================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 1-3970
--------------------
HARSCO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-1483991
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
Camp Hill, Pennsylvania 17001-8888
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number (717) 763-7064
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [_]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2004
----- -------------------------------
Common stock, par value $1.25 per share 41,265,409
================================================================================
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2004 2003
==================================================================================================================================
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 439,956 $ 376,951 $ 1,286,563 $ 1,098,673
Product sales 177,332 153,234 504,575 455,874
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 617,288 530,185 1,791,138 1,554,547
==================================================================================================================================
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 325,453 277,994 956,839 812,217
Cost of products sold 145,292 121,991 410,772 367,284
Selling, general and administrative expenses 90,594 81,553 268,053 243,518
Research and development expenses 590 695 1,971 2,367
Other expenses 907 2,172 4,480 4,509
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 562,836 484,405 1,642,115 1,429,895
==================================================================================================================================
OPERATING INCOME FROM CONTINUING OPERATIONS 54,452 45,780 149,023 124,652
Equity in income of unconsolidated entities, net 38 10 210 271
Interest income 454 482 1,655 1,558
Interest expense (10,092) (10,271) (30,412) (30,797)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST 44,852 36,001 120,476 95,684
Income tax expense (12,147) (10,781) (35,616) (29,266)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 32,705 25,220 84,860 66,418
Minority interest in net income (2,031) (1,846) (6,349) (5,120)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 30,674 23,374 78,511 61,298
- ----------------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued business (203) (206) (619) (415)
Gain/(loss) on disposal of discontinued business (36) 106 (124) 634
Income related to discontinued defense business 12,529 8,030 12,753 8,030
Income tax expense (4,411) (2,838) (4,298) (2,953)
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS 7,879 5,092 7,712 5,296
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 38,553 $ 28,466 $ 86,223 $ 66,594
==================================================================================================================================
Average shares of common stock outstanding 41,165 40,752 41,061 40,637
Basic earnings per common share:
Continuing operations $ 0.75 $ 0.57 $ 1.91 $ 1.51
Discontinued operations 0.19 0.12 0.19 0.13
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ 0.94 $ 0.70(a) $ 2.10 $ 1.64
==================================================================================================================================
Diluted average shares of common stock outstanding 41,589 41,100 41,525 40,877
Diluted earnings per common share:
Continuing operations $ 0.74 $ 0.57 $ 1.89 $ 1.50
Discontinued operations 0.19 0.12 0.19 0.13
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 0.93 $ 0.69 $ 2.08 $ 1.63
==================================================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.275 $ 0.2625 $ 0.825 $ 0.7875
==================================================================================================================================
(a) Does not total due to rounding.
See accompanying notes to consolidated financial statements.
-2-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2004 2003(A)
=======================================================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 93,459 $ 80,210
Accounts receivable, net 526,977 446,875
Inventories 244,201 190,221
Other current assets 58,869 47,045
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 923,506 764,351
=======================================================================================================================
Property, plant and equipment, net 884,576 865,374
Goodwill, net 409,596 407,846
Other assets 101,660 97,483
Assets held for sale 1,884 2,981
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,321,222 $ 2,138,035
=======================================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 15,950 $ 14,854
Current maturities of long-term debt 18,557 14,252
Accounts payable 204,712 188,430
Accrued compensation 53,805 46,034
Income taxes 56,952 45,116
Dividends payable 11,335 11,238
Other current liabilities 212,617 175,151
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 573,928 495,075
=======================================================================================================================
Long-term debt 612,671 584,425
Deferred income taxes 74,568 66,855
Insurance liabilities 52,465 47,897
Retirement plan liabilities 118,183 115,190
Other liabilities 51,233 50,707
Liabilities associated with assets held for sale 617 898
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,483,665 1,361,047
=======================================================================================================================
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock 84,624 84,197
Additional paid-in capital 131,875 120,070
Accumulated other comprehensive expense (173,560) (169,427)
Retained earnings 1,398,082 1,345,787
Treasury stock (603,464) (603,639)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 837,557 776,988
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,321,222 $ 2,138,035
=======================================================================================================================
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2003 information has been reclassified for comparative purposes.
See accompanying notes to consolidated financial statements.
-3-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30
(IN THOUSANDS) 2004 2003
=======================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 86,223 $ 66,594
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 133,448 123,433
Amortization 1,859 1,262
Equity in income of unconsolidated entities, net (210) (271)
Dividends or distributions from unconsolidated entities 544 1,335
Other, net (5,823) (3,908)
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (67,015) (53,637)
Inventories (54,079) (3,151)
Accounts payable 16,710 (5,921)
Net disbursements related to discontinued defense business (220) (1,039)
Other assets and liabilities 54,388 29,717
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 165,825 154,414
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (153,883) (96,827)
Purchase of businesses, net of cash acquired (5,165) (23,529)
Proceeds from sales of assets 3,564 14,218
- -------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (155,484) (106,138)
=======================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 1,610 (14,078)
Current maturities and long-term debt:
Additions 152,829 264,879
Reductions (121,409) (273,862)
Cash dividends paid on common stock (33,831) (31,971)
Common stock issued-options 10,350 7,485
Other financing activities (4,778) (4,160)
- -------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 4,771 (51,707)
=======================================================================================================
Effect of exchange rate changes on cash (1,863) 9,864
- -------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 13,249 6,433
Cash and cash equivalents at beginning of period 80,210 70,132
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 93,459 $ 76,565
=======================================================================================================
See accompanying notes to consolidated financial statements.
