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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
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HARSCO CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 23-1483991
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
350 Poplar Church Road, Camp Hill, Pennsylvania 17011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 717-763-7064
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Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange on which registered
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Common stock, par value $1.25 per share New York Stock Exchange
Preferred stock purchase rights
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [X] NO [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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 Act). YES [ ] NO [X]
The aggregate market value of the Company's voting stock held by non-affiliates
of the Company as of June 30, 2006 was $3,274,276,264.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Classes Outstanding at January 31, 2007
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Common stock, par value $1.25 per share 42,017,140
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 2007 Proxy Statement are incorporated by reference into
Part III of this Report.
The Exhibit Index (Item No. 15) located on pages 98 to 103 incorporates several
documents by reference as indicated therein.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Harsco Corporation ("the Company") is a diversified, multinational provider of
market-leading industrial services and engineered products. The Company's
operations fall into three reportable segments: Mill Services, Access Services
and Gas Technologies, plus an "all other" category labeled Engineered Products
and Services. The Company has locations in 46 countries, including the United
States. The Company was incorporated in 1956.
The Company's executive offices are located at 350 Poplar Church Road, Camp
Hill, Pennsylvania 17011. The Company's main telephone number is (717) 763-7064.
The Company's Internet website address is www.harsco.com. Through this Internet
website (found in the "Investor Relations" link) the Company makes available,
free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K and all amendments to those reports, as soon as
reasonably practicable after these reports are electronically filed or furnished
to the Securities and Exchange Commission. Information contained on the
Company's website is not incorporated by reference into this Annual Report, and
should not be considered as part of this Annual Report.
The Company's principal lines of business and related principal business drivers
are as follows:
Principal Lines of Business Principal Business Drivers
- --------------------------- --------------------------
o Outsourced, on-site services to steel mills and o Steel mill production and capacity utilization
other metals producers o Outsourcing of services
- ---------------------------------------------------- -------------------------------------------------------------------------------
o Scaffolding, forming, shoring and other o Non-residential and commercial construction
access-related services, rentals and sales o Industrial and building maintenance requirements
- ---------------------------------------------------- -------------------------------------------------------------------------------
o Railway track maintenance services and equipment o Domestic and international railway track maintenance-of-way capital spending
o Outsourcing of track maintenance and new track construction by railroads
- ---------------------------------------------------- -------------------------------------------------------------------------------
o Industrial grating products o Industrial plant and warehouse construction and expansion
- ---------------------------------------------------- -------------------------------------------------------------------------------
o Air-cooled heat exchangers o Natural gas compression and transmission
- ---------------------------------------------------- -------------------------------------------------------------------------------
o Industrial abrasives and roofing granules o Industrial and infrastructure surface preparation and restoration
o Residential roof replacement
- ---------------------------------------------------- -------------------------------------------------------------------------------
o Heat transfer products and powder processing o Commercial and institutional boiler and water heater requirements
equipment o Pharmaceutical, food and chemical production
- ---------------------------------------------------- -------------------------------------------------------------------------------
o Gas control and containment products
-Cryogenic containers and industrial o General industrial production and industrial gas production
gas cylinders
-Valves o Use of industrial and refrigerant gases
o Respiratory care market
-Propane Tanks o Use of propane as a primary and/or backup fuel
-Filament-wound composite cylinders o Self-contained breathing apparatus ("SCBA") demand
o Natural gas vehicle ("NGV") demand
- ---------------------------------------------------- -------------------------------------------------------------------------------
-2-
The Company reports segment information using the "management approach" in
accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). This approach is based on the way management
organizes and reports the segments within the enterprise for making operating
decisions and assessing performance. The Company's reportable segments are
identified based upon differences in products, services and markets served.
These segments and the types of products and services offered are more fully
described below.
In 2006, 2005 and 2004, the United States contributed sales of $1.3 billion,
$1.2 billion and $1.0 billion, equal to 38%, 42% and 42% of total sales,
respectively. In 2006, 2005 and 2004, the United Kingdom contributed sales of
$0.7 billion, $0.5 billion and $0.5 billion, respectively, equal to 20%, 20% and
21% of total sales, respectively. One customer represented 10% of the Company's
sales during 2006. No customer represented 10% or more of the Company's sales in
2005 and 2004. There were no significant inter-segment sales.
(b) Financial Information about Segments
Financial information concerning industry segments is included in Note 14,
Information by Segment and Geographic Area, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
(c) Narrative Description of Business
(1) A narrative description of the businesses by reportable segment is as
follows:
MILL SERVICES SEGMENT - 40% OF CONSOLIDATED SALES FOR 2006
The Mill Services Segment, which consists of the MultiServ Division, is
the Company's largest operating segment in terms of revenues and operating
income. MultiServ is the world's largest provider of on-site, outsourced
mill services to the global steel and metals industries. MultiServ
provides its services on a long-term contract basis, supporting each stage
of the metal-making process from initial raw material handling to
post-production by-product processing and on-site recycling. Working as a
specialized, high-value-added services provider, MultiServ rarely takes
ownership of its customers' raw materials or finished products. Similar
services are provided to the producers of non-ferrous metals, such as
aluminum, copper and nickel. The Company's multi-year Mill Services
contracts had estimated future revenues of $4.4 billion at December 31,
2006. This provides the Company with a substantial base of long-term
revenues. Approximately 60% of these revenues are expected to be
recognized by December 31, 2009. The remaining revenues are expected to be
recognized principally between January 1, 2010 and December 31, 2015.
MultiServ's geographic reach to over 30 countries, and its increasing
range of services, enhance the Company's financial and operating balance.
In 2006, this Segment's revenues were generated in the following regions:
MILL SERVICES SEGMENT
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2006 PERCENTAGE
REGION OF REVENUES
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Europe 56%
North America 21%
Latin America (a) 10%
Asia/Pacific 7%
Middle East and Africa 6%
(a) Including Mexico.
For 2006, 2005 and 2004, the Mill Services Segment's percentage of the
Company's consolidated sales was 40%, 38% and 40%, respectively.
ACCESS SERVICES SEGMENT - 31% OF CONSOLIDATED SALES FOR 2006
The Access Services Segment includes the Company's SGB Group, Hunnebeck
Group and Patent Construction Systems Divisions. The Company's Access
Services Segment leads the access industry as one of the world's most
complete providers of rental scaffolding, shoring, forming and other
access solutions. The U.K.-based SGB
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Group Division operates from a network of international branches
throughout Europe, the Middle East and Asia/Pacific; the Germany-based
Hunnebeck Division serves Europe, the Middle East and South America while
the U.S.-based Patent Construction Systems Division serves North America.
Major services include the rental of concrete shoring and forming systems,
scaffolding and powered access equipment for non-residential construction
and international multi-dwelling residential construction projects; as
well as a variety of other access services including project engineering
and equipment erection and dismantling and, to a lesser extent, access
equipment sales.
The Company's access services are provided through branch locations in
approximately 30 countries plus export sales worldwide. In 2006, this
Segment's revenues were generated in the following regions:
ACCESS SERVICES SEGMENT
----------------------------------------------------------------
2006 PERCENTAGE
REGION OF REVENUES
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Europe 70%
North America 21%
Middle East and Africa 7%
Asia/Pacific 1%
Latin America 1%
For 2006, 2005 and 2004, the Access Services Segment's percentage of the
Company's consolidated sales was 31%, 29% and 28%, respectively.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - 17% OF
CONSOLIDATED SALES FOR 2006
The Engineered Products and Services ("all other") Category includes the
Harsco Track Technologies, Reed Minerals, IKG Industries, Air-X-Changers,
and Patterson-Kelley Divisions. Approximately 88% of this category's
revenues originate in the United States.
Export sales for this Category totaled $96.6 million, $116.6 million and
$101.2 million in 2006, 2005 and 2004, respectively. In 2006, 2005 and
2004, export sales for the Harsco Track Technologies Division were $51.5
million, $80.0 million and $76.3 million, respectively, which included
sales to Europe, Asia, the Middle East and Africa. The increased export
sales for the Division in 2005 and 2004 were due to large shipments to
China.
Harsco Track Technologies is a global provider of equipment and services
to maintain, repair and construct railway track. The Company's railway
track maintenance services provide high-technology comprehensive track
maintenance and new track construction support to railroad customers
worldwide. The railway track maintenance equipment product class includes
specialized track maintenance equipment used by private and
government-owned railroads and urban transit systems worldwide.
Reed Minerals' roofing granules and industrial abrasives are produced from
power-plant utility coal slag at a number of locations throughout the
United States. The Company's Black Beauty(R) abrasives are used for
industrial surface preparation, such as rust removal and cleaning of
bridges, ship hulls and various structures. Roofing granules are sold to
residential roofing shingle manufacturers, primarily for the replacement
roofing market. This Division is the United States' largest producer of
slag abrasives and third largest producer of residential roofing granules.
IKG Industries manufactures a varied line of industrial grating products
at several plants in North America. These products include a full range of
bar grating configurations, which are used mainly in industrial flooring,
and safety and security applications in the power, paper, chemical,
refining and processing industries.
Air-X-Changers is a leading supplier of custom-designed and manufactured
air-cooled heat exchangers for the natural gas industry. The Company's
heat exchangers are the primary apparatus used to condition natural gas
during recovery, compression and transportation from underground reserves
through the major pipeline distribution channels.
Patterson-Kelley is a leading manufacturer of heat transfer products such
as boilers and water heaters for commercial and institutional
applications, and also powder processing equipment such as blenders,
dryers and mixers for the chemical, pharmaceutical and food processing
industries.
-4-
For 2006, 2005 and 2004, the Engineered Products and Services ("all
other") Category's percentage of the Company's consolidated sales was 17%,
20% and 18%, respectively.
GAS TECHNOLOGIES SEGMENT - 12% OF CONSOLIDATED SALES FOR 2006
The Gas Technologies Segment includes the Company's Harsco GasServ
Division. The Segment's manufacturing and service facilities in the United
States, Europe, Australia, Malaysia and China comprise an integrated
manufacturing network for gas containment and control products. This
global operating presence and product breadth provide economies of scale
and multiple code production capability, enabling Harsco GasServ to serve
as a primary source to the world's leading industrial gas producers and
distributors, as well as regional and local customers. In 2006,
approximately 85% of this Segment's revenues were generated in the United
States.
The Company's gas containment products include cryogenic gas storage
tanks; high pressure and acetylene gas cylinders; propane tanks; and
composite vessels for industrial and commercial gases, natural gas
vehicles (NGV) and other products. The Company's gas control products
include valves and regulators serving a variety of markets, including the
industrial gas, commercial refrigeration, life support and outdoor
recreation industries.
For 2006, 2005 and 2004, the Gas Technologies Segment's percentage of the
Company's consolidated sales was 12%, 13% and 14%, respectively.
In January 2007, the Company's Board of Directors approved the divestiture
of this Segment. The Company expects this divestiture to occur in the
second half of 2007.
(1) (i) The products and services of the Company include a
number of product groups. These product groups are more
fully discussed in Note 14, Information by Segment and
Geographic Area, to the Consolidated Financial Statements
under Part II, Item 8, "Financial Statements and
Supplementary Data." The product groups that contributed 10%
or more as a percentage of consolidated sales in any of the
last three fiscal years are set forth in the following
table:
PERCENTAGE OF CONSOLIDATED SALES
--------------------------------
PRODUCT GROUP 2006 2005 2004
---------------------------------------------------------
Mill Services 40% 38% 40%
Access Services 31% 29% 28%
Industrial Gas Products 12% 13% 14%
=========================================================
(1) (ii) New products and services are added from time to time;
however, in 2006 none required the investment of a material
amount of the Company's assets.
(1) (iii) The manufacturing requirements of the Company's operations
are such that no unusual sources of supply for raw materials
are required. The raw materials used by the Company include
principally steel and, to a lesser extent, aluminum, which
are usually readily available. 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,
such costs increased during 2006. If steel or other material
costs associated with the Company's manufactured products
continue to increase and the costs cannot be passed on to
the Company's customers, operating income would be adversely
impacted. 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 impacted.
(1) (iv) While the Company has a number of trademarks, patents and
patent applications, it does not consider that any material
part of its business is dependent upon them.
(1) (v) The Company furnishes products and materials and certain
industrial services within the Access Services and Gas
Technologies Segments and the Engineered Products and
Services ("all other") Category that are seasonal in nature.
As a result, the Company's sales and net income for the
first quarter ending
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March 31 are normally lower than the second, third and
fourth quarters. Additionally, 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. The Company's
historical revenue patterns and cash provided by operating
activities were as follows:
HISTORICAL REVENUE PATTERNS
(IN MILLIONS) 2006 2005 2004 2003 2002
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First Quarter Ended March 31 $ 769.6 $ 640.1 $ 556.3 $ 487.9 $ 458.6
Second Quarter Ended June 30 865.5 696.1 617.6 536.4 510.3
Third Quarter Ended September 30 875.9 697.5 617.3 530.2 510.5
Fourth Quarter Ended December 31 912.3 732.5 710.9 564.0 497.3
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Totals $ 3,423.3 $ 2,766.2 $ 2,502.1 $ 2,118.5 $ 1,976.7
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HISTORICAL CASH PROVIDED BY OPERATIONS
(IN MILLIONS) 2006 2005 2004 2003 2002
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First Quarter Ended March 31 $ 69.8 $ 48.1 $ 32.4 $ 31.2 $ 9.0
Second Quarter Ended June 30 114.5 86.3 64.6 59.2 71.4
Third Quarter Ended September 30 94.6 98.1 68.9 64.1 83.3
Fourth Quarter Ended December 31 130.3 82.7 104.6 108.4 90.1
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Totals $ 409.2 $ 315.3 (a) $ 270.5 $ 262.8 (a) $ 253.8
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(a) Does not total due to rounding.
(1) (vi) The practices of the Company relating to working capital are
similar to those practices of other industrial service
providers or manufacturers servicing both domestic and
international industrial services and commercial markets.
These practices include the following:
o Standard accounts receivable payment terms of 30 days
to 60 days, with progress payments required for certain
long-lead-time or large orders. Payment terms are
longer in certain international markets.
o Standard accounts payable payment terms of 30 days to
90 days.
o Inventories are maintained in sufficient quantities to
meet forecasted demand. Due to the time required to
manufacture certain railway maintenance equipment to
customer specifications, inventory levels of this
business tend to increase for an extended time during
the production phase and then decline when the
equipment is sold.
(1) (vii) No single customer represented 10% or more of the Company's
sales in 2005 and 2004. However, in 2006 one customer
represented 10% of its sales. In addition, the Mill Services
Segment is dependent largely on the global steel industry
and in 2006, 2005 and 2004, there were two customers that
each provided in excess of 10% of this Segment's revenues
under multiple long-term contracts at several mill sites.
The loss of any one of the contracts would not have a
material adverse effect upon the Company's financial
position or cash flows; however, it could have a material
effect on quarterly or annual results of operations.
Additionally, these customers have significant accounts
receivable balances. Further consolidation in the global
steel industry is probable. Should transactions occur
involving some of the Company's larger steel industry
customers, 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 closely monitors the
credit standing and accounts receivable position of its
customer base.
-6-
(1) (viii) Backlog of orders was $301.0 million and $275.8 million as
of December 31, 2006 and 2005, respectively. It is expected
that approximately 20% of the total backlog at December 31,
2006 will not be filled during 2007. The Company's backlog
is seasonal in nature and tends to follow in the same
pattern as sales and net income which is discussed in
section (1) (v) above. Order backlog for scaffolding,
shoring and forming services of the Access Services Segment
is excluded from the above amounts. These amounts are
generally not quantifiable due to short order lead times for
certain services, the nature and timing of the products and
services provided and equipment rentals with the ultimate
length of the rental period often unknown. Backlog for
roofing granules and slag abrasives is not included in the
total backlog because it is generally not quantifiable, due
to the short order lead times of the products provided.
Contracts for the Mill Services Segment are also excluded
from the total backlog. These contracts have estimated
future revenues of $4.4 billion at December 31, 2006. For
additional information regarding backlog, see the Backlog
section included in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results
of Operations."
(1) (ix) At December 31, 2006, the Company had no material contracts
that were subject to renegotiation of profits or termination
at the election of the U.S. Government.
(1) (x) The Company encounters active competition in all of its
activities from both larger and smaller companies who
produce the same or similar products or services, or who
produce different products appropriate for the same uses.
(1) (xi) The expense for product development activities was $3.0
million, $2.7 million and $2.6 million in 2006, 2005 and
2004, respectively. For additional information regarding
product development activities, see the Research and
Development section included in Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(1) (xii) The Company has become subject, as have others, to stringent
air and water quality control legislation. In general, the
Company has not experienced substantial difficulty complying
with these environmental regulations in the past, and does
not anticipate making any material capital expenditures for
environmental control facilities. While the Company expects
that environmental regulations may expand, and that its
expenditures for air and water quality control will
continue, it cannot predict the effect on its business of
such expanded regulations. For additional information
regarding environmental matters see Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements
included in Part II, Item 8, "Financial Statements and
Supplementary Data."
(1) (xiii) As of December 31, 2006, the Company had approximately
21,500 employees.
(d) Financial Information about Geographic Areas
Financial information concerning foreign and domestic operations is included in
Note 14, Information by Segment and Geographic Area, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data." Export sales totaled $162.6 million, $171.0 million and
$139.3 million in 2006, 2005 and 2004, respectively.
(e) Available Information
Information is provided in Part I, Item 1 (a), "General Development of
Business."
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.
-7-
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY AFFECT 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 or commercial construction and the volatility
of 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 and valves, 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 $1.6 million
for 2006 compared with 2005, approximately $3.8 million for 2005 compared with
2004, and approximately $5.4 million for 2004 compared with 2003. 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
-8-
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.
THE COMPANY'S GLOBAL PRESENCE SUBJECTS IT TO A VARIETY OF RISKS ARISING
FROM DOING BUSINESS INTERNATIONALLY.
The Company operates in 46 countries, including the United States. The Company's
global footprint exposes it to a variety of risks that may adversely affect
results of operations, cash flows or financial position. These include the
following:
o periodic economic downturns in the countries in which the Company does
business;
o fluctuations in currency exchange rates;
o customs matters and changes in trade policy or tariff regulations;
o imposition of or increases in currency exchange controls and hard currency
shortages;
o changes in regulatory requirements in the countries in which the Company
does business;
o higher tax rates and potentially adverse tax consequences including
restrictions on repatriating earnings, adverse tax withholding requirements
and "double taxation ";
o longer payment cycles and difficulty in collecting accounts receivable;
o complications in complying with a variety of 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 impacted.
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, Iran, Israel, Lebanon and other countries with a
continued high risk of armed hostilities. During 2006, 2005 and 2004, the
Company's Middle East operations contributed approximately $34.8 million, $32.7
million and $25.5 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), avian influenza and others). Should such 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 58% of the
Company's sales and approximately 71% and 67% of the Company's operating income
from continuing operations for the years ended December 31, 2006 and 2005,
respectively, were derived from operations outside the United States. More
specifically, during both 2006 and 2005, approximately 20% of the Company's
revenues were derived from operations in the U.K. Additionally, approximately
23% and 18% of the Company's revenues were derived from operations with the euro
as their functional
-9-
currency during 2006 and 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. The Company's 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 and the acquisition of Cleton in the
third quarter of 2006.
Compared with the corresponding period in 2005, the average values of major
currencies changed as follows in relation to the U.S. dollar during 2006,
impacting the Company's sales and income:
o British pound sterling Strengthened by 2%
o euro Strengthened by 2%
o South African rand Weakened by 6%
o Brazilian real Strengthened by 11%
o Canadian dollar Strengthened by 7%
o Australian dollar Neutral
Compared with exchange rates at December 31, 2005, the values of major
currencies changed as follows as of December 31, 2006:
o British pound sterling Strengthened by 14%
o euro Strengthened by 12%
o South African rand Weakened by 10%
o Brazilian real Strengthened by 9%
o Canadian dollar Neutral
o Australian dollar Strengthened by 8%
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 2006, revenues would have been approximately 1%
or $35.3 million less and operating income would have been approximately 1% or
$3.0 million less if the average exchange rates for 2005 were utilized. A
similar comparison for 2005 would have decreased revenues approximately 1% or
$14.8 million, while operating income would have been approximately 1% or $2.8
million less if the average exchange rates for 2005 would have remained the same
as 2004. If the U.S. dollar weakens in relation to the euro and British pound
sterling, the Company would expect to see a positive impact on future sales and
income from continuing operations as a result of foreign currency translation.
Currency changes also result in assets and liabilities denominated in local
currencies being translated into U.S. dollars at different amounts than at the
prior period end.
The Company seeks to reduce exposures to foreign currency transaction
fluctuations through the use of forward exchange contracts. At December 31,
2006, the notional amount of these contracts was $170.9 million, and over 99% of
these contracts will mature within the first quarter of 2007. 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.
-10-
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 other 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 and consolidation of
certain large steel mill customers in 2006. Conversely, such consolidation may
provide additional service opportunities for the Company.
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 involve asbestos. Most of these complaints contain a standard
claim for damages of $20 million or $25 million 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 10, Commitments and Contingencies, to the
Consolidated Financial Statements under Part II, Item 8, "Financial Statements
and Supplementary Data."
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 and commercial 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. 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 IMPACT 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 occurred in 2006 and additional
consolidation is probable. Should additional transactions occur involving some
of the steel industry's larger companies, which are customers of the Company, it
would result in an increase in
-11-
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, an imbalance in the supply and
demand for oil, extreme weather conditions, or armed hostilities in
oil-producing regions, 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 2006, 2005 and 2004, energy costs have approximated 4.0%, 3.6%
and 3.5% 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.
INCREASES OR DECREASES IN PURCHASE PRICES OR SELLING 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,
such costs increased again during 2006 on a comparative basis with 2005. 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 impacted. 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 acquired Excell Materials ("Excell") in
February 2007. Certain services performed by Excell result in the recovery,
processing and sale of stainless steel scrap to its customers. The selling price
of the scrap material is market-based and varies based upon the current fair
value of its components (predominantly nickel). Therefore, the revenue amounts
recorded from the sale of such scrap material vary based upon the fair value of
the commodity components being sold. The Company intends to execute hedging
instruments to help reduce the volatility of the revenue from the sale of the
scrap material at varying market prices. However, there can be no guarantee that
such hedging strategies will be fully effective in reducing the variability of
revenues from period to period.
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
international 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 at December 31, 2006 and 2005 include an accrual of $3.8 million and $2.8
million, respectively, for environmental matters. The amounts charged against
pre-tax earnings related to environmental matters totaled $2.2 million, $1.5
million and $2.1 million for the years ended December 31, 2006, 2005 and 2004,
respectively. The liability for future remediation costs is evaluated on a
quarterly basis. Actual costs to be incurred at
-12-
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 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 December 31,
2006, the Company was in compliance with these covenants with a debt to capital
ratio of 48.1%, and a net worth of $1.15 billion. The Company had $395.3 million
in outstanding indebtedness containing these covenants at December 31, 2006.
HIGHER THAN EXPECTED CLAIMS UNDER INSURANCE POLICIES, UNDER WHICH THE
COMPANY RETAINS A PORTION OF THE 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
December 31, 2006 and 2005, the Company had recorded liabilities of $103.4
million and $102.3 million, respectively, related to both asserted and
unasserted insurance claims. Included in the balance at December 31, 2006 and
2005 were $18.9 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 second half 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. The Company's
historical revenue patterns and net cash provided by operating activities are
included in Part I, Item 1, "Business."
THE COMPANY'S CASH FLOWS AND EARNINGS ARE SUBJECT TO CHANGES IN INTEREST
RATES.
The Company's total debt as of December 31, 2006 was $1.06 billion. Of this
amount, approximately 47.7% had variable rates of interest and 52.3% had fixed
rates of interest. The weighted average interest rate of total debt was
approximately 5.7%. At current debt levels, a one-percentage increase/decrease
in variable interest rates would increase/decrease interest expense by
approximately $5.1 million per year.
The future financial impact on the Company associated with the above risks
cannot be estimated.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
-13-
ITEM 2. PROPERTIES
Information as to the principal plants owned and operated by the Company is
summarized in the following table:
LOCATION PRINCIPAL PRODUCTS
-----------------------------------------------------------------------------------------------
Access Services Segment
-----------------------
Marion, Ohio Access Equipment Maintenance
Dosthill, United Kingdom Access Equipment Maintenance
Engineered Products and Services ("all other") Category
-------------------------------------------------------
Drakesboro, Kentucky Roofing Granules/Abrasives
Gary, Indiana Roofing Granules/Abrasives
Moundsville, West Virginia Roofing Granules/Abrasives
Tampa, Florida Roofing Granules/Abrasives
Brendale, Australia Rail Maintenance Equipment
Fairmont, Minnesota Rail Maintenance Equipment
Ludington, Michigan Rail Maintenance Equipment
West Columbia, South Carolina Rail Maintenance Equipment
Channelview, Texas Industrial Grating Products
Leeds, Alabama Industrial Grating Products
Queretaro, Mexico Industrial Grating Products
East Stroudsburg, Pennsylvania Process Equipment
Catoosa, Oklahoma Heat Exchangers
Gas Technologies Segment
------------------------
Niagara Falls, New York Valves
Washington, Pennsylvania Valves
Bloomfield, Iowa Propane Tanks
Fremont, Ohio Propane Tanks
Jesup, Georgia Propane Tanks
West Jordan, Utah Propane Tanks
Harrisburg, Pennsylvania High Pressure Cylinders
Huntsville, Alabama High Pressure Cylinders
Beijing, China Cryogenic Storage Vessels
Jesup, Georgia Cryogenic Storage Vessels
Kosice, Slovakia Cryogenic Storage Vessels
Shah Alam, Malaysia Cryogenic Storage Vessels
Theodore, Alabama Cryogenic Storage Vessels
===============================================================================================
The Company also operates the following plants which are leased:
LOCATION PRINCIPAL PRODUCTS
-----------------------------------------------------------------------------------------------
Access Services Segment
-----------------------
DeLimiet, Netherlands Access Equipment Maintenance
Ratingen, Germany Access Equipment Maintenance
-14-
Engineered Products and Services ("all other") Category
-------------------------------------------------------
Memphis, Tennessee Roofing Granules/Abrasives
Eastwood, United Kingdom Rail Maintenance Equipment
Tulsa, Oklahoma Industrial Grating Products
Garrett, Indiana Industrial Grating Products
Catoosa, Oklahoma Heat Exchangers
Sapulpa, Oklahoma Heat Exchangers
Gas Technologies Segment
------------------------
Cleveland, Ohio Brass Castings
Pomona, California Composite Cylinders
===============================================================================================
The above listing includes the principal properties owned or leased by the
Company. The Company also operates from a number of other smaller plants,
branches, depots, warehouses and offices in addition to the above. The Company
considers all of its properties at which operations are currently performed to
be in satisfactory condition and suitable for operations.
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is included in Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II, Item 8,
"Financial Statements and Supplementary Data."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
covered by this Report.
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT (PURSUANT TO
INSTRUCTION 3 TO ITEM 401(B) OF REGULATION S-K)
Set forth below, as of February 27, 2007, are the executive officers (this
excludes four corporate officers who are not deemed "executive officers" within
the meaning of applicable Securities and Exchange Commission regulations) of the
Company and certain information with respect to each of them. D. C. Hathaway, S.
D. Fazzolari, G. D. H. Butler, M. E. Kimmel, S. J. Schnoor and R. C. Neuffer
were elected to their respective offices effective April 25, 2006. All terms
expire on April 25, 2007. There are no family relationships between any of the
executive officers.
NAME AGE PRINCIPAL OCCUPATION OR EMPLOYMENT
- ---- --- ----------------------------------
EXECUTIVE OFFICERS:
D. C. Hathaway 62 Chairman and Chief Executive Officer of the
Corporation since January 24, 2006 and from January
1, 1998 to July 31, 2000. Served as Chairman,
President and Chief Executive Officer from April 1,
1994 to December 31, 1997 and from July 31, 2000 to
January 23, 2006 and as President and Chief
Executive Officer from January 1, 1994 to April 1,
1994. Director since 1991. From 1991 to 1993, served
as President and Chief Operating Officer. From 1986
to 1991 served as Senior Vice President-Operations
of the Corporation. Served as Group Vice President
from 1984 to 1986 and as President of the Dartmouth
Division of the Corporation from 1979 until 1984.
-15-
S. D. Fazzolari 54 President, Chief Financial Officer and Treasurer of
the Corporation effective January 24, 2006 and
Director since January 2002. Served as Senior Vice
President, Chief Financial Officer and Treasurer
from August 24, 1999 to January 23, 2006 and as
Senior Vice President and Chief Financial Officer
from January 1998 to August 1999. Served as Vice
President and Controller from January 1994 to
December 1997 and as Controller from January 1993 to
January 1994. Previously served as Director of
Auditing from 1985 to 1993 and served in various
auditing positions from 1980 to 1985.
G. D. H. Butler 60 Senior Vice President-Operations of the Corporation
effective September 26, 2000 and Director since
January 2002. Concurrently serves as President of
the MultiServ and SGB Group Divisions. From
September 2000 through December 2003, he was
President of the Heckett MultiServ International and
SGB Group Divisions. Was President of the Heckett
MultiServ-East Division from July 1, 1994 to
September 26, 2000. Served as Managing Director -
Eastern Region of the Heckett MultiServ Division
from January 1, 1994 to June 30, 1994. Served in
various officer positions within MultiServ
International, N. V. prior to 1994 and prior to the
Company's acquisition of that corporation in August
1993.
M. E. Kimmel 47 General Counsel and Corporate Secretary effective
January 1, 2004. Served as Corporate Secretary and
Assistant General Counsel from May 1, 2003 to
December 31, 2003. Held various legal positions
within the Corporation since he joined the Company
in August 2001. Prior to joining Harsco, he was Vice
President, Administration and General Counsel, New
World Pasta Company from January 1, 1999 to July
2001. Before joining New World Pasta, Mr. Kimmel
spent approximately 12 years in various legal
positions with Hershey Foods Corporation.
S. J. Schnoor 53 Vice President and Controller of the Corporation
effective May 15, 1998. Served as Vice President and
Controller of the Patent Construction Systems
Division from February 1996 to May 1998 and as
Controller of the Patent Construction Systems
Division from January 1993 to February 1996.
Previously served in various auditing positions for
the Corporation from 1988 to 1993. Prior to joining
Harsco, he served in various auditing positions for
Coopers & Lybrand from September 1985 to April 1988.
Mr. Schnoor is a Certified Public Accountant.
R. C. Neuffer 64 President of the Engineered Products and Services
business group since his appointment on January 24,
2006. Previously, he led the Patterson-Kelley, IKG
Industries and Air-X-Changers units as Vice
President and General Manager since 2004. In 2003,
he was Vice President and General Manager of IKG
Industries and Patterson-Kelley. Between 1997 and
2002, he was Vice President and General Manager of
Patterson-Kelley. Mr. Neuffer joined Harsco in 1991.
-16-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Harsco Corporation common stock is listed on the New York Exchange, and also
trades on the Boston and Philadelphia Exchanges under the symbol HSC. At the end
of 2006, there were 42,018,680 shares outstanding. In 2006, the Company's common
stock traded in a range of $67.52 to $89.70 and closed at $76.10 at year-end. At
December 31, 2006 there were approximately 20,000 stockholders. There are no
significant limitations on the payment of dividends included in the Company's
loan agreements. For additional information regarding Harsco common stock market
price and dividends declared, see Dividend Action under Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Common Stock Price and Dividend Information under Part II,
Item 8, "Financial Statements and Supplementary Data." For additional
information on the Company's equity compensation plans see Part III, Item 11,
"Executive Compensation."
(c). Issuer Purchases of Equity Securities
TOTAL NUMBER OF SHARES MAXIMUM NUMBER OF SHARES THAT
TOTAL NUMBER OF AVERAGE PRICE PAID PURCHASED AS PART OF PUBLICLY MAY YET BE PURCHASED UNDER THE
PERIOD SHARES PURCHASED PER SHARE ANNOUNCED PLANS OR PROGRAMS PLANS OR PROGRAMS
- -----------------------------------------------------------------------------------------------------------------------------------
October 1, 2006 - October 31, 2006 - - - 1,000,000
November 1, 2006 - November 30, 2006 - - - 1,000,000
December 1, 2006 - December 31, 2006 - - - 1,000,000
- ---------------------------------------------------------------------------------------------------------
Total - - -
- ---------------------------------------------------------------------------------------------------------
The Company's share repurchase program was extended by the Board of Directors in
November 2006. The program authorizes the repurchase of up to 1,000,000 shares
of the Company's common stock and expires January 31, 2008. After the close of
business on March 26, 2007, this authorization will be 2,000,000 shares as a
result of the stock split approved by the Board of Directors in January 2007.
-17-
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR STATISTICAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE, EMPLOYEE
INFORMATION AND PERCENTAGES) 2006 2005(A) 2004 2003 2002
- --------------------------------------------------- --------------- ---------------- --------------- --------------- ---------------
INCOME STATEMENT INFORMATION
Revenues from continuing operations $ 3,423,293 $ 2,766,210 $ 2,502,059 $ 2,118,516 $ 1,976,732
Income from continuing operations 196,509 156,750 113,540 86,999 88,410
Income (loss) from discontinued operations (111) (93) 7,671 5,218 1,696
Net income 196,398 156,657 121,211 92,217 90,106
- --------------------------------------------------- --------------- ---------------- --------------- --------------- ---------------
FINANCIAL POSITION AND CASH FLOW INFORMATION
Working capital $ 320,847 $ 352,620 $ 346,768 $ 269,276 $ 228,552
Total assets 3,326,423 2,975,804 2,389,756 2,138,035 1,999,297
Long-term debt 864,817 905,859 594,747 584,425 605,613
Total debt 1,063,021 1,009,888 625,809 613,531 639,670
Depreciation and amortization 252,982 198,065 184,371 168,935 155,661
Capital expenditures 340,173 290,239 204,235 143,824 114,340
Cash provided by operating activities 409,239 315,279 270,465 262,788 253,753
Cash used by investing activities (359,455) (645,185) (209,602) (144,791) (53,929)
Cash provided (used) by financing activities (84,196) 369,325 (56,512) (125,501) (205,480)
- --------------------------------------------------- --------------- ---------------- --------------- --------------- ---------------
RATIOS
Return on sales(b) 5.7% 5.7% 4.5% 4.1% 4.5%
Return on average equity(c) 18.1% 16.7% 13.8% 12.2% 12.6%
Current ratio 1.4:1 1.5:1 1.6:1 1.5:1 1.5:1
Total debt to total capital(d) 48.1% 50.4% 40.6% 44.1% 49.8%
- --------------------------------------------------- --------------- ---------------- --------------- --------------- ---------------
PER SHARE INFORMATION
Basic - Income from continuing operations $ 4.68 $ 3.76 $ 2.76 $ 2.14 $ 2.19
- Income from discontinued operations -- -- 0.19 0.13 0.04
--------------- ---------------- --------------- --------------- ---------------
- Net income $ 4.68 $ 3.76 $ 2.95 $ 2.27 $ 2.23
=============== ================ =============== =============== ===============
Diluted - Income from continuing operations $ 4.65 $ 3.73 $ 2.73 $ 2.12 $ 2.17
- Income from discontinued operations -- -- 0.18 0.13 0.04
--------------- ---------------- --------------- --------------- ---------------
- Net income $ 4.65 $ 3.72(e) $ 2.91 $ 2.25 $ 2.21
=============== ================ =============== =============== ===============
Book value $ 27.28 $ 23.79 $ 22.07 $ 19.01 $ 15.90
Cash dividends declared 1.330 1.225 1.125 1.0625 1.0125
- --------------------------------------------------- --------------- ---------------- --------------- --------------- ---------------
OTHER INFORMATION
Diluted average number of shares outstanding 42,215 42,080 41,598 40,973 40,680
Number of employees 21,500 21,000 18,500 17,500 17,500
Backlog from continuing operations (f) $ 300,998 $ 275,790 $ 243,006 $ 186,222 $ 157,777
=================================================== =============== ================ =============== =============== ===============
(a) Includes the Northern Hemisphere mill services operations of Brambles
Industrial Services (BISNH) acquired December 29, 2005 (Mill Services) and
Hunnebeck Group GmbH acquired November 21, 2005 (Access Services).
(b) "Return on sales" is calculated by dividing income from continuing
operations by revenues from continuing operations.
(c) "Return on average equity" is calculated by dividing income from continuing
operations by quarterly weighted-average equity.
(d) "Total debt to total capital" is calculated by dividing the sum of debt
(short-term borrowings and long-term debt including current maturities) by
the sum of equity and debt.
(e) Does not total due to rounding.
(f) Excludes the estimated amount of long-term mill service contracts, which
had estimated future revenues of $4.4 billion at December 31, 2006. Also
excludes backlog of the Access Services Segment and the roofing granules
and slag abrasives business. These amounts are generally not quantifiable
due to the nature and timing of the products and services provided.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements involve a
-18-
number of risks, uncertainties and other factors that could cause actual results
to differ materially, as discussed more fully herein.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include statements
about our management confidence and strategies for performance; expectations for
new and existing products, technologies, and opportunities; and expectations
regarding growth, sales, cash flows, earnings and Economic Value Added (EVA(R)).
These statements can be identified by the use of such terms as "may," "could,"
"expect," "anticipate," "intend," "believe," or other comparable terms.
Factors which could cause results to differ include, but are not limited to: (1)
changes in the worldwide business environment in which the Company operates,
including general economic conditions; (2) changes in currency exchange rates,
interest rates and capital costs; (3) changes in the performance of stock and
bond markets that could affect, among other things, 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 environmental, tax and import tariff standards; (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; (7) the seasonal nature of the business; (8) the successful
integration of the Company's strategic acquisitions; and (9) 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 I, Item 1A,
"Risk Factors," of this Form 10-K. The Company cautions that these factors may
not be exhaustive and that many of these factors are beyond the Company's
ability to control or predict. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The Company undertakes no
duty to update forward-looking statements except as may be required by law.
EXECUTIVE OVERVIEW
The Company's record performance in 2006 reflected the execution of the
Company's portfolio-based management strategy of growth through selective
strategic acquisitions and increased international diversity that is industrial
services focused. All of the Company's core operating groups showed improved
full-year results over the prior year. The 2006 results were led by the Access
Services and Mill Services Segments. Only the Gas Technologies Segment's results
were below prior year. In the first quarter of 2007, the Board of Directors
approved the divestiture of this business, which is expected to occur in the
second half of 2007.
The Company's 2006 revenues were a record $3.4 billion. This was an increase of
$657.1 million or 24% over 2005. Income from continuing operations was a record
$196.5 million for 2006 compared with $156.8 million in 2005, an increase of
25%. Diluted earnings per share from continuing operations were a record $4.65
for 2006, a 25% increase from 2005.
In addition to strong market conditions for most of the Company's services and
products, the 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 Hemisphere steel mill services of Brambles
Industrial Services ("BISNH"). Both of these acquisitions performed well in
2006. Revenues in 2006 were reduced by the sale of the Company's U.K.-based
Youngman manufacturing operation on October 1, 2005. The net effect of business
acquisitions and divestitures increased revenues by $405.2 million in 2006.
During 2006, the Company had record net cash provided by operating activities of
$409.2 million, a 30% increase over the $315.3 million achieved in 2005. The
Company expects strong cash flows from operating activities in 2007, exceeding
the record achieved in 2006. The Company's cash flows are further discussed in
the Liquidity and Capital Resources section.
The record revenue, income from continuing operations and diluted earnings per
share for 2006 demonstrate the balance and geographic diversity of the Company's
operations. The Company's Mill Services and Access Services Segments, as well as
the Engineered Products and Services ("all other") Category delivered improved
results. This operating balance and geographic diversity, as well as growth
opportunities in the Company's core services platforms, such as the February
2007 acquisition of Excell Materials, provide a broad foundation for future
growth and a hedge against normal changes in economic and industrial cycles.
-19-
SEGMENT OVERVIEW
Mill Services Segment revenues in 2006 were $1.4 billion compared with $1.1
billion in 2005, a 29% increase. Operating income increased by 35% to $147.8
million, from $109.6 million in 2005. Operating margins for this Segment
increased by 50 basis points to 10.8% from 10.3% in 2005. The increase in
operating margins was due to improved operating performance at several
locations, principally due to the Company's ongoing cost reduction program. The
overall effect of acquisitions increased revenues for the Segment by $219.0
million in 2006, and BISNH was accretive in 2006. This Segment accounted for 40%
of the Company's revenues and 41% of the operating income for 2006.
The Access Services Segment's revenues in 2006 were $1,080.9 million compared
with $788.8 million in 2005, a 37% increase. Operating income increased by 61%
to $120.4 million, from $74.7 million in 2005. Operating margins for the Segment
improved by 160 basis points to 11.1% from 9.5% in 2005. These improvements were
broad-based, and were led by the North American and European operations,
including Hunnebeck. The net effect of business acquisitions and divestitures
increased revenues for this Segment by $186.2 million in 2006, mostly due to
Hunnebeck. This Segment accounted for 31% of the Company's revenues and 34% of
the operating income for 2006.
The Engineered Products and Services ("all other") Category's revenues in 2006
were $578.2 million compared with $546.9 million in 2005, a 6% increase.
Operating income increased by 11% to $77.5 million, from $69.7 million in 2005.
Four of the five businesses in this Category contributed higher revenues in 2006
compared with 2005, and three of the businesses contributed higher operating
income. The air-cooled heat exchangers business continued to benefit from strong
energy market demand due to increased natural gas drilling and transmission. The
industrial grating business again posted improved results due to strong
end-markets in energy and non-residential construction. The roofing granules and
abrasives business and the boiler and process equipment business contributed
solid performances in 2006, consistent with 2005. The railway track maintenance
services and equipment business continued the shift towards contract services,
but operating income was negatively impacted by increased operating expenses,
mostly from the effects of a rail grinder accident, increased raw material costs
and higher sub-contractor equipment and labor costs. However, the overall strong
performance by the businesses in this group helped to moderate the rising
commodity costs experienced throughout this Category in 2006. This Category
accounted for 17% of the Company's revenue and 21% of the operating income for
2006.
The Gas Technologies Segment's revenues in 2006 were $397.7 million compared
with $370.2 million in 2005, a 7% increase. Operating income decreased by 21% to
$14.2 million, from $17.9 million in 2005. Operating income was negatively
impacted by restructuring costs associated with strategic initiatives including
exiting an underperforming product line, as well as higher commodity costs for
brass and steel. These increased costs reduced operating margins for this
Segment by 120 basis points from 4.8% in 2005 to 3.6% in 2006. This Segment
accounted for 12% of the Company's revenues and 4% of the operating income for
2006.
The positive effect of foreign currency translation increased 2006 consolidated
revenues by $35.3 million and pre-tax income by $2.4 million when compared with
2005.
OUTLOOK OVERVIEW
The Company's operations span several industries and products as more fully
discussed in Part I, Item 1, "Business." On a macro basis, the Company is
affected by worldwide steel mill production and capacity utilization;
non-residential and commercial construction and industrial maintenance
activities; industrial production volume; and the general business trend towards
the outsourcing of services. The overall outlook for 2007 continues to be
positive for these business drivers.
The Company's Mill Services Segment expects to continue to benefit from
consistent levels of global steel production at mills served by the Company, new
contract signings and continued accretion from the December 2005 acquisition of
BISNH. However, the Company may also experience increased operating costs that
could have a negative impact on operating margins, to the extent these costs
cannot be passed to customers.
Both the domestic and international Access Services activity remains strong.
Although the sale of the Youngman light-access manufacturing business in late
2005 modestly affected 2006 revenues, operating income in 2006 for the Segment
was a record and is expected to continue to benefit from the strong performance
of Hunnebeck; increased non-residential construction spending and industrial
maintenance activity in the Company's major markets; 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 and continuous
process improvement initiatives.
-20-
The outlook for the Engineered Products and Services ("all other") Category
remains positive for 2007. Income and margins in the Company's railway track
maintenance services and equipment business are expected to improve in the long
term from the shift towards contract services. 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. The boiler and process
equipment business and the industrial grating products business are expected to
post another year of solid, stable results in 2007. The roofing granules and
abrasives business is expected to continue to perform consistently well
long-term, although increased operating costs could reduce operating margins.
In January 2007, the Company announced its intention to divest the Gas
Technologies business. This decision is consistent with the Company's overall
strategic focus on global industrial services businesses. The divestiture is
expected to be completed in the second half of 2007.
The stable or improved market conditions for most of the Company's services and
products, the significant investments made recently for acquisitions, such as
the February 2007 acquisition of Excell Materials, and other growth-related
capital expenditures provide the base for achieving the Company's stated
objective for growth in diluted earnings per share from continuing operations
and net cash provided by operating activities for 2007. The record performance
and cash flow achieved in 2006 and the executed strategic actions provide a
solid foundation towards achieving these goals.
- ------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- ------------------------------------------------------------------------------------------------------
TOTAL REVENUES PERCENTAGE GROWTH FROM
TWELVE MONTHS ENDED DECEMBER 31 2005 TO 2006
- ------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005 VOLUME CURRENCY TOTAL
- ------------------------------------------------------------------------------------------------------
Europe $ 1,593.1 $ 1,109.1 41.2% 2.4% 43.6%
North America 1,364.0 1,219.8 11.5 0.3 11.8
Latin America 165.4 149.2 5.3 5.6 10.9
Middle East and Africa 159.5 153.7 6.0 (2.2) 3.8
Asia/Pacific 141.2 134.4 5.4 (0.3) 5.1
- ------------------------------------------------------------------------------------------------------
Total $ 3,423.2 $ 2,766.2 22.5% 1.3% 23.8%
======================================================================================================
2006 HIGHLIGHTS
The following significant items affected the Company overall during 2006 in
comparison with 2005:
Company Wide:
o Strong worldwide economic activity, as well as the accretive performance
of the Hunnebeck and BISNH acquisitions, benefited the Company in 2006.
This included increased access equipment services, especially in North
America and Europe; net increased volume and new business in the Mill
Services Segment; and increased demand for air-cooled heat exchangers and
industrial grating products.
o As expected, during 2006, the Company experienced higher fuel and
energy-related costs, as well as higher commodity costs for certain
manufacturing businesses. 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 2006 increased $5.8 million compared with 2005.
Defined contribution and multi-employer plan expenses for 2006 increased
approximately $7.4 million from 2005 due to increased volume in the Mill
Services and Access Services Segments. This was partially offset by
decreased defined benefit pension expense of approximately $1.6 million
due principally to improved returns on plan assets in 2005 as well as the
Company's cash contributions to the plans' 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 2006, international sales and operating income were 62% and 71%,
respectively, of total sales and operating income. This compares with 2005
levels of 58% of sales and 67% of operating income. The international
percentages have increased from 2005 to 2006 principally as a result of
the Hunnebeck and BISNH acquisitions.
-21-
MILL SERVICES SEGMENT:
(DOLLARS IN MILLIONS) 2006 2005
---------------------------------------------------------------------------
Revenues $ 1,366.5 $ 1,060.4
Operating income 147.8 109.6
Operating margin percent 10.8% 10.3%
===========================================================================
---------------------------------------------------------------------------
MILL SERVICES SEGMENT - SIGNIFICANT EFFECTS ON REVENUES: (IN MILLIONS)
---------------------------------------------------------------------------
Revenues - 2005 $ 1,060.4
Acquisitions - (principally BISNH) 219.0
Increased volume and new business 68.7
Impact of foreign currency translation 18.4
---------------------------------------------------------------------------
Revenues - 2006 $ 1,366.5
===========================================================================
MILL SERVICES SEGMENT - SIGNIFICANT EFFECTS ON OPERATING INCOME:
o Operating income for 2006 increased by $35.3 million (excluding the
effect of foreign currency translation), as a result of the BISNH
acquisition and increased volumes and net new business, particularly
in the United States, Europe and Latin America, partially offset by
increased operating costs (as noted below).
o Compared with 2005, the Segment's operating income and margins in 2006
were negatively impacted by increased fuel and energy-related costs
(excluding increased costs due to acquisitions) of approximately $10
million. A portion of this increase was growth-related. Despite the
increased energy costs, margins improved in 2006 due to continuous
process improvement activities and stringent cost controls.
o Foreign currency translation in 2006 increased operating income for
this Segment by $2.8 million, compared with 2005.
ACCESS SERVICES SEGMENT:
(DOLLARS IN MILLIONS) 2006 2005
---------------------------------------------------------------------------
Revenues $ 1,080.9 $ 788.8
Operating income 120.4 74.7
Operating margin percent 11.1% 9.5%
===========================================================================
---------------------------------------------------------------------------
ACCESS SERVICES SEGMENT - SIGNIFICANT EFFECTS ON REVENUES: (IN MILLIONS)
---------------------------------------------------------------------------
Revenues - 2005 $ 788.8
Net effect of acquisitions and divestitures ((Hunnebeck
and Cleton) offset by the Youngman light-access
manufacturing unit divestiture) 186.2
Increased volume and new business 91.2
Impact of foreign currency translation 14.8
Other (0.1)
---------------------------------------------------------------------------
Revenues - 2006 $ 1,080.9
===========================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT EFFECTS ON OPERATING INCOME:
o The net effect of acquisitions and divestitures had a positive effect
on 2006 operating income of $25.8 million, with the Hunnebeck business
performing well.
o In 2006, there was a continued strengthening in the North American
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 and operating income in North
America to improve. Equipment rentals, particularly in the
construction sector, provide the highest margins for this Segment.
-22-
o The international access services business continued to improve due to
increased non-residential construction spending and industrial
maintenance activity in the Company's major markets.
o Operating income and margins were negatively impacted in 2006 due to
lower gains on the sale of significant assets in 2006 of $2.5 million,
compared with asset gains of $5.1 million in 2005.
o Foreign currency translation in 2006 increased operating income for
this Segment by $1.5 million compared with 2005.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY:
(DOLLARS IN MILLIONS) 2006 2005
---------------------------------------------------------------------------
Revenues $ 578.2 $ 546.9
Operating income 77.5 69.7
Operating margin percent 13.4% 12.7%
===========================================================================
---------------------------------------------------------------------------
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - (IN MILLIONS)
SIGNIFICANT EFFECTS ON REVENUES:
---------------------------------------------------------------------------
Revenues - 2005 $ 546.9
Air-cooled heat exchangers 32.5
Industrial grating products 8.4
Boiler and process equipment 5.4
Roofing granules and abrasives 0.9
Railway track maintenance services and equipment (17.0)
Impact of foreign currency translation 0.9
Other 0.2
---------------------------------------------------------------------------
Revenues - 2006 $ 578.2
===========================================================================
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - SIGNIFICANT
EFFECTS ON OPERATING INCOME:
o Operating income for the air-cooled heat exchangers business improved
in 2006 due to increased volume resulting from an improved natural gas
market.
o The boiler and process equipment business delivered improved results
in 2006 due to increased revenues from the new-generation MACH
boilers, Thermific boilers and process equipment.
o The increase in 2006 operating income for the industrial grating
products business was due principally to higher pricing and an
improved product mix, partially offset by higher raw material costs.
o Higher pricing resulting from the pass-through of higher energy costs
for roofing granules and abrasives again sustained profitable results
for that business in 2006, approximating 2005's operating income.
o Operating income for the railway track maintenance services and
equipment business was lower in 2006 compared with 2005 due to
increased operating expenses, mostly from the effects of a rail
grinder accident, increased raw material costs and higher
sub-contractor equipment and labor costs, partially offset by
favorable equipment sales mix and increased repair parts volume.
o The impact of foreign currency translation in 2006 did not have a
material impact on operating income for this Category when compared
with the 2005.
GAS TECHNOLOGIES SEGMENT:
(DOLLARS IN MILLIONS) 2006 2005
---------------------------------------------------------------------------
Revenues $ 397.7 $ 370.2
Operating income 14.2 17.9
Operating margin percent 3.6% 4.8%
===========================================================================
-23-
---------------------------------------------------------------------------
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT EFFECTS ON REVENUES: (IN MILLIONS)
---------------------------------------------------------------------------
Revenues - 2005 $ 370.2
Increased demand for cryogenics equipment and industrial
cylinders 23.5
Increased demand for composite-wrapped cylinders and
certain valves 11.9
Decreased sales of propane tanks (8.8)
Impact of foreign currency translation 1.2
Other (0.3)
---------------------------------------------------------------------------
Revenues - 2006 $ 397.7
===========================================================================
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o Operational improvements and the effect of increased sales were offset
by increased brass costs, higher insurance and restructuring costs
(principally in the third quarter) associated with strategic
initiatives in the valves business in 2006 compared with 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 significantly increased brass costs in 2006. In
addition, certain product lines have been rationalized which resulted
in significant restructuring costs incurred in 2006.
o The international businesses, principally in Europe, contributed to
the improved performance of the cryogenics business during 2006
compared with 2005.
o Despite higher demand for industrial cylinders, operating income
decreased from 2005 due mainly to the effect of equipment repairs and
maintenance, product mix and higher commodity and energy-related
costs.
o Operating income decreased for propane tanks in 2006, due to decreased
demand, as well as increased commodity costs. The negative effect of
these items was partially offset by a favorable product mix and
process improvement initiatives.
o Operating income increased during 2006 for composite-wrapped cylinders
due to increased sales and a favorable product mix, partially offset
by higher raw material costs.
o Foreign currency translation in 2006 decreased operating income for
this Segment by $0.9 million.
OUTLOOK, TRENDS AND STRATEGIES
Looking to 2007 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 industrial services
businesses, with a particular emphasis on growing the Mill Services
Segment, the Access Services Segment and other specialized services.
