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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, 2006
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
- --------------------------------------------------------------------------------
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [_] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [_] NO [X]
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, 2006
Common stock, par value $1.25 per share 41,952,909
================================================================================
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2006 2005
===============================================================================================================
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 572,631 $ 469,573
Product sales 196,922 170,488
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 769,553 640,061
===============================================================================================================
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 422,824 352,405
Cost of products sold 156,224 141,242
Selling, general and administrative expenses 120,570 97,037
Research and development expenses 691 659
Other expenses 1,867 1,442
- ---------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 702,176 592,785
===============================================================================================================
OPERATING INCOME FROM CONTINUING OPERATIONS 67,377 47,276
Equity in income of unconsolidated entities, net 61 79
Interest income 890 577
Interest expense (14,090) (10,443)
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST 54,238 37,489
Income tax expense (17,673) (12,109)
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 36,565 25,380
Minority interest in net income (2,315) (2,327)
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 34,250 23,053
- ---------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Income/(loss) from operations of discontinued business 11 (26)
Loss on disposal of discontinued business -- (9)
Income/(loss) related to discontinued defense business (6) 38
Income tax expense (3) (1)
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS 2 2
- ---------------------------------------------------------------------------------------------------------------
NET INCOME $ 34,252 $ 23,055
===============================================================================================================
Average shares of common stock outstanding 41,822 41,503
Basic earnings per common share:
Continuing operations $ 0.82 $ 0.56
Discontinued operations -- --
- ---------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ 0.82 $ 0.56
===============================================================================================================
Diluted average shares of common stock outstanding 42,115 41,978
Diluted earnings per common share:
Continuing operations $ 0.81 $ 0.55
Discontinued operations -- --
- ---------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 0.81 $ 0.55
===============================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.325 $ 0.30
===============================================================================================================
See accompanying notes to consolidated financial statements.
-2-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2006 2005(a)
===============================================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 98,852 $ 120,929
Accounts receivable, net 648,240 666,252
Inventories 280,133 251,080
Other current assets 59,710 60,436
Assets held-for-sale 2,341 2,326
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,089,276 1,101,023
===============================================================================================================
Property, plant and equipment, net 1,173,175 1,139,808
Goodwill, net 563,026 559,629
Intangible assets, net 78,464 78,839
Other assets 94,425 96,505
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,998,366 $2,975,804
===============================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 110,263 $ 97,963
Current maturities of long-term debt 5,615 6,066
Accounts payable 251,991 247,179
Accrued compensation 62,107 75,742
Income taxes payable 41,423 42,284
Dividends payable 13,622 13,580
Insurance liabilities 45,042 47,244
Other current liabilities 224,169 218,345
- ---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 754,232 748,403
===============================================================================================================
Long-term debt 882,175 905,859
Deferred income taxes 128,377 123,334
Insurance liabilities 53,674 55,049
Retirement plan liabilities 99,160 98,946
Other liabilities 50,853 50,319
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,968,471 1,981,910
===============================================================================================================
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 85,486 85,322
Additional paid-in capital 159,537 152,899
Accumulated other comprehensive loss (158,768) (167,318)
Retained earnings 1,546,845 1,526,216
Treasury stock (603,205) (603,225)
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,029,895 993,894
===============================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,998,366 $2,975,804
===============================================================================================================
(a) Reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
-3-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 2006 2005
===============================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,252 $ 23,055
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 58,415 48,760
Amortization 1,836 660
Equity in income of unconsolidated entities, net (61) (79)
Other, net 2,336 3,818
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable 27,464 9,129
Inventories (27,611) (32,633)
Accounts payable (10,250) 593
Accrued interest payable 4,710 5,374
Accrued compensation (14,543) (13,512)
Other assets and liabilities (6,708) 2,978
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 69,840 48,143
===============================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (66,940) (58,301)
Net source of cash associated with the purchases of businesses 2,264 --
Proceeds from sale of assets 1,324 358
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (63,352) (57,943)
===============================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (including reclassifications to/from
long-term debt) 10,352 25,909
Current maturities and long-term debt:
Additions 59,841 24,521
Reductions (including reclassifications to
short-term borrowings) (92,484) (41,752)
Cash dividends paid on common stock (13,580) (12,434)
Common stock issued-options 6,345 4,410
Other financing activities (2,266) (2,343)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (31,792) (1,689)
===============================================================================================================
Effect of exchange rate changes on cash 3,227 (4,199)
- ---------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (22,077) (15,688)
Cash and cash equivalents at beginning of period 120,929 94,093
===============================================================================================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 98,852 $ 78,405
===============================================================================================================
See accompanying notes to consolidated financial statements.
-4-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 2006 2005
===============================================================================================================
Net income $ 34,252 $ 23,055
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss):
Foreign currency translation adjustments 10,825 (20,886)
Net loss on cash flow hedging instruments, net of deferred
income taxes of $5 and $0 in 2006 and 2005, respectively (10) --
Pension liability adjustments, net of deferred income taxes
of $668 and ($1,232) in 2006 and 2005, respectively (2,267) 2,865
Marketable securities, unrealized gain net of deferred income
taxes of $1 and $0 in 2006 and 2005, respectively 1 --
Reclassification adjustment for (gain) loss on cash flow hedging
instruments included in net income, net of deferred income
taxes of ($1) and $1 in 2006 and 2005, respectively 1 (1)
- ---------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 8,550 (18,022)
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TOTAL COMPREHENSIVE INCOME $ 42,802 $ 5,033
===============================================================================================================
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.
The year-end condensed balance sheet information contained in this Form 10-Q was
derived from 2005 audited financial statements, but does not include all
disclosures required by accounting principals generally accepted in the United
States of America. The unaudited interim information contained herein should
also be read in conjunction with the Company's 2005 Form 10-K filing.
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 Balance Sheets. As a result of these
reclassifications, certain 2005 amounts presented for comparative purposes will
not individually agree with previously filed Forms 10-K or 10-Q.
C. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123R), which replaced SFAS No. 123, "Accounting for
Stock-Based Compensation," and superseded 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 also requires that the
additional tax benefits the Company receives from stock-based compensation be
recorded as cash inflows from financing activities in the statement of cash
flows. Prior to January 1, 2006, the Company applied the provisions of APB 25 in
accounting for awards made under the Company's stock-based compensation plans.
The Company adopted the provisions of SFAS 123R using the modified-prospective
transition method. Under this method, results from prior periods have not been
restated. During 2003, the Company ceased granting stock options to employees
and non-employee directors. As such, the effect of adopting SFAS 123R was not
material to the Company's income from continuing operations, net income or cash
flows from operating and financing activities for the three months ended March
31, 2006, and the cumulative effect of adoption using the modified-prospective
transition method was not material.
The Company currently grants restricted stock units as the long-term equity
component of compensation for non-employee directors, officers and certain key
employees.. The restricted stock units require no payment from the recipient and
compensation cost is measured based on the market price on the grant date and is
recorded over the vesting period. The vesting period for restricted stock units
granted to non-employee directors is one year; and each restricted stock unit
will be exchanged for a like number of shares of Company stock following the
termination of the participant's service as a director. The vesting period for
restricted stock units granted to officers is three years, and upon vesting each
restricted stock unit will be exchanged for a like number of shares of the
Company stock. Restricted stock units do not have an option for cash payment.
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The following table summarizes restricted stock units issued and the
compensation expense recorded for the three months ended March 31, 2006 and
2005:
STOCK-BASED
COMPENSATION EXPENSE
FOR THE THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS)
-----------------------------------------------------------------------------
RESTRICTED FAIR VALUE
STOCK UNITS PER UNIT 2006 2005
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Directors:
May 1, 2004 3,500 $ 43.42 $ -- $ 38
May 1, 2005 6,000 53.75 81 --
Employees:
January 24, 2005 32,700 50.41 115 101
January 24, 2006 46,550 67.70 199 --
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Total 88,750 $ 395 $ 139
=============================================================================
Restricted stock unit activity for the three months ended March 31, 2006 was as
follows:
WEIGHTED AVERAGE
RESTRICTED GRANT-DATE
STOCK UNITS FAIR VALUE
-----------------------------------------------------------------------------
Nonvested at January 1, 2006 31,750 $ 50.62
Granted 46,550 67.70
Vested (2,000) 52.91
Forfeited (3,250) 63.71
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Nonvested at March 31, 2006 73,050 $ 60.86
=============================================================================
As of March 31, 2006, the total unrecognized compensation costs related to
nonvested restricted stock units was $3.6 million which is expected to be
recognized over a weighted-average period of approximately 2.5 years.
Excess tax benefits, resulting principally from stock options exercised in the
three months ended March 31, 2006 and 2005 were $2.1 million and $1.4 million,
respectively. In accordance with SFAS 123R, the excess tax benefits recognized
for the three months ended March 31, 2006 have been classified as cash inflows
from financing activities.
No stock options were granted during 2004 and 2005. During 2003, stock options
were only granted to non-employee directors. Prior to 2003, the Company had
granted stock options for the purchase of its common stock to officers, certain
key employees and non-employee directors under two stockholder-approved plans.
The 1995 Executive Incentive Compensation Plan authorizes the issuance of up to
4,000,000 shares of the Company's common stock for use in paying incentive
compensation awards in the form of stock options or other equity awards such as
restricted stock, restricted stock units or stock appreciation rights. The 1995
Non-Employee Directors' Stock Plan authorizes the issuance of up to 300,000
shares of the Company's common stock for equity awards.
When the Company issued stock options, they were granted at fair market value on
the date of grant. Options issued in 2002 under the 1995 Executive Incentive
Compensation Plan generally vested and became exercisable two years following
the date of grant. Options issued under the 1995 Non-Employee Directors' Stock
Plan became exercisable one year following the date of grant but vested
immediately. The options under both Plans expire ten years from the date of
grant. At March 31, 2006, there were 1,239,631 and 156,500 shares available for
granting equity awards under the 1995 Executive Incentive Compensation Plan and
the 1995 Non-Employee Directors' Stock Plan, respectively. Generally, new shares
are issued for exercised stock options and treasury shares are issued for vested
restricted stock units.
-7-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Stock option activity for the three months ended March 31, 2006 was as follows:
STOCK OPTIONS
----------------------------------------------------------------
SHARES WEIGHTED AVERAGE AGGREGATE INTRINSIC
UNDER OPTION EXERCISE PRICE VALUE (IN MILLIONS)(b)
-------------------------------------------------------------------------------------------------
Outstanding, December 31, 2005 749,025 (a) $31.93 $26.9
Granted -- -- --
Exercised (130,965) $33.34 --
-------------------------------------------------------------------------------------------------
OUTSTANDING, MARCH 31, 2006 618,060 (a) $31.64 $31.7
=================================================================================================
(a) Included in options outstanding at March 31, 2006 and December 31, 2005
were 681 options granted to SGB key employees as part of the Company's
acquisition of SGB in 2000. These options are not a part of the 1995
Executive Compensation Plan, or the 1995 Non-Employee Directors' Stock
Plan.
(b) Intrinsic value is defined as the difference between the current market
value and the exercise price.
The total intrinsic value of options exercised during the three months ended
March 31, 2006 and 2005 was $6.1 million and $4.0 million, respectively.
Options to purchase 618,060 shares were exercisable at March 31, 2006. The
following table summarizes information concerning outstanding and exercisable
options at March 31, 2006.
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
EXERCISABLE PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------
$25.63 - $29.00 236,872 4.02 $27.52 236,872 $27.52
29.31 - 32.65 253,903 5.76 32.54 253,903 32.54
32.81 - 46.16 127,285 3.15 37.47 127,285 37.47
- -----------------------------------------------------------------------------------------------------------------------
618,060 618,060
=======================================================================================================================
D. REVIEW OF OPERATIONS BY SEGMENT
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
--------------------------------------------------------------------------------------------------------------------------------
Mill Services Segment $ 326,235 $ 33,580 $ 268,635 $ 27,001
Access Services Segment 225,794 16,783 183,577 9,366
Gas Technologies Segment 87,488 2,327 82,134 2,097
--------------------------------------------------------------------------------------------------------------------------------
Segment Totals 639,517 52,690 534,346 38,464
Engineered Products and Services
("all other") Category 130,036 15,438 105,715 9,031
General Corporate -- (751) -- (219)
--------------------------------------------------------------------------------------------------------------------------------
Consolidated Totals $ 769,553 $ 67,377 $ 640,061 $ 47,276
================================================================================================================================
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME
BEFORE INCOME TAXES AND MINORITY INTEREST
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 2006 2005
---------------------------------------------------------------------------------------------------------------
Segment Operating Income $ 52,690 $ 38,464
Engineered Products and Services
("all other") Category 15,438 9,031
General Corporate (751) (219)
---------------------------------------------------------------------------------------------------------------
Operating income from continuing operations 67,377 47,276
Equity in income of unconsolidated entities, net 61 79
Interest income 890 577
Interest expense (14,090) (10,443)
---------------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interest $ 54,238 $ 37,489
===============================================================================================================
E. ACCOUNTS RECEIVABLE AND INVENTORIES
At March 31, 2006 and December 31, 2005, accounts receivable of $648.2 million
and $666.3 million, respectively, were net of an allowance for doubtful accounts
of $24.1 million and $24.4 million, respectively. Gross accounts receivable
included trade accounts receivable of $632.2 million and $638.5 million at March
31, 2006 and December 31, 2005, respectively. Also, included in gross
receivables were $19.5 million and $25.2 million of insurance claim receivables
at March 31, 2006 and December 31, 2005, respectively. These insurance claim
receivables were fully offset by current insurance liabilities at March 31, 2006
and December 31, 2005. The provision for doubtful accounts was $2.2 million and
$1.3 million for the three months ended March 31, 2006 and 2005, respectively.