-4-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS) 2004 2003 2004 2003
================================================================================================================================
Net income $ 38,553 $ 28,466 $ 86,223 $ 66,594
- --------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense):
Foreign currency translation adjustments 8,552 4,231 (3,205) 37,329
Net gains (losses) on cash flow hedging instruments, net of
deferred income taxes 22 9 (3) 4
Pension liability adjustments, net of deferred income taxes 537 (1,326) (1,030) 15,748
Reclassification adjustment for loss on cash flow hedging
instruments, net of deferred income taxes included in net
income -- -- 104 --
Marketable securities, unrealized gain net of deferred income
taxes 1 -- 1 --
Reclassification adjustment for loss on marketable securities,
net of deferred income taxes included in net income -- -- -- 2
- --------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (expense) 9,112 2,914 (4,133) 53,083
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 47,665 $ 31,380 $ 82,090 $119,677
================================================================================================================================
See accompanying notes to consolidated financial statements.
-5-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
A. OPINION OF MANAGEMENT
Financial information furnished herein, which is unaudited, in the opinion of
management reflects all adjustments (all of which are of a normal recurring
nature) that are necessary to present a fair statement of the interim period.
This unaudited interim information should be read in conjunction with the
Company's annual Form 10-K filing for the year ended December 31, 2003.
B. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform with
current year classifications. These reclassifications relate principally to
segment information, which has been reclassified to conform to the current
presentation as described in Note D, "Review of Operations by Segment."
Additional reclassifications have been made between the property, plant and
equipment accounts and the assets held for sale account to reflect assets
currently classified as held for sale as permitted by SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets."
As a result of these reclassifications, certain 2003 amounts presented for
comparative purposes will not individually agree with previously filed Forms
10-K or 10-Q.
C. OPTIONS FOR COMMON STOCK
The Company uses the intrinsic value method to account for options granted to
employees for the purchase of common stock. No compensation expense is
recognized on the grant date, since at that date, the option price equals the
market price of the underlying common stock.
The Company's net income and net income per common share would have been reduced
to the pro forma amounts indicated below if compensation cost for the Company's
stock option plan had been determined based on the fair value at the grant date
for awards in accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS, EXCEPT PER SHARE) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
Net income:
As reported $ 38,553 $ 28,466 $ 86,223 $ 66,594
Compensation expense (a) -- (466) (96) (1,300)
---------------------------------------------------------
Pro forma $ 38,553 $ 28,000 $ 86,127 $ 65,294
=========================================================
Basic earnings per share:
As reported $ 0.94 $ 0.70 $ 2.10 $ 1.64
Pro forma 0.94 0.69 2.10 1.61
Diluted earnings per share:
As reported 0.93 0.69 2.08 1.63
Pro forma 0.93 0.68 2.07 1.60
- ------------------------------------------------------------------------------------------------------
(a) Total stock-based employee compensation expense determined under fair
value-based method for all awards, net of related tax effects.
D. REVIEW OF OPERATIONS BY SEGMENT
In June 2004, the Company announced a new identity for its Gas and Fluid Control
Segment and renamed it Gas Technologies. Additionally, the Other Infrastructure
Products and Services ("all other") Category has been renamed
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Engineered Products and Services ("all other") Category. Except as noted below,
there have been no changes to the components of the aforementioned Segment or
Category.
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (a) (LOSS) (b) SALES (a) (LOSS) (b)
- ----------------------------------------------------------------------------------------------------
Mill Services Segment $ 244,904 $ 24,958 $ 208,591 $ 20,681
Access Services Segment 176,338 13,446 154,771 11,008
Gas Technologies Segment (c) 84,448 2,444 74,193 2,952
- ----------------------------------------------------------------------------------------------------
Segment Totals 505,690 40,848 437,555 34,641
Engineered Products & Services
("all other") Category (c) 111,598 13,667 92,630 11,224
General Corporate -- (63) -- (85)
- ----------------------------------------------------------------------------------------------------
Consolidated Totals $ 617,288 $ 54,452 $ 530,185 $ 45,780
====================================================================================================
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
OPERATING
INCOME OPERATING
(IN THOUSANDS) SALES (a) (LOSS) (b) SALES (a) INCOME (b)
- ----------------------------------------------------------------------------------------------------
Mill Services Segment $ 723,445 $ 75,056 $ 600,607 $ 63,074
Access Services Segment 517,273 31,168 460,077 26,361
Gas Technologies Segment (c) 244,964 10,799 212,125 9,880
- ----------------------------------------------------------------------------------------------------
Segment Totals 1,485,682 117,023 1,272,809 99,315
Engineered Products & Services
("all other") Category (c) 305,456 33,007 281,738 24,683
General Corporate -- (1,007) -- 654
- ----------------------------------------------------------------------------------------------------
Consolidated Totals $ 1,791,138 $ 149,023 $ 1,554,547 $ 124,652
====================================================================================================
(a) Sales from continuing operations.
(b) Operating income (loss) from continuing operations.
(c) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business, which was
previously classified in the Gas Technologies Segment, is classified in
the Engineered Products & Services ("all other") category.
-7-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RECONCILIATION OF SEGMENT OPERATING INCOME TO CONSOLIDATED INCOME
BEFORE INCOME TAXES AND MINORITY INTEREST
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Segment Operating Income $ 40,848 $ 34,641 $ 117,023 $ 99,315
Engineered Products & Services
("all other") Category 13,667 11,224 33,007 24,683
General Corporate (63) (85) (1,007) 654
- ----------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations 54,452 45,780 149,023 124,652
Equity in income of unconsolidated entities, net 38 10 210 271
Interest income 454 482 1,655 1,558
Interest expense (10,092) (10,271) (30,412) (30,797)
- ----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interest $ 44,852 $ 36,001 $ 120,476 $ 95,684
======================================================================================================================
E. ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable are net of an allowance for doubtful accounts of $20.1
million and $24.6 million at September 30, 2004 and December 31, 2003,
respectively. The decrease in the allowance for doubtful accounts is due
principally to the write-off of previously reserved accounts receivable. The
provision for doubtful accounts was $4.2 million and $1.5 million for the nine
months ended September 30, 2004 and 2003, respectively. The increase in
provision for doubtful accounts includes the effect of a $1.8 million reserve
reversal in 2003 for a Mill Services customer. Also, increased provisions of
approximately $0.8 million in 2004 are due principally to Access Services
customers.