Growth is expected to be achieved through the provision of additional
services to existing customers, new contracts in both developed and
emerging markets and strategic acquisitions, such as the February 2007
acquisition of Excell Materials, Inc. Additionally, new higher-margin
service opportunities in railway services will be pursued globally.
o In January 2007, the Company announced its intention to divest the Gas
Technologies business. This decision is consistent with the Company's
overall strategic focus on industrial services businesses.
o The Company will continue to invest in strategic acquisitions and growth
capital investments; however, management will be very selective in its
capital investments, choosing those with the highest Economic Value Added
(EVA(R)).
o A greater focus on corporate-wide expansion into emerging economies is
expected in the coming years. More specifically, within the next three to
five years, a focused strategy of the Company is to approximately double
its presence in the Latin American, Asia Pacific, Middle East and Africa,
and Eastern European markets to approximately 30% of total revenues.
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 energy and commodity costs (e.g., fuel, natural gas, 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. Fuel and energy costs increased
approximately $15 million in 2006 compared
-24-
with 2005 (excluding increased costs due to acquisitions). A portion of
this increase was growth-related. Should cost increases continue, it could
result in reduced operating income for certain products to the extent that
such costs cannot be passed on to customers. The effect of any Middle East
armed hostilities on the cost of fuel and commodities is currently
unknown, but it could have a significant effect.
o The armed hostilities in the Middle East could also have a significant
effect on the Company's operations in the region. The potential impact of
this risk is currently unknown. This exposure is further discussed in Part
I, Item 1A, "Risk Factors."
o Foreign currency translation had an overall favorable effect on the
Company's sales, operating income and Stockholders' equity as a result of
translation adjustments during 2006. If the U.S. dollar strengthens,
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 The Company expects strong cash flow from operating activities in 2007
exceeding the record of $409 million achieved in 2006. This will help
support the Company's 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 and India.
o Total pension expense (defined benefit, defined contribution and
multi-employer) for 2007 is expected to approximate or be slightly higher
than the 2006 level. Defined benefit pension expense is expected to
decline in 2007 due to the significant level of cash contributions,
including voluntary cash contributions (approximately $10.6 million during
2006 and $16.9 million during 2005, mostly to the U.K. plan, which will
have a positive effect on future years' pension expense), to the defined
benefit pension plans as well as the higher than expected returns in 2006
on the plans' assets. 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 should mitigate future volatility
and expense. On a comparative basis, total pension expense during 2006 was
$5.8 million higher than 2005, due principally to increased defined
contribution and multi-employer pension expense resulting from increased
volume in the Access Services and Mill Services Segments.
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 approximately 48% of the Company's borrowings are at variable interest
rates as of December 31, 2006 (in comparison to approximately 50% at
December 31, 2005). The Company manages the mix of fixed rate and floating
rate debt to preserve adequate funding flexibility as well as control the
effect of interest rate changes on consolidated interest expense.
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. Based on current market conditions and industry reports, the
Company expects global steel production to remain stable in 2007, which
would generally have a favorable effect on this Segment's revenues.
o Further consolidation in the global steel industry is probable. Should
additional 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 revenues and 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 closely monitors the credit standing and accounts
receivable position of its customer base. Further consolidation may also
increase pricing pressure on the Company and the competitive risk of
services contracts which are up for renewal. Conversely, such
consolidation may provide additional service opportunities for the Company
as the Company believes it is well-positioned competitively.
o Energy-related costs increased approximately $10 million during 2006
compared with 2005 (excluding increased costs due to acquisitions). Some
of these costs were passed on to customers in the form of selling price
increases. Given the volatility of such costs, the future effect on the
Company cannot be quantified.
o The Company has been placing significant emphasis on improving operating
margins of this Segment. Margin improvements are most likely to be
achieved through internal efforts such as global procurement initiatives;
process improvement programs; maintenance best practices programs; and
continued execution of the Company's reorganization plan.
-25-
Access Services Segment:
- ------------------------
o Both the international and domestic Access Services businesses experienced
buoyant markets during 2006 and that is expected to continue in 2007.
Specifically, international and especially North American non-residential
construction activity continues at historically high volume levels.
Additionally, new product line additions continue to benefit growth in
North America.
Engineered Products and Services ("all other") Category:
- --------------------------------------------------------
o International demand for the railway track maintenance services and
equipment business's products and services is expected to be strong in the
long term. In addition, increased volume of higher-margin contract
services and manufacturing process improvements and efficiencies 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 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 that rising steel
prices could have on operating income.
o The roofing granules and abrasives business is expected to continue to
perform well long-term, although increased energy costs could reduce
operating margins. This business is pursuing the use of more
energy-efficient equipment to help mitigate the increased energy-related
costs.
o Due to a strong natural gas market and additional North American
opportunities, demand for air-cooled heat exchangers is expected to remain
strong for 2007.
Gas Technologies Segment:
- -------------------------
o In January 2007, the Company announced its intention to divest the Gas
Technologies business. This decision is consistent with the Company's
overall strategic focus on industrial services businesses.
RESULTS OF OPERATIONS FOR 2006, 2005 AND 2004
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE INFORMATION AND PERCENTAGES) 2006 2005 2004
- -----------------------------------------------------------------------------------------------------------------
Revenues from continuing operations $ 3,423.3 $ 2,766.2 $ 2,502.1
Cost of services and products sold 2,547.6 2,099.4 1,916.4
Selling, general and administrative expenses 507.4 393.2 368.4
Other expenses 6.9 2.0 4.9
Operating income from continuing operations 358.5 268.9 209.8
Interest expense 60.5 41.9 41.1
Income tax expense from continuing operations 97.5 64.8 49.0
Income from continuing operations 196.5 156.8 113.5
Income/(loss) from discontinued operations (0.1) (0.1) 7.7
Net income 196.4 156.7 121.2
Diluted earnings per common share from continuing operations 4.65 3.73 2.73
Diluted earnings per common share 4.65 3.72 2.91
Effective income tax rate for continuing operations 32.3% 28.1% 28.6%
Consolidated effective income tax rate 32.3% 28.1% 29.1%
=================================================================================================================
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
2006 vs. 2005
- -------------
Revenues for 2006 increased $657.1 million or 24% from 2005, to a record level.
This increase was attributable to the following significant items:
-26-
- --------------------------------------------------------------------------------
IN MILLIONS CHANGE IN REVENUES 2006 VS. 2005
- --------------------------------------------------------------------------------
$ 405.2 Net effect of business acquisitions and divestitures. Increased
revenues of $219.0 million and $186.2 million in the Mill
Services and Access Services Segments, respectively.
91.2 Net increased revenues in the Access Services Segment due
principally to strong non-residential construction markets in
North America and the continued strength of the international
business, particularly in Europe (excluding the net effect of
acquisitions and divestitures).
68.7 Net increased volume, new contracts and sales price changes in
the Mill Services Segment, particularly in Europe and the U.S.
(excluding acquisitions).
35.3 Effect of foreign currency translation.
32.5 Increased revenues of the air-cooled heat exchangers business due
to a strong natural gas market and increased prices.
26.3 Net increased revenues in the Gas Technologies Segment due
principally to demand for cryogenics equipment, certain valves
and industrial cylinders, partially offset by decreased demand
for propane tanks.
8.4 Increased revenues of the industrial grating products business
due to increased demand and, to a lesser extent, increased prices
and a more favorable product mix.
(17.0) Net decreased revenues in the railway track maintenance services
and equipment business due to decreased equipment sales,
partially offset by increased contract services as well as repair
part sales in the U.K. Equipment sales declined due to a large
order shipped to China in 2005 which did not recur in 2006.
6.5 Other (minor changes across the various units not already
mentioned).
- --------------------------------------------------------------------------------
$ 657.1 Total Change in Revenues 2006 vs. 2005
================================================================================
2005 vs. 2004
- -------------
Revenues for 2005 increased $264.1 million or 11% from 2004. This increase was
attributable to the following significant items:
- --------------------------------------------------------------------------------
IN MILLIONS CHANGE IN REVENUES 2005 VS. 2004
- --------------------------------------------------------------------------------
$ 72.5 Net increased revenues in the Access Services Segment due
principally to improved markets in the North America and the
strength of the international business, particularly in the
Middle East and Europe (excluding the net effect of acquisitions
and divestitures).
41.9 Net increased volume, new contracts and price changes in the Mill
Services Segment (excluding acquisitions).
38.0 Net increased revenues in the railway track maintenance services
and equipment business due to increased contract services
(principally in the U.K.), rail equipment sales (primarily to
international customers) and repair part sales.
32.2 Increased revenues of the air-cooled heat exchangers business due
to an improved natural gas market.
31.0 Net increased revenues in the Gas Technologies Segment due
principally to improved market conditions for industrial
cylinders, cryogenics equipment and composite-wrapped cylinders,
partially offset by slightly decreased demand for propane tanks.
The decrease in propane tank sales was due to customers
accelerating purchases in 2004 to avoid anticipated price
increases due to commodity cost inflation.
16.5 Net effect of business acquisitions and divestitures. Increased
revenues of $4.0 million and $12.5 million in the Mill Services
and Access Services Segments, respectively.
14.8 Effect of foreign currency translation.
12.4 Increased revenues of the industrial grating products business
due to increased demand (partially due to the effects of
Hurricanes Katrina and Rita) and, to a lesser extent, increased
prices and a more favorable product mix.
4.8 Other (minor changes across the various units not already
mentioned).
- --------------------------------------------------------------------------------
$ 264.1 Total Change in Revenues 2005 vs. 2004
================================================================================
-27-
COST OF SERVICES AND PRODUCTS SOLD
2006 vs. 2005
- -------------
Cost of services and products sold for 2006 increased $448.2 million or 21% from
2005, slightly lower than the 24% increase in revenues. This increase was
attributable to the following significant items:
- --------------------------------------------------------------------------------
IN MILLIONS CHANGE IN COST OF SERVICES AND PRODUCTS SOLD 2006 VS. 2005
- --------------------------------------------------------------------------------
$ 281.8 Net effect of business acquisitions and divestitures.
159.6 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).
25.9 Effect of foreign currency translation.
(19.1) Other (due to product mix; stringent 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 not recovered through
selling prices).
- --------------------------------------------------------------------------------
$ 448.2 Total Change in Cost of Services and Products Sold 2006 vs. 2005
================================================================================
2005 vs. 2004
Cost of services and products sold for 2005 increased $183.0 million or 10% from
2004, slightly lower than the 11% increase in revenues. This increase was
attributable to the following significant items:
- --------------------------------------------------------------------------------
IN MILLIONS CHANGE IN COST OF SERVICES AND PRODUCTS SOLD 2005 VS. 2004
- --------------------------------------------------------------------------------
$ 177.8 Increased costs due to increased revenues (exclusive of the
effect of foreign currency translation and business acquisitions
and including the impact of increased costs included in selling
prices).
12.7 Effect of foreign currency translation.
4.1 Net effect of business acquisitions and divestitures.
(11.6) Other (due to product mix; stringent cost controls; process
improvements; and minor changes across the various units not
already mentioned; partially offset by increased fuel and
energy-related costs).
- --------------------------------------------------------------------------------
$ 183.0 Total Change in Cost of Services and Products Sold 2005 vs. 2004
================================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
2006 vs. 2005
- -------------
Selling, general and administrative ("SG&A") expenses for 2006 increased $114.2
million or 29% from 2005, a higher rate than the 24% increase in revenues. The
higher relative percentage increase in SG&A expense as compared with revenues
was due principally to the effect of certain acquisitions which, by their
nature, have a higher percentage of SG&A-related costs. This increase was
attributable to the following significant items:
- --------------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS 2006 VS. 2005
- --------------------------------------------------------------------------------
$ 71.3 Net effect of business acquisitions and dispositions.
22.4 Increased compensation expense due to salary increases, increased
headcount, higher commissions and employee incentive plan costs
due to improved performance.
5.5 Effect of foreign currency translation.
3.7 Increased space and equipment rentals, supplies, utilities and
fuel costs.
3.2 Increased travel expenses.
2.9 Increased professional fees due to special projects.
5.2 Other.
- --------------------------------------------------------------------------------
$ 114.2 Total Change in Selling, General and Administrative Expenses
2006 vs. 2005
================================================================================
-28-
2005 vs. 2004
- -------------
Selling, general and administrative expenses for 2005 increased $24.8 million or
7% from 2004, less than the 11% increase in revenues. This increase was
attributable to the following significant items:
- --------------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS 2005 VS. 2004
- --------------------------------------------------------------------------------
$ 6.5 Increased employee compensation expense due to salary increases,
increased payroll taxes and employee incentive plan increases due
to improved performance, partially offset by decreased defined
benefit pension expense.
5.6 Net effect of business acquisitions and dispositions.
3.5 Increased sales commission expense due to increased revenues.
1.9 Increased costs on a comparative basis due to income generated by
the termination of postretirement benefit plans in 2004 that were
not repeated in 2005.
1.4 Increased travel expenses.
1.0 Increased professional fees due to special projects.
0.4 Effect of foreign currency translation.
4.5 Other (including energy-related costs and the cost of new
technology projects).
- --------------------------------------------------------------------------------
$ 24.8 Total Change in Selling, General and Administrative Expenses
2005 vs. 2004
================================================================================
OTHER EXPENSES
This income statement classification includes impaired asset write-downs,
employee termination benefit costs and costs to exit activities, offset by net
gains on the disposal of non-core assets. Net Other Expenses of $6.9 million in
2006 compared with $2.0 million in 2005 and $4.9 million in 2004.
2006 vs. 2005
- -------------
Net Other Expenses for 2006 increased $4.9 million or 243% from 2005. This
increase was attributable to the following significant items:
- --------------------------------------------------------------------------------
IN MILLIONS CHANGE IN OTHER EXPENSES 2006 VS. 2005
- --------------------------------------------------------------------------------
$ 4.2 Decrease in net gains on disposals of non-core assets. This
decrease was attributable principally to $5.5 million in net
gains that were realized in 2006 from the sale of non-core assets
compared with $9.7 million in 2005. The net gains for both years
were principally within the Access Services and Mill Services
Segments.
3.9 Increase in impaired asset write-downs due principally to exiting
an underperforming product line of the Gas Technologies Segment.
2.3 Increase in other expenses, including costs to exit activities.
(5.5) Decrease in employee termination benefit costs. This decrease
related principally to decreased costs in the Mill Services and
Access Services Segments.
- --------------------------------------------------------------------------------
$ 4.9 Total Change in Other Expenses 2006 vs. 2005
================================================================================
-29-
2005 vs. 2004
- -------------
Net Other Expenses for 2005 decreased $2.9 million or 59% from 2004. This
decrease was attributable to the following significant items:
- --------------------------------------------------------------------------------
IN MILLIONS CHANGE IN OTHER EXPENSES 2005 VS. 2004
- --------------------------------------------------------------------------------
$ (8.2) Increase in net gains on disposals of non-core assets. This
increase was attributable principally to $9.7 million in net
gains that were realized in 2005 from the sale of non-core assets
principally within the Access Services and Mill Services
Segments, compared with $1.5 million in 2004.
5.2 Increase in employee termination benefit costs. This increase
related principally to increased costs in the Mill Services and
Access Services Segments as well as the Engineered Products and
Services ("all other") Category and the Corporate headquarters
compared with 2004.
0.1 Increase in other expenses.
- --------------------------------------------------------------------------------
$ (2.9) Total Change in Other Expenses 2005 vs. 2004
================================================================================
For additional information, see Note 15, Other (Income) and Expenses, to the
Consolidated Financial Statements under Part II, Item 8, "Financial Statements
and Supplementary Data."
- --------------------------------------------------------------------------------
INTEREST EXPENSE
2006 vs. 2005
- -------------
Interest expense in 2006 was $18.6 million or 44% higher than in 2005. This was
principally due to increased borrowings to finance business acquisitions made in
the fourth quarter of 2005 and, to a lesser extent, higher interest rates on
variable interest rate borrowings. The impact of foreign currency translation
also increased interest expense by approximately $0.6 million.
2005 vs. 2004
- -------------
Interest expense in 2005 was $0.9 million or 2% higher than in 2004. This was
principally due to higher interest rates on variable interest rate borrowings in
the United States and, to a lesser extent, increased borrowings in November and
December 2005 to finance acquisitions. This was partially offset by
approximately $0.3 million of decreased interest expense due to the effect of
foreign currency translation.
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
2006 vs. 2005
- -------------
The increase in 2006 of $32.8 million or 51% in the provision for income taxes
from continuing operations was primarily due to increased earnings from
continuing operations for the reasons mentioned above and an increased effective
income tax rate. The effective income tax rate relating to continuing operations
for 2006 was 32.3% versus 28.1% for 2005. The increase related principally to
increased effective income tax rates on international earnings and remittances.
The year 2005 included a one-time benefit recorded in the fourth quarter of $2.7
million associated with funds repatriated under the American Jobs Creation Act
of 2004 (AJCA). Additionally, during the fourth quarter of 2005, consistent with
the Company's strategic plan of investing for growth at certain international
locations, the Company received a one-time income tax benefit of $3.6 million.
2005 vs. 2004
- -------------
The increase in 2005 of $15.7 million or 32% in the provision for income taxes
from continuing operations was primarily due to increased earnings from
continuing operations for the reasons mentioned above, partially offset by a
decreased effective income tax rate. The effective income tax rate relating to
continuing operations for 2005 was 28.1% versus 28.6% for 2004. The decrease
related principally to reduced effective income tax rates on international
earnings and remittances, partially offset by reduced favorable settlements of
tax contingencies in comparison with 2004. The differences on international
earnings and remittances from 2004 to 2005 included a one-time benefit recorded
in the fourth quarter of 2005 of $2.7 million associated with funds repatriated
under the American Jobs Creation Act of 2004 (AJCA). Additionally, during the
fourth quarter of 2005, consistent with the Company's strategic plan of
investing for growth at certain international locations, the Company received a
one-time income tax benefit of $3.6 million.
-30-
For additional information, see Note 9, Income Taxes, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data."
- --------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
2006 vs. 2005
- -------------
Income from continuing operations in 2006 of $196.5 million was $39.8 million or
25% higher than 2005. This increase resulted from strong demand for most of the
Company's services and products and the net effect of business acquisitions and
divestitures.
2005 vs. 2004
- -------------
Income from continuing operations in 2005 of $156.8 million was $43.2 million or
38% higher than 2004. This increase resulted from strong demand for most of the
Company's services and products (principally from the Access Services Segment
and industrial grating products) that resulted in increased revenues, as well as
from stringent cost controls and process improvements that contained selling,
general and administrative expenses growth to a level below revenue growth.
- --------------------------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS
2006 vs. 2005
- -------------
Income from discontinued operations for 2006 approximated the 2005 amount and
was immaterial.
2005 vs. 2004
- -------------
Income from discontinued operations for 2005 decreased $7.8 million or 101% from
2004. This decrease was attributable principally to after-tax income from the
one-time settlement of the Company's Federal Excise Tax (FET) litigation in
2004. For additional information on the FET litigation see Note 10, Commitments
and Contingencies, to the Consolidated Financial Statements under Part II, Item
8, "Financial Statements and Supplementary Data," in the Company's 2004 Form
10-K.
- --------------------------------------------------------------------------------
NET INCOME AND EARNINGS PER SHARE
2006 vs. 2005
Net income of $196.4 million and diluted earnings per share of $4.65 in 2006
exceeded 2005 by $39.7 million or 25% and $0.93 or 25%, respectively, due to
increased income from continuing operations for the reasons described above.
2005 vs. 2004
Net income of $156.7 million and diluted earnings per share of $3.72 in 2005
exceeded 2004 by $35.4 million or 29% and $0.81 or 28%, respectively, primarily
due to increased income from continuing operations, partially offset by the
decrease in income from discontinued operations for the reasons described above.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Building on its history of strong operating cash flows, the Company achieved a
record $409.2 million in operating cash flow in 2006. This represents a 30%
improvement over 2005's operating cash flow of $315.3 million. In 2006, this
significant source of cash has enabled the Company to invest $340.2 million in
capital expenditures (45% of which were for revenue-growth projects); pay $54.5
million in stockholder dividends; and invest $34.3 million in business
acquisitions. These significant 2006 investments follow $290 million of capital
expenditures (over 50% of which were for revenues-growth projects); $49.9
million in stockholder dividends; and $394.5 million in business acquisitions
invested in 2005. The Company believes these investments provide a solid
foundation for future revenue and Economic Value Added (EVA(R)) growth.
Despite significant investment amounts in 2006, the Company's net cash
borrowings decreased by $35.7 million. Balance sheet debt, which is affected by
foreign currency translation, increased $53.1 million from December 31, 2005.
However, for the same period, the debt to capital ratio declined from 50.4% to
48.1% as a result of increased Stockholder's Equity.
-31-
The Company's strategic objectives for 2007 include generating record net cash
provided by operating activities in excess of the $409.2 million generated in
2006. The Company's strategy to redeploy excess or discretionary cash in
long-term, high-renewal-rate services contracts for the Mill Services business;
for growth and international diversification in the Access Services Segment; for
growth and international expansion of the recently acquired Excell Materials;
expansion of the railway track maintenance services and equipment business; and
for sensible bolt-on acquisitions in the industrial services businesses. The
Company also foresees continuing its long and consistent history of paying
dividends to stockholders and to pay down debt to the extent possible.
To further enhance its portfolio of industrial services businesses and provide
cash flow for strategic investments, in January 2007, the Company's Board of
Directors approved a plan to divest the Gas Technologies Segment. The Company
estimates that the business will be sold during the second half of 2007.
Proceeds from the sale of this manufacturing business will provide financial
flexibility to further invest in the Company's services businesses and for debt
reduction.
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.
CASH REQUIREMENTS
The following summarizes the Company's expected future payments related to
contractual obligations and commercial commitments at December 31, 2006.
CONTRACTUAL OBLIGATIONS AS OF DECEMBER 31, 2006 (A)
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN 1-3 4-5 AFTER
(IN MILLIONS) TOTAL 1 YEAR YEARS YEARS 5 YEARS
- -------------------------------------------------------------------------------------------------------------------------
Short-term Debt $ 185.1 $ 185.1 $ -- $ -- $ -
Long-term Debt
(including current maturities and capital leases) 877.9 13.1 10.0 705.8 149.0
Projected interest payments on Long-term Debt (b) 227.3 59.4 102.2 52.6 13.1
Pension and Other Post- retirement Obligations (c) 611.4 51.2 108.3 118.1 333.8
Operating Leases 184.5 50.4 72.9 30.4 30.8
Purchase Obligations 161.4 158.5 1.9 0.5 0.5
Foreign Currency Forward Exchange Contracts (d) 170.9 170.9 -- -- -
- -------------------------------------------------------------------------------------------------------------------------
Total Contractual Obligations $ 2,418.5 $ 688.6 $ 295.3 $ 907.4 $ 527.2
=========================================================================================================================
(a) See Note 6, Debt and Credit Agreements; Note 7, Leases; Note 8,
Employee Benefit Plans; and Note 13, Financial Instruments, to the
Consolidated Financial Statements under Part II, Item 8, "Financial
Statements and Supplementary Data," for additional disclosures on
short-term and long-term debt; operating leases; pensions and other
postretirement benefits; and foreign currency forward exchange
contracts, respectively.
(b) The total projected interest payments on Long-term Debt are based
upon borrowings, interest rates and foreign currency exchange rates
as of December 31, 2006. The interest rates on variable-rate debt
and the foreign currency exchange rates are subject to changes
beyond the Company's control and may result in actual interest
expense and payments differing from the amounts projected above.
(c) Amounts represent expected benefit payments for the next 10 years.
(d) This amount represents the notional value of the foreign currency
exchange contracts outstanding at December 31, 2006. Due to the
nature of these transactions, there will be offsetting cash flows to
these contracts, with the difference recognized as a gain or loss in
the consolidated income statement. See Note 13, Financial
Instruments, to the Consolidated Financial Statements under Part II,
Item 8, "Financial Statements and Supplementary Data."
OFF-BALANCE SHEET ARRANGEMENTS - The following table summarizes the Company's
contingent commercial commitments at December 31, 2006. These amounts are not
included in the Company's Consolidated Balance Sheet
-32-
since there are no current circumstances known to management indicating that the
Company will be required to make payments on these contingent obligations.
COMMERCIAL COMMITMENTS AS OF DECEMBER 31, 2006
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
------------------------------------------
TOTAL AMOUNTS LESS THAN 1-3 4-5 OVER 5 INDEFINITE
(IN MILLIONS) COMMITTED 1 YEAR YEARS YEARS YEARS EXPIRATION
- -----------------------------------------------------------------------------------------------------
Standby Letters of Credit $ 95.7 $ 77.8 $ 17.9 $ -- $ -- $ --
Guarantees 29.1 12.9 1.1 1.4 0.8 12.9
Performance Bonds 14.4 8.8 0.1 -- -- 5.5
Other Commercial Commitments 11.1 -- -- -- -- 11.1
- -----------------------------------------------------------------------------------------------------
Total Commercial Commitments $ 150.3 $ 99.5 $ 19.1 $ 1.4 $ 0.8 $ 29.5
=====================================================================================================
Certain guarantees and performance bonds are of a continuous nature and do not
have a definite expiration date.
SOURCES AND USES OF CASH
The Company's principal sources of liquidity are cash from operations and
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
principal payments; and dividend payments. Cash will also be used for strategic
or bolt-on acquisitions as the appropriate opportunities arise.
RESOURCES AVAILABLE FOR CASH REQUIREMENTS - The Company has various credit
facilities and commercial paper programs available for use throughout the world.
The following chart illustrates the amounts outstanding under credit facilities
and commercial paper programs and available credit as of December 31, 2006.
-33-
SUMMARY OF CREDIT FACILITIES AND
COMMERCIAL PAPER PROGRAMS AS OF DECEMBER 31, 2006
- --------------------------------------------------------------------------------
(IN MILLIONS) FACILITY OUTSTANDING AVAILABLE
LIMIT BALANCE CREDIT
- --------------------------------------------------------------------------------
U.S. commercial paper program $ 550.0(a) $ 263.4 $ 286.6
Euro commercial paper program 264.0 207.2 56.8
Revolving credit facility (b) 450.0 -- 450.0
Supplement credit facility (b) (c) 100.0 -- 100.0
Bilateral credit facility (d) 50.0 -- 50.0
- --------------------------------------------------------------------------------
TOTALS AT DECEMBER 31, 2006 $ 1,414.0 $ 470.6 $ 943.4(E)
================================================================================
(a) In June 2006, the Company increased the maximum amount of its U.S.
commercial paper program from $400 million to $550 million.
(b) U.S. - based program.
(c) This facility was increased to $250 million effective February 1, 2007.
(d) International-based Program.
(e) Although the Company has significant available credit, as of
December 31, 2006, it was the Company's policy to limit aggregate
commercial paper and credit facility borrowings at any one time to a
maximum of $600 million. Effective February 1, 2007, this maximum
was increased to $750 million.
See Note 6, Debt and Credit Agreements, to the Consolidated Financial Statements
under Part II, Item 8, "Financial Statements and Supplementary Data," for more
information on the Company's credit facilities.
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings as of December 31, 2006:
U.S.-BASED
LONG-TERM NOTES COMMERCIAL 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 August 2006, S&P reaffirmed it's A- and A-2
ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. In January 2007, Fitch reaffirmed it's
ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. Also in January 2007, Moody's reaffirmed
its ratings for the Company. A downgrade to the Company's credit ratings would
probably increase borrowing costs to the Company, while an improvement in the
Company's credit ratings would probably decrease borrowing costs to the Company.
-34-
WORKING CAPITAL POSITION - Changes in the Company's working capital are
reflected in the following table:
DECEMBER 31 DECEMBER 31 INCREASE
(DOLLARS ARE IN MILLIONS) 2006 2005 (DECREASE)
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 101.2 $ 120.9 $ (19.7)
Accounts receivable, net 753.2 666.3 86.9
Inventories 285.2 251.1 34.1
Other current assets 88.4 60.4 28.0
Assets held-for-sale 3.6 2.3 1.3
- --------------------------------------------------------------------------------
Total current assets 1,231.6 1,101.0 130.6
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Notes payable and current maturities 198.2 104.0 94.2
Accounts payable 287.0 247.2 39.8
Accrued compensation 95.0 75.7 19.3
Income taxes payable 62.0 42.3 19.7
Other current liabilities 268.6 279.2 (10.6)
- --------------------------------------------------------------------------------
Total current liabilities 910.8 748.4 162.4
- --------------------------------------------------------------------------------
WORKING CAPITAL $ 320.8 $ 352.6 $ (31.8)
- --------------------------------------------------------------------------------
CURRENT RATIO 1.4:1 1.5:1
================================================================================
Working capital decreased 9% in 2006 due principally to the following factors:
o Cash decreased by $19.7 million due principally to payments made to reduce
the Company's net cash borrowings.
o Net receivables increased by $86.9 million due principally to increases in
the Mill Services and Access Services Segments which were largely due to
foreign currency translation as a result of the strengthening of the
British pound sterling and the euro in relation to the U.S. dollar, higher
sales and the Cleton acquisition. Partially offsetting these increases was
the timing of cash collections in the railway track maintenance services
and equipment business.
o The increase in inventory balances related principally to increased demand
in the Access Services Segment, increased demand and the timing of
purchases and shipments in the Gas Technologies Segment and foreign
currency translation.
o Notes payable and current maturities increased $94.2 million principally
due to increased bank overdrafts and the anticipated payment of a portion
of commercial paper borrowings within one year.
o Accounts payable increased $39.8 million due principally to increases in
the Mill Services and Access Services Segments which were largely due to
foreign currency translation, the Cleton acquisition and the timing of
payments.
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, 2006, the Company's mill services contracts had estimated future
revenues of $4.4 billion, compared with $4.3 billion as of December 31, 2005. In
addition, as of December 31, 2006, the Company had an order backlog of $301.0
million for its manufacturing businesses and railway track maintenance services
and equipment business. This compares with $275.8 million as of December 31,
2005. This increase is due principally to new orders for air-cooled heat
exchangers, industrial grating and increased demand for certain products within
the Gas Technologies Segment, partially offset by decreased orders for railway
track maintenance services in the Engineered Products and Services ("all other")
Category. The railway track maintenance services and equipment business backlog
includes a significant portion that is long-term, which will not be realized
until 2007 and later due to the long lead times necessary to build certain
equipment, and the long-term nature of certain service contracts. Order backlog
for scaffolding, shoring and forming services of the Access Services Segment and
for roofing granules and slag abrasives is excluded from the above amounts.
These amounts are generally not
-35-
quantifiable due to short order lead times for certain services, the nature and
timing of the products and services provided and equipment rentals with the
ultimate length of the rental period often unknown.
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 and markets 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 Consolidated Statements of Cash Flows, are summarized in the
following table:
SUMMARIZED CASH FLOW INFORMATION
(IN MILLIONS) 2006 2005 2004
- --------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 409.2 $ 315.3 $ 270.5
Investing activities (359.4) (645.2) (209.6)
Financing activities (84.2) 369.3 (56.5)
Effect of exchange rate changes on cash 14.7 (12.6) 9.5
- --------------------------------------------------------------------------------
Net change in cash and cash equivalents $ (19.7) $ 26.8 $ 13.9
================================================================================
CASH FROM OPERATING ACTIVITIES - Net cash provided by operating activities
in 2006 was a record $409.2 million, an increase of $93.9 million from 2005. The
increased cash from operations in 2006 resulted from the following factors:
o Increased net income in 2006 compared with 2005.
o The timing of accounts receivable collections at the railway track
maintenance services and equipment business, mill services business and the
air-cooled heat exchangers business.
o Partially offsetting the above improvements was the use of cash for other
assets and liabilities in 2006 compared with a source of cash for other
assets and liabilities for 2005. This was principally due to an increase in
insurance liabilities during 2005 not repeated in 2006, partially offset by
an increase in income tax payments due to increased net income in 2006. The
increased insurance liabilities during 2005 were directly offset by
increased third-party insurance claim receivables.
CASH USED IN INVESTING ACTIVITIES - Capital investments in 2006 were
$340.2 million, an increase of $50.0 million from 2005. Approximately 45% of the
investments were for projects intended to grow future revenues. Investments were
made predominantly for the industrial services businesses with 48% in the Mill
Services Segment and 41% in the Access Services Segment. The Company also
invested $34.3 million principally for acquisitions in the Mill Services and
Access Services Segments. See Note 2, Acquisitions and Dispositions, to the
Consolidated Financial Statements under Part II, Item 8, "Financial Statements
and Supplementary Data," for additional disclosures related to these
acquisitions.
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions as of December 31, 2006 and 2005.
DECEMBER 31 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2006 2005
- --------------------------------------------------------------------------------
Notes Payable and Current Maturities $ 198.2 $ 104.0
Long-term Debt 864.8 905.9
- --------------------------------------------------------------------------------
Total Debt 1,063.0 1,009.9
Total Equity 1,146.4 993.9
- --------------------------------------------------------------------------------
Total Capital $ 2,209.4 $ 2,003.9(a)
Total Debt to Total Capital 48.1% 50.4%
================================================================================
(a) Does not total due to rounding.
-36-
The Company's debt as a percentage of total capital decreased in 2006. Overall
debt increased due to 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 in 2006 and foreign
currency translation, partially offset by SFAS No. 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158") pension adjustments and
dividends.
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 December 31, 2006, the Company could
increase borrowings by approximately $655.2 million and still be within its debt
covenants. Alternatively, keeping all other factors constant, the Company's
equity could decrease by approximately $438.0 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. An example of the execution of
this strategy is the February 2007 acquisition of Excell Materials. 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 2006 results, meaningful improvement in EVA was achieved compared with
2005.
The Company is committed to continue paying dividends to stockholders. The
Company has increased the dividend rate for 13 consecutive years, and in
November 2006, the Company paid its 226th consecutive quarterly cash dividend.
In November 2006, the Company declared its 227th consecutive quarterly dividend
and increased its dividend rate by more than nine percent. The Company also
plans to continue paying down debt to the extent possible. Additionally, the
Company has authorization to repurchase up to one million of its shares through
January 31, 2008.
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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
liabilities. On an on-going basis the Company evaluates its estimates, including
those related to pensions and other postretirement benefits, bad debts, goodwill
valuation, long-lived asset valuations, inventory valuations, insurance
reserves, contingencies and income taxes. The impact of changes in these
estimates, as necessary, is reflected in the respective segment's operating
income in the period of the change. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different outcomes, assumptions or conditions.
The Company believes the following critical accounting policies are affected by
its more significant judgments and estimates used in the preparation of its
consolidated financial statements. Management has discussed the development and
selection of the critical accounting estimates described below with the Audit
Committee of the Board of Directors and the Audit Committee has reviewed the
Company's disclosure relating to these estimates in this Management's Discussion
and Analysis of Financial Condition and Results of Operations. These items
should be read in conjunction with Note 1, Summary of Significant Accounting
Policies, to the Consolidated Financial Statements under Part II, Item 8,
"Financial Statements and Supplementary Data."
-37-
PENSION BENEFITS
The Company has defined benefit pension plans in several countries. The largest
of these plans are in the United Kingdom and the United States. The Company's
funding policy for these plans is to contribute amounts sufficient to meet the
minimum funding pursuant to U.K. and U.S. statutory requirements, plus any
additional amounts that the Company may determine to be appropriate. The Company
made cash contributions to its defined benefit pension plans of $37.2 million
(including $10.6 million of discretionary payments) and $48.8 million (including
$16.9 million discretionary payments) during 2006 and 2005, respectively.
Additionally, the Company expects to make a minimum of $25.6 million in cash
contributions to its defined benefit pension plans during 2007.
For the year 2005, the Company accounted for its defined benefit pension plans
in accordance with SFAS No. 87, "Employer's Accounting for Pensions" ("SFAS
87"), which requires that amounts recognized in financial statements be
determined on an actuarial basis. At December 31, 2005, the adjustment to
recognize the additional minimum liability required under SFAS 87 impacted
accumulated other comprehensive loss in the Stockholders' Equity section of the
Consolidated Balance Sheets by $14.7 million, net of deferred income taxes.
As of December 31, 2006, the Company accounted for its defined benefit pension
plans in accordance with SFAS 158, which requires the Company 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 (projected benefit obligation for a
pension plan) as an asset or liability. The charge or credit is recorded as
adjustment to accumulated other comprehensive income/loss, net of tax. This
reduced the Company's equity on an after-tax basis by approximately $88.2
million compared with measurement under prior standards. The results of
operations were not affected. The adoption of SFAS 158 did not have a negative
impact on compliance with the Company's debt covenants.
Management implemented a three-part strategy in 2002 and 2003 to deal with the
adverse market forces that have increased the unfunded benefit obligations of
the Company. These strategies included pension plan design changes, a review of
funding policy alternatives and a review of the asset allocation policy and
investment manager structure. With regards to plan design, the Company amended a
majority of the U.S. defined benefit pension plans and certain international
defined benefit pension plans so that accrued service is no longer granted for
periods after December 31, 2003, although compensation increases will continue
to be recognized on actual service to-date (for the U.S. plans this is limited
to 10 years - through December 2013). In place of these plans, the Company
established, effective January 1, 2004, defined contribution pension plans
providing for the Company to contribute a specified matching amount for
participating employees' contributions to the plan. Domestically, this match is
made on employee contributions up to four percent of their eligible
compensation. Additionally, the Company may provide a discretionary contribution
of up to two percent of compensation for eligible employees. Internationally,
this match is up to six percent of eligible compensation with an additional two
percent going towards insurance and administrative costs. The Company believes
these new retirement benefit plans will provide a more predictable and less
volatile pension expense than existed under the defined benefit plans.
The Company's pension task force 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 could reduce future
pension expense volatility and minimize risk.
CRITICAL ESTIMATE - DEFINED BENEFIT PENSION BENEFITS
Accounting for defined benefit pensions and other postretirement benefits
requires the use of actuarial assumptions. The principal assumptions used
include the discount rate and the expected long-term rate-of-return on plan
assets. Each assumption is reviewed annually and represents management's best
estimate at that time. The assumptions are selected to represent the average
expected experience over time and may differ in any one year from actual
experience due to changes in capital markets and the overall economy. These
differences will impact the amount of unfunded benefit obligation and the
expense recognized.
The discount rates as of the September 30, 2006 measurement date for the U.K.
defined benefit pension plan and the October 31, 2006 measurement date for the
U.S. defined benefit pension plans were 5.13% and 5.87%, respectively. These
rates were used in calculating the Company's projected benefit obligations as of
December 31, 2006. The discount rates selected represent the average yield on
high-quality corporate bonds as of the measurement dates. The global
weighted-average of these assumed discount rates for the years ending December
31, 2006, 2005 and 2004 were 5.3%, 5.3% and 5.7%, respectively. Annual pension
expense is determined using the discount rate as of
-38-
the beginning of the year, which for 2007 is the 5.3% global weighted-average
discount rate. Pension expense and the projected benefit obligation generally
increase as the selected discount rate decreases.
The expected long-term rate-of-return on plan assets is determined by evaluating
the portfolios' asset class return expectations with the Company's advisors as
well as actual, long-term, historical results of asset returns for the pension
plans. The pension expense increases as the expected long-term rate-of-return on
assets decreases. For 2006, the global weighted-average expected long-term
rate-of-return on asset assumption was 7.6%. For 2007, the expected global
long-term rate-of-return on assets will remain the same at 7.6%. This rate was
determined based on a model of expected asset returns for an actively managed
portfolio.
Based on the updated actuarial assumptions and the structural changes in the
pension plans mentioned previously, the Company's 2007 pension expense is
expected to stabilize. Total pension expense increased from 2005 to 2006 by $5.8
million due principally to increased multi-employer and defined contribution
pension plan costs resulting from increased volume in the Access Services and
Mill Services Segments. From 2004 to 2005, pension expense decreased by $1.7
million due principally to lower defined benefit pension expense in the United
Kingdom. This resulted from plan design changes in 2004 when certain defined
benefit plans were replaced by defined contribution plans.
Changes in pension benefit expense may occur in the future due to changes in
actuarial assumptions and due to changes in returns on plan assets resulting
from financial market conditions. 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 2007
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 $0.7 million Decrease of $4.3 million
One-half percent decrease Increase of $2.0 million Increase of $4.1 million
Expected long-term rate-of-
- ---------------------------
return on plan assets
- ---------------------
One-half percent increase Decrease of $1.3 million Decrease of $3.7 million
One-half percent decrease Increase of $1.3 million Increase of $3.7 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 and SFAS 158.
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 under the provisions of SFAS No.
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" ("SFAS 88").
See Note 8, Employee Benefit Plans, to the Consolidated Financial Statements
under Part II, Item 8, "Financial Statements and Supplementary Data," for
additional disclosures related to these items.
NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable are stated at their net realizable value through
the use of an allowance for doubtful accounts. The allowance is maintained for
estimated losses resulting from the inability or unwillingness of customers to
make required payments. The Company has policies and procedures in place
requiring customers to be evaluated for creditworthiness prior to the execution
of new service contracts or shipments of products. These reviews are structured
to minimize the Company's risk related to realizability of its receivables.
Despite these policies and procedures, the Company may still experience
collection problems and potential bad debts due to economic conditions within
certain industries (e.g., construction and steel industries) and countries and
regions in which the Company operates. As of December 31, 2006 and 2005,
receivables of $753.2 million and $666.3 million, respectively, were net of
reserves of $25.4 million and $24.4 million, respectively.
CRITICAL ESTIMATE - NOTES AND ACCOUNTS RECEIVABLE
A considerable amount of judgment is required to assess the realizability of
receivables, including the current creditworthiness of each customer, related
aging of the past due balances and the facts and circumstances
-39-
surrounding any non-payment. The Company's provisions for bad debts during 2006,
2005 and 2004 were $9.2 million, $6.5 million and $5.0 million, respectively.
The increase from 2005 to 2006 related principally to the acquisition of
businesses in the fourth quarter of 2005 and overall increased revenues.
On a monthly basis, customer accounts are analyzed for collectibility. Reserves
are established based upon a specific-identification method as well as
historical collection experience, as appropriate. The Company also evaluates
specific accounts when it becomes aware of a situation in which a customer may
not be able to meet its financial obligations due to a deterioration in its
financial condition, credit ratings or bankruptcy. The reserve requirements are
based on the facts available to the Company and are re-evaluated and adjusted as
additional information is received. Reserves are also determined by using
percentages (based upon experience) applied to certain aged receivable
categories. Specific issues are discussed with Corporate Management and any
significant changes in reserve amounts or the write-off of balances must be
approved by a specifically designated Corporate Officer. All approved items are
monitored to ensure they are recorded in the proper period. Additionally, any
significant changes in reserve balances are reviewed to ensure the proper
Corporate approval has occurred.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Conversely, an improvement in a customer's ability
to make payments could result in a decrease of the allowance for doubtful
accounts. Changes in the allowance related to both of these situations would be
recorded through income in the period the change was determined.
The Company has not materially changed its methodology for calculating
allowances for doubtful accounts for the years presented.
See Note 3, Accounts Receivable and Inventories, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data,"
for additional disclosures related to these items.
GOODWILL
The Company's net goodwill balances were $612.5 million and $559.6 million, as
of December 31, 2006 and 2005, respectively. Goodwill is not amortized but
tested for impairment at the reporting unit level on an annual basis, and
between annual tests whenever events or circumstances indicate that the carrying
value of a reporting unit's goodwill may exceed its fair value.
CRITICAL ESTIMATE - GOODWILL
A discounted cash flow model is used to estimate the fair value of a reporting
unit. This model requires the use of long-term planning estimates and
assumptions regarding industry-specific economic conditions that are outside the
control of the Company. The annual test for impairment includes the selection of
an appropriate discount rate to value cash flow information. The basis of this
discount rate calculation is derived from several internal and external factors.
These factors include, but are not limited to, the average market price of the
Company's stock, the number of shares of stock outstanding, the book value of
the Company's debt, a long-term risk-free interest rate, and both market and
size-specific risk premiums. The Company's annual goodwill impairment testing,
performed as of October 1, 2006 and 2005, indicated that the fair value of all
reporting units tested exceeded their respective book values and therefore no
additional goodwill impairment testing was required. Due to uncertain market
conditions, it is possible that estimates used for goodwill impairment testing
may change in the future. Therefore, there can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
The Company has not materially changed its methodology for goodwill impairment
testing for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described above.
See Note 5, Goodwill and Other Intangible Assets, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data,"
for additional information on goodwill and other intangible assets.
ASSET IMPAIRMENT
Long-lived assets are reviewed for impairment when events and circumstances
indicate that the book value of an asset may be impaired. The amounts charged
against pre-tax income related to impaired long-lived assets were $4.4 million,
$0.6 million and $0.4 million in 2006, 2005 and 2004, respectively. The
increased 2006 amount relates to exiting an underperforming product line of the
Gas Technologies Segment.
-40-
CRITICAL ESTIMATE - ASSET IMPAIRMENT
The determination of a long-lived asset impairment loss involves significant
judgments based upon short and long-term projections of future asset
performance. Impairment loss estimates are based upon the difference between the
book value and the fair value of the asset. The fair value is generally based
upon the Company's estimate of the amount that the assets could be bought or
sold for in a current transaction between willing parties. If quoted market
prices for the asset or similar assets are unavailable, the fair value estimate
is generally calculated using a discounted cash flow model. Should circumstances
change that affect these estimates, additional impairment charges may be
required and would be recorded through income in the period the change was
determined.
The Company has not materially changed its methodology for calculating asset
impairments for the years presented. There are currently no known trends,
demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described
above.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventory balances are
adjusted for estimated obsolete or unmarketable inventory equal to the
difference between the cost of inventory and its estimated market value. At
December 31, 2006 and 2005, inventories of $285.2 million and $251.1 million,
respectively, are net of lower of cost or market reserves and obsolescence
reserves of $14.3 million and $16.1 million, respectively.
CRITICAL ESTIMATE - INVENTORIES
In assessing the ultimate realization of inventory balance amounts, the Company
is required to make judgments as to future demand requirements and compare these
with the current or committed inventory levels. If actual market conditions are
determined to be less favorable than those projected by management, additional
inventory write-downs may be required and would be recorded through income in
the period the determination is made. Additionally, the Company records reserves
to adjust a substantial portion of its U.S. inventory balances to the last-in,
first-out (LIFO) method of inventory valuation. In adjusting these reserves
throughout the year, the Company estimates its year-end inventory costs and
quantities. At December 31 of each year, the reserves are adjusted to reflect
actual year-end inventory costs and quantities. During periods of inflation, the
LIFO expense usually increases and during periods of deflation it decreases.
These year-end adjustments resulted in pre-tax income/(expense) of $(2.1)
million, $1.7 million and $(4.3) million in 2006, 2005 and 2004, respectively.
The Company has not materially changed its methodology for calculating inventory
reserves for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described above.
See Note 3, Accounts Receivable and Inventories, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data,"
for additional disclosures related to these items.
INSURANCE RESERVES
The Company retains a significant portion of the risk for property, workers'
compensation, U.K. employers' liability, automobile, general and product
liability losses. At December 31, 2006 and 2005 the Company has recorded
liabilities of $103.4 million and $102.3 million, respectively, related to both
asserted as well as unasserted insurance claims. At December 31, 2006 and 2005,
$18.9 million and $25.2 million, respectively, is included in insurance
liabilities related to claims covered by insurance carriers for which a
corresponding receivable has been recorded.
CRITICAL ESTIMATE - INSURANCE RESERVES
Reserves have been recorded based upon actuarial calculations which 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. During 2006,
the Company recorded a retrospective insurance reserve adjustment that increased
pre-tax insurance expense by $1.2 million. In 2005 and 2004, the retrospective
insurance reserve adjustments decreased pre-tax insurance expense for
self-insured programs by $4.1 million and $2.7 million, respectively. The
Company has programs in place to improve claims experience, such as aggressive
claim and insured litigation management and an improved focus on workplace
safety.
-41-
The Company has not materially changed its methodology for calculating insurance
reserves for the years presented. There are currently no known trends, demands,
commitments, events or uncertainties that are reasonably likely to occur that
would materially affect the methodology or assumptions described above.
LEGAL AND OTHER CONTINGENCIES
Reserves for contingent liabilities are recorded when it is probable that an
asset has been impaired or a liability has been incurred and the loss can be
reasonably estimated. Adjustments to estimated amounts are recorded as necessary
based on new information or the occurrence of new events or the resolution of an
uncertainty. Such adjustments are recorded in the period that the required
change is identified.
CRITICAL ESTIMATE - LEGAL AND OTHER CONTINGENCIES
On a quarterly basis, recorded contingent liabilities are analyzed to determine
if any adjustments are required. Additionally, functional department heads
within each business unit are consulted monthly to ensure all issues with a
potential financial accounting impact, including possible reserves for
contingent liabilities have been properly identified, addressed or disposed of.
Specific issues are discussed with Corporate Management and any significant
changes in reserve amounts or the adjustment or write-off of previously recorded
balances must be approved by a specifically designated Corporate Officer. If
necessary, outside legal counsel, other third parties or internal experts are
consulted to assess the likelihood and range of outcomes for a particular issue.
All approved changes in reserve amounts are monitored to ensure they are
recorded in the proper period. Additionally, any significant changes in reported
business unit reserve balances are reviewed to ensure the proper Corporate
approval has occurred. On a quarterly basis, the Company's business units submit
a reserve listing to the Corporate headquarters which is reviewed in detail. All
significant reserve balances are discussed with a designated Corporate Officer
to assess their validity, accuracy and completeness. Anticipated changes in
reserves are identified for follow-up prior to the end of a reporting period.
Any new issues that may require a reserve are also identified and discussed to
ensure proper disposition. Additionally, on a quarterly basis, all significant
environmental reserve balances or issues are evaluated to assess their validity,
accuracy and completeness.
The Company has not materially changed its methodology for calculating legal and
other contingencies for the years presented. There are currently no known
trends, demands, commitments, events or uncertainties that are reasonably likely
to occur that would materially affect the methodology or assumptions described
above.
See Note 10, Commitments and Contingencies, to the Consolidated Financial
Statements under Part II, Item 8, "Financial Statements and Supplementary Data,"
for additional disclosure on this uncertainty and other contingencies.
INCOME TAXES
The Company is subject to various federal, state and local income taxes in the
taxing jurisdictions where the Company operates. At the end of each quarterly
period, the Company makes its best estimate of the annual effective income tax
rate and applies that rate to year-to-date pre-tax income to arrive at the
year-to-date income tax provision. Income tax loss contingencies are recorded in
the period when it is determined that it is probable that a liability has been
incurred and the loss can be reasonably estimated. Adjustments to estimated
amounts are recorded as necessary based upon new information, the occurrence of
new events or the resolution of an uncertainty. As of December 31, 2006, 2005
and 2004, the Company's net effective income tax rate was 32.3%, 28.1% and
29.1%, respectively.
A valuation allowance to reduce deferred tax assets is evaluated on a quarterly
basis. The valuation allowance is principally for tax-loss carryforwards which
are uncertain as to realizability. The valuation allowance was $13.9 million and
$21.7 million as of December 31, 2006 and 2005, respectively.
CRITICAL ESTIMATE - INCOME TAXES
The annual effective income tax rates are developed giving recognition to tax
rates, tax holidays, tax credits and capital losses, as well as certain exempt
income and non-deductible expenses in all of the jurisdictions where the Company
does business. The income tax provision for the quarterly period is the change
in the year-to-date provision from the previous quarterly period.
The Company considers future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance. In the
event the Company were to determine that it would more likely than not be able
to realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Likewise, should the Company
-42-
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would
decrease income in the period in which such determination was made.
The Company has not materially changed its methodology for calculating income
tax expense for the years presented.
In July 2006, the FASB issued FASB Interpretation, ("FIN") 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting for uncertainty in income taxes recognized
in an entity's financial statements in accordance with SFAS No. 109, "Accounting
for Income Taxes." It prescribes a recognition threshold and measurement
attribute for financial statement recognition and disclosure of tax positions
taken or expected to be taken on a tax return. This interpretation is effective
for fiscal years beginning after December 15, 2006. The Company will adopt this
interpretation in the first quarter of 2007.
The Company is currently evaluating the requirements of FIN 48 and has not yet
determined the impact on the consolidated financial statements. There are
currently no other known trends, demands, commitments, events or uncertainties
that are reasonably likely to occur that would materially affect the methodology
or assumptions described above.
See Note 9, Income Taxes, to the Consolidated Financial Statements under Part
II, Item 8, "Financial Statements and Supplementary Data," for additional
disclosures related to these items.
NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
See Note 1, Summary of Significant Accounting Policies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and
Supplementary Data," for disclosures on new financial accounting standards
issued and their effect on the Company.
RESEARCH AND DEVELOPMENT
The Company invested $3.0 million, $2.7 million and $2.6 million in internal
research and development programs in 2006, 2005 and 2004, respectively. Internal
funding for research and development was as follows:
RESEARCH AND DEVELOPMENT EXPENSE
- ------------------------------------------------------------------------------
(IN MILLIONS) 2006 2005 2004
- ------------------------------------------------------------------------------
Mill Services Segment $ 1.1 $ 1.4 $ 1.3
Access Services Segment 0.7 0.5 0.4
Gas Technologies Segment 0.2 0.2 0.3
- ------------------------------------------------------------------------------
Segment Totals 2.0 2.1 2.0
Engineered Products and Services ("all
other") Category 1.0 0.6 0.6
- ------------------------------------------------------------------------------
Consolidated Totals $ 3.0 $ 2.7 $ 2.6
==============================================================================
BACKLOG
As of December 31, 2006, the Company's order backlog, exclusive of long-term
mill services contracts, access services and roofing granules and slag
abrasives, was $301.0 million compared with $275.8 million as of December 31,
2005, a 9% increase. Of the $301.0 million of order backlog at December 31,
2006, approximately $58.7 million or 20% is not expected to be filled in 2007.
