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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 1-3970
____________________
HARSCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-1483991
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(State of incorporation) (I.R.S. Employer Identification No.)
350 Poplar Church Road, Camp Hill, Pennsylvania 17011
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number (717) 763-7064
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [_]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2005
----- -----------------------------
Common stock, par value $1.25 per share 41,595,340
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-1-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 469,573 $ 405,907
Product sales 170,488 150,366
- ---------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 640,061 556,273
- ---------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 352,405 304,792
Cost of products sold 141,242 124,196
Selling, general and administrative expenses 97,037 88,004
Research and development expenses 659 705
Other expenses 1,442 1,620
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TOTAL COSTS AND EXPENSES 592,785 519,317
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OPERATING INCOME FROM CONTINUING OPERATIONS 47,276 36,956
Equity in income of unconsolidated entities, net 79 97
Interest income 577 714
Interest expense (10,443) (10,282)
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST 37,489 27,485
Income tax expense (12,109) (8,527)
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INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 25,380 18,958
Minority interest in net income (2,327) (2,101)
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INCOME FROM CONTINUING OPERATIONS 23,053 16,857
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DISCONTINUED OPERATIONS:
Income/(loss) from operations of discontinued business (26) 10
Loss on disposal of discontinued business (9) (147)
Income related to discontinued defense business 38 224
Income tax expense (1) (20)
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INCOME FROM DISCONTINUED OPERATIONS 2 67
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NET INCOME $ 23,055 $ 16,924
=====================================================================================================================
Average shares of common stock outstanding 41,503 40,937
Basic earnings per common share:
Continuing operations $ 0.56 $ 0.41
Discontinued operations -- --
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BASIC EARNINGS PER COMMON SHARE $ 0.56 $ 0.41
=====================================================================================================================
Diluted average shares of common stock outstanding 41,978 41,461
Diluted earnings per common share:
Continuing operations $ 0.55 $ 0.41
Discontinued operations -- --
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DILUTED EARNINGS PER COMMON SHARE $ 0.55 $ 0.41
=====================================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.30 $ 0.275
=====================================================================================================================
See accompanying notes to consolidated financial statements.
-2-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2005 2004
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 78,405 $ 94,093
Accounts receivable, net 535,649 555,191
Inventories 247,816 217,026
Other current assets 55,821 58,614
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TOTAL CURRENT ASSETS 917,691 924,924
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Property, plant and equipment, net 923,888 932,298
Goodwill, net 425,272 433,125
Other assets 98,079 98,477
Assets held for sale 916 932
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TOTAL ASSETS $ 2,365,846 $ 2,389,756
=========================================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 38,260 $ 16,145
Current maturities of long-term debt 13,825 14,917
Accounts payable 217,431 220,322
Accrued compensation 48,905 63,776
Income taxes 38,990 40,227
Dividends payable 12,473 12,429
Other current liabilities 210,832 210,581
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TOTAL CURRENT LIABILITIES 580,716 578,397
- -------------------------------------------------------------------------------------------------------------------------
Long-term debt 570,921 594,747
Deferred income taxes 99,171 95,702
Insurance liabilities 56,041 53,960
Retirement plan liabilities 96,057 97,586
Other liabilities 49,616 54,483
Liabilities associated with assets held for sale 657 691
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,453,179 1,475,566
- -------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 85,071 84,889
Additional paid-in capital 146,773 139,532
Accumulated other comprehensive expense (145,513) (127,491)
Retained earnings 1,431,214 1,420,637
Treasury stock (603,357) (603,377)
Unearned stock-based compensation (1,521) --
- -------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 912,667 914,190
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,365,846 $ 2,389,756
=========================================================================================================================
See accompanying notes to consolidated financial statements.
-3-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 2005 2004
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,055 $ 16,924
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 48,760 43,972
Amortization 660 552
Equity in income of unconsolidated entities, net (79) (97)
Dividends or distributions from unconsolidated entities -- 456
Other, net 3,818 3,122
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable 9,129 (21,329)
Inventories (32,633) (15,590)
Accounts payable 593 (3,424)
Accrued interest payable 5,374 5,277
Accrued compensation (13,512) (3,565)
Other assets and liabilities 2,978 6,077
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NET CASH PROVIDED BY OPERATING ACTIVITIES 48,143 32,375
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (58,301) (46,539)
Purchase of businesses, net of cash acquired -- (434)
Proceeds from sale of assets 358 1,818
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NET CASH USED BY INVESTING ACTIVITIES (57,943) (45,155)
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 25,909 2,172
Current maturities and long-term debt:
Additions 24,521 41,787
Reductions (41,752) (24,471)
Cash dividends paid on common stock (12,434) (11,247)
Common stock issued-options 4,410 3,493
Dividends paid to minority interests (2,343) (85)
- ---------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,689) 11,649
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Effect of exchange rate changes on cash (4,199) (234)
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Net decrease in cash and cash equivalents (15,688) (1,365)
Cash and cash equivalents at beginning of period 94,093 80,210
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 78,405 $ 78,845
=============================================================================================
See accompanying notes to consolidated financial statements.
-4-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 2005 2004
- --------------------------------------------------------------------------------------------------------------------
Net income $ 23,055 $ 16,924
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Other comprehensive income (expense):
Foreign currency translation adjustments (20,886) (3,191)
Net gains (losses) on cash flow hedging instruments, net of deferred
income taxes of $0 and $14 in 2005 and 2004, respectively -- (25)
Pension liability adjustments, net of deferred income taxes of ($1,232)
and $1,291 in 2005 and 2004, respectively 2,865 (3,061)
Reclassification adjustment for (gain) loss on cash flow hedging
instruments included in net income, net of deferred income taxes of $1
and ($56) in 2005 and 2004, respectively (1) 104
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive expense (18,022) (6,173)
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TOTAL COMPREHENSIVE INCOME $ 5,033 $ 10,751
====================================================================================================================
See accompanying notes to consolidated financial statements.
-5-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
A. OPINION OF MANAGEMENT
Financial information furnished herein, which is unaudited, in the opinion of
management reflects all adjustments (all of which are of a normal recurring
nature) that are necessary to present a fair statement of the interim period.
This unaudited interim information should be read in conjunction with the
Company's annual Form 10-K filing for the year ended December 31, 2004.
B. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform with
current year classifications. These reclassifications relate principally to
components of the Consolidated Statements of Cash Flows. As a result of these
reclassifications, certain 2004 amounts presented for comparative purposes will
not individually agree with previously filed Forms 10-K or 10-Q.
C. OPTIONS FOR COMMON STOCK
In prior years, when stock options were issued to employees, the Company used
the intrinsic value method to account for the options. No compensation expense
was recognized on the grant date, since at that date, the option price equaled
the market price of the underlying common stock. Effective in 2003, the Company
ceased granting stock options to employees. In 2004, the Management Development
and Compensation Committee of the Board of Directors approved the granting of
restricted stock units as the long-term equity component of officer
compensation. In the first quarter of 2005, the Company issued 32,700
performance-based restricted stock units with a fair value of $50.41 per unit to
certain officers. Restricted stock units are more fully described in Note 12,
"Stock-Based Compensation," to the Company's Form 10-K for the year ended
December 31, 2004.