Inventories consist of the following:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2004 2003
- -------------------------------------------------------------------------------
Finished goods $ 64,992 $ 59,739
Work-in-process 55,179 32,121
Raw materials and purchased parts 100,100 74,231
Stores and supplies 23,930 24,130
- -------------------------------------------------------------------------------
Total Inventories $ 244,201 $ 190,221
===============================================================================
Inventories increased $54.0 million due to the following factors: increased raw
material costs (e.g., steel) across all of the Company's manufacturing
operations; increased work-in-process inventories due to long-lead-time orders
currently being manufactured at the railway track services and equipment
business but not scheduled for delivery until mainly the fourth quarter of 2004
or later; increases in the Gas Technologies Segment due to normal increases from
seasonal low levels at the end of December 2003; and increases for industrial
grating products as result of an increase in orders and higher steel prices.
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2004 2003 (A)
- -------------------------------------------------------------------------------------------------------
Land and improvements $ 39,574 $ 39,311
Buildings and improvements 177,450 174,581
Machinery and equipment 1,856,190 1,803,867
Uncompleted construction 55,132 37,505
- -------------------------------------------------------------------------------------------------------
Gross property, plant and equipment 2,128,346 2,055,264
Less accumulated depreciation and facilities valuation allowance (1,243,770) (1,189,890)
- -------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 884,576 $ 865,374
=======================================================================================================
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2003 information has been reclassified for comparative purposes.
G. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in carrying amounts of goodwill for the
nine months ended September 30, 2004:
ENGINEERED
PRODUCTS
& SERVICES
MILL ACCESS GAS ("ALL OTHER") CONSOLIDATED
(IN THOUSANDS) SERVICES SERVICES TECHNOLOGIES CATEGORY TOTALS
- ------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2003, net of
accumulated amortization $ 211,318 $ 151,698 $ 36,693 $ 8,137 $ 407,846
Goodwill acquired during year -- 1,474 -- -- 1,474
Foreign currency translation (656) 932 -- -- 276
- ------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 2004, NET
OF ACCUMULATED AMORTIZATION $ 210,662 $ 154,104 $ 36,693 $ 8,137 $ 409,596
========================================================================================================================
Goodwill is net of accumulated amortization of $104.8 million and $105.2 million
at September 30, 2004 and December 31, 2003, respectively.
Intangible assets, which are included principally in Other assets on the
Condensed Consolidated Balance Sheet, totaled $10.2 million, net of accumulated
amortization of $9.7 million at September 30, 2004 and $10.4 million, net of
accumulated amortization of $8.4 million at December 31, 2003. The following
chart reflects these intangible assets by major category.
SEPTEMBER 30, 2004 DECEMBER 31, 2003
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- -------------------------------------------------------------------------------------------------------
Customer Relationships $ 6,957 $ 464 $ 6,373 $ 196
Non-compete agreements 4,890 3,935 4,863 3,671
Patents 4,286 3,576 4,304 3,351
Other 3,756 1,685 3,313 1,197
- -------------------------------------------------------------------------------------------------------
Total $ 19,889 $ 9,660 $ 18,853 $ 8,415
=======================================================================================================
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The increase in gross intangible assets is due principally to the acquisitions
discussed in Note H, "Acquisitions and Dispositions." As part of these
transactions in 2004, the Company acquired the following intangible assets (by
major class) which are subject to amortization:
ACQUIRED INTANGIBLE ASSETS
- ----------------------------------------------------------------------------
GROSS CARRYING RESIDUAL WEIGHTED-AVERAGE
(IN THOUSANDS) AMOUNT VALUE AMORTIZATION PERIOD
- ----------------------------------------------------------------------------
Customer relationships $ 584 None 5 years
Non-compete agreements 29 None 3 years
Other 471 None 6 years
------------
Total $ 1,084
============
There were no research and development assets acquired and written off in 2004
or 2003.
Amortization expense for intangible assets was $1.3 million and $0.7 million for
the nine months ended September 30, 2004 and 2003, respectively. The following
chart shows the estimated amortization expense for the next five fiscal years
based on current intangible assets.
(IN THOUSANDS) 2004 2005 2006 2007 2008
- -------------------------------------------------------------------------------
Estimated Amortization Expense $ 1,700 $ 1,500 $ 1,300 $ 1,100 $ 800
H. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
In April 2004, the Company's Access Services Segment acquired the Australian
distributor, Raffia Contracting Pty, and Raffia's sister company, Tower
International Pty. Both businesses are based in Sydney, New South Wales. Raffia
Contracting is involved in the supply and erection of scaffolding, working with
many of the major contractors in and around the state capital, while Tower
International provides light access sales and rentals throughout the area. The
combined businesses will be known as SGB Raffia. Additionally, in May 2004 the
Company acquired a small business in Holland to expand its international mill
services operations. The proforma impact of these acquisitions was not material.
DISPOSITIONS - ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
In management's ongoing strategic efforts to increase the Company's focus on
core industrial services, certain manufacturing operations have been divested.
Effective March 21, 2002, the Board of Directors authorized the sale of the
Capitol Manufacturing business, a business unit of the Gas Technologies Segment.