ORDER BACKLOG
- -------------------------------------------------------------------------------
(IN MILLIONS) 2006 2005
- -------------------------------------------------------------------------------
Engineered Products and Services ("all other") Category $ 236.5 $ 230.6
Gas Technologies Segment 64.5 45.2
- -------------------------------------------------------------------------------
Consolidated Backlog $ 301.0 $ 275.8
===============================================================================
Order backlog for the Engineered Products and Services ("all other") Category at
December 31, 2006 was 3% above the December 31, 2005 order backlog. The change
is principally due to increased order backlog of air-cooled heat exchangers and
industrial grating products, partially offset by decreased order backlog for
railway track maintenance services. Order backlog for roofing granules and slag
abrasives is excluded from the above amounts. Order backlog amounts for that
product group are generally not quantifiable due to the short order lead times
of the products provided.
-43-
The Gas Technologies Segment order backlog at December 31, 2006 was 43% above
the December 31, 2005 order backlog. The change primarily reflects increased
order backlog for cryogenics equipment and industrial gas cylinders, partially
offset by decreased order backlog for composite pressure vessels.
Mill services contracts have an estimated future value of $4.4 billion at
December 31, 2006 compared with $4.3 billion at December 31, 2005. Approximately
60% of these revenues are expected to be recognized by December 31, 2009. The
remaining revenues are expected to be recognized between January 1, 2010 and
December 31, 2015.
Order backlog for scaffolding, shoring and forming services of the Access
Services Segment is excluded from the above amounts. These amounts are generally
not quantifiable due to short order lead times for certain services, the nature
and timing of the products and services provided and equipment rentals with the
ultimate length of the rental period often unknown.
DIVIDEND ACTION
The Company paid four quarterly cash dividends of $0.325 per share in 2006, for
an annual rate of $1.30. This is an increase of 8.3% from 2005. At the November
2006 meeting, the Board of Directors increased the dividend by 9.2% to an annual
rate of $1.42 per share. The Board normally reviews the dividend rate
periodically during the year and annually at its November meeting. There are no
material restrictions on the payment of dividends.
The February 2007 payment marked the 227th consecutive quarterly dividend paid
at the same or at an increased rate. In 2006, 28% of net earnings were paid out
in dividends. The Company is philosophically committed to maintaining or
increasing the dividend at a sustainable level. The Company has paid dividends
each year since 1939.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Part I, Item 1A, "Risk Factors," for quantitative and qualitative
disclosures about market risk.
-44-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Supplementary Data
Page
Consolidated Financial Statements of Harsco Corporation:
Management's Report on Internal Control Over Financial Reporting 46
Report of Independent Registered Public Accounting Firm 47
Consolidated Balance Sheets
December 31, 2006 and 2005 49
Consolidated Statements of Income
for the years 2006, 2005 and 2004 50
Consolidated Statements of Cash Flows
for the years 2006, 2005 and 2004 51
Consolidated Statements of Stockholders' Equity
for the years 2006, 2005 and 2004 52
Consolidated Statements of Comprehensive Income
for the years 2006, 2005 and 2004 53
Notes to Consolidated Financial Statements 54
Supplementary Data (Unaudited):
Two-Year Summary of Quarterly Results 92
Common Stock Price and Dividend Information 92
-45-
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management of Harsco Corporation, together with its consolidated subsidiaries
(the Company), is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company's internal control over financial
reporting is a process designed under the supervision of the Company's principal
executive and principal financial officers to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance
with U.S. generally accepted accounting principles.
The Company's internal control over financial reporting includes policies and
procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect transactions and dispositions of assets of
the Company;
o Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and the directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Management has assessed the effectiveness of its internal control over financial
reporting as of December 31, 2006 based on the framework established in INTERNAL
CONTROL -- INTEGRATED FRAMEWORK issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment,
management has determined that the Company's internal control over financial
reporting is effective as of December 31, 2006.
Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report appearing below, which expresses unqualified opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006.
/S/ Derek C. Hathaway /S/ Salvatore D. Fazzolari
Derek C. Hathaway Salvatore D. Fazzolari
Chairman and Chief Executive Officer President, Chief Financial Officer
February 27, 2007 and Treasurer
February 27, 2007
-46-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
To The Stockholders of Harsco Corporation:
We have completed integrated audits of Harsco Corporation's consolidated
financial statements and of its internal control over financial reporting as of
December 31, 2006, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Harsco
Corporation and its subsidiaries at December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item 15(a)2
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in the accompanying
"Management's Report on Internal Control Over Financial Reporting," that the
Company maintained effective internal control over financial reporting as of
December 31, 2006 based on criteria established in INTERNAL CONTROL - INTEGRATED
FRAMEWORK issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2006, based on criteria established in INTERNAL CONTROL - INTEGRATED FRAMEWORK
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations
-47-
of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 27, 2007
-48-
HARSCO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31 DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 101,260 $ 120,929
Accounts receivable, net 753,168 666,252
Inventories 285,229 251,080
Other current assets 88,398 60,436
Assets held-for-sale 3,567 2,326
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,231,622 1,101,023
- -----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,322,467 1,139,808
Goodwill, net 612,480 559,629
Intangible assets, net 88,164 78,839
Other assets 71,690 96,505
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,326,423 $ 2,975,804
===================================================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 185,074 $ 97,963
Current maturities of long-term debt 13,130 6,066
Accounts payable 287,006 247,179
Accrued compensation 95,028 75,742
Income taxes payable 61,967 42,284
Dividends payable 15,983 13,580
Insurance liabilities 40,810 47,244
Other current liabilities 211,777 218,345
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 910,775 748,403
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 864,817 905,859
Deferred income taxes 103,592 123,334
Insurance liabilities 62,542 55,049
Retirement plan liabilities 189,457 98,946
Other liabilities 48,876 50,319
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,180,059 1,981,910
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, Series A junior participating cumulative preferred stock -- --
Common stock, par value $1.25, issued 68,491,523 and 68,257,785 shares as of December 31, 2006 and 2005,
respectively 85,614 85,322
Additional paid-in capital 166,494 154,017
Accumulated other comprehensive loss (169,334) (167,318)
Retained earnings 1,666,761 1,526,216
Treasury stock, at cost (26,472,843 and 26,474,609 shares, respectively) (603,171) (603,225)
Unearned stock-based compensation -- (1,118)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,146,364 993,894
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,326,423 $ 2,975,804
===================================================================================================================================
See accompanying notes to consolidated financial statements.
-49-
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31 2006 2005 2004
- -------------------------------------------------------------------------------------------------------------
REVENUES FROM CONTINUING OPERATIONS:
Service revenue $ 2,538,068 $ 1,928,539 $ 1,764,159
Product revenue 885,225 837,671 737,900
- -------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,423,293 2,766,210 2,502,059
- -------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 1,851,230 1,425,222 1,313,075
Cost of products sold 696,350 674,177 603,309
Selling, general and administrative expenses 507,367 393,187 368,385
Research and development expenses 3,026 2,676 2,579
Other expenses 6,851 2,000 4,862
- -------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 3,064,824 2,497,262 2,292,210
=============================================================================================================
OPERATING INCOME FROM CONTINUING OPERATIONS 358,469 268,948 209,849
Equity in income of unconsolidated entities, net 192 74 128
Interest income 3,709 3,165 2,319
Interest expense (60,478) (41,918) (41,057)
- -------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST 301,892 230,269 171,239
Income tax expense (97,523) (64,771) (49,034)
- -------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 204,369 165,498 122,205
Minority interest in net income (7,860) (8,748) (8,665)
- -------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 196,509 156,750 113,540
- -------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued business (181) (430) (801)
Gain/(loss) on disposal of discontinued business 28 261 (102)
Income/(loss) related to discontinued defense business (25) 20 12,849
Income tax benefit (expense) 67 56 (4,275)
- -------------------------------------------------------------------------------------------------------------
INCOME/(LOSS) FROM DISCONTINUED OPERATIONS (111) (93) 7,671
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 196,398 $ 156,657 $ 121,211
=============================================================================================================
Average shares of common stock outstanding 41,953 41,642 41,129
Basic earnings per common share:
Continuing operations $ 4.68 $ 3.76 $ 2.76
Discontinued operations -- -- 0.19
- -------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ 4.68 $ 3.76 $ 2.95
=============================================================================================================
Diluted average shares of common stock outstanding 42,215 42,080 41,598
Diluted earnings per common share:
Continuing operations $ 4.65 $ 3.73 $ 2.73
Discontinued operations -- -- 0.18
- -------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 4.65 $ 3.72(a)$ 2.91
=============================================================================================================
(a) Does not total due to rounding.
See accompanying notes to consolidated financial statements.
-50-
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31 2006 2005 2004
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 196,398 $ 156,657 $ 121,211
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 245,397 195,139 181,914
Amortization 7,585 2,926 2,457
Equity in income of unconsolidated entities, net (188) (74) (128)
Dividends or distributions from unconsolidated entities -- 170 589
Other, net 8,008 8,134 (2,781)
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (27,261) (64,580) (81,403)
Inventories (20,347) (25,908) (22,278)
Accounts payable 13,017 10,787 22,310
Net receipts (disbursements) related to discontinued defense
business (3) (141) 12,280
Other assets and liabilities (13,367) 32,169 36,294
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 409,239 315,279 270,465
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (340,173) (290,239) (204,235)
Purchase of businesses, net of cash acquired* (34,333) (394,493) (12,264)
Proceeds from sales of assets 17,650 39,543 6,897
Other investing activities (2,599) 4 --
- -------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (359,455) (645,185) (209,602)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 73,050 73,530 (5,863)
Current maturities and long-term debt:
Additions 315,010 571,928 198,032
Reductions (423,769) (230,010) (214,551)
Cash dividends paid on common stock (54,516) (49,928) (45,170)
Common stock issued-options 11,574 9,097 16,656
Other financing activities (5,545) (5,292) (5,616)
- -------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (84,196) 369,325 (56,512)
- -------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 14,743 (12,583) 9,532
- -------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (19,669) 26,836 13,883
Cash and cash equivalents at beginning of period 120,929 94,093 80,210
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 101,260 $ 120,929 $ 94,093
=============================================================================================================
*PURCHASE OF BUSINESSES, NET OF CASH ACQUIRED
Working capital, other than cash $ (2,547) $ (26,831) $ (60)
Property, plant and equipment (15,106) (169,172) (3,024)
Other noncurrent assets and liabilities, net (16,680) (198,490) (9,180)
- -------------------------------------------------------------------------------------------------------------
NET CASH USED TO ACQUIRE BUSINESSES $ (34,333) $(394,493) $ (12,264)
=============================================================================================================
See accompanying notes to consolidated financial statements.
-51-
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------------- ACCUMULATED
ADDITIONAL OTHER UNEARNED
(IN THOUSANDS, EXCEPT SHARE AND PAID-IN RETAINED COMPREHENSIVE STOCK-BASED
PER SHARE AMOUNTS) ISSUED TREASURY CAPITAL EARNINGS INCOME(LOSS) COMPENSATION TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 2004 $ 84,197 $(603,639) $ 120,070 $1,345,787 $(169,427) $ -- $ 776,988
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 121,211 121,211
Cash dividends declared, $1.125 per share (46,361) (46,361)
Translation adjustments 46,230 46,230
Cash flow hedging instrument adjustments,
net of $(86) deferred income taxes 159 159
Pension liability adjustments, net of
$2,062 deferred income taxes (4,453) (4,453)
Stock options exercised, 564,529 shares 692 253 19,308 20,253
Other, 250 shares, and 3,500 restricted
stock units 9 154 163
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2004 $ 84,889 $(603,377) $ 139,532 $1,420,637 $(127,491) $ -- $ 914,190
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 156,657 156,657
Cash dividends declared, $1.225 per share (51,078) (51,078)
Translation adjustments, net of $2,846
deferred income taxes (54,399) (54,399)
Cash flow hedging instrument adjustments,
net of $82 deferred income taxes (152) (152)
Pension liability adjustments, net of
$(6,407) deferred income taxes 14,724 14,724
Stock options exercised, 350,840 shares 433 116 12,596 13,145
Other, 1,087 shares, and 36,250 restricted
stock units (net of forfeitures) 36 1,889 (1,847) 78
Amortization of unearned compensation on
restricted stock units 729 729
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2005 $ 85,322 $(603,225) $ 154,017 $1,526,216 $(167,318) $(1,118) $ 993,894
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 196,398 196,398
Adoption of SFAS 123(R) (1,118) 1,118 --
Cash dividends declared, $1.33 per share (55,853) (55,853)
Translation adjustments, net of $(5,643)
deferred income taxes 91,578 91,578
Cash flow hedging instrument adjustments,
net of $(72) deferred income taxes 134 134
Pension liability adjustments, net of
$1,307 deferred income taxes (5,523) (5,523)
Adoption of SFAS 158, net of $40,313
deferred income taxes (88,207) (88,207)
Marketable securities unrealized gains,
net of $1 deferred income taxes 2 2
Stock options exercised, 234,419 shares 292 19 11,659 11,970
Other, 1,085 shares, and 50,700 restricted
stock units (net of forfeitures) 35 (3) 32
Amortization of unearned compensation on
restricted stock units 1,939 1,939
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2006 $ 85,614 $(603,171) $ 166,494 $1,666,761 $(169,334) $ -- $1,146,364
===================================================================================================================================
See accompanying notes to consolidated financial statements.
-52-
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31 2006 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 196,398 $ 156,657 $ 121,211
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss):
Foreign currency translation adjustments 91,578 (54,399) 46,230
Net gains (losses) on cash flow hedging instruments, net of deferred income taxes of $(40),
$79 and $(30) in 2006, 2005 and 2004, respectively 75 (147) 55
Reclassification adjustment for (gain)/loss on cash flow hedging instruments, net of
deferred income taxes of $(32), $3, and $(56) in 2006, 2005 and 2004, respectively 59 (5) 104
Pension liability adjustments, net of deferred income taxes of $1,307, $(6,407) and $2,062
in 2006, 2005 and 2004, respectively (5,523) 14,724 (4,453)
Unrealized gain on marketable securities, net of deferred income taxes of $(1) in 2006 2 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 86,191 (39,827) 41,936
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 282,589 $ 116,830 $ 163,147
===================================================================================================================================
See accompanying notes to consolidated financial statements.
-53-
HARSCO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Harsco Corporation
and its majority-owned subsidiaries (the "Company"). Additionally, the Company
consolidates three entities in which it has an equity interest of 49% to 50% and
exercises management control. These three entities had combined revenues of
approximately $87.3 million or 2.5% of the Company's total revenues in 2006.
Investments in unconsolidated entities (all of which are 40-50% owned) are
accounted for under the equity method. The Company does not have any off-balance
sheet arrangements with unconsolidated special-purpose entities.
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 prior year amounts presented for
comparative purposes will not individually agree with previously filed Forms
10-K or 10-Q.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits and short-term
investments which are highly liquid in nature and have an original maturity of
three months or less.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventories in the United
States are accounted for using principally the last-in, first-out (LIFO) method.
Other inventories are accounted for using the first-in, first-out (FIFO) or
average cost methods.
DEPRECIATION
Property, plant and equipment is recorded at cost and depreciated over the
estimated useful lives of the assets using principally the straight-line method.
When property is retired from service, the cost of the retirement is charged to
the allowance for depreciation to the extent of the accumulated depreciation and
the balance is charged to income. Long-lived assets to be disposed of by sale
are not depreciated while they are held for sale.
LEASES
The Company leases certain property and equipment under noncancelable lease
agreements. All lease agreements are evaluated and classified as either an
operating lease or capital lease. A lease is classified as a capital lease if
any of the following criteria are met: transfer of ownership to the Company by
the end of the lease term; the lease contains a bargain purchase option; the
lease term is equal to or greater than 75% of the asset's economic life; or the
present value of future minimum lease payments is equal to or greater than 90%
of the asset's fair market value. Operating lease expense is recognized ratably
over the entire lease term, including rent abatement periods and rent holidays.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill is not amortized but tested for impairment at the reporting unit level.
SFAS No. 142, "Goodwill and Other Intangible Assets," (SFAS 142) defines a
reporting unit as an operating segment or one level below an operating segment
(referred to as a component). A component of an operating segment is a reporting
unit if the component constitutes a business for which discrete financial
information is available and segment management regularly reviews the operating
results of that component. Accordingly, the Company performs the goodwill
impairment test at the operating segment level for the Mill Services Segment,
the Access Services Segment and the Engineered Products and Services category
and at the component level for the Gas Technologies Segment. The goodwill
impairment tests are performed on an annual basis as of October 1 and between
annual tests whenever events or circumstances indicate that the carrying value
of a reporting unit's goodwill may exceed its fair value. A discounted cash flow
model is used to estimate the fair value of a reporting unit. This model
requires the use of long-term planning forecasts and assumptions regarding
industry-specific economic conditions that are outside the control of the
Company. See Note 5, "Goodwill and Other Intangible Assets," for additional
information on intangible assets and goodwill impairment testing. Finite-lived
intangible assets are amortized over their estimated useful lives.
IMPAIRMENT OF LONG-LIVED ASSETS (OTHER THAN GOODWILL)
Long-lived assets are reviewed for impairment when events and circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's policy is to record an impairment loss when it is determined that the
carrying amount of the asset exceeds the sum of the expected undiscounted future
cash flows resulting from use of
-54-
the asset and its eventual disposition. Impairment losses are measured as the
amount by which the carrying amount of the asset exceeds its fair value.
Long-lived assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell.
REVENUE RECOGNITION
Product sales and service sales are recognized when they are realized or
realizable and when earned. Revenue is realized or realizable and earned when
all of the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the Company's
price to the buyer is fixed or determinable and collectibility is reasonably
assured. Service sales include sales of the Mill Services and Access Services
Segments as well as railway track maintenance services. Product sales include
sales of the Gas Technologies Segment as well as the manufacturing businesses of
the Engineered Products and Services ("all other") Category.
MILL SERVICES SEGMENT - This Segment provides services predominantly on a
long-term, volume-of-production contract basis. Contracts may include both fixed
monthly fees as well as variable fees based upon specific services provided to
the customer. The fixed-fee portion is recognized periodically as earned
(normally monthly) over the contractual period. The variable-fee portion is
recognized as services are performed and differs from period-to-period based
upon the actual provision of services.
ACCESS SERVICES SEGMENT - This Segment rents equipment under
month-to-month rental contracts, provides services under both fixed-fee and
time-and-materials short-term contracts and, to a lesser extent, sells products
to customers. Equipment rentals are recognized as earned over the contractual
rental period. Services provided on a fixed-fee basis are recognized over the
contractual period based upon the completion of specific units of accounting
(i.e., erection and dismantling of equipment). Services provided on a
time-and-materials basis are recognized when earned as services are performed.
Product sales revenue is recognized when title and risk of loss transfer, and
when all of the revenue recognition criteria have been met.
GAS TECHNOLOGIES SEGMENT - This Segment sells products under
customer-specific sales contracts. Product sales revenue is recognized when
title and risk of loss transfer, and when all of the revenue recognition
criteria have been met. Title and risk of loss for domestic shipments generally
transfers to the customer at the point of shipment. For international sales,
title and risk of loss transfer in accordance with the international commercial
terms included in the specific customer contract.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - This category
includes the Harsco Track Technologies, Reed Minerals, IKG Industries,
Patterson-Kelley and Air-X-Changers operating segments. These operating segments
principally sell products. The Harsco Track Technologies Division sells products
and provides services. Product sales revenue for each of these operating
segments is recognized generally when title and risk of loss transfer, and when
all of the revenue recognition criteria have been met. Title and risk of loss
for domestic shipments generally transfers to the customer at the point of
shipment. For export sales, title and risk of loss transfer in accordance with
the international commercial terms included in the specific customer contract.
Revenue may be recognized subsequent to the transfer of title and risk of loss
for certain product sales of the Harsco Track Technologies Division if the
specific sales contract includes a customer acceptance clause which provides for
different timing. In those situations revenue is recognized after transfer of
title and risk of loss and after customer acceptance. The Harsco Track
Technologies Division also provides services predominantly on a long-term,
time-and-materials contract basis. Revenue is recognized when earned as services
are performed.
INCOME TAXES
United States federal and state income taxes and non-U.S. income taxes are
provided currently on the undistributed earnings of international subsidiaries
and unconsolidated affiliated entities, giving recognition to current tax rates
and applicable foreign tax credits, except when management has specific plans
for reinvestment of undistributed earnings which will result in the indefinite
postponement of their remittance. Deferred taxes are provided using the asset
and liability method for temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. A valuation allowance to reduce deferred tax assets is evaluated on a
quarterly basis. The valuation allowance is principally for tax loss
carryforwards which are uncertain as to realizability. Income tax loss
contingencies are recorded in the period when it is determined that it is
probable that a liability has been incurred and the loss can be reasonably
estimated. Adjustments to estimated amounts are recorded as necessary based upon
new information, the occurrence of new events or the resolution of an
uncertainty. Beginning in 2007, income tax contingencies will be measured under
FASB Interpretation ("FIN") 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" ("FIN 48").
-55-
ACCRUED INSURANCE AND LOSS RESERVES
The Company retains a significant portion of the risk for workers' compensation,
U.K. employers' liability, automobile, general and product liability losses.
During 2006, 2005 and 2004, the Company recorded insurance expense related to
these lines of coverage of approximately $44 million, $37 million and $37
million, respectively. Reserves have been recorded which reflect the
undiscounted estimated liabilities including claims incurred but not reported.
When a recognized liability is covered by third-party insurance, the Company
records an insurance claim receivable to reflect the covered liability. Changes
in the estimates of the reserves are included in net income in the period
determined. During 2006, the Company recorded a retrospective insurance reserve
adjustment that increased pre-tax insurance expense for self insured programs by
$1.2 million. In 2005 and 2004, the retrospective insurance reserve adjustments
decreased pre-tax insurance expense by $4.1 million and $2.7 million,
respectively. At December 31, 2006 and 2005, the Company has recorded
liabilities of $103.4 million and $102.3 million, respectively, related to both
asserted as well as unasserted insurance claims. Included in the balance at
December 31, 2006 and 2005 were $18.9 million and $25.2 million, respectively,
of recognized liabilities covered by insurance carriers. Amounts estimated to be
paid within one year have been classified as current Insurance liabilities, with
the remainder included in non-current Insurance liabilities in the Consolidated
Balance Sheets.
WARRANTIES
The Company has recorded product warranty reserves of $4.8 million, $5.0 million
and $4.2 million as of December 31, 2006, 2005 and 2004, respectively. The
Company provides for warranties of certain products as they are sold in
accordance with SFAS No. 5, "Accounting for Contingencies." The following table
summarizes the warranty activity for the years ended December 31, 2006, 2005 and
2004:
WARRANTY ACTIVITY
- --------------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
Balance at the beginning of the period $ 4,962 $ 4,161 $ 2,788
Accruals for warranties issued during the period 3,371 3,851 4,135
Increase/(reductions) related to pre-existing
warranties (868) 60 (414)
Warranties paid (2,731) (3,083) (2,361)
Other (principally foreign currency translation) 71 (27) 13
- --------------------------------------------------------------------------------
Balance at end of the period $ 4,805 $ 4,962 $ 4,161
================================================================================
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's subsidiaries outside the United
States, except for those subsidiaries located in highly inflationary economies
and those entities for which the U.S. dollar is the currency of the primary
economic environment in which the entity operates, are measured using the local
currency as the functional currency. Assets and liabilities of these
subsidiaries are translated at the exchange rates as of the balance sheet date.
Resulting translation adjustments are recorded in the cumulative translation
adjustment account, a separate component of Other comprehensive income (loss).
Income and expense items are translated at average monthly exchange rates. Gains
and losses from foreign currency transactions are included in net income. For
subsidiaries operating in highly inflationary economies, and those entities for
which the U.S. dollar is the currency of the primary economic environment in
which the entity operates, gains and losses on foreign currency transactions and
balance sheet translation adjustments are included in net income.
FINANCIAL INSTRUMENTS AND HEDGING
The Company has operations throughout the world that are exposed to fluctuations
in related foreign currencies in the normal course of business. The Company
seeks to reduce exposure to foreign currency fluctuations through the use of
forward exchange contracts. 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. The Company has a Foreign Currency
Risk Management Committee that meets periodically to monitor foreign currency
risks.
The Company executes foreign currency forward exchange contracts to hedge
transactions for firm purchase commitments, to hedge variable cash flows of
forecasted transactions and for export sales denominated in foreign currencies.
These contracts are generally for 90 days or less. For those contracts that are
designated as qualified
-56-
cash flow hedges under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), gains or losses are recorded in Other
comprehensive income (loss).
Amounts recorded in Other comprehensive income (loss) are reclassified into
income in the same period or periods during which the hedged forecasted
transaction affects income. The cash flows from these contracts are classified
consistent with the cash flows from the transaction being hedged (e.g., the cash
flows related to contracts to hedge the purchase of fixed assets are included in
cash flows from investing activities, etc.). The Company also enters into
certain forward exchange contracts not designated as hedges under SFAS 133.
Gains and losses on these contracts are recognized in income based on fair
market value. For fair value hedges of a firm commitment, the gain or loss on
the derivative and the offsetting gain or loss on the hedged firm commitment are
recognized currently in income.
OPTIONS FOR COMMON STOCK
In prior years, when stock options were issued to employees, the Company used
the intrinsic value method to account for the options. No compensation expense
was recognized on the grant date, since at that date, the option price equaled
the market price of the underlying common stock. Effective in 2002 and 2003, the
Company ceased granting stock options to employees and non-employee directors,
respectively.
The Company's net income and earnings per common share would have been reduced
to the pro forma amounts indicated below if compensation cost for the Company's
stock option plan had been determined based on the fair value at the grant date
for awards in accordance with the provisions of SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)").
PRO FORMA IMPACT OF SFAS 123(R) ON EARNINGS
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE) 2005 2004
- --------------------------------------------------------------------------------
Net income:
As reported $ 156,657 $ 121,211
Compensation expense (a) -- (96)
----------------------------
Pro forma $ 156,657 $ 121,115
============================
Basic earnings per share:
As reported $ 3.76 $ 2.95
Pro forma 3.76 2.94
Diluted earnings per share:
As reported 3.72 2.91
Pro forma 3.72 2.91
- --------------------------------------------------------------------------------
(a) Total stock-based employee compensation expense related to stock options
determined under fair value-based method for all awards, net of related income
tax effects.
In 2004, the Board of Directors approved the granting of performance-based
restricted stock units as the long-term equity component of officer
compensation. See Note 12, "Stock-Based Compensation," for additional
information on the Company's equity compensation plans.
EARNINGS PER SHARE
Basic earnings per share are calculated using the average shares of common stock
outstanding, while diluted earnings per share reflect the dilutive effects of
restricted stock units and the potential dilution that could occur if stock
options were exercised. See Note 11, "Capital Stock," for additional information
on earnings per share.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses. Actual results could differ from
those estimates.
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
-57-
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 implemented SFAS 155 effective January 1, 2007, and it did not have a
material impact on 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 implemented SFAS 156 effective January 1, 2007,
and it did not have a material impact on the Company's financial position,
results of operations or cash flows.
FASB Interpretation ("FIN") 48, "Accounting for Uncertainty in Income Taxes-an
- ------------------------------------------------------------------------------
interpretation of FASB Statement No. 109" ("FIN 48")
- ----------------------------------------------------
In July 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements in
accordance with SFAS No. 109, "Accounting for Income Taxes." It prescribes a
recognition threshold and measurement attribute for financial statement
recognition and disclosure of tax positions taken or expected to be taken on a
tax return. The provisions of this interpretation are required to be adopted for
fiscal periods beginning after December 15, 2006. The Company will be required
to apply the provisions of FIN 48 to all tax positions upon initial adoption
with any cumulative effect adjustment to be recognized as an adjustment to
retained earnings.
The Company is currently evaluating the requirements of FIN 48 and has not yet
determined the impact on the consolidated financial statements.
SFAS No. 157, "Fair Value Measurements" ("SFAS 157")
- ----------------------------------------------------
In September 2006, the FASB issued SFAS 157 to provide a single definition of
fair value, establish a framework for measuring fair value in U.S. generally
accepted accounting principles ("GAAP"), and expand the disclosure requirements
regarding fair value measurements. SFAS 157 is applicable in the application of
other accounting pronouncements that require or permit fair value measurements,
but does not require new fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 (January 1, 2008 for the
Company), with limited retrospective application required. The Company is
currently evaluating the requirements of SFAS 157 and has not yet determined the
impact on the consolidated financial statements.
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
- -------------------------------------------------------------------------
Misstatements When Quantifying Misstatements in Current Year Financial
- ----------------------------------------------------------------------
Statements" ("SAB 108")
- -----------------------
In September 2006, the SEC issued SAB 108 to provide guidance for quantifying
and evaluating the materiality of a misstatement. SAB 108 indicates that an
entity should use both a balance sheet (iron curtain) approach and an income
statement (rollover) approach when quantifying and evaluating the materiality of
a misstatement, and provides guidance for using the dual approach. SAB 108 also
provides transition guidance for correcting errors existing in prior years. SAB
108 is effective for annual financial statements covering the first fiscal year
ending after November 15, 2006 (December 31, 2006 for the Company). The Company
implemented SAB 108 effective December 31, 2006, and it did not have an impact
on the Company's financial position, results of operations or cash flows as
there were no misstatements that required evaluation under the standard.
SFAS No. 158, "Employer's Accounting for Defined Benefit Pension and Other
- --------------------------------------------------------------------------
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
- --------------------------------------------------------------------------
132(R)" ("SFAS 158")
- --------------------
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 SFAS 158
-58-
in September 2006. Included in SFAS 158 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. SFAS 158 also eliminates the early measurement dates by requiring
the pension plan obligation to be measured as of the date of the entity's
balance sheet. The requirement to recognize the funded status of the pension
plans is effective for publicly-held companies for fiscal years ending after
December 15, 2006 (December 31, 2006 for the Company). The requirement to
measure the pension obligation as of the entity's balance sheet date is
effective for fiscal years ending after December 15, 2008 (December 31, 2008 for
the Company). The Company implemented Phase I of SFAS 158 effective December 31,
2006. This reduced the Company's equity on an after-tax basis by approximately
$88.2 million compared with measurement under prior standards. The results of
operations were not affected. The adoption of SFAS 158 did not have a negative
impact on compliance with the Company's debt covenants.
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
- -----------------------------------------------------------------------
Liabilities" ("SFAS 159").
- --------------------------
In February 2007, the FASB issued SFAS 159, which permits all entities to choose
to measure eligible items at fair value at specified election dates. Unrealized
gains and losses on items for which the fair value option has been elected will
be reported in earnings at each subsequent reporting date. The fair value option
may be applied financial instrument by financial instrument (with limited
exceptions), is generally irrevocable, and must be applied to the entire
financial instrument. SFAS 159 is effective for fiscal years that begin after
November 15, 2007 (January 1, 2008 for the Company). The Company is currently
evaluating the requirements of SFAS 159, and has not yet determined the impact
on the consolidated financial statements.
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
In February 2007, the Company acquired Excell Materials, Inc. ("Excell"), a
Pittsburgh-based multinational company, for approximately $200 million, subject
to various adjustments. Excell specializes in the reclamation and recycling of
high-value content from steelmaking slag. Excell is also involved in the
development of minerals technologies for commercial applications. Excell
recorded 2006 sales in excess of $100 million and maintains operations at nine
locations in the United States, Canada, Brazil, and South Africa.
In November 2006, the Company acquired the Santiago, Chile-based company
Moldajes y Andamios TH S.A. ("MyATH"), a supplier of rental formwork,
scaffolding and related services to the construction, infrastructure and
building maintenance sectors. MyATH employs approximately 100 people and its
annual revenues are approximately $8 million. MyATH has been included in the
Hunnebeck Division of the Access Services Segment.
In November 2006, the Company acquired the conveyor services and trading arm of
Technic Gum, a Belgium-based provider of conveyor belt maintenance services for
the steel and cement-producing industries. Technic Gum recorded revenues of
approximately $8 million in 2005 and employs approximately 50 people. Technic
Gum has been included in the Mill Services Segment.
In July 2006, the Company acquired the assets of UK-based Cape PLC's Cleton
industrial maintenance services ("Cleton") subsidiaries in Holland, Belgium and
Germany for (euro)8 million (approximately $10 million). Cleton posted 2005
revenues in excess of $50 million and employs close to 400 people. Cleton
specializes in providing scaffolding and related insulation services for the
maintenance of large-scale industrial plants, and serves some of the largest oil
refinery, petrochemical, and process plant sites in the Benelux countries.
Cleton has been included in the SGB Division of the Access Services Segment.
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 $235 million), excluding acquisition costs. BISNH has been
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 $96.3
million, of which $91.8 million is expected to be deductible for U.S. income tax
purposes.
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 excluded acquisition costs.
-59-
Hunnebeck has been 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 $67.8 million, none of which is expected to be deductible
for U. S. income tax purposes.
DISPOSITIONS - ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
In January 2007, the Company's Board of Directors approved the divestiture of
its Gas Technologies Segment. This Segment recorded revenues and operating
income of $397.7 million and $14.2 million, respectively, for 2006. The Company
expects the divestiture to occur in the second half of 2007. Results of the
Segment will be included in Discontinued Operations of the income statement
effective with the first quarter 2007 report. The Segment's assets and
liabilities will be classified as held-for-sale in the Company's first quarter
2007 balance sheet.
Throughout the past several years, management approved the sale of certain
long-lived assets (primarily land and buildings) throughout the Company's
operations. The major classes of assets held-for-sale included in the
Consolidated Balance Sheets are as follows:
(IN THOUSANDS)
AS OF DECEMBER 31 2006 2005
- --------------------------------------------------------------------------------
ASSETS
Property, plant and equipment, net $ 3,567 $ 2,326
- --------------------------------------------------------------------------------
TOTAL ASSETS HELD-FOR-SALE $ 3,567 $ 2,326
================================================================================
3. ACCOUNTS RECEIVABLE AND INVENTORIES
At December 31, 2006 and 2005, accounts receivable of $753.2 million and $666.3
million, respectively, were net of allowances for doubtful accounts of $25.4
million and $24.4 million, respectively. Gross accounts receivable included
trade accounts receivable of $737.1 million and $638.5 million at December 31,
2006 and 2005, respectively. Other receivables included insurance claim
receivables of $18.9 million and $25.2 million at December 31, 2006 and 2005,
respectively. The increase in accounts receivable and the allowance for doubtful
accounts from December 31, 2005 related principally to increased sales, foreign
currency translation and the net effect of acquisitions and divestitures
discussed in Note 2, "Acquisitions and Dispositions." The provision for doubtful
accounts was $9.2 million, $6.5 million and $5.0 million for 2006, 2005 and
2004, respectively.
Inventories consist of the following:
INVENTORIES
---------------------------------
(IN THOUSANDS) 2006 2005
---------------------------------------------------------------------------
Finished goods $ 117,072 $ 85,325
Work-in-process 31,489 43,830
Raw materials and purchased parts 96,750 87,251
Stores and supplies 39,918 34,674
---------------------------------------------------------------------------
Total inventories $ 285,229 $ 251,080
===========================================================================
Valued at lower of cost or market:
Last-in, first out (LIFO) basis $ 138,643 $ 137,101
First-in, first out (FIFO) basis 28,165 26,003
Average cost basis 118,421 87,976
---------------------------------------------------------------------------
Total inventories $ 285,229 $ 251,080
===========================================================================
The increase in inventory balances related principally to increased demand in
the Access Services Segment, increased demand and the timing of purchases and
shipments in the Gas Technologies Segment, and foreign currency translation.
Inventories valued on the LIFO basis at December 31, 2006 and 2005 were
approximately $46.1 million and $34.1 million, respectively, less than the
amounts of such inventories valued at current costs.
-60-
As a result of reducing certain inventory quantities valued on the LIFO basis,
net income increased from that which would have been recorded under the FIFO
basis of valuation by $0.11 million, $1.6 million and $0.02 million in 2006,
2005 and 2004, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
(IN THOUSANDS) 2006 2005
---------------------------------------------------------------------------
Land and improvements $ 41,255 $ 39,306
Buildings and improvements 192,575 168,727
Machinery and equipment 2,699,131 2,291,294
Uncompleted construction 52,640 91,186
---------------------------------------------------------------------------
Gross property, plant and equipment 2,985,601 2,590,513
Less accumulated depreciation (1,663,134) (1,450,705)
---------------------------------------------------------------------------
Net property, plant and equipment $1,322,467 $1,139,808
===========================================================================
The increase in net property, plant and equipment from 2005 to 2006 related
principally to investments in the Mill Services and Access Services Segments.
The estimated useful lives of different types of assets are generally:
Land improvements 5 to 20 years
Buildings and improvements 5 to 40 years
Machinery and equipment 3 to 20 years
Leasehold improvements Estimated useful life of the improvement
or, if shorter, the life of the lease
5. GOODWILL AND OTHER INTANGIBLE ASSETS
In connection with the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," (SFAS 142) goodwill and intangible assets with indefinite
useful lives are no longer amortized. Goodwill is tested for impairment at the
reporting unit level on an annual basis, and between annual tests, whenever
events or circumstances indicate that the carrying value of a reporting unit's
goodwill may exceed its fair value. This impairment testing is a two-step
process as outlined in SFAS 142. Step one is a comparison of each reporting
unit's fair value to its book value. If the fair value of the reporting unit
exceeds the book value, step two of the test is not required. Step two requires
the allocation of fair values to assets and liabilities as if the reporting unit
had just been purchased resulting in the implied fair value of goodwill. If the
carrying value of the goodwill exceeds the implied fair value, a write down to
the implied fair value would be required.
The Company uses a discounted cash flow model to estimate the fair value of a
reporting unit in performing step one of the testing. This model requires the
use of long-term planning estimates and assumptions regarding industry-specific
economic conditions that are outside the control of the Company. The Company
performed required annual testing for goodwill impairment as of October 1, 2006
and 2005 and all reporting units of the Company passed the step one testing
thereby indicating that no goodwill impairment exists. However, there can be no
assurance that future goodwill impairment tests will not result in a charge to
earnings.
-61-
The following table reflects the changes in carrying amounts of goodwill by
segment for the years ended December 31, 2005 and 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, 2004, net of accumulated
amortization $ 220,493 $ 167,802 $ 36,693 $ 8,137 $ 433,125
Goodwill acquired during year 93,268 71,068 -- -- 164,336
Goodwill written off related to sale of business unit -- (5,370) -- -- (5,370)
Other (principally foreign currency translation) (16,542) (15,920) -- -- (32,462)
- ------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2005, net of accumulated
amortization $ 297,219 $ 217,580 $ 36,693 $ 8,137 $ 559,629
- ------------------------------------------------------------------------------------------------------------------------------
Goodwill acquired during year 341 4,704 222 -- 5,267
Changes to Goodwill (a) 3,709 (3,251) -- -- 458
Other (b) -- (3,286) -- -- (3,286)
Foreign currency translation 24,223 26,190 (1) -- 50,412
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2006, NET OF ACCUMULATED
AMORTIZATION $ 325,492 $ 241,937 $ 36,914 $ 8,137 $ 612,480
==============================================================================================================================
(a) Relate principally to opening balance sheet adjustments for the BISNH,
Hunnebeck and Cleton acquisitions.
(b) Reduction of valuation allowance related to realization of a tax loss
carryback.
Goodwill is net of accumulated amortization of $109.3 million and $103.0 million
at December 31, 2006 and 2005, respectively.
Intangible assets totaled $88.2 million, net of accumulated amortization of
$19.4 million at December 31, 2006 and $78.8 million, net of accumulated
amortization of $11.8 million at December 31, 2005. The following table reflects
these intangible assets by major category:
INTANGIBLE ASSETS
- ------------------------------------------------------------------------------------------------
DECEMBER 31, 2006 DECEMBER 31, 2005
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ------------------------------------------------------------------------------------------------
Customer relationships $ 87,426 $ 7,084 $ 73,224 $ 1,262
Non-compete agreements 5,648 4,708 5,036 4,402
Patents 4,700 3,940 4,426 3,587
Other 9,800 3,678 7,962 2,558
- ------------------------------------------------------------------------------------------------
Total $ 107,574 $ 19,410 $ 90,648 $ 11,809
================================================================================================
-62-
The increase in intangible assets for 2006 was due principally to the
acquisitions discussed in Note 2, "Acquisitions and Dispositions," and foreign
currency translation. As part of these transactions, the Company acquired the
following intangible assets (by major class) which are subject to amortization:
ACQUIRED INTANGIBLE ASSETS
- --------------------------------------------------------------------------------
GROSS CARRYING RESIDUAL WEIGHTED-AVERAGE
(IN THOUSANDS) AMOUNT VALUE AMORTIZATION PERIOD
- --------------------------------------------------------------------------------
Customer relationships $ 5,863 None 10 years
Non-compete agreements 593 None 4 years
Other 1,239 None 5 years
--------------
Total $ 7,695
==============
There were no research and development assets acquired and written off in 2006,
2005 or 2004.
Amortization expense for intangible assets was $6.9 million, $2.1 million and
$1.8 million for the years ended December 31, 2006, 2005 and 2004, respectively.
The following table shows the estimated amortization expense for the next five
fiscal years based on current intangible assets.
(IN THOUSANDS) 2007 2008 2009 2010 2011
- --------------------------------------------------------------------------------
Estimated amortization expense $7,645 $7,356 $7,129 $6,820 $5,496
6. DEBT AND CREDIT AGREEMENTS
The Company has various credit facilities and commercial paper programs
available for use throughout the world. The following table illustrates the
amounts outstanding on credit facilities and commercial paper programs and
available credit at December 31, 2006. As of December 31, 2006, the Company
limited the aggregate commercial paper, syndicated credit facility and bilateral
credit facility borrowings at any one time to a maximum of $600 million.
Effective February 1, 2007, with the increase in the supplemental credit
facility to $250 million as indicated below, this maximum was increased to $750
million to provide additional financial flexibility for growth-related
investments. These credit facilities and programs are described in more detail
below the table.
SUMMARY OF CREDIT FACILITIES AND
COMMERCIAL PAPER PROGRAMS AS OF DECEMBER 31, 2006
- --------------------------------------------------------------------------------
(IN THOUSANDS) FACILITY OUTSTANDING AVAILABLE
LIMIT BALANCE CREDIT
- --------------------------------------------------------------------------------
U.S. commercial paper program $ 550,000(a) $ 263,371 $ 286,629
Euro commercial paper program 264,020 207,207 56,813
Revolving credit facility(b) 450,000 -- 450,000
Supplemental credit facility(b)(c) 100,000 -- 100,000
Bilateral credit facility(d) 50,000 -- 50,000
- --------------------------------------------------------------------------------
TOTALS AT DECEMBER 31, 2006 $ 1,414,020 $ 470,578 $ 943,442(E)
================================================================================
(a) In June 2006, the Company increased the maximum amount of its U.S.
commercial paper program from $400 million to $550 million.
(b) U.S.-based program
(c) This facility was increased to $250 million effective February 1, 2007.
(d) International-based program
(e) Although the Company has significant available credit, as of
December 31, 2006, it was the Company's policy to limit aggregate
commercial paper and credit facility borrowings at any one time to a
maximum of $600 million. Effective February 1, 2007, this maximum
was increased to $750 million.
-63-
The Company has a U.S. commercial paper borrowing program under which it can
issue up to $550 million of short-term notes in the U.S. commercial paper
market. In addition, the Company has a 200 million euro commercial paper
program, equivalent to approximately $264 million at December 31, 2006, which is
used to fund the Company's international operations. Commercial paper interest
rates, which are based on market conditions, have been lower than comparable
rates available under the credit facilities. At December 31, 2006 and 2005, the
Company had $263.4 million and $351.3 million of U.S. commercial paper
outstanding, respectively, and $207.2 million and $127.4 million outstanding,
respectively, under its European-based commercial paper program. Commercial
paper is classified as long-term debt when the Company has the ability and
intent to refinance it on a long-term basis through existing long-term credit
facilities. At December 31, 2006 and 2005, the Company classified $161.5 million
and $88.7 million of commercial paper as short-term debt, respectively. The
remaining $309.1 million and $390.1 million in commercial paper at December 31,
2006 and 2005, respectively, was classified as long-term debt.
The Company has a revolving credit facility in the amount of $450 million,
through a syndicate of 16 banks, which matures in November 2010. This facility
serves as back-up to the Company's commercial paper programs. Interest rates on
the facility are based upon the London Interbank Offered Rate (LIBOR) plus a
margin. The Company pays a facility fee (.08% per annum as of December 31, 2006)
that varies based upon its credit ratings. At December 31, 2006 and 2005, there
were no borrowings outstanding on this credit facility.
On December 22, 2006, the Company renewed its supplemental 364-day credit
facility in the amount of $100 million, through two banks, which now matures in
December 2007. On February 1, 2007, the Company increased its supplemental
364-day credit facility to $250 million. This facility also serves as back-up to
the Company's commercial paper programs. Interest rates on the facility are
based upon either the announced Citicorp lending rate, the Federal Funds
Effective Rate plus a margin or LIBOR plus a margin. The Company pays a facility
fee (.08% per annum as of December 31, 2006) that varies based upon its credit
ratings. As of December 31, 2006 and 2005, there were no borrowings outstanding
on this credit facility.
The bilateral credit facility was renewed in December 2006 for an additional one
year. The facility serves as back-up to the Company's commercial paper programs
and also provides available financing for the Company's European operations.
Borrowings under this facility, which expires in December 2007, are available in
most major currencies with active markets at interest rates based upon LIBOR
plus a margin. Borrowings outstanding at expiration may be repaid over the
succeeding 12 months. As of December 31, 2006 and 2005, there were no borrowings
outstanding on this facility.
Short-term debt amounted to $185.1 million and $98.0 million (of which $161.5
million and $88.7 million was commercial paper) at December 31, 2006 and 2005,
respectively. Other than the commercial paper borrowings, short-term debt was
principally bank overdrafts. The weighted-average interest rate for short-term
borrowings at December 31, 2006 and 2005 was 4.8% and 4.0%, respectively.
-64-
Long-term debt consists of the following:
LONG-TERM DEBT
----------------------------
(IN THOUSANDS) 2006 2005
- ----------------------------------------------------------------------------------------------------
7.25% British pound sterling-denominated notes due October 27, 2010 $ 388,763 $ 341,063
5.125% notes due September 15, 2013 148,978 148,856
Commercial paper borrowings, with a weighted average interest rate
of 4.7% and 3.9% as of December 31, 2006 and 2005, respectively 309,109 390,074
Faber Prest loan notes due October 31, 2008 with interest based on
sterling LIBOR minus .75% (4.5% and 3.9% at December 31, 2006
and 2005, respectively) 5,494 6,731
Industrial development bonds, payable in varying amounts from 2010
to 2011 with a weighted average interest rate of 4.1% and 3.7%
as of December 31, 2006 and 2005, respectively 6,500 6,500
Other financing payable in varying amounts to 2011 with a weighted
average interest rate of 5.9% and 5.5% as of December 31, 2006
and 2005, respectively 19,103 18,701
- ----------------------------------------------------------------------------------------------------
877,947 911,925
Less: current maturities (13,130) (6,066)
- ----------------------------------------------------------------------------------------------------
$ 864,817 $ 905,859
====================================================================================================
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%. 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. At December 31, 2006, the Company was in compliance with
these covenants.
The maturities of long-term debt for the four years following December 31, 2007
are as follows:
(IN THOUSANDS)
--------------------------
2008 $ 8,702
2009 1,333
2010 700,831
2011 4,974
Cash payments for interest on all debt from continuing operations were $59.7
million, $42.2 million and $40.2 million in 2006, 2005 and 2004, respectively.
7. LEASES
The Company leases certain property and equipment under noncancelable operating
leases. Rental expense (for both continuing and discontinued operations) under
such operating leases was $72.2 million, $52.1 million and $49.4 million in
2006, 2005 and 2004, respectively.
Future minimum payments under operating leases with noncancelable terms are as
follows:
(IN THOUSANDS)
--------------------------
2007 $ 50,409
2008 37,402
2009 35,509
2010 17,702
2011 12,729
After 2011 30,793
Total minimum rentals to be received in the future under non-cancelable
subleases as of December 31, 2006 are $18.9 million.
-65-
8. EMPLOYEE BENEFIT PLANS
PENSION BENEFITS
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"). The
Company adopted the recognition provisions of SFAS 158 effective December 31,
2006. The impact of adopting SFAS 158 has been reflected in the consolidated
financial statements as of December 31, 2006 and the incremental effect of
applying SFAS 158 is disclosed below.
The Company has pension and profit sharing retirement plans covering a
substantial number of its employees. The defined benefits for salaried employees
generally are based on years of service and the employee's level of compensation
during specified periods of employment. Plans covering hourly employees
generally provide benefits of stated amounts for each year of service. The
multi-employer plans in which the Company participates provide benefits to
certain unionized employees. The Company's funding policy for qualified plans is
consistent with statutory regulations and customarily equals the amount deducted
for income tax purposes. The Company also makes periodic voluntary contributions
as recommended by its pension committee. The Company's policy is to amortize
prior service costs of defined benefit pension plans over the average future
service period of active plan participants. The Company uses an October 31
measurement date for its United States defined benefit pension plans and
recently acquired international plans. A September 30 measurement date is used
for other international defined benefit pension plans.
For a majority of the U.S. defined benefit pension plans and certain
international defined benefit pension plans, accrued service is no longer
granted for periods after December 31, 2003. In place of these plans, the
Company has established, effective January 1, 2004, defined contribution pension
plans providing for the Company to contribute a specified matching amount for
participating employees' contributions to the plan. Domestically, this match is
made on employee contributions up to four percent of their eligible
compensation. Additionally, the Company may provide a discretionary contribution
of up to two percent of compensation for eligible employees. The two percent
discretionary contribution was recorded for the last three years, 2006, 2005 and
2004, and paid in February of the subsequent year. Internationally, this match
is up to six percent of eligible compensation with an additional two percent
going towards insurance and administrative costs. The Company believes the
defined contribution plans will provide a more predictable and less volatile
pension expense than exists under the defined benefit plans.
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) U.S. PLANS INTERNATIONAL PLANS
- ------------------------------------------------------------------------------------------------------------------------
2006 2005 2004 2006 2005 2004
PENSION EXPENSE (INCOME)
Defined benefit plans:
Service cost $ 3,685 $ 3,380 $ 2,610 $ 9,168 $ 8,195 $ 9,561
Interest cost 14,919 13,914 13,592 43,506 40,475 37,876
Expected return on plan assets (19,942) (19,112) (17,960) (52,081) (44,796) (39,765)
Recognized prior service costs 742 767 754 1,446 1,208 1,245
Recognized losses 2,949 3,617 2,982 12,882 12,247 13,431
Amortization of transition (asset) liability (361) (1,455) (1,466) 36 117 (567)
Settlement/Curtailment loss (gain) 78 (3) 131 (51) 50 --
- ------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense 2,070 1,108 643 14,906 17,496 21,781
Multi-employer plans 10,560 8,156 7,674 8,662 5,579 5,395
Defined contribution plans 8,846 7,522 6,197 6,531 5,901 5,722
- ------------------------------------------------------------------------------------------------------------------------
Pension expense $ 21,476 $ 16,786 $ 14,514 $ 30,099 $ 28,976 $ 32,898
=======================================================================================================================
-66-
The change in the financial status of the pension plans and amounts recognized
in the Consolidated Balance Sheets at December 31, 2006 and 2005 are as follows:
DEFINED BENEFIT PENSION BENEFITS U. S. PLANS INTERNATIONAL PLANS
- --------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005 2006 2005
- --------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 255,629 $ 243,568 $ 798,334 $ 746,573
Service cost 3,686 3,380 9,102 8,195
Interest cost 14,919 13,914 43,424 40,475
Plan participants' contributions -- -- 2,393 1,866
Amendments 1,159 711 (2,932) --
Actuarial loss 3,717 5,300 57,593 86,447
Settlements/curtailments -- -- (994) (541)
Benefits paid (12,669) (11,244) (37,639) (28,602)
Obligations of added plans -- -- 4,204 20,695
Effect of foreign currency -- -- 108,133 (76,774)
- --------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 266,441 $ 255,629 $ 981,618 $ 798,334
==================================================================================================
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 246,680 $ 223,108 $ 670,149 $ 617,097
Actual return on plan assets 35,685 26,377 72,112 104,295
Employer contributions 2,203 8,439 34,992 40,367
Plan participants' contributions -- -- 2,393 1,868
Benefits paid (12,669) (11,244) (36,725) (28,225)
Plan assets of added plans -- -- 3,012 10,292
Effect of foreign currency -- -- 83,994 (75,545)
- --------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 271,899 $ 246,680 $ 829,927 $ 670,149
==================================================================================================
FUNDED STATUS:
Funded status at end of year $ 5,458 $ (8,949) $(151,691) $(128,185)
Unrecognized net loss -- 54,593 -- 229,454
Unrecognized transition (asset) obligation -- (361) -- 332
Unrecognized prior service cost -- 3,802 -- 9,643
- --------------------------------------------------------------------------------------------------
Net amount recognized $ 5,458 $ 49,085 $(151,691) $ 111,244
==================================================================================================
DEFINED BENEFIT PENSION BENEFITS U. S. PLANS INTERNATIONAL PLANS
(IN THOUSANDS) 2006 2005 2006 2005
- --------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSIST OF THE FOLLOWING:
Noncurrent assets $ 36,966 $ 64,580 $ 5,840 $ 9,537
Current liabilities (1,135) (958) (1,090) (19,207)
Noncurrent liabilities (30,373) (30,458) (156,441) (66,418)
Accumulated other comprehensive loss before tax 43,650 15,921 295,102 187,332
- --------------------------------------------------------------------------------------------------
-67-
AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE
LOSS CONSIST OF THE FOLLOWING:
U. S. PLANS INTERNATIONAL PLANS
(IN THOUSANDS) 2006 2006
- --------------------------------------------------------------------------------------------------
Net actuarial loss $ 39,620 $ 288,216
Prior service cost 4,030 6,512
Transition obligation -- 374
- --------------------------------------------------------------------------------------------------
Total $ 43,650 $ 295,102
==================================================================================================
THE ESTIMATED AMOUNTS THAT WILL BE AMORTIZED FROM
ACCUMULATED OTHER COMPREHENSIVE LOSS INTO DEFINED
BENEFIT PENSION EXPENSE IN 2007 ARE AS FOLLOWS:
(IN THOUSANDS) U. S. PLANS INTERNATIONAL PLANS
- --------------------------------------------------------------------------------------------------
Net actuarial loss $ 1,531 $ 15,057
Prior service cost 827 907
Transition obligation -- 29
- --------------------------------------------------------------------------------------------------
Total $ 2,358 $ 15,993
==================================================================================================
INCREMENTAL EFFECT ON CONSOLIDATED BALANCE SHEET
OF ADOPTING SFAS 158 FOR PENSION PLANS
DECEMBER 31, 2006
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------
BALANCE SHEET ADJUSTMENTS BALANCE SHEET
BEFORE TO ADOPT AFTER
ADOPTING SFAS 158(A) SFAS 158 ADOPTING SFAS 158(A)
-------------------- -------- --------------------
Assets:
Other assets $ 164,571 $ (92,881) $ 71,690
Liabilities:
Other current liabilities $ 210,061 $ 1,716 $ 211,777
Retirement plan liabilities 186,014 3,443 189,457
Deferred income tax liabilities 113,425 (9,833) 103,592
Stockholders' Equity:
Accumulated other comprehensive loss $ (81,127) $ (88,207) $ (169,334)
- --------------------------------------------------------------------------------------------------
(a) Balances represent major captions as presented on the Consolidated Balance
Sheet.