The higher provision for doubtful accounts in the first quarter of 2006 was
principally in the Access Services Segment. This was as a result of a customer
bankruptcy filing in March 2006 and the inclusion of bad debt expense in the
first quarter of 2006 results related to a recent business acquisition.
Inventories consist of the following:
INVENTORIES
------------------------------
(IN THOUSANDS) MARCH 31 DECEMBER 31
2006 2005
---------------------------------------------------------------------------------------------------------------
Finished goods $ 98,721 $ 85,325
Work-in-process 50,480 43,830
Raw materials and purchased parts 95,470 87,251
Stores and supplies 35,462 34,674
---------------------------------------------------------------------------------------------------------------
Total Inventories $ 280,133 $ 251,080
===============================================================================================================
Inventories increased $29.1 million from December 31, 2005 due to the following
factors:
o Increased raw materials, finished goods and work-in-process inventories for
orders currently being manufactured in the Gas Technologies Segment to meet
expected customer demand in 2006;
o Higher inventories in the railway track maintenance services and equipment
business for orders scheduled for delivery during the remainder of 2006; and
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o Increased finished goods in the international Access Services business to
meet expected customer demand in 2006.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2006 2005
-------------------------------------------------------------------------------------------------------------
Land and improvements $ 39,167 $ 39,306
Buildings and improvements 172,560 168,727
Machinery and equipment 2,370,292 2,291,294
Uncompleted construction 74,720 91,186
-------------------------------------------------------------------------------------------------------------
Gross property, plant and equipment 2,656,739 2,590,513
Less accumulated depreciation (1,483,564) (1,450,705)
-------------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 1,173,175 $ 1,139,808
=============================================================================================================
G. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in carrying amounts of goodwill for the
three months ended March 31, 2006:
GOODWILL BY SEGMENT
- --------------------------------------------------------------------------------------------------------------------------
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, 2005, net of
accumulated amortization $ 297,219 $ 217,580 $ 36,693 $ 8,137 $ 559,629
Goodwill acquired during year (a) (1,811) (1,580) -- -- (3,391)
Foreign currency translation 2,926 3,862 -- -- 6,788
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF MARCH 31, 2006, NET OF
ACCUMULATED AMORTIZATION $ 298,334 $ 219,862 $ 36,693 $ 8,137 $ 563,026
==========================================================================================================================
(a) Relates principally to opening balance sheet adjustments for the BISNH and
Hunnebeck acquisitions.
Goodwill is net of accumulated amortization of $104.6 million and $103.0 million
at March 31, 2006 and December 31, 2005, respectively.
-10-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The following table reflects intangible assets by major category:
INTANGIBLE ASSETS
-------------------------------------------------------------------------------------------------
MARCH 31, 2006 DECEMBER 31, 2005
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------------------------------------------------------------------------------------------
Customer Relationships $ 74,387 $ 2,546 $ 73,224 $ 1,262
Non-compete agreements 5,037 4,495 5,036 4,402
Patents 4,465 3,663 4,426 3,587
Other 8,076 2,797 7,962 2,558
-------------------------------------------------------------------------------------------------
Total $ 91,965 $ 13,501 $ 90,648 $ 11,809
=================================================================================================
Amortization expense for intangible assets was $1.6 million and $0.5 million for
the three months ended March 31, 2006 and 2005, respectively. The following
table shows the estimated amortization expense for the next five fiscal years
based on current intangible assets:
(IN THOUSANDS) 2006 2007 2008 2009 2010
-----------------------------------------------------------------------------------------------
Estimated Amortization Expense (a) $ 6,300 $ 6,100 $ 5,800 $ 5,500 $ 5,300
(a) These estimated amortization expense amounts do not reflect the
potential effect of future foreign currency exchange rate fluctuations.
H. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
In December 2005, the Company acquired the Northern Hemisphere steel mill
services operations of Brambles Industrial Services (BISNH), a unit of the
Sydney, Australia-based Brambles Industrial Limited, for (pound)136 million
(approximately $234 million), excluding acquisition costs. BISNH is included in
the Company's Mill Services Segment. The Company did not assume debt as part of
this acquisition. BISNH is a provider of on-site, outsourced mill services to
the steel and metals industries, operating at 19 locations in the U.K., France,
Holland and the United States. Goodwill recognized in this transaction (based on
foreign exchange rates at the transaction date) was $91.3 million, of which
$86.8 million is expected to be deductible for U. S. income tax purposes.
Because this acquisition occurred near the end of 2005, the purchase price
allocations and goodwill balance have not been finalized as of March 31, 2006.
In November 2005, the Company acquired the Germany-based Hunnebeck Group GmbH
(Hunnebeck) for (euro)140 million (approximately $164 million), which included
the assumption of debt but excludes acquisition costs. Hunnebeck is included in
the Company's Access Services Segment. Hunnebeck is a provider of highly
engineered formwork and scaffolding equipment with more than 60 branches and
depots in 12 countries and export sales worldwide. Goodwill recognized in this
transaction (based on foreign exchange rates at the transaction date) was $69.6
million, none of which is expected to be deductible for U. S. income tax
purposes. Because this acquisition occurred near the end of 2005, the purchase
price allocations and goodwill balance have not been finalized as of March 31,
2006.
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
DISPOSITIONS - ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Throughout 2004 and 2005, management approved the sale of certain long-lived
assets (primarily land and buildings) of the Gas Technologies Segment, the Mill
Services Segment and the Engineered Products and Services Category. The major
classes of assets "held-for-sale" included in the Consolidated Balance Sheets
are as follows:
ASSETS "HELD-FOR-SALE"
- --------------------------------------------------------------------------------
MARCH 31 DECEMBER 31
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
ASSETS
Property, plant and equipment, net $ 2,341 $ 2,326
- --------------------------------------------------------------------------------
TOTAL ASSETS "HELD-FOR-SALE" $ 2,341 $ 2,326
================================================================================
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 March 31, 2006 and December 31, 2005 both include
accruals of $2.8 million for environmental matters. The amounts charged against
pre-tax income related to environmental matters totaled $0.2 million and $0.3
million for the first three months of 2006 and 2005, 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.
ROYALTY EXPENSE DISPUTE
The Company is involved in a royalty expense dispute with the 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, 2006, the maximum assessment from the CRA for the
period 1994-1998 is approximately $10.1 million including tax and interest. The
Ontario Ministry of Finance ("Ontario") is also proposing to disallow these same
deductions for the period 1994-1998. As of March 31, 2006, the maximum
assessment from Ontario is approximately $3.3 million including tax and
interest. The Company has filed administrative appeals and will vigorously
contest these disallowances.
The Company currently anticipates that, ultimately, it may have a liability for
some portion of the assessment 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, 2006 and, therefore will not have a material adverse impact on the
Company's future results of operations or financial condition. In accordance
with Canadian tax law, the Company made a payment to the CRA in the fourth
quarter of 2005 of $5.0 million, or one-half of the disputed amount.
Additionally, the Company made a payment to the Ontario Ministry of Finance in
the first quarter of 2006 of $3.3 million, the entire disputed amount. These
payments were made for tax compliance purposes and to reduce potential interest
expense on the disputed amount. These payments in no way reflect the Company's
acknowledgement as to the validity of the assessed amounts.
OTHER
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos over the past several decades. In their suits, the plaintiffs
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
have named as defendants, among others, 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 levels of airborne asbestos
exposure, and moreover, the type of asbestos contained in any component that was
used in those products was protectively encapsulated in other materials and is
not associated with the types of injuries alleged in the pending suits. Finally,
in most of the depositions taken of plaintiffs to date in the litigation against
the Company, plaintiffs have failed to specifically identify any Company
products as the source of their asbestos exposure.
The majority of the asbestos complaints pending against the Company 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 specifically 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 specifically
identifying any Company product as the source of plaintiff's alleged asbestos
exposure.
As of March 31, 2006, there are 27,166 pending asbestos personal injury claims
filed against the Company. Of these cases, 26,217 were pending in the New York
Supreme Court for New York County in New York State and 602 of the cases were
pending in state courts of various counties in Mississippi. The other claims,
totaling approximately 347, 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, 2006, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in 16,224 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 have been developments
during the past several years, both by certain state legislatures and by certain
state courts, which could favorably affect the Company's ability to defend these
asbestos claims in those jurisdictions. These developments include procedural
changes, docketing changes, proof of damage requirements and other changes that
require plaintiffs to follow specific procedures in bringing their claims and to
show proof of damages before they can proceed with their claim. An example is
the action taken by the New York Supreme Court (a trial court), which is
responsible for managing all asbestos cases pending within New York County in
the State of New York. This Court issued an order in December of 2002 that
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 discernable physical impairment, and an Active or In Extremis Docket for
plaintiffs who are able to show such medical condition. As a result of this
order, the majority of the asbestos cases filed against the Company in New York
County have been moved to the Inactive Docket until such time as the plaintiff
can show that they have incurred a physical impairment. As of March 31, 2006,
the Company has been listed as a defendant in 255 Active or In Extremis asbestos
cases in New York County. The Court's Order has been challenged by plaintiffs.
The Company's insurance carrier has paid all legal and settlement 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.
The Company intends to continue its practice of vigorously defending these cases
as they are listed for trial. It is not possible to predict the ultimate outcome
of asbestos-related lawsuits, claims and proceedings due to the unpredictable
nature of personal injury litigation. Despite this uncertainty, and although
results of operations and cash flows for a given period could be adversely
affected by asbestos-related lawsuits, claims and proceedings, management
believes that the ultimate 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.
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Insurance liabilities are recorded in accordance with SFAS 5, "Accounting for
Contingencies." Insurance reserves have been estimated based primarily upon
actuarial calculations and reflect the undiscounted estimated liabilities for
ultimate losses including claims incurred but not reported. Inherent in these
estimates are assumptions which are based on the Company's history of claims and
losses, a detailed analysis of existing claims with respect to potential value,
and current legal and legislative trends. If actual claims differ from those
projected by management, changes (either increases or decreases) to insurance
reserves may be required and would be recorded through income in the period the
change was determined. When a recognized liability is covered by third-party
insurance, the Company records an insurance claim receivable to reflect the
covered liability. See Note 1, "Summary of Significant Accounting Policies," of
the Company's Form 10-K for the year ended December 31, 2005 for additional
information on Accrued Insurance and Loss Reserves.
J. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED
MARCH 31
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005
----------------------------------------------------------------------------------------------------------
Income from continuing operations $ 34,250 $ 23,053
==========================================================================================================
Average shares of common stock outstanding used to compute
basic earnings per common share 41,822 41,503
Dilutive effect of stock-based compensation 293 475
----------------------------------------------------------------------------------------------------------
Shares used to compute dilutive effect of stock-based compensation 42,115 41,978
==========================================================================================================
Basic earnings per common share from continuing operations $ 0.82 $ 0.56
==========================================================================================================
Diluted earnings per common share from continuing operations $ 0.81 $ 0.55
==========================================================================================================
All outstanding stock options and restricted stock units were included in the
computation of diluted earnings per share at March 31, 2006 and 2005.
K. EMPLOYEE BENEFIT PLANS
THREE MONTHS ENDED
MARCH 31
-------------------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U. S. PLANS INTERNATIONAL PLANS
----------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 921 $ 845 $ 2,145 $ 1,881
Interest cost 3,730 3,479 10,263 10,340
Expected return on plan assets (4,986) (4,778) (12,318) (11,405)
Recognized prior service costs 186 192 295 323
Recognized losses 737 904 3,066 3,215
Amortization of transition liability (asset) (90) (364) 9 9
Settlement loss (gain) -- -- (12) 13
----------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 498 $ 278 $ 3,448 $ 4,376
============================================================================================================================
Defined benefit pension expense in the first quarter of 2006 was $0.7 million
lower than the comparable 2005 period. This decrease relates primarily to an
increase in the expected return on plan assets resulting from an increased fair
value of plan assets as of December 31, 2005. The increased fair value of plan
assets as of December 31, 2005 resulted from 2005 actual return on plan assets
of 15.6% (based on beginning of the year fair value of plan assets) as well as
Company cash contributions of $48.8 million, including $16.9 million of
voluntary contributions. The global weighted average
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
expected long-term rate of return on plan assets was decreased to 7.6% for 2006
compared with 7.8% for 2005, for reasons disclosed in the 2005 Form 10-K.