A significant portion of the Capitol Manufacturing business was sold on June 28,
2002. The Company continues to recognize income from inventory consigned to the
buyer in accordance with the sale agreement and when all revenue recognition
criteria have been met. This business has been included in discontinued
operations and the assets and liabilities have been separately identified on the
Balance Sheet as "held for sale" for all periods presented. There were no sales
from discontinued operations for the nine months ended September 30, 2004 and
2003 as the business was sold during 2002. The income (loss) from discontinued
operations does not include any charges to reduce the book value of the business
held for sale to its fair market value less cost to sell, since the fair value
of the business exceeded the book value.
Throughout 2003 and 2004, management approved the sale of certain long-lived
assets (primarily land and buildings) of the Access Services and Mill Services
Segments. Accordingly, these assets have been separately identified on the
Balance Sheet as "held for sale" for all periods presented.
-10-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The major classes of assets and liabilities "held for sale" included in the
Condensed Consolidated Balance Sheet are as follows:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2004 2003 (A)
- -------------------------------------------------------------------------------
ASSETS
Accounts receivable, net $ 13 $ 411
Inventories 149 222
Other current assets 23 20
Property, plant and equipment, net 1,699 2,328
- -------------------------------------------------------------------------------
TOTAL ASSETS "HELD FOR SALE" $ 1,884 $ 2,981
===============================================================================
LIABILITIES
Accounts payable $ 8 $ 512
Other current liabilities 480 386
Other liabilities 129 --
- -------------------------------------------------------------------------------
TOTAL LIABILITIES ASSOCIATED WITH ASSETS
"HELD FOR SALE" $ 617 $ 898
===============================================================================
(a) As permitted by the Financial Accounting Standards Board (FASB) Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
2003 information has been reclassified for comparative purposes.
DISCONTINUED DEFENSE BUSINESS
In January 1994, FMC Corporation and the Company combined certain assets and
liabilities of FMC's Defense Systems Group and the Company's BMY-Combat Systems
Division to form United Defense, L.P. On August 25, 1997, the Company and FMC
Corporation signed an agreement to sell United Defense, L.P. for $850 million,
and the sale was completed on October 6, 1997. Prior to the sale, FMC had been
the managing general partner and 60% owner of United Defense, L.P., while the
Company owned the balance of 40% as the limited partner. United Defense supplies
ground combat and naval weapons systems for the U.S. and military customers
worldwide. These transactions did not include any of the assets or liabilities
of the Company's BMY-Wheeled Vehicles Division, which were retained by the
Company. This division, which was exited by the Company in 1995, sold five-ton
trucks to the United States Army under a completed 1986 contract that was the
subject of a federal excise tax dispute as more fully discussed in Note I,
"Commitments and Contingencies," in Part I, Item 1, Financial Statements.
Income and cash flows related to the discontinued defense business are shown
separately on the Consolidated Statements of Income and Cash Flows,
respectively.
I. COMMITMENTS AND CONTINGENCIES
FEDERAL EXCISE TAX AND OTHER MATTERS RELATED TO THE FIVE-TON TRUCK CONTRACT
In 1995, the Company, the United States Army ("Army"), and the United States
Department of Justice concluded a settlement of Harsco's previously reported
claims against the Army relating to Federal Excise Tax ("FET") arising under a
completed 1986 contract for the sale of five-ton trucks to the Army. On
September 27, 1995, the Army paid the Company $49 million in accordance with the
settlement terms. The Company released the Army from any further liability for
those claims, and the Department of Justice released the Company from a
threatened action for damages and civil penalties based on an investigation
conducted by the Department's Commercial Litigation Branch that had been pending
for several years.
The settlement preserved the rights of the parties to assert claims and defenses
under the Internal Revenue Code, and rights of the Army and the Company to claim
certain amounts that may be owed by either party to reconcile possible
underpayments or overpayments on the truck contract as part of the formal
contract close-out process.
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The settlement did not resolve the claim by the Internal Revenue Service ("IRS")
that, contrary to the Company's position, certain cargo truck models sold by the
Company should be considered to have gross vehicle weights in excess of the
33,000 pound threshold under FET law, are not entitled to an exemption from FET
under any other theory, and therefore are taxable. In 1999, the IRS assessed an
increase in FET of $30.4 million plus penalties and applicable interest. This
increase in FET took into account offsetting credits of $9.2 million, based on a
partial allowance of the Company's $31.9 million claim that certain truck
components are exempt from FET. The IRS disallowed in full the Company's
additional claim that it is entitled to the entire $52 million of FET the
Company paid on the five-ton trucks, on the grounds that such trucks qualify for
the FET exemption applicable to certain vehicles specially designed for the
primary function of off-highway transportation. In August 2000, the Company
filed legal action against the Government in the U.S. Court of Federal Claims
challenging the assessment and seeking a refund of all FET that the Company has
paid on five-ton trucks.
The Company, by letter dated August 2, 2004, received formal notice that the
Government had accepted a settlement proposal submitted by the Company. The
Company has approved the settlement calculations and the Government's refund
check is being processed. The amount of the refund is approximately $12.6
million and is expected to be received by the Company in the fourth quarter of
2004. Income of $12.5 million from the settlement has been recognized in the
Company's financial statements in the third quarter of 2004 in Discontinued
Operations. Approximately $0.1 million in interest related to the period
subsequent to September 30, 2004 has not yet been recognized.
As a result of developments in the case that occurred during the third and
fourth quarters of 2003, the Company adjusted an accrual related to this matter.
These adjustments were included as income related to the discontinued defense
business on the Company's Consolidated Statements of Income for the three months
ended September 30, 2003 and the three month periods ended March 31, 2004 and
September 30, 2004. The Company's current expectation is that its future
obligations for finalizing this matter will approximate $0.3 million.
ENVIRONMENTAL
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its financial
exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheets at September 30, 2004 and December 31, 2003 include
accruals of $3.2 million and $3.3 million, respectively, for environmental
matters. The amounts charged against pre-tax income related to environmental
matters totaled $1.4 million and $0.7 million for the first nine months of 2004
and 2003, respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position,
results of operations or cash flows.