The Company's best estimate of expected contributions to be paid in year 2007
for the U.S. defined benefit plans is $2.4 million and for the international
defined benefit plans is $23.2 million.
On August 17, 2006, the Pension Protection Act of 2006 (the "Act") was signed
into law. Key provisions of the Act include a requirement to fully fund U.S.
defined benefit pension plans within seven years and an increase in the annual
income tax deduction limit applicable to pension plans. The Company is currently
evaluating the impact of the Act on its cash flows; however, it is not expected
to materially impact the Company's cash flows for any given period.
Contributions to multi-employer pension plans were $18.3 million, $13.6 million
and $15.2 million in years 2006, 2005 and 2004, respectively. For defined
contribution plans, payments were $13.7 million, $12.9 million and $9.7 million
for years 2006, 2005 and 2004, respectively.
-68-
FUTURE BENEFIT PAYMENTS
The expected benefit payments for defined benefit plans over the next ten years
are as follows:
(IN MILLIONS) U.S. PLANS INTERNATIONAL PLANS
-------------------------------------------------------------
2007 $ 12.3 $ 38.6
2008 12.4 39.5
2009 13.9 41.9
2010 14.7 42.4
2011 15.8 44.6
2012 - 2016 92.5 239.8
- --------------------------------------------------------------------------------
NET PERIODIC PENSION EXPENSE ASSUMPTIONS
The weighted-average actuarial assumptions used to determine the net periodic
pension expense for the years ended December 31 were as follows:
GLOBAL WEIGHTED AVERAGE
DECEMBER 31
-----------------------------
2006 2005 2004
---------------------------------------------------------------------------
Discount rates 5.3% 5.7% 5.9%
Expected long-term rates of return on
plan assets 7.6% 7.8% 7.9%
Rates of compensation increase 3.4% 3.4% 3.5%
U. S. PLANS INTERNATIONAL PLANS
DECEMBER 31 DECEMBER 31
-------------------------------------------------------------------------------------------
2006 2005 2004 2006 2005 2004
-------------------------------------------------------------------------------------------
Discount rates 5.87% 5.75% 6.25% 5.2% 5.7% 5.7%
Expected long-term rates of return on
plan assets 8.25% 8.75% 8.75% 7.4% 7.5% 7.5%
Rates of compensation increase 4.36% 4.0% 4.0% 3.2% 3.3% 3.4%
The expected long-term rates of return on plan assets for the 2007 pension
expense are 8.25% for the U.S. plans and 7.3% for the international plans.
- --------------------------------------------------------------------------------
DEFINED BENEFIT PENSION OBLIGATION ASSUMPTIONS
The weighted-average actuarial assumptions used to determine the defined benefit
pension plan obligations at December 31 were as follows:
GLOBAL WEIGHTED AVERAGE
DECEMBER 31
------------------------------------------
2006 2005 2004
--------------------------------------------------------------------------
Discount rates 5.3% 5.3% 5.7%
Rates of compensation increase 3.3% 3.4% 3.5%
U. S. PLANS INTERNATIONAL PLANS
DECEMBER 31 DECEMBER 31
------------------------------------------------------------------------------
2006 2005 2004 2006 2005 2004
------------------------------------------------------------------------------
Discount rates 5.87% 5.87% 5.75% 5.1% 5.2% 5.7%
Rates of compensation increase 4.5% 4.36% 4.0% 3.2% 3.2% 3.3%
- --------------------------------------------------------------------------------
-69-
The U.S. discount rate was determined using a yield curve that was produced from
a universe containing over 500 U.S.-issued, AA-graded corporate bonds, all of
which were noncallable (or callable with make-whole provisions), and excluding
the 10% of the bonds with the highest yields and the 10% with the lowest yields.
The discount rate was then developed as the level-equivalent rate that would
produce the same present value as that using spot rates to discount the
projected benefit payments. For international plans, the discount rate is
aligned to Corporate bond yields in the local markets, normally AA-rated
Corporations. The process and selection seeks to approximate the cash outflows
with the timing and amounts of the expected benefit payments. As of the
September 30, 2006 measurement date, these rates have declined by 10 basis
points from the prior year.
- --------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATIONS
The accumulated benefit obligation for all defined benefit pension plans at
December 31 was as follows:
(IN MILLIONS) U.S. PLANS INTERNATIONAL PLANS
---------------------------------------------------------------------------
2006 $252.1 $880.2
2005 244.4 744.7
- --------------------------------------------------------------------------------
PLANS WITH ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets at December 31 were as follows:
U. S. PLANS INTERNATIONAL PLANS
(IN MILLIONS) 2006 2005 2006 2005
-----------------------------------------------------------------------------
Projected benefit obligation $70.3 $76.8 $945.6 $778.2
Accumulated benefit obligation 66.1 74.2 850.3 730.1
Fair value of plan assets 39.0 44.9 787.3 644.8
The asset allocations attributable to the Company's U.S. defined benefit pension
plans at October 31, 2006 and 2005 and the target allocation of plan assets for
2007, by asset category, are as follows:
- --------------------------------------------------------------------------------
U.S. PLANS TARGET 2007 PERCENTAGE OF PLAN
ASSET CATEGORY ALLOCATION ASSETS AT OCTOBER 31
2006 2005
- --------------------------------------------------------------------------------
Domestic Equity Securities 45% - 55% 54.2% 51.9%
Fixed Income Securities 27% - 37% 27.5% 29.0%
International Equity Securities 4.5% - 14.5% 12.3% 10.7%
Cash & Cash Equivalents 0% - 5% 1.6% 4.1%
Other 2.5% - 12.5% 4.4% 4.3%
Plan assets are allocated among various categories of equities, fixed income,
cash and cash equivalents with professional investment managers whose
performance is actively monitored. The primary investment objective is long-term
growth of assets in order to meet present and future benefit obligations. The
Company periodically conducts an asset/liability modeling study to ensure the
investment strategy is aligned with the profile of benefit obligations.
The Company reviews the long-term expected return-on-asset assumption on a
periodic basis taking into account a variety of factors including the historical
investment returns achieved over a long-term period, the targeted allocation of
plan assets and future expectations based on a model of asset returns for an
actively managed portfolio, inflation and administrative/other expenses. The
model simulates 500 different capital market results over 15 years. For 2007,
the expected return-on-asset assumption for U.S. plans is 8.25%, consistent with
the expected return-on-asset assumption for 2006.
The U.S. defined benefit pension plans assets include 382,640 shares of the
Company's stock valued at $31.3 million and $24.4 million on October 31, 2006
and 2005, respectively, representing 11.5% and 9.9%, respectively, of total plan
assets. As part of a rebalancing of the pension fund to further diversify the
plan assets, approximately one-half of the pension fund's holdings in the
Company's stock were sold in the second quarter of 2004. As of December 31,
2006, the Company's stock represented 10.3% of total plan assets. The Company is
considering a further rebalancing of the Company's stock in the pension fund
during 2007. Dividends paid to the pension plans on the Company stock amounted
to $0.5 million in 2006 and $0.4 million in 2005.
- -70-
The asset allocations attributable to the Company's international defined
benefit pension plans at September 30, 2006 and 2005 and the target allocation
of plan assets for 2007, by asset category, are as follows:
- --------------------------------------------------------------------------------
INTERNATIONAL PLANS TARGET 2007 PERCENTAGE OF PLAN
ASSET CATEGORY ALLOCATION ASSETS AT SEPTEMBER 30
2006 2005
- --------------------------------------------------------------------------------
Equity Securities 50.0 % 54.1% 57.1%
Fixed Income Securities 40.0 % 39.9% 40.8%
Cash & Cash Equivalents 5.0% 2.6% 1.0%
Other 5.0% 3.4% 1.1%
Plan assets as of September 30, 2006, in the United Kingdom (U.K.) defined
benefit pension plan amounted to 90% of the international pension assets. These
assets were divided into portfolios representing various categories of equities,
fixed income, cash and cash equivalents managed by a number of professional
investment managers.
The primary investment objective is long-term growth of assets in order to meet
present and future benefit obligations. The Company periodically conducts
asset/liability modeling studies to ensure the investment strategies are aligned
with the profile of benefit obligations. For the international long-term
rate-of-return assumption, the Company considered the current level of expected
returns in risk-free investments (primarily government bonds), the historical
level of the risk premium associated with other asset classes in which the
portfolio is invested and the expectations for future returns of each asset
class and plan expenses. The expected return for each asset class was then
weighted based on the target asset allocation to develop the expected long-term
rate-of-return on assets. The Company's expected rate-of-return assumption for
the U.K. plan was 7.50% for both 2007 and 2006. The remaining international
pension plans with assets representing 10% of the international pension assets
are under the guidance of professional investment managers and have similar
investment objectives.
POSTRETIREMENT BENEFITS
The Company has postretirement health care benefits for a limited number of
employees mainly under plans related to acquired companies and postretirement
life insurance benefits for certain hourly employees. The costs of health care
and life insurance benefits are accrued for current and future retirees and are
recognized as determined under the projected unit credit actuarial method. Under
this method, the Company's obligation for postretirement benefits is to be fully
accrued by the date employees attain full eligibility for such benefits. The
Company's postretirement health care and life insurance plans are unfunded. The
Company uses an October 31 measurement date for its postretirement benefit
plans.
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS EXPENSE (INCOME)
Service cost $ 5 $ 7 $ 11
Interest cost 186 200 342
Recognized prior service costs 3 7 32
Recognized (gains) or losses (38) (37) 39
Curtailment gains (20) (318) (2,236)
- --------------------------------------------------------------------------------
Postretirement benefit expense/(income) $ 136 $ (141) $(1,812)
================================================================================
The curtailment gains of $0.3 million for 2005 and $2.2 million for 2004 were
due to the termination of certain retiree health care plans.
Effective October 31, 2004, the Company adopted the provisions of Financial
Accounting Standards Board Staff Position No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FSP FAS 106-2"). Adoption of FSP FAS 106-2 reduced
the Company's accumulated postretirement benefit obligation by $0.3 million as
of December 31, 2004. This amount was treated as an unrecognized actuarial gain.
The Company deferred re-measurement of its postretirement health care benefit
obligation until its measurement date, so there was no effect on 2004 reported
expense. The expense for 2006 and 2005 decreased by $29 thousand and $36
thousand, respectively, after reflecting the value of the federal subsidy.
-71-
The changes in the postretirement benefit liability recorded in the Consolidated
Balance Sheets are as follows:
POSTRETIREMENT BENEFITS
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 3,321 $ 4,187
Service cost 5 7
Interest cost 186 200
Actuarial gain (23) (117)
Plan participants' contributions 13 25
Benefits paid (289) (311)
Curtailment (20) (670)
- --------------------------------------------------------------------------------
Benefit obligation at end of year $ 3,193 $ 3,321
================================================================================
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF THE FOLLOWING:
Current liability $ (332) $ --
Noncurrent liability (2,861) (3,560)
- --------------------------------------------------------------------------------
Net amount recognized $ (3,193) $ (3,560)
================================================================================
POSTRETIREMENT BENEFITS
(IN THOUSANDS) 2006
- -------------------------------------------------------------------
AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE
INCOME CONSIST OF THE FOLLOWING:
Net actuarial gain $ (241)
Prior service cost 14
- -------------------------------------------------------------------
Net amount recognized (before tax adjustment) $ (227)
===================================================================
THE ESTIMATED AMOUNTS THAT WILL BE AMORTIZED FROM
ACCUMULATED OTHER COMPREHENSIVE INCOME INTO NET
PERIODIC BENEFIT COST IN 2007 ARE AS FOLLOWS:
Actuarial gain $ (127)
Prior service cost 3
- -------------------------------------------------------------------
Total $ (124)
===================================================================
The actuarial assumptions used to determine the
postretirement benefit obligation are as follows:
(DOLLARS IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------------------------
Assumed discount rate 5.87% 5.87% 5.75%
Health care cost trend rate 9.00% 10.00% 10.00%
Decreasing to ultimate rate 5.00% 5.00% 5.00%
Effect of one percent increase in health care cost trend rate:
On total service and interest cost components $ 10 $ 10 $ 15
On postretirement benefit obligation $ 144 $ 166 $ 239
Effect of one percent decrease in health care cost trend rate:
On total service and interest cost components $ (9) $ (9) $ (13)
On postretirement benefit obligation $ (130) $ (149) $ (212)
- ---------------------------------------------------------------------------------------------------
It is anticipated that the health care cost trend rate will decrease from 9% in
2007 to 5.0% in the year 2011.
-72-
The assumed discount rates to determine the postretirement benefit expense for
the years 2006, 2005 and 2004 were 5.87%, 5.75% and 6.25%, respectively.
The Company's expected benefit payments over the next ten years are as follows:
(IN THOUSANDS) BENEFITS PAYMENTS BEFORE EXPECTED SUBSIDY UNDER MEDICARE
SUBSIDY MODERNIZATION ACT
-----------------------------------------------------------------------------
2007 $ 332 $ 28
2008 331 29
2009 332 29
2010 330 30
2011 324 29
2012 - 2016 1,476 132
SAVINGS PLAN
Prior to January 1, 2004, the Company had a 401(k) Savings Plan ("the Savings
Plan") which covered substantially all U.S. employees with the exception of
employees represented by a collective bargaining agreement, unless the agreement
expressly provides otherwise. Effective January 1, 2004, certain U.S. employees
previously covered by the Savings Plan were transferred into the Harsco
Retirement Savings and Investment Plan ("HRSIP") which is a defined contribution
pension plan. The transferred employees were those whose credited years of
service under the qualified Defined Benefit Pension Plan were frozen as of
December 31, 2003. Employees whose credited service was not frozen as of
December 31, 2003 remained in the Savings Plan. The expenses related to the
HRSIP are included in the defined contribution pension plans disclosure in the
Pension Benefits section of this footnote.
Employee contributions to the Savings Plan are generally determined as a
percentage of covered employees' compensation. The expense for contributions to
the Savings Plan by the Company was $0.9 million, $0.9 million and $0.4 million
for 2006, 2005 and 2004, respectively.
Employee directed investments in the Savings Plan and HRSIP include the
following amounts of Company stock:
COMPANY SHARES IN PLANS
- ------------------------------------------------------------------------------------------------------
DECEMBER 31, 2006 DECEMBER 31, 2005 DECEMBER 31, 2004
NUMBER FAIR NUMBER FAIR NUMBER FAIR
(DOLLARS IN MILLIONS) OF SHARES MARKET VALUE OF SHARES MARKET VALUE OF SHARES MARKET VALUE
- ------------------------------------------------------------------------------------------------------
Savings Plan 857,149 $ 65.2 929,537 $ 62.8 1,017,241 $ 56.7
HRSIP 909,237 69.2 921,258 62.2 954,442 53.2
EXECUTIVE INCENTIVE COMPENSATION PLAN
The amended 1995 Executive Incentive Compensation Plan provides the basis for
determination of annual incentive compensation awards under a performance-based
Economic Value Added (EVA(R)) plan. Actual cash awards are usually paid in
January or February of the following year. The Company accrues amounts
reflecting the estimated value of incentive compensation anticipated to be
earned for the year. Total executive incentive compensation expense was $7.7
million, $6.1 million and $4.5 million in 2006, 2005 and 2004, respectively. The
2006 and 2005 expenses included performance-based restricted stock units
("RSUs") that were granted to certain officers and key employees of the Company.
There were no RSUs granted to officers or employees in 2004. See Note 12,
"Stock-Based Compensation," for additional information on the equity component
of executive compensation.
-73-
9. INCOME TAXES
Income before income taxes and minority interest for both continuing and
discontinued operations in the Consolidated Statements of Income consists of the
following:
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
United States $ 76,468 $ 74,013 $ 57,566
International 225,246 156,107 125,619
- --------------------------------------------------------------------------------
Total income before income taxes and
minority interest $ 301,714 $ 230,120 $ 183,185
================================================================================
Income tax expense/(benefit):
Currently payable:
Federal $ 39,329 $ 24,260 $ (2,788)
State 2,468 637 (281)
International 54,325 34,381 31,471
- --------------------------------------------------------------------------------
Total income taxes currently payable 96,122 59,278 28,402
Deferred federal and state (1,328) 4,550 17,110
Deferred international 2,662 887 7,797
- --------------------------------------------------------------------------------
Total income tax expense $ 97,456 $ 64,715 $ 53,309
================================================================================
Continuing Operations $ 97,523 $ 64,771 $ 49,034
Discontinued Operations (67) (56) 4,275
- --------------------------------------------------------------------------------
Total income tax expense $ 97,456 $ 64,715 $ 53,309
================================================================================
Cash payments for income taxes were $98.9 million, $52.2 million and $26.2
million, for 2006, 2005 and 2004, respectively.
The following is a reconciliation of the normal expected statutory U.S. federal
income tax rate to the effective rate as a percentage of Income before income
taxes and minority interest for both continuing and discontinued operations as
reported in the Consolidated Statements of Income:
2006 2005 2004
- --------------------------------------------------------------------------------
U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit 0.7 0.7 1.0
Export sales corporation benefit/domestic manufacturing
deduction (0.4) (0.6) (0.6)
Deductible 401(k) dividends (0.3) (0.4) (0.4)
Difference in effective tax rates on international
earnings and remittances (2.8) (5.4) (1.7)
Settlement of tax contingencies (0.3) (0.9) (3.3)
Other, net 0.4 (0.3) (0.9)
- --------------------------------------------------------------------------------
Effective income tax rate 32.3% 28.1% 29.1%
================================================================================
The difference in effective tax rates on international earnings and remittances
from 2005 to 2006 includes a one-time benefit recorded in the fourth quarter of
2005 of $2.7 million associated with funds repatriated under the American Jobs
Creation Act of 2004 ("AJCA"). Additionally, during the fourth quarter of 2005,
consistent with the Company's strategic plan of investing for growth, the
Company designated certain international earnings as permanently reinvested
which resulted in a one-time income tax benefit of $3.6 million.
-74-
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax assets and liabilities for the years ended December 31,
2006 and 2005 are as follows:
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
DEFERRED INCOME TAXES ASSET LIABILITY ASSET LIABILITY
- --------------------------------------------------------------------------------
Depreciation $ -- $ 146,301 $ -- $ 143,802
Expense accruals 29,853 -- 23,951 --
Inventories 5,646 -- 3,510 --
Provision for receivables 3,060 -- 1,578 --
Postretirement benefits -- 79 1,340 --
Deferred revenue -- 1,736 -- 4,941
Operating loss carryforwards 18,421 -- 22,340 --
Deferred foreign tax credits 7,681 -- 8,708 --
Pensions 49,608 3,512 26,764 17,129
Currency translation adjustment -- 3,258 2,846 --
Other -- 8,741 4,615 428
- --------------------------------------------------------------------------------
Subtotal 114,269 163,627 95,652 166,300
Valuation allowance (13,892) -- (21,682) --
- --------------------------------------------------------------------------------
Total deferred income taxes $ 100,377 $ 163,627 $ 73,970 $ 166,300
================================================================================
The deferred tax asset and liability balances are included in the following
Consolidated Balance Sheets line items:
- -----------------------------------------------------------
DEFERRED INCOME TAXES DECEMBER 31
(IN THOUSANDS) 2006 2005
- -----------------------------------------------------------
Other current assets $ 33,226 $ 29,756
Other assets 11,710 5,203
Other current liabilities 4,594 3,955
Deferred income taxes 103,592 123,334
At December 31, 2006, the tax effected amount of net operating loss
carryforwards ("NOLs") totaled $18.4 million. Of that amount, $8.6 million is
attributable to international operations and can be carried forward
indefinitely. Tax effected U.S. federal NOLs are $1.2 million and expire in
2018. Tax effected U.S. state NOLs are $8.6 million. Of that amount, $0.9
million expire in 2007-2013, $0.7 million expire in 2014-2021, and $7.0 million
expire in 2026. Included in the above-mentioned total are $1.2 million of
preacquisition NOLs.
The valuation allowance of $13.9 million and $21.7 million at December 31, 2006
and 2005, respectively, related principally to NOLs which are uncertain as to
realizability. To the extent that the preacquisition NOLs are utilized in the
future and the associated valuation allowance reduced, the tax benefit will be
allocated to reduce goodwill.
The change in the valuation allowances for 2006 and 2005 results primarily from
the utilization of NOLs, the release of valuation allowances in certain
jurisdictions based on the Company's revaluation of the realizability of future
benefits and the increase in valuation allowances in certain jurisdictions based
on the Company's revaluation of the realizability of future benefits.
The Company has not provided U.S. income taxes on certain of its non-U.S.
subsidiaries' undistributed earnings as such amounts are permanently reinvested
outside the U.S. At December 31, 2006 and 2005, such earnings were approximately
$425 million and $295 million, respectively. If these earnings were repatriated
at December 31, 2006, the one time tax cost associated with the repatriation
would be approximately $48 million. The Company has various tax holidays in
Europe, the Middle East and Asia that expire between 2005 and 2010. During 2006,
2005 and 2004, these tax holidays resulted in approximately $3.6 million, $2.4
million and $4.2 million, respectively, in reduced income tax expense.
On October 22, 2004, the AJCA was signed into law. The AJCA included a deduction
of 85% for certain international earnings that are repatriated, as defined in
the AJCA, to the U.S. The Company completed its evaluation of the repatriation
provisions of the AJCA and repatriated qualified earnings of approximately $24
million in the fourth quarter
-75-
of 2005. This resulted in the Company receiving a one-time income tax benefit of
approximately $2.7 million during the fourth quarter of 2005.
10. 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 December 31, 2006 and 2005 include accruals of
$3.8 million and $2.8 million, respectively, for environmental matters. The
amounts charged against pre-tax income related to environmental matters totaled
$2.2 million, $1.5 million and $2.1 million in 2006, 2005 and 2004,
respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position,
results of operations or cash flows.
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 December 31, 2006, the maximum assessment from the CRA for the
period 1994-1998 is approximately $10.4 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 December 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 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
December 31, 2006 and, therefore will not have a material adverse effect 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. Additionally, the Company made a payment to the
Ontario Ministry of Finance in the first quarter of 2006 for 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.
DERAILMENT
One of the Company's production rail grinders derailed near Baxter, California
on November 9, 2006, resulting in two crew member fatalities and the near total
loss of the rail grinder. Government and private investigations into the cause
of the derailment are on-going. Most of the clean-up and salvage efforts are
completed, although work on environmental remediation is on-going. Estimated
environmental remediation expenses have been recognized as of December 31, 2006.
All remaining Company rail grinders have been inspected by the Federal Railroad
Administration ("FRA") and each grinder is fully operational and in compliance
with legal requirements. The Company has also conducted its own inspections to
ensure that its grinders are safe and in compliance with contractual
commitments. The Company believes that the insurance proceeds from the loss of
the rail grinder will offset the majority of incurred expenses, which have been
recognized as of December 31, 2006. Therefore, the Company does not believe that
the derailment will have a material adverse effect on its financial position,
results of operations or cash flows.
OTHER
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos over the past several decades. In their suits, the plaintiffs
have named as defendants, among others, many manufacturers, distributors and
installers of numerous types of equipment or products that allegedly contained
asbestos.
-76-
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 New York. 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 plaintiff's alleged medical condition,
and without specifically identifying any Company product as the source of
plaintiff's asbestos exposure.
As of December 31, 2006, there are 26,440 pending asbestos personal injury
claims filed against the Company. Of these cases, 26,111 were pending in the New
York Supreme Court for New York County in New York State. The other claims,
totaling 329, are filed in various counties in a number of state courts, and in
certain Federal District Courts (including New York), and those complaints
generally assert lesser amounts of damages than the New York State court cases
or do not state any amount claimed.
As of December 31, 2006, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in 16,953 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 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 December 31, 2006,
the Company has been listed as a defendant in 248 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 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.
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
-77-
(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," for additional information on
Accrued Insurance and Loss Reserves.
11. CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000 shares of
common stock and 4,000,000 shares of preferred stock, both having a par value of
$1.25 per share. The preferred stock is issuable in series with terms as fixed
by the Board of Directors. None of the preferred stock has been issued. On June
24, 1997, the Company adopted a revised Shareholder Rights Plan. Under that
Plan, the Board declared a dividend to stockholders of record on September 28,
1997, of one right for each share of common stock. The rights may only be
exercised if, among other things, a person or group has acquired 15% or more, or
intends to commence a tender offer for 20% or more, of the Company's common
stock. Each right entitles the holder to purchase 1/100th share of a new Harsco
Junior Participating Cumulative Preferred Stock at an exercise price of $150.
Once the rights become exercisable, if any person acquires 20% or more of the
Company's common stock, the holder of a right will be entitled to receive common
stock calculated to have a value of two times the exercise price of the right.
The rights, which expire on September 28, 2007, do not have voting power, and
may be redeemed by the Company at a price of $.05 per right at any time until
the 10th business day following public announcement that a person or group has
accumulated 15% or more of the Company's common stock. At December 31, 2006,
750,000 shares of $1.25 par value preferred stock were reserved for issuance
upon exercise of the rights.
The Board of Directors has authorized the repurchase of shares of common stock
as follows:
NO. OF SHARES REMAINING NO. OF
AUTHORIZED TO BE ADDITIONAL SHARES SHARES AUTHORIZED
PURCHASED NO. OF SHARES AUTHORIZED FOR FOR PURCHASE
JANUARY 1 PURCHASED PURCHASE DECEMBER 31
- --------------------------------------------------------------------------------
2004 1,000,000 - -- 1,000,000
2005 1,000,000 (133) (a) -- 1,000,000
2006 1,000,000 - -- 1,000,000
================================================================================
(a) The 133 shares purchased were not part of the share repurchase program.
They were shares which a retired employee sold to the Company in order to
pay personal federal and state income taxes on shares issued to the
employee upon retirement.
In November 2006, the Board of Directors extended the share purchase
authorization through January 31, 2008 for the 1,000,000 shares still remaining
from the prior authorization.
In 2006, 2005 and 2004, additional issuances of treasury shares of 1,766 shares,
5,306 shares and 11,195 shares, respectively, were made for SGB stock option
exercises, employee service awards and shares related to vested restricted stock
units.
-78-
The following table summarizes the Company's common stock:
COMMON STOCK
--------------------------------------------
SHARES TREASURY OUTSTANDING
ISSUED SHARES SHARES
- --------------------------------------------------------------------------------
Outstanding, January 1, 2004 67,357,447 26,490,977 40,866,470
Stock Options Exercised 553,584 (10,945) 564,529
Other -- (250) 250
- --------------------------------------------------------------------------------
Outstanding, December 31, 2004 67,911,031 26,479,782 41,431,249
Stock Options Exercised 346,754 (4,086) 350,840
Other -- (1,220) 1,220
Purchases -- 133 (133)
- --------------------------------------------------------------------------------
Outstanding, December 31, 2005 68,257,785 26,474,609 41,783,176
Stock Options Exercised 233,738 (681) 234,419
Other -- (1,085) 1,085
- --------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 2006 68,491,523 26,472,843 42,018,680
================================================================================
The following is a reconciliation of the average shares of common stock used to
compute basic earnings per common share to the shares used to compute diluted
earnings per common share as shown on the Consolidated Statements of Income:
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005 2004
- --------------------------------------------------------------------------------
Income from continuing operations $196,509 $156,750 $13,540
================================================================================
Average shares of common stock outstanding used
to compute basic earnings per common share 41,953 41,642 41,129
Dilutive effect of stock options and restricted
stock units 262 438 469
- --------------------------------------------------------------------------------
Shares used to compute dilutive effect of stock
options 42,215 42,080 41,598
================================================================================
Basic earnings per common share from continuing
operations $ 4.68 $ 3.76 $ 2.76
================================================================================
Diluted earnings per common share from
continuing operations $ 4.65 $ 3.73 $ 2.73
================================================================================
All outstanding stock options were included in the computation of diluted
earnings per share at December 31, 2006, 2005 and 2004.
On January 23, 2007, the Company's Board of Directors approved a two-for-one
stock split. One additional share of common stock will be issued on March 26,
2007, to stockholders of record at the close of business on February 28, 2007.
The total number of authorized common stock shares and par value were unchanged
by this action. The stock split will require retroactive restatement of all
historical share and per share data in the first quarter ending on March 31,
2007. Stockholder's equity will also be restated to give retroactive recognition
of the stock split. For all periods presented, the par value of the additional
shares resulting from the split will be reclassified from Additional paid-in
capital to Common stock.
All references to the number of shares and per share amounts in the Consolidated
Financial Statements for the years 2006, 2005 and 2004 are presented on a
pre-split basis.
-79-
The company's historical earnings per common share on a pro forma basis
(unaudited), assuming the stock split had occurred on January 1, 2004, would be
as follows:
PRO FORMA EARNINGS PER COMMON SHARE
-------------------------------------
YEAR ENDED DECEMBER 31 2006 2005 2004
- --------------------------------------------------------------------------------
Basic earnings per common share:
Continuing operations $ 2.34 $ 1.88 $ 1.38
Discontinued operations -- -- 0.09
- --------------------------------------------------------------------------------
Basic earnings per common share $ 2.34 $ 1.88 $ 1.47
================================================================================
Diluted earnings per common share:
Continuing operations $ 2.33 $ 1.86 $ 1.36
Discontinued operations -- -- 0.09
- --------------------------------------------------------------------------------
Diluted earnings per common share $ 2.33 $ 1.86 $ 1.46(a)
================================================================================
(a) Does not total due to rounding.
12. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payments" ("SFAS 123(R)"), 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 123(R) 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). However, this
recognition period would be shorter if the recipient becomes retirement-eligible
prior to the vesting date. SFAS 123(R) 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 123(R) using the modified-prospective
transition method. Under this method, results from prior periods have not been
restated. During 2002 and 2003, the Company ceased granting stock options to
employees and non-employee directors, respectively. Primarily because of this,
the effect of adopting SFAS 123(R) was not material to the Company's income from
continuing operations, income before income taxes, net income, basic or diluted
earnings per share or cash flows from operating and financing activities for the
year ended December 31, 2006, and the cumulative effect of adoption using the
modified-prospective transition method was not material. In addition, the
Company elected to use the short-cut transition method for calculating the
historical pool of windfall tax benefits.
In 2004, the Board of Directors approved the granting of performance-based
restricted stock units as the long-term equity component of director, officer
and certain key employee compensation. 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 generally 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
and certain key employees is three years, and, upon vesting, each restricted
stock unit will be exchanged for a like number of shares of the Company's stock.
In September 2006, the Board of Directors approved changes to the employee
restricted stock units program where future awards will vest on a pro rata basis
over a three-year period and the specified retirement age will be 62. This
compares with the prior three-year cliff vesting and retirement age of 65.
Restricted stock units do not have an option for cash payment.
-80-
The following table summarizes restricted stock units issued and the
compensation expense recorded for the years ended December 31, 2006 and 2005:
STOCK-BASED COMPENSATION EXPENSE
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT)
- --------------------------------------------------------------------------------
RESTRICTED FAIR VALUE EXPENSE
STOCK UNITS PER UNIT 2006 2005 2004
- --------------------------------------------------------------------------------
Directors:
May 1, 2004 3,500 $ 43.42 $ -- $ 51 $ 101
May 1, 2005 6,000 53.75 108 215 --
May 1, 2006 8,000 82.59 440 -- --
Employees:
January 24, 2005 32,700 50.41 477 502 --
January 24, 2006 46,550 67.70 914 -- --
- --------------------------------------------------------------------------------
Total 96,750 $ 1,939 $ 768 $ 101
================================================================================
Restricted stock unit activity for the year ended December 31, 2006 was as
follows:
WEIGHTED AVERAGE
RESTRICTED GRANT-DATE
STOCK UNITS FAIR VALUE
- ----------------------------------------------------------------------------
Nonvested at January 1, 2006 31,750 $ 50.62
Granted 54,550 69.88
Vested (7,833) 73.17
Forfeited (5,850) 61.79
- ----------------------------------------------------------------------------
NONVESTED AT DECEMBER 31, 2006 72,617 $ 61.76
============================================================================
As of December 31, 2006, the total unrecognized compensation costs related to
nonvested restricted stock units was $2.7 million which is expected to be
recognized over a weighted-average period of approximately 1.8 years.
As of December 31, 2006, 2005 and 2004, excess tax benefits, resulting
principally from stock options were $3.6 million, $3.9 million and $3.3 million,
respectively.
No stock options have been granted to officers and employees since February
2002. No stock options have been granted to non-employee directors since May
2003. Prior to these dates, 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 exercise price of the stock
options was the fair value on the grant date, which was the date the Board of
Directors approved the respective grants. 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. At December 31, 2006, there were
1,242,231 and 148,500 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.
Options issued under the 1995 Executive Incentive Compensation Plan generally
vested and became exercisable one year following the date of grant except
options issued in 2002 generally vested and became exercisable two years
following the date of grant. Options issued under the 1995 Non-Employee
Director's Stock Plan generally 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.
-81-
Stock option activity for the years ended December 31, 2006, 2005 and 2004 was
as follows:
STOCK OPTIONS
-----------------------------------------------
AGGREGATE
INTRINSIC
SHARES WEIGHTED AVERAGE VALUE (IN
UNDER OPTION EXERCISE PRICE MILLIONS)(C)
- --------------------------------------------------------------------------------
Outstanding, January 1, 2004 1,695,080 $30.72 $22.5
Exercised (564,529) 30.02 -
Terminated and Expired (9,450) 40.25 -
- --------------------------------------------------------------------------------
Outstanding, December 31, 2004 1,121,101(a) $31.01 $27.9
Exercised (370,836) 29.10 -
Terminated and Expired (1,240) 33.41 -
- --------------------------------------------------------------------------------
Outstanding, December 31, 2005 749,025(b) $31.93 $26.9
Exercised (234,419) 34.06
Terminated and Expired (900) 28.75 -
- --------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 2006 513,706 $30.97 $23.4
================================================================================
(a) Included in options outstanding at December 31, 2004 were 5,107 options
granted to SGB key employees as part of the Company's acquisition of SGB in
2000. These options were not a part of the 1995 Executive Compensation
Plan, or the 1995 Non-Employee Directors' Stock Plan.
(b) Included in options outstanding at December 31, 2005 were 681 options
granted to SGB key employees as part of the Company's acquisition of SGB in
2000. These options were not a part of the 1995 Executive Compensation
Plan, or the 1995 Non-Employee Directors' Stock Plan.
(c) 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 twelve months ended
December 31, 2006, 2005 and 2004 were $10.8 million, $11.1 million and $9.5
million, respectively.
Options to purchase 513,706 shares were exercisable at December 31, 2006. The
following table summarizes information concerning outstanding and exercisable
options at December 31, 2006.
STOCK OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------------------------------
RANGE OF NUMBER OUTSTANDING REMAINING CONTRACTUAL WEIGHTED AVERAGE
EXERCISABLE PRICES AND EXERCISABLE LIFE IN YEARS EXERCISE PRICE
- --------------------------------------------------------------------------------
$25.63 - $29.00 211,208 3.28 $27.47
29.31 - 32.65 244,894 4.99 32.54
32.81 - 46.16 57,604 3.97 37.09
- --------------------------------------------------------------------------------
513,706
================================================================================
13. FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
As collateral for the Company's performance and to insurers, the Company is
contingently liable under standby letters of credit, bonds and bank guarantees
in the amounts of $128.4 million and $154.0 million at December 31, 2006 and
2005, respectively. These standby letters of credit, bonds and bank guarantees
are generally in force for up to four years. Certain issues have no scheduled
expiration date. The Company pays fees to various banks and insurance companies
that range from 0.25 percent to 1.90 percent per annum of the instruments' face
value. If the Company were required to obtain replacement standby letters of
credit, bonds and bank guarantees as of December 31, 2006 for those currently
outstanding, it is the Company's opinion that the replacement costs would not
vary significantly from the present fee structure.
-82-
The Company has currency exposures in approximately 45 countries. The Company's
primary foreign currency exposures during 2006 were in the United Kingdom,
members of the European Economic and Monetary Union, Brazil, Canada and South
Africa.
OFF-BALANCE SHEET RISK - THIRD PARTY GUARANTEES
In connection with the licensing of one of the Company's trade names and
providing certain management services (the furnishing of selected employees),
the Company guarantees the debt of certain third parties related to its
international operations. These guarantees are provided to enable the third
parties to obtain financing of their operations. The Company receives fees from
these operations, which are included as Services sales in the Company's
Consolidated Statements of Income. The revenue the Company recorded from these
entities was $2.2 million, $1.9 million and $1.0 million for the twelve months
ended December 31, 2006, 2005 and 2004, respectively. The guarantees are renewed
on an annual basis and the Company would only be required to perform under the
guarantees if the third parties default on their debt. The maximum potential
amount of future payments (undiscounted) related to these guarantees was $2.9
million at December 31, 2006 and 2005. There is no recognition of this potential
future payment in the accompanying financial statements as the Company believes
the potential for making these payments is remote. These guarantees were renewed
in June 2006, September 2006 and November 2006.
The Company provided an environmental indemnification for property that was sold
to a third party in 2006. The term of this guarantee is three years and the
Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property. The Company is not aware of
any environmental issues related to the property. The maximum potential amount
of future payments (undiscounted) related to this guarantee is $0.2 million at
December 31, 2006. There is no recognition of this potential future payment in
the accompanying financial statements as the Company believes the potential for
making this payment is remote.
The Company provided an environmental indemnification for property that was sold
to a third party in 2006. The term of this guarantee is indefinite, and the
Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property relating to the time the
Company owned the property. The Company is not aware of any environmental issues
related to this property. The maximum potential amount of future payments
(undiscounted) related to this guarantee is estimated to be $3.0 million at
December 31, 2006. There is no recognition of this potential future payment in
the accompanying financial statements as the Company believes the potential for
making this payment is remote.
The Company provides guarantees related to arrangements with certain customers
that include joint and several liability for actions for which the Company may
be partially at fault. The terms of these guarantees do not exceed four years
and the maximum amount of future payments (undiscounted) related to these
guarantees is $3.0 million per occurrence. This amount represents the Company's
self-insured maximum limitation. There is no specific recognition of potential
future payments in the accompanying financial statements as the Company is not
aware of any claims.
The Company provided a guarantee related to the payment of taxes for a product
line that was sold to a third party in 2005. The term of this guarantee is five
years, and the Company would only be required to perform under the guarantee if
taxes were not properly paid to the government while the Company owned the
product line in accordance with applicable statutes. The Company is not aware of
any instances of noncompliance related to these statutes. The maximum potential
amount of future payments (undiscounted) related to this guarantee is estimated
to be $1.3 million at December 31, 2006. There is no recognition of any
potential future payment in the accompanying financial statements as the Company
believes the potential for making this payment is remote.
The Company provided an environmental indemnification for property that was sold
to a third party in 2004. The term of this guarantee is seven years and the
Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property relating to the time the
Company owned the property that was not known by the buyer at the date of sale.
The Company is not aware of any environmental issues related to this property.
The maximum potential amount of future payments (undiscounted) related to this
guarantee is $0.8 million at December 31, 2006 and 2005. There is no recognition
of this potential future payment in the accompanying financial statements as the
Company believes the potential for making this payment is remote.
Every three years, the Company requires a third party to review procedures and
record keeping related to the production of certain products. Commencing in
2004, the Company provided an indemnification for any costs incurred by the
third party resulting from an injury while these services are being provided to
the Company. In addition, the Company provided an indemnification for certain
costs resulting from an outside claim against the third party. The
indemnification is provided for as long as the Company is producing products
which meet the third party's specifications. At December 31, 2006 and 2005, the
maximum potential amount of future payments (undiscounted) related to this
guarantee is $3.0 million per occurrence. This amount represents the Company's
self-insured maximum
-83-
limitation. There is no specific recognition of this potential future payment in
the accompanying financial statements as the Company is not aware of any claims.
Prior to the Company's acquisition of the business, Hunnebeck guaranteed certain
third party debt to leasing companies in connection with the sale of equipment.
The guarantees expire on January 1, 2007 and December 1, 2008. At December 31,
2006, the maximum potential amount of future payments (undiscounted) related to
these guarantees was $0.1 million. The Company would only be required to perform
under the guarantees if a customer defaulted on the lease payments. There is no
recognition of these potential future payments in the accompanying financial
statements as the Company believes the potential for making these payments is
remote.
Liabilities for the fair value of each of the guarantee instruments noted above
were recognized in accordance with FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). These liabilities are included
in Other current liabilities or Other liabilities (as appropriate) on the
Consolidated Balance Sheets. The recognition of these liabilities did not have a
material impact on the Company's financial condition or results of operations
for the twelve months ended December 31, 2006 or 2005.
In the normal course of business, the Company provides legal indemnifications
related primarily to the performance of its products and services and patent and
trademark infringement of its goods and services sold. These indemnifications
generally relate to the performance (regarding function, not price) of the
respective goods or services and therefore no liability is recognized related to
the fair value of such guarantees.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has several hedges of net investment recorded in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). The Company recorded a debit of $14.0 million and a credit of
$16.3 million during 2006 and 2005, respectively, in the foreign currency
translation adjustments line of Other comprehensive income (loss) related to
hedges of net investments.
At December 31, 2006 and 2005, the Company had $170.9 million and $157.9 million
contracted amounts, respectively, of foreign currency forward exchange contracts
outstanding. These contracts are part of a worldwide program to minimize foreign
currency exchange operating income and balance sheet exposure. The unsecured
contracts outstanding at December 31, 2006 mature within six months and are with
major financial institutions. The Company may be exposed to credit loss in the
event of non-performance by the other parties to the contracts. The Company
evaluates the credit worthiness of the counterparties and does not expect
default by them. Foreign currency forward exchange contracts are used to hedge
commitments, such as foreign currency debt, firm purchase commitments and
foreign currency cash flows for certain export sales transactions.
The following tables summarize by major currency the contractual amounts of the
Company's forward exchange contracts in U.S. dollars as of December 31, 2006 and
2005. The "Buy" amounts represent the U.S. dollar equivalent of commitments to
purchase foreign currencies, and the "Sell" amounts represent the U.S. dollar
equivalent of commitments to sell foreign currencies.
FORWARD EXCHANGE CONTRACTS
- --------------------------------------------------------------------------------
(IN THOUSANDS) AS OF DECEMBER 31, 2006
- --------------------------------------------------------------------------------
U.S. DOLLAR RECOGNIZED
TYPE EQUIVALENT MATURITY GAIN(LOSS)
- --------------------------------------------------------------------------------
Australian Dollar Sell $ 2,373 January 2007 $ (16)
Australian Dollar Buy 1,050 January 2007 --
Canadian Dollar Sell 3,050 January 2007 26
Canadian Dollar Buy 7,850 January 2007 (151)
Euros Sell 10,828 January 2007 12
Euros Buy 52,699 January 2007 288
British Pounds Sterling Sell 19,503 January 2007 34
British Pounds Sterling Buy 70,551 January through March 2007 (386)
Mexican Pesos Buy 509 January 2007 3
Taiwan Dollar Buy 895 January 2007 (2)
Taiwan Dollar Sell 895 January 2007 3
South African Rand Sell 691 January through May 2007 (17)
- --------------------------------------------------------------------------------
Total $ 170,894 $ (206)
================================================================================
-84-
At December 31, 2006, the Company held forward exchange contracts in British
pounds sterling, euros, Canadian dollars, Australian dollars, Mexican pesos,
South African rands and Taiwan dollars which were used to offset certain future
payments between the Company and its various subsidiaries, vendors or customers.
These contracts all mature by May 2007. The Company had outstanding forward
contracts designated as SFAS 133 cash flow hedges in the amount of $1.1 million
at December 31, 2006. These forward contracts had a net unrealized gain of $5
thousand that was included in Other comprehensive income (loss), net of deferred
taxes, at December 31, 2006. The Company did not elect to treat the remaining
contracts as hedges under SFAS 133 and so mark-to-market gains and losses were
recognized in net income.
FORWARD EXCHANGE CONTRACTS
- --------------------------------------------------------------------------------
(IN THOUSANDS) AS OF DECEMBER 31, 2005
- --------------------------------------------------------------------------------
U.S. DOLLAR RECOGNIZED
TYPE EQUIVALENT MATURITY GAIN(LOSS)
- --------------------------------------------------------------------------------
Euros Buy $ 14,343 January through June 2006 $ (211)
Euros Sell 1,987 January 2006 15
British pounds sterling Buy 75,743 January 2006 (1,334)
British pounds sterling Sell 56,929 January 2006 436
Canadian dollars Buy 942 January 2006 5
Canadian dollars Sell 1,886 January 2006 15
Taiwan dollars Sell 6,088 August through November 2006 --
- --------------------------------------------------------------------------------
Total $157,918 $(1,074)
================================================================================
At December 31, 2005, the Company held forward exchange contracts in British
pounds sterling, euros, Canadian dollars and Taiwan dollars which were used to
offset certain future payments between the Company and its various subsidiaries,
vendors or customers. These contracts all mature by November 2006. The Company
had outstanding forward contracts designated as SFAS 133 cash flow hedges in the
amount of $6.1 million at December 31, 2005. These forward contracts had a net
unrealized loss of $112 thousand that was included in other comprehensive income
(loss), net of deferred taxes, at December 31, 2005. The Company did not elect
to treat the remaining contracts as hedges under SFAS 133 and so mark-to-market
gains and losses were recognized in net income.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and cash equivalents with high-quality
financial institutions and, by policy, limits the amount of credit exposure to
any one institution.
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, consolidation
in the global steel industry has increased the Company's exposure to specific
customers. Additional consolidation 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.
The Company generally does not require collateral or other security to support
customer receivables. If a receivable from one or more of the Company's larger
customers becomes uncollectible, it could have a material effect on the
Company's results of operations and cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the relatively short
period to maturity of these instruments.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
The fair value of foreign currency forward exchange contracts is
estimated by obtaining quotes from brokers.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on
the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining
maturities.
-85-
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 2006 and 2005 are as follows:
FINANCIAL INSTRUMENTS
-------------------------------------------
(IN THOUSANDS) 2006 2005
- --------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $101,260 $101,260 $120,929 $120,929
Liabilities:
Long-term debt including current
maturities 877,947 893,373 911,925 947,406
Foreign currency forward exchange
contracts 206 206 1,074 1,074
- --------------------------------------------------------------------------------
14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA
The Company reports information about its operating segments using the
"management approach" in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). This approach is
based on the way management organizes and reports the segments within the
enterprise for making operating decisions and assessing performance. The
Company's reportable segments are identified based upon differences in products,
services and markets served. There were no significant inter-segment sales.
The Company's Divisions are aggregated into three reportable segments and an
"all other" category labeled Engineered Products and Services. These segments
and the types of products and services offered include the following:
MILL SERVICES SEGMENT
This segment provides on-site, outsourced services to steel mills and other
metal producers such as aluminum. Services include slag processing;
semi-finished inventory management; material handling; scrap management;
in-plant transportation; and a variety of other services.
ACCESS SERVICES SEGMENT
Major services include the rental and sale of scaffolding, shoring and concrete
forming systems for non-residential construction, international multi-dwelling
residential construction projects, industrial maintenance projects, as well as a
variety of other access services including project engineering and equipment
installation.
Products and services are provided to commercial and industrial construction
contractors; public utilities; industrial plants; and the infrastructure repair
and maintenance markets.
GAS TECHNOLOGIES SEGMENT
Major products and services include tanks, cylinders and valves for the
containment and control of compressed gases.
Major customers include various industrial markets and users of compressed
gases; the hospital, life support, and refrigerant gas industries; welding
distributors; medical laboratories; beverage carbonation users; and the animal
husbandry industry.
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY
Major products and services include railway track maintenance equipment and
services; industrial grating; air-cooled heat exchangers; granules for asphalt
roofing shingles and abrasives for industrial surface preparation derived from
coal slag; and boilers, water heaters and process equipment, including
industrial blenders, dryers and mixers.
Major customers include private and government-owned railroads and urban mass
transit systems worldwide; industrial plants and the non-residential, commercial
and public construction and retrofit markets; the natural gas exploration and
processing industry; asphalt roofing manufacturers; and the chemical, food
processing and pharmaceutical industries.
-86-
OTHER INFORMATION
The measurement basis of segment profit or loss is operating income. Sales of
the Company in the United States and the United Kingdom exceeded 10% of
consolidated sales with 38% and 20%, respectively, in 2006; 42% and 20%,
respectively, in 2005; and 42% and 21%, respectively, in 2004. There are no
significant inter-segment sales.
No single customer represented 10% or more of the Company's sales in 2005 and
2004. However, one customer in the Mill Services Segment provided $351.0 million
in sales for 2006, which was 10% of the Company's revenues for the year. In
addition, the Mill Services Segment is dependent largely on the global steel
industry and in 2006, 2005 and 2004, there were two customers that each provided
in excess of 10% of this Segment's revenues under multiple long-term contracts
at several mill sites. The loss of any one of these contracts would not have a
material adverse impact upon the Company's financial position or cash flows;
however, it could have a material effect on quarterly or annual results of
operations. Additionally, these customers have significant accounts receivable
balances. Further consolidation in the global steel industry is probable. Should
transactions occur involving some of the Company's larger steel industry
customers, it would result in an increase in concentration of credit risk for
the Company.
Corporate assets include principally cash, insurance receivables, prepaid
pension costs and United States deferred income taxes. Net Property, Plant and
Equipment in the United States represented 30%, 33% and 34% of total Net
Property, Plant and Equipment as of December 31, 2006, 2005 and 2004,
respectively. Net Property, Plant and Equipment in the United Kingdom
represented 23% of total Net Property, Plant and Equipment as of December 31,
2006, 2005 and 2004.
SEGMENT INFORMATION
- ---------------------------------------------------------------------------------------------------------
TWELVE MONTHS ENDED
-----------------------------------------------------------------------
DECEMBER 31, 2006 DECEMBER 31, 2005 DECEMBER 31, 2004
OPERATING OPERATING OPERATING
INCOME INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS) SALES (LOSS)
- ---------------------------------------------------------------------------------------------------------
Mill Services Segment $1,366,530 $147,798 $1,060,354 $109,591 $ 997,410 $105,490
Access Services Segment 1,080,924 120,382 788,750 74,742 706,490 44,464
Gas Technologies Segment 397,680 14,160 370,201 17,912 339,086 14,393
- ---------------------------------------------------------------------------------------------------------
Segment Totals 2,845,134 282,340 2,219,305 202,245 2,042,986 164,347
Engineered Products and Services
("all other") Category 578,159 77,466 546,905 69,699 459,073 47,029
General Corporate -- (1,337) -- (2,996) -- (1,527)
- ---------------------------------------------------------------------------------------------------------
Consolidated Totals $3,423,293 $358,469 $2,766,210 $268,948 $2,502,059 $209,849
=========================================================================================================
-87-
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME
BEFORE INCOME TAXES AND MINORITY INTEREST
- --------------------------------------------------------------------------------
TWELVE MONTHS ENDED
-------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
Segment operating income $ 282,340 $ 202,245 $ 164,347
Engineered Products and Services
("all other") Category 77,466 69,699 47,029
General Corporate Expense (1,337) (2,996) (1,527)
- --------------------------------------------------------------------------------
Operating income from continuing operations 358,469 268,948 209,849
Equity in income of unconsolidated
entities, net 192 74 128
Interest Income 3,709 3,165 2,319
Interest Expense (60,478) (41,918) (41,057)
- --------------------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interest $ 301,892 $ 230,269 $ 171,239
================================================================================
SEGMENT INFORMATION
- -----------------------------------------------------------------------------------------------------
DEPRECIATION AND
ASSETS (A) AMORTIZATION
-----------------------------------------------------------------
(IN THOUSANDS) 2006 2005 2004 2006 2005 2004
- -----------------------------------------------------------------------------------------------------
Mill Services Segment $1,401,603 $1,273,522 $ 985,538 $151,005 $114,952 $107,682
Access Services Segment 1,239,892 976,936 763,916 69,781 53,263 48,005
Gas Technologies Segment 271,367 253,276 257,233 11,411 12,610 12,735
- -----------------------------------------------------------------------------------------------------
Segment Totals 2,912,862 2,503,734 2,006,687 232,197 180,825 168,422
Engineered Products and Services
("all other") Category 287,482 315,241 274,627 18,922 15,735 14,675
Corporate 126,079 156,829 108,442 1,863 1,505 1,274
- -----------------------------------------------------------------------------------------------------
Total $3,326,423 $2,975,804 $2,389,756 $252,982 $198,065 $184,371
=====================================================================================================
(a) Assets from discontinued operations of $0.0 million, $0.4 million and $0.5
million in 2006, 2005 and 2004, respectively, are included in the Gas
Technologies Segment.