In the quarter ended March 31, 2006, the Company contributed $0.2 million and
$4.7 million for the U.S. and international defined benefit pension plans,
respectively. The Company currently anticipates contributing an additional $0.7
million and $15.8 million for the U.S. and international plans, respectively,
during the remainder of 2006.
In the quarter ended March 31, 2006, the Company's contributions to
multi-employer pension plans were $3.9 million and for defined contribution
plans, payments were $5.0 million.
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) MARCH 31
-----------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005
-----------------------------------------------------------------------------------------------------------
Service cost $ 1 $ 3
Interest cost 47 55
Recognized prior service costs 1 5
Recognized gains (10) (9)
Curtailment gains -- (318)
-----------------------------------------------------------------------------------------------------------
Postretirement benefits expense (income) $ 39 $ (264)
===========================================================================================================
The curtailment gain of $0.3 million for 2005 was due to the termination of
certain postretirement health care plans.
In the quarter ended March 31, 2006, the Company contributed $73 thousand to the
postretirement plans and anticipates contributing approximately $252 thousand
during the remainder of 2006.
L. NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments, an Amendment
- --------------------------------------------------------------------------------
of FASB Statements No. 133 and 140" (SFAS 155)
- ----------------------------------------------
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
155, which amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." SFAS 155 addresses
several issues relating to the accounting for financial instruments, including
permitting fair value measurement for any hybrid financial instrument that
contains an embedded derivative, and eliminating the prohibition on a qualifying
special-purpose entity from holding certain derivative instruments. SFAS 155
also provides clarification that concentrations of credit risk in the form of
subordination are not embedded derivatives. SFAS 155 is effective for all
financial instruments issued or acquired after the fiscal year that begins after
September 15, 2006 (January 1, 2007 for the Company), with early adoption
permitted. The Company expects to adopt SFAS 155 effective January 1, 2007, and
has determined that it is not likely to materially impact the Company's
financial position, results of operations or cash flows.
SFAS No. 156, "Accounting for Servicing of Financial Assets, an Amendment of
- ----------------------------------------------------------------------------
FASB Statement 140" (SFAS 156)
- ------------------------------
In March 2006, the FASB issued SFAS 156, which amends SFAS No. 140, "Accounting
of Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS 156 requires, in certain specified situations, an entity to
recognize a servicing asset or servicing liability when it undertakes an
obligation to service a financial asset by entering into a servicing contract.
SFAS 156 also requires all separately recognized servicing assets and servicing
liabilities to be initially recognized at fair value if practical, and allows
entities to choose either the amortization method or the fair value measurement
method for subsequent measurement. SFAS 156 is effective for all servicing
transactions occurring on or after the beginning of the first fiscal year that
begins after September 15, 2006 (January 1, 2007 for the Company), with early
adoption permitted. The Company expects to adopt SFAS 156 effective January 1,
2007, and has determined that it is not likely to materially impact the
Company's financial position, results of operations or cash flows.
-15-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Proposed Statement of Financial Accounting Standards, "Employer's Accounting for
- --------------------------------------------------------------------------------
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
- ----------------------------------------------------------------------------
Statements No. 87, 88, 106, and 132(R)," (the "Exposure Draft")
- ---------------------------------------------------------------
The FASB is currently reconsidering the accounting for pensions and other
postretirement benefits in a two-phase project. Phase I of this project
primarily addresses the balance sheet recognition of a plan's overfunded or
underfunded status. Phase II will be a comprehensive reconsideration of all
elements of pension accounting, and is expected to take several years to
complete once Phase I is complete. As part of Phase I, the FASB issued the
Exposure Draft in March 2006. Included in this Exposure Draft is a requirement
for an entity to recognize in its balance sheet, the overfunded or underfunded
status of its defined benefit postretirement plans measured as the difference
between the fair value of the plan assets and the benefit obligation. For a
pension plan, this would be the projected benefit obligation; for any other
postretirement plan, the benefit obligation would be the accumulated
postretirement benefit obligation. The Exposure Draft also eliminates early
measurement dates by requiring the pension plan obligations to be measured as of
the date of the entity's balance sheet. It is expected that the final standard
will be issued in the third quarter of 2006, with some of its key provisions
requiring implementation as of December 31, 2006. The Company is currently
evaluating the potential effects of the Exposure Draft on its accounting for its
defined benefit pension plans and other postretirement benefit plans.
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, 2005, 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 2006
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: (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 1A, "Risk Factors," 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 2006 revenues were a record $769.6 million. This is
an increase of $129.5 million or 20% over the first quarter of 2005. Income from
continuing operations was a record $34.3 million for the first quarter of 2006
compared with $23.1 million in the first quarter of 2005, an increase of 49%.
Diluted earnings per share from continuing operations were a record $0.81 for
the first quarter of 2006, a 47% increase from the first quarter of 2005.
All four of the Company's operating groups showed improved revenues, operating
income and margins for the first quarter of 2006 over the comparable 2005
period. First quarter 2006 performance benefited from the Company's November 21,
2005 acquisition of Hunnebeck Group GmbH (Hunnebeck) and the December 29, 2005
acquisition of the Northern
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Hemisphere steel mill services operations of Brambles Industrial Services
("BISNH"). Both of these acquisitions were accretive in the first quarter of
2006. Sales in the first quarter of 2006 were reduced by the sale of the
Company's U.K.-based Youngman manufacturing operation on October 1, 2005. In
comparison to the first quarter of 2005, negative foreign currency translation
reduced first quarter 2006 sales by $16.6 million, but had only a minimal effect
on pre-tax income in the quarter.
During the first quarter of 2006, the Company had record net cash provided by
operating activities of $69.8 million, a 45% increase over the $48.1 million
achieved in the first quarter of 2005. For the full year 2006, the Company has
set a target of $400 million for net cash provided by operating activities, a
27% increase over the 2005 record level. The Company's cash flows are further
discussed in the Liquidity and Capital Resources section.
SEGMENT OVERVIEW
Revenues for the first quarter of 2006 for the Mill Services Segment were $326.2
million compared with $268.6 million in the first quarter of 2005, a 21%
increase. Operating income increased by 24% to $33.6 million, from $27.0 million
in the first quarter of 2005. Operating margins for this Segment improved by 20
basis points to 10.3% from 10.1% in the first quarter of 2005 due to increased
volumes and process improvement initiatives, partially offset by higher energy
costs. This Segment accounted for 42% of the Company's revenues and 50% of the
operating income for the first quarter of 2006.
The Access Services Segment's revenues in the first quarter of 2006 were $225.8
million compared with $183.6 million in the first quarter of 2005, a 23%
increase. Operating income increased by 79% to $16.8 million, from $9.4 million
in the first quarter of 2005. Operating margins for the Segment improved by 230
basis points to 7.4% from 5.1% in the first quarter of 2005. These improvements
were broad-based, and were led by the Middle East, Europe and North America.
Hunnebeck has performed well since it was acquired on November 21, 2005 and was
accretive during the first quarter of 2006. This Segment accounted for 29% of
the Company's revenues and 25% of the operating income for the first quarter of
2006. Improved performance was achieved by both the international and domestic
access services operations.
The Gas Technologies Segment's revenues in the first quarter of 2006 were $87.5
million compared with $82.1 million in the first quarter of 2005, a 7% increase.
Operating income increased by 11% to $2.3 million, from $2.1 million in the
first quarter of 2005. The increased revenues in the first quarter 2006 were led
by the valves and industrial cylinder businesses although higher raw material
and energy costs negatively impacted operating income for these businesses.
Improved market conditions and a favorable sales mix in the cryogenics and
propane product lines contributed to the higher operating income in the first
quarter of 2006. This Segment accounted for 11% of the Company's revenues and 3%
of the operating income for the first quarter of 2006.
All five of the businesses in the Engineered Products and Services ("all other")
Category contributed higher revenues and operating income in the first quarter
of 2006 compared with the first quarter of 2005. Additionally, four of the five
businesses contributed higher operating margins, with only the roofing granules
and abrasives business showing slightly lower margins in the quarter due to
higher transportation and energy costs. Overall, operating margins for the
Category improved by 340 basis points to 11.9% from 8.5% in the first quarter of
2005.
The negative effect of foreign currency translation decreased the first quarter
of 2006 consolidated revenues by $16.6 million when compared with the first
quarter of 2005. The impact on pre-tax income was not significant.
OUTLOOK OVERVIEW
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, 2005. 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 overall outlook for 2006
continues to be positive for these business drivers.
The Company's Mill Services Segment expects to benefit from consistent levels of
steel production at mills served by the Company, new contract signings, contract
renewals and a full year of accretion from the December 29, 2005 acquisition of
BISNH. However, the Company also expects to experience continued increased
energy costs that may have a negative impact on operating margins, to the extent
these costs cannot be passed to customers.
Both domestic and international Access Services activity remains strong.
Although the sale of the Youngman light-access manufacturing business in late
2005 will modestly affect 2006 revenues, improvements to operating performance
in 2006 for the Segment are expected to be led by a full-year of accretion from
the November 21, 2005 Hunnebeck acquisition; increased non-residential
construction spending and industrial maintenance activity in the Company's major
markets;
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
continued development of new markets; further market penetration from new
products; product cross-selling opportunities among the markets served by the
three Access Services businesses; and cost reduction opportunities through
consolidated procurement initiatives.
In the Gas Technologies Segment for 2006, demand for industrial cylinders and
cryogenics equipment is expected to show continued improvement. The propane
business is expected to return to a more normal business cycle in comparison to
the prior two years, and an overall improvement in the valves business is
expected. International operations are expected to continue to perform well.
However, the risk remains that certain commodity cost inflation and the
availability of certain raw materials could adversely affect this Segment's
results.
The outlook for the Engineered Products and Services ("all other") Category
remains positive for 2006. The Company's railway track maintenance services and
equipment business' income and margins are expected to continue to benefit from
the shift toward contract services, with several major contracts scheduled to
start in 2006. The air-cooled heat exchangers business is expected to continue
to benefit from strong end-market demand due to increased natural gas drilling
and transmission. While not expecting a repeat of the same level of benefits
from post-Katrina rebuilding experienced in the second half of 2005, the
industrial grating products business is expected to post another year of
improved results in 2006, as are the roofing granules and abrasives and the
boiler and process equipment businesses.
The stable or improved market conditions for most of the Company's services and
products and the significant investments made recently for acquisitions and
growth-related capital expenditures provide a solid base for achieving the
Company's stated objective of growth in diluted earnings per share from
continuing operations in 2006. The record performance achieved in the first
quarter of 2006 provides a strong base for this 2006 growth and continues to
support Company Management's expectations.
-------------------------------------------------------------------------------------------------------------------
REVENUES BY REGION
-------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
MARCH 31 2005 TO 2006
-------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005 VOLUME CURRENCY TOTAL
-------------------------------------------------------------------------------------------------------------------
Europe $ 347.8 $ 263.8 39.5% (7.7)% 31.8%
North America 309.0 270.3 13.9 0.4 14.3
Middle East and Africa 40.9 39.4 4.8 (0.9) 3.9
Latin America 40.2 34.5 3.5 12.9 16.4
Asia/Pacific 31.7 32.1 2.6 (3.8) (1.2)
-------------------------------------------------------------------------------------------------------------------
Total $ 769.6 $ 640.1 22.8% (2.6)% 20.2%
===================================================================================================================
2006 HIGHLIGHTS
The following significant items affected the Company overall during the first
quarter of 2006 in comparison with the first quarter of 2005:
Company Wide:
- -------------
o Strong worldwide economic activity benefited the Company in the first
quarter of 2006. This included increased access equipment sales and
rentals, especially in the U.S., Middle East and Europe; net increased
volume and new business in the Mill Services Segment; increased global
demand for railway track maintenance services and equipment; and increased
demand for air-cooled heat exchangers, industrial cylinders, cryogenics
equipment and industrial grating products.
o As expected, during the first quarter of 2006, the Company experienced
increased fuel and energy-related costs. To the extent that such costs
cannot be passed to customers in the future, operating income may be
adversely affected.
o Total pension expense for the first quarter of 2006 increased $0.1 million
from the first quarter of 2005. Defined contribution and multi-employer
plan expenses for the first quarter of 2006 increased approximately $0.8
million from the first quarter of 2005. This was mostly offset by
decreased defined benefit pension expense of approximately $0.7 million
due to improved returns on plan assets. The Company is currently taking
additional actions designed to further mitigate pension expense
volatility. This is more fully discussed in the Outlook, Trends and
Strategies section.
o During the first quarter of 2006, international sales and income were 62%
and 77%, respectively, of total sales and income. This compares with the
first quarter 2005 levels of 60% of sales and 75% of income. As expected,
the international percentages have increased as a result of the Hunnebeck
and BISNH acquisitions.
o Foreign currency translation in the first quarter of 2006 did not have a
material impact on the Company's operating income compared with the first
quarter of 2005.