In January 2002, the New Jersey Department of Environmental Protection ("NJDEP")
issued Notices of Civil Administrative Penalty Assessment to the Company for
violations of the New Jersey Air Pollution Control Act. The Notices allege that
the Company operated a slag processing plant in violation of the emission permit
for control of slag dust. The Agency assessed civil administrative penalties
totaling approximately $311,000 and the Company filed an appeal with the Agency.
In March 2003, NJDEP amended its assessment and reduced the proposed penalty to
$146,000. This amended order has been appealed. Recently, the NJDEP amended its
reassessment to increase the penalty to $325,400. The Company is continuing to
prosecute its appeal. The Company ceased operations at the plant in the fourth
quarter of 2001 for unrelated reasons.
CUSTOMER RESTRUCTURING
On January 29, 2004, a customer of the Company announced that it had obtained an
order to initiate a Court-supervised restructuring under Canada's Companies'
Creditors Arrangement Act (the Act). The Company is actively monitoring this
restructuring to determine the Company's potential loss exposure, if any. The
Company's pre-petition net receivable balance with the customer as of September
30, 2004 was approximately $5.5 million. The Company intends to vigorously
pursue collection of the entire receivable balance pursuant to our rights and
obligations under the Act. The Company has been successful in collecting
substantially all of the pre-petition receivable amounts in several similar
non-Canadian cases
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
where the customer has filed for bankruptcy court protection. Accordingly, no
reserve has been recognized as of September 30, 2004.
OTHER
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos over the past several decades. In their suits, the plaintiffs
have named as defendants many manufacturers, distributors and installers of
numerous types of equipment or products that allegedly contained asbestos.
The Company believes that the claims against it are without merit. The Company
has never been a producer, manufacturer or processor of asbestos fibers. Any
component within a Company product which may have contained asbestos would have
been purchased from a supplier. Based on scientific and medical evidence, the
Company believes that any asbestos exposure arising from normal use of any
Company product never presented any harmful airborne asbestos exposure, and
moreover, the type of asbestos contained in any component that was used in those
products is protectively encapsulated in other materials and is not associated
with the types of injuries alleged. Finally, in most of the depositions taken of
plaintiffs to date in the litigation against the Company, plaintiffs have failed
to identify any Company products as the source of their asbestos exposure.
The majority of the asbestos complaints have been filed in either New York or
Mississippi. Almost all of the New York complaints contain a standard claim for
damages of $20 million or $25 million against the approximately 90 defendants,
regardless of the individual's alleged medical condition, and without
identifying any Company product as the source of plaintiff's asbestos exposure.
With respect to the Mississippi complaints, most contain a standard claim for an
unstated amount of damages against the numerous defendants (typically 240 to
270), without identifying any Company product as the source of plaintiff's
asbestos exposure.
The Company has not paid any amounts in settlement of these cases, with the
exception of two settlements totaling less than $10,000 paid in 1998 from
insurance proceeds. The Company's insurance carrier has paid all legal costs and
expenses to date. The Company has liability insurance coverage available under
various primary and excess policies that the Company believes will be available
if necessary to substantially cover any liability that might ultimately be
incurred on these claims.
During the third quarter of 2004, there was little change in the total number of
pending cases with the current number of pending asbestos personal injury claims
filed against the Company approximating 36,400. Approximately 26,440 of these
cases were pending in the New York Supreme Court for New York County;
approximately 260 cases were pending in the New York Supreme Court for various
counties in New York State (other than New York County); and approximately 9,670
of the cases were pending in state courts of various counties in Mississippi.
Other claims totaling approximately 30 are filed in various counties in a number
of state courts, and in U.S. Federal District Court for the Eastern District of
Pennsylvania, and those complaints assert lesser amounts of damages than the New
York cases or do not state any amount claimed. Cases that were previously
reported in the "other claims" number have been reclassified within the New York
cases noted above.
As of September 30, 2004, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in all cases that have proceeded to trial. To
date, the Company has been dismissed from approximately 4,100 suits.
In view of the persistence of asbestos litigation nationwide, which has not yet
been sufficiently addressed either politically or legally, the Company expects
to continue to receive additional claims. However, there were developments
during the fourth quarter of 2002 that could have a favorable effect for the
Company regarding the pending claims and the number of future claims filed in
the New York Supreme Court for New York County and in Mississippi state courts
after 2002. On December 19, 2002, the New York Supreme Court responsible for
managing all asbestos cases pending within New York County issued an Order which
created a Deferred or Inactive Docket for all pending and future asbestos claims
filed by plaintiffs who cannot demonstrate that they have a malignant condition
or discernible physical impairment, and an Active Docket for plaintiffs who are
able to show such medical conditions. The Court is reviewing cases for docketing
based on their date of filing, with the older pending cases reviewed first.
Cases designated as Active are then assigned to a "FIFO" trial group, which
groups are scheduled for trial in the designated months of either February or
August. For cases in which there has been a recent death or a diagnosis of
cancer, the Court reviews such cases on an expedited basis and, if medically
supported, such cases are transferred to an "In Extremis" trial group, which
groups are scheduled for trial in the designated months of either May or
November. As of September 30, 2004, the Company was listed as a defendant in
approximately 200 pending cases in the New York Supreme Court for New York
County that have been designated as
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Active or "In Extremis" and assigned to trial groups. To date, the Company has
been dismissed as a defendant prior to trial in all New York cases that have
proceeded to trial. The number of these dismissals is currently 1,080.
Also, in the fourth quarter of 2002, Mississippi enacted tort reform legislation
that made various changes in the law favorable to the Company's defense and that
will apply to all cases filed on or after January 1, 2003. The majority of the
claims pending against the Company in Mississippi were filed in the fourth
quarter of 2002, in advance of the effective date of this more restrictive
legislation.