CAPITAL EXPENDITURES
-----------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005 2004
-----------------------------------------------------------------------------
$161,651 $155,595 $120,890
Mill Services Segment
Access Services Segment 138,459 86,668 50,439
Gas Technologies Segment 9,330 6,438 8,958
-----------------------------------------------------------------------------
Segment Totals 309,440 248,701 180,287
Engineered Products and Services ("all other")
Category 27,635 39,834 22,585
Corporate 3,098 1,704 1,363
-----------------------------------------------------------------------------
Total $340,173 $290,239 $204,235
=============================================================================
-88-
INFORMATION BY GEOGRAPHIC AREA (A)
- ------------------------------------------------------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS NET PROPERTY, PLANT AND EQUIPMENT
-----------------------------------------------------------------------
(IN THOUSANDS) 2006 2005 2004 2006 2005 2004
- ------------------------------------------------------------------------------------------
United States $1,296,256 $1,157,034 $1,047,416 $ 401,997 $ 371,039 $313,391
United Kingdom 676,520 546,673 534,097 298,582 258,786 218,127
All Other 1,450,517 1,062,503 920,546 621,888 509,983 400,780
- ------------------------------------------------------------------------------------------
Totals excluding
Corporate $3,423,293 $2,766,210 $2,502,059 $1,322,467 $1,139,808 $932,298
==========================================================================================
(a) Revenues are attributed to individual countries based on the location of
the facility generating the revenue.
INFORMATION ABOUT PRODUCTS AND SERVICES
- --------------------------------------------------------------------------------
SALES TO UNAFFILIATED CUSTOMERS
-----------------------------------
(IN THOUSANDS) 2006 2005 2004
- --------------------------------------------------------------------------------
PRODUCT GROUP
Mill services $1,366,530 $1,060,354 $ 997,410
Access services 1,080,924 788,750 706,490
Industrial gas products 397,680 370,201 339,086
Railway track maintenance services and
equipment 231,625 247,452 209,765
Industrial grating products 107,048 98,845 85,609
Industrial abrasives and roofing granules 73,112 72,216 70,863
Heat exchangers 124,829 92,339 60,103
Powder processing equipment and heat
transfer products 41,545 36,053 32,733
- --------------------------------------------------------------------------------
Consolidated Sales $3,423,293 $2,766,210 $2,502,059
================================================================================
15. OTHER (INCOME) AND EXPENSES
In the years 2006, 2005 and 2004, the Company recorded pre-tax Other (income)
and expenses from continuing operations of $6.9 million, $2.0 million and $4.9
million, respectively. The major components of this income statement category
are as follows:
--------------------------------------------------------------------------
OTHER (INCOME) AND EXPENSES
------------------------------------
(IN THOUSANDS) 2006 2005 2004
--------------------------------------------------------------------------
Net gains $ (5,450) $ (9,674) $ (1,524)
Impaired asset write-downs 4,441 579 484
Employee termination benefit costs 3,552 9,060 3,892
Costs to exit activities 1,389 1,028 975
Other expense 2,919 1,007 1,035
--------------------------------------------------------------------------
Total $ 6,851 $ 2,000 $ 4,862
==========================================================================
NET GAINS
Net gains are recorded from the sales of redundant properties (primarily land,
buildings and related equipment) and non-core assets. In 2006, gains related to
assets principally in Europe, South America and the United States. In 2005,
gains related to assets principally in the United States and Europe.
-89-
-----------------------------------------------------------------------------
NET GAINS
----------------------------------------
(IN THOUSANDS) 2006 2005 2004
-----------------------------------------------------------------------------
Mill Services Segment $ (2,823) $ (4,202) $ (354)
Access Services Segment (2,510) (5,413) (1,124)
Gas Technologies Segment -- -- --
Engineered Products and Services
("all other") Category (117) (59) (46)
Corporate -- -- --
-----------------------------------------------------------------------------
Total $ (5,450) $ (9,674) $ (1,524)
=============================================================================
Cash proceeds associated with these gains are included in Proceeds from the sale
of assets in the investing activities section of the Consolidated Statements of
Cash Flows.
IMPAIRED ASSET WRITE-DOWNS
Impairment losses are measured as the amount by which the carrying amount of
assets exceeded their fair value. Fair value is estimated based upon the
expected future realizable cash flows including anticipated selling prices. In
2006, the Company recorded an asset impairment loss of $4.2 million for certain
plant, property and equipment related to exiting an underperforming product line
in the Gas Technologies Segment.
Non-cash impaired asset write-downs are included in Other, net in the
Consolidated Statements of Cash Flows as adjustments to reconcile net income to
net cash provided by operating activities.
EMPLOYEE TERMINATION BENEFIT COSTS
The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," ("SFAS 146") on January 1, 2003. This standard addresses
involuntary termination costs associated with one-time benefit arrangements
provided as part of an exit or disposal activity. These costs and the related
liabilities are recognized by the Company when a formal plan for reorganization
is approved at the appropriate level of management and communicated to the
affected employees. Additionally, costs associated with on-going benefit
arrangements, or in certain countries where statutory requirements dictate a
minimum required benefit, are recognized when they are probable and estimable,
in accordance with SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," (SFAS 112).
The total amount of employee termination benefit costs incurred for the years
2006, 2005 and 2004 was as follows. None of the actions are expected to incur
any additional costs.
-----------------------------------------------------------------------------
EMPLOYEE TERMINATION BENEFIT COSTS
-----------------------------------------
(IN THOUSANDS) 2006 2005 2004
-----------------------------------------------------------------------------
Mill Services Segment $ 1,820 $ 4,827 $ 1,338
Access Services Segment 799 1,647 1,504
Gas Technologies Segment 57 107 229
Engineered Products and Services
("all other") Category 821 1,256 685
Corporate 55 1,223 136
-----------------------------------------------------------------------------
Total $ 3,552 $ 9,060 $ 3,892
=============================================================================
The terminations for the years 2004 to 2006 occurred principally in Europe,
South America and the United States.
-90-
Employee termination benefit costs incurred but not paid as of December 31 2006
totaled $1.9 million. The payments for employee termination benefit costs are
reflected as uses of operating cash in the Consolidated Statements of Cash
Flows.
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
Costs associated with exit or disposal activities are recognized in accordance
with SFAS 146 and are included as a component of Other expenses in the Company's
Consolidated Statements of Income. SFAS 146 addresses involuntary termination
costs (as discussed above) and other costs associated with exit or disposal
activities (exit costs). Costs to terminate a contract that is not a capital
lease are recognized when an entity terminates the contract or when an entity
ceases using the right conveyed by the contract. This includes the costs to
terminate the contract before the end of its term or the costs that will
continue to be incurred under the contract for its remaining term without
economic benefit to the entity (e.g., lease run-out costs). Other costs
associated with exit or disposal activities (e.g., costs to consolidate or close
facilities and relocate equipment or employees) are recognized and measured at
their fair value in the period in which the liability is incurred. In 2006, $1.4
million of exit costs were incurred. These were principally relocation costs and
lease run-out costs for the Engineered Products and Services Category and the
Mill Services and Access Services Segments.
In 2005 and 2004, exit costs incurred were $1.0 million and $1.0 million,
respectively. These were principally lease run-out costs, lease termination
costs and relocation costs for the Mill Services and Access Services Segments
and the Engineered Products and Services Category.
16. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Total Accumulated other comprehensive income (loss) is included in the
Consolidated Statements of Stockholders' Equity. The components of Accumulated
other comprehensive income (loss) are as follows:
-----------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
DECEMBER 31
(IN THOUSANDS) 2006 2005
-----------------------------------------------------------------------------
Cumulative foreign exchange translation adjustments $ 65,416 $ (26,162)
Fair value of effective cash flow hedges 70 (64)
Minimum pension liability -- (141,094)
Pension and postretirement benefit adjustment (234,825) --
Marketable securities unrealized gains 5 2
-----------------------------------------------------------------------------
Total Accumulated Other Comprehensive Income (Loss) $(169,334) $(167,318)
=============================================================================
-91-
TWO-YEAR SUMMARY OF QUARTERLY RESULTS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2006
---------------------------------------
QUARTERLY FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
Sales $ 769.6 $ 865.5 $ 875.9 $ 912.3
Gross profit (a) 190.5 224.0 230.0 231.3
Net income 34.3 53.9 55.8 52.5
Basic earnings per share 0.82 1.28 1.33 1.25
Diluted earnings per share 0.81 1.28 1.32 1.24
================================================================================
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2005
---------------------------------------
QUARTERLY FIRST SECOND THIRD FOURTH
- --------------------------------------------------------------------------------
Sales $ 640.1 $ 696.1 $ 697.5 $ 732.5
Gross profit (a) 146.4 169.8 164.8 185.7
Net income 23.1 41.7 40.0 51.9
Basic earnings per share 0.56 1.00 0.96 1.24
Diluted earnings per share 0.55 0.99 0.95 1.23
================================================================================
(a) Gross profit is defined as Sales less costs and expenses associated
directly with or allocated to products sold or services rendered.
COMMON STOCK PRICE AND DIVIDEND INFORMATION
(UNAUDITED)
MARKET PRICE PER SHARE DIVIDENDS DECLARED
HIGH LOW PER SHARE
- -----------------------------------------------------------------------
2006
First Quarter $ 84.55 $ 67.52 $ 0.3250
Second Quarter 89.70 71.25 0.3250
Third Quarter 82.42 67.77 0.3250
Fourth Quarter 82.97 76.00 0.3550
2005
First Quarter $ 61.35 $ 49.87 $ 0.3000
Second Quarter 61.10 52.37 0.3000
Third Quarter 66.20 53.56 0.3000
Fourth Quarter 70.57 59.70 0.3250
=======================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. 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 December 31, 2006. Based on that
-92-
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective. There have been no
changes in internal control over financial reporting that could materially
affect, or are likely to materially affect, internal control over financial
reporting.
Management's Report on Internal Controls Over Financial Reporting is included in
Part II, Item 8, "Financial Statements and Supplementary Data." Management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
appearing in Part II, Item 8, "Financial Statements and Supplementary Data,"
which expresses unqualified opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2006.
ITEM 9B. OTHER INFORMATION
10b5-1 Plan
- -----------
The Chief Executive Officer ("CEO") of the Company plans to adopt, in the first
quarter of 2007, a new personal trading plan as part of a long-term strategy for
asset diversification and liquidity, in accordance with the Securities and
Exchange Commission's Rule 10b5-1. Under the proposed plan, the CEO will
exercise 40,000 shares, under pre-arranged terms, in open market transactions.
The proposed trading plan will expire in April 2007.
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
pursuant to the terms of his plan will be disclosed publicly through Form 144
and Form 4 filings with the Securities and Exchange Commission.
-93-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information regarding executive officers required by this Item is set forth as a
Supplementary Item at the end of Part I hereof (pursuant to Instruction 3 to
Item 401(b) of Regulation S-K). Other information required by this Item is
incorporated by reference to the sections entitled "Corporate Governance,"
"Director Information," "Report of the Audit Committee" and "Section 16(a)
Beneficial Ownership Reporting Compliance" of the 2007 Proxy Statement.
The Company's Code of Ethics for the Chief Executive Officer and Senior
Financial Officers (the "Code") may be found on the Company's internet website,
www.harsco.com. The Company intends to disclose on its website any amendments to
the Code or any waiver from a provision of the Code. The Code is available in
print to any stockholder who requests it.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers and directors is
incorporated by reference to the sections entitled "Compensation Discussion and
Analysis," "Compensation Committee Report," "Executive Compensation,"
"Non-Employee Director Compensation" and "Compensation Committee Interlocks and
Insider Participation" of the 2007 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the section entitled "Share Ownership
of Directors, Management and Certain Beneficial Owners" of the 2007 Proxy
Statement.
EQUITY COMPENSATION PLAN INFORMATION
The Company maintains the 1995 Executive Incentive Compensation Plan and the
1995 Non-Employee Directors' Stock Plan, which allow the Company to grant equity
awards to eligible persons. Upon stockholder approval of these two plans in
1995, the Company terminated the use of the 1986 Stock Option Plan for granting
stock option awards.
The Company also assumed options under the SGB Group Plc Discretionary Share
Option Plan 1997 (the "SGB Plan") upon the Company's acquisition of SGB Group
Plc ("SGB") in 2000. The SGB Plan terminated in accordance with its terms when
the remaining Harsco Replacement Options were exercised on August 30, 2006.
-94-
The following table gives information about equity awards under these plans as
of December 31, 2006. All securities referred to are shares of Harsco common
stock.
EQUITY COMPENSATION PLAN INFORMATION
- --------------------------------------------------------------------------------------------------------
Column (a) Column (b) Column (c)
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in Column (a))
- --------------------------------------------------------------------------------------------------------
Equity compensation plans 513,706 $30.97 1,390,731
approved by security
holders (1)
Equity compensation plans
not approved by security
holders -- -- --
- --------------------------------------------------------------------------------------------------------
Total 513,706 $30.97 1,390,731
========================================================================================================
(1) Plans include the 1995 Executive Incentive Compensation Plan, as amended,
and the 1995 Non-Employee Directors' Stock Plan, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information regarding certain relationships and related transactions is
incorporated by reference to the sections entitled "Certain Relationships and
Related Party Transactions" and "Corporate Governance" of the 2007 Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accounting fees and services is incorporated by
reference to the sections entitled "Report of the Audit Committee" and "Fees
Billed by the Accountants for Audit and Non-Audit Services" of the 2007 Proxy
Statement.
-95-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. The Consolidated Financial Statements are listed in the index to
Item 8, "Financial Statements and Supplementary Data," on page 45.
(a) 2. The following financial statement schedule should be read in
conjunction with the Consolidated Financial Statements (see Item 8,
"Financial Statements and Supplementary Data"):
Page
----
Report of Independent Registered Public Accounting Firm 47
Schedule II - Valuation and Qualifying Accounts for the
years 2006, 2005 and 2004 97
Schedules other than that listed above are omitted for the reason that
they are either not applicable or not required, or because the
information required is contained in the financial statements or notes
thereto.
Condensed financial information of the registrant is omitted since
"restricted net assets" of consolidated subsidiaries does not exceed
25% of consolidated net assets.
Financial statements of 50% or less owned unconsolidated companies are
not submitted inasmuch as (1) the registrant's investment in and
advances to such companies do not exceed 20% of the total consolidated
assets, (2) the registrant's proportionate share of the total assets
of such companies does not exceed 20% of the total consolidated
assets, and (3) the registrant's equity in the income from continuing
operations before income taxes of such companies does not exceed 20%
of the total consolidated income from continuing operations before
income taxes.
-96-
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
CONTINUING OPERATIONS
(DOLLARS IN THOUSANDS)
COLUMN C
--------
COLUMN A COLUMN B ADDITIONS COLUMN D (DEDUCTIONS) ADDITIONS COLUMN E
-------- -------- --------- ------------------------------- --------
BALANCE AT BEGINNING OF CHARGED TO COST AND DUE TO CURRENCY BALANCE AT END OF
DESCRIPTION PERIOD EXPENSES TRANSLATION ADJUSTMENTS OTHER (A) PERIOD
- ----------- ------ -------- ----------------------- --------- ------
FOR THE YEAR 2006:
Allowance for Doubtful Accounts $ 24,404 $ 9,230 $ 1,880 $ (10,163) $ 25,351
Deferred Tax Assets -
Valuation Allowance $ 21,682 $ (5,793) $ (270) $ (1,727) $ 13,892
FOR THE YEAR 2005:
Allowance for Doubtful Accounts $ 19,095 $ 6,453 $ (832) $ (312) $ 24,404
Deferred Tax Assets -
Valuation Allowance $ 17,492 $ 2,119 $ 172 $ 1,899 $ 21,682
FOR THE YEAR 2004:
Allowance for Doubtful Accounts $ 24,612 $ 5,048 $ 863 $ (11,428)(b) $ 19,095
Deferred Tax Assets -
Valuation Allowance $ 13,098 $ 4,228 $ 166 $ -- $ 17,492
(a) Includes principally the use of previously reserved amounts and changes
related to acquired companies.
(b) Includes $5,322 for the write-off of six accounts receivable in the Mill
Services Segment as well as the write-off of other accounts receivable for
all segments.
-97-
(a) 3. Listing of Exhibits Filed with Form 10-K
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN FORM 10-K
- ------ ------------- ---------------------
2(a) Share Purchase Agreement between Sun HB Holdings, LLC, Boca Raton, Florida, United Exhibit to Form 10-Q for the
States of America and Harsco Corporation, Camp Hill, Pennsylvania, United States period ended September 30, 2005
of America dated September 20, 2005 regarding the sale and purchase of the
issued share capital of Hunnebeck Group GmbH, Ratingen, Germany.
2(b) Agreement, dated as of December 29, 2005, by and among the Harsco Corporation (for Exhibit volume, 2005 10-K
itself and as agent for each of MultiServ France SA, Harsco Europa BV and Harsco
Investment Limited), Brambles U.K. Limited, a company incorporated under the
laws of England and Wales, Brambles France SAS, a company incorporated under the
laws of France, Brambles USA, Inc., a Delaware corporation, Brambles Holdings
Europe B.V., a company incorporated under the laws of the Netherlands, and
Brambles Industries Limited, a company incorporated under the laws of
Australia. In accordance with Item 601(b)(2) of Regulation S-K, the registrant
hereby agrees to furnish supplementally a copy of any omitted schedule to the
Commission upon request. Portions of Exhibit 2(a) have been omitted pursuant to
a request for confidential treatment. The omitted portions have been filed
separately with the Securities and Exchange Commission.
2(c) Stock Purchase Agreement among Excell Materials, Inc., the Stockholders of Excell Exhibit volume, 2006 10-K
Materials, Inc. and Harsco Corporation dated as of January 4, 2007.
3(a) Restated Certificate of Incorporation as amended April 24, 1990 Exhibit volume, 1990 10-K
3(b) Certificate of Amendment of Restated Certificate of Incorporation filed June 3, 1997 Exhibit volume, 1999 10-K
3(c) Certificate of Designation filed September 25, 1997 Exhibit volume, 1997 10-K
3(d) By-laws as amended January 23, 2007 Exhibit to Form 8-K dated January
23, 2007
3(e) Certificate of Amendment of Restated Certificate of Incorporation filed April 26, Proxy Statement dated March 22,
2005 2005 on Appendix A pages A-1
through A-2
4(a) Harsco Corporation Rights Agreement dated as of September 28, 1997, with Chase Incorporated by reference to Form
Mellon Shareholder Services L.L.C. 8-A, filed September 26, 1997
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EXHIBIT
NUMBER DATA REQUIRED LOCATION IN FORM 10-K
- ------ ------------- ---------------------
4(b) Registration of Preferred Stock Purchase Rights Incorporated by reference to Form
8-A dated October 2, 1987
4(c) Current Report on dividend distribution of Preferred Stock Purchase Rights Incorporated by reference to Form
8-K dated October 13, 1987
4(f) Debt and Equity Securities Registered Incorporated by reference to Form
S-3, Registration No. 33-56885
dated December 15, 1994, effective
date January 12, 1995
4(g) Harsco Finance B. V. (pound)200 million, 7.25% Guaranteed Notes due 2010 Exhibit to Form 10-Q for the
period ended September 30, 2000
4(h)(i) Indenture, dated as of May 1, 1985, by and between Harsco Corporation and The Chase Exhibit to Form 8-K dated
Manhattan Bank (National Association), as trustee (incorporated herein by September 8, 2003
reference to Exhibit 4(d) to the Registration Statement on Form S-3, filed by
Harsco Corporation on August 23, 1991 (Reg. No. 33-42389))
4(h)(ii) First Supplemental Indenture, dated as of April 12, 1995, by and among Harsco Exhibit to Form 8-K dated
Corporation, The Chase Manhattan Bank (National Association), as resigning September 8, 2003
trustee, and Chemical Bank, as successor trustee
4(h)(iii) Form of Second Supplemental Indenture, by and between Harsco Corporation and Exhibit to Form 8-K dated
JPMorgan Chase Bank, as Trustee September 8, 2003
4(h)(iv) Second Supplemental Indenture, dated as of September 12, 2003, by and between Exhibit to 10-Q for the period
Harsco Corporation and J.P. Morgan Chase Bank, as Trustee ended September 30, 2003
4(i)(i) Form of 5.125% Global Senior Note due September 15, 2013 Exhibit to Form 8-K dated
September 8, 2003
4(i)(ii) 5.125% 2003 Notes due September 15, 2013 described in Prospectus Supplement Incorporated by reference to the
dated September 8, 2003 to Form S-3 Registration under Rule 415 dated Prospectus Supplement dated
December 15, 1994 September 8, 2003 to Form S-3,
Registration No. 33-56885 dated
December 15, 1994
-99-
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN FORM 10-K
- ------ ------------- ---------------------
MATERIAL CONTRACTS - CREDIT AND UNDERWRITING AGREEMENTS
10(a)(i) $50,000,000 Facility agreement dated December 15, 2000 Exhibit volume, 2000 10-K
10(a)(ii) Agreement extending term of $50,000,000 Facility agreement dated December 15, 2000 Exhibit volume, 2001 10-K
10(a)(iii) Agreement amending term and amount of $50,000,000 Facility agreement dated December Exhibit volume, 2002 10-K
15, 2000
10(a)(iv) Agreement extending term of $50,000,000 Facility agreement dated December 15, 2000 Exhibit volume, 2003 10-K
10(a)(v) Agreement extending term of $50,000,000 Facility agreement dated December 15, 2000 Exhibit to Form 8-K dated January
25, 2005
10(a)(vi) Agreement extending term of $50,000,000 Facility agreement dated December 15, 2000 Exhibit volume, 2005 10-K
10(a)(vii) Agreement extending term of $50,000,000 Facility agreement dated December 15, 2000 Exhibit to Form 8-K dated December
22, 2006
10(b) Commercial Paper Dealer Agreement dated September 24, 2003, between ING Belgium Exhibit volume, 2003 10-K
SA/NV and Harsco Finance B.V.
10(b)(i) Commercial Paper Dealer Agreement dated September 24, 2003, between ING Belgium Exhibit to Form 8-K dated November
8, 2005
SA/NV and Harsco Finance B.V. - Supplement No. 1 to the Dealer Agreement
10(c) Commercial Paper Payment Agency Agreement Dated October 1, 2000, between Salomon Exhibit volume, 2000 10-K
Smith Barney Inc. and Harsco Corporation
10(e) Issuing and Paying Agency Agreement, Dated October 12, 1994, between Morgan Exhibit volume, 1994 10-K
Guaranty Trust Company of New York and Harsco Corporation
10(f) 364-Day Credit Agreement Exhibit to Form 8-K dated December
23, 2005
-100-
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN FORM 10-K
- ------ ------------- ---------------------
10(f)(i) Amendment No. 1 to the Credit Agreement, dated as of December 22, 2006, by and Exhibit to Form 8-K dated December
among Harsco Corporation, The Royal Bank of Scotland, PLC, as syndication agent, 22, 2006
and Citicorp North America, Inc., as administrative agent.
10(g) Five Year Credit Agreement Exhibit to Form 8-K dated November
23, 2005
10(i) Commercial Paper Dealer Agreement dated June 7, 2001, between Citibank Exhibit to 10-Q for the period
International plc, National Westminster Bank plc, The Royal Bank of Scotland plc ended June 30, 2001
and Harsco Finance B.V.
10(j) Commercial Paper Placement Agency Agreement dated November 6, 1998, between Chase Exhibit volume, 1998 10-K
Securities, Inc. and Harsco Corporation
MATERIAL CONTRACTS - MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10(d) Form of Change in Control Severance Agreement (Chairman, President and CEO and Exhibit to Form 8-K dated June 21,
Senior Vice Presidents) 2005
10(k) Harsco Corporation Supplemental Retirement Benefit Plan as amended October 4, 2002 Exhibit volume, 2002 10-K
10(l) Trust Agreement between Harsco Corporation and Dauphin Deposit Bank and Trust Exhibit volume, 1987 10-K
Company dated July 1, 1987 relating to the Supplemental Retirement Benefit Plan
10(m) Harsco Corporation Supplemental Executive Retirement Plan as amended Exhibit volume, 1991 10-K
10(n) Trust Agreement between Harsco Corporation and Dauphin Deposit Bank and Trust Exhibit volume, 1988 10-K
Company dated November 22, 1988 relating to the Supplemental Executive
Retirement Plan
10(o) Harsco Corporation 1995 Executive Incentive Compensation Plan As Amended and Proxy Statement dated March 23,
Restated 2004 on Exhibit B pages B-1
through B-15
10(p) Authorization, Terms and Conditions of the Annual Incentive Awards, as Amended and Exhibit to Form 8-K dated March
Restated April 27, 2004, under the 1995 Executive Incentive Compensation Plan 23, 2006
-101-
EXHIBIT
NUMBER DATA REQUIRED LOCATION IN FORM 10-K
- ------ ------------- ---------------------
10(r) Special Supplemental Retirement Benefit Agreement for D. C. Hathaway Exhibit Volume, 1988 10-K
10(s) Harsco Corporation Form of Restricted Stock Units Agreement (Directors) Exhibit to Form 8-K dated April
26, 2005
10(u) Harsco Corporation Deferred Compensation Plan for Non-Employee Directors, as Exhibit to Form 8-K dated April
amended and restated January 1, 2005 26, 2005
10(v) Harsco Corporation 1995 Non-Employee Directors' Stock Plan As Amended and Restated Proxy Statement dated March 23,
at January 27, 2004 2004 on Exhibit A pages A-1
through A-9
10(x) Settlement and Consulting Agreement Exhibit to 10-Q for the period
ended March 31, 2003
10(y) Restricted Stock Units Agreement Exhibit to Form 8-K dated
January 23, 2007
10(z) Form of Change in Control Severance Agreement (Certain Harsco Vice Presidents) Exhibit to Form 8-K dated June 21,
2005
-102-
DIRECTOR INDEMNITY AGREEMENTS -
10(t) A. J. Sordoni, III Exhibit volume, 1989 10-K Uniform
agreement, same as shown for J. J.
Burdge
" R. C. Wilburn " "
" J. I. Scheiner " "
" C. F. Scanlan " "
" J. J. Jasinowski " "
" J. P. Viviano " "
" D. H. Pierce " "
" K. G. Eddy Exhibit to Form 8-K dated August
27, 2004
12 Computation of Ratios of Earnings to Fixed Charges Exhibit volume, 2006 10-K
21 Subsidiaries of the Registrant Exhibit volume, 2006 10-K
23 Consent of Independent Accountants Exhibit volume, 2006 10-K
31(a) Certification Pursuant to Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section Exhibit volume, 2006 10-K
302 of the Sarbanes-Oxley Act of 2002
31(b) Certification Pursuant to Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section Exhibit volume, 2006 10-K
302 of the Sarbanes-Oxley Act of 2002
32(a) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 Exhibit volume, 2006 10-K
of the Sarbanes-Oxley Act of 2002
32(b) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 Exhibit volume, 2006 10-K
of the Sarbanes-Oxley Act of 2002
Exhibits other than those listed above are omitted for the reason that they are
either not applicable or not material.
The foregoing Exhibits are available from the Secretary of the Company upon
receipt of a fee of $10 to cover the Company's reasonable cost of providing
copies of such Exhibits.
-103-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date 2-27-07 By /S/ Salvatore D. Fazzolari
------- -----------------------------------
Salvatore D. Fazzolari
President, Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacity and on the dates indicated.
SIGNATURE CAPACITY DATE
/S/ Derek C. Hathaway Chairman and Chief Executive Officer 2-27-07
- ----------------------------- -------
(Derek C. Hathaway)
/S/ Salvatore D. Fazzolari President, Chief Financial Officer, 2-27-07
- ----------------------------- Treasurer and Director -------
(Salvatore D. Fazzolari) (Principal Financial Officer)
/S/ Geoffrey D. H. Butler Senior Vice President - Operations 2-27-07
- ----------------------------- and Director -------
(Geoffrey D. H. Butler)
/S/ Stephen J. Schnoor Vice President and Controller 2-27-07
- ----------------------------- (Principal Accounting Officer) -------
(Stephen J. Schnoor)
/S/ Kathy G. Eddy Director 2-27-07
- ----------------------------- -------
(Kathy G. Eddy)
/S/ Jerry J. Jasinowski Director 2-27-07
- ----------------------------- -------
(Jerry J. Jasinowski)
/S/ D. Howard Pierce Director 2-27-07
- ----------------------------- -------
(D. Howard Pierce)
/S/ Carolyn F. Scanlan Director 2-27-07
- ----------------------------- -------
(Carolyn F. Scanlan)
/S/ James I. Scheiner Director 2-27-07
- ----------------------------- -------
(James I. Scheiner)
/S/ Andrew J. Sordoni, III Director 2-27-07
- ----------------------------- -------
(Andrew J. Sordoni, III)
/S/ Joseph P. Viviano Director 2-27-07
- ----------------------------- -------
(Joseph P. Viviano)
/S/ Dr. Robert C. Wilburn Director 2-27-07
- ----------------------------- -------
(Dr. Robert C. Wilburn)
104
EXHIBIT 2(c)
------------
EXECUTION COPY
--------------
STOCK PURCHASE AGREEMENT
AMONG
EXCELL MATERIALS, INC.,
THE STOCKHOLDERS OF
EXCELL MATERIALS, INC.
AND
HARSCO CORPORATION
DATED AS OF
JANUARY 4, 2007
TABLE OF CONTENTS
PAGE
----
ARTICLE I DEFINITIONS....................................................... 1
1.1 Certain Defined Terms................................. 1
1.2 Other Interpretive Provisions.........................11
ARTICLE II PURCHASE AND SALE.................................................11
2.1 Purchase and Sale of the Shares.......................11
2.2 Consideration.........................................11
2.3 The Closing...........................................12
2.4 Deliveries at the Closing.............................12
2.5 Reserved..............................................14
2.6 Purchase Price Adjustment.............................14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLERS.....................17
3.1 Validity and Enforceability...........................17
3.2 Title to Shares.......................................17
3.3 No Conflict...........................................17
3.4 Proceedings...........................................17
ARTICLE IV REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY AND
THE COMPANY SUBSIDIARIES..........................................18
4.1 Organization..........................................18
4.2 Capital Stock of the Company..........................18
4.3 Company Subsidiaries..................................18
4.4 Financial Statements..................................19
4.5 No Conflicts or Approvals.............................19
4.6 Compliance with Law; Governmental Authorizations......20
4.7 Proceedings...........................................21
4.8 Absence of Certain Changes............................21
4.9 Tax Matters...........................................21
4.10 Employee Benefits.....................................24
4.11 Labor Relations.......................................29
4.12 Intellectual Property.................................30
4.13 Contracts.............................................32
4.14 Environmental Matters.................................34
4.15 Insurance.............................................36
4.16 Assets................................................36
4.17 Real Property.........................................36
4.18 Customers and Suppliers...............................38
4.19 Product Liability.....................................38
4.20 Affiliate Transactions................................38
4.21 Accounts..............................................39
4.22 Inventory.............................................39
4.23 Bank Accounts.........................................39
i
TABLE OF CONTENTS
PAGE
----
4.24 No Brokers' or Other Fees.............................39
4.25 Books and Records.....................................40
4.26 Directors and Officers................................40
4.27 Disclosure............................................40
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BUYER.......................40
5.1 Organization..........................................40
5.2 Authorization; Enforceability.........................40
5.3 No Conflicts or Approvals.............................40
5.4 Proceedings...........................................41
5.5 No Brokers' or Other Fees.............................41
5.6 Investment Intent.....................................41
5.7 Financial Ability to Perform..........................41
ARTICLE VI COVENANTS AND AGREEMENTS..........................................41
6.1 Conduct of the Business Prior to the Closing..........41
6.2 Access to Books and Records; Confidentiality..........44
6.3 Tax Returns, Contests and Cooperation.................44
6.4 Section 338...........................................46
6.5 Refunds and Tax Benefits..............................46
6.6 Employees; Benefit Plans..............................46
6.7 Labor Matters.........................................46
6.8 Consents and Competition..............................47
6.9 Insurance.............................................48
6.10 Notice of Events......................................48
6.11 Cooperation...........................................48
6.12 Anti-Sandbag..........................................48
ARTICLE VII CONDITIONS TO CLOSING.............................................49
7.1 Conditions to the Obligations of the Parties..........49
7.2 Conditions to the Obligation of the Sellers...........49
7.3 Conditions to the Obligations of the Buyer............50
ARTICLE VIII TERMINATION......................................................50
8.1 Termination...........................................50
8.2 Effect of Termination.................................51
ARTICLE IX INDEMNIFICATION...................................................51
9.1 Indemnification by the Sellers........................51
9.2 Indemnification by the Buyer..........................52
9.3 Indemnification as Exclusive Remedy...................52
9.4 Survival..............................................52
9.5 Limitations on Indemnification........................53
9.6 Sellers Representative................................55
ii
TABLE OF CONTENTS
PAGE
----
ARTICLE X MISCELLANEOUS.....................................................57
10.1 Fees and Expenses.....................................57
10.2 Governing Law.........................................57
10.3 Amendment.............................................57
10.4 Assignment; Third Parties.............................57
10.5 Waiver................................................57
10.6 Notices...............................................57
10.7 Complete Agreement....................................59
10.8 Counterparts..........................................59
10.9 Publicity.............................................59
10.10 Headings..............................................59
10.11 Severability..........................................59
10.12 Further Assurances....................................59
10.13 Service of Process; Waiver of Jury Trial..............59
10.14 Specific Performance..................................60
iii
EXHIBITS
--------
Exhibit A Confidentiality Agreement
Exhibit B Form of Escrow Agreement
Exhibit C Form of Release
iv
SCHEDULES
---------
Schedule A ............2006 Capital Expenditure Budget
Schedule B ............Share Ownership
Schedule 1.1(a).........Debt Obligations
Schedule 1.1(b).........Buyer Knowledge
Schedule 1.1(c).........Company Knowledge
Schedule 1.1(d).........Permitted Liens
Schedule 2.2(b).........Repayment of Debt Obligations
Schedule 2.4(a)(vii)....Consents
Schedule 2.4(a)(viii)...Resignations
Schedule 3.3(b).........Seller Consents
Schedule 4.2............Capitalization of Company
Schedule 4.3............Company Subsidiaries
Schedule 4.4(a).........Financial Statements
Schedule 4.4(b).........Undisclosed Liabilities
Schedule 4.5(a).........No Conflicts
Schedule 4.5(b).........Company Consents
Schedule 4.6............Compliance with Laws
Schedule 4.7............Proceedings
Schedule 4.8............Absence of Certain Changes
Schedule 4.9............Tax Matters
Schedule 4.10(a)........Benefit Matters
Schedule 4.10(b)........Benefit Matters
Schedule 4.10(d)........Benefit Matters
Schedule 4.10(g)........Benefit Matters
Schedule 4.10(h)........Benefit Matters
Schedule 4.10(m)........Benefit Matters
Schedule 4.10(n)........Benefit Matters
Schedule 4.10(o)........Benefit Matters
Schedule 4.11...........Labor Matters
Schedule 4.12...........Intellectual Property
Schedule 4.13...........Contracts
Schedule 4.14...........Environmental Matters
Schedule 4.15(a)........Insurance Policies
Schedule 4.15(b)........Material Insurance Claims
Schedule 4.16...........Assets
Schedule 4.17(a)........Leased Real Property
Schedule 4.17(b)........Owned Real Property
Schedule 4.17(c)........Property Matters
Schedule 4.18...........Customers and Suppliers
Schedule 4.19...........Product Liability
Schedule 4.20...........Affiliate Transactions
Schedule 4.22...........Inventory
Schedule 4.23...........Bank Accounts
Schedule 4.26...........Directors and Officers
Schedule 5.3(b).........Buyer Consents
v
Schedule 6.1............Interim Covenants
Schedule 6.6............Employees
Schedule 6.12...........Anti-Sandbag
vi
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, dated as of January 4, 2007, is by
and among the stockholders of Excell Materials, Inc., a Delaware corporation
(the "COMPANY"), as listed on the signature page hereto (each, individually a
"SELLER" and collectively, the "SELLERS"), the Company and Harsco Corporation, a
Delaware corporation (the "BUYER").
A. The Sellers own all of the issued and outstanding shares of
capital stock (the "SHARES") of the Company; and
B. The Sellers desire to sell, and the Buyer desires to purchase,
the Shares, upon the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained and intending to be legally bound
hereby, the parties hereto hereby agree as follows:
ARTICLE I DEFINITIONS
1.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms have the following meanings:
"ACTIVE COMPANY EMPLOYEES" has the meaning set forth in SECTION
6.6(A).
"AFFILIATE" means, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by or under common control with
such Person, (ii) any other Person directly or indirectly owning or controlling
ten percent (10%) or more of the outstanding voting equity securities of such
Person or (iii) any officer, director, general partner or trustee of such
Person.
"AFFILIATE CONTRACTS" has the meaning set forth in SECTION 4.20.
"AGREEMENT" means this Stock Purchase Agreement (including the
Schedules and Exhibits), as amended, modified or supplemented from time to time.
"ANNUAL FINANCIAL STATEMENTS" has the meaning set forth in SECTION
4.4(A).
"APPLICABLE RATE" means the "Prime Rate" as set forth from time to
time in THE WALL STREET JOURNAL, Eastern Edition, "Money Rates" column.
"AUTHORIZED CAPITAL EXPENDITURE DEFICIENCY" has the meaning set
forth in SECTION 2.6(D)(III).
"AUTHORIZED CAPITAL EXPENDITURE EXCESS" has the meaning set forth in
SECTION 2.6(D)(III).
"AUTHORIZED CAPITAL EXPENDITURE STATEMENT" has the meaning set forth
in SECTION 2.6(A).
"AUTHORIZED CAPITAL EXPENDITURES" means any reasonable capital
expenditures made by the Company or the Company Subsidiaries prior to the
Closing Date to the extent such capital expenditures relate solely to the G
Plant Project in Canada, the Cement Plant Project (up to an aggregate amount of
$2,700,000) or any other project which benefits periods after 2006 and which is
specifically approved in writing by Buyer as reimbursable, in each case, only to
the extent such capital expenditure disbursements remain within the scope of the
project as initially presented to Buyer.
"BALANCE SHEET" has the meaning set forth in SECTION 4.4(A).
"BENEFIT PLAN" or "BENEFIT PLANS" has the meaning set forth in
SECTION 4.10(A).
"BUSINESS" means the minerals, mill service, and metal processing
business of the Company and the Company Subsidiaries carried out anywhere in the
world as of the date of this Agreement.
"BUSINESS DAY" means any day that is not a Saturday, a Sunday or
other day on which banks in New York, New York are required or authorized by Law
to be closed.
"BUYER" has the meaning set forth in the preamble.
"BUYER INDEMNIFIED PERSONS" has the meaning set forth in SECTION
9.1(A).
"CANADIAN COMPANY SUBSIDIARIES" means Recmix, Inc., Melri, Inc. and
Excell Materials G.P.
"CAPITAL EXPENDITURE BUDGET" means the capital expenditure budget
with respect to the Business for the calendar year 2006, as set forth on
SCHEDULE A.
"CASH AND CASH EQUIVALENTS" means, as of any date, the fair market
value (expressed in United States dollars) of all cash and cash equivalents
(including marketable securities and short term investments) of the Company or
any wholly owned Company Subsidiary.
"CLAIM" has the meaning set forth in SECTION 9.5(D)(I).
"CLAIM NOTICE" has the meaning set forth in SECTION 9.5(D)(I).
"CLAIM RESPONSE" has the meaning set forth in SECTION 9.5(D)(I).
"CLOSING" has the meaning set forth in SECTION 2.3.
"CLOSING CERTIFICATE" has the meaning set forth in SECTION
2.4(A)(IX).
"CLOSING DATE" has the meaning set forth in SECTION 2.3.
"CODE" has the meaning set forth in SECTION 2.2(D).
"COMPANY" has the meaning set forth in the preamble.
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"COMPANY EMPLOYEE" has the meaning set forth in SECTION 4.10(A).
"COMPANY MATERIAL ADVERSE EFFECT" means any state of facts, change,
occurrence or development that (i) directly or indirectly prevents or materially
impairs or delays the ability of any Seller to perform his, her or its
obligations hereunder or (ii) has a material adverse effect on the condition
(financial or otherwise), results of operations, business, properties, assets or
Liabilities of the Company and the Company Subsidiaries taken as a whole, but
excludes any effect (a) resulting from general economic conditions (whether as a
result of acts of terrorism, war (whether or not declared), armed conflicts or
otherwise) and (b) impacting companies in the industry in which the Business is
conducted generally.
"COMPANY SUBSIDIARY" has the meaning set forth in SECTION 4.3
"COMPETITION/INVESTMENT LAW" means any Law that is designed or
intended to prohibit, restrict or regulate (a) foreign investment or (b)
antitrust, monopolization, restraint of trade or competition.
"CONFIDENTIALITY AGREEMENT" means the confidentiality agreement
between the Buyer and the Company, a copy of which is attached as EXHIBIT A.
"CONSENT" means any consent, approval, order, Permit, authorization,
waiver, report or notification required to be obtained from, filed with or
delivered to any Governmental Authority or other third party in connection with
the execution, delivery and performance of this Agreement and the Transaction
Agreements, the consummation of the transactions contemplated hereby and thereby
or compliance by the Sellers, the Company Subsidiaries or the Company with any
of the provisions hereof and thereof.
"CONTRACT" means any contract, agreement, obligation, plan,
indenture, note, bond, loan, instrument, lease (including real property leases),
conditional sale contract, mortgage, license, Permit, franchise, insurance
policy, undertaking, commitment or other enforceable arrangement or agreement,
whether written or oral.
"CPA FIRM" means the firm of Ernst & Young, LLP or, if such firm is
unable or unwilling to serve in such capacity on terms mutually acceptable to
Buyer and Sellers, another nationally recognized independent accounting firm
mutually acceptable to Buyer and Sellers Representative.
"CPA RESOLUTION" has the meaning set forth in SECTION 9.5(E)(II).
"CURRENT TAX MATTER" means any claim, suit, action, audit,
litigation or proceeding relating to Taxes solely in respect of a Pre-Closing
Tax Period that is in progress as of the Closing Date.
"DEBT OBLIGATIONS" means, with respect to any Person as of any date
without duplication, all (a) indebtedness for borrowed money of such Person
(including principal and accrued interest), including under those agreements set
forth on SCHEDULE 1.1(A), (b) except as set forth on SCHEDULE 1.1(A),
obligations of such Person in respect of capitalized leases required to recorded
as such on a balance sheet prepared in accordance with GAAP and obligations of
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such Person for the deferred purchase price of goods or services (other than
trade payables incurred in the ordinary course of business), (c) except as set
forth on SCHEDULE 1.1(A), obligations of such Person in respect of banker's
acceptances or letters of credit issued or created for the account of such
Person, (d) all indebtedness or obligations of any other Person of the types
referred to in the preceding clauses (a) and (b) secured by any Lien on any
assets of such Person, (e) those payments required to be made to Company
Employees set forth on SCHEDULE 1.1(A), (f) guarantees of obligations of any
other Person of the type described in clause (a) above by such Person, and (g)
any payment obligation in respect of interest under any existing interest rate
swap, hedge or similar agreement entered into by any Person with respect to any
indebtedness described in clause (a) above, including under those agreements set
forth on SCHEDULE 1.1(A). With respect to the Company and any Company
Subsidiary, Debt Obligations shall not include any item in (a) through (g)
above, if such item relates solely to an obligation between the Company and one
or more Company Subsidiary or between one Company Subsidiary and another Company
Subsidiary; provided that the aggregate amount of such intercompany Debt
Obligations equals zero on a consolidated basis as of the Closing. If the amount
of intercompany Debt Obligations does not equal zero as of the Closing, then
such excess amount shall constitute Debt Obligations for purposes of SECTION
2.6.
"ENVIRONMENT" means the outdoor or indoor environment, including
soil, surface waters, groundwater, land, stream sediments, surface or subsurface
strata or ambient air or indoor air.
"ENVIRONMENTAL CLAIM" means any written notice, or, to the Knowledge
of the Company, any oral notice, or pending Proceeding, by any Person alleging
Liability or potential Liability relating to any Environmental Losses or in
respect of any Environmental Laws.
"ENVIRONMENTAL LAW" means any Law, including common law, relating to
the protection of the Environment or natural resources or relating to human
health or safety with respect to exposure to Hazardous Materials.
"ENVIRONMENTAL LOSSES" means Losses arising from a Release or
threatened Release of Hazardous Materials or noncompliance with or Liability or
Loss under any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and the rules and regulations promulgated thereunder.
"ERISA AFFILIATE" means any entity that is considered a single
employer with the Company under ERISA Section 4001(b) or part of the same
"controlled group" as the Company for purposes of ERISA Section 302(d)(8)(c).
"ESCROW AGREEMENT" means that certain escrow agreement, dated as of
the Closing Date, by and among the Buyer, the Sellers and PNC Institutional
Investments, in substantially the form attached hereto as EXHIBIT B.
"ESCROW AMOUNT" means $7,000,000.
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"ESTIMATED AUTHORIZED CAPITAL EXPENDITURE AMOUNT" means the total of
all Authorized Capital Expenditures as of immediately prior to the Closing,
prepared in accordance with GAAP applied on a basis consistent with the Annual
Financial Statements, as set forth on the Purchase Price Certificate.
"ESTIMATED NET DEBT" means the Net Debt as of immediately prior to
the Closing, as set forth on the Purchase Price Certificate.
"ESTIMATED NET WORKING CAPITAL" means the Net Working Capital as of
immediately prior to the Closing, prepared in accordance with GAAP applied on a
basis consistent with the Annual Financial Statements, as set forth on the
Purchase Price Certificate.
"ESTIMATED NET WORKING CAPITAL ADJUSTMENT" means the Estimated Net
Working Capital minus the Target Working Capital.
"FINAL STATEMENT OF AUTHORIZED CAPITAL EXPENDITURES" has the meaning
set forth in SECTION 2.6(C).
"FINAL STATEMENT OF NET DEBT" has the meaning set forth in SECTION
2.6(C).
"FINAL STATEMENT OF NET WORKING CAPITAL" has the meaning set forth
in SECTION 2.6(C).
"FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.4(A).
"FOREIGN BENEFIT PLAN" has the meaning set forth in SECTION 4.10(B).
"FORMER EMPLOYEES" means former employees of the Company and the
Company Subsidiaries.
"GAAP" means United States generally accepted accounting principles.
"GENERAL ENFORCEABILITY EXCEPTIONS" has the meaning set forth in
SECTION 3.1.
"GOVERNMENT SCHEMES" means any mandatory government-sponsored or
maintained agreements, arrangements, customs, practices or obligations under any
Law to which any company contributes in compliance with applicable Law for the
payment of, provision for, or contribution towards, any pensions, allowances,
lump sums or other like benefits on retirement, death, termination of employment
(whether voluntary or not), or during periods of sickness or disablement, which
are for the benefit of an employee or the benefit of persons dependent on any
employee.
"GOVERNMENTAL AUTHORITY" means any government or other political
subdivision (whether federal, state, provincial, local or foreign), or any
agency or instrumentality of any such government or political subdivision,
exercising legislative, judicial, regulatory or administrative duties or any
federal, state, provincial, local or foreign court, tribunal or arbitrator.
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"GOVERNMENTAL ORDER" means any judgment, order, writ, assessment,
injunction, decree or ruling of any Governmental Authority.
"HAZARDOUS MATERIALS" means any pollutant, toxic substance, asbestos
and asbestos-containing materials, hazardous waste, special handling waste,
universal waste, hazardous material, hazardous substance, contaminant,
petroleum, petroleum-containing materials, crystalline silica, radiation and
radioactive materials and polychlorinated biphenyls as defined in, or regulated
by, any Environmental Law and any other material that could result in Liability
under any Environmental Law.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"INCOME TAXES" means any Tax imposed on or measured by income.
"INDEMNIFIED PARTY" means a party entitled to indemnification under
this Agreement.
"INDEMNIFYING PARTY" means a party obligated to provide
indemnification under this Agreement.
"INFORMATION SYSTEMS" means all computer hardware, databases and
data storage systems, computer, data, database and communications networks
(other than the Internet), architecture interfaces and firewalls (whether for
data, voice, video or other media access, transmission or reception) and other
apparatus used to create, store, transmit, exchange or receive information in
any form.
"INSURANCE POLICIES" has the meaning set forth in SECTION 4.15(A).
"INTELLECTUAL PROPERTY" means any and all patents and patent
applications; trademarks, service marks, trade names, brand names, trade dress,
slogans, logos and Internet domain names and uniform resource locators, and the
goodwill associated with any of the foregoing; inventions (whether patentable or
not), industrial designs, discoveries, improvements, ideas, designs, models,
formulae, patterns, compilations, data collections, drawings, blueprints, mask
works, devices, methods, techniques, processes, know-how, proprietary
information, customer lists, software, technical information and trade secrets;
copyrights, copyrightable works, and rights in databases and data collections;
moral and economic rights of authors and inventors; other intellectual or
industrial property rights and foreign equivalent or counterpart rights and
forms of protection of a similar or analogous nature to any of the foregoing or
having similar effect in any jurisdiction throughout the world; and
registrations and applications for registration of any of the foregoing,
including any renewals, extensions, continuations (in whole or in part),
divisionals, re-examinations or reissues or equivalent or counterpart thereof;
and all documentation and embodiments of the foregoing.
"INTERIM FINANCIAL STATEMENTS" has the meaning set forth in SECTION
4.4(A).
"IRCA" has the meaning set forth in SECTION 4.11(C).
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"IRS" has the meaning set forth in SECTION 4.10(C).
"KNOWLEDGE OF THE BUYER" means the actual knowledge of the
individuals listed on SCHEDULE 1.1(B) after reasonable inquiry.
"KNOWLEDGE OF THE COMPANY" means the actual knowledge of each of the
individuals listed on SCHEDULE 1.1(C) after reasonable inquiry.
"LAW" means any law, statute, code, ordinance, treaty, Governmental
Order, rule or regulation of any Governmental Authority.
"LEASED REAL PROPERTY" has the meaning set forth in SECTION 4.17(A).
"LIABILITIES" means any obligations or liabilities of any kind
(whether accrued, absolute, contingent or otherwise, and whether or not due or
to become due or asserted or unasserted).
"LIEN" means any adverse claim, mortgage, pledge, security interest,
or other similar encumbrance.
"LOSSES" means any and all claims, Liabilities, losses, damages,
fines, penalties, judgments and costs (in each case including reasonable
out-of-pocket expenses).
"MATERIAL CONTRACTS" has the meaning set forth in SECTION 4.13(A).
"MAXIMUM AMOUNT" has the meaning set forth in SECTION 9.1(B).
"NET DEBT" shall mean the excess of Debt Obligations over the Cash
and Cash Equivalents of the Company and the Company Subsidiaries immediately
prior to the Closing, determined on a consolidated basis in accordance with
GAAP.
"NET DEBT DEFICIENCY" has the meaning set forth in SECTION
2.6(D)(I).
"NET DEBT EXCESS" has the meaning set forth in SECTION 2.6(D)(I).
"NET DEBT STATEMENT" has the meaning set forth in SECTION 2.6(A).
"NET WORKING CAPITAL" means, as of immediately prior to the Closing,
the amount by which (a) the aggregate sum of the Company's accounts receivable
trade, other current assets, inventory, prepaid expenses and sales tax
receivable exceeds (b) the aggregate sum (excluding all Debt Obligations) of the
Company's accounts payable and accrued liabilities, and salaries and benefits
payable, all as determined on a consolidated basis in accordance with GAAP, but
excluding all non-cash mark-to market adjustments for transactions hedging the
results of operations of the Company and the Company Subsidiaries for fiscal
2007 or thereafter.
"NET WORKING CAPITAL DEFICIENCY" has the meaning set forth in
SECTION 2.6(D)(II).
"NET WORKING CAPITAL EXCESS" has the meaning set forth in SECTION
2.6(D)(II).
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"NET WORKING CAPITAL STATEMENT" has the meaning set forth in SECTION
2.6(A).
"NLRB" has the meaning set forth in SECTION 4.11(A).
"ORDINARY COURSE OF BUSINESS" means, in all material respects, the
usual, regular and ordinary course of a business consistent with the past
practice thereof.
"ORGANIZATIONAL DOCUMENT" means, as to any Person, its certificate
or articles of incorporation, its regulations or by-laws or any equivalent
documents under the Law of such Person's jurisdiction of incorporation or
organization.
"OUTSIDE DATE" has the meaning set forth in SECTION 8.1(B).
"OWNED INTELLECTUAL PROPERTY" means all Intellectual Property owned
(in whole or in part) by the Company or the Company Subsidiaries.
"OWNED REAL PROPERTY" has the meaning set forth in SECTION 4.17(B).