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
MILL SERVICES SEGMENT:
- ----------------------
THREE MONTHS
ENDED MARCH 31
------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005
------------------------------------------------------------------------------
Revenues $ 326.2 $ 268.6
Operating income 33.6 27.0
Operating margin percent 10.3% 10.1%
==============================================================================
--------------------------------------------------------------------------------------------------
THREE MONTHS
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES: ENDED MARCH 31
--------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------
Revenues - 2005 $ 268.6
Acquisitions - (BISNH and Evulca SAS) 52.3
Increased volume and new business 11.9
Impact of negative foreign currency translation (6.6)
--------------------------------------------------------------------------------------------------
Revenues - 2006 $ 326.2
==================================================================================================
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o Operating income for the first quarter of 2006 increased by $3.3 million
as a result of increased volumes and new business, particularly in
Europe, partially offset by increased operating costs (as noted below).
o Compared with the first quarter of 2005, the Segment's operating income
and margins in the first quarter of 2006 were negatively impacted by
increased fuel and energy-related costs of approximately $3 million
(excluding increased costs due to acquisitions).
o The BISNH acquisition was accretive in the first quarter of 2006.
o Foreign currency translation in the first quarter of 2006 did not have a
material impact on operating income for this Segment compared with the
first quarter of 2005.
ACCESS SERVICES SEGMENT:
- ------------------------
THREE MONTHS
ENDED MARCH 31
------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005
------------------------------------------------------------------------------
Revenues $ 225.8 $ 183.6
Operating income 16.8 9.4
Operating margin percent 7.4% 5.1%
==============================================================================
--------------------------------------------------------------------------------------------------------
THREE MONTHS
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES: ENDED MARCH 31
--------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------
Revenues - 2005 $ 183.6
Net effect of acquisitions and divestitures (Hunnebeck offset by the
Youngman light-access manufacturing unit divestiture) 32.4
Net increased volume (mostly Europe, U.S. and the Middle East) 20.0
Impact of negative foreign currency translation (9.3)
Other (0.9)
--------------------------------------------------------------------------------------------------------
Revenues - 2006 $ 225.8
========================================================================================================
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o The international access services business continued to increase outside
the U.K., predominantly in the Middle East and Europe, due to certain
large projects as well as the Hunnebeck acquisition. During the first
quarter of 2006, the international operations outside of the U.K. had
$116.0 million in revenues and $13.1 million in operating income. This
compares with $61.4 million in revenues and $5.7 million in operating
income for the first quarter of 2005.
o In the first quarter of 2006, there was a continued strengthening in the
U.S. non-residential construction markets that started in the latter half
of 2004. This had a positive effect on volume (particularly equipment
rentals) 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 The net effect of acquisitions and divestitures had a positive effect on
the first quarter of 2006 operating income, with the Hunnebeck business
performing well.
o The impact of negative foreign currency translation in the first quarter
of 2006 for this Segment resulted in decreased operating income of $0.3
million when compared with the first quarter of 2005.
GAS TECHNOLOGIES SEGMENT:
- -------------------------
THREE MONTHS
ENDED MARCH 31
------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005
------------------------------------------------------------------------------
Revenues $ 87.5 $ 82.1
Operating income 2.3 2.1
Operating margin percent 2.7% 2.6%
==============================================================================
--------------------------------------------------------------------------------------------------------
THREE MONTHS
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES: ENDED MARCH 31
--------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------
Revenues - 2005 $ 82.1
Increased demand for cryogenics equipment and industrial cylinders 4.8
Increased demand for certain valves partially offset by decreased demand
for certain composite-wrapped cylinders 3.3
Decreased demand for propane tanks (as a result of the warm winter in the
U.S. and increased fuel costs for customers) (2.3)
Impact of negative foreign currency translation (0.3)
Other (0.1)
--------------------------------------------------------------------------------------------------------
Revenues - 2006 $ 87.5
========================================================================================================
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o The international businesses, principally in Europe and, to a lesser
extent, Asia, contributed significantly to the increased performance of
the cryogenics business during the first quarter of 2006 compared with
the first quarter of 2005.
o Despite decreased demand for propane tanks in the first quarter of 2006,
operating income increased due to product mix and certain reduced costs
as a result of process improvements.
o Slightly lower operating income in the first quarter of 2006 for
composite-wrapped cylinders was due to unfavorable product mix and higher
raw material costs for carbon fiber.
o Despite higher demand for industrial cylinders, operating income
decreased due mainly to the effect of several equipment breakdowns,
product mix and higher energy-related costs.
o Operational improvements and the effect of increased sales were partially
offset by increased brass costs in the valves business in the first
quarter of 2006 compared with the first quarter of 2005. A strategic
action plan has been implemented to improve the results of the valves
business. Cost savings as a result of this plan helped decrease the
impact of increased brass costs. This plan is further discussed in the
Outlook, Trends and Strategies section.
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o Foreign currency translation in the first quarter of 2006 did not have a
material impact on operating income for this Segment compared with the
first quarter of 2005.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY:
- --------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005
------------------------------------------------------------------------------
Revenues $ 130.0 $ 105.7
Operating income 15.4 9.0
Operating margin percent 11.9% 8.5%
==============================================================================
----------------------------------------------------------------------------------------------------------
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - THREE MONTHS
SIGNIFICANT IMPACTS ON REVENUES: ENDED MARCH 31
----------------------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------
Revenues - 2005 $ 105.7
Air-cooled heat exchangers 11.7
Railway track services and equipment 7.8
Roofing granules and abrasives 2.5
Industrial grating products 1.4
Boiler and process equipment 1.3
Impact of negative foreign currency translation (0.4)
----------------------------------------------------------------------------------------------------------
Revenues - 2006 $ 130.0
==========================================================================================================
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - SIGNIFICANT
IMPACTS ON OPERATING INCOME:
o Higher operating income in the first quarter of 2006, in comparison with
the first quarter of 2005, for the railway track maintenance services and
equipment business was due principally to increased repair parts and rail
equipment sales. This was partially offset by reduced contract services
income due to higher maintenance and start-up costs as well as downtime
for certain machines.
o Operating income for the air-cooled heat exchangers business improved in
the first quarter of 2006 due to increased volume resulting from an
improved natural gas market.
o Increased first quarter 2006 operating income for the industrial grating
products business was due principally to higher volume and an improved
product mix.
o The boiler and process equipment business delivered improved first
quarter 2006 results due to improved revenues from the new-generation
Mach boilers as well as Thermific boilers.
o Strong demand for roofing granules and abrasives again resulted in
profitable results for that business in first quarter of 2006, consistent
with prior periods. This is despite increased energy costs in the first
quarter of 2006.
o The impact of negative foreign currency translation in the first quarter
of 2006 resulted in decreased operating income of $0.2 million for this
Category when compared with the first quarter of 2005.
OUTLOOK, TRENDS AND STRATEGIES
Looking to the remainder of 2006 and beyond, the following significant items,
trends and strategies are expected to affect the Company:
Company Wide:
-------------
o The Company will continue its focus on expanding the higher-margin
industrial services businesses, with a particular emphasis on growing the
Mill Services Segment and the Access Services Segment through the
provision of additional services to existing customers, new contracts in
both mature and emerging markets and strategic acquisitions.
Additionally, new higher-margin service opportunities, particularly in
railway services, will be pursued.
o A greater focus on corporate-wide expansion into China is expected in
2006 and beyond. The opening of a representative office in Beijing in the
fourth quarter of 2005 has provided a local presence to pursue new
business opportunities for all operating units of the Company, as well as
lower cost supply-chain initiatives.
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o The continued growth of the Chinese steel industry, as well as other
Asian emerging economies, could impact the Company in several ways.
Increased steel mill production in China, and in other Asian countries,
may provide additional service opportunities for the Mill Services
Segment. However, increased Asian steel exports could result in lower
steel production in other parts of the world, affecting the Company's
customer base. Additionally, continued increased Chinese economic
activity may result in increased commodity costs in the future, which may
adversely affect the Company's manufacturing businesses. The potential
impact of these risks is currently unknown.
o Increases in commodity costs (e.g., steel, brass, aluminum, etc.) and
worldwide demand for these commodities could have an adverse effect on
the Company's raw material costs and ability to obtain the necessary raw
materials. These increased costs could result in reduced operating income
for certain products to the extent that such costs cannot be passed on to
customers. The potential impact of this risk is currently unknown.
o Fuel and energy costs increased approximately $5 million in the first
quarter of 2006 compared with the first quarter of 2005 (excluding
increased costs due to acquisitions). Should these costs continue to
rise, the Company's operating costs would further increase and
profitability would decline to the extent that such costs cannot be
passed to customers.
o Foreign currency translation had an overall unfavorable impact on the
Company's sales and operating income during the first quarter of 2006
compared with the first quarter of 2005, but a positive effect on
Stockholders' equity as a result of translation adjustments. Should the
U.S. dollar continue to 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, income and Stockholders' equity.
o An internal target of $400 million in net cash provided by operating
activities has been established for 2006 to help support expected growth
initiatives.
o Controllable cost reductions and continuous process improvement
initiatives across the Company are targeted to further enhance margins
for most businesses. These initiatives include improved supply chain
management; additional outsourcing in the manufacturing businesses; and
an added emphasis on corporate-wide procurement initiatives. The Company
will use its increased size and leverage due to recent acquisitions to
reduce vendor costs and focus on additional opportunities for cost
reductions via procurement in low-cost countries such as China.
o Total pension expense (defined benefit, defined contribution and
multi-employer) for 2006 is expected to approximate the 2005 level. In
the U.K., defined benefit pension expense is expected to decline in 2006
due to the significant level of cash contributions, including voluntary
cash contributions (approximately $16.9 million during 2005), to the
defined benefit pension plan as well as the improved 2005 performance of
the plan's assets. Domestically, the majority of the twenty-year
amortization of the transition asset (from the initial implementation of
SFAS No. 87 in 1986) has ceased during 2006. By itself, the elimination
of this benefit is projected to increase domestic defined-benefit pension
expense by approximately $1.0 million when compared with 2005. The
Company's pension task force continues to evaluate alternative strategies
to further mitigate overall pension expense, including the on-going
evaluation of investment fund managers' performance; the balancing of
plan assets and liabilities; the risk assessment of all multi-employer
pension plans; the possible merger of certain plans; the consideration of
incremental cash contributions to certain plans; and other changes that
will mitigate future volatility and expense. On a comparative basis,
total pension expense in the first quarter of 2006 was $0.1 million
higher than the first quarter of 2005.
o Changes in worldwide interest rates, particularly in the U.S. and Europe,
could have a significant effect on the Company's overall interest
expense, as currently approximately 48% of the Company's borrowings are
at variable interest rates (in comparison to approximately 50% at
December 31, 2005 and 13% at March 31, 2005).
Mill Services Segment:
----------------------
o To maintain pricing levels, a more disciplined steel industry has been
adjusting production levels to bring inventories in-line with current
demand. However, based on current market conditions and industry reports,
the Company expects global steel production to remain stable in 2006,
which would generally have a favorable effect on this Segment's revenues.
o The increased energy-related costs this Segment experienced during the
first quarter of 2006 are expected to persist through the remainder of
2006. In the first quarter of 2006, these costs increased approximately
$3 million compared with the first quarter of 2005 (excluding increased
costs due to acquisitions). However, given the volatility of such costs,
the future effect cannot be quantified.
o The Company has been placing significant emphasis on improving operating
margins of this Segment. Specific plans for 2006 include global
procurement initiatives; process improvement programs; maintenance best
practices programs; and execution of its reorganization plan.
o The December 29, 2005 BISNH acquisition is expected to provide increased
sales and income for this Segment during 2006.
o Further consolidation in the global steel industry is possible. Should
transactions occur involving some of the steel industry's larger
companies that are customers of the Company, it would result in an
increase in concentration of credit risk for the Company. If a large
customer were to experience financial difficulty, or file for bankruptcy
protection,
-22-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
it could adversely impact the Company's income, cash flows and asset
valuations. As part of its credit risk management practices, the Company
is developing strategies to mitigate this increased concentration of
credit risk.
Access Services Segment:
------------------------
o Both the international and domestic Access Services businesses are
expected to show continued improvement during 2006. Specifically,
international and U.S. non-residential construction activity continued to
improve in the first quarter of 2006 and the overall market outlook
remains positive. Various industry sources are currently forecasting
continued growth for most non-residential construction markets served by
this Segment during the remainder of 2006. Additionally, new product line
additions should assist with growth in North America.
o In October 2005, the U.K.-based Youngman light-access manufacturing unit
was sold, which has eliminated the associated revenue. In 2006, the
revenue decrease is expected to be offset by increased sales and income
from the Hunnebeck acquisition and through the further development of
core activities. Additionally, the sale of the Youngman unit will allow
for greater focus on the more profitable rental business.