The Company intends to continue its practice of vigorously defending these cases
as they are listed for trial and expects the insurance carriers to continue to
pay the legal costs and expenses. Management believes that the outcome of these
cases will not have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
The Company is subject to various other claims and legal proceedings covering a
wide range of matters that arose in the ordinary course of business. In the
opinion of management, all such matters are adequately covered by insurance or
by accruals, and if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
J. COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
As described in Note 15, "Other (Income) and Expenses," to the Company's Form
10-K for the year ended December 31, 2003, the Company adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," (SFAS 146)
on January 1, 2003. SFAS 146 addresses significant issues regarding the
recognition, measurement and reporting of costs that are associated with exit
and disposal activities. These activities include restructuring activities that
were previously accounted for pursuant to the guidance that the Emerging Issues
Task Force (EITF) had set forth in EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," (EITF 94-3). The scope
of SFAS 146 also includes (1) costs related to terminating a contract that is
not a capital lease and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract.
Costs associated with exit or disposal activities are included as a component of
Other expenses on the Company's Condensed Consolidated Statements of Income.
This income statement classification principally includes impaired asset
write-downs, employee termination benefit costs and costs to exit activities,
offset by net gains on the disposal of non-core assets and is more fully
described in Note 15, "Other (Income) and Expenses," to the Company's Form 10-K
for the year ended December 31, 2003.
During the first nine months of 2004 and 2003, the Company continued its
strategy to streamline operations. This strategy principally included continued
staff reductions in both administrative and operating positions. Under these
reorganization actions, the Company and its management have established and
approved specific plans of termination. During the nine months ended September
30, 2004 and 2003, the Company initiated reorganization actions in several
operations, including, but not limited to, certain operations located in the
U.S., the U.K., the Netherlands, Mexico and Germany (2003 only). There were no
individually material reorganization actions initiated during the nine months
ended September 30, 2004 and 2003; however, the following table summarizes these
actions in aggregate for the Company:
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
EMPLOYEE TERMINATION BENEFITS EXPENSE AND PAYMENTS
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) REORGANIZATIONS OCCURRING IN 2004
=================================================================================================================================
FIRST SECOND THIRD
QUARTER QUARTER QUARTER SEPTEMBER 30
ENDED ENDED ENDED YEAR-TO-DATE
Original reorganization action period MARCH 31 JUNE 30 SEPTEMBER 30 TOTAL
=================================================================================================================================
Employee termination benefits expense $ 630 $ 1,571 $ 607 $ 2,808
- ---------------------------------------------------------------------------------------------------------------------------------
Payments:
In first quarter of 2004 (235) -- -- (235)
In second quarter of 2004 (226) (608) -- (834)
In third quarter of 2004 (137) (247) (138) (522)
- ---------------------------------------------------------------------------------------------------------------------------------
Total payments in 2004: (598) (855) (138) (1,591)
Other: (27) 17 -- (10)
- ---------------------------------------------------------------------------------------------------------------------------------
Remaining payments as of September 30,
2004 $ 5 $ 733 $ 469 $ 1,207
=================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) REORGANIZATIONS OCCURRING IN 2003
===================================================================================================================================
FIRST SECOND THIRD NINE DEC 31
QUARTER QUARTER QUARTER MONTHS YEAR-TO-
ENDED ENDED ENDED ENDED OCT 1 - DATE
Original reorganization action period MARCH 31 JUNE 30 SEPT 30 SEPT 30 DEC 31 TOTAL
===================================================================================================================================
Employee termination benefits expense $ 1,590 $ 915 $ 1,230 $ 3,735 $ 2,329 $ 6,064
- -----------------------------------------------------------------------------------------------------------------------------------
Payments:
In 2003 (1,595) (852) (1,064) (3,511) (327) (3,838)
In 2004 (40) (5) (104) (149) (1,485) (1,634)
- -----------------------------------------------------------------------------------------------------------------------------------
Total payments: (1,635) (857) (1,168) (3,660) (1,812) (5,472)
Other: 111 (38) (2) 71 12 83
- -----------------------------------------------------------------------------------------------------------------------------------
Remaining payments as of September 30,
2004 $ 66 $ 20 $ 60 $ 146 $ 529 $ 675
===================================================================================================================================
The total amount of costs expected to be incurred for the streamlining
initiatives and the costs incurred to date for the three months and the nine
months ended September 30, 2004 and 2003 by reportable segment were as follows:
EMPLOYEE TERMINATION BENEFITS COSTS
- ------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------
TOTAL COSTS COSTS TOTAL COSTS COSTS
EXPECTED TO BE INCURRED EXPECTED TO BE INCURRED
(IN THOUSANDS) INCURRED TO DATE INCURRED TO DATE
- ------------------------------------------------------------------------------------------------------------------
Mill Services Segment $ 116 $ 116 $ 702 $ 702
Access Services Segment 394 394 325 325
Gas Technologies Segment (a) 61 61 73 73
Engineered Products & Services ("all
other") Category (a) 36 36 130 130
Corporate -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total $ 607 $ 607 $ 1,230 $ 1,230
==================================================================================================================
(a) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business is classified in
the Engineered Products & Services ("all other") Category.
-15-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
EMPLOYEE TERMINATION BENEFITS COSTS
- ------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------
TOTAL COSTS COSTS TOTAL COSTS COSTS
EXPECTED TO BE INCURRED EXPECTED TO BE INCURRED
(IN THOUSANDS) INCURRED TO DATE INCURRED TO DATE
- ------------------------------------------------------------------------------------------------------------------
Mill Services Segment $ 1,001 $ 1,001 $ 2,103 $ 2,103
Access Services Segment 1,128 1,128 749 749
Gas Technologies Segment (a) 163 163 168 168
Engineered Products & Services ("all
other") Category (a) 516 516 505 505
Corporate -- -- 210 210
- ------------------------------------------------------------------------------------------------------------------
Total $ 2,808 $ 2,808 $ 3,735 $ 3,735
==================================================================================================================
(a) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business is classified in
the Engineered Products & Services ("all other") Category.
