cash contributions, principally to the U.K. plan. The funded status of the plans
was further strengthened in the first quarter of 2005 with an additional
discretionary cash contribution of $9.4 million to the U.K. plan.
The Company's strategic objectives for 2005 include generating a record $320
million in net cash provided by operating activities, augmented by targeted
asset sales. The Company's strategy is to redeploy excess or discretionary cash
in new long-term, high renewal-rate services contracts for the Mill Services
business and for growth in the Access Services and railway track maintenance
services businesses. The Company will also pursue sensible bolt-on acquisitions
to further enhance its industrial services growth and increase Economic Value
Added (EVA(R)). The Company has targeted a minimum of $140 million of
discretionary cash flow for internal growth opportunities and acquisitions.
Additionally, the Company will use funds from targeted asset sales for
acquisitions.
As of December 31, 2004, the Company had approximately $65 million of debt that
may 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 to
pay dividends to stockholders.
CASH REQUIREMENTS
The following summarizes the Company's expected future payments related to
contractual obligations and commercial commitments at December 31, 2004.
CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2004 (a)
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1-3 4-5 AFTER 5
(IN MILLIONS) TOTAL 1 YEAR YEARS YEARS YEARS
-----------------------------------------------------------------------------------------------------
Short-term Debt $ 16.1 $ 16.1 $ -- $ -- $ --
Long-term Debt
(including current maturities and
capital leases) 609.7 14.9 49.4 10.4 535.0
Projected interest payments on
Long-term Debt(b) 235.4 38.7 74.3 71.0 51.4
Pension and Other Post-
retirement Obligations (c) 154.1 31.4 54.9 51.8 16.0
Operating Leases 126.1 41.1 46.6 27.3 11.1
Purchase Obligations 94.1 92.3 1.4 0.1 0.3
Foreign Currency Forward
Exchange Contracts 93.7 93.7 -- -- --
-----------------------------------------------------------------------------------------------------
Total Contractual Obligations $1,329.2 $ 328.2 $ 226.6 $ 160.6 $ 613.8
=====================================================================================================
(a) See Note 6, Debt and Credit Agreements; Note 7, Leases; Note 8,
Employee Benefit Plans; and Note 13, Financial Instruments, to the
Consolidated Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data," for additional disclosures on
short-term and long-term debt; operating leases; pensions and other
postretirement benefits; and foreign currency forward exchange
contracts, respectively.
(b) The total projected interest payments on Long-term Debt are based
upon borrowings, interest rates and foreign currency exchange rates
as of December 31, 2004. The interest rates on variable rate debt
and the foreign currency exchange rates are subject to changes
beyond the Company's control and may result in actual interest
expense and payments differing from the amounts projected above.
(c) The total obligation for Pension and Other Postretirement
Obligations is based on actuarial calculations and represents the
funded status of the Company's Plans as of December 31, 2004.
Payments due by period are based on the expected undiscounted
amounts to be paid in the years shown. The amount shown in the After
5 years column is the remaining balance of the obligation as
calculated at December 31, 2004. It is not practicable to estimate
the actual amount to be paid after five years.
-24-
COMMERCIAL COMMITMENTS - The following table summarizes the Company's
contingent commercial commitments at December 31, 2004. These amounts are not
included in the Company's Consolidated Balance Sheet since there are no current
circumstances known to management indicating that the Company will be required
to make payments on these contingent obligations.
COMMERCIAL COMMITMENTS AS OF DECEMBER 31, 2004
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
TOTAL LESS
AMOUNTS THAN 1-3 4-5 OVER 5 INDEFINITE
(IN MILLIONS) COMMITTED 1 YEAR YEARS YEARS YEARS EXPIRATION
---------------------------------------------------------------------------------------------------------------
Standby Letters of Credit $ 121.1 $ 111.5 $ 9.6 $ -- $ -- $ --
Guarantees 27.6 3.6 1.0 -- 0.8 22.2
Performance Bonds 97.2 86.8 1.9 -- -- 8.5
Other Commercial Commitments 11.1 -- -- -- -- 11.1
------------------------------------------------------------