The Company's net income and net income per common share would have been reduced
to the pro forma amounts indicated below if compensation cost for the Company's
stock option plan had been determined based on the fair value at the grant date
for awards in accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE) 2005 2004
-------------------------------------------------------------------------------------
Net income:
As reported $ 23,055 $ 16,924
Compensation expense (a) -- (96)
-------------------------
Pro forma $ 23,055 $ 16,828
=========================
Basic earnings per share:
As reported $ 0.56 $ 0.41
Pro forma 0.56 0.41
Diluted earnings per share:
As reported 0.55 0.41
Pro forma 0.55 0.41
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(a) Total stock-based employee compensation expense related to stock
options determined under fair value-based method for all awards, net
of related tax effects.
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
D. REVIEW OF OPERATIONS BY SEGMENT
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2004
-------------- --------------
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
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Mill Services Segment $ 268,635 $ 27,001 $ 236,293 $ 25,250
Access Services Segment 183,577 9,366 157,807 3,400
Gas Technologies Segment (a) 82,134 2,097 77,562 3,088
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Segment Totals 534,346 38,464 471,662 31,738
Engineered Products and Services
("all other") Category (a) 105,715 9,031 84,611 6,163
General Corporate -- (219) -- (945)
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Consolidated Totals $ 640,061 $ 47,276 $ 556,273 $ 36,956
==========================================================================================
(a) In June 2004, the Company announced a new identity for its Gas and
Fluid Control Segment and renamed it Gas Technologies. Additionally,
in June 2004, the Other Infrastructure Products and Services ("all
other") Category was renamed Engineered Products and Services ("all
other") Category. There have been no changes to the components of the
aforementioned Segment or Category.
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME
BEFORE INCOME TAXES AND MINORITY INTEREST
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 2005 2004
---------------------------------------------------------------------------------------
Segment Operating Income $ 38,464 $ 31,738
Engineered Products and Services
("all other") Category 9,031 6,163
General Corporate (219) (945)
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Operating income from continuing operations 47,276 36,956
Equity in income of unconsolidated entities, net 79 97
Interest income 577 714
Interest expense (10,443) (10,282)
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Income from continuing operations before
income taxes and minority interest $ 37,489 $ 27,485
=======================================================================================
E. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable are net of an allowance for doubtful accounts of $16.8
million and $19.1 million at March 31, 2005 and December 31, 2004, respectively.
The decrease in the allowance for doubtful accounts is due principally to the
write-off of previously reserved accounts receivable. The provision for doubtful
accounts was $1.3 million and $1.7 million for the three months ended March 31,
2005 and 2004, respectively.
-7-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
INVENTORIES
-------------------------
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2005 2004
------------------------------------------------------------------------
Finished goods $ 73,441 $ 60,554
Work-in-process 49,945 37,882
Raw materials and purchased parts 97,926 91,965
Stores and supplies 26,504 26,625
------------------------------------------------------------------------
Total Inventories $ 247,816 $ 217,026
========================================================================
Inventories increased $30.8 million from December 31, 2004 due to the following
factors: increased work-in-process and raw materials inventories due primarily
to long-lead-time orders currently being manufactured at the railway track
maintenance services and equipment business, but not scheduled for delivery
until the second half of 2005; increased finished goods for the international
Access Services and Gas Technologies businesses to meet expected demand in the
second and third quarters of 2005.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2005 2004
--------------------------------------------------------------------------------------------------------------------
Land and improvements $ 40,520 $ 39,838
Buildings and improvements 182,915 185,807
Machinery and equipment 2,023,970 2,027,765
Uncompleted construction 53,873 45,083
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Gross property, plant and equipment 2,301,278 2,298,493
Less accumulated depreciation (1,377,390) (1,366,195)
--------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 923,888 $ 932,298
====================================================================================================================
G. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in carrying amounts of goodwill for the
three months ended March 31, 2005:
GOODWILL
------------------------------------------------------------------------
ENGINEERED
PRODUCTS
MILL ACCESS GAS AND SERVICES
SERVICES SERVICES TECHNOLOGIES ("ALL OTHER") CONSOLIDATED
(IN THOUSANDS) SEGMENT SEGMENT SEGMENT CATEGORY TOTALS
-----------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2004, net of
accumulated amortization $ 220,493 $ 167,802 $ 36,693 $ 8,137 $ 433,125
Foreign currency translation (4,406) (3,359) -- -- (7,765)
Other -- (88) -- -- (88)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2005, NET OF
ACCUMULATED AMORTIZATION $ 216,087 $ 164,355 $ 36,693 $ 8,137 $ 425,272
=============================================================================================================================
Goodwill is net of accumulated amortization of $106.7 million and $108.4 million
at March 31, 2005 and December 31, 2004, respectively.
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Intangible assets, which are included principally in Other assets on the
Consolidated Balance Sheets, totaled $10.2 million, net of accumulated
amortization of $10.9 million at March 31, 2005 and $10.9 million, net of
accumulated amortization of $10.5 million at December 31, 2004. The following
chart reflects these intangible assets by major category:
INTANGIBLE ASSETS
-------------------------------------------------------------------
MARCH 31, 2005 DECEMBER 31, 2004
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------------------------------------------------------------------------------------------
Customer Relationships $ 7,611 $ 726 $ 7,662 $ 609
Non-compete agreements 4,896 4,122 4,898 4,032
Patents 4,374 3,805 4,416 3,757
Other 4,293 2,282 4,411 2,087
------------------------------------------------------------------------------------------------
Total $ 21,174 $ 10,935 $ 21,387 $ 10,485
================================================================================================
Amortization expense for intangible assets was $0.5 million and $0.4 million for
the three months ended March 31, 2005 and 2004, respectively. The following
chart shows the estimated amortization expense for the next five fiscal years
based on intangible assets:
(IN THOUSANDS) 2005 2006 2007 2008 2009
------------------------------------------------------------------------------------------
Estimated Amortization Expense $ 1,859 $ 1,561 $ 1,205 $ 917 $ 586
H. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
In management's ongoing strategic efforts to increase the Company's focus on
core industrial services, certain manufacturing operations have been divested.
Effective March 21, 2002, the Board of Directors authorized the sale of the
Capitol Manufacturing business, a business unit of the Gas Technologies Segment.
A significant portion of the Capitol Manufacturing business was sold on June 28,
2002. The Company continues to recognize income from inventory consigned to the
buyer in accordance with the sale agreement and when all revenue recognition
criteria have been met. This business has been included in Discontinued
operations in the Consolidated Statements of Income and the assets and
liabilities have been separately identified on the Consolidated Balance Sheets
as "held for sale" for all periods presented. There were no sales from
Discontinued operations for the three months ended March 31, 2005 and 2004 as
the business was sold during 2002. The income from Discontinued operations does
not include any charges to reduce the book value of the business held for sale
to its fair market value less cost to sell, since the fair value of the business
exceeded the book value.