The following table summarizes employee termination benefit costs and payments
(associated with continuing operations) related to reorganization actions
initiated prior to January 1, 2003 and accounted for under EITF 94-3:
(IN THOUSANDS)
Original reorganization action period 2002 2001
- ------------------------------------------------------------------------------
Employee termination benefits expense $ 7,140 $ 10,135
- ------------------------------------------------------------------------------
Payments:
In 2001 -- (6,142)
In 2002 (4,438) (1,997)
In 2003 (2,627) (2,215)
In 2004 (39) (33)
- ------------------------------------------------------------------------------
Total payments: (7,104) (10,387)
Other: 42 252
- ------------------------------------------------------------------------------
Remaining payments as of September 30, 2004 $ 78 $ --
==============================================================================
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
K. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS, EXCEPT AMOUNTS PER SHARE) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 30,674 $ 23,374 $ 78,511 $ 61,298
===============================================================================================================================
Average shares of common stock outstanding used
to compute basic earnings per common share
from continuing operations 41,165 40,752 41,061 40,637
Additional common shares to be issued assuming
exercise of stock options, net of shares assumed
reacquired 424 348 464 240
- -------------------------------------------------------------------------------------------------------------------------------
Shares used to compute dilutive effect of stock
options 41,589 41,100 41,525 40,877
===============================================================================================================================
Basic earnings per common share from continuing
operations $ .75 $ .57 $ 1.91 $ 1.51
===============================================================================================================================
Diluted earnings per common share from continuing
operations $ .74 $ .57 $ 1.89 $ 1.50
===============================================================================================================================
Options to purchase 8,000 shares and 172,600 shares were outstanding at
September 30, 2004 and 2003, respectively, but were not included in the
computation of diluted earnings per share because the effect was antidilutive.
L. EMPLOYEE BENEFIT PLANS
PENSION EXPENSE FOR DEFINED BENEFIT PLANS
THREE MONTHS ENDED
DEFINED BENEFIT PENSION EXPENSE (INCOME) SEPTEMBER 30
U. S. PLANS INTERNATIONAL PLANS
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 652 $ 1,835 $ 2,113 $ 2,311
Interest cost 3,398 3,300 9,083 7,465
Expected return on plan assets (4,490) (3,940) (9,649) (7,860)
Recognized prior service costs 188 182 301 257
Recognized losses 746 1,102 3,312 2,693
Amortization of transition asset (366) (366) (135) (146)
Settlement/curtailment loss -- -- -- 2
- ---------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 128 $ 2,113 $ 5,025 $ 4,722
=================================================================================================================================
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NINE MONTHS ENDED
DEFINED BENEFIT PENSION EXPENSE (INCOME) SEPTEMBER 30
U. S. PLANS INTERNATIONAL PLANS
- ---------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost $ 1,957 $ 5,504 $ 6,938 $ 7,645
Interest cost 10,194 9,900 27,984 24,383
Expected return on plan assets (13,470) (11,819) (29,459) (25,528)
Recognized prior service costs 565 545 918 814
Recognized losses 2,237 3,307 9,966 8,667
Amortization of transition asset (1,099) (1,099) (410) (471)
Settlement/curtailment loss -- -- -- 5
- ---------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 384 $ 6,338 $ 15,937 $ 15,515
=================================================================================================================================
Defined benefit pension expense for the three months and nine months ended
September 30, 2004, decreased $1.7 million and $5.5 million from the three
months and nine months ended September 30, 2003, respectively. Increases in
defined contribution plans pension expense of $2.0 million and $6.6 million,
respectively, more than offset the decreases in defined benefit pension plans
expense for the same periods. This is principally due to pension plan structural
changes resulting in accrued service no longer being granted for periods after
December 31, 2003 for a majority of the U.S. defined benefit pension plans and
certain international defined benefit pension plans. In place of these plans,
the Company has established, effective January 1, 2004, defined contribution
plans providing for the Company to contribute a specified matching amount for
participating employees' contributions to the plan. Domestically, this match
will be made on employee contributions up to four percent of their eligible
compensation. Additionally, the Company may provide a discretionary contribution
of up to two percent of compensation for eligible employees. Internationally,
this match is up to six percent of eligible compensation with an additional two
percent going towards insurance and administrative costs. The Company believes
these new defined contribution plans will provide a more predictable and less
volatile pension expense than existed under the defined benefit plans.
In the quarter ended September 30, 2004, the Company contributed $1.3 million
and $3.7 million for the U.S. and international defined benefit pension plans,
respectively. For the nine months ended September 30, 2004, the Company
contributed $1.8 million and $13.4 million for the U.S. and international
defined benefit pension plans, respectively. The Company currently anticipates
contributing an additional $0.2 million and $5.5 million for the U.S. and
international plans, respectively, during the remainder of 2004. These are
reductions from the estimates included in the Company's Form 10-K for the
year-ended December 31, 2003 due to updated international estimates and the
passage of the Pension Funding Equity Act of 2004, which impacted domestic
plans. However, due to its expected strong future cash flows, the Company is
currently considering making additional cash contributions to its pension plans
in either the fourth quarter of 2004 or in 2005. The additional cash
contributions that are being considered are not material.
In the second quarter of 2004, the U.S. pension plans sold 350,000 shares of
Harsco Corporation Common Stock at an average price of $44.48. The sale of
Company shares was approved by the Company's Board of Directors to rebalance the
investments in the U.S. pension fund and further diversify the plan assets. At
this time, no future share sales are scheduled. As of September 30, 2004,
382,640 shares of the Company's common stock with a fair market value of
approximately $17.2 million are included in U.S. pension plan assets.