Gas Technologies Segment:
-------------------------
o Worldwide supply and demand for steel, aluminum and the availability of
carbon fiber used to manufacture filament-wound composite cylinders could
have adverse effects on future raw material costs and this Segment's
ability to obtain the necessary raw materials. Additionally, the price of
brass, a raw material used for certain valves production, continued to
increase during the first quarter of 2006. Should brass prices continue
to increase during the remainder of 2006, this could result in reduced
operating income for certain products to the extent that such costs
cannot be passed on to customers.
o A comprehensive strategic plan to improve the performance of the valves
business was developed during the fourth quarter of 2005 and is currently
being executed. The plan includes the following: a new senior management
team; development and marketing of new products; focus on an expanded
international customer base; consolidating certain manufacturing
processes; process improvements within the manufacturing operations
including outsourcing; and optimization of the organizational structure
of the business. If the market conditions encountered during 2005 persist
and raw material costs continue to increase, despite execution of the
strategic action plan, the valuation of this business could be negatively
impacted.
o Despite a slight decline in the first quarter of 2006, the propane
business is expected to improve in 2006, as it returns to its more normal
business cycle.
o The industrial cylinder and cryogenics equipment businesses are expected
to show continued improved performance in 2006.
Engineered Products and Services ("all other") Category:
--------------------------------------------------------
o International demand for the railway track maintenance services and
equipment business' products and services has been strong and is expected
to remain so in 2006. However, on a comparative basis, 2006 sales are
expected to be less than 2005 due to the shipment of several large
machine orders in 2005. Despite this expected decrease in sales,
operating income is expected to be higher in 2006 due to increased volume
of higher-margin industrial services and manufacturing process
improvements and efficiencies that are expected to improve margins on a
long-term basis. Additionally, higher-margin international equipment
sales will continue to be pursued by this business.
o The industrial grating business is expected to sustain its 2005 levels of
sales and operating income in 2006.
o Worldwide supply and demand for steel could have an adverse impact on raw
material costs and the ability to obtain the necessary raw materials for
most businesses in this Category. The Company has implemented certain
strategies and plans to help ensure continued product supply to our
customers and mitigate the potentially negative impact rising steel
prices could have on operating income.
o Consistent, sustained profitable results are expected from the roofing
granules and abrasives business, although increased energy costs could
impact margins. This business is pursuing the use of more
energy-efficient equipment to help mitigate the increased energy-related
costs.
o Due to an improving natural gas market and additional North American
opportunities, demand for air-cooled heat exchangers is expected to
remain strong for the remainder of 2006.
-23-
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) 2006 2005
----------------------------------------------------------------------------------------------
Revenues from continuing operations $ 769.6 $ 640.1
Cost of services and products sold 579.0 493.6
Selling, general and administrative expenses 120.6 97.0
Other expenses 1.9 1.4
Operating income from continuing operations 67.4 47.3
Interest expense 14.1 10.4
Income tax expense from continuing operations 17.7 12.1
Net income 34.3 23.1
Diluted earnings per common share 0.81 0.55
Consolidated effective income tax rate 32.6% 32.3%
----------------------------------------------------------------------------------------------
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
Revenues for the first quarter of 2006 increased $129.5 million or 20% from the
first quarter of 2005. The increase was attributable to the following
significant items:
CHANGES IN REVENUES - 2006 VS. 2005 FIRST QUARTER
--------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------
Net effect of business acquisitions and divestitures in the Mill Services
Segment, $52.3 million, and the Access Services Segment, $32.4 million $ 84.7
Net increased revenues in the Access Services Segment due principally to
improved markets in North America and the strength of the international
business, particularly in Europe and the Middle East 19.1
Net increased volume, new contracts and sales price changes in the Mill
Services Segment (excluding acquisitions) 11.9
Increased revenues of the air-cooled heat exchangers business due to an
improved natural gas market, price increases in the third quarter of 2005
and product mix 11.7
Increased revenues in the railway track maintenance services and equipment
business due to increased repair part sales, contract services and rail
equipment sales 7.8
Net increased revenues in the Gas Technologies Segment due principally to
increased demand for certain valves, industrial cylinders and cryogenics
equipment, partially offset by decreased demand for propane tanks 5.7
Effect of negative foreign currency translation (16.6)
Other (minor changes across the various units not already mentioned) 5.2
--------------------------------------------------------------------------------------------------------
Total Change in Revenues - 2006 vs. 2005 $ 129.5
========================================================================================================
-24-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
COST OF SERVICES AND PRODUCTS SOLD
Cost of services and products sold for the first quarter of 2006 increased $85.4
million, or 17%, from the first quarter of 2005, a lower rate than the 20%
increase in revenues. This increase was attributable to the following
significant items:
CHANGES IN COST OF SERVICES AND PRODUCTS SOLD - 2006 VS. 2005 FIRST QUARTER
--------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------
Net effect of business acquisitions and divestitures $ 59.3
Increased costs due to increased revenues (exclusive of the effect of foreign
currency translation and business acquisitions and including the impact
of increased commodity and energy costs included in selling prices) 47.1
Effect of foreign currency translation (11.8)
Other (due to product mix; cost controls; process improvements; volume-
related efficiencies and minor changes across the various units not
already mentioned; partially offset by increased fuel and energy-
related costs) (9.2)
--------------------------------------------------------------------------------------------------------
Total Change in Cost of Services and Products Sold - 2006 vs. 2005 $ 85.4
========================================================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the first quarter of
2006 increased $23.5 million or 24% from the first quarter of 2005, a higher
rate than the 20% increase in revenues. This higher relative percentage increase
in SG&A expenses as compared with revenues was due principally to net effect of
acquisitions and divestitures and the nature of the businesses acquired. The
increase in SG&A expenses was attributable to the following significant items:
CHANGES IN SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES - 2006 VS. 2005 FIRST QUARTER
--------------------------------------------------------------------------------------------------------
(IN MILLIONS)
--------------------------------------------------------------------------------------------------------
Net effect of business acquisitions and divestitures $ 17.0
Higher compensation expense due to salary increases, increased headcount
and employee incentive plan costs due to improved performance 3.9
Increased sales commission expense due to increased revenues 1.3
Effect of foreign currency translation (3.3)
Other (including increased energy-related costs) 4.6
--------------------------------------------------------------------------------------------------------
Total Change in Selling, General and Administrative
Expenses - 2006 vs. 2005 $ 23.5
========================================================================================================
OTHER (INCOME) 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 $1.9 million
in the first quarter of 2006, compared with $1.4 million in the comparable 2005
period. This increase was attributable to the following significant items:
CHANGES IN OTHER (INCOME) EXPENSES - 2006 VS. 2005 FIRST QUARTER
-------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------------------------------------------------
Increase in costs to exit activities $ 0.5
Increase in other expenses due principally to a loss on a sublease in the first
quarter of 2006 0.4
Decrease in employee termination benefit costs (0.4)
-------------------------------------------------------------------------------------------------------
Total Change in Other (Income) Expenses - 2006 vs. 2005 $ 0.5
=======================================================================================================
-25-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
INTEREST EXPENSE
Interest expense for the first quarter of 2006 increased $3.6 million or 35%
from the first quarter of 2005. This was principally due to increased borrowings
to finance acquisitions made in the fourth quarter of 2005. Additionally, there
was approximately $0.5 million of decreased interest expense due to the effect
of foreign currency translation.
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
The increase in income tax expense from continuing operations for the first
quarter of 2006 of $5.6 million or 46% was primarily due to increased earnings
from continuing operations. The effective income tax rate of 32.6% for the first
quarter of 2006 was comparable to the 32.3% rate for the first quarter of 2005.
NET INCOME AND EARNINGS PER SHARE
Net income of $34.3 million and diluted earnings per share of $0.81 in the first
quarter of 2006 exceeded the first quarter of 2005 by $11.2 million and $0.26,
respectively, primarily due to strong demand for most of the Company's services
and products and the net effect of business acquisitions and divestitures.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Building on 2005's record cash provided by operations of $315.3 million, the
Company continued that momentum by achieving a record $69.8 million in operating
cash in the first three months of 2006, 45% higher than the first three months
of 2005. This significant source of cash in the first quarter of 2006 enabled
the Company to invest $66.9 million in capital expenditures (over 40% of which
were for revenue growth projects), in addition to paying $13.6 million in
stockholder dividends.
The Company's management reaffirms its previously stated strategic objectives
for 2006 that include generating a record $400 million in net cash provided by
operating activities. The Company has also targeted a minimum of $100 million of
discretionary cash flows for debt reduction; however, the amount of debt
reduction will be affected by the timing of growth initiatives (including
acquisitions) and the amount of asset sales. The Company's net cash borrowings
decreased $22.3 million in the first three months of 2006.
The Company will continue its strategy 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, to a lesser extent, railway
track maintenance services businesses, and it will continue to consider sensible
bolt-on acquisitions in the industrial services businesses. The Company also
plans to continue its long and consistent history of paying dividends to
stockholders.
The Company also intends to focus on improved working capital management.
Specifically, accounts receivable in the Access Services Segment and inventory
levels in the manufacturing businesses will continue to be scrutinized and
challenged to improve the Company's use of funds.
SOURCES AND USES OF CASH
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. 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 and equipment
business). Cash returns on capital investments made in prior years, for which no
cash is currently required, are a significant source of operating cash.
Depreciation expense 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 of the business.
Major uses of operating cash flows and borrowed funds include payroll costs and
related benefits; pension funding payments; raw material purchases for the
manufacturing businesses; income tax payments; interest payments; insurance
premiums and payments of self-insured casualty losses; and machinery, equipment,
automobile and facility rental payments. Other primary uses of cash include
capital investments, principally in the industrial services businesses; debt
payments; and dividend payments. Cash will also be used for bolt-on acquisitions
as the appropriate opportunities arise.
-26-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RESOURCES AVAILABLE FOR CASH REQUIREMENTS - The Company has various credit
facilities and commercial paper programs available for use throughout the world.
The following table illustrates the amounts outstanding under credit facilities
and commercial paper programs and available credit at March 31, 2006.
SUMMARY OF CREDIT FACILITIES AND
COMMERCIAL PAPER PROGRAMS AS OF MARCH 31, 2006
--------------------------------------------------------------------------------------
FACILITY OUTSTANDING AVAILABLE
(IN MILLIONS) LIMIT BALANCE CREDIT
--------------------------------------------------------------------------------------
U.S. commercial paper program $ 400.0 $ 273.2 $ 126.8
Euro commercial paper program 243.1 173.1 70.0
Revolving credit facility (a) 450.0 -- 450.0
Supplemental credit facility (a) 100.0 -- 100.0
Bilateral credit facility (b) 50.0 -- 50.0
--------------------------------------------------------------------------------------
TOTALS AT MARCH 31, 2006 $1,243.1 $ 446.3 $ 796.8(c)
======================================================================================
(a) U.S.-based program
(b) International-based program
(c) Although the Company has significant available credit, it is the
Company's policy to limit aggregate commercial paper and credit
facility borrowings at any one time to a maximum of $600 million.
Additionally, the Company is considering increasing the maximum limit of the
U.S. commercial paper program to $450 million.
For more information on the Company's credit facilities, see Note 6, "Debt and
Credit Agreements," to the Company's Form 10-K for the year ended December 31,
2005.
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at March 31, 2006:
U.S.-BASED
LONG-TERM COMMERCIAL
NOTES PAPER OUTLOOK
----------------------------------------------------------------------------
Standard & Poor's (S&P) A- A-2 Stable
Moody's A3 P-2 Stable
Fitch A- F2 Stable
----------------------------------------------------------------------------
The Company's euro-based commercial paper program has not been rated since the
euro market does not require it. In January 2006, Fitch reaffirmed its A- and F2
ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. S&P and Moody's reaffirmed their ratings
for the Company in December 2005. A downgrade to the Company's credit rating
would probably increase the costs to the Company to borrow funds. An improvement
in the Company's credit rating would probably decrease the costs to the Company
to borrow funds.