Throughout 2004, management approved the sale of certain long-lived assets
(primarily land and buildings) of the Mill Services Segment. Accordingly, these
assets have been separately identified on the Consolidated Balance Sheets as
"held for sale" for all periods presented. No additional assets were classified
as "held for sale" during the first quarter of 2005.
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The major classes of assets and liabilities "held for sale" included in the
Consolidated Balance Sheets are as follows:
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2005 2004
- --------------------------------------------------------------------------------------
ASSETS
Accounts receivable, net $ 12 $ 15
Inventories 119 133
Other current assets 23 23
Property, plant and equipment, net 762 761
- --------------------------------------------------------------------------------------
TOTAL ASSETS "HELD FOR SALE" $ 916 $ 932
======================================================================================
LIABILITIES
Accounts payable $ 35 $ 24
Other current liabilities 506 542
Other liabilities 116 125
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES ASSOCIATED WITH ASSETS
"HELD FOR SALE" $ 657 $ 691
======================================================================================
I. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its financial
exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheets at both March 31, 2005 and December 31, 2004
included accruals of $2.7 million for environmental matters. The amounts charged
against pre-tax income related to environmental matters totaled $0.3 million and
$0.4 million for the first three months of 2005 and 2004, respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position,
results of operations or cash flows.
In January 2002, the New Jersey Department of Environmental Protection ("NJDEP")
issued Notices of Civil Administrative Penalty Assessment to the Company for
violations of the New Jersey Air Pollution Control Act. The Notices allege that
the Company operated a slag processing plant in violation of the emission permit
for control of slag dust. The Agency assessed civil administrative penalties
totaling approximately $311,000 and the Company filed an appeal with the Agency.
In March 2003, NJDEP amended its assessment and reduced the proposed penalty to
$146,000. In August 2004, NJDEP amended its reassessment of $146,000 and revised
the proposed penalty to $325,400. The amended order has been appealed.
Discussions continue between the parties to resolve this matter. The Company
ceased operations at the plant in the fourth quarter of 2001 for unrelated
reasons.
ROYALTY EXPENSE DISPUTE
The Company is involved in a royalty expense dispute with Canada Revenue Agency
(CRA). The CRA is proposing to disallow certain royalty expense deductions
claimed by the Company's Canadian subsidiary on its 1994-1998 tax returns. As of
March 31, 2005, the maximum assessment from the CRA for the period 1994-1998 is
approximately $9 million including tax and interest. The Company has filed an
administrative appeal and will vigorously contest the disallowance.
-10-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The Company currently anticipates that some portion of the assessment may be
paid in this royalty expense dispute. However, the Company intends to utilize
competent authority proceedings in the U.S. to recover a portion of any required
tax payment amount. The Company believes that any amount not recovered through
these proceedings has been fully reserved as of March 31, 2005, and therefore
will not have a material adverse affect on the Company's future results of
operations.
OTHER
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos over the past several decades. In their suits, the plaintiffs
have named as defendants many manufacturers, distributors and installers of
numerous types of equipment or products that allegedly contained asbestos.
The Company believes that the claims against it are without merit. The Company
has never been a producer, manufacturer or processor of asbestos fibers. Any
component within a Company product which may have contained asbestos would have
been purchased from a supplier. Based on scientific and medical evidence, the
Company believes that any asbestos exposure arising from normal use of any
Company product never presented any harmful airborne asbestos exposure, and
moreover, the type of asbestos contained in any component that was used in those
products is protectively encapsulated in other materials and is not associated
with the types of injuries alleged. Finally, in most of the depositions taken of
plaintiffs to date in the litigation against the Company, plaintiffs have failed
to identify any Company products as the source of their asbestos exposure.
The majority of the asbestos complaints have been filed in either New York or
Mississippi. Almost all of the New York complaints contain a standard claim for
damages of $20 million or $25 million against the approximately 90 defendants,
regardless of the individual's alleged medical condition, and without
identifying any Company product as the source of plaintiff's asbestos exposure.
With respect to the Mississippi complaints, most contain a standard claim for an
unstated amount of damages against the numerous defendants (typically 240 to
270), without identifying any Company product as the source of plaintiff's
asbestos exposure.
The Company has not paid any amounts in settlement of these cases, with the
exception of two settlements totaling less than $10,000 paid in 1998 from
insurance proceeds. The Company's insurance carrier has paid all legal costs and
expenses to date. The Company has liability insurance coverage available under
various primary and excess policies that the Company believes will be available
if necessary to substantially cover any liability that might ultimately be
incurred on these claims.
As of March 31, 2005, there are 31,784 pending asbestos personal injury claims
filed against the Company. Of these cases, 26,510 were pending in the New York
Supreme Court for New York County in New York State and 4,988 of the cases were
pending in state courts of various counties in Mississippi. The other claims
totaling approximately 286 are filed in various counties in a number of state
courts, and in certain Federal District Courts, and those complaints assert
lesser amounts of damages than the New York cases or do not state any amount
claimed.
As of March 31, 2005, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in all cases that have proceeded to trial. To
date, the Company has been dismissed from 9,677 cases.
In view of the persistence of asbestos litigation nationwide, which has not yet
been sufficiently addressed either politically or legally, the Company expects
to continue to receive additional claims. However, there were developments
during the fourth quarter of 2002 that could have a favorable effect for the
Company regarding the pending claims and the number of future claims filed in
the New York Supreme Court for New York County and in Mississippi state courts
after 2002. On December 19, 2002, the New York Supreme Court responsible for
managing all asbestos cases pending within New York County issued an Order which
created a Deferred or Inactive Docket for all pending and future asbestos claims
filed by plaintiffs who cannot demonstrate that they have a malignant condition
or discernible physical impairment, and an Active Docket for plaintiffs who are
able to show such medical conditions. The Court is reviewing cases for docketing
based on their date of filing, with the older pending cases reviewed first.
Cases designated as Active are then assigned to a "FIFO" trial group, which
groups are scheduled for trial in the designated months of either February or
August. For cases in which there has been a recent death or a diagnosis of
cancer, the Court reviews such cases on an expedited basis and, if medically
supported, such cases are transferred to an "In Extremis" trial group, which
groups are scheduled for trial in the designated months of either May or
November. As of March 31, 2005, the Company was listed as a defendant in
approximately 163 pending cases in the New York Supreme Court for New York
County that have been designated as Active or "In Extremis" and assigned to
trial groups. To date, the Company has been dismissed as a defendant prior to
trial in all New York cases that have proceeded to trial. The number of these
dismissals is currently approximately 1,231.
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Also, in the fourth quarter of 2002, Mississippi enacted tort reform legislation
that made various changes in the law favorable to the Company's defense and that
will apply to all cases filed on or after January 1, 2003. The majority of the
claims pending against the Company in Mississippi were filed in the fourth
quarter of 2002, in advance of the effective date of this more restrictive
legislation.