"PBGC" has the meaning set forth in SECTION 4.10(D).
"PERMITS" has the meaning set forth in SECTION 4.6.
"PERMITTED LIENS" means (a) Liens arising under the Debt Obligations
as set forth on SCHEDULE 1.1(D), (b) Liens for Taxes, assessments and other
charges of Governmental Authorities not yet due and payable or being contested
in good faith by appropriate proceedings, (c) mechanics', workmen's,
repairmen's, warehousemen's, carriers' or other like Liens arising or incurred
in the ordinary course of business or by operation of Law if the underlying
obligations are not delinquent, (d) with respect to the Real Property (i) any
conditions that may be shown by a current, accurate survey, (ii) easements,
encroachments, restrictions, rights of way and any other non-monetary title
defects; and (iii) zoning, building and other similar restrictions; provided
none of the foregoing described in clause (d) will individually or in the
aggregate materially impair the value or continued use and operation of the
property to which they relate in the Business as presently conducted.
"PERSON" means any individual, sole proprietorship, partnership,
firm, corporation, association, trust, unincorporated organization, joint
venture, limited liability company, Governmental Authority or other legal
entity.
"POST-CLOSING TAX PERIOD" means a taxable period (or in the case of
a Straddle Period, the portion thereof) ending after the Closing Date.
"PRE-CLOSING TAX PERIOD" means a taxable period (or in the case of a
Straddle Period, the portion thereof) ending on or before the close of business
on the Closing Date.
"PROCEEDING" means any claim, action, suit, proceeding, audit,
investigation, inquiry, administrative enforcement proceeding or arbitration
proceeding before any Governmental Authority.
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"PURCHASE PRICE" has the meaning set forth in SECTION 2.2(A).
"PURCHASE PRICE CERTIFICATE" has the meaning set forth in SECTION
2.2(A).
"REAL PROPERTY" means the Owned Real Property and the Leased Real
Property.
"RELEASE" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, migrating, dumping, or
disposing of a Hazardous Material into the Environment (including, without
limitation, the abandonment or discarding of barrels, containers and other
receptacles containing any Hazardous Material), and any condition that results
in the exposure (in excess of applicable concentrations, limits or amount set
forth in Environmental Laws) of a Person to a Hazardous Material.
"RESPONSE PERIOD" has the meaning set forth in SECTION 9.5(D)(I).
"RESPONSIBLE PARTY" has the meaning set forth in SECTION
9.5(D)(II)(B).
"RESTRAINT" has the meaning set forth in SECTION 7.1(A).
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"SELLER FILED TAX RETURNS" has the meaning set forth in SECTION
6.3(B).
"SELLER INDEMNIFIED PERSONS" has the meaning set forth in SECTION
9.2.
"SELLER RELEASES" has the meaning set forth in SECTION 2.4(A)(IV).
"SELLERS" or "SELLER" has the meaning set forth in the preamble.
"SELLERS OBJECTION" has the meaning set forth in SECTION 2.6(B).
"SELLERS REPRESENTATIVE" means Thomas Campion.
"SELLING EXPENSES" means all costs, fees and expenses of outside
professionals incurred by the Company or the Company Subsidiaries relating to
the process of selling the Company and the Company Subsidiaries, whether
incurred in connection with this Agreement or otherwise, including, without
limitation, legal, accounting, tax and investment banking fees and expenses.
"SHARES" has the meaning set forth in the recitals.
"STRADDLE PERIOD" means any taxable period which begins before and
ends after the Closing Date.
"SUBSIDIARY" of any Person means another Person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its board of directors or
other governing body (or, if there is no such voting
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interest, 50% of the equity interests of which) is owned directly or indirectly
by such first Person, by one or more of its subsidiaries, or by such Person and
one or more of its subsidiaries.
"TARGET WORKING CAPITAL" means $13,000,000.
"TAX" or "TAXES" means (a) any foreign, United States federal, state
or local net income, alternative or add-on minimum tax, gross income, gross
receipts, sales, use, ad valorem, value added (including goods and services),
transfer, franchise, profits, capital (including large corporations), license,
withholding, payroll (including, as relating to the Canadian Subsidiaries,
employment and health insurance contributions or premiums), employment, excise,
severance, stamp, occupation, premium, property, environmental or windfall
profit tax, custom, duty or other tax, governmental fee or other like assessment
or charge of any kind whatsoever, together with any interest, penalty, addition
to tax or additional amount imposed by any Law or Taxing Authority, whether
disputed or not, (b) any liability for the payment of any amounts of any of the
foregoing as a result of being a member of an affiliated, consolidated,
combined, unitary or similar group, or being a party to any agreement or
arrangement whereby liability for payment of such amounts was determined or
taken into account with reference to the liability of any other Person, (c) any
liability for the payment of any amounts as a result of being a party to any tax
sharing agreements or arrangements (whether or not written) or with respect to
the payment of any amounts of any of the foregoing as a result of any express or
implied obligation to indemnify any other Person, and (d) any liability for the
payment of any of the foregoing types as a successor or transferee.
"TAX CLAIM" has the meaning set forth in SECTION 9.5(E)(I).
"TAX RETURN" means any and all returns (including amended returns),
filings, statements or similar reports relating to Taxes, including any
schedules and amendments thereto.
"TAXING AUTHORITY" means any Governmental Authority responsible for
the administration or imposition of any Tax whether of the United States, or any
state, country, local or foreign government or subdivision or agency thereof.
"THIRD PARTY CLAIM" has the meaning set forth in SECTION
9.5(D)(II)(A).
"TRANSACTION AGREEMENTS" means the Escrow Agreement and the Seller
Releases.
"TRANSFER TAXES" has the meaning set forth in SECTION 6.3(C).
"TRANSITION PERIOD" has the meaning set forth in SECTION 6.6(B).
"TREASURY REGULATIONS" means the Treasury Regulations promulgated
under the Code.
"U.S. BENEFIT PLAN" has the meaning set forth in SECTION 4.10(B).
"WARN ACT" has the meaning set forth in SECTION 4.11(A).
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1.2 OTHER INTERPRETIVE PROVISIONS. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement refer to
this Agreement as a whole (including any Schedules and Exhibits hereto) and not
to any particular provision of this Agreement, and all Article, Section,
Schedule and Exhibit references are to this Agreement unless otherwise
specified. The words "include," "includes" and "including" will be deemed to be
followed by the phrase "without limitation." The meanings given to terms defined
herein will be equally applicable to both the singular and plural forms of such
terms. Whenever the context may require, any pronoun includes the corresponding
masculine, feminine and neuter forms. Except as otherwise expressly provided
herein, all references to "dollars" or "$" will be deemed references to the
lawful money of the United States of America.
ARTICLE II PURCHASE AND SALE
2.1 PURCHASE AND SALE OF THE SHARES. On the Closing Date and subject
to the terms and conditions set forth in this Agreement, Sellers shall sell,
convey, assign, transfer and deliver to the Buyer and the Buyer will purchase
and acquire, all of Sellers' right, title and interest in and to the Shares, in
each case, free and clear of all Liens.
2.2 CONSIDERATION. (a) On the Closing Date and subject to the terms
and conditions set forth in this Agreement, the Buyer will pay to Sellers, in
consideration of the sale, conveyance, assignment, transfer and delivery of the
Shares, the aggregate sum of $200,000,000 in cash plus the Estimated Authorized
Capital Expenditure Amount plus (i) the Estimated Net Debt (if a negative
number) and (ii) the Estimated Net Working Capital Adjustment (if a positive
number), minus (i) the Estimated Net Debt (if a positive number), (ii) the
Estimated Net Working Capital Adjustment (if a negative number), (iii) any and
all Selling Expenses that remain unpaid at the time of Closing and (iv) the
Escrow Amount, which shall be payable to the escrow agent pursuant to the terms
of the Escrow Agreement (as adjusted pursuant to this Agreement, the "PURCHASE
PRICE"). Such amount shall be paid, in the proportion set forth on SCHEDULE B,
to the applicable Seller on the Closing Date by means of one or more wire
transfers of immediately available funds to an account or accounts designated in
writing by each Seller at least one Business Day prior the Closing Date. At
least three Business Days prior to the Closing Date, Sellers shall deliver to
the Buyer a certificate (the "PURCHASE PRICE CERTIFICATE") of the chief
financial officer of the Company, in a form and substance reasonably acceptable
to Buyer, setting forth in sufficient detail Sellers' good faith estimate of
Estimated Working Capital, Estimated Net Debt and the Estimated Authorized
Capital Expenditure Amount. Any amount used in determining the Purchase Price as
provided in this SECTION 2.2(A) or the adjustments to the Purchase Price
provided in SECTION 2.6 below not denominated in U.S. Dollars shall be converted
to U.S. Dollars at the exchange rate in effect one Business Day before the date
of delivery of the Purchase Price Certificate or the date of determination of
such adjustment, as the case may be, in each case, as set forth in THE WALL
STREET JOURNAL, Eastern Edition.
(b) On the Closing Date, Buyer shall pay or cause to be paid (A) to
the Persons entitled thereto, all of the Debt Obligations set forth on SCHEDULE
2.2(B), in the amounts set forth in the Closing Certificate; and (B) to the
Persons entitled thereto, all of the Selling Expenses to the extent unpaid at
the time of the Closing.
(c) Reserved.
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(d) Notwithstanding anything in this Agreement to the contrary, if
any of the Sellers fails to provide the Buyer with the certification provided in
SECTION 2.4(A)(VI) in whole or in part, the Buyer shall be entitled to withhold
the requisite amount from the Purchase Price in accordance with Section 1445 of
the Internal Revenue Code of 1986, as amended (the "CODE") and the Treasury
Regulations promulgated thereunder or other applicable Law.
2.3 THE CLOSING. Unless this Agreement is terminated pursuant to
ARTICLE VIII, the closing of the transactions contemplated by this Agreement
(the "CLOSING") shall take place at the offices of Jones Day, 901 Lakeside Ave.,
Cleveland, Ohio 44114, not later than the third Business Day following the
satisfaction or waiver of the conditions set forth in ARTICLE VII hereof (other
than those conditions that are to be satisfied at the Closing), or at such other
place and on such other date or time as may be agreed upon by the Sellers and
the Buyer (the "CLOSING DATE"). The Closing shall be effective as of 12:01 a.m.
on the Closing Date.
2.4 DELIVERIES AT THE CLOSING. (a) At or prior to the Closing, the
Sellers shall deliver or cause to be delivered to the Buyer:
(i) stock certificates evidencing the Shares to be sold by each
Seller, accompanied by stock powers duly executed in blank and requisite
transfer tax stamps, if any, as may be necessary or desirable to effect
the transactions described in SECTION 2.1;
(ii) a receipt from each Seller, in form and substance reasonably
acceptable to Buyer, acknowledging receipt by such Seller of the portion
of the Purchase Price paid to such Seller;
(iii) the Escrow Agreement, duly executed by each Seller and the
escrow agent thereunder;
(iv) releases, in substantially the form attached hereto as EXHIBIT
C, duly executed by each of the Sellers and the employees receiving
payments pursuant to SCHEDULE 1.1(A) (the "SELLER RELEASES");
(v) copies of the resolutions of the boards of directors (or
equivalent governing body) of each of the Sellers that is not an
individual, authorizing and approving this Agreement and the Transaction
Agreements and the transactions contemplated hereby and thereby,
certified by the respective corporate secretaries (or equivalent) of the
applicable Sellers to be true and complete and in full force and effect
and unmodified as of the Closing Date;
(vi) certificates in form and substance satisfactory to the Buyer,
duly executed and acknowledged by each Seller to the extent required
under applicable Law, certifying that the transactions contemplated
hereby are exempt from withholding under Section 1445 of the Code and
other applicable Law;
(vii) the Consents listed on SCHEDULE 2.4(A)(VII);
12
(viii) the resignations of the officers, as corporate officers, and
directors of the Company and the Company Subsidiaries set forth on
SCHEDULE 2.4(A)(VIII);
(ix) a certificate (the "CLOSING CERTIFICATE") of the chief
financial officer of the Company, dated as of the Closing Date and in a
form and substance reasonably acceptable to Buyer, setting forth in
sufficient detail the aggregate amount of (i) those Debt Obligations set
forth on SCHEDULE 2.2(B) outstanding immediately prior to the Closing and
(ii) any and all Selling Expenses that remain unpaid immediately prior to
the Closing;
(x) all minute books, stock record books (or similar registries) and
corporate (or similar) records and seals of each of the Company and the
Company Subsidiaries not already in the possession of the Company or the
Company Subsidiaries;
(xi) a copy of the certificate of incorporation (or equivalent
document) of the Company and each Company Subsidiary, certified by the
secretary of state or similar Governmental Authority of its jurisdiction
of incorporation or organization, and a copy of the bylaws (or equivalent
document) of the Company and each Company Subsidiary, certified by an
officer of the Company;
(xii) a reasonably current good standing certificate (or equivalent
document if available) for the Company and each Company Subsidiary issued
by the secretary of state or similar Governmental Authority of its
jurisdiction of incorporation or organization;
(xiii) payoff letters and appropriate termination statements under
the Uniform Commercial Code and other instruments as may be requested by
the Buyer to extinguish all Debt Obligations of the Company and each
Company Subsidiary and all security interests related thereto to the
extent directed by Buyer;
(xiv) a list of the signatories on each of the bank accounts set
forth on SCHEDULE 4.23; and
(xv) stock certificates (or local legal equivalents) evidencing the
capital stock of each Company Subsidiary.
(b) At or prior to the Closing, the Buyer shall deliver or cause to
be delivered to the respective Sellers the following:
(i) the Purchase Price by wire transfer of immediately available
funds to an account or accounts designated by Sellers as provided in
Section 2.2(a);
(ii) a receipt evidencing the Buyer's receipt of the Shares and the
payment of the amounts set forth in SECTION 2.2(B);
(iii) copies of the resolutions of the board of directors of the
Buyer authorizing and approving this Agreement and all other transactions
and agreements contemplated hereby, certified by the corporate secretary
of the Buyer to be true and complete and in full force and effect and
unmodified as of the Closing Date; and
(iv) the Escrow Agreement, duly executed by the Buyer and the escrow
agent thereunder.
13
2.5 Reserved.
2.6 PURCHASE PRICE ADJUSTMENT.
(a) Within 90 calendar days after the Closing Date, Buyer will
prepare, or cause to be prepared, and deliver to the Sellers Representative
(along with relevant supporting documentation) a statement containing a
calculation of the Net Debt (the "NET DEBT STATEMENT"), which shall be prepared
in accordance with the definition of Net Debt. Within 90 calendar days after the
Closing Date, Buyer will prepare, or cause to be prepared, and deliver to
Sellers Representative (along with relevant supporting documentation) a
statement of Net Working Capital (the "NET WORKING CAPITAL STATEMENT"), which
shall be prepared in accordance with the definition of Net Working Capital. Also
within 90 calendar days after the Closing Date, Buyer will prepare, or cause to
be prepared, and deliver to Sellers Representative (along with relevant
supporting documentation), a statement of Authorized Capital Expenditures (the
"AUTHORIZED CAPITAL EXPENDITURE STATEMENT").
(b) The Sellers Representative shall, within 60 calendar days after
the delivery by the Buyer of the Net Debt Statement, the Net Working Capital
Statement and the Authorized Capital Expenditure Statement, complete its review
of the Net Debt Statement, the Net Working Capital Statement and the Authorized
Capital Expenditure Statement. In the event that the Sellers Representative
determines that any of the Net Debt Statement, the Net Working Capital Statement
or the Authorized Capital Expenditure Statement has not been prepared on a basis
consistent with the requirements of SECTION 2.6(A), the Sellers Representative
shall, on or before the last day of such 60-day period, inform the Buyer in
writing (the "SELLERS OBJECTION"), setting forth a specific description of the
basis of the Sellers Objection, the adjustments to the Net Debt Statement, the
Net Working Capital Statement and/ or the Authorized Capital Expenditure
Statement which the Sellers Representative believes should be made, and the
Sellers Representative's calculation of the Net Debt, Net Working Capital or
Authorized Capital Expenditures, as the case may be, and the Sellers
Representative shall be deemed to have accepted any items not specifically
disputed in the Sellers Objection. Failure to so notify the Buyer on or before
the last day of such 60-day period shall constitute acceptance and approval of
the Buyer's calculation of the Net Debt, Net Working Capital and the Authorized
Capital Expenditures, which shall be conclusive and binding upon the Sellers and
Buyer.
(c) Subject to SECTION 2.6(D)(IV):
The Buyer shall have 30 calendar days following the date it receives the Sellers
Objection to review and respond to the Sellers Objection. If the Sellers
Representative and the Buyer are unable to resolve all of their disagreements
with respect to the determination of the foregoing items by the 30th day
following the Buyer's response thereto, after having used their good faith
efforts to reach a resolution, they shall refer their remaining differences to
the CPA Firm, which shall determine on a basis consistent with the requirements
of SECTION 2.6(A), and only with respect to the specific remaining accounting
related differences so submitted, whether and to what extent, if any, the
Authorized Capital Expenditure Statement, the Net Working Capital Statement
and/or the Net Debt Statement, as applicable, requires adjustment. The Sellers
Representative and the Buyer shall request the CPA Firm to use its best efforts
to render its determination within 45 calendar days. The CPA Firm's
determination shall be conclusive and
14
binding upon the Sellers and the Buyer. The Sellers Representative and the Buyer
shall make reasonably available to the CPA Firm all relevant books and records,
any work papers (including those of the parties' respective accountants) and
supporting documentation relating to the Authorized Capital Expenditure
Statement, the Net Working Capital Statement and/or the Net Debt Statement, as
applicable, and all other items reasonably requested by the CPA Firm. The "FINAL
STATEMENT OF NET DEBT" shall be (i) the Net Debt Statement in the event that (x)
no Sellers Objection is delivered to the Buyer during the initial 60-day period
specified above or (y) the Sellers Representative and the Buyer so agree, (ii)
the Net Debt Statement, adjusted in accordance with the Sellers Objection, in
the event that (x) Buyer does not respond to the Sellers Objection during the
30-day period specified above following receipt by the Buyer of the Sellers
Objection or (y) the Sellers Representative and the Buyer so agree or (iii) the
Net Debt Statement, as adjusted pursuant to the agreement of the Buyer and the
Sellers Representative or as adjusted by the CPA Firm together with any other
modifications to the Net Debt Statement agreed upon by Sellers Representative
and the Buyer. The "FINAL STATEMENT OF NET WORKING CAPITAL" shall be (i) the Net
Working Capital Statement in the event that (x) no Sellers Objection is
delivered to the Buyer during the initial 60-day period specified above or (y)
the Sellers Representative and the Buyer so agree, (ii) the Net Working Capital
Statement, adjusted in accordance with the Sellers Objection, in the event that
(x) Buyer does not respond to the Sellers Objection during the 30-day period
specified above following receipt by the Buyer of the Sellers Objection or (y)
the Sellers and the Buyer so agree or (iii) the Net Working Capital Statement,
as adjusted pursuant to the agreement of the Buyer and the Sellers
Representative or as adjusted by the CPA Firm together with any other
modifications to the Net Working Capital Statement agreed upon by Sellers
Representative and the Buyer. The "FINAL STATEMENT OF AUTHORIZED CAPITAL
EXPENDITURES" shall be (i) the Authorized Capital Expenditure Statement in the
event that (x) no Sellers Objection is delivered to the Buyer during the initial
60-day period specified above or (y) the Sellers Representative and the Buyer so
agree, (ii) the Authorized Capital Expenditure Statement, adjusted in accordance
with the Sellers Objection, in the event that (x) Buyer does not respond to the
Sellers Objection during the 30-day period specified above following receipt by
the Buyer of the Sellers Objection or (y) the Sellers Representative and the
Buyer so agree or (iii) the Authorized Capital Expenditure Statement, as
adjusted pursuant to the agreement of the Buyer and the Sellers Representative
or as adjusted by the CPA Firm together with any other modifications to the
Authorized Capital Expenditures Statement agreed upon by Sellers Representative
and the Buyer. All fees and disbursements of the CPA Firm shall be shared
equally by the Sellers Representative on behalf of the Sellers, on the one hand,
and the Buyer, on the other hand.
(d) Subject to SECTION 2.6(D)(IV):
(i) if the calculation of the Net Debt contained in the Final
Statement of Net Debt is less than the Estimated Net Debt, the Buyer
shall pay an amount in cash equal to the amount of such deficiency (such
amount, the "NET DEBT DEFICIENCY"), plus interest computed at the
Applicable Rate for the period from the Closing Date to the date of such
payment on the Net Debt Deficiency, in immediately available funds to the
Sellers Representative, for the benefit of the Sellers, within five (5)
Business Days after the ultimate determination of the Final Statement of
Net Debt as provided in this SECTION 2.6. If the calculation of the Net
Debt contained in the Final Statement of Net Debt is greater than the
Estimated Net Debt, the Sellers, jointly and severally, shall pay an
amount in
15
cash equal the amount of such excess (such amount, the "NET DEBT
EXCESS"), plus interest computed at the Applicable Rate for the period
from the Closing Date to the date of such payment on the Net Debt Excess,
in immediately available funds to the Buyer, within five (5) Business
Days after the ultimate determination of the Final Statement of Net Debt
as provided in this SECTION 2.6.
(ii) if the calculation of the Net Working Capital contained in the
Final Statement of Net Working Capital is less than the Estimated Net
Working Capital, the Sellers, jointly and severally, shall pay an amount
in cash equal to the amount of such deficiency (such amount, the "NET
WORKING CAPITAL DEFICIENCY"), plus interest computed at the Applicable
Rate for the period from the Closing Date to the date of such payment on
the Net Working Capital Deficiency, in immediately available funds to the
Buyer within five (5) Business Days after the ultimate determination of
the Final Statement of Net Working Capital as provided in this SECTION
2.6. If the calculation of the Net Working Capital contained in the Final
Statement of Net Working Capital is greater than the Estimated Net
Working Capital, the Buyer shall pay an amount in cash equal to the
amount of such excess (such amount, the "NET WORKING CAPITAL EXCESS"),
plus interest computed at the Applicable Rate for the period from the
Closing Date to the date of such payment on the Net Working Capital
Excess, in immediately available funds to the Sellers Representative, for
the benefit of Sellers, within five (5) Business Days after the ultimate
determination of the Final Statement of Net Working Capital as provided
in this SECTION 2.6.
(iii) if the calculation of the Authorized Capital Expenditures
contained in the Final Statement of Authorized Capital Expenditures is
less than the Estimated Authorized Capital Expenditure Amount, the
Sellers, jointly and severally, shall pay an amount in cash equal to the
amount of such deficiency (such amount, the "AUTHORIZED CAPITAL
EXPENDITURE DEFICIENCY"), plus interest computed at the Applicable Rate
for the period from the Closing Date to the date of such payment on the
Authorized Capital Expenditure Deficiency, in immediately available funds
to Buyer, within five (5) Business Days after the ultimate determination
of the Final Statement of Authorized Capital Expenditure as provided in
this SECTION 2.6. If the calculation of the Authorized Capital
Expenditures contained in the Final Statement of Authorized Capital
Expenditures is greater than the Estimated Authorized Capital Expenditure
Amount, the Buyer shall pay an amount in cash equal the amount of such
excess (such amount, the "AUTHORIZED CAPITAL EXPENDITURE EXCESS"), plus
interest computed at the Applicable Rate for the period from the Closing
Date to the date of such payment on the Authorized Capital Expenditure
Excess, in immediately available funds to the Sellers Representative, for
the benefit of the Sellers, within five (5) Business Days after the
ultimate determination of the Final Statement of Authorized Capital
Expenditures as provided in this SECTION 2.6.
(iv) All amounts payable by Buyer or the Sellers Representative, as
the case may be, pursuant to SECTIONS 2.6(D)(I), (II) or (III), as the
case may be, shall be netted against all amounts payable to such party by
the other party pursuant to such sections.
(v) Notwithstanding anything in this Agreement to the contrary,
including SECTION 9.5(C), Buyer may, but is not required to, draw any
amounts payable to Buyer
16
pursuant to SECTIONS 2.6(D)(I), (II) or (III) from the funds subject to
the Escrow Agreement.
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLERS
Each Seller severally represents and warrants to the Buyer as
follows:
3.1 VALIDITY AND ENFORCEABILITY. Such Seller has the capacity or the
requisite power and authority, as the case may be, to execute, deliver and
perform his, her or its obligations under this Agreement and the Transaction
Agreements. This Agreement and the Transaction Agreements have been duly
executed and delivered by such Seller and, assuming due authorization, execution
and delivery by the other parties thereto, represent the legal, valid and
binding obligation of such Seller enforceable against such Seller in accordance
with their respective terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, fraudulent conveyance and other similar
Laws affecting creditors' rights and remedies generally and general equitable
principles (whether considered in a Proceeding in equity or at Law) (the
"GENERAL ENFORCEABILITY EXCEPTIONS"). No further action on the part of such
Seller is or will be required in connection with the transactions contemplated
by this Agreement or the Transaction Agreements.
3.2 TITLE TO SHARES. Such Seller has good and valid title to his,
her or its Shares, free and clear of all Liens. Upon the consummation of the
transactions contemplated by this Agreement, the Buyer will acquire good and
valid title to such Seller's Shares, free and clear of all Liens, voting trusts,
shareholder agreements, proxies or other similar restrictions.
3.3 NO CONFLICT. (a) Neither the execution of this Agreement or the
Transaction Agreements, nor the performance by such Seller of his, her or its
obligations hereunder or thereunder will (i) violate or conflict with (A) in the
case of any Seller that is not a natural person, the organizational documents of
such Seller or (B) any Law or Governmental Order applicable to such Seller or by
which any of his, her or its properties or assets are bound, (ii) violate,
conflict with or result in a breach or termination of, or otherwise give any
Person additional rights or compensation under, or the right to terminate or
accelerate, or constitute (with notice or lapse of time, or both) a default
under the terms of any Contract to which such Seller is a party or by which any
of the assets or the properties of such Seller are bound or (iii) result in the
creation or imposition of any Lien with respect to, or otherwise have an adverse
effect upon, the Shares owned by such Seller.
(b) Except as set forth on SCHEDULE 3.3(B), no Consent is required
to be obtained, filed or delivered by such Seller for the consummation by such
Seller of the transactions contemplated by this Agreement or the Transaction
Agreements.
3.4 PROCEEDINGS. There are no Proceedings pending or, to such
Seller's actual knowledge, threatened (a) against such Seller or (b) that
challenge, or question the validity of, this Agreement, any Transaction
Agreement or any action taken or to be taken by such Seller in connection with,
or which seeks to enjoin or obtain monetary damages in respect of, the
consummation of the transactions contemplated hereby or thereby.
17
ARTICLE IV REPRESENTATIONS AND WARRANTIES
RELATING TO THE COMPANY AND THE COMPANY SUBSIDIARIES
The Company represents and warrants to the Buyer as follows:
4.1 ORGANIZATION. Each of the Company and the Company Subsidiaries
is a corporation duly organized, validly existing and in good standing (to the
extent such concept exists) under the Laws of its jurisdiction of incorporation
or organization. Each of the Company and the Company Subsidiaries has the
requisite corporate power and authority to own, lease and operate its assets and
to carry on its business as now being conducted and is duly qualified,
authorized or licensed to do business and is in good standing (to the extent
such concept exists) in the jurisdictions in which the ownership, lease or
operation of its assets or the conduct of its business requires such
qualification, authorization or license, except where the failure to be so
qualified, authorized or licensed would not reasonably be expected to have a
Company Material Adverse Effect.
4.2 CAPITAL STOCK OF THE COMPANY. SCHEDULE 4.2 sets forth for the
Company (a) its jurisdiction of incorporation, and (b) the number of authorized,
issued and outstanding shares of capital stock, the names of the holders
thereof, and the number of shares of capital stock held by each such holder and,
except as set forth on SCHEDULE 4.2, there are no other authorized, issued or
outstanding shares of capital stock or other equity interests of the Company.
All of the issued and outstanding shares of capital stock of the Company are
owned beneficially and of record by the Sellers, free and clear of any Liens.
All of the shares of capital stock of the Company are duly authorized and
validly issued and are fully paid and nonassessable and have been issued in
compliance with (and since such issuance, have not been transferred except in
compliance with) all applicable federal, state and foreign securities Laws and
any preemptive rights, rights of first refusal or similar rights of any Person.
Except for this Agreement, there are no outstanding subscriptions, options,
warrants, calls, preemptive rights, conversion or other rights, agreements,
commitments, arrangements, trusts, proxies or understandings relating to the
sale, issuance or voting of any shares of the capital stock of the Company, or
of any securities or other instruments convertible into, exchangeable for or
evidencing the right to purchase any shares of capital stock of the Company.
There are no outstanding agreements or commitments obligating the Company to
repurchase, redeem or otherwise acquire any outstanding shares or other equity
interests of the Company.
4.3 COMPANY SUBSIDIARIES. SCHEDULE 4.3 sets forth a list of each
Subsidiary of the Company (the "COMPANY SUBSIDIARIES") and for each of the
Company Subsidiaries (i) its jurisdiction of incorporation, formation or
organization, as applicable, and (ii) the number of authorized, issued and
outstanding shares of each class of its capital stock or other authorized,
issued and outstanding equity interests, as applicable, the names of the holders
thereof, and the number of shares or percentage interests, as applicable, held
by each such holder. Each Company Subsidiary is duly incorporated, formed or
organized, as applicable, validly existing and, where applicable, in good
standing under the Laws of its jurisdiction of incorporation, formation or
organization, as applicable, has the requisite corporate or similar power and
authority to own, lease and operate its assets and to carry on its business as
now being conducted, and is duly qualified, authorized or licensed to do
business, and, where applicable, is in good standing in the jurisdictions in
which the ownership, lease or operation of its assets or the
18
conduct of its business requires such qualification or license except where the
failure to be so qualified would not cause a Company Material Adverse Effect.
Except as set forth on SCHEDULE 4.3, all the issued and outstanding shares of
capital stock or other equity interests of the Company Subsidiaries are owned,
beneficially and of record, by the Company or another Company Subsidiary, free
and clear of any Liens, and the Company or a Company Subsidiary has good and
valid title to such shares of capital stock or other equity interests. All of
such issued and outstanding shares were duly authorized and validly issued and
are fully paid and nonassessable. Except as set forth on SCHEDULE 4.3, there are
no outstanding subscriptions, options, warrants, calls, preemptive rights,
conversion or other rights, agreements, commitments, arrangements, trusts,
proxies or understandings relating to the sale, issuance or voting of any shares
of the capital stock or other equity interest of any of the Company
Subsidiaries, or of any securities or other instruments convertible into,
exchangeable for or evidencing the right to purchase any shares of capital stock
or other equity interests of any of the Company Subsidiaries. There are no
outstanding agreements or commitments obligating the Company or any Company
Subsidiary to repurchase, redeem or otherwise acquire any outstanding shares or
other equity interests of any Company Subsidiary. Other than the ownership
interests in the Company Subsidiaries, neither the Company nor the Company
Subsidiaries own any equity interest in any other Person.
4.4 FINANCIAL STATEMENTS. SCHEDULE 4.4(A) sets forth true and
complete copies of the audited consolidated balance sheet of the Company and the
Company Subsidiaries as of December 31, 2005 and December 31, 2004, and the
related audited consolidated statements of income, consolidated statement of
stockholders' equity and consolidated statement of cash flows for each of the
years in the period then ended (the "ANNUAL FINANCIAL STATEMENTS"). SCHEDULE
4.4(A) also sets forth the unaudited consolidated balance sheet of the Company
and the Company Subsidiaries as of September 30, 2006 (the "BALANCE SHEET"), the
related unaudited consolidated statement of income, consolidated statement of
stockholders' equity and the consolidated statement of cash flows for the
nine-month period then ended (the "INTERIM FINANCIAL STATEMENTS" and, together
with the Annual Financial Statements, the "FINANCIAL Statements"). Except as set
forth on SCHEDULE 4.4(A), the Financial Statements have been prepared from the
books and records of the Company and the Company Subsidiaries, and fairly
present in all material respects the financial position and results of
operations of the Company and the Company Subsidiaries on a consolidated basis
at the dates and for the respective periods covered, in each case in accordance
with GAAP applied on a consistent basis, subject, in the case of the Interim
Financial Statements, which in the absence of note disclosures include all
adjustments necessary for a fair presentation.
(b) To the Knowledge of the Company, neither the Company nor any
Company Subsidiary has any material Liabilities of any kind, except for
Liabilities (i) reflected on, accrued or reserved against, in the Balance Sheet,
(ii) incurred in the ordinary course of business since the date of the Balance
Sheet, (iii) arising under Contracts disclosed in the schedules to this
Agreement or not required to be so disclosed, or (iv) set forth on SCHEDULE
4.4(B).
4.5 NO CONFLICTS OR APPROVALS. Except as set forth on SCHEDULE
4.5(A), the execution, delivery and performance by the Company of this Agreement
and the Transaction Agreements and the consummation by the Company of the
transactions contemplated hereby and
19
thereby do not and will not (i) violate, conflict with or result in a breach of
the organizational documents of any of the Company or the Company Subsidiaries,
(ii) violate, conflict with or result in a breach of, or constitute a default by
the Company or the Company Subsidiaries (or create an event which, with notice
or lapse of time or both, would constitute a default) or give rise to any right
of termination, consent, cancellation, acceleration, increased Liabilities or
fees, or right to increase the obligations or otherwise modify the terms under,
or result in the creation of any Lien, other than Permitted Liens, upon any of
the material properties, rights or assets of any of the Company or the Company
Subsidiaries or on the Shares or to which any of such properties, assets or
Shares are subject under, any material Contract to which any of the foregoing is
a party or otherwise bound, or (iii) subject to the receipt of the requisite
approvals referred to on SCHEDULE 4.5(B), conflict with or violate any
Governmental Order or Law applicable to any of the Company or the Company
Subsidiaries or any of their respective properties, rights or assets.
(b) Except as set forth on SCHEDULE 4.5(B), no Consent is required
to be obtained, filed or delivered by the Sellers for the consummation by the
Company or any Company Subsidiary of the transactions contemplated by this
Agreement and the Transaction Agreements.
4.6 COMPLIANCE WITH LAW; GOVERNMENTAL AUTHORIZATIONS. Except as set
forth on SCHEDULE 4.6, each of the Company and the Company Subsidiaries is now
and has been since October 29, 2003, in compliance in all material respects with
all Laws and Governmental Orders. To the Knowledge of the Company, there is no
proposed Law or Governmental Order that would be applicable to any of the
Company or the Company Subsidiaries that would materially adversely affect the
condition (financial or otherwise), business, assets, properties, Liabilities or
operations of any of the Company or the Company Subsidiaries. Neither the
Company nor any Company Subsidiary nor any director, officer, agent or employee
acting on behalf of the Company or any Company Subsidiary has used any corporate
funds to make, directly or indirectly, any unlawful contribution, gift, bribe,
payoff, kickback or other unlawful payment to any United States or foreign
government official or employee or violated any provision of the United States
Foreign Corrupt Practices Act of 1997. Except as set forth in SCHEDULE 4.6, each
of the Company and the Company Subsidiaries possess all material licenses,
approvals, permits, registrations, certificates and other governmental
authorizations ("PERMITS") necessary to own, lease and operate its assets and
conduct the business of the Company and the Company Subsidiaries as currently
conducted. Except as set forth in SCHEDULE 4.6, the Permits are in full force
and effect and the Company and the Company Subsidiaries have not received any
written notice or, to the Knowledge of the Company, oral notice, from any
Governmental Authority (a) asserting that the Company or any Company Subsidiary
is not in material compliance with any Permit or (b) threatening to suspend,
revoke, revise, limit, restrict or terminate any Permit held by the Company or
any Company Subsidiary or declare any such Permit invalid. Except as set forth
in SCHEDULE 4.6, (x) the statutory records of each of the Company and the
Company Subsidiaries required to be maintained by the Laws of its jurisdiction
of incorporation, organization or formation have been properly kept and contain
an accurate and materially complete record of the applicable matters required to
be contained therein and no written notice, that any of them is incorrect or
should be rectified has been received and (y) all documents required to be filed
with any relevant Governmental Authority in any relevant jurisdiction in respect
of the Company and the Company Subsidiaries have been
20
filed and were correct in all material respects. In limitation of the above, no
representation or warranty provided in this SECTION 4.6, shall apply to any
matters covered by SECTIONS 4.9, 4.10 and 4.14, it being understood that the
sole representations and warranties with respect to the matters covered by
SECTIONS 4.9, 4.10 and 4.14 are the representations and warranties contained
therein.
4.7 PROCEEDINGS. Except as set forth on SCHEDULE 4.7, there are no
Proceedings pending or, to the Knowledge of the Company, threatened (a) against
the Company or any Company Subsidiary or (b) that challenge, or question the
validity of, this Agreement, any Transaction Agreement or any action taken or to
be taken by the Company or any Company Subsidiary in connection with, or which
seeks to enjoin or obtain monetary damages in respect of, the consummation of
the transactions contemplated hereby or thereby.
4.8 ABSENCE OF CERTAIN CHANGES. Except as (a) set forth in SCHEDULE
4.8, or (b) otherwise expressly permitted or required by this Agreement, since
the date of the Balance Sheet, the business of the Company and the Company
Subsidiaries has been conducted only in the ordinary course of business.
4.9 TAX MATTERS. Except as set forth in SCHEDULE 4.9;
(a) All Tax Returns required to be filed by or on behalf of the
Company and Company Subsidiaries have been timely filed (subject to permitted
extensions applicable to such filing), and all such Tax Returns of the Company
and Company Subsidiaries are true, correct and complete in all respects. All
Taxes of the Company and Company Subsidiaries due or payable (whether or not
shown on such Tax Returns) have been paid within the prescribed period or any
extension thereof, other than Taxes that are being contested in good faith or
properly reflected or adequately reserved against on a balance sheet of the
Company or a Company Subsidiary prepared in accordance with GAAP. All material
elections made on behalf of the Company or the Company Subsidiaries have been
timely and properly made.
(b) There are no Liens relating to Taxes encumbering any of the
Shares or any assets or properties of the Company or the Company Subsidiaries,
except for Permitted Liens.
(c) There are no Proceedings currently pending against the Company
or the Company Subsidiaries or, to the Knowledge of the Company, threatened
against the Company or the Company Subsidiaries in respect of any Tax for any
Pre-Closing Tax Period. To the Knowledge of the Company, no claims for Taxes
have been made by any Taxing Authority in a jurisdiction in which any of the
Company or the Company Subsidiaries does not file a Tax Return.
(d) None of the Company or the Company Subsidiaries has granted any
extension or waiver of the statute of limitations period applicable to any Tax
or Tax Return, or has agreed to any extension of time with respect to a material
Tax assessment or deficiency, which period (after giving effect to such
extension or waiver) has not yet expired.
(e) Since October 29, 2003, none of the Company or Company
Subsidiaries (i) has been a member of an affiliated, consolidated, combined or
unitary group as set forth in Section 1504 of the Code or any other similar
provision of state, local or foreign Law or (ii) has
21
any liability for Taxes of any Person under Treasury Regulation Section 1.1502-6
(or any similar provision of state, local or foreign law), as transferee or
successor, by contract or otherwise; in either case, other than with respect to
any current affiliated, consolidated, combined or unitary group.
(f) All Tax amounts required to be withheld or collected for payment
by the Company or Company Subsidiaries, including in connection with amounts
paid or owing to any employee, independent contractor, creditor, stockholder or
any other Person have been collected or withheld and paid to the appropriate
Taxing Authorities, except for payments not yet due to be paid over to a taxing
authority.
(g) None of the Company or the Company Subsidiaries will be required
to include any item of income in, or exclude any material item of deduction
from, taxable income for any taxable period (or portion thereof) ending after
the Closing Date (i) as a result of any change in method of accounting made
between October 29, 2003 and on or prior to the Closing Date, (ii) pursuant to a
"closing agreement" as described in Section 7121 of the Code (or any
corresponding or similar provision of state, local or foreign income Tax law)
executed between October 29, 2003 and on or prior to the Closing Date, (iii)
pursuant to an installment sale or open transaction disposition made between
October 29, 2003 and on or prior to the Closing, or (iv) as a result of any
prepaid amount received between October 29, 2003 and on or prior to the Closing.
Any income, gain, deduction or loss attributable to "intercompany transactions"
(as defined in Treasury Regulations under Section 1502 of the Code or any
corresponding provision of state, local foreign or other income Tax Law)
involving the Company or any Company Subsidiary consummated prior to the Closing
or "excess loss accounts" (as defined in Treasury Regulations under Section 1502
of the Code or any corresponding provision of state, local foreign or other
income Tax Law) with respect to the stock of the Company or any Company
Subsidiary existing at the Closing will be taken into account for federal, state
or local Income Tax purposes as a result of the transactions contemplated by
this Agreement.
(h) Neither the Company or any of the Company Subsidiaries has been
a United States real property holding corporation within the meaning of Section
897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(ii).
(i) Since October 29, 2003, neither the Company nor any of the
Company Subsidiaries has been a "distributing corporation" or a "controlled
corporation" in a distribution that was purported or intended to be governed by
Section 355(a) of the Code.
(j) Each of the Company and the Company Subsidiaries have disclosed
on their federal income Tax Returns all positions taken therein that could give
rise to a substantial understatement of federal income Tax within the meaning of
Section 6662 of the Code.
(k) Neither the Company nor any Company Subsidiary is a party to or
bound by any Tax allocation or Tax sharing agreement or arrangement.
(l) Since October 29, 2003, no Tax Return filed with respect to the
Company or Company Subsidiaries reflects any material adjustment pursuant to
Section 482 of the Code or any analogous provision of state, local or foreign
Tax law.
22
(m) Since October 29, 2003, none of the Company or the Company
Subsidiaries has been a party to any understanding or arrangement described in
Section 6111(b)(2) of the Code, nor has any of the Company or the Subsidiaries
participated in a reportable transaction as defined in Treasury Regulation
Section 1.6011-4(b) and (c)(3), or any analogous provision of state, local or
foreign Tax law.
(n) There are no outstanding rulings of, or requests for rulings
with, any Tax authority expressly addressed to the Company or any Company
Subsidiary, with respect to the Company or any Company Subsidiary.
(o) None of the Canadian Company Subsidiaries have entered into any
agreement contemplated by section 191.3 of the Income Tax Act (Canada).
(p) No Person (other than the Buyer) has ever acquired or had the
right to acquire control of the Canadian Company Subsidiaries for the purposes
of Section 111 of the Income Tax Act (Canada).
(q) There is no, and prior to the Closing there will not be, any
transaction, election, or failure to take any action or make any election prior
to the Closing that would restrict or limit use (for the benefit of the Buyer)
of the Canadian Company Subsidiaries' net losses as at the Closing in a taxation
year ending after the Closing, other than any limits or restrictions caused by
any act, omission or failure of the Buyer under applicable Laws, including
Section 111 of the Income Tax Act (Canada).
(r) None of sections 78, 80, 80.01, 80.02, 80.03 and 80.04 of the
Income Tax Act (Canada) or any equivalent provision of the Laws of any other
jurisdiction, have applied or will apply to the Canadian Company Subsidiaries on
or before the Closing Date.
(s) No Canadian Company Subsidiary has acquired property from a
non-arm's length Person, within the meaning of the Income Tax Act (Canada), for
consideration, the value of which is less than the fair market value of the
property, including, but not limited to, in circumstances which could subject it
to a liability under section 160 of the Income Tax Act (Canada). The value of
the consideration paid or received by the Canadian Company Subsidiaries for the
acquisition, sale or transfer of property (including intangibles) or the
provision of services (including financial transactions) from or to any non
arm's length Person is equal to the estimated fair market value of such property
acquired, transferred or sold or services purchased or provided. The Canadian
Company Subsidiaries have not received any requirement pursuant to section 224
of the Income Tax Act (Canada) which remains unsatisfied in any respect.
(t) No circumstances exist and no transaction or event or series of
transactions or events has occurred which has resulted or could result in a
liability for Tax to the Canadian Company Subsidiaries, either before, on or
after Closing, under section 17 of the Income Tax Act (Canada). Paragraph
214(3)(a) of the Income Tax Act (Canada) has not applied as a result of any
transaction or event involving the Canadian Company Subsidiaries. For all
transactions between a Canadian Company Subsidiary and any Person that is a
non-resident of Canada for purposes of the Income Tax Act (Canada) with whom it
was not dealing at arm's
23
length during a taxation year commencing after 1998 and ending on or before the
Closing Date and to which subsection 247(3) of the Income Tax Act (Canada) could
apply, the Canadian Company Subsidiary has made or obtained records or documents
that meet the requirements of paragraphs 247(4)(a) to (c) of the Income Tax Act
(Canada).
(u) The Canadian Company Subsidiaries are duly registered under Part
IX of the Excise Tax Act (Canada) with respect to the goods and services tax and
their registration numbers are 88618-8903RT0001 (Recmix, Inc.), 88613-7207RT0001
(Melri, Inc.) and 84174-5540RT0001 (Excell Materials G.P.), respectively.
4.10 EMPLOYEE BENEFITS. (a) SCHEDULE 4.10(A) sets forth a list of
(i) every employee benefit plan, within the meaning of Section 3(3) of ERISA,
(ii) every other severance pay, retention, parachute, employment, salary
continuation, bonus, incentive, stock option, stock purchase, restricted stock,
retirement, pension, profit sharing or deferred compensation plan, contract,
program, fund, or arrangement of any kind, and (iii) every other employee
benefit plan, contract, program, fund, or arrangement (whether written or oral,
qualified or nonqualified, formal or informal, funded or unfunded, foreign or
domestic, currently effective or terminated) and every trust, escrow, or similar
agreement related thereto, whether or not funded, in respect of any present or
former employees, directors, officers, shareholders, consultants, or independent
contractors of the Company, the Company Subsidiaries or any ERISA Affiliate that
are sponsored or maintained by the Company, a Company Subsidiary or any ERISA
Affiliate or with respect to which the Company, a Company Subsidiary or any
ERISA Affiliate has made or is required to make payments, transfers, or
contributions (all of the above being hereinafter individually or collectively
referred to as a "BENEFIT PLAN" or "BENEFIT PLANS," respectively). Neither the
Sellers, the Company nor any Company Subsidiary has any Liability with respect
to any plan, arrangement or practice of the type described in the preceding
sentence other than the Benefit Plans. "COMPANY EMPLOYEE" means any current or
former employee, director or officer of the Company or the Company Subsidiaries.
(b) SCHEDULE 4.10(B) separately identifies each Benefit Plan that is
maintained in the United States (each, a "U.S. BENEFIT PLAN"), and each Benefit
Plan that is not a U.S. Benefit Plan (each, a "FOREIGN BENEFIT PLAN").
(c) Current, accurate and complete copies (or, as to clause (i) of
this sentence, to the extent no copy exists, an accurate description) of the
following materials have been delivered to the Buyer with respect to each U.S.
Benefit Plan, to the extent applicable: (i) current plan documents, any
amendments and any related trust agreement, group annuity contract or other
funding instrument, (ii) the most recent determination letter from the Internal
Revenue Service ("IRS"), (iii) the most recent summary plan description and
summary of material modifications to the extent not included in the summary plan
description in each case distributed to employees, and (iv) for the three (3)
most recent years (A) the Form 5500 and attached schedules, (B) audited
financial statements and (C) where applicable, actuarial valuation reports.
(d) Except as set forth in SCHEDULE 4.10(D): (i) the U.S. Benefit
Plans have been established and administered in compliance with their terms and
the applicable requirements of ERISA, the Code, and other applicable Laws; (ii)
each U.S. Benefit Plan and related trust that is intended to be qualified within
the meaning of Section 401 or 501, as
24
applicable, of the Code is so qualified and has received or has timely applied
for a favorable determination letter as to its qualification, and to the
Knowledge of the Company, nothing has occurred, whether by action or failure to
act, that could reasonably be expected to cause the loss of such qualification
or other losses arising from such action or failure to act; (iii) no event has
occurred and no condition exists with respect to any U.S. Benefit Plan that
would subject the Company or Company Subsidiaries, either directly or by reason
of their affiliation with any ERISA Affiliate, to any material tax, fine, lien,
penalty or other liability imposed by ERISA, the Code or other applicable Laws;
(iv) no "reportable event" (as such term is defined in Section 4043 of the
Code), non-exempt "prohibited transaction" (as such term is defined in Section
406 of ERISA and Section 4975 of the Code), "accumulated funding deficiency" (as
such term is defined in Section 302 of ERISA and Section 412 of the Code
(whether or not waived)), or breach of any duties imposed on "fiduciaries"
(within the meaning of Section 3(21) of ERISA) by ERISA has occurred with
respect to any U.S. Benefit Plan that could result in any liability or excise
tax under ERISA or the Code being imposed on the Company or a Company
Subsidiary; (v) all premiums due to the Pension Benefit Guaranty Corporation
("PBGC") with respect to any U.S. Benefit Plan have been timely paid in full;
(vi) the PBGC has not instituted proceedings to terminate any U.S. Benefit Plan;
and (vii) no Liability (other than for premiums to the PBGC) under Title IV of
ERISA has been or could reasonably be expected to be incurred by any of the
Company or Company Subsidiaries.
(e) With respect to any insurance policy providing funding for
benefits under any U.S. Benefit Plan, (i) there is no Liability of the Company
or any Company Subsidiary in the nature of a retroactive rate adjustment, loss
sharing arrangement, or other actual or contingent Liability, nor would there be
any such Liability if such insurance policy was terminated on the date hereof,
and (ii) no insurance company issuing any such policy is in receivership,
conservatorship, liquidation or similar proceeding and, to the Knowledge of the
Company, no such proceedings with respect to any such insurer are imminent.
(f) Except as set forth in SCHEDULE 4.10(G), neither the Company, a
Company Subsidiary nor any ERISA Affiliate currently has, and at no time in the
past has had, an obligation to contribute to a "defined benefit plan" as defined
in Section 3(35) of ERISA, a pension plan subject to the funding standards of
Section 302 of ERISA or Section 412 of the Code, a "multiemployer plan" as
defined in Section 3(37) of ERISA or Section 414(f) of the Code or a "multiple
employer plan" within the meaning of Section 210(a) of ERISA or Section 413(c)
of the Code.
(g) With respect to any U.S. Benefit Plan, except as set forth in
SCHEDULE 4.10(G): (i) there are no pending or, to the Knowledge of the Company,
threatened Proceedings, other than routine claims for benefits in the ordinary
course by participants and beneficiaries; (ii) to the Knowledge of the Company,
no facts or circumstances exist that could give rise to any such Proceedings;
(iii) no written or to the Knowledge of the Company, oral communication has been
received from the PBGC in respect of any U.S. Benefit Plan subject to Title IV
of ERISA concerning the funded status of any such plan or any transfer of assets
and liabilities from any such plan in connection with the transactions
contemplated herein; and (iv) no administrative investigation, audit or other
Proceeding by the Department of Labor, the PBGC, the IRS or other Governmental
Authorities is pending or in progress or, to the Knowledge of the Company,
threatened.
25
(h) Except as set forth in SCHEDULE 4.10(H), (i) all persons
classified as independent contractors of the Company or Company Subsidiaries
satisfy and have at all times satisfied in all material respects the
requirements of applicable Law to be so classified; (ii) the Company and Company
Subsidiaries have fully and accurately reported such persons' compensation on
IRS Form 1099 when required to do so; (iii) neither the Company nor any Company
Subsidiary has or has had any obligations to provide benefits with respect to
such persons under any Benefit Plan or otherwise and (iv) none of the Company or
Company Subsidiaries has employed or employs any "leased employees" as defined
in Section 414(n) of the Code.
(i) With respect to each U.S. Benefit Plan that is a group health
plan benefiting any current or former employee of the Company, Company
Subsidiary or any ERISA Affiliate that is subject to Section 4980B of the Code,
the Company, Company Subsidiaries and each ERISA Affiliate have complied with
the continuation coverage requirements of Section 4980B of the Code and Part 6
of Subtitle B of Title I of ERISA.
(j) All contributions, transfers and payments in respect of any U.S.
Benefit Plan, other than transfers incident to an incentive stock option plan
within the meaning of Section 422 of the Code, have been or are fully deductible
under the Code.
(k) No U.S. Benefit Plan provides benefits, including, without
limitation, death or medical benefits, beyond termination of service or
retirement other than (i) coverage mandated by Law or (ii) death or retirement
benefits under any U.S. Benefit Plan that is intended to be qualified under
Section 401(a) of the Code.
(l) (i) All contributions (including, without limitation, all
employer matching or other contributions and employee salary reduction
contributions) to and payments from any U.S. Benefit Plan in respect of any
Company Employees that are required in accordance with the terms of such U.S.
Benefit Plan, any related document, the Code or ERISA have been timely made, or,
if not yet due, have been properly reflected in the Financial Statements; and
(ii) all such contributions to, and payments from, any U.S. Benefit Plan, except
those to be made from a trust qualified under Section 401(a) of the Code, that
are required to be made as of the Closing Date will be made on or prior to the
Closing Date.
(m) (i) SCHEDULE 4.10(M)(I) sets forth a true, complete, up-to-date
and accurate list of all written or oral Foreign Benefit Plans sponsored,
maintained or contributed to or required to be contributed to by the Company or
Company Subsidiaries or any affiliate or subsidiary thereof for the benefit of
its employees or former employees and their dependents or beneficiaries which
are maintained by the Company or Company Subsidiaries or in which the Company or
Company Subsidiaries participates in or has any actual or potential liabilities
or obligations other than plans established and pursuant to a Government Scheme.