-27-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
WORKING CAPITAL POSITION - Changes in the Company's working capital are
reflected in the following table:
MARCH 31 DECEMBER 31 INCREASE
(DOLLARS ARE IN MILLIONS) 2006 2005 (DECREASE)
------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 98.9 $ 120.9 $ (22.0)
Accounts receivable, net 648.2 666.3 (18.1)
Inventories 280.1 251.1 29.0
Other current assets 59.7 60.4 (0.7)
Assets held-for-sale 2.3 2.3 --
------------------------------------------------------------------------------------------
Total current assets 1,089.3(a) 1,101.0 (11.7)(a)
------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Notes payable and current maturities 115.9 104.0 11.9
Accounts payable 252.0 247.2 4.8
Accrued compensation 62.1 75.7 (13.6)
Income taxes payable 41.4 42.3 (0.9)
Other current liabilities 282.8 279.2 3.6
------------------------------------------------------------------------------------------
Total current liabilities 754.2 748.4 5.8
------------------------------------------------------------------------------------------
WORKING CAPITAL $ 335.1 $ 352.6 $ (17.5)
------------------------------------------------------------------------------------------
CURRENT RATIO 1.4:1 1.5:1
==========================================================================================
(a) Does not total due to rounding
Working capital decreased approximately 5% in the first three months of 2006 due
principally to the following factors:
o Cash decreased by $22.0 million due to payments made to reduce the
Company's net cash borrowings.
o Net receivables decreased by $18.1 million due principally due to the
timing of collections in the railway track maintenance services and
equipment business and the Gas Technologies Segment, as well as decreases
in insurance claim receivables (primarily related to claims covered by
third-party insurance). Partially offsetting these decreases were
increases in receivables in the Mills Services and Access Services
Segments which were principally due to foreign currency translation due
to the strengthening of the euro and the British pound sterling in
relation to the U.S. dollar.
o Inventories increased $29.0 million due to the following:
- Increase in the Gas Technologies Segment primarily to meet expected
demand, and to a lesser extent, increases due to higher raw material
costs.
- Increased work-in-process and raw materials inventories due primarily
to customer orders being manufactured at the railway track maintenance
services and equipment business, scheduled for delivery later in 2006.
- Increased finished goods in the Access Services Segment due to
increased activity and seasonal demand.
o Notes payable and current maturities increased $11.9 million due to
increases in bank overdrafts partially offset by payments made to reduce
the Company's net cash borrowings.
o Accrued compensation decreased $13.6 million due principally to payments
of incentive compensation earned during 2005.
CERTAINTY OF CASH FLOWS - The certainty of the Company's future cash flows is
underpinned by the long-term nature of the Company's mill services contracts. At
December 31, 2005, the Company's mill services contracts had estimated future
revenues of $4.3 billion. In addition, as of March 31, 2006, the Company had an
order backlog of $315.1 million for
-28-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
its manufacturing businesses and railway track maintenance services. This
compares with $275.8 million at December 31, 2005 and $256.7 million at March
31, 2005. The increase from December 31, 2005 is due principally to new orders
for railway track maintenance equipment, industrial grating and heat exchangers
within the Engineered Products and Services ("all other") Category, as well as
increased demand for certain products within the Gas Technologies Segment. The
railway track maintenance services and equipment business backlog includes a
significant portion that will not be realized until 2007 and later due to the
long lead time necessary to build certain equipment, and the long-term nature of
certain service contracts. 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.
The types of products and services that the Company provides are not subject to
rapid technological change, which increases the stability of related cash flows.
Additionally, each of the Company's businesses is among the top three companies
(relative to sales) in the industries the Company serves. Due to these factors,
the Company is confident in its future ability to generate positive cash flows
from operations.
CASH FLOW SUMMARY
The Company's cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
SUMMARIZED CASH FLOW INFORMATION
---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31
(IN MILLIONS) 2006 2005
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 69.8 $ 48.1
Investing activities (63.4) (57.9)
Financing activities (31.8) (1.7)
Effect of exchange rate changes on cash 3.2 (4.2)
---------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents $ (22.1)(a) $ (15.7)
=========================================================================================================
(a) Does not total due to rounding
CASH FROM OPERATING ACTIVITIES - Net cash provided by operating activities in
the first three months of 2006 was $69.8 million, an increase of $21.7 million
from the first three months of 2005. The increased cash from operations was a
result of the following factors:
o Increased net income in the first three months of 2006 compared with the
first three months of 2005.
o Overall increased source of cash for net receivables in the first three
months of 2006 compared with the first three months of 2005 due
principally to the timing of collections in the railway track maintenance
services and equipment business and Access Services Segment, as well as
the favorable timing of receipts on third-party insurance claims. The
decrease in receivables due to third-party insurance claims was directly
offset by a use of cash for insurance liabilities.
o The use of cash for net inventories in the first three months of 2006 was
less than the use of cash for net inventories for the comparable period
in 2005. This was due principally to the timing of inventory purchases
and production in the Gas Technologies Segment and the railway track
maintenance services and equipment business.
o Partially offsetting the above improvements was the timing of cash
payments to vendors in the Access Services Segment and a decrease in
insurance liabilities due to the timing of payments on third-party
insurance claims.
CASH USED IN INVESTING ACTIVITIES - Capital investments for the first
three months of 2006 were $66.9 million. This was an increase of $8.6 million
over the first three months of 2005. Over 40% of the investments were for
projects intended to grow future revenues. Investments were made predominantly
in the industrial services businesses, with 55% in the Mill Services Segment and
28% in the Access Services Segment. Throughout the remainder of 2006, the
Company plans to continue to invest in high-return projects and bolt-on
acquisitions, principally in the industrial services businesses.
-29-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions at March 31, 2006 and December 31, 2005.
MARCH 31 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2006 2005
-----------------------------------------------------------------------------
Notes Payable and Current Maturities $ 115.9 $ 104.0
Long-term Debt 882.2 905.9
-----------------------------------------------------------------------------
Total Debt 998.1 1,009.9
Total Equity 1,029.9 993.9
-----------------------------------------------------------------------------
Total Capital $2,028.0 $2,003.9(a)
Total Debt to Total Capital 49.2% 50.4%
=============================================================================
(a) Does not total due to rounding
The Company's debt as a percent of total capital as of March 31, 2006 decreased
from December 31, 2005. Overall debt decreased due to payments made to reduce
the Company's net borrowings, which was partially offset by increases in foreign
currency-denominated debt due to foreign currency translation resulting from the
weakening of the U.S. dollar in comparison with the euro and the British pound
sterling. Additionally, total equity increased due principally to increased net
income for the three months ended March 31, 2006, positive foreign currency
translation, and to a lesser extent, increases in additional paid-in capital
from stock option exercises.
DEBT COVENANTS
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Based on balances at March 31, 2006, the Company could
increase borrowings by approximately $546.8 million and still be within its debt
covenants. Alternatively, keeping all other factors constant, the Company's
equity could decrease by approximately $364.3 million and the Company would
still be within its covenants. Additionally, the Company's 7.25% British pound
sterling-denominated notes due October 27, 2010 include a covenant that permits
the note holders to redeem their notes, at par, in the event of a change of
control of the Company. The Company expects to be compliant with these debt
covenants one year from now.
CASH AND VALUE-BASED MANAGEMENT
The Company plans to continue with its strategy of selective investing for
strategic purposes for the foreseeable future. The goal of this strategy is to
improve the Company's Economic Value Added (EVA(R)) under the program that
commenced January 1, 2002. Under this program, the Company evaluates strategic
investments based upon the investment's economic profit. EVA equals after-tax
operating profits less a charge for the use of the capital employed to create
those profits (only the service cost portion of pension expense is included for
EVA purposes). Therefore, value is created when a project or initiative produces
a return above the cost of capital. Consistent with the first quarter 2006
results, meaningful improvement in EVA was achieved compared with the prior year
first quarter.
The Company is committed to continue paying dividends to stockholders. The
Company has increased the dividend rate for twelve consecutive years, and in
February 2006, the Company paid its 223rd consecutive quarterly cash dividend.
In March 2006, the Company declared its 224th consecutive quarterly cash
dividend. The Company also plans to pay down debt to the extent possible.
Additionally, the Company has authorization to repurchase up to one million of
its shares through January 1, 2007.
The Company's financial position and debt capacity should enable it to meet
current and future requirements. As additional resources are needed, the Company
should be able to obtain funds readily and at competitive costs. The Company is
well-positioned and intends to continue investing strategically in high-return
projects and acquisitions, reducing debt to the extent possible, and paying cash
dividends as a means to enhance stockholder value.
NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
Information on new financial accounting standards issued is included in Note L,
"New Financial Accounting Standards Issued," in Part I, Item 1, Financial
Statements.
-30-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
See Part II, Item 1A, "Risk Factors," for quantitative and qualitative
disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures as of March 31, 2006. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective. There have been no
significant changes in internal controls over financial reporting that could
materially affect, or are likely to materially affect, internal control over
financial reporting during the first quarter of 2006.
-31-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
Information on legal proceedings is included under Part I, Item 1, Footnote I
labeled "Commitments and Contingencies."
ITEM 1A. RISK FACTORS
- ---------------------
MARKET RISK.
In the normal course of business, the Company is routinely subjected to a
variety of risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY IMPACT THE
COMPANY'S BUSINESSES.
The Company's businesses are subject to general economic slowdowns and cyclical
conditions in the industries served. In particular,
o The Company's Mill Services business may be adversely impacted by slowdowns
in steel mill production, excess capacity, consolidation or bankruptcy of
steel producers or a reversal or slowing of current outsourcing trends in
the steel industry;
o The Company's Access Services business may be adversely impacted by
slowdowns in non-residential construction and annual industrial and
building maintenance cycles;
o The railway track maintenance business may be adversely impacted by
developments in the railroad industry that lead to lower capital spending
or reduced maintenance spending;
o The industrial abrasives and roofing granules business may be adversely
impacted by reduced home resales or economic conditions that slow the rate
of residential roof replacement, or by slowdowns in the industrial and
infrastructure refurbishment industries;
o The industrial grating business may be adversely impacted by slowdowns in
non-residential construction and industrial production;
o The air-cooled heat exchangers business is affected by cyclical conditions
present in the natural gas industry. A high demand for natural gas is
currently creating increased demand for the Company's air-cooled heat
exchangers. However, a slowdown in natural gas production could adversely
affect this business; and
o The Company's Gas Technologies business may be adversely impacted by
reduced industrial production, and lower demand for industrial gases,
slowdowns in demand for medical cylinders, valves and consumer barbecue
grills, or lower demand for natural gas vehicles.
THE COMPANY'S DEFINED BENEFIT PENSION EXPENSE IS DIRECTLY AFFECTED BY THE
EQUITY AND BOND MARKETS AND A DOWNWARD TREND IN THOSE MARKETS COULD
ADVERSELY IMPACT THE COMPANY'S FUTURE EARNINGS. AN UPWARD TREND IN THE
EQUITY AND BOND MARKETS COULD POSITIVELY AFFECT THE COMPANY'S FUTURE
EARNINGS.
In addition to the economic issues that directly affect the Company's
businesses, changes in the performance of equity and bond markets, particularly
in the United Kingdom and the United States, impact actuarial assumptions used
in determining annual pension expense, pension liabilities and the valuation of
the assets in the Company's defined benefit pension plans. The downturn in
financial markets during 2000, 2001 and 2002 negatively impacted the Company's
pension expense and the accounting for pension assets and liabilities. This
resulted in an increase in pre-tax defined benefit pension expense from
continuing operations of approximately $20.8 million for calendar year 2002
compared with 2001 and $17.7 million for calendar year 2003 compared with 2002.
The upturn in certain financial markets beginning in 2003 and certain plan
design changes (discussed below) contributed to a decrease in pre-tax defined
benefit pension expense from continuing operations of approximately $3.8 million
for 2005 compared with 2004, and approximately $5.4 million for 2004 compared
with 2003. Additionally, defined benefit pension expense declined $0.7 million
for the first
-32-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
quarter of 2006 compared with the first quarter of 2005. An upward trend in
capital markets would likely result in a decrease in future unfunded obligations
and pension expense. This could also result in an increase to Stockholders'
Equity and a decrease in the Company's statutory funding requirements. If the
financial markets deteriorate, it would most likely have a negative impact on
the Company's pension expense and the accounting for pension assets and
liabilities. This could result in a decrease to Stockholders' Equity and an
increase in the Company's statutory funding requirements.
In response to the adverse market conditions, during 2002 and 2003 the Company
conducted a comprehensive global review of its pension plans in order to
formulate a plan to make its long-term pension costs more predictable and
affordable. The Company implemented design changes for most of these plans
during 2003. The principal change involved converting future pension benefits
for many of the Company's non-union employees in both the U.K. and U.S. from
defined benefit plans to defined contribution plans as of January 1, 2004. This
conversion is expected to make the Company's pension expense more predictable
and affordable and less sensitive to changes in the financial markets.
The Company's pension committee continues to evaluate alternative strategies to
further reduce overall pension expense including the on-going evaluation of
investment fund managers' performance; the balancing of plan assets and
liabilities; the risk assessment of all multi-employer pension plans; the
possible merger of certain plans; the consideration of incremental cash
contributions to certain plans; and other changes that are likely to reduce
future pension expense volatility and minimize risk.