During the first quarter of 2005, the Company obtained a significant number of
case dismissals in Mississippi. These dismissals were in the wake of the
Mississippi Supreme Court's decision in the Mangialardi case (in which the court
held that consolidation of personal injury claims is impermissible and that
restricted out of state residents from bringing asbestos suits in Mississippi).
Based on these dismissals, the total number of pending Mississippi cases as of
March 31, 2005 is now 4,988. Significantly, however, 2,879 of those cases were
filed in, or removed to, the Mississippi federal district court, which is in the
process of transferring them to the federal Multidistrict Asbestos Docket in
Philadelphia (the "MDL"). In accordance with an order of the MDL court entered
several years ago, the transferred cases are deemed "administratively
dismissed," subject to being reinstated only when each individual plaintiff can
demonstrate both a present physical injury and that asbestos exposure resulted
from the products or activities of identifiable defendants. These
"administratively dismissed" cases are not included in the dismissal numbers
noted in the above paragraphs.
The Company intends to continue its practice of vigorously defending these cases
as they are listed for trial and expects the insurance carriers to continue to
pay the legal costs and expenses. Management believes that the outcome of these
cases will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
The Company is subject to various other claims and legal proceedings covering a
wide range of matters that arose in the ordinary course of business. In the
opinion of management, all such matters are adequately covered by insurance or
by accruals, and if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
J. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED
MARCH 31
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2004
----------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 23,053 $ 16,857
======================================================================================================================
Average shares of common stock outstanding used to compute
basic earnings per common share 41,503 40,937
Dilutive effect of stock-based compensation 475 524
----------------------------------------------------------------------------------------------------------------------
Shares used to compute dilutive effect of stock-based compensation 41,978 41,461
======================================================================================================================
Basic earnings per common share from continuing operations $ 0.56 $ 0.41
======================================================================================================================
Diluted earnings per common share from continuing operations $ 0.55 $ 0.41
======================================================================================================================
All outstanding stock options were included in the computation of diluted
earnings per share at March 31, 2005. Options to purchase 12,000 shares were
outstanding at March 31, 2004, but were not included in the computation of
diluted earnings per share because the effect was antidilutive.
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
K. EMPLOYEE BENEFIT PLANS
THREE MONTHS ENDED
MARCH 31
--------------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U. S. PLANS INTERNATIONAL PLANS
----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2005 2004 2005 2004
----------------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 845 $ 652 $ 1,881 $ 2,458
Interest cost 3,479 3,398 10,340 9,522
Expected return on plan assets (4,778) (4,490) (11,405) (9,982)
Recognized prior service costs 192 189 323 313
Recognized losses 904 746 3,215 3,360
Amortization of transition (asset) (364) (367) 9 (137)
Settlement loss -- -- 13 --
----------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 278 $ 128 $ 4,376 $ 5,534
================================================================================================================
Defined benefit pension expense in the first quarter of 2005 was $1.0 million
lower than the comparable 2004 period. This decrease relates primarily to a
decline in the Company's U.K. pension expense as a result of plan changes
implemented effective January 1, 2004.
In the quarter ended March 31, 2005, the Company contributed $0.2 million and
$14.9 million for the U.S. and international defined benefit pension plans,
respectively. This includes a $9.4 million voluntary contribution to the
Company's U.K. pension plan. The Company currently anticipates contributing an
additional $0.7 million and $15.4 million for the U.S. and international plans,
respectively, during the remainder of 2005.
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) MARCH 31
---------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2005 2004
---------------------------------------------------------------------------------------------------------
Service cost $ 3 $ 3
Interest cost 55 107
Recognized prior service costs 5 8
Recognized (gains)/losses (9) 14
Curtailment gains (318) (736)
---------------------------------------------------------------------------------------------------------
Postretirement benefits income $ (264) $ (604)
=========================================================================================================
The curtailment gains of $0.3 million for 2005 and $0.7 million for 2004 were
due to the termination of certain postretirement health care plans.
In the quarter ended March 31, 2005, the Company contributed $67 thousand to the
postretirement plans and anticipates contributing approximately $253 thousand
during the remainder of 2005.
L. INCOME TAXES
The effective income tax rate relating to continuing operations was 32.3% in the
first quarter of 2005. This compares with 31.0% in the first quarter of 2004.
This increase in the effective income tax rate in 2005 was primarily a result of
the expiration of three tax holidays; one in Europe, one in the Middle East and
one in Asia.
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 to the U.S., as defined in the AJCA. 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. On April 18, 2005 the IRS stated that they are working to
finalize certain issues and release the second round of guidance. 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, as well as the
possible action by Congress to enact technical corrections. A specific range of
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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.
M. NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R)
- --------------------------------------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123R which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). SFAS 123R requires the cost of employee
services received in exchange for an award of equity instruments to be based
upon the grant-date fair value of the award (with limited exceptions).
Additionally, this cost is to be recognized as expense over the period during
which an employee is required to provide services in exchange for the award
(usually the vesting period). SFAS 123R eliminates APB 25's intrinsic value
method which the Company has historically used to account for stock option
grants.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 107 (SAB 107) which summarizes the views of the SEC
staff regarding the interaction between SFAS 123R and certain SEC rules and
regulations. SAB 107 provides guidance on several topics including: valuation
methods, the classification of compensation expense, capitalization of
compensation cost related to share-based payment arrangements, the accounting
for income tax effects of share-based payment arrangements, and disclosures in
Management's Discussion and Analysis subsequent to adoption of SFAS 123R.
In April 2005, the SEC issued FR-74, "Amendment to Rule 4-01(a) of Regulation
S-X Regarding the Compliance Date for Statement of Financial Accounting
Standards No. 123 (Revised 2004), SHARE-BASED PAYMENT" (FR-74). FR-74 allows
companies to implement SFAS 123R at the beginning of their next fiscal year
(January 1, 2006 for the Company), instead of the next reporting period that
begins after June 15, 2005. FR-74 does not change the accounting required by
SFAS 123R; it only changes the required implementation date of the standard.
The Company has not yet determined the full impact of implementing SFAS 123R,
but it is not expected to have a material impact on the Company's financial
position, results of operations or cash flows since the Company ceased granting
stock options in 2003. The Company plans to implement SFAS 123R as of January 1,
2006.
SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4" (SFAS
- ----------------------------------------------------------------------------
151)
- ----
In November 2004, the FASB issued SFAS 151, which amends Accounting Research
Bulletin No. 43, Chapter 4 "Inventory Pricing" (ARB 43). SFAS 151 clarifies that
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage) should be expensed rather than capitalized as inventory.
Additionally, SFAS 151 requires that allocation of fixed production overheads to
inventory costs be based upon the normal capacity of the production facility.
The provisions of SFAS 151 are applicable to inventory costs incurred during
fiscal years beginning after June 15, 2005 (as of January 1, 2006 for the
Company) with earlier application permitted. The Company has not yet determined
the full impact of SFAS 151; however, it is not expected to materially impact
the Company's financial position, results of operations or cash flows. The
Company plans to implement SFAS 151 effective January 1, 2006.
SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No.
- -------------------------------------------------------------------------------
29" (SFAS 153)
- --------------
In December 2004, the FASB issued SFAS 153 which eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary
Transactions," and replaces it with an exception for exchanges that do not have
commercial substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of SFAS 153 are
applicable for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005 (as of July 1, 2005 for the Company) with earlier
application permitted. The Company has not yet determined the full impact of
SFAS 153; however, it is not expected to materially impact the Company's
financial position, results of operations or cash flows as the Company has
historically had a very limited number of nonmonetary exchange transactions. The
Company plans to implement SFAS 153 effective July 1, 2005.
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement
- ------------------------------------------------------------------------
Obligations, an interpretation of FASB Statement No. 143" (FIN 47).
- -------------------------------------------------------------------
In March 2005, the FASB issued FIN 47 which clarifies that the term "conditional
asset retirement obligation" as used in SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143), refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. The obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of settlement.
Accordingly, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. The fair value of a liability for the conditional
asset retirement obligation should be recognized when incurred--generally upon
acquisition, construction, or development and/or through the normal operation of
the asset. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. FIN 47 also clarifies when
an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005 (December 31, 2005 for the
Company). The Company has not yet determined the full impact of implementing FIN
47, but it is not expected to have a material impact on the Company's financial
position, results of operations or cash flows. The Company plans to implement
FIN 47 by December 31, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The following discussion should be read in conjunction with the accompanying
unaudited financial statements as well as the Company's annual Form 10-K for the
year ended December 31, 2004 which included additional information about the
Company's critical accounting policies, contractual obligations, practices and
the transactions that support the financial results and provided a more
comprehensive summary of the Company's outlook, trends and strategies for 2005
and beyond.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include statements
about our management confidence and strategies for performance; expectations for
new and existing products, technologies, and opportunities; and expectations
regarding growth, sales, cash flows, earnings and Economic Value Added (EVA(R)).
These statements can be identified by the use of such terms as "may," "could,"
"expect," "anticipate," "intend," "believe," or other comparable terms.
Factors which could cause results to differ include, but are not limited to,
those discussed in Part I, Item 3, "Quantitative and Qualitative Disclosures
About Market Risk," of this Form 10-Q. The Company cautions that these factors
may not be exhaustive and that many of these factors are beyond the Company's
ability to control or predict. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The Company undertakes no
duty to update forward-looking statements.
EXECUTIVE OVERVIEW
The Company's first quarter 2005 revenues were a first quarter record $640.1
million. This is an increase of $83.8 million or 15% over the first quarter of
2004. Income from continuing operations was $23.1 million for the first quarter
of 2005 compared with $16.9 million in the first quarter of 2004, an increase of
37%. Diluted earnings per share from continuing operations were a first quarter
record $0.55 compared with $0.41 for the first quarter of 2004, a 34% increase.
The first quarter of 2005 results were led by a strong performance from the
Access Services Segment and all businesses in the Engineered Products and
Services ("all other") Category. The Mill Services Segment also had improved
revenues and operating income while the Gas Technologies Segment had improved
revenues but decreased operating income.
Revenues for the first quarter of 2005 for the Mill Services Segment were $268.6
million compared with $236.3 million in the first quarter of 2004, a 14%
increase. Operating income for the first quarter of 2005 increased by 7% to
$27.0 million, from $25.3 million in the first quarter of 2004. The Mill
Services business accounted for 42% of the Company's revenues
-15-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
and 57% of the operating income for the first quarter of 2005. Operating margins
for this Segment declined by 60 basis points to 10.1% from 10.7% in the first
quarter last year due to higher energy, maintenance and start-up costs. Mill
Services growth is expected to continue as worldwide steel mill production
volume is projected to remain strong in the near-term, and as the Company
invests substantial cash to grow the business.
The Access Services Segment's revenues in the first quarter of 2005 were $183.6
million compared with $157.8 million in the first quarter of 2004, a 16%
increase. Operating income for the first quarter of 2005 increased by 275% to
$9.4 million, from $3.4 million in the first quarter of 2004. The Access
Services business accounted for 29% of the Company's revenues and 20% of the
operating income for the first quarter of 2005. Operating margins for the
Segment improved by 290 basis points to 5.1% from 2.2% in the first quarter of
last year due to product mix and increased equipment rentals. Improved
performance was achieved by both the international and domestic Access Services
operations.
The Gas Technologies Segment revenues in the first quarter of 2005 were $82.1
million compared with $77.6 million in the first quarter of 2004, a 6% increase.
Operating income was $2.1 million for the first quarter of 2005 compared with
$3.1 million for the first quarter of 2004. The increased revenues in the first
quarter of 2005 were led by the cryogenics equipment, industrial cylinder and
composite cylinder businesses. Although revenue increased, operating income and
operating margins for the first quarter of 2005 declined in comparison with the
first quarter of 2004 due to higher operating costs and customer pre-buying of
propane tanks that occurred in last year's first quarter in anticipation of
future price increases. Additionally, reduced demand for certain valves
negatively impacted operating income in the first quarter of 2005.
Four of the five businesses in the Engineered Products and Services ("all
other") Category contributed higher revenues in the first quarter of 2005
compared with the first quarter of 2004. All five businesses showed improvements
in operating income and margins in comparison to the first quarter of 2004, with
the industrial grating products and air-cooled heat exchangers businesses
achieving the largest increases.
The positive effect of foreign currency translation increased first quarter 2005
consolidated revenues by $15.6 million and pre-tax income by $1.3 million when
compared with the first quarter of 2004.
The Company's operations span several industries and products as more fully
discussed in Part I, Item 1, "Business," of the Company's Form 10-K for the year
ended December 31, 2004. On a macro basis, the Company is affected by worldwide
steel mill production and capacity utilization; non-residential construction and
industrial maintenance activities; industrial production volume; and the general
business trend towards the outsourcing of services. The outlook for 2005
continues to be positive for these business drivers. Currently, the Company is
generally experiencing increased activity in its industrial services businesses.
Domestically, Access Services rental equipment on the customer job sites is at
the highest level since 2001; the estimated future value of mill services
contracts as of December 31, 2004 was $3.7 billion; and backlogs in the
manufacturing businesses have been growing. The Company believes that its record
first quarter sales and earnings per share, the improving business drivers and
the Company's target of $140 million in growth-related capital expenditures or
acquisitions in 2005 provide a solid base for achieving the Company's stated
objective of double-digit growth in diluted earnings per share from continuing
operations in 2005.