With respect to each Foreign Benefit Plan which is not a Government Scheme, to
the extent applicable, current, accurate and complete copies of, or, where oral,
written summaries of the material terms thereof as amended at the date hereof,
including, without limitation, (A) current plan documents, any amendments and
any related trust agreement, group annuity contract or other funding instrument,
investment management agreements, current asset valuations, collective
agreements, all professional opinions (whether or not internally prepared) with
respect to each Foreign Benefit
26
Plan, all material internal memoranda concerning the Foreign Benefit Plans,
copies of material correspondence with all regulatory authorities with respect
to each Foreign Benefit Plan and plan summaries, employee booklets and personnel
manuals (or, to the extent no copy exists, an accurate description), and (B) the
most recent audited financial statements and/or actuarial valuation reports,
have been delivered to the Buyer;
(ii) with respect to each Foreign Benefit Plan, except as set forth
in SCHEDULE 4.10(M)(II), all data and information required, in the case
of such Benefit Plans that are not Government Schemes, to administer or,
in the case of such Benefit Plans that are Government Schemes, to comply
with applicable rules and regulations, is in the possession or control of
the Company or the Company Subsidiaries and is complete and correct in
all material respects;
(iii) with respect to each Foreign Benefit Plan, except as set forth
in SCHEDULE 4.10(M)(III): (A) there are no pending or, to the Knowledge
of the Company, threatened Proceedings, other than routine claims for
benefits in the ordinary course by participants and beneficiaries; (B) to
the Knowledge of the Company, no facts or circumstances exist that could
give rise to any such Proceedings; (C) no written or, to the Knowledge of
Company, oral communication has been received from any Governmental
Authority in respect of any Foreign Benefit Plan concerning the funded
status of any such plan or any transfer of assets and Liabilities from
any such plan in connection with the transactions contemplated herein;
(D) no administrative investigation, audit or other Proceeding by any
Governmental Authority is pending or in progress or, to the Knowledge of
the Company, threatened; and (E) no Foreign Benefit Plan in Canada is
subject to any pending, threatened or anticipated examination,
investigation or other procedure, action, or claim initiated by any
Governmental Authority, by any employee or beneficiary covered by such
plan and there exists no state of facts that could give rise to such
investigation that could affect the registration;
(iv) with respect to each Foreign Benefit Plan, except as set forth
in SCHEDULE 4.10(M)(IV): (A) each such plan that is intended to be tax
qualified or tax registered is so qualified or registered, and no fact or
circumstance exists that could reasonably be expected to cause the loss
of such qualification or registration or exemption or approval (and in
the case of such plans established in Canada, the assets of such plans
have been invested so as to avoid exposure to penalty taxes under the
Income Tax Act (Canada)); (B) all Foreign Benefit Plans that are required
to be funded are funded in accordance with applicable Law and other
requirements (and in the case of each plan established in Canada is fully
funded on a going concern and on a solvency basis pursuant to the most
recently filed actuarial valuation reports for such plans and in
accordance with the methods and assumptions set forth therein and no
material changes have occurred to the Foreign Benefit Plans in Canada or
are expected to occur that would affect the actuarial reports or
financial statements required to be provided to the Buyer); (C) for all
Foreign Benefit Plans that are not required to be funded, the level of
reserves required by Law or applicable accounting standards under each
insured Foreign Benefit Plan is reasonable and sufficient to provide for
all incurred but unreported claims; (D) all current obligations under any
Foreign Benefit Plan have been met, and all contributions to and, with
respect to Foreign Benefit Plans that are not Government Schemes,
payments
27
from any Foreign Benefit Plan in respect of any Company Employee that are
required in accordance with the terms of such Foreign Benefit Plan or
applicable Law have been timely made, or if not yet due, have been
properly reflected in the Financial Statements; (E) where applicable, all
contributions or premiums required to be made by any of the Company or
Company Subsidiaries under the terms of each Foreign Benefit Plan in
Canada to any governmental or non-governmental reinsurance scheme backing
up any Foreign Benefit Plan in case of insolvency of the relevant obligor
have been made, and nothing has occurred, whether by action or failure to
act, that could reasonably be expected to cause the loss of the coverage
under such reinsurance scheme and the Company or Company Subsidiaries do
not have, and as of Closing, will not have any liabilities owing; (F) no
Foreign Benefit Plans (other than Government Schemes which have been
described generically) or similar schemes or promises, whether with
respect to groups of beneficiaries or individual beneficiaries, exist
with respect to or obliging any of the Company or Company Subsidiaries
that have not been disclosed on SCHEDULE 4.10(M)(IV) or expressly or
reasonably identifiable and adequately provided for on the financial
statements of such companies; (G) all Foreign Benefit Plans (and their
corresponding assets or funds) have been implemented, administered and
invested in compliance with their terms, the Law and all applicable
collective bargaining agreements, and all reports, returns or similar
documents required to be filed with a Governmental Authority in respect
of the Foreign Benefit Plans have been duly and timely filed; (H) no
event has occurred that would cause the termination in whole or in part
of a Foreign Benefit Plan in Canada and there have been no improper
withdrawals, applications or transfers of assets from a Foreign Benefit
Plan in Canada or the trusts and funding media thereto and neither the
Company or Company Subsidiaries nor any of their agents have been in
breach of any fiduciary obligation with respect to the administration of
the Foreign Benefit Plans in Canada or trusts or other funding media
thereto; (I) none of the Foreign Benefit Plans is a multi-employer plan
as defined under the provisions of applicable law; and (J) none of the
Foreign Benefit Plans in Canada provides benefits to retired employees or
their beneficiaries or dependents.
(n) Except as set forth in SCHEDULE 4.10(N), no Benefit Plan exists
that, as a result of the execution of this Agreement, shareholder approval of
this Agreement or the transactions contemplated by this Agreement (whether alone
or in connection with any other events), would (i) entitle any Company Employee
to severance pay or any increase in severance pay upon any termination of
employment after the date of this Agreement; (ii) with respect to any Company
Employee, accelerate the time of payment or vesting or result in any payment or
funding (through a grantor trust or otherwise) of compensation or benefits
under, increase the amount payable or result in any other material obligation
pursuant to, any of the Benefit Plans; (iii) limit or restrict the right of the
Company or Company Subsidiaries to merge, amend or terminate any of the Benefit
Plans; or (iv) cause the Company or Company Subsidiaries to record additional
compensation expense on their income statements with respect to any outstanding
stock option or other equity-based award.
(o) Except as set forth in SCHEDULE 4.10(O), there is no Contract,
plan or arrangement (written or otherwise) covering any Company Employee that,
individually or collectively, could give rise to the payment of any amount that
would be nondeductible pursuant to Section 280G of the Code or could give rise
to the payment of any amount in respect of Code
28
Section 4999, nor will any of the transactions contemplated by this Agreement
result in any amounts that are not deductible pursuant to Section 280G of the
Code or the payment of any amount in respect of Code Section 4999.
(p) Neither the Company nor any of the Company Subsidiaries has
agreed or committed to institute any plan, program, arrangement or agreement for
the benefit of employees or former employees of the Company or any Company
Subsidiary other than the Benefit Plans, or to make any amendments to any of the
Benefit Plans, nor will any such plan, program, arrangement, agreement or
amendment be made prior to the Closing Date.
(q) Each of the Company and Company Subsidiaries has reserved all
rights necessary to amend or terminate each of the Benefit Plans without the
consent of any other Person.
(r) No Benefit Plan provides benefits to any individual who is not a
current or former employee of the Company or a Company Subsidiary, or the
dependents or other beneficiaries of any such current or former employee.
4.11 LABOR RELATIONS. (a) Except as set forth in SCHEDULE 4.11 or as
otherwise permitted pursuant to this Agreement, (i) none of the Company or the
Company Subsidiaries is a party to any collective bargaining agreement nor is
any such contract or agreement presently being negotiated, (ii) none of the
Company or Company Subsidiaries is in material breach of any collective
bargaining agreement, (iii) within the past three (3) years, there has been no
labor strike, work stoppage, slowdown, lockout or other labor controversy in
effect with respect to the Company or the Company Subsidiaries, or, to the
Knowledge of the Company, threatened against the Company or the Company
Subsidiaries, (iv) there are no material grievances or other material labor
disputes or Proceedings pending against the Company or the Company Subsidiaries
or, to the Knowledge of the Company, threatened against the Company or the
Company Subsidiaries or involving any Company Employees, (v) there are no
material unfair labor practice charges, grievances or complaints, actions,
inquiries, Proceedings or, to the Knowledge of the Company, investigations
pending against the Company or the Company Subsidiaries or, to the Knowledge of
the Company, threatened against the Company or the Company Subsidiaries by or on
behalf of any Company Employees and (vi) the Company and the Company
Subsidiaries are in material compliance with their obligations pursuant to the
Worker Adjustment and Retraining Notification Act of 1988 ("WARN ACT"), and all
other notification and bargaining obligations arising under any collective
bargaining agreement or statute. As of the date of this Agreement, to the
Knowledge of the Company, there is no union campaign being conducted to solicit
cards from the Company Employees to authorize a union to request a National
Labor Relations Board ("NLRB") certifications election with respect to the
Company Employees.
(b) SCHEDULE 4.11 sets forth a list of (i) all employees of each of
the Company and the Company Subsidiaries with an annual salary of more than
$100,000, (ii) the employment status of each such individual (E.G., active,
inactive, approved leave (including nature of such leave)), (iii) the employment
category of each such individual (E.G., full-time, part-time, temporary), (iv)
the rate of all regular and special compensation payable to each such individual
in any and all capacities and (v) any regular or special compensation that will
be payable to each
29
such individual in any and all capacities as of the Closing Date other than the
then current accrual of regular payroll compensation. To the Knowledge of the
Company, no individual required to be set forth on SCHEDULE 4.11 has provided
oral or written notice that he or she intends to retire or terminate their
employment relationship with the Company or any of the Company Subsidiaries.
Except as set forth in SCHEDULE 4.11, and except for obligations arising under
applicable Laws neither the Company nor any of the Company Subsidiaries employs
any employee whose employment is not at will and cannot be dismissed immediately
without notice or cause and without further Liability to the Company or any of
the Company Subsidiaries.
(c) All current employees of the Company and the Company
Subsidiaries who work in the United States are, and all former employees of the
Company and the Company Subsidiaries who worked in the United States whose
employment terminated, voluntarily or involuntarily, within the three years
prior to the date of this Agreement were, legally authorized to work in the
United States. The Company and each Company Subsidiary that is located in the
United States or has employees working in the United States has completed and
retained the necessary employment verification paperwork under the Immigration
Reform and Control Act of 1986 ("IRCA") for the employees hired prior to the
date of this Agreement, and the Company and each Company Subsidiary that is
located in the United States or has employees working in the United States has
complied with anti-discrimination provisions of the IRCA.
(d) Except as set forth on SCHEDULE 4.11 neither the Company nor any
Company Subsidiary has closed any plant or facility, effectuated any layoffs of
employees or implemented any early retirement, separation or window program
within the past three (3) years, nor has the Company or any Company Subsidiary
planned or announced any such action or program for the future.
(e) Except as set forth on SCHEDULE 4.11, no Company or Company
Subsidiary is a party to or otherwise bound by, any consent decree with, or
citation by, any Governmental Authority related to employees or employment
practices.
4.12 INTELLECTUAL PROPERTY. (a) SCHEDULE 4.12 is a complete and
correct list of all the Owned Intellectual Property that constitutes a patent,
trademark, domain name or copyright registration or patent, trademark, domain
name or copyright application. All fees associated with maintaining any Owned
Intellectual Property required to have been set forth on SCHEDULE 4.12 have been
paid in full in a timely manner to the proper Governmental Authority and, except
as set forth on SCHEDULE 4.12, no such fees are due within the three month
period after the Closing Date. Except as set forth on SCHEDULE 4.12, all of the
Owned Intellectual Property required to be listed thereon are in full force and
effect.
(b) Except pursuant to a Material Contract set forth on SCHEDULE
4.13, all of the Owned Intellectual Property is owned by the Company or a
Company Subsidiary and, to the Knowledge of the Company, the owner thereof has
the exclusive right to use and possess such Intellectual Property, for any
purpose free from (i) any Liens (except for Permitted Liens incurred in the
ordinary course of business) and (ii) any requirement of any past, present or
future royalty payments, license fees, charges or other payments or conditions
or restrictions whatsoever. Except pursuant to a Material Contract set forth on
SCHEDULE 4.13, neither the Company nor the Company Subsidiaries has licensed or
otherwise granted any right to any
30
Person under any Owned Intellectual Property or has otherwise agreed not to
assert any such Intellectual Property against any Person.
(c) Except as set forth on SCHEDULE 4.12, all former and current
consultants or contractors to the Company and the Company Subsidiaries have
executed and delivered valid written instruments that assign to the Company or
the Company Subsidiaries all rights to any Intellectual Property developed by
them in the course of their performing services for the Company or the Company
Subsidiaries. All employees of the Company and the Company Subsidiaries who
participated in the creation or contributed to the conception or development of
Intellectual Property relating to the business of the Company and the Company
Subsidiaries were employees of the Company or the Company Subsidiaries at the
time of rendering such services and such services were within the scope of their
employment or such employees have otherwise validly assigned such Intellectual
Property to the Company or the Company Subsidiaries. Except as set forth on
SCHEDULE 4.12, no director, officer, stockholder, employee, consultant,
contractor, agent or other representative of the Company or the Company
Subsidiaries owns or claims any rights in (nor has any of them made application
for) any Intellectual Property owned or used by the Company or the Company
Subsidiaries.
(d) Except as set forth on SCHEDULE 4.12, the Company and the
Company Subsidiaries have entered into confidentiality and nondisclosure
agreements with all of their directors, officers, employees, consultants,
contractors and agents and any other Person with access to the trade secrets of
the Company and the Company Subsidiaries to protect the confidentiality and
value of such trade secrets, and there has not been any breach by any of the
foregoing of any such agreement. The Company and the Company Subsidiaries use
reasonable measures to maintain the secrecy of all trade secrets of the Company
or the Company Subsidiaries that are material to the operations of the Company
and the Company Subsidiaries and are valuable thereto by virtue of their
secrecy.
(e) Except as set forth on SCHEDULE 4.12 and to the Knowledge of the
Company, the operation of the Company's and the Company Subsidiaries' business
as currently conducted or any part thereof, including without limitation the
manufacture, use, sale and importation of products of the Company or the Company
Subsidiaries and the possession, use, disclosure, copying or distribution of any
information, data or products, whether tangible or intangible, in the possession
of the Company and the Company Subsidiaries, and the possession or use of the
Owned Intellectual Property, has, does and will not infringe, misappropriate,
dilute, violate or otherwise conflict with any Intellectual Property right of
any other Person. To the Knowledge of the Company, the operation of the
Company's and the Company Subsidiaries' business does not constitute unfair
competition or deceptive or unfair trade practice. To the Knowledge of the
Company, none of the Owned Intellectual Property is being infringed or otherwise
used or available for use by any Person other than the Company and the Company
Subsidiaries, except pursuant to a Material Contract listed on SCHEDULE 4.13.
(f) Except as set forth on SCHEDULE 4.12, no Proceeding is pending
or, to the Knowledge of the Company, threatened, that (i) challenges the rights
of the Company or the Company Subsidiaries in respect of any Intellectual
Property or the scope of Intellectual Property, or (ii) asserts that the
operation of the business of the Company and the Company Subsidiaries is, was or
will be infringing or otherwise in violation of any Intellectual Property, or
31
is (except as set forth in a Material Contract listed on SCHEDULE 4.13) required
to pay any royalty, license fee, charge or other amount with regard to any
Intellectual Property. Except as set forth on SCHEDULE 4.12, none of the Owned
Intellectual Property is or has been subject to any Governmental Order, and
neither the Company nor the Company Subsidiaries has been subject to any
Governmental Order in respect of any other Person's Intellectual Property.
Neither the Company nor any Company Subsidiary has requested any oral or written
opinion of any intellectual property counsel regarding any other Person's
Intellectual Property.
(g) Except as set forth in SCHEDULE 4.12, no funding from any
Governmental Authority or facilities of a university, college, other educational
institution or non-profit organization was used in the development of the Owned
Intellectual Property, and to the Knowledge of the Company, no Governmental
Authority, university, college, other educational institution or non-profit
organization has a claim or right to claim any right in the Owned Intellectual
Property.
(h) SCHEDULE 4.12 lists all the Information Systems used by the
Company or the Company Subsidiaries and operated by any other Person. Except for
the Internet and those Information Systems set forth on SCHEDULE 4.12, all
Information Systems used by the Company or the Company Subsidiaries are owned,
controlled and operated by the Company or a Company Subsidiary, as applicable
and are not wholly or partly dependent upon any Information System of any other
Person (other than the Internet). All Information Systems used by the Company
and the Company Subsidiaries are sufficient for the conduct of its business as
currently conducted. The Company and the Company Subsidiaries have sufficient
user licenses in effect for all Information Systems to conduct the Business as
currently conducted.
4.13 CONTRACTS. (a) SCHEDULE 4.13 sets forth a true, complete and
correct list of each of the following contracts to which any of the Company or
the Company Subsidiaries is a party or by which any of them is bound as of the
date of this Agreement, other than the Benefit Plans (collectively, the
"MATERIAL CONTRACTS"):
(i) Contracts involving the expenditure by the Company or the
Company Subsidiaries of more than $200,000 in calendar years 2005 or 2006
for the purchase of materials, supplies, equipment or services, excluding
any such Contracts that are terminable by the Company or the Company
Subsidiaries without penalty on not more than thirty (30) days notice;
(ii) (A) indentures, mortgages, loan agreements, capital leases,
security agreements, or other Contracts relating to Debt Obligations or
(B) any Contract or other currently outstanding instrument under which
any of the Company or the Company Subsidiaries has, directly or
indirectly, made any advance, loan, extension of credit (other than an
account receivable) or capital contribution to, or other investment in,
any Person;
(iii) Contracts that restrict the Company or the Company
Subsidiaries from engaging in any line of business in any geographic area
or competing with any Person;
32
(iv) Contracts that restrict the declaration, set aside or payment
of any dividends or distributions on, or in respect of, any capital stock
or equity interest of the Company or any Company Subsidiary;
(v) Contracts to sell goods or services with respect to the
customers set forth on SCHEDULE 4.18 and any other customers of the
Business with annual purchases in excess of $200,000 in calendar years
2005 or 2006;
(vi) Contracts granting any Person a first-refusal, first offer or
similar preferential right to purchase or acquire any right, asset or
property of the Company or the Company Subsidiaries;
(vii) any commitment to make any capital expenditure or to purchase
a capital asset in each case, in excess of $250,000 not contemplated by
the Capital Expenditure Budget;
(viii) except as to the extent contemplated by the Capital
Expenditure Budget, any commitment for the purchase or sale of any of its
assets, other than in the ordinary course of business, or any capital
stock of the Company or the Company Subsidiaries;
(ix) any lease or similar agreement under which (A) any of the
Company or the Company Subsidiaries is the lessee of, or holds or uses,
any facility, machinery, equipment, vehicle or other tangible personal
property owned by any third Person for an annual rent in excess of
$100,000 or (B) any of the Company or the Company Subsidiaries is the
lessor of, or makes available for use by any third Person, any tangible
personal property owned by any of the Company or the Company Subsidiaries
for an annual rent in excess of $100,000;
(x) Contracts (i) entered into or assumed by any of the Company or
the Company Subsidiaries in which it has an obligation in respect of
providing for indemnification or purchase price adjustment, in connection
with any disposition, sale or other transfer of any present or former
business or commercial activity and (ii) which was either (A) entered
into after October 29, 2003 or (B) pursuant to which there are any
outstanding, unresolved or potential indemnification claims in excess of
$50,000 against any of the Company or Company Subsidiaries;
(xi) Contracts pursuant to which the Company or the Company
Subsidiaries have licensed the Owned Intellectual Property to, or the use
of the Owned Intellectual Property is otherwise permitted with respect
to, any other Person; and pursuant to which the Company or the Company
Subsidiaries have had Intellectual Property licensed to it, or has
otherwise been permitted to use Intellectual Property, excluding
non-exclusive, commercially available software licenses entered into in
the ordinary course of business;
(xii) partnership, limited liability company, joint venture
agreements or other Contracts involving a sharing of profits or expenses
by the Company or Company Subsidiaries;
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(xiii) Contracts with any directors, officers, employees or
stockholders of any of the Company, the Company Subsidiaries or
Affiliates of any of the Sellers; and
(xiv) Contracts involving the acquisition of any business enterprise
whether via stock or asset purchase, or otherwise.
(b) True, correct and complete copies of each of the Material
Contracts that are in writing have been made available to the Buyer and, if such
Material Contract is not in writing, written summaries thereof have been made
available to the Buyer, including in each case amendments, waivers or other
changes thereto.
(c) Each Material Contract is in full force and effect, and is a
valid and binding agreement of the Company or applicable Company Subsidiary
enforceable by or against the Company or such Company Subsidiary in accordance
with its terms subject to the General Enforceability Exceptions. The Company or
the Company Subsidiaries have performed in all material respects its obligations
required to be performed by them to date under the Material Contracts. There is
no default or breach by the Company or the Company Subsidiaries or, to the
Knowledge of the Company, any other party, in the timely performance of any
material obligation to be performed or paid under any Material Contract.
4.14 ENVIRONMENTAL MATTERS. Except as set forth on SCHEDULE 4.14:
(a) each of the Company and the Company Subsidiaries is and for the
past three (3) years has been, in material compliance with all Environmental
Laws applicable to the Real Property or the Business (including all material
Permits required under such Environmental Laws), and with respect to any
locations owned, leased or operated within the past three (3) years, each of the
Company and the Company Subsidiaries had been in material compliance with
applicable Environmental Laws during the respective period of such Company's or
the Company Subsidiary's ownership, leasing or operation of any such location;
(b) neither the Company nor any Company Subsidiaries has received
any written notice of the following, which in each instance has not been
settled, dismissed or prosecuted to a final, non-appealable judgment or decision
with no ongoing obligations or Liabilities: (i) any Environmental Claim (ii) any
threatened Environmental Claim, or (iii) any violation, request for information,
demand letter, or administrative inquiry relating to any Environmental Law or
the Release of any Hazardous Material regarding the Company, any Company
Subsidiary, or the Real Property; nor to the Knowledge of Company, has the
Company or any Company Subsidiary received oral notice of any of the foregoing
described in clauses (i) through (iii);
(c) none of the Company and the Company Subsidiaries has Released
any Hazardous Materials at or in the vicinity of the Real Property that requires
reporting, investigation, assessment, cleanup, remediation or other type of
response action by the Company or any Company Subsidiary pursuant to any
Environmental Law or that could otherwise reasonably be expected to result in
material Liability under or relating to any Environmental Law, and Hazardous
Materials are not otherwise present at or, to the Knowledge of the Company,
about (i) any of the Real Property, (ii) any other facility currently owned,
leased or
34
operated by any of the Company or the Company Subsidiaries, or (iii) any other
facility formerly owned, leased or operated by any of the Company or the Company
Subsidiaries, with respect to any of the foregoing described in clauses (i)
through (iii) in an amount or condition that would reasonably be expected to
result in material Liability to the Company or any Company Subsidiary under or
relating to any Environmental Law;
(d) Reserved.
(e) there are no (i) underground storage tanks and related pipes and
equipment, whether active or abandoned, (ii) asbestos or asbestos-containing
materials, (iii) polychlorinated biphenyls, or (iv) urea-formaldehyde insulation
present at or, to the Knowledge of the Company, about any of the Real Property
in a condition that currently requires reporting, investigation, assessment,
cleanup, removal, remediation or any other type of response action by the
Company or any Company Subsidiary pursuant to applicable Environmental Laws, or
that would otherwise result in material Liability under any Environmental Laws;
(f) Hazardous Materials have not been Released, transported,
disposed of or arranged to be disposed of by, or on behalf of, any of the
Company or the Company Subsidiaries to any location, in material violation of,
or in a manner that would reasonably be expected to result in material Liability
under or relating to, any Environmental Law, or to any location which is listed
or proposed (through written notice to the public) for listing on the National
Priorities List under the Comprehensive Environmental Response, Compensation and
Liability Information System or any similar state list;
(g) none of the Company and the Company Subsidiaries has expressly
assumed or retained by contract any material Liabilities or material obligations
of other Persons under any Environmental Laws;
(h) the Company and the Company Subsidiaries do not sell and have
not sold any product containing asbestos or that utilizes or incorporates
asbestos-containing materials in any way;
(i) there currently are effective all material Permits required
under any Environmental Law which are necessary for the Company's and each
Company Subsidiary's business operations and activities and operations at the
Real Property, including any ongoing alterations or improvements at the Real
Property; and any application for renewal of such Permits have been submitted on
a timely basis;
(j) to the Knowledge of the Company the use, handling and
manufacture of products containing silicon or silica by the Company or any
Company Subsidiary and the distribution and sale of such products by the Company
or any Company Subsidiary have not resulted in the exposure of any Persons to
silicon or silica above any thresholds or standards established pursuant to any
Environmental Law or at levels which have been associated with or could give
rise to adverse health effects; and
(k) the Company and the Company Subsidiaries have delivered to Buyer
copies of all documents, records and information in their possession concerning
Releases of Hazardous Materials at, upon or from the Real Property, exposure of
any Person to Hazardous
35
Materials, and compliance with or Liability under any Environmental Laws with
regard to the Company or any Company Subsidiary, including, without limitation,
previously conducted environmental audits and documents regarding any Release or
disposal of Hazardous Materials at, upon or from the Real Property or formerly
owned, leased or operated property and environmental agency reports and
correspondence.
4.15 INSURANCE. (a) SCHEDULE 4.15(A) contains a true, correct and
complete list of all insurance policies held in the names of the Company or the
Company Subsidiaries and all other insurance arrangements or contracts for the
transfer or sharing of insurance risks covering the assets, businesses,
operations, Company Employees, officers or directors of the Company and the
Company Subsidiaries (the "INSURANCE POLICIES") as of the date hereof,
specifying the insurer, amount of coverage and type of insurance. All such
policies are in full force and effect and were in full force and effect during
the periods of time that such insurance policies purported to be in effect, are
valid, enforceable, existing and binding and all premiums due thereon have been
timely paid (subject to changes made in the ordinary course of business that
will not materially reduce the coverage thereunder).
(b) SCHEDULE 4.15(B) sets forth a true, complete and correct list of
all material claims filed under the Insurance Policies within three years prior
to the Closing Date.
(c) The Insurance Policies are sufficient for compliance with
applicable Law and all Contracts to which any of the Company or the Company
Subsidiaries is a party or by which they or any of their respective assets or
properties are bound. All appropriate insurers under the Insurance Policies have
been notified of all pending litigation and legal matters, and no such insurer
has informed the Company or any of the Company Subsidiaries of any denial of
coverage or reservation of rights thereto.
(d) Except as set forth in SCHEDULE 4.15(B), since the date of the
Balance Sheet no event has occurred which, with notice or lapse of time or both,
would constitute a material breach or default or give rise to any right of
termination or cancellation or otherwise modify the terms under any Insurance
Policy.
4.16 ASSETS. (a) Except as set forth on SCHEDULE 4.16, the Company
and the Company Subsidiaries have good, valid and marketable title to, or hold
by valid and existing lease or license, all the tangible personal property
assets reflected as assets on the Balance Sheet, or acquired after the date of
the Balance Sheet, except with respect to assets disposed of in the ordinary
course of business since such date, free and clear of all Liens, except for
Permitted Liens, and such tangible assets are in good operating condition,
ordinary wear and tear excepted.
(b) The Company and the Company Subsidiaries own, or have valid
leasehold interests in or licenses to use, all the assets necessary for the
conduct of the Business, as currently conducted.
4.17 REAL PROPERTY. SCHEDULE 4.17(A) lists all real property leased
or subleased or otherwise used or occupied (but not owned) by any of the Company
or the Company Subsidiaries (the "LEASED REAL PROPERTY"). The Leased Real
Property is sufficient for the operation of the Business as it is currently
conducted. Except as set forth on
36
SCHEDULE 4.17(A), the Sellers have delivered to the Buyer true and complete
copies of the leases and subleases covering the Leased Real Property leased by
the Company or any Company Subsidiary. With respect to each such lease and
sublease and except as otherwise specified on SCHEDULE 4.17(A):
(i) such lease or sublease is in full force and effect in all
material respects and enforceable in accordance with its terms, subject
to the General Enforceability Exceptions;
(ii) all rents, deposits and additional rents due pursuant to such
lease or sublease have been paid in full and no security deposit or
portion thereof has been applied in respect of a breach or default under
such lease or sublease that has not been redeposited in full; and
(iii) none of the Company or the Company Subsidiaries is in material
default under any such lease or sublease and, to the Knowledge of the
Company, no other party to any such lease or sublease is in material
default thereunder.
(b) SCHEDULE 4.17(B) lists all real property owned by the Company or
any of the Company Subsidiaries (the "OWNED REAL PROPERTY"). The Owned Real
Property is sufficient for the operation of the Business as it is currently
conducted. With respect to each such parcel of the Owned Real Property and
except as otherwise specified on SCHEDULE 4.17(B):
(i) the identified owner has fee simple title to the parcel of Owned
Real Property, free and clear of any Liens, except for Permitted Liens;
and
(ii) there are no pending or, to the Knowledge of the Company,
threatened condemnation Proceedings with respect to the Owned Real
Property.
(c) With respect to each parcel of the Owned Real Property and the
Leased Real Property, except as otherwise specified on SCHEDULE 4.17(C):
(i) the Company's and the Company Subsidiary's use and occupation of
the Owned Real Property and the Leased Real Property, and the condition
thereof, comply with, and neither, the Company nor any Company Subsidiary
has received written notification, or to the Knowledge of Company, oral
notification of any violation of, (A) any applicable Law and Governmental
Orders applicable to or affecting the Owned Real Property or Leased Real
Property, (B) any restriction, covenant or encumbrance of record with
respect to the Owned Real Property or Leased Real Property, or (C) any
Contract (including, without limitation, insurance policies to the extent
necessary to prevent cancellation thereof and to insure full payment of
any claims made under such policies), applicable to the Owned Real
Property or Leased Real Property or the ownership, operation, use or
possession thereof;
(ii) the structures, improvements and fixtures at or upon the Owned
Real Property and Leased Real Property, including, but not limited to,
roofs and structural elements thereof and the electrical, plumbing,
heating, ventilation, air conditioning, and similar units and systems,
are fit for their intended use, subject to the provision of usual
37
and customary maintenance and repair performed in the ordinary course of
business with respect to similar properties of like age and construction,
and are free from structural defects;
(iii) all facilities located on the Owned Real Property and Leased
Real Property are supplied with utilities and other services necessary
for the operation of such facilities as currently operated, all of such
services are adequate to conduct that portion of the Business as it
presently is conducted at each of such facilities and all utility
connection fees and use charges have been paid in full as of the date of
this Agreement, to the extent due and owing; and
(iv) there exist adequate rights of access to public roads and ways
available to the Owned Real Property and Leased Real Property to permit
full utilization of the Owned Real Property and Leased Real Property for
the conduct of the Business and, to the Knowledge of the Company, all
such public roads and ways have been completed and dedicated to public
use and to the Knowledge of the Company there are no encroachments onto
adjacent properties, or from adjacent properties onto the Owned Real
Property or Leased Real Property that materially adversely affect the use
of the Owned Real Property or Leased Real Property.
4.18 CUSTOMERS AND SUPPLIERS. SCHEDULE 4.18 sets forth a true,
correct and complete list of (a) the ten (10) largest customers of the Company
and the Company Subsidiaries taken as a whole in terms of sales during the
nine-month period ended September 30, 2006 and (b) the ten (10) largest
suppliers of the Company and the Company Subsidiaries taken as a whole in terms
of purchases during the nine-month period ended September 30, 2006. Neither the
Company nor any Company Subsidiary has received written notice, or to the
Knowledge of the Company, oral notice from any customer or supplier listed on
SCHEDULE 4.18 that such customer or supplier intends to terminate or materially
adversely modify its relationship or materially reduce the volume of business
that it does with the Company or any Company Subsidiary. Except as set forth on
SCHEDULE 4.18, the Company and Company Subsidiaries have not purchased, from any
single supplier, goods or services for which the aggregate purchase price
exceeds five percent (5%) of the total amount of goods and services purchased
for the Company and the Company Subsidiaries taken as a whole during its most
recent full fiscal year.
4.19 PRODUCT LIABILITY. Except as set forth on SCHEDULE 4.19, none
of the Company or any Company Subsidiary has received any written notice, or, to
the Knowledge of the Company, any oral notice, relating to any claim involving
use of or exposure to any of the products (or any part or component) designed,
manufactured, serviced or sold, or services performed, by the Company or any
Company Subsidiary, including for negligence, strict liability, design or
manufacturing defect, conspiracy, failure to warn, or breach of express or
implied warranties of merchantability or fitness for any purpose or use, or from
any alleged breach of implied warranties or representations, or any alleged
noncompliance with any applicable Laws pertaining to products liability matters.
4.20 AFFILIATE TRANSACTIONS. SCHEDULE 4.20 lists all existing
Contracts or other arrangements or transactions between any of the Company and
the Company Subsidiaries, on the one hand, and any of (a) the Sellers and its
Affiliates (other than the Company and the Company
38
Subsidiaries) or (b) the directors, officers or employees (or any immediate
family member thereof) of any Seller and its Affiliates (including the Company
and the Company Subsidiaries) (except those of a type available to employees
generally), on the other hand (collectively, the "AFFILIATE CONTRACTS"). All
Affiliate Contracts are at least as favorable to the Company and the Company
Subsidiaries as would be available with independent third parties dealing at
arm's length. Except as set forth on SCHEDULE 4.20, as of the Closing, all
Affiliate Contracts shall be terminated and Buyer, the Company and the Company
Subsidiaries shall not have any obligations thereunder.
4.21 ACCOUNTS. All accounts and notes receivable of the Company and
the Company Subsidiaries are valid and genuine and have arisen solely out of
bona fide sales and deliveries of goods, performances of services and other
business transactions in the ordinary course of business, and the accounts
receivable reserve reflected in the Balance Sheet is, as of the date thereof,
adequate and established in accordance with GAAP, subject to year-end
adjustments and accruals in the ordinary course of business and not material in
amount. Since the date of the Balance Sheet there has been no event or
occurrence that, when considered individually or together with all such other
events or occurrences, would cause such accounts receivable reserves to be
inadequate. Since the date of the Balance Sheet none of the Company or the
Company Subsidiaries has, (a) with respect to any non-de minimis portion of its
trade accounts payable, (i) failed to pay its trade accounts payable in the
ordinary course or (ii) extended the terms of payment, whether by contract,
amendment, act, deed, or course of dealing, of any trade account payable, and
(b) with respect to any non-de minimis portion of its accounts receivable,
accelerated or delayed collection of such accounts receivable.
4.22 INVENTORY. The inventories set forth in the Balance Sheet were
properly stated therein at the lower of cost or market value determined in
accordance with GAAP consistently maintained and applied by the Company and the
Company Subsidiaries. Inventory costs have been determined by the methods set
forth on SCHEDULE 4.22. Since the date of the Balance Sheet such inventories
have been maintained in the ordinary course of business. All such inventories
are owned free and clear of all Liens other than Permitted Liens. All of the
inventories recorded on the Balance Sheet consist of, and such inventories on
the Closing Date will consist of, items of a quality usable or saleable in the
ordinary course of business subject to appropriate and adequate allowances, if
any, reflected on the books and records of the Company and the Company
Subsidiaries for obsolete, excess, slow-moving and other irregular items.
4.23 BANK ACCOUNTS. SCHEDULE 4.23 sets forth a true and complete
list and description of the bank accounts, lock box accounts and other accounts
maintained by or for the benefit of each of the Company and the Company
Subsidiaries.
4.24 NO BROKERS' OR OTHER FEES. No Person has been employed by or on
behalf of the Sellers as a broker, finder, investment banker or financial
advisor in connection with the transactions contemplated hereby, and no Person
with which the Sellers have had any dealings or communications of any kind is
entitled or will become entitled to any fee or commission, brokerage, finder's
fee or like payment based in any way on any agreement, arrangement or
understanding made by or on behalf of the Sellers to which the Buyer or its
Affiliates (including, from and after the Closing Date, the Company and the
Company
39
Subsidiaries) will have any obligation or responsibility in connection with the
transactions contemplated hereby.
4.25 BOOKS AND RECORDS. All books, records and accounts of the
Company and the Company Subsidiaries are accurate and complete in all material
respects and are maintained in accordance with all applicable Laws. The
corporate minute books and stock record books of the Company and the Company
Subsidiaries previously delivered to the Buyer are true, correct and complete.
All stock transfer taxes levied, if any, or payable with respect to all
transfers of shares of the Company and the Company Subsidiaries prior to the
Closing Date have been paid and appropriate transfer tax stamps affixed.
4.26 DIRECTORS AND OFFICERS. SCHEDULE 4.26 sets forth a true and
complete list of the directors and officers of the Company and the Company
Subsidiaries.
4.27 DISCLOSURE. To the Knowledge of the Company, neither this
Agreement (including the exhibits and schedules hereto) or the Transaction
Agreements contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading.
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer hereby represents and warrants to the Sellers as follows:
5.1 ORGANIZATION. The Buyer is a corporation duly incorporated,
validly existing and in good standing under the Laws of the State of Delaware.
The Buyer has the requisite corporate power and authority to own, lease and
operate its assets and to carry on its business as now being conducted.
5.2 AUTHORIZATION; ENFORCEABILITY. The Buyer has the requisite
corporate power and authority to execute and deliver this Agreement and the
Transaction Agreements and to perform its obligations hereunder and thereunder.
The execution and delivery of this Agreement and the Transaction Agreements by
the Buyer and the performance by the Buyer of its obligations hereunder and
thereunder have been duly authorized by all necessary corporate action on the
part of the Buyer and no other corporate or shareholder proceedings or actions
are necessary to authorize and consummate this Agreement, the Transaction
Agreements or the transactions contemplated hereby or thereby. This Agreement
has been, and the Transaction Agreements will be, when delivered to Sellers,
duly executed and delivered by the Buyer and, assuming due authorization,
execution and delivery by the Sellers, as applicable, this Agreement
constitutes, and the Transaction Agreements will constitute, a valid and binding
agreement of the Buyer, enforceable against it in accordance with their terms,
subject to the General Enforceability Exceptions.
5.3 NO CONFLICTS OR APPROVALS. (a) The execution, delivery and
performance by the Buyer of this Agreement and the Transaction Agreements to
which the Buyer is a party and the consummation by the Buyer of the transactions
contemplated hereby and thereby do not and will not (i) violate, conflict with
or result in a breach by the Buyer of the organizational documents of the Buyer,
(ii) violate, conflict with or result in a breach of, or constitute a default by
the Buyer (or create an event which, with notice or lapse of time or both,
40
would constitute a default) or give rise to any right of termination, consent,
cancellation, acceleration, increased Liabilities or fees, or right to increase
the obligations or otherwise modify the terms under, or result in the creation
of any Lien, other than Permitted Liens, upon any of the properties, rights or
assets of the Buyer or to which any of such properties, rights or assets are
subject under, any Contract to which the Buyer or any of its properties, rights
or assets may be bound, except as would not, individually or in the aggregate,
have a material adverse effect on the ability of the Buyer to consummate the
transactions contemplated by this Agreement, or (iii) subject to the receipt of
the requisite approvals referred to on SCHEDULE 5.3(B), conflict with or violate
any Governmental Order or Law applicable to the Buyer or any of its properties,
rights or assets.
(b) Except as set forth on SCHEDULE 5.3(B), no Consent is required
to be obtained, filed or delivered by the Buyer for the consummation by the
Buyer of the transactions contemplated by this Agreement and the Transaction
Agreements that if not obtained, filed or delivered, as the case may be, would
reasonably be expected to have a material adverse effect on the ability of the
Buyer to consummate the transactions contemplated by this Agreement and the
Transaction Agreements.
5.4 PROCEEDINGS. Except as set forth in SCHEDULE 5.4, there are no
Proceedings pending or, to the Knowledge of the Buyer, threatened against the
Buyer that challenge, or question the validity of, this Agreement, any
Transaction Agreement or any action taken or to be taken by the Buyer in
connection with, or which seeks to enjoin or obtain monetary damages in respect
of, the consummation of the transactions contemplated hereby or thereby.
5.5 NO BROKERS' OR OTHER FEES. No Person has been employed by or on
behalf of the Buyer as a broker, finder, investment banker or financial advisor
in connection with the transactions contemplated hereby, and no Person with
which the Buyer has had any dealings or communications of any kind, is entitled
or will become entitled to any fee or commission, brokerage, finder's fee or
like payment based in any way on any agreement, arrangement or understanding
made by or on behalf of the Buyer to which Sellers or their Affiliates will have
any obligation or responsibility in connection with the transactions
contemplated hereby.
5.6 INVESTMENT INTENT. The Buyer is acquiring the Shares for the
Buyer's own account for investment and not with a view to or for sale in
connection with any distribution thereof other than in compliance with the
Securities Act.
5.7 FINANCIAL ABILITY TO PERFORM. The Buyer will have at the Closing
cash in an aggregate amount sufficient for the Buyer to pay the Purchase Price.
ARTICLE VI COVENANTS AND AGREEMENTS
6.1 CONDUCT OF THE BUSINESS PRIOR TO THE CLOSING. Except as (a)
expressly contemplated by this Agreement or (b) disclosed on SCHEDULE 6.1, from
and after the date of this Agreement and until the Closing or the earlier
termination of this Agreement in accordance with its terms, the Company shall,
and shall cause the Company Subsidiaries to: (i) conduct its operations in the
ordinary course of business, (ii) use their commercially reasonable efforts to
41
maintain and preserve intact the Business and to maintain satisfactory
relationships with suppliers, customers, key employees and other Persons having
business relationships with the Company or the Company Subsidiaries and (iii)
make capital expenditures solely to the extent provided on SCHEDULE 6.1. Except
as (x) contemplated by this Agreement or (y) as set forth on SCHEDULE 6.1, the
Company shall not, and shall cause each of the Company Subsidiaries not to do
any of the following without the prior written consent of the Buyer:
(a) purchase or sell any capital stock or other equity interests of
the Company or any Company Subsidiary or grant or make any option, subscription,
warrant, call, commitment or agreement of any character in respect of any such
capital stock or other equity interests;
(b) acquire, lease, license, assign, sell, transfer or otherwise
dispose any of its property, rights, businesses or assets (including by merger,
consolidation or acquisition of stock or assets) excluding in all cases sales of
inventory and obsolete equipment or non-exclusive licenses in the ordinary
course of business;
(c) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
with respect to the Company or any Company Subsidiary;
(d) incur, assume or guarantee any obligations for borrowed money
other than under lines of credit existing on the date of this Agreement;
(e) incur any Lien on any properties, rights or assets of the
Company or any Company Subsidiary, in each case, other than Permitted Liens;
(f) enter into any new lease for Real Property or modify, renew,
extend or terminate any existing lease for Real Property or purchase or acquire
or enter into any agreement to acquire, assign, sell, transfer or dispose of any
Real Property of any Company Subsidiary or the Company;
(g) (i) declare, set aside or pay any dividends or distributions on,
or make any other distributions (whether in securities or other property) in
respect of, any capital stock or equity interest of the Company or any Company
Subsidiary, (ii) split, combine or reclassify any of its outstanding capital
stock or equity interest of the Company or any Company Subsidiary or issue or
authorize the issuance of any capital stock or equity interest of the Company or
any Company Subsidiary, (iii) purchase, redeem or otherwise acquire or dispose
of any securities or equity interests of the Company or Company Subsidiaries or
(iv) issue, sell, transfer, grant, pledge, dispose of or otherwise encumber any
capital stock or equity interest of the Company or any Company Subsidiary;
(h) (i) establish, adopt, enter into any plan, agreement, program,
policy, trust, fund or other arrangement that would be a Benefit Plan if it were
in existence as of the date of this Agreement or amend or terminate any Benefit
Plan in a manner that would affect the benefits provided to or with respect to
any Company Employee or otherwise increase the Liabilities of the Company and
any Company Subsidiaries under the Benefit Plans, except as required by Law, or
take any action to accelerate vesting under, or release any restrictions
42
applicable under, any of the foregoing for any Company Employee, (ii) increase
the compensation or fringe benefits of any Company Employee (except for
increases in salary or hourly wage rates, in the ordinary course of business or
as may be required by the collective bargaining agreements), (iii) pay any bonus
to, accelerate any right under any Employee Plan to, grant any severance or
termination pay to any Company Employee, except in the ordinary course of
business or as may be required by the collective bargaining agreements, (iv)
loan or advance any money or other property to any Company Employee, or (v)
increase the funding obligation to or contribution rate under any Benefit Plan
subject to Title IV of ERISA, except as required by Law;
(i) make any change in its accounting methods, policies or practices
(other than such changes that have been required by Law or GAAP);
(j) make or change any election relating to Taxes, change an annual
accounting period or adopt or change any accounting method relating to Taxes,
file any amended Tax Return, enter into any closing agreement, settle any Tax
claim or assessment relating to the Company or the Company Subsidiaries,
surrender any right to claim a refund, consent to any extension or waiver of the
limitation period applicable to any Tax claim or assessment relating to the
Company or the Company Subsidiaries;
(k) enter into, amend, supplement, waive, modify, terminate, annul,
cancel, allow to lapse, assign, convey, encumber or otherwise transfer, in each
case in any material respect, in whole or in part, rights and interests in or
under any Material Contracts or enter into any Contract that would be a Material
Contract if in effect on the date of this Agreement, except Contracts made in
the ordinary course of business;
(l) compromise, settle, grant any waiver or release relating to or
otherwise adjust any right or claim with respect to any pending or threatened
Proceeding (A) relating to the transactions contemplated by this Agreement or
(B) against the Company or the Company Subsidiaries;
(m) change, or agree to change, any business policies of the Company
and Company Subsidiaries which relate to advertising, promotional activities,
pricing, personnel, labor relations, sales, returns or warranties in each case
in any material respect other than in the ordinary course of business;
(n) amend any organizational document of the Company or any Company
Subsidiary;
(o) sell, license, sublicense, covenant not to sue under, abandon,
assign, transfer, disclose, encumber or otherwise grant any rights under any
Owned Intellectual Property to any Person, other than in the ordinary course of
business;
(p) materially shorten or lengthen the customary payment and
collection cycles, as the case may be, for the Company's or the Company
Subsidiaries' trade accounts payable and receivables; or
(q) agree or commit to do any of the foregoing.
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6.2 ACCESS TO BOOKS AND RECORDS; CONFIDENTIALITY.
(a) During the period commencing on the date hereof and ending on
the Closing Date or the earlier termination of this Agreement in accordance with
its terms, the Company shall give the Buyer and its counsel, accountants,
employees, agents, and other authorized representatives full access, during
normal business hours, upon reasonable advance notice, to the officers,
directors, premises, properties, books, records, financial statements, Tax
Returns of the Company and any Company Subsidiary. Any information provided to
or obtained by the Buyer and/or its counsel, accountants, employees, agents and
other authorized representatives pursuant to this SECTION 6.2(A) will be subject
to the Confidentiality Agreement and must be held by the Buyer in accordance
with and be subject to the terms of the Confidentiality Agreement. The Buyer
agrees to be bound by and comply with the provisions set forth in the
Confidentiality Agreement as if such provisions were set forth herein, and such
provisions are hereby incorporated herein by reference.
(b) From and after the date hereof, except as (i) required by Law or
(ii) as necessary for the preparation of any Tax Returns, the Sellers shall, and
shall cause their Affiliates and respective officers, directors, employees,
counsel, accountants, agents and other representatives to hold in strict
confidence all information relating to the Company and Company Subsidiaries as
conducted before the Closing; provided that the foregoing shall not apply to
information that is or becomes generally available to the public through no
action of the Sellers. If any Seller or its Affiliates or their respective
officers, directors, employees, counsel, accountants, agents and other
representatives are legally compelled or required to disclose any such
information, it is agreed that Sellers will promptly notify Buyer to permit
Buyer to seek a protective order or take other appropriate action. Sellers will
cooperate in Buyer's efforts to obtain a protective order or other reasonable
assurance that confidential treatment will be accorded to such information. If,
in the absence of a protective order, Sellers or any of their Affiliates and
respective officers, directors, employees, counsel, accountants, agents and
other representatives are, in the opinion of counsel, compelled as a matter of
Law to disclose such information to a third party, Sellers may disclose to the
third party compelling disclosure only the part of such information as is
required by Law to be disclosed (in which case, prior to disclosure, Sellers
will use reasonable efforts to advise and consult with Buyer and its counsel as
to such disclosure and the nature and wording of such disclosure), and Sellers
will use commercially reasonable efforts to obtain confidential treatment of any
such information so disclosed. Sellers acknowledge and agree that other remedies
cannot fully compensate Buyer for a violation by Sellers of the terms of this
SECTION 6.2(B) and that Buyer shall be entitled to injunctive relief to prevent
any such violation or continuing violation by any Seller. At the Closing, the
Sellers shall assign their respective rights under any confidentiality agreement
relating to the Company and Company Subsidiaries with a third party to Buyer or
its Affiliates.
6.3 TAX RETURNS, CONTESTS AND COOPERATION. (a) The Buyer and the
Sellers agree to furnish or cause to be furnished to each other, upon request,
as promptly as practicable, such information and assistance (including powers of
attorney and, at the expense of the requesting party, reasonable access to the
other party's Tax Return preparer, provided that such other party may limit such
access as it reasonably deems necessary to protect confidential information)
relating to any of the Company or the Company Subsidiaries (including access to
books and records, employees, contractors and representatives) as is reasonably
necessary for the
44
filing of all Tax Returns, the making of any election related to Taxes, the
preparation for any audit by any Taxing Authority, and the prosecution or
defense of any claim, suit or proceeding relating to any Tax or Tax Return. The
Buyer and the Sellers shall retain all books and records that pertain to the
Company or the Company Subsidiaries until the expiration of all relevant
statutes of limitations (and, to the extent notified by the Buyer and the
Sellers, any extensions thereof). At the end of such period, each party shall
provide the other with at least thirty (30) days' prior written notice before
destroying any such books and records, during which period the party receiving
such notice can elect to take possession, at its own expense, of such books and
records. Neither Buyer nor any of its Affiliates will revoke, amend or otherwise
modify any existing powers of attorney effective for or with respect to any
Current Tax Matter without the prior written consent of Sellers Representative,
which shall not be unreasonably withheld.
(b) Sellers shall prepare and timely file, or cause to be prepared
and timely filed, all Tax Returns that are due to be filed on or prior to the
Closing Date for any Pre-Closing Tax Period, in respect of the Company or any of
the Company Subsidiaries, and shall timely pay all Taxes shown on such Tax
Returns (the "SELLER FILED TAX RETURNS"). All such Seller Filed Tax Returns
shall be prepared in accordance with prior practices unless otherwise required
by Law. For all such Seller Filed Tax Returns filed following the date of this
Agreement, the Company shall provide Buyer with a copy of each proposed Seller
Filed Tax Return (and such additional information regarding such Seller Filed
Tax Return as may reasonably be requested by Buyer) (i) at least fifteen (15)
calendar days prior to the filing of such Seller Filed Tax Return or (ii) in the
case of a Seller Filed Tax Return that is required to be filed within twenty
(20) calendar days of the Closing Date, at least ten (10) calendar days prior to
the date such Seller Filed Tax Return is required to be filed; provided, that
with respect to all Seller Filed Tax Returns related to corporate income taxes,
Buyer shall have the right to approve such filing, which approval must not be
unnecessarily withheld or delayed; provided, further, that in the case of a Tax
Return that is required to be filed within ten (10) calendar days of the Closing
Date, the Company shall use its commercially reasonable efforts to afford Buyer
a reasonable opportunity to review and approve if related to corporate income
taxes, such Seller Filed Tax Return prior to filing such Tax Return. Except as
required by Law, neither Buyer nor any of its Affiliates shall amend, refile,
revoke or otherwise modify any Tax Return or Tax election of the Company or any
Company Subsidiary in respect of a Pre-Closing Tax Period to the extent that
such amendment, refiling, revocation or other modification would have an adverse
effect on any of the Sellers or their Affiliates, without the prior written
consent of Sellers, which consent shall not be unreasonably withheld or delayed.
The Buyer shall prepare and timely file, or cause to be prepared and timely
filed, all other Tax Returns in respect of the Company or any of the Company
Subsidiaries with respect to all Tax periods, including any Pre-Closing Tax
Period and any Straddle Period.
(c) All transfer, documentary, sales, use, registration and other
such Taxes (including all applicable real estate transfer Taxes, but excluding
any Taxes based on or attributable to income or gains) and related fees
(including any penalties, interest and additions to Tax) ("TRANSFER TAXES")
arising out of or incurred in connection with this Agreement shall be borne by
the party incurring such cost. The party (or parties) that is legally required
to file a Tax Return relating to Transfer Taxes shall be responsible for
preparing and timely filing such Tax Return.
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(d) All Tax sharing agreements between any of the Company or Company
Subsidiaries, on the one hand, and any of Sellers or their Affiliates (other
than the Company or any of the Company Subsidiaries), on the other hand, shall
be terminated as of the Closing Date and shall have no further effect on or
after the Closing Date.
6.4 SECTION 338. Neither the Buyer nor the Company shall make any
election under Section 338 of the Code with respect to the transactions
contemplated by this Agreement.
6.5 REFUNDS AND TAX BENEFITS. All Tax refunds or credits
attributable to any Tax period shall be for the sole benefit of the Buyer.