Changes in the related pension benefit costs may occur in the future due to
changes in the assumptions and due to changes in returns on plan assets
resulting from financial market conditions. Using the expense calculated for
calendar year 2006 and holding all other assumptions constant, a one-half
percent increase or decrease in the discount rate and the expected long-term
rate of return on plan assets would increase or decrease annual pre-tax defined
benefit pension expense as follows:
APPROXIMATE CHANGES IN PRE-TAX DEFINED BENEFIT
----------------------------------------------
PENSION EXPENSE
---------------
U.S. PLANS U.K. PLAN
---------- ---------
Discount rate
-------------
One-half percent increase Decrease of $1.8 million Decrease of $4.8 million
One-half percent decrease Increase of $2.0 million Increase of $5.2 million
Expected long-term rate of return on plan assets
------------------------------------------------
One-half percent increase Decrease of $1.2 million Decrease of $3.0 million
One-half percent decrease Increase of $1.2 million Increase of $3.0 million
Should circumstances change that affect these estimates, changes (either
increases or decreases) to the net pension obligations may be required and would
be recorded in accordance with the provisions of SFAS 87. Additionally, certain
events could result in the pension obligation changing at a time other than the
annual measurement date. This would occur when the benefit plan is amended or
when plan curtailments occur.
THE COMPANY'S GLOBAL PRESENCE SUBJECTS IT TO A VARIETY OF RISKS ARISING
FROM DOING BUSINESS INTERNATIONALLY.
The Company operates in 45 countries, including the United States. The Company's
global footprint exposes it to a variety of risks that may adversely impact
results of operations, cash flows or financial position. These include the
following:
o periodic economic downturns in the countries in which the Company does
business;
o fluctuations in currency exchange rates;
o customs matters and changes in trade policy or tariff regulations;
o imposition of or increases in currency exchange controls and hard
currency shortages;
o changes in regulatory requirements in the countries in which the
Company does business;
-33-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
o higher tax rates and potentially adverse tax consequences including
restrictions on repatriating earnings, adverse tax withholding
requirements and "double taxation ";
o longer payment cycles and difficulty in collecting accounts
receivable;
o complications in complying with a variety of international laws and
regulations;
o political, economic and social instability, civil unrest and armed
hostilities in the countries in which the Company does business;
o inflation rates in the countries in which the Company does business;
o laws in various international jurisdictions that limit the right and
ability of subsidiaries to pay dividends and remit earnings to
affiliated companies unless specified conditions are met; and,
o uncertainties arising from local business practices, cultural
considerations and international political and trade tensions.
If the Company is unable to successfully manage the risks associated with its
global business, the Company's financial condition, cash flows and results of
operations may be negatively affected.
The Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq and other countries with a continued high risk of
armed hostilities. During the first quarters of 2006, 2005 and 2004, these
countries contributed approximately $9.5 million, $7.4 million and $4.7 million,
respectively, to the Company's operating income. Additionally, the Company has
operations in and sales to countries that have encountered outbreaks of
communicable diseases (e.g., Acquired Immune Deficiency Syndrome (AIDS) and
others). Should these outbreaks worsen or spread to other countries, the Company
may be negatively impacted through reduced sales to and within those countries
and other countries impacted by such diseases.
EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY IMPACT THE COMPANY'S BUSINESS.
Fluctuations in foreign exchange rates between the U.S. dollar and the
approximately 40 other currencies in which the Company conducts business may
adversely impact the Company's operating income and income from continuing
operations in any given fiscal period. Approximately 62% and 60% of the
Company's sales and approximately 77% and 75% of the Company's operating income
from continuing operations for the three months ended March 31, 2006 and 2005,
respectively, were derived from operations outside the United States. More
specifically, during the three months ended March 31, 2006 and 2005,
approximately 20% and 21%, respectively, of the Company's revenues were derived
from operations in the U.K. Additionally, approximately 21% and 18% of the
Company's revenues were derived from operations with the euro as their
functional currency during the three months ended March 31, 2006 and March 31,
2005, respectively. Given the structure of the Company's revenues and expenses,
an increase in the value of the U.S. dollar relative to the foreign currencies
in which the Company earns its revenues generally has a negative impact on
operating income, whereas a decrease in the value of the U.S. dollar tends to
have the opposite effect. The Company's principal foreign currency exposures are
to the British pound sterling and the euro, and the exposure to these
currencies, as well as other foreign currencies, has increased in 2006 due to
the acquisitions of Hunnebeck and the Northern Hemisphere mill services
operations of Brambles Industrial Services ("BISNH") in the fourth quarter of
2005.
Compared with the corresponding period in 2005, the average values of major
currencies changed as follows in relation to the U.S. dollar during the first
quarter of 2006, impacting the Company's sales and income:
o British pound sterling Weakened by 8%
o euro Weakened by 9%
o South African rand Weakened by 3%
o Brazilian real Strengthened by 17%
o Australian dollar Weakened by 6%
-34-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Compared with exchange rates at December 31, 2005, the values of major
currencies changed as follows as of March 31, 2006:
o British pound sterling Strengthened by 2%
o euro Strengthened by 3%
o South African rand Strengthened by 2%
o Brazilian real Strengthened by 6%
o Australian dollar Weakened by 3%
The Company's foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies change
materially in relation to the U.S. dollar, the Company's financial position,
results of operations, or cash flows may be materially affected.
To illustrate the effect of foreign currency exchange rate changes in certain
key markets of the Company, in the first three months of 2006, revenues would
have been approximately 2% or $16.6 million higher and operating income would
have been approximately 1% or $0.4 million higher if the average exchange rates
for the first three months of 2005 were utilized. A similar comparison for the
first three months of 2005 would have decreased revenues approximately 2% or
$15.6 million while operating income would have been approximately 3% or $1.5
million less if the average exchange rates would have remained the same as the
first three months of 2004.
Currency changes result in assets and liabilities denominated in local
currencies being translated into U.S. dollars at different amounts than at the
prior period end. These currency changes resulted in increased net assets of
$10.8 million and decreased net assets of $20.9 million, at March 31, 2006 and
2005, respectively, when compared with December 31, 2005 and 2004, respectively.
The Company seeks to reduce exposures to foreign currency transaction
fluctuations through the use of forward exchange contracts. At March 31, 2006,
the notional amount of these contracts was $75.2 million, and over 90% will
mature in the second quarter of 2006. The Company does not hold or issue
financial instruments for trading purposes, and it is the Company's policy to
prohibit the use of derivatives for speculative purposes.
Although the Company engages in foreign currency forward exchange contracts and
other hedging strategies to mitigate foreign exchange risk, hedging strategies
may not be successful or may fail to offset the risk.
In addition, competitive conditions in the Company's manufacturing businesses
may limit the Company's ability to increase product prices in the face of
adverse currency movements. Sales of products manufactured in the United States
for the domestic and export markets may be affected by the value of the U.S.
dollar relative to other currencies. Any long-term strengthening of the U.S.
dollar could depress demand for these products and reduce sales and may cause
translation gains or losses due to the revaluation of accounts payable, accounts
receivable and other asset and liability accounts. Conversely, any long-term
weakening of the U.S. dollar could improve demand for these products and
increase sales and may cause translation gains or losses due to the revaluation
of accounts payable, accounts receivable and other asset and liability accounts.
NEGATIVE ECONOMIC CONDITIONS MAY ADVERSELY IMPACT THE ABILITY OF THE
COMPANY'S CUSTOMERS TO MEET THEIR OBLIGATIONS TO THE COMPANY ON A TIMELY
BASIS AND IMPACT THE VALUATION OF THE COMPANY'S ASSETS.
If a downturn in the economy occurs, it may adversely impact the ability of the
Company's customers to meet their obligations to the Company on a timely basis
and could result in bankruptcy filings by them. If customers are unable to meet
their obligations on a timely basis, it could adversely impact the realizability
of receivables, the valuation of inventories and the valuation of long-lived
assets across the Company's businesses, as well as negatively affect the
forecasts used in performing the Company's goodwill impairment testing under
SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). If management
determines that goodwill or assets are impaired or that inventories or
receivables cannot be realized at recorded amounts, the Company will be required
to record a write-down in the period of determination, which will reduce net
income for that period. Additionally, 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. The potential financial impact of this risk has increased
with the Company's acquisition of BISNH in December 2005. Conversely, such
consolidation may provide additional service opportunities for the Company.
-35-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
A NEGATIVE OUTCOME ON PERSONAL INJURY CLAIMS AGAINST THE COMPANY MAY
ADVERSELY IMPACT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos. In their suits, the plaintiffs have named as defendants many
manufacturers, distributors and repairers of numerous types of equipment or
products that may contain asbestos. Most of these complaints contain a standard
claim for damages of $20 million or more against the named defendants. If the
Company was found to be liable in any of these actions and the liability was to
exceed the Company's insurance coverage, results of operations, cash flows and
financial condition could be adversely affected. For more information concerning
this litigation, see Note I, "Commitments and Contingencies," in Part 1, Item 1,
Financial Statements.
THE COMPANY MAY LOSE CUSTOMERS OR BE REQUIRED TO REDUCE PRICES AS A RESULT
OF COMPETITION.
The industries in which the Company operates are highly competitive.
o The Company's Mill Services business is sustained mainly through contract
renewals. Historically, the Company's contract renewal rate has averaged
approximately 95%. If the Company is unable to renew its contracts at the
historical rates or renewals are at reduced prices, revenue may decline.
o The Company's Access Services business rents and sells equipment and
provides erection and dismantling services to principally the
non-residential construction and industrial plant maintenance markets.
Contracts are awarded based upon the Company's engineering capabilities,
product availability, safety record, and the ability to competitively price
its rentals and services. Commencing in 2000, due to economic downturns in
their home markets, certain international competitors exported significant
quantities of rental equipment to the markets the Company serves,
particularly the U.S. This resulted in an oversupply of certain equipment
and a consequential reduction in product and rental pricing in the markets
receiving the excess equipment. The effect of these actions was mitigated,
to some extent, in 2005 and the first three months of 2006 due to a buoyant
U.S. non-residential construction market. However, if the Company is unable
to consistently provide high-quality products and services at competitive
prices, it may lose customers or operating margins may decline due to
reduced selling prices.
o The Company's manufacturing businesses compete with companies that
manufacture similar products both internationally and domestically. Certain
international competitors export their products into the United States and
sell them at lower prices due to lower labor costs and government subsidies
for exports. Such practices may limit the prices the Company can charge for
its products and services. Additionally, unfavorable foreign exchange rates
can adversely impact the Company's ability to match the prices charged by
international competitors. If the Company is unable to match the prices
charged by international competitors, it may lose customers.
The Company's strategy to overcome this competition includes continuous process
improvement and cost reduction programs, international customer focus and the
diversification, streamlining and consolidation of operations.
INCREASED CUSTOMER CONCENTRATION AND CREDIT RISK IN THE MILL SERVICES
SEGMENT MAY ADVERSELY AFFECT THE COMPANY'S FUTURE EARNINGS AND CASH FLOWS.
Concentrations of credit risk with respect to accounts receivable are generally
limited due to the Company's large number of customers and their dispersion
across different industries and geographies. However, the Company's Mill
Services Segment has several large customers throughout the world with
significant accounts receivable balances. In December 2005, the Company acquired
BISNH. This acquisition has increased the Company's corresponding concentration
of credit risk to customers in the steel industry.
Additionally, further consolidation in the global steel industry is possible.
Should transactions occur involving some of the steel industry's larger
companies, which are customers of the Company, it would result in an increase in
concentration of credit risk for the Company. If a large customer were to
experience financial difficulty, or file for bankruptcy protection, it could
adversely impact the Company's income, cash flows and asset valuations. As part
of its credit risk management practices, the Company is developing strategies to
mitigate this increased concentration of credit risk.
INCREASES IN ENERGY PRICES COULD INCREASE THE COMPANY'S OPERATING COSTS AND
REDUCE ITS PROFITABILITY.
Worldwide political and economic conditions, extreme weather conditions, among
other factors, may result in an increase in the volatility of energy costs, both
on a macro basis and for the Company specifically. In the first three months of
2006 and 2005, energy costs have approximated 4.4% and 3.9% of the Company's
revenue, respectively. To the extent that such costs cannot be passed to
customers in the future, operating income and results of operations may be
adversely affected.
-36-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
INCREASES OR DECREASES IN PURCHASE PRICES OR AVAILABILITY OF STEEL OR OTHER
MATERIALS AND COMMODITIES MAY AFFECT THE COMPANY'S PROFITABILITY.
The profitability of the Company's manufactured products are affected by
changing purchase prices of steel and other materials and commodities. Beginning
in 2004, the price paid for steel and certain other commodities increased
significantly compared with prior years. Although these costs moderated in 2005,
the current outlook for 2006 indicates that there will be increases in the
prices of commodities such as brass and there may be increases in the prices of
other commodities such as steel. If raw material costs associated with the
Company's manufactured products increase and the costs cannot be passed on to
the Company's customers, operating income would be adversely affected.
Additionally, decreased availability of steel or other materials, such as carbon
fiber used to manufacture filament-wound composite cylinders, could affect the
Company's ability to produce manufactured products in a timely manner. If the
Company cannot obtain the necessary raw materials for its manufactured products,
then revenues, operating income and cash flows will be adversely affected.