-----------------------------------------------------------------------------------------
REVENUES BY REGION
-----------------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
MARCH 31 2004 TO 2005
(DOLLARS IN MILLIONS) 2005 2004 VOLUME CURRENCY TOTAL
-----------------------------------------------------------------------------------------
Europe $ 263.8 $ 233.9 8.1% 4.7% 12.8%
U.S 255.5 227.3 12.4 0.0 12.4
Latin America 34.5 27.1 22.7 4.6 27.3
Asia-Pacific 32.1 25.8 22.2 2.2 24.4
Middle East 23.2 14.8 55.3 1.5 56.8
Other 31.0 27.4 3.9 9.2 13.1
-----------------------------------------------------------------------------------------
Total $ 640.1 $ 556.3 12.3% 2.8% 15.1%
=========================================================================================
2005 HIGHLIGHTS
The following significant items affected the Company overall during the first
quarter of 2005 in comparison with the first quarter of 2004, respectively:
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 and services. This included international demand
for railway track maintenance services and equipment; access equipment
sales and rentals especially in the Middle East; cryogenics equipment;
industrial cylinders; industrial grating products; and air-cooled heat
exchangers.
o An increase in the effective income tax rate relating to continuing
operations, from 31.0% in the first quarter of 2004 to 32.3% in the first
quarter of 2005, resulted in approximately $0.5 million in higher income
tax expense for the first quarter of 2005. This is more fully discussed
under Part I, Item 1, Footnote L labeled "Income Taxes."
MILL SERVICES SEGMENT:
- ----------------------
THREE MONTHS
ENDED MARCH 31
----------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2005 2004
----------------------------------------------------------------------------------------
Revenues $ 268.6 $ 236.3
Operating income 27.0 25.3
Operating margin percent 10.1% 10.7%
========================================================================================
THREE MONTHS
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED MARCH 31
----------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------
Revenues - 2004 $ 236.3
Continued strong volume and new business 22.0
Benefit of positive foreign currency translation 10.4
Other (0.1)
----------------------------------------------------------------------------------------
Revenues - 2005 $ 268.6
========================================================================================
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH 2004:
o Operating income in the first quarter of 2005 increased by $0.4 million as
a result of continued strong volume, and increased pricing and new
business, particularly in North America, Europe and Brazil, partially
offset by increased operating costs (as noted below).
o The benefit of positive foreign currency translation in the first quarter
of 2005 resulted in increased operating income of $1.2 million compared
with the first quarter of 2004.
o Compared with the first quarter of 2004, the Segment's operating income in
first quarter of 2005 was negatively impacted by increased fuel and
energy-related costs of approximately $3.6 million.
o The Segment's operating income for the first quarter of 2005 was impacted
by increased maintenance and repair costs; higher start-up costs for new
contracts; and increased selling, general and administrative costs
(including increased compensation costs and Sarbanes-Oxley Section
404-related costs). Selling, general and administrative costs increased
$2.4 million or 16% (versus a 14% increase in revenues) for the first
quarter of 2005 (including approximately $0.7 million related to foreign
currency translation).
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ACCESS SERVICES SEGMENT:
- ------------------------
THREE MONTHS
ENDED MARCH 31
----------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2005 2004
----------------------------------------------------------------------------------------
Revenues $ 183.6 $ 157.8
Operating income 9.4 3.4
Operating margin percent 5.1% 2.2%
========================================================================================
THREE MONTHS
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED MARCH 31
----------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------
Revenues - 2004 $ 157.8
Net increased volume and pricing 17.9
Benefit of positive foreign currency translation 4.8
Acquisitions (principally SGB Raffia in Australia) 2.2
Other 0.9
----------------------------------------------------------------------------------------
Revenues - 2005 $ 183.6
========================================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH 2004:
o In the first quarter of 2005, the Segment was positively affected by the
performance of the concrete forming rental business, particularly in the
Middle East and the U.K.
o Lower pension expense in the first quarter of 2005 increased operating
income by approximately $1.0 million when compared with the first quarter
of 2004.
o During the first quarter of 2005, the international Access Services
business continued to grow outside the U.K., predominantly in the Middle
East, due to certain on-going large projects. During the first quarter of
2005, the international operations outside of the U.K. had $61.4 million in
revenues and $5.7 million in operating income. This compares with $41.3
million in revenues and $3.5 million in operating income for the first
quarter of 2004.
o In the first quarter of 2005, there was a continued strengthening in the
U.S. non-residential construction markets that started in the latter half
of 2004. This strengthening had a positive effect on volume (particularly
erection and dismantling labor revenue and equipment rental) which caused
overall margins in the U.S. to improve. Equipment rentals, particularly in
the construction sector, provide the highest margins for this Segment.
o Foreign currency translation in the first quarter of 2005 did not have a
material impact on operating income compared with the first quarter of
2004.
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
GAS TECHNOLOGIES SEGMENT:
- -------------------------
THREE MONTHS
ENDED MARCH 31
----------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2005 2004
----------------------------------------------------------------------------------------
Revenues $ 82.1 $ 77.6
Operating income 2.1 3.1
Operating margin percent 2.6% 4.0%
========================================================================================
THREE MONTHS
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED MARCH 31
----------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------
Revenues - 2004 $ 77.6
Increased demand for cryogenics equipment and industrial cylinders 9.1
Decreased sales of propane tanks (3.9)
Decreased demand for certain valves partially offset by increased
demand for composite-wrapped cylinders (0.7)
----------------------------------------------------------------------------------------
Revenues - 2005 $ 82.1
========================================================================================
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH 2004:
o Operating income decreased in the first quarter of 2005 compared with the
same period of 2004, due mainly to decreased volume for propane tanks and
valves.
o As expected, the propane business had decreased revenues and operating
income in the first quarter of 2005 when compared with the first quarter of
2004. As indicated last year, there was increased demand for propane tanks
in the first quarter of 2004 driven by customers accelerating purchases in
anticipation of future price increases due to higher steel prices.
o Decreased demand for certain valves negatively impacted operating income in
the first quarter of 2005 compared with the same period of 2004. A
strategic action plan is being implemented to improve the results of the
valves business. This plan is further discussed in the Outlook, Trends and
Strategies section.
o The international businesses, in both Asia and Europe, contributed
significantly to the increased performance of the cryogenics business
during the first quarter of 2005 compared with the first quarter of 2004.
o Higher volume for industrial cylinders was due to increased demand and
selling price increases.
o Foreign currency translation in the first of quarter 2005 did not have a
material impact on operating income for this Segment compared with the
first quarter of 2004.
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY:
- --------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
----------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2005 2004
----------------------------------------------------------------------------------------
Revenues $ 105.7 $ 84.6
Operating income 9.0 6.2
Operating margin percent 8.5% 7.3%
========================================================================================
ENGINEERED PRODUCTS & SERVICES ("ALL OTHER") CATEGORY - THREE MONTHS
SIGNIFICANT IMPACTS ON REVENUES ENDED MARCH 31
----------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------
Revenues - 2004 $ 84.6
Railway track maintenance services and equipment 9.7
Air-cooled heat exchangers 7.4
Industrial grating products 3.9
Roofing granules and abrasives 0.2
Benefit of positive foreign currency translation 0.2
Boiler and process equipment (0.4)
Other (due to rounding) 0.1
----------------------------------------------------------------------------------------
Revenues - 2005 $ 105.7
========================================================================================
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - SIGNIFICANT
IMPACTS ON OPERATING INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2005
COMPARED WITH 2004:
o Higher first quarter of 2005 operating income in the railway track
maintenance services and equipment business was due principally to
increased international contract services and repair parts sales.
o Operating income for the air-cooled heat exchangers business improved in
the first quarter of 2005 due to increased volume resulting from an
improving natural gas market.
o Increased first quarter of 2005 operating income for the industrial grating
products business was due principally to higher selling prices.
o The roofing granules and abrasives business again attained profitable
results in the first quarter of 2005, consistent with prior periods.
o Foreign currency translation in the first quarter of 2005 did not have a
material impact on operating income for the Segment compared with the first
quarter of 2004.