6.6 EMPLOYEES; BENEFIT PLANS.
(a) Except as set forth in SCHEDULE 6.6, all persons who were
employed by the Company or Company Subsidiaries immediately preceding the
Closing Date, including those on vacation, leave of absence or disability (the
"ACTIVE COMPANY EMPLOYEES"), will remain employed in a comparable position on
and immediately after the Closing Date; provided, however, subject to the
requirements of applicable Law, nothing in this Agreement shall require the
Company or Company Subsidiaries to retain any Active Company Employees for any
period of time after the Closing Date.
(b) For a period of twelve (12) months following the Closing Date
(the "TRANSITION PERIOD"), the Buyer shall, and shall cause the Company and the
Company Subsidiaries to, either maintain the Benefit Plans (other than any stock
option or equity-based plans) or provide the Active Company Employees
eligibility to participate in employee benefit plans of the Buyer which in the
aggregate are substantially equivalent to those provided to similarly-situated
employees of the Buyer. The Buyer may, or may cause the Company or Company
Subsidiaries to, amend, modify or terminate any of the Benefit Plans or merge
any of the Benefit Plans with the Buyer's employee benefit plans as the Buyer
deems appropriate. To the extent not otherwise required by or resulting from the
operation of Law, the Buyer shall, or shall cause the Company and Company
Subsidiaries to, recognize each Active Company Employee's service for purposes
of eligibility to participate and vesting (but not for any other purpose, such
as benefit accrual or level of benefits) with the Company or the Company
Subsidiaries as of the Closing Date as service with the Buyer, to the extent
that such service was credited under the corresponding Benefit Plans, under the
Buyer's employee welfare benefit plans, employee pension plans, vacation,
disability, severance and other employee benefit plans or policies and any other
such plans or policies in which the Active Company Employees become or may
become eligible to participate on or after the Closing Date.
(c) Nothing herein expressed or implied shall confer upon any of the
employees of the Buyer, the Company, the Company Subsidiaries or any of their
Affiliates, any rights or remedies, including any right to benefits or
employment, or continued benefits or employment, for any specified period, of
any nature or kind whatsoever under or by reason of this Agreement.
6.7 LABOR MATTERS. (a) Between the date hereof and the Closing Date
or the earlier termination of this Agreement in accordance with its terms, the
Company and the
46
Company Subsidiaries shall not effect or permit a "plant closing" or "mass
layoff" as these terms are defined in the WARN Act with respect to any member of
the Company and the Company Subsidiaries without notifying the Buyer in advance
and without complying with the notice requirements and all other provisions of
the WARN Act. The Company will also notify the Buyer of, and obtain its consent
to, prior to the Closing, all layoffs and terminations at any "single site of
employment" or "facility or operating unit within a single site of employment"
that occur within ninety (90) days of the Closing and that, in the aggregate,
exceed twenty percent (20%) of the workforce or 25 or more employees at either
the "single site of employment" or a "facility or operating unit", which consent
shall not be unreasonably withheld.
(b) The Company and the Buyer shall reasonably cooperate in
connection with any required notification to, or any required consultation with,
or the provision of documents and information to, the employees, employee
representatives, work councils, unions, labor boards and relevant government
agencies and governmental officials concerning the transactions contemplated by
this Agreement with respect to non-U.S. Employees of any of the Company and the
Company Subsidiaries so that such Persons may render advice as required in
accordance with Law.
6.8 CONSENTS AND COMPETITION. (a) The Buyer and the Sellers shall,
(i) as promptly as practicable, but in no event later than five (5) Business
Days following the date of this Agreement, within the applicable filing
deadlines, submit all initial filings required by the HSR Act and (ii) as
promptly as practicable, within the applicable filing deadlines, submit all
initial filings required by or any other applicable Competition/Investment Law,
and thereafter provide any supplemental information requested in connection
therewith. The Buyer and the Sellers shall furnish to the other such necessary
information and reasonable assistance as the other may request in connection
with its preparation of any filing or submission that is necessary under the HSR
Act or any other applicable Competition/Investment Law. The Buyer and the
Sellers shall request early termination of the applicable waiting period under
the HSR Act or any other applicable Competition/Investment Law. The Buyer and
the Sellers will promptly inform the other party of any material communication
received by such party from any Governmental Authority in respect of any filing
under the HSR Act or any other applicable Competition/Investment Law. Each of
the parties will (a) use its respective commercially reasonable efforts to
comply as expeditiously as possible with all requests of any Governmental
Authority for additional information and documents, including, without
limitation, information or documents requested under the HSR Act or any other
applicable Competition/Investment Law; (b) not (i) extend any waiting period
under the HSR Act or any other applicable Competition/Investment Law or (ii)
enter into any agreement with any Governmental Authority not to consummate the
transactions contemplated by this Agreement, except with the prior consent of
the other parties; and (c) cooperate with the other parties and use commercially
reasonable efforts to contest and resist any action, including legislative,
administrative or judicial action, and to have vacated, lifted, reversed or
overturned any Governmental Order (whether temporary, preliminary or permanent)
that restricts, prevents or prohibits the consummation of the transactions
contemplated by this Agreement.
(b) The Company shall use commercially reasonable efforts to take,
or cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable to
47
obtain all third-party Consents in order to consummate the transactions
contemplated hereby, including securing Consents listed in SCHEDULE 2.4(A)(VII).
6.9 INSURANCE. From the date of this Agreement to the Closing Date,
the Company shall use its commercially reasonable efforts to maintain its
Insurance Policies in full force and effect (subject to any renewals thereof)
and in any event will not materially reduce the level of its insurance coverage
from the level of coverage as of the date hereof.
6.10 NOTICE OF EVENTS. (a) During the period from the date of this
Agreement to the Closing Date or the earlier termination of this Agreement in
accordance with its terms, the Buyer shall give prompt written notice to the
Sellers of (i) the occurrence or non-occurrence of any event that has caused, or
could reasonably be expected to cause, any representation or warranty made by it
to be untrue or inaccurate in any material respect at any time after the date of
this Agreement and prior to the Closing Date; and (ii) any material failure on
its part to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder.
(b) During the period from the date of this Agreement to the Closing
Date or the earlier termination of this Agreement in accordance with its terms,
the Company shall give prompt written notice to the Buyer if it becomes aware of
(i) the occurrence or non-occurrence of any event to the Knowledge of the
Company which has caused, or could reasonably be expected to cause, any
representation or warranty made by the Company or any Seller to be untrue or
inaccurate in any material respect at any time after the date of this Agreement
and prior to the Closing Date; and (ii) any material failure on the Company's or
Sellers' part to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder. If any such event requires any
change to the schedules to this Agreement with respect to ARTICLE III or ARTICLE
IV, the Company shall promptly deliver to the Buyer a supplement to the
schedules specifying such change; provided that any such supplement shall not be
taken into account for purposes of determining whether the conditions precedent
in ARTICLE VII are satisfied or for purposes of indemnification as set forth in
ARTICLE IX. The delivery of any notice pursuant to this SECTION 6.10(B) shall
not limit or otherwise affect the rights or remedies available hereunder
(including, without limitation, the indemnification provisions hereof).
6.11 COOPERATION. Upon the terms and subject to the conditions set
forth in this Agreement, each party hereto shall use its commercially reasonable
efforts to take, or cause to be taken, all actions, and do, or cause to be done,
and to assist and cooperate with the other parties hereto in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated hereby, and to
satisfy, or cause to be satisfied all of the conditions precedent that are set
forth in ARTICLE VII, as applicable to each of them.
6.12 ANTI-SANDBAG. Notwithstanding anything to the contrary
contained in this Agreement (including without limitation the Company's or
Sellers' failure to disclose any matter required to be disclosed on any Exhibit
or Schedule hereto), Buyer agrees that no representation or warranty of the
Sellers or the Company in this Agreement or in any agreement or instrument
executed in connection herewith shall be deemed to be untrue or incorrect, and
Sellers and the Company shall not be deemed to be in breach thereof, if the
following officers or
48
employees of Buyer had actual knowledge on the date of this Agreement of any
undisclosed matter that would constitute a breach of such representation or
warranty or that any such representation or warranty was untrue or incorrect:
Michael H. Kolinsky, Mark E. Kimmel, Michael L. Evelhoch, Salvatore D.
Fazzolari, Gene Iannazo (but only with respect to matters uncovered in Buyer's
due diligence review of the Company in connection with the transactions
contemplated by this Agreement and not with respect to any other matters,
including matters known to or discovered by Gene Iannazo as a result of his
day-to-day duties and/or activities) and Stephen J. Schnoor. For purposes of
determining whether any such persons had such actual knowledge, all such persons
shall be deemed to have actual knowledge of all due diligence reports prepared
and delivered to the Buyer by the outside advisors set forth on SCHEDULE 6.12.
ARTICLE VII CONDITIONS TO CLOSING
7.1 CONDITIONS TO THE OBLIGATIONS OF THE PARTIES. The respective
obligations of the Buyer and the Sellers to consummate the transactions
contemplated by this Agreement are subject to the satisfaction or waiver (if
permitted by applicable Law) at or prior to the Closing of each of the following
conditions:
(a) None of the parties hereto will be subject to any Governmental
Order or Law that restrains or prohibits the consummation of the transactions
contemplated by this Agreement (a "RESTRAINT"). If any such Restraint has been
issued, enacted, enforced or promulgated by a Governmental Authority, each party
shall use its commercially reasonable efforts to have any such Restraint
overturned or lifted.
(b) The waiting period (including any extension thereof) applicable
to the consummation of the transactions contemplated by this Agreement under the
HSR Act or any other applicable Competition/Investment Law will have expired or
been terminated.
7.2 CONDITIONS TO THE OBLIGATION OF THE SELLERS. The obligation of
the Sellers to consummate the transactions contemplated by this Agreement is
subject to the satisfaction or waiver (if permitted by applicable Law) at or
prior to the Closing of each of the following conditions:
(a) The representations and warranties made by the Buyer in this
Agreement will be true and correct in all material respects (provided that any
representation or warranty of the Buyer contained herein that is subject to a
materiality, material adverse effect or similar qualification will not be so
qualified for purposes of determining the existence of any breach thereof on the
part of the Buyer) as of the Closing Date as though made on and as of such date
(except to the extent such representations and warranties speak as of an earlier
date, in which case such representations and warranties shall be, subject to the
proviso set forth above, true and correct in all material respects as of such
earlier date).
(b) The Buyer will have performed and complied in all material
respects with all agreements and covenants required by this Agreement to be so
performed or complied with by it at or prior to the Closing.
(c) The Buyer will have delivered, or caused to be delivered, all of
the closing deliveries required by SECTION 2.4(B).
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7.3 CONDITIONS TO THE OBLIGATIONS OF THE BUYER. The obligation of
the Buyer to consummate the transactions contemplated by this Agreement is
subject to the satisfaction or waiver (if permitted by applicable Laws) at or
prior to the Closing of each of the following conditions:
(a) The representations and warranties made by the Sellers and the
Company in this Agreement will be true and correct in all material respects
(provided that any representation or warranty of the Sellers contained herein
that is subject to a materiality, Company Material Adverse Effect or similar
qualification will not be so qualified for purposes of determining the existence
of any breach thereof on the part of the Company) as of the Closing Date as
though made on and as of such date (except to the extent such representations
and warranties speak as of an earlier date, in which case such representations
and warranties shall be, subject to the proviso set forth above, true and
correct in all material respects as of such earlier date).
(b) The Company and the Sellers will have performed and complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by them at or prior to the Closing.
(c) Since the date of this Agreement, there has been no change,
development or occurrence of any character (whether or not covered by insurance)
that, in the aggregate, has had or would reasonably be expected to have a
Company Material Adverse Effect, except for (i) changes in the price of nickel
or other metals recovered by the Company in connection with its slag handling
business, (ii) changes resulting from the announcement of the transactions
contemplated by this Agreement, or (iii) changes in generally accepted
accounting principles, Environmental Law or other Law.
(d) Sellers will have delivered, or caused to be delivered, all of
the closing deliveries required by SECTION 2.4(A).
ARTICLE VIII TERMINATION
8.1 TERMINATION. This Agreement may be terminated at any time prior
to the Closing Date:
(a) by the mutual written consent of Sellers Representative, on
behalf of the Sellers, and the Buyer;
(b) by Sellers Representative, on behalf of the Sellers, or the
Buyer, upon written notice to the other party, if the Closing has not occurred
on or before March 1, 2007 (the "OUTSIDE DATE"), provided, however, that if the
transactions contemplated by this Agreement shall not have been consummated
solely due to the waiting period (or any extension thereof) or approvals under
the HSR Act or any other Competition/Investment Law not having expired or been
terminated or received, then such date shall be extended to April 15, 2007; and
provided, further, that the right to terminate this Agreement under this SECTION
8.1(B) shall not be available to any party whose failure to fulfill any material
obligations under this Agreement has been the cause of, or resulted in, the
failure of the transactions contemplated by this Agreement to have been
consummated on or before such date.
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(c) by Sellers Representative, on behalf of the Sellers, or the
Buyer, upon written notice to the other party, if any Restraint is in effect and
has become final and nonappealable, provided that the party seeking to terminate
this Agreement pursuant to this SECTION 8.1(C) has used its commercially
reasonable efforts to remove such Restraint;
(d) by the Buyer, if the Company or any Seller materially breaches
any of its representations, warranties, covenants or agreements under this
Agreement and such breach is not capable of being cured or if curable is not
cured within twenty (20) calendar days after written notice to the Sellers
Representative by the Buyer; or
(e) by Sellers Representative, on behalf of the Sellers, if the
Buyer materially breaches any of its representations, warranties, covenants or
agreements under this Agreement and such breach is not capable of being cured or
if curable is not cured within twenty (20) calendar days after written notice to
the Buyer by Sellers Representative.
8.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement pursuant to SECTION 8.1, this Agreement will become void and have no
effect, and no party will have any liability or any further obligation to any
other party, except as provided in this SECTION 8.2 and except that nothing
herein releases, or may be construed as releasing, any party hereto from any
liability or damage to any other party hereto arising out of the breaching
party's willful breach of its representations and warranties or breach in the
performance of any of its covenants or agreements arising under this Agreement.
The obligations of the parties to this Agreement under SECTION 6.2 (as such
Section relates to confidentiality), SECTION 8.2 and ARTICLE X will survive any
termination of this Agreement.
ARTICLE IX INDEMNIFICATION
9.1 INDEMNIFICATION BY THE SELLERS. Subject to the terms and
conditions set forth in this ARTICLE IX, from and after the Closing, the Sellers
shall, severally and not jointly, indemnify and hold harmless the Buyer, its
Affiliates (including, after the Closing, the Company and the Company
Subsidiaries) and their respective officers, directors, shareholders, employees,
agents and representatives (collectively, the "BUYER INDEMNIFIED PERSONS") from
and against any and all Losses incurred or suffered by any Buyer Indemnified
Person arising out of or related to (i) any breach or inaccuracy of any
representation or warranty by the Sellers or the Company contained in this
Agreement whether made upon execution of this Agreement or at Closing as
contemplated by SECTION 7.3(A), (ii) any non-fulfillment or breach by the
Company or any Seller of any covenant or agreement hereunder, or (iii) payments
to Company Employees, including former employees, triggered in whole or in part
by the transactions contemplated hereby (whether alone or in connection with
other events), excluding those payments made to Company Employees included in
the definition of Debt Obligations and any payments resulting from Buyer's
termination of such Company Employee following the Closing.
(b) None of the Buyer Indemnified Persons will be entitled to
recover from the Sellers for any Losses indemnifiable pursuant to SECTION
9.1(A)(I) AND (A)(II), unless and until the total of all Losses indemnifiable
under SECTION 9.1(A)(I) AND (II) exceeds $1,500,000, in which case the Sellers
will be liable in the manner set forth in this ARTICLE IX for all such Losses
(including such first $1,500,000 of Losses) without regard to such amount. The
Buyer
51
Indemnified Persons will not be entitled to recover more than an aggregate of
$20,000,000 (the "MAXIMUM AMOUNT"), from the Sellers with respect to all Losses
indemnifiable pursuant to SECTION 9.1(A)(I) AND (A)(II); provided that, subject
to the limitations in the following sentence, the foregoing limitations shall
not apply to any obligation or Liability under SECTION 9.1(A)(I) arising out of
or related to a breach or inaccuracy of any of the representations or warranties
set forth in SECTIONS 3.1, 3.2, 4.1, 4.2, 4.3 and 4.24. Notwithstanding the
above, any breach of a representation or warranty set forth in SECTIONS 3.1 or
3.2, shall be made only against such Seller breaching such representation or
warranty and no other Seller shall have any liability to Buyer with respect to
such breach.
9.2 INDEMNIFICATION BY THE BUYER. Subject to the terms and
conditions set forth in this ARTICLE IX, from and after the Closing, the Buyer
shall indemnify and hold harmless each of the Sellers, their respective
Affiliates and their respective officers, directors, shareholders, employees,
agents, and representatives (collectively, the "SELLER INDEMNIFIED PERSONS")
from and against any and all Losses incurred or suffered by any Seller
Indemnified Person arising out of or related to (i) any breach of any
representation or warranty by Buyer contained in this Agreement whether made
upon execution of this Agreement or at Closing as contemplated by SECTION
7.2(A), and (ii) any non-fulfillment or breach by Buyer of any covenant or
agreement hereunder.
9.3 INDEMNIFICATION AS EXCLUSIVE REMEDY. Except as otherwise
provided below, the indemnification provided for in this ARTICLE IX, subject to
the limitations set forth herein, shall be the exclusive post-Closing remedy
available to any party in connection with any Losses arising out of the matters
set forth in this Agreement or the transactions contemplated hereunder;
provided, however, that nothing herein will limit in any way any such party's
remedies in respect of fraud by a party in connection herewith or with any
Transaction Agreement or the transactions contemplated hereby or thereby;
provided that liability for such claims of fraud with respect to each Seller who
was not a party perpetrating such fraud shall be limited to the product of: (x)
the aggregate Losses of Buyer resulting from such fraud times (y) (a) the
Purchase Price (as adjusted pursuant to SECTION 2.6) received by such Seller
divided by (b) the aggregate Purchase Price (as adjusted pursuant to SECTION
2.6); provided further, that in no instance shall any Seller be liable, after
taking into consideration all amounts paid by such Seller pursuant to this
ARTICLE IX, for any amount in excess of such Seller's portion of the Purchase
Price (as adjusted pursuant to SECTION 2.6).
9.4 SURVIVAL. Except as set forth below, all claims for
indemnification under SECTION 9.1(A) must be asserted on or prior to the date of
the termination of the respective survival periods set forth in this SECTION
9.4, except such claims may be pursued thereafter if written notice thereof
(specifying in reasonable detail the basis for such claim) was duly given within
such period. Claims for fraud may be asserted at any time prior to the
expiration of the applicable statute of limitations. The representations and
warranties, covenants and other agreements contained in this Agreement will
survive the Closing Date until the second anniversary of the Closing Date,
except that the representations and warranties (a) set forth in SECTIONS 3.1,
3.2, 4.1, 4.2, 4.24 and 5.5 shall survive indefinitely, (b) set forth in
SECTIONS 4.3, 4.9, 4.10, 5.1 and 5.2 shall survive the Closing until sixty days
after the expiration of the applicable statute of limitations (and in the case
of SECTION 4.9 any extensions thereof), and
52
(c) set forth in SECTION 4.14 shall survive the Closing until the third
anniversary of the Closing Date.
9.5 LIMITATIONS ON INDEMNIFICATION. (a) The amount of any Losses for
which indemnification is provided under SECTION 9.1(A) or 9.2 shall be computed
net of any third party insurance proceeds received by, or payable to, an
Indemnified Party in connection with such Losses (net of any expenses incurred
by the Indemnified Party in obtaining such insurance proceeds including the cost
of maintaining any insurance policy). The parties agree that any indemnification
payments made pursuant to this Agreement shall be treated for tax purposes as an
adjustment to the Purchase Price, unless otherwise required by Law.
(b) Sellers shall use all commercially reasonable efforts to
maintain and to assign to Buyer any third-party indemnities, settlements or cost
sharing agreements available or potentially available to Buyer.
(c) Notwithstanding anything to the contrary contained in this
ARTICLE IX, any indemnification obligations of the Sellers to the Buyer
Indemnified Persons that are subject to the Maximum Amount shall be first drawn
from the funds subject to the Escrow Agreement. Thereafter, the Sellers will be
severally, and not jointly, liable for all indemnification obligations to the
Buyer Indemnified Persons pursuant to this Agreement, subject to the limitations
contained herein. Any indemnification obligations of the Sellers to the Buyer
Indemnified Persons not subject to the Maximum Amount may be drawn from the
funds subject to the Escrow Agreement or may be sought from the Sellers in the
sole discretion of Buyer. In each case, the Buyer may offset the indemnification
obligations of such Seller under this ARTICLE IX against any amounts due or to
become due to such Seller under this Agreement. The parties agree that no Seller
Indemnified Persons shall have any rights of contribution or indemnity, or any
other right, remedy or recourse, as against the Company in connection with any
indemnification obligation or other Liability arising under or in connection
with, or related to, this Agreement or any Transaction Agreement, or any of the
transactions contemplated hereby or thereby. Each Seller's liability for
indemnification shall be limited to the product of: (x) the aggregate Losses of
Buyer resulting from such claims times (y) (a) the Purchase Price (as adjusted
pursuant to SECTION 2.6) received by such Seller divided by (b) the aggregate
Purchase Price (as adjusted pursuant to SECTION 2.6); provided further, that in
no instance shall any Seller be liable, after taking into consideration all
amounts paid by such Seller pursuant to this ARTICLE IX, for any amount in
excess of such Seller's portion of the Purchase Price (as adjusted pursuant to
SECTION 2.6); provided further, that with respect to claims subject to the
Maximum Amount, no Seller's liability for indemnification under this ARTICLE IX
shall exceed the product of the following: (x) (i) $20,000,000 minus (ii) the
total amount paid to Buyer from the funds subject to the Escrow Agreement times
(y) (a) the Purchase Price (as adjusted pursuant to SECTION 2.6) received by
such Seller divided by (b) the aggregate Purchase Price (as adjusted pursuant to
SECTION 2.6).
(d) PROCEDURES.
(i) Notice of Losses. As soon as is reasonably practicable after the
Sellers or the Buyer has actual knowledge of any Losses for which
indemnification is available under SECTION 9.1(A) or SECTION 9.2 (a
"CLAIM"), such party shall give written notice
53
thereof (a "CLAIM NOTICE") to the other party. A Claim Notice must
describe the Claim in reasonable detail, and must indicate the amount
(estimated to the extent feasible) of the Loss that has been or will be
suffered by the Indemnified Party. No delay in or failure to give a Claim
Notice by the Indemnified Party to the Indemnifying Party will adversely
affect any other rights or remedies that the Indemnified Party has under
this Agreement, or alter or relieve the Indemnifying Party of its
obligations to indemnify the Indemnified Party to the extent that such
delay or failure has not materially prejudiced the Indemnifying Party.
Each Indemnifying Party to whom a Claim Notice is given shall respond to
any Indemnified Party that has given a Claim Notice (a "CLAIM RESPONSE")
within thirty (30) calendar days (the "RESPONSE PERIOD") after the date
the Claim Notice is given. Any Claim Response must specify whether or not
the Indemnifying Party disputes the Claim described in the Claim Notice.
If any Indemnifying Party fails to give a Claim Response within the
Response Period, such Indemnifying Party will be deemed not to dispute
the Claim described in the related Claim Notice. If any Indemnifying
Party elects not to dispute a Claim described in a Claim Notice, whether
by failing to give a timely Claim Response or otherwise, then the amount
of such Claim will be conclusively deemed to be an obligation of such
Indemnifying Party and such Indemnifying Party shall pay to the
Indemnified Party within thirty (30) days after the last day of the
applicable Response Period the amount to which such Indemnified Party is
entitled. If a Claim is disputed, the parties may pursue any remedies
available in Law or equity.
(ii) Third Party Claims. (A) If any Claim Notice identifies any
Claim brought by a third Person (a "THIRD PARTY CLAIM"), the Indemnifying
Party will have the right, exercisable by written notice to the
Indemnified Party within thirty (30) calendar days of receipt of such
Claim Notice, to assume the defense of such Third Party Claim, with
counsel selected by the Indemnifying Party that is reasonably
satisfactory to the Indemnified Party. If the Indemnifying Party assumes
the defense of, and the full responsibility for paying or otherwise
discharging such Third Party Claim, the Indemnifying Party will not be
liable to the Indemnified Party for any legal expenses of other counsel
or any other expenses subsequently incurred by such Indemnified Party in
connection with the defense thereof and the Indemnified Party will have
the right to participate at its own expense in the defense of such Third
Party Claim. If the Indemnifying Party does not assume the defense of
such Third Party Claim, the Indemnified Party may defend such Third Party
Claim at the sole cost of the Indemnifying Party and the Indemnifying
Party may still participate in, but not control, the defense of such
Third Party Claim at the Indemnifying Party's sole cost and expense.
(B) The party responsible for the defense of any Third Party Claim
(a "RESPONSIBLE PARTY") shall, to the extent reasonably requested by the
other party, keep such other party informed as to the status of such
Third Party Claim, including, without limitation, all settlement
negotiations and offers. With respect to a Third Party Claim for which a
Seller is the Responsible Party, the Buyer shall use all reasonable
efforts to make available to such Seller all books and records of the
Buyer relating to such Third Party Claim and shall cooperate with such
Seller in the defense of the Third Party Claim. No settlement or
compromise or consent to the entry of any judgment that does not relate
solely to monetary damages arising from any such Third Party Claim may be
effected (1) by the Indemnifying Party without the written consent of the
Indemnified Party
54
(which consent shall not be unreasonably withheld or delayed) unless all
relief provided is paid or satisfied in full by the Indemnifying Party
and the Indemnified Party receives a full release in respect of the Third
Party Claim or (2) by the Indemnified Party without the consent of the
Indemnifying Party (which consent shall not be unreasonably withheld or
delayed). In no event shall an Indemnifying Party be liable for any
settlement effected without its prior written consent.
(e)(i) Notwithstanding the foregoing, at the election of Buyer,
Buyer shall have the sole right to control the defense, compromise and
resolution of any claim, suit, action, audit, litigation or proceeding relating
to any breach of the representations and warranties contained in SECTION 4.9 or
of the covenants contained in SECTION 6.3 (a "TAX CLAIM"). In the event that
Buyer assumes the defense of a Tax Claim and compromises or otherwise reaches a
resolution then Buyer's right to indemnification is subject to clause (ii)
below.
(ii) Buyer shall permit the Sellers Representative to participate in
the Tax Claim, at Sellers sole cost and expense, and keep the Sellers
Representative informed as to the status of all compromise and settlement
negotiations and offers. The Buyer shall make available to Sellers
Representative all books and records of the Buyer and the Company
relating to such Tax Claim in order for Sellers Representative to
evaluate any proposed compromise or other resolution. If the Sellers
Representative consents to the compromise or other resolution of the Tax
Claim, then Buyer shall be entitled to indemnification under SECTION 9.1
for the amount of such compromise or resolution, subject to the
limitations set forth in this ARTICLE IX. If the Sellers Representative
does not agree with a proposed resolution, then Buyer and Sellers
Representative shall consult with the CPA Firm to determine the best
resolution possible (the "CPA RESOLUTION"). In determining the CPA
Resolution, the CPA Firm will attempt to minimize the amount of the Tax
Claim for the Tax year at issue without moving income or loss for any Tax
year to another Tax year, whether from a pre-Closing period to
post-Closing period or from post-Closing period to a pre-Closing period,
except as otherwise required by applicable law. If Buyer agrees to use
the CPA Resolution to resolve the Tax Claim, then Buyer shall be entitled
to indemnification under SECTION 9.1 for the amount of such resolution,
including any legal and/or accounting costs incurred in connection with
such Tax Claim, subject to the limitations set forth in this ARTICLE IX.
If Buyer does not use the CPA Resolution to resolve the Tax Claim, then
Buyer shall be entitled to indemnification under SECTION 9.1 (subject to
the limitations set forth in this ARTICLE IX) only for an amount equal to
but not exceeding the amount reflected in the CPA Resolution.
9.6 SELLERS REPRESENTATIVE.
(a) Sellers Representative; Power and Authority. Each Seller hereby
appoints the Sellers Representative as agent and attorney-in-fact for each such
Seller, for and on behalf of each such Seller, with full power and authority to
represent each Seller and such Seller's successors and assigns with respect to
all matters arising under this Agreement and the Escrow Agreement and all
actions taken by the Sellers Representative under this Agreement or the Escrow
Agreement will be binding upon each such Seller and such Seller's successors and
assigns as if expressly ratified and confirmed in writing by each of them.
Without limiting the generality of the foregoing, the Sellers Representative has
full power and authority, on behalf of
55
each Seller and such Seller's successors and assigns, to interpret the terms and
provisions of this Agreement and the Escrow Agreement, to dispute or fail to
dispute any Claim under this Agreement or the Escrow Agreement, to negotiate and
compromise any dispute that may arise under this Agreement or the Escrow
Agreement and to sign any releases or other documents with respect to any such
dispute. A Seller will be deemed a party or a signatory to any agreement,
document, instrument or certificate for which the Sellers Representative signs
on behalf of such Seller. The Sellers Representative hereby accepts such
designation.
(b) Liability. In performing any of its duties under this Agreement
or upon the claimed failure to perform its duties under this Agreement, the
Sellers Representative will not be liable to the Sellers for any Losses that the
Sellers may incur as a result of any act, or failure to act, by the Sellers
Representative under this Agreement, and the Sellers Representative shall be
indemnified and held harmless by the Sellers for all Losses; provided, however,
that the Sellers Representative will not be entitled to indemnification for
Losses to the extent that a court of competent jurisdiction has finally
determined that the actions or omissions of the Sellers Representative both (i)
were taken or omitted not in good faith and (ii) constituted willful breach
under this Agreement. Accordingly, the Sellers Representative will not incur any
such liability with respect to (x) any action taken or omitted to be taken in
good faith upon advice of counsel given with respect to any questions relating
to the duties and responsibilities of the Sellers Representative under this
Agreement or the Escrow Agreement or (y) any action taken or omitted to be taken
in reliance upon any document, including any written notice or instructions
provided for in this Agreement or the Escrow Agreement, not only as to its due
execution and to the validity and effectiveness of such document's provisions,
but also as to the truth and accuracy of any information contained in such
document, which the Sellers Representative does in good faith believe to be
genuine, to have been signed or presented by the purported proper Person or
Persons and to conform with the provisions of this Agreement or the Escrow
Agreement. The limitation of liability provisions of this SECTION 9.6(B) will
survive the termination of this Agreement and the resignation of the Sellers
Representative.
(c) Successor Sellers Representative. In the event that the Sellers
Representative dies, becomes incapacitated, resigns or otherwise fails to
perform his or her obligations hereunder on behalf of the Sellers for any
reason, then Brian Soeldner, or if he is unwilling or unable to act, another
Person selected by a vote of Sellers owning in the aggregate at least a majority
of the issued and outstanding Common Stock immediately prior to Closing shall be
appointed and as the substituting representative to act on behalf of the Sellers
with respect to the matters set forth in this Agreement and the Transaction
Agreements.
(d) Reliance on Sellers Representative. The Sellers Representative
is authorized to act on behalf of the Sellers in accordance with the terms of
this SECTION 9.6, notwithstanding any dispute or disagreement among the Sellers.
Buyer shall be entitled to rely on any and all actions taken by the Sellers
Representative without any liability to, or obligation to inquire of, any of the
Sellers even if Buyer is aware of any actual or potential dispute or
disagreement among the Sellers. Buyer, the Company, the Company Subsidiaries and
any third party is and shall be fully protected in acting or refraining from
acting upon and relying upon any notice, instruction, direction, request,
waiver, consent, receipt or other paper or document in writing that Buyer, the
Company, the Company Subsidiaries or such other third party in good faith
reasonably believes after due inquiry has been signed by the Sellers
Representative.
56
ARTICLE X MISCELLANEOUS
10.1 FEES AND EXPENSES. Except as otherwise provided in this
Agreement with respect to Selling Expenses remaining unpaid as of the Closing
Date, Sellers, on the one hand, and the Buyer, on the other hand, shall bear its
own expenses and the expenses of its Affiliates in connection with the
preparation and negotiation of this Agreement and the consummation of the
transactions contemplated by this Agreement. Sellers, on the one hand, and the
Buyer, on the other hand, shall bear the fees and expenses of any broker or
finder retained by such party or parties and their respective Affiliates in
connection with the transactions contemplated by this Agreement and the
Transaction Agreements.
10.2 GOVERNING LAW. This Agreement will be construed under and
governed by the Laws of the Commonwealth of Pennsylvania applicable to contracts
made and to be performed in that State.
10.3 AMENDMENT. This Agreement may be amended, supplemented or
modified, and any provision hereof may be waived with the written consent of the
parties hereto.
10.4 ASSIGNMENT; THIRD PARTIES. Neither this Agreement nor any of
the rights, interests or obligations hereunder may be assigned by any party
hereto without the prior written consent of the other parties; provided that
Buyer may assign its rights or obligations hereunder to any Affiliate of Buyer
or, for collateral security purposes, to any lender providing financing to the
Buyer, any of the Company or any of their Affiliates, without the prior written
consent of the other parties hereto; provided, further, that no such assignment
by Buyer shall relieve Buyer of its obligations hereunder. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by, the parties hereto and their respective successors and
permitted assigns, and is not intended nor shall it be construed to confer upon
any Person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies hereunder (except for Indemnified
Parties in ARTICLE IX).
10.5 WAIVER. Any of the terms or conditions of this Agreement that
may be lawfully waived may be waived in writing at any time by each party, at
its sole discretion, that is entitled to the benefits thereof. Any waiver of any
of the provisions of this Agreement by any party hereto will be binding only if
set forth in an instrument in writing signed on behalf of such party. No failure
to enforce any provision of or right under this Agreement will be deemed to or
will constitute a waiver of such provision or right and no waiver of any of the
provisions of this Agreement will be deemed to or will constitute a waiver of
any other provision hereof (whether or not similar) nor will such waiver
constitute a continuing waiver.
10.6 NOTICES. (a) Any notice, demand, or communication required or
permitted to be given by any provision of this Agreement will be deemed to have
been sufficiently given or served for all purposes if (i) personally delivered,
(ii) sent by a nationally recognized overnight courier service to the recipient
at the address below indicated, (iii) sent by registered or certified mail,
return receipt requested, postage prepaid, or (iv) delivered by facsimile with
confirmation of receipt:
57
If to the Buyer:
Salvatore Fazzolari
President, Chief Financial Officer and Treasurer
Harsco Corporation
350 Poplar Church Road
Camp Hill, PA 17011
Telecopy: (717) 763-6402
With a copy to:
Mark Kimmel
General Counsel
Harsco Corporation
350 Poplar Church Road
Camp Hill, PA 17011
Telecopy: (717) 763-6402
and
Jones Day
North Point
901 Lakeside Avenue
Cleveland, Ohio 44114
Attn: Patrick J. Leddy
Telecopy: (216) 579-0212
If to any of the Sellers:
Thomas Campion
Sellers Representative
Merit Capital Partners
303 W. Madison Street, Suite 2100
Chicago, IL 60606
Telecopy: (312) 592-6112
With a copy to:
Buchanan Ingersoll & Rooney PC
One Oxford Center
301 Grant Street, 20th Floor
Pittsburgh, PA 15219
Attn: Michael J. Flinn
Telecopy: (412) 562-1041
or to such other address or facsimile number as any party hereto may, from time
to time, designate in a written notice given in like manner.
58
(b) Except as otherwise provided herein, any notice under this
Agreement will be deemed to have been given (i) on the date such notice is
personally delivered or delivered by facsimile, (ii) the next succeeding
Business Day after the date such notice is delivered to the overnight courier
service if sent by overnight courier, or (iii) five (5) Business Days after the
date such notice is sent by registered or certified mail; provided that in each
case notices received after 4:00 p.m. (local time of the recipient) will be
deemed to have been duly given on the next Business Day.
10.7 COMPLETE AGREEMENT. This Agreement (together with the
Schedules, Exhibits and Transaction Agreements), the Confidentiality Agreement
and the other documents and writings referred to herein or delivered pursuant
hereto contain the entire understanding of the parties with respect to the
subject matter hereof and thereof and supersede all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and thereof.
10.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which will be considered one and the same agreement and
each of which will be deemed an original.
10.9 PUBLICITY. The Sellers and the Buyer will consult with each
other and will mutually agree upon any publication or press release of any
nature with respect to this Agreement or the transactions contemplated hereby
and shall not issue any such publication or press release prior to such
consultation and agreement except as may be required by Law or by obligations
pursuant to any listing agreement with any securities exchange or any securities
exchange regulation, in which case the party proposing to issue such publication
or press release shall make all reasonable efforts to consult in good faith with
the other party or parties before issuing any such publication or press release
and shall provide a copy thereof to the other party or parties prior to such
issuance.
10.10 HEADINGS. The headings contained in this Agreement are for
reference only and do not affect in any way the meaning, interpretation or
effect of this Agreement.
10.11 SEVERABILITY. Any provision of this Agreement that is invalid,
illegal or unenforceable in any jurisdiction will, as to that jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability,
without affecting in any way the remaining provisions hereof in such
jurisdiction or rendering that or any other provision of this Agreement invalid,
illegal or unenforceable in any other jurisdiction.
10.12 FURTHER ASSURANCES. The parties shall execute such further
instruments and take such further actions as may be reasonably necessary to
carry out the intent of this Agreement. Each party hereto shall cooperate
affirmatively with the other parties, to the extent reasonably requested by such
other parties, to enforce rights and obligations herein provided.
10.13 SERVICE OF PROCESS; WAIVER OF JURY TRIAL. Each of the parties
agrees that service of any process, summons, notice or document to such party's
respective address listed above in one of the manners set forth in SECTION 10.6
will be deemed in every respect effective service of process in any such
Proceeding, and waives any objection it might otherwise have to
59
service of process under Law. Nothing herein will affect the right of any Person
to serve process in any other manner permitted by Law. The parties hereto hereby
irrevocably and unconditionally waive trial by jury in any Proceeding relating
to this Agreement or any other agreement entered into in connection herewith and
for any counterclaim with respect hereto.
10.14 SPECIFIC PERFORMANCE. The parties agree that irreparable
damages would occur if any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent actual breaches or threatened breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court, in
addition to any other remedy to which they are entitled at law or in equity and
without the necessity of proving damages or posting a bond or other security.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
60
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed, in each case as of the date first above written.
THE COMPANY:
EXCELL MATERIALS, INC.
By: /s/ W. S. Brown III
-----------------------------------
Name: W. S. Brown III
Title: President/CEO
SELLERS:
WILLIAM BLAIR MEZZANINE CAPITAL FUND III, L.P.
BY: William Blair Mezzanine Capital
Partners III, LLC, its general partner
By: /s/ Thomas F. Campion
-----------------------------------
Name: Thomas F. Campion
Title: Managing Director
WHISPERING PINES PARTNERS L.P.
BY: Connack LLC its General Partner
By: /s/ Gregg A. Brown
-----------------------------------
Name: Gregg A. Brown
Title: Member
NATIONAL CITY BANK - TRUSTEE, BUCHANAN INGERSOLL PC
RETIREMENT PLAN SHARES OF MICHAEL J. FLINN
By: /s/ Robin W. Rice
-----------------------------------
Name: Robin Rice
Title: Vice President
THE LENOX GROUP, LLC
By: /s/ James M. Fite
-----------------------------------
Name: James M. Fite
Title: Managing Director
MICHAEL R. BOYCE FAMILY TRUST #1996
By: /s/ Michael R. Boyce
-----------------------------------
Name: Michael R. Boyce
Title: Manager
KC II-IV ENTERPRISES LLC DEFINED BENEFIT PLAN
By: /s/ Frank J. Clements
-----------------------------------
Name: Frank J. Clements
Title: Trustee
C&D PARTNERS
By: /s/ Frank J. Clements
-----------------------------------
Name: Frank J. Clements
Title: Partner
/s/ Ronald J. Sullivan
-----------------------------------
Ronald J. Sullivan
/s/ Jeffrey C. Edwards
-----------------------------------
Jeffrey C. Edwards
WELSH ROAD PARTNERS, L.P.
By: /s/ Richard E. Redlinger
-----------------------------------
Richard E. Redlinger, its General Partner
BUYER:
HARSCO CORPORATION
By: /s/ Salvatore D. Fazzolari
-----------------------------------
Name: Salvatore D. Fazzolari
Title: President, Chief Financial Officer
and Treasurer
SELLERS REPRESENTATIVE:
/s/ Thomas Campion
-----------------------------------
Thomas Campion
Exhibit 12
----------
HARSCO CORPORATION
Computation of Ratios of Earnings to Fixed Charges
(Dollars in Thousands)
YEARS ENDED DECEMBER 31
-----------------------------------------------------------------
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Pre-tax income from continuing
operations (net of minority
interest in net income) $ 294,032 $ 221,521 $ 162,574 $ 128,707 $ 130,650
Add fixed charges computed below 94,109 66,690 65,978 61,520 64,424
Net adjustments for equity
companies (192) 96 461 1,062 (219)
Net adjustments for capitalized
interest (1,114) (567) (124) 14 121
---------- ---------- ---------- ---------- ----------
Consolidated Earnings Available
for Fixed Charges $ 386,835 $ 287,740 $ 228,889 $ 191,303 $ 194,976
========== ========== ========== ========== ==========
Consolidated Fixed Charges:
Interest expense per financial
statements (a) $ 60,478 $ 41,918 $ 41,057 $ 40,513 $ 43,323
Interest expense capitalized 1,325 677 251 101 --
Portion of rentals (1/3) representing
a reasonable approximation of
the interest factor 32,306 24,095 24,670 20,906 20,972
Interest expense for equity
companies whose debt is
guaranteed -- -- -- -- 129
---------- ---------- ---------- ---------- ----------
Consolidated Fixed Charges $ 94,109 $ 66,690 $ 65,978 $ 61,520 $ 64,424
========== ========== ========== ========== ==========
Consolidated Ratio of Earnings to
Fixed Charges 4.11 4.31 3.47 3.11 3.03
========== ========== ========== ========== ==========
(a) Includes amortization of debt discount and expense.
EXHIBIT 21
----------
HARSCO CORPORATION
Subsidiaries of the Registrant
Country of Ownership
Name Incorporation Percentage
- -------------------------------------------------------------------------------------------
MultiServ Argentina S.A. Argentina 100%
Harsco (Australia) Pty. Limited Australia 100%
Harsco Track Technologies Pty. Ltd. Australia 100%
MultiServ Australasia Pty. Ltd. Australia 70%
MultiServ Holdings Pty. Limited Australia 55%
MultiServ NSW Pty. Limited Australia 55%
MultiServ South East Asia Pty. Ltd. Australia 100%
MultiServ Victoria Pty. Ltd. Australia 70%
SGB Raffia Pty. Ltd. Australia 100%
Taylor-Wharton (Australia) Pty. Limited Australia 100%
Hunnebeck Austria Schalungstechnik Austria 100%
AluServ Middle East W.L.L. Bahrain 65%
La Louviere Logistique S.A. Belgium 100%
MultiServ S.A. Belgium 100%
MultiServ Services Specialises S.A.S. Belgium 100%
SGB Belgium Sarl Belgium 100%
Verwerkingsbedryf Voor Byproduckten
in de Staalnyverhei Belgium 100%
SGB Belgium Sprl Belgium 100%
Harsco (Bermuda) Limited Bermuda 100%
MultiServ Limitada Brazil 100%
Sobremetal - Recuperacao de Metais Ltda. Brazil 100%
Harsco Canada Corporation Canada 100%
Harsco Canada General Partner Limited Canada 100%
Harsco Canada Limited Partnership Canada 100%
Harsco Nova Scotia Holding Corporation Canada 100%
Guernsey Plant Hire Ltd. Channel Islands-Guernsey 100%
SGB (Channel Islands) Ltd. Channel Islands-Jersey 100%
MultiServ Chile S.A. Chile 100%
Inversiones Hunnebeck (Chile) LTDA Chile 100%
Moldajes Y Andamios TH S.A. Chile 100%
MultiServ Tang Shan Iron & Steel
Service Corp. Ltd. China 100%
MultiServ Zhejiang Iron & Steel
Service Corp. Ltd. China 80%
Taylor-Wharton (Beijing) Cryogenic
Equipment Co. Ltd. China 100%
Czech Slag - Nova Hut s.r.o. Czech Republic 65%
Heckett MultiServ spol. s.r.o. Czech Republic 100%
Hunnebeck Bohemia spol s.r.o. Czech Republic 100%
MultiServ Cz s.r.o. Czech Republic 100%
SGB Cz a.s. Czech Republic 100%
Hunnebeck Danmark A/S Denmark 100%
Hunnebeck SGB ApS Denmark 100%
EXHIBIT 21
----------
HARSCO CORPORATION
Subsidiaries of the Registrant
Country of Ownership
Name Incorporation Percentage
- -------------------------------------------------------------------------------------------
Heckett Bahna Co. For Industrial
Operations S.A.E. Egypt 100%
Heckett MultiServ Bahna S.A.E. Egypt 65%
SGB Egypt for Scaffolding and Formwork S.A.E. Egypt 98.85%
Slag Processing Company Egypt (SLAR) S.A.E. Egypt 60%
MultiServ Oy Finland 100%
BC Nord S.A.S. France 100%
BC S.A.S. France 100%
Becema S.A.S. France 100%
Evulca S.A.S. France 100%
Floyequip S.A. France 100%
Hunnebeck France S.A.S. France 100%
MultiServ France S.A. France 100%
MultiServ Industries S.A.S. France 100%
MultiServ Logistique et Services
Specialises S.A.S. France 100%
MultiServ S.A.S. France 100%
MultiServ Sud S.A. France 100%
PyroServ SARL France 100%
SGB S.A.S. France 100%
SMI Lorelev S.A.S. France 100%
Solomat Industries S.A. France 100%
Carbofer International GmbH Germany 100%
Harsco GmbH Germany 100%
Hunnebeck GmbH Germany 100%
SGB Cleton Isolierungen GmbH Germany 100%
Hunnebeck Group GmbH Germany 100%
MultiServ GmbH Germany 100%
MultiServ Guatemala S.A. Guatemala 100%
SGB Asia Pacific Ltd. Hong Kong 100%
Hunnebeck Hungaria s.r.o. Hungary 100%
SGB Eventlink (Ireland) Ltd. Ireland 100%
SGB Scafform Limited Ireland 100%
Hunnebeck Italia S.p.A. Italy 100%
MultiServ Italia SrL Italy 100%
IlServ SrL Italy 65%
SGB Baltics S.I.A. Latvia 70%
Luxequip Holding S.A. Luxembourg 100%
MultiServ S.A. Luxembourg 100%
SGB Asia Pacific (M) Sdn Bhd. Malaysia 100%
Taylor-Wharton Asia (M) Sdn. Bhd. Malaysia 100%
Taylor-Wharton Gas Equipment Sdn. Bhd. Malaysia 100%
Andamios Patentados, S.A. de C.V. Mexico 100%
Electroforjados Nacionales, S.A. de C.V. Mexico 100%
EXHIBIT 21
----------
HARSCO CORPORATION
Subsidiaries of the Registrant
Country of Ownership
Name Incorporation Percentage
- -------------------------------------------------------------------------------------------
Irving, S.A. de C.V. Mexico 100%
MultiServ Metals de Mexico, S.A. de C.V. Mexico 100%
MultiServ Transport, BV Netherlands 100%
Harrie Scholten BV Netherlands 100%
Harsco Europa B.V. Netherlands 100%
Harsco Finance B.V. Netherlands 100%
Heckett MultiServ China B.V. Netherlands 100%
Heckett MultiServ Far East B.V. Netherlands 100%
MultiServ (Holland) B.V. Netherlands 100%
MultiServ Finance B.V. Netherlands 100%
MultiServ International B.V. Netherlands 100%
SGB Hunnebeck Framework Netherlands 100%
SGB Industrial Services B.V. Netherlands 100%
SGB Cleton B.V. Netherlands 100%
SGB Logistic Services B.V. Netherlands 100%
SGB North Europe B.V. Netherlands 100%
Slag Reductie (Pacific) B.V. Netherlands 100%
Slag Reductie Nederland B.V. Netherlands 100%
Stalen Steigers Holland B.V. Netherlands 100%
SteelServ Limited New Zealand 50%
Hunnebeck Norge AS Norway 100%
MultiServ A.S. Norway 100%
MultiServ Peru SA Peru 100%
Hunnebeck Polska Sp zoo Poland 100%
Companhia de Tratamento de Sucatas, Limitada Portugal 100%
Trenci-Engenharia Tecnicas Racuionalizades
de Construcao Civil Lda. Portugal 100%
SGB Al Darwish United WLL Qatar 49%
Heckett MultiServ Saudi Arabia Limited Saudi Arabia 55%
MultiServ Smederevo D.O.O. Serbia 100%
MultiServ Slovensko s.r.o. Slovak Republic 100%
SGB Slovensko s.r.o. Slovak Republic 100%
Taylor-Wharton Harsco, s.r.o. Slovak Republic 100%
MultiServ South Africa (Pty.) Limited South Africa 100%
SRH Mill Services (Pty.) Ltd. South Africa 100%
SteelServ (Pty.) Ltd. South Africa 100%
Heckett MultiServ Ltd. South Africa 100%
Gestion Materias Ferricas, S.A. Spain 100%
MultiServ Iberica S.A. Spain 100%
MultiServ Intermetal S.A. Spain 100%
MultiServ Lycrete S.A. Spain 100%
MultiServ Reclamet, S.A. Spain 100%
Serviequipo S.A. Spain 100%
Hunnebeck Sverige A.B. Sweden 100%
EXHIBIT 21
----------
HARSCO CORPORATION
Subsidiaries of the Registrant
Country of Ownership
Name Incorporation Percentage
- -------------------------------------------------------------------------------------------
Montanus Industriforvaltning A.B. Sweden 100%
MultiServ (Sweden) A.B. Sweden 100%
MultiServ A.B. Sweden 100%
MultiServ Nordiska A.B. Sweden 100%
MultiServ (Thailand) Company Limited Thailand 100%
Faber Prest Limited U.K. 100%
Fourninezero Ltd. U.K. 100%
Harsco (U.K.) Ltd. U.K. 100%
Harsco Investment Ltd. U.K. 100%
Harsco Track Technologies Ltd. U.K. 100%
Heckett Limited U.K. 100%
MultiServ Holding Limited U.K. 100%
MultiServ Group Ltd. U.K. 100%
MultiServ Investment Limited U.K. 100%
MultiServ plc U.K. 100%
SGB Exclesio UA JV LTD U.K. 87%
SGB Group Ltd. U.K. 100%
SGB Investments Ltd. U.K. 100%
SGB Services Ltd. U.K. 100%
Short Bros (Plant) Ltd. U.K. 100%
Slag Reduction Overseas Limited U.K. 100%
Ashland Recovery Inc. U.S.A. 100%
Braddock Recovery Inc. U.S.A. 100%
ECR Inc. U.S.A. 100%
Great Lakes Recovery Systems Inc. U.S.A. 100%
Harsco Defense Holding, Inc. U.S.A. 100%
Harsco Minnesota Corporation U.S.A. 100%
Harsco Technologies Corporation U.S.A. 100%
Harsco UDLP Corporation U.S.A. 100%
Heckett Technology Services Inc. U.S.A. 100%
MultiServ General Corp. U.S.A. 100%
MultiServ Inc. U.S.A. 100%
MultiServ Intermetal Inc. U.S.A. 100%
MultiServ Investment Corporation U.S.A. 100%
MultiServ Operations Ltd. U.S.A. 100%
MultiServ U.S. Corporation U.S.A. 100%
National Briquette Corporation U.S.A. 100%
SGB Holdings Inc. U.S.A. 100%
Slag Reduction Investment Corporation U.S.A. 100%
SGB (Ukraine) LLC Ukraine 100%
Hunnebeck Emirates LLC United Arab Emirates 49%
Quebeisi SGB LLC United Arab Emirates 49%
Hunnebeck Middle East FZE United Arab Emirates 100%
Heckett MultiServ M.V. & M.S., C.A. Venezuela 100%
EXHIBIT 21
----------
HARSCO CORPORATION
Subsidiaries of the Registrant
Companies in which Harsco Corporation does not exert management control are not
consolidated. These companies are listed below as unconsolidated entities.
Country of
Incorporation/ Ownership
Name Organization Percentage
- -------------------------------------------------------------------------------------------
Granufos S.A.S. France 50%
Phooltas Tamper Private Limited India 40%
p.t. Purna Baja Heckett Indonesia 40%
EXHIBIT 23
----------
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-57876, 33-5300, 33-14064, 33-24854, 333-13175,
333-13173, 333-114958, 333-59832, 333-70710) and on Form S-3 (No. 33-56885) of
Harsco Corporation of our report dated February 27, 2007 relating to the
consolidated financial statements, financial statement schedule, management's
assessment of the effectiveness of internal control over financial reporting and
the effectiveness of internal control over financial reporting, which appear in
this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 27, 2007
EXHIBIT 31(A)
-------------
CERTIFICATIONS
--------------
I, Derek C. Hathaway, certify that:
1. I have reviewed this annual report on Form 10-K 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 control 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.
February 27, 2007
/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 annual report on Form 10-K 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 control 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.
February 27, 2007
/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 Annual Report of Harsco Corporation (the "Company") on
Form 10-K for the period ending December 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
February 27, 2007
A signed original of this written statement required by Section 906 has been
provided to Harsco Corporation and will be retained by Harsco Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
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 Annual Report of Harsco Corporation (the "Company") on
Form 10-K for the period ending December 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
February 27, 2007
A signed original of this written statement required by Section 906 has been
provided to Harsco Corporation and will be retained by Harsco Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.