THE COMPANY IS SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND THE SUCCESS OF
EXISTING OR FUTURE ENVIRONMENTAL CLAIMS AGAINST IT COULD ADVERSELY IMPACT
THE COMPANY'S RESULTS OF OPERATIONS AND CASH FLOWS.
The Company's operations are subject to various federal, state, local and
foreign laws, regulations and ordinances relating to the protection of health,
safety and the environment, including those governing discharges to air and
water, handling and disposal practices for solid and hazardous wastes, the
remediation of contaminated sites and the maintenance of a safe work place.
These laws impose penalties, fines and other sanctions for non-compliance and
liability for response costs, property damages and personal injury resulting
from past and current spills, disposals or other releases of, or exposure to,
hazardous materials. The Company could incur substantial costs as a result of
non-compliance with or liability for remediation or other costs or damages under
these laws. The Company may be subject to more stringent environmental laws in
the future, and compliance with more stringent environmental requirements may
require the Company to make material expenditures or subject it to liabilities
that the Company currently does not anticipate.
The Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a "potentially responsible party" for certain waste disposal sites
under the federal "Superfund" law. At several sites, the Company is currently
conducting environmental remediation, and it is probable that the Company will
agree to make payments toward funding certain other of these remediation
activities. It also is possible that some of these matters will be decided
unfavorably to the Company and that other sites requiring remediation will be
identified. Each of these matters is subject to various uncertainties and
financial exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Company has evaluated its potential liability and the Consolidated Balance
Sheets both at March 31, 2006 and December 31, 2005 include an accrual of $2.8
million for environmental matters. The amounts charged against pre-tax earnings
related to environmental matters totaled $0.2 million and $0.3 million for the
three months ended March 31, 2006 and 2005, respectively. The liability for
future remediation costs is evaluated on a quarterly basis. Actual costs to be
incurred at identified sites in future periods may be greater than the
estimates, given inherent uncertainties in evaluating environmental exposures.
RESTRICTIONS IMPOSED BY THE COMPANY'S CREDIT FACILITIES AND OUTSTANDING
NOTES MAY LIMIT THE COMPANY'S ABILITY TO OBTAIN ADDITIONAL FINANCING OR TO
PURSUE BUSINESS OPPORTUNITIES.
The Company's credit facilities and certain notes payable agreements contain a
covenant requiring a maximum debt to capital ratio of 60%. In addition, certain
notes payable agreements also contain a covenant requiring a minimum net worth
of $475 million. These covenants limit the amount of debt the Company may incur,
which could limit its ability to obtain additional financing or to pursue
business opportunities. In addition, the Company's ability to comply with these
ratios may be affected by events beyond its control. A breach of any of these
covenants or the inability to comply with the required financial ratios could
result in a default under these credit facilities. In the event of any default
under these credit facilities, the lenders under those facilities could elect to
declare all borrowings outstanding, together with accrued and unpaid interest
and other fees, to be due and payable, which would cause an event of default
under the notes. This could, in turn, trigger an event of default under the
cross-default provisions of the Company's other outstanding indebtedness. At
March 31, 2006, the Company was in compliance with a debt to capital ratio of
49.2% and a net worth of $1,029.9 million. The company had $352.9 million in
outstanding indebtedness containing these covenants at March 31, 2006.
-37-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
HIGHER THAN EXPECTED CLAIMS UNDER INSURANCE POLICIES, UNDER WHICH THE
COMPANY RETAINS A PORTION OF RISK, COULD ADVERSELY IMPACT RESULTS OF
OPERATIONS AND CASH FLOWS.
The Company retains a significant portion of the risk for property, workers'
compensation, U.K. employers' liability, automobile, general and product
liability losses. Reserves have been recorded which reflect the undiscounted
estimated liabilities for ultimate losses including claims incurred but not
reported. Inherent in these estimates are assumptions that are based on the
Company's history of claims and losses, a detailed analysis of existing claims
with respect to potential value, and current legal and legislative trends. At
March 31, 2006 and December 31, 2005, the Company had recorded liabilities of
$98.7 million and $102.3 million, respectively, related to both asserted and
unasserted insurance claims. Included in the balances at March 31, 2006 and
December 31, 2005 were $19.5 million and $25.2 million, respectively, of
recognized liabilities covered by insurance carriers. If actual claims are
higher than those projected by management, an increase to the Company's
insurance reserves may be required and would be recorded as a charge to income
in the period the need for the change was determined. Conversely, if actual
claims are lower than those projected by management, a decrease to the Company's
insurance reserves may be required and would be recorded as a reduction to
expense in the period the need for the change was determined.
THE SEASONALITY OF THE COMPANY'S BUSINESS MAY CAUSE ITS QUARTERLY RESULTS
TO FLUCTUATE.
The Company has historically generated the majority of its cash flows in the
third and fourth quarters (periods ending September 30 and December 31). This is
a direct result of normally higher sales and income during the latter part of
the year, as the Company's business tends to follow seasonal patterns. If the
Company is unable to successfully manage the cash flow and other effects of
seasonality on the business, its results of operations may suffer.
HISTORICAL REVENUE PATTERNS
(IN MILLIONS) 2006 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------------------------------
First Quarter Ended
March 31 $ 769.6 $ 640.1 $ 556.3 $ 487.9 $ 458.6 $ 505.0
Second Quarter Ended
June 30 -- 696.1 617.6 536.4 510.3 510.1
Third Quarter Ended
September 30 -- 697.5 617.3 530.2 510.5 510.3
Fourth Quarter Ended
December 31 -- 732.5 710.9 564.0 497.3 499.7
----------------------------------------------------------------------------------------------------------
Totals $ -- $2,766.2 $2,502.1 $2,118.5 $1,976.7 $2,025.2(a)
==========================================================================================================
(a) Does not total due to rounding.
-38-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
HISTORICAL CASH PROVIDED BY OPERATIONS
(IN MILLIONS) 2006 2005 2004 2003 2002 2001
----------------------------------------------------------------------------------------------------------
First Quarter Ended
March 31 $ 69.8 $ 48.1 $ 32.4 $ 31.2 $ 9.0 $ 2.6
Second Quarter Ended
June 30 -- 86.3 64.6 59.2 71.4 65.1
Third Quarter Ended
September 30 -- 98.1 68.9 64.1 83.3 66.1
Fourth Quarter Ended
December 31 -- 82.7 104.6 108.4 90.1 106.9
----------------------------------------------------------------------------------------------------------
Totals $ -- $ 315.3(a)$ 270.5 $ 262.8(a)$ 253.8 $ 240.6(a)
==========================================================================================================
(a) Does not total due to rounding.
THE COMPANY'S CASH FLOWS AND EARNINGS ARE SUBJECT TO CHANGES IN INTEREST
RATES.
The Company's total debt as of March 31, 2006 was $998.1 million. Of this
amount, approximately 48.5% had variable rates of interest and 51.5% had fixed
rates of interest. The weighted average interest rate of total debt was
approximately 5.4%. At current debt levels, a one-percentage increase/decrease
in variable interest rates would increase/decrease interest expense by
approximately $4.8 million per year.
The future financial impact on the Company associated with the above risks
cannot be estimated.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- -------------------------------------------------------------------
(c). Issuer Purchases of Equity Securities
TOTAL NUMBER OF MAXIMUM NUMBER OF
TOTAL SHARES PURCHASED SHARES THAT MAY YET
NUMBER OF AVERAGE AS PART OF PUBLICLY BE PURCHASED UNDER
SHARES PRICE PAID ANNOUNCED PLANS OR THE PLANS OR
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS
- -------------------------------------------------------------------------------------------------------------------
January 1, 2006 - January 31, 2006 -- -- -- 1,000,000
February 1, 2006 - February 28, 2006 -- -- -- 1,000,000
March 1, 2006 - March 31, 2006 -- -- -- 1,000,000
- -------------------------------------------------------------------------------------------------------------------
Total -- -- --
- -------------------------------------------------------------------------------------------------------------------
The Company's share repurchase program was extended by Board of Directors in
November 2005. The program authorizes the repurchase of up to 1,000,000 shares
of the Company's common stock and expires January 31, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
- -----------------------------------------------------------
At the annual meeting of stockholders held on April 25, 2006 in Camp Hill,
Pennsylvania, the following proposals were voted upon by stockholders:
o Stockholders elected all eleven current members of the Board of
Directors to terms expiring in 2007 under the declassified Board
structure approved at the 2005 annual meeting.
-39-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
The Board of Directors voting tabulation was as follows:
For Withheld
Name No. of Shares No. of Shares
---- ------------- -------------
G. D. H. Butler 35,673,484 2,754,370
K. G. Eddy 38,131,503 296,351
S. D. Fazzolari 34,486,715 3,941,139
D. C. Hathaway 35,951,432 2,476,422
J. J. Jasinowski 38,075,434 352,420
D. H. Pierce 38,128,535 299,319
C. F. Scanlan 38,051,450 376,404
J. I. Scheiner 35,983,179 2,444,675
A. J. Sordoni, III 35,657,480 2,770,374
J. P. Viviano 38,115,344 312,510
R. C. Wilburn 35,995,939 2,431,915
o Stockholders approved the appointment of PricewaterhouseCoopers LLP as
independent accountants to audit the financial statements of the
Company for the fiscal year ending December 31, 2006 by the following
vote:
For Against Abstentions
No. of Shares No. of Shares No. of Shares
------------- ------------- -------------
35,369,643 2,870,650 187,560
ITEM 5. OTHER INFORMATION
- -------------------------
DIVIDEND INFORMATION
- --------------------
On March 23, 2006, the Board of Directors declared a quarterly cash dividend of
$0.325 per share, payable May 15, 2006, to stockholders of record as of April
13, 2006.
10b5-1 Plan
- -----------
The Chief Executive Officer (CEO) of the Company adopted in the First Quarter of
2006, a personal trading plan, as part of a long-term strategy for asset
diversification and liquidity, in accordance with the Securities and Exchange
Commission's Rule 10b5-1. Under the plan, the CEO will exercise, under
pre-arranged terms, up to 100,000 options in open market transactions. The
trading plan will expire in July 2006. As of May 8, 2006, 75,000 shares have
been sold under the trading plan.
The President and Chief Financial Officer (CFO) of the Company adopted in the
First Quarter of 2006, a personal trading plan, as part of a long-term strategy
for asset diversification and liquidity, in accordance with the Securities and
Exchange Commission's Rule 10b5-1. Under the plan, the President and CFO will
exercise, under pre-arranged terms, up to 28,000 options in open market
transactions. The trading plan will expire in August 2006. As of May 8, 2006,
13,000 shares have been sold under the trading plan.
Rule 10b5-1 allows officers and directors, at a time when they are not in
possession of material non-public information, to adopt written plans to sell
shares on a regular basis under pre-arranged terms, regardless of any subsequent
non-public information they may receive. Exercises of stock options by the CEO
or President and CFO pursuant to the terms of their
-40-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
respective plans will be disclosed publicly through Form 144 and Form 4 filings
with the Securities and Exchange Commission.
ITEM 6. EXHIBITS
- ----------------
Listing of Exhibits filed with Form 10-Q:
Exhibit
Number Data Required Location
------ ------------- --------
31 (a) Certification Pursuant to Rule 13a-14(a) and Exhibit
15d-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31 (b) Certification Pursuant to Rule 13a-14(a) and Exhibit
15d-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 (a) Certification Pursuant to 18 U.S.C. Section 1350, Exhibit
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32 (b) Certification Pursuant to 18 U.S.C. Section 1350, Exhibit
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
-41-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARSCO CORPORATION
(Registrant)
DATE May 8, 2006 /S/ Salvatore D. Fazzolari
---------------- -------------------------------
Salvatore D. Fazzolari
President, Chief Financial
Officer and Treasurer
DATE May 8, 2006 /S/ Stephen J. Schnoor
---------------- -------------------------------
Stephen J. Schnoor
Vice President and Controller
-42-
EXHIBIT 31(a)
-------------
CERTIFICATIONS
I, Derek C. Hathaway, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harsco Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
May 8, 2006
/s/ Derek C. Hathaway
- ---------------------------
Derek C. Hathaway
Chief Executive Officer
EXHIBIT 31(b)
-------------
CERTIFICATIONS
I, Salvatore D. Fazzolari, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harsco Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
May 8, 2006
/s/ Salvatore D. Fazzolari
- ------------------------------
Salvatore D. Fazzolari
Chief Financial Officer
EXHIBIT 32(a)
-------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harsco Corporation (the "Company") on
Form 10-Q for the period ending March 31, 2006 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Derek C. Hathaway,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Derek C. Hathaway
- ---------------------------
Derek C. Hathaway
Chief Executive Officer
May 8, 2006
EXHIBIT 32(b)
-------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harsco Corporation (the "Company") on
Form 10-Q for the period ending March 31, 2006 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Salvatore D.
Fazzolari, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Salvatore D. Fazzolari
- --------------------------------
Salvatore D. Fazzolari
Chief Financial Officer
May 8, 2006