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
OUTLOOK, TRENDS AND STRATEGIES
Looking to the remainder of 2005 and beyond, the following significant items,
trends and strategies are expected to affect the Company:
Company Wide:
- -------------
o A continued focus on expanding the higher-margin industrial services
businesses, with a particular emphasis on growing the Mill Services Segment
through the provision of additional services to existing customers, new
contracts in both mature and emerging markets and strategic acquisitions.
Significant capital investments are also expected to be made to grow the
Access Services and railway services businesses.
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 Higher fuel, energy, transportation and material costs, particularly steel,
have been encountered during 2004 and the first quarter of 2005. Although
certain costs (e.g., steel) are expected to moderate during the remainder
of 2005, should these costs continue to rise, the Company's operating costs
would increase and profitability would decline to the extent that such
costs cannot be passed to customers.
o The Company will continue to focus on improving Economic Value Added
(EVA(R)).
o A target of a record $320 million in net cash provided by operating
activities has been established for 2005.
o Foreign currency translation has had a favorable effect on the Company's
sales and income during the first quarter of 2005. However, should the U.S.
dollar strengthen, particularly in relationship to the euro or British
pound sterling, the impact on the Company would generally be negative in
terms of reduced sales and income.
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 The current trend towards rising interest rates in the U.S. should not
significantly increase the Company's overall interest expense.
Approximately 87% of the Company's current borrowings are at fixed interest
rates, principally in British pounds sterling or U.S. dollars.
Additionally, approximately 84% of the Company's borrowings are long-term
in nature and do not mature until 2010 or later. Should the Company require
significant additional borrowings to finance growth-related acquisitions,
they would be at the prevailing market interest rates which may be higher
than the Company is currently paying under its commercial paper programs.
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. On
April 18, 2005 the IRS stated that they are working to finalize certain
issues and release the second round of guidance. 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, as well as the
possible action by Congress to enact technical corrections. 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 According to the International Iron and Steel Institute (IISI), global
steel production (excluding China) for the first quarter of 2005 increased
by 1% compared with the first quarter of 2004. 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. There have been
recent media reports regarding a potential decline in U.S. steel production
to allow the steel mills to maintain pricing. A decline in U.S. production
should not have a significant impact on this Segment since approximately
80% of Segment revenues are earned internationally.
o Positive growth momentum is expected to continue for the remainder of 2005.
However, foreign currency translation is not expected to be as much a
factor in 2005 as it was in 2004. Most of the Mill Services growth this
year should come primarily from add-on services and investments, including
possible bolt-on acquisitions.
o The increased energy-related costs this Segment experienced during the
first quarter of 2005 are expected to persist through the rest of the year;
however, it is expected that price escalation clauses that are built into
existing contracts will assist the Company in recovering a portion of these
increased costs from customers.
o The risk remains that certain Mill Services customers may 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
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
service opportunities for the Company. A merger during April 2005 of two of
the Company's larger customers has created the world's largest steel
company. Currently, the effect of this merger on the Company cannot be
estimated.
Access Services Segment:
- ------------------------
o Both the international and U.S. Access Services businesses are expected to
show continued improvement during 2005.
o U.S. non-residential construction activity continued to improve in the
first quarter of 2005 and the overall market outlook remains positive.
Although industry sources have trimmed their forecasts for U.S.
non-residential construction growth from 5% to 4% for the year due to the
first quarter's severe weather conditions on the West Coast, the remainder
of the year is forecasted to improve as previously predicted. Additionally,
new office building and hotel starts are still expected to see double-digit
growth for 2005.
o Positive growth momentum is expected to continue for the remainder of 2005.
However, foreign currency translation is not expected to be as much a
factor in 2005 as it was in 2004.
o The current trend towards increasing interest rates in the U.S. should help
support equipment rental rate increases that have been instituted during
the first quarter of 2005.
Gas Technologies Segment:
- -------------------------
o Although cost inflation for certain commodities is expected to moderate in
2005, continued increases in steel prices; worldwide demand for steel; and
availability of carbon fiber used to manufacture filament-wound composite
cylinders 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 valves; manufacturing inefficiencies; new
product start-up costs; and increased raw material costs have impacted the
valves business during the first quarter of 2005. A comprehensive strategic
plan has been developed and it is 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; consolidating certain manufacturing
process; process improvements within the manufacturing operations; and
optimization of the organizational structure of the business. If the
conditions encountered during 2004 and the first quarter of 2005 persist
despite execution of the strategic action plan, the valuation of this
business could be negatively impacted.
o Despite a decline in the first quarter of 2005, the propane business is
expected to perform well in 2005 as a whole, as it returns to its more
normal business cycle.
Engineered Products and Services ("all other") Category:
- --------------------------------------------------------
o International demand for the railway track maintenance 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.
o Due to an improving natural gas market, demand for air-cooled heat
exchangers is expected to remain strong for the balance of the 2005 and
stable into 2006.
-22-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RESULTS OF OPERATIONS
----------------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AND PERCENTAGES) 2005 2004
----------------------------------------------------------------------------------------
Revenues from continuing operations $ 640.1 $ 556.3
Cost of services and products sold 493.6 429.0
Selling, general and administrative expenses 97.0 88.0
Other expenses 1.4 1.6
Operating income from continuing operations 47.3 37.0
Interest Expense 10.4 10.3
Income tax expense 12.1 8.5
Net income 23.1 16.9
Diluted earnings per common share 0.55 0.41
Consolidated effective income tax rate 32.3% 31.0%
----------------------------------------------------------------------------------------
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
First Quarter 2005 vs. First Quarter 2004
- -----------------------------------------
Revenues for the first quarter of 2005 increased $83.8 million or 15% from the
first quarter of 2004, to a record level for a first quarter. This increase was
attributable to the following significant items:
----------------------------------------------------------------------------
CHANGE IN REVENUES
IN MILLIONS FIRST QUARTER 2005 VS. FIRST QUARTER 2004
----------------------------------------------------------------------------
$ 21.9 Net increased volume, new contracts and sales price changes
in the Mill Services Segment.
18.8 Net increased revenues in the Access Services Segment due
principally to the strength of the concrete forming
business, particularly in the Middle East, and
increased activity in the U.S.
15.6 Effect of foreign currency translation.
9.7 Net increased revenues in the railway track maintenance
services and equipment business due principally to
increased contract services and, to a lesser extent,
increased rail equipment and repair part sales.
7.4 Increased revenues of the air-cooled heat exchangers
business due to improving natural gas market.
4.3 Net increased revenues in the Gas Technologies Segment due
principally to improved market conditions and selling
price increases for cryogenics equipment and industrial
cylinders, partially offset by decreased demand for
propane tanks and valves.
3.9 Increased revenues of the industrial grating products
business due to increased prices.
2.2 Effect of business acquisitions in the Access Services
Segment.
----------------------------------------------------------------------------
Total Change in Revenues -
$ 83.8 First Quarter 2005 vs. First Quarter 2004
============================================================================
-23-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
COST OF SERVICES AND PRODUCTS SOLD
First Quarter 2005 vs. First Quarter 2004
- -----------------------------------------
Cost of services and products sold for the first quarter of 2005 increased $64.7
million, or 15%, from the first quarter of 2004, in line with the 15% increase
in revenues. This increase was attributable to the following significant items:
----------------------------------------------------------------------------
CHANGE IN COST OF SERVICES AND PRODUCTS SOLD
IN MILLIONS FIRST QUARTER 2005 VS. FIRST QUARTER 2004
----------------------------------------------------------------------------
$ 50.9 Increased costs due to increased revenues (exclusive of the
effect of foreign currency translation and business
acquisitions) including the effect of increased
commodity costs and energy-related costs.
12.0 Effect of foreign currency translation.
1.5 Effect of business acquisitions in the Access Services
Segment.
0.3 Other (due to product mix and minor changes across the
various units not already mentioned, partially offset
by stringent cost control, process improvements and
reorganization actions).
----------------------------------------------------------------------------
Total Change in Cost of Services and Products Sold -
$ 64.7 First Quarter 2005 vs. First Quarter 2004
============================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
First Quarter 2005 vs. First Quarter 2004
- -----------------------------------------
Selling, general and administrative (SG&A) expenses for the first quarter of
2005 increased $9.0 million or 10% from the first quarter of 2004, a lower rate
than the 15% increase in revenues. The lower relative increase in SG&A expenses
(10%) as compared with revenues (15%) was due to stringent cost controls,
process improvements and reorganization actions. The absolute dollar increase in
SG&A expenses was attributable to the following significant items:
----------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS FIRST QUARTER 2005 VS. FIRST QUARTER 2004
----------------------------------------------------------------------------
$ 4.0 Increased compensation expense due to salary increases,
increased headcount, increased payroll taxes and
employee incentive plan increases due to improved
performance.
2.2 Effect of foreign currency translation.
1.4 Increased professional fees due to higher external auditor
fees (related to Sarbanes-Oxley Section 404) and
increased consulting expenses.
0.9 Effect of business acquisitions - principally SGB Raffia in
Australia.
0.5 Other (including increased energy-related costs).
----------------------------------------------------------------------------
Total Change in Selling, General and Administrative
$ 9.0 Expenses - First Quarter 2005 vs. First Quarter 2004
============================================================================
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. Net Other expenses were $1.4 million
in the first quarter of 2005, compared with $1.6 million in the comparable 2004
period.
First Quarter 2005 vs. First Quarter 2004
- -----------------------------------------
Other expenses for the first quarter of 2005 decreased $0.2 million or 11% from
the first quarter of 2004. This decrease was attributable to the following
significant items:
----------------------------------------------------------------------------
CHANGE IN OTHER EXPENSES
IN MILLIONS FIRST QUARTER 2005 VS. FIRST QUARTER 2004
----------------------------------------------------------------------------
$ (0.8) Decrease in other expenses due to a loss on a sublease in
the first quarter of 2004 that did not recur in the
first quarter of 2005.
0.6 Increase in employee termination benefit costs.
----------------------------------------------------------------------------
Total Change in Other Expenses -
$ (0.2) First Quarter 2005 vs. First Quarter 2004
============================================================================
-24-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
First Quarter 2005 vs. First Quarter 2004
- -----------------------------------------
The increase in the first quarter of 2005 of $3.6 million or 42% in income tax
expense from continuing operations was due to increased earnings from continuing
operations for the reasons mentioned above and an increase in the effective
income tax rate relating to continuing operations from 31% in the first quarter
of 2004 to 32.3% in the first quarter of 2005. The increase in the effective
income tax rate was primarily a result of the expiration of three tax holidays;
one in Europe, one in the Middle East and one in Asia.
================================================================================
NET INCOME AND EARNINGS PER SHARE
First Quarter 2005 vs. First Quarter 2004
- -----------------------------------------
Net income of $23.1 million and diluted earnings per share of $0.55 in the first
quarter of 2005 exceeded the first quarter of 2004 by $6.1 million and $0.14,
respectively, due to increased income from continuing operations. This increase
primarily resulted from increased revenues, stringent cost controls, process
improvements and reorganization actions that contained selling, general and
administrative expenses growth to a 10% increase while revenue increased 15%;
partially offset by an increased effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's principal sources of liquidity are cash from operations and
short-term borrowings under its various credit agreements, augmented
periodically by cash proceeds from asset sales. During 2004, the Company
achieved record net cash provided by operating activities of $270.5 million.
During the first three months of 2005, net cash provided by operating activities
of $48.1 million was 49% higher than in the first three months of 2004. Due to
record capital investments of $58.3 million for the first three months of 2005
and the seasonal aspect of the Company's cash flows in the first three months of
the year, the Company's net cash borrowings increased $8.7 million in the first
three months of 2005.
The Company's management reaffirms its previously stated strategic objectives
for 2005 that 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 or growth initiatives. The Company
also plans to continue its long history of paying dividends to stockholders.
The Company also plans to pay down debt to the extent possible. However, as of
March 31, 2005, the Company had only approximately $71 million of debt that can
be paid prior to maturity. The balance of the debt, principally the Company's
(pound)200 million notes and its $150 million notes, cannot be paid until
maturity in 2010 and 2013, respectively.
COMMERCIAL COMMITMENTS
As of March 31, 2005, there was a decrease in the standby letters of credit and
performance bonds of approximately $91.4 million from the total $218.3 million
outstanding at December 31, 2004. This decrease was due principally to the
release in January 2005 of an $80 million surety bond and a $9 million standby
letter of credit, both related to the Company's settled Federal Excise Tax (FET)
dispute, as previously reported in the Annual Report on Form 10-K.
SOURCES AND USES OF CASH
The primary drivers of the Company's cash flow from operations are the Company's
sales and income, particularly in the services businesses. The Company's
long-term mill services contracts provide predictable cash flows for several
years into the future. (See "Certainty of Cash Flows" section for additional
information on estimated future revenues of Mill Services contracts and order
backlogs for the Company's manufacturing businesses and railway track
maintenance services business.) Additionally, returns on capital investments
made in prior years, for which no cash is currently required, are a significant
source of operating cash. Depreciation related to these investments is a
non-cash charge. The Company also continues to maintain working capital at a
manageable level based upon the requirements and seasonality