POSTRETIREMENT BENEFITS
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) SEPTEMBER 30
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003
- -------------------------------------------------------------------------------
Service cost $ 3 $ 3
Interest cost 72 115
Recognized prior service costs 8 8
Recognized losses 8 11
- -------------------------------------------------------------------------------
Postretirement benefits expense $ 91 $ 137
===============================================================================
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NINE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) SEPTEMBER 30
- -------------------------------------------------------------------------------
(IN THOUSANDS) 2004 2003
- -------------------------------------------------------------------------------
Service cost $ 9 $ 18
Interest cost 270 439
Recognized prior service costs 24 24
Recognized losses 30 55
Settlement/curtailment gain (2,238) (4,898)
- -------------------------------------------------------------------------------
Postretirement benefits income $ (1,905) $ (4,362)
===============================================================================
Postretirement benefits income of $1.9 million through September 30, 2004 was
due principally to the termination of certain postretirement health care plans.
Postretirement benefits income of $4.4 million through September 30, 2003 was
due principally to the termination of certain postretirement life insurance
plans and a postretirement health care plan.
In accordance with the provisions of Financial Accounting Standards Board Staff
Position No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP FAS
106-2), the Company has deferred any re-measurement of its postretirement health
care benefit obligation until December 31, 2004, since the impact is expected to
be immaterial. For a detailed disclosure of the Company's pension and
postretirement benefit plans, see Note 8, "Employee Benefit Plans," to the
Company's Form 10-K for the year ended December 31, 2003.
M. INCOME TAXES
The effective income tax rate relating to continuing operations was 27.1% and
29.6% in the third quarter and first nine months of 2004, respectively. This
compares with 29.9% and 30.6% in the third quarter and first nine months of
2003, respectively. These decreases in the effective income tax rates in 2004
were primarily a result of a change in estimate of the amount of international
earnings subject to U.S. income tax and favorable tax credits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The following management's discussion and analysis describes the principal
factors affecting the Company's results of operations and liquidity. This
discussion should be read in conjunction with the accompanying unaudited
financial statements as well as the Company's annual Form 10-K for the year
ended December 31, 2003 which included additional information about the
Company's critical accounting policies, contractual obligations, practices and
the transactions that support the financial results and provided a more
comprehensive summary of the Company's outlook, trends and strategies for 2004
and beyond.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include statements
about our management confidence and strategies for performance; expectations for
new and existing products, technologies, and opportunities; and expectations
regarding growth, sales, cash flows, earnings and Economic Value Added (EVA(R)).
These statements can be identified by the use of such terms as "may," "could,"
"expect," "anticipate," "intend," "believe," or other comparable terms.
Factors which could cause results to differ include, but are not limited to,
those discussed in Part I, Item 3 "Quantitative and Qualitative Disclosures
About Market Risk." The Company cautions that these factors may not be
exhaustive and that many of these factors are beyond the Company's ability to
control or predict. Accordingly, forward-looking statements should not be relied
upon as a prediction of actual results. The Company undertakes no duty to update
forward-looking statements.
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
EXECUTIVE OVERVIEW
The Company's third quarter 2004 revenues were a record $617.3 million. This is
an increase of $87.1 million or 16% over the third quarter of 2003. Income from
continuing operations was a record $30.7 million for the third quarter 2004
compared with $23.4 million in the third quarter of 2003, an increase of 31%.
Diluted earnings per share from continuing operations were a record $0.74 in the
third quarter of 2004 compared with $0.57 for the third quarter of 2003, a 30%
increase.
Revenues for the first nine months of 2004 were a record $1,791.1 million. This
is an increase of $236.6 million or 15% over the first nine months of 2003.
Income from continuing operations was $78.5 million for the first nine months of
2004 compared with $61.3 million in the first nine months of 2003, an increase
of 28%. Diluted earnings per share from continuing operations were $1.89 in the
first nine months of 2004 compared with $1.50 for the first nine months of 2003,
a 26% increase.
The third quarter and first nine months of 2004 results were led by the Mill
Services Segment. Revenues in the third quarter 2004 for this Segment were
$244.9 million compared with $208.6 million in last year's third quarter, a 17%
increase. The Mill Services business accounted for 40% of the Company's revenues
and 46% of the operating income for the third quarter of 2004. The Mill Services
Segment operating income for the quarter increased by 21% to $25.0 million, from
$20.7 million in the same period last year. Operating margins improved by 30
basis points to 10.2% from 9.9% in the third quarter last year. In comparison
with the first nine months of 2003, this Segment achieved period-over-period
revenue growth of $122.8 million or 20%, and accounted for 40% of the Company's
revenues and 50% of the operating income for the first nine months of 2004.
Strong Mill Services performance is expected to continue, as the Company invests
substantial cash to grow the business.
The Access Services Segment revenues in the third quarter were $176.3 million
compared with $154.8 million in last year's third quarter, a 14% increase. The
Access Services business revenue increased $57.2 million or 12% for the first
nine months of 2004, compared with the corresponding 2003 period. Operating
income for the quarter increased by 22% to $13.4 million, from $11.0 million in
the same period last year. Operating margins improved by 50 basis points to 7.6%
from 7.1% in the third quarter last year. The improved performance of the Access
Services Segment was driven by the international operations.
The Gas Technologies Segment revenues in the third quarter were $84.4 million
compared with $74.2 million in last year's third quarter, a 14% increase. This
Segment's revenue increased $32.8 million or 15% for the first nine months of
2004, compared with the corresponding 2003 period. The increase in the third
quarter was led by the international cryogenics operations, particularly Asia,
as well as the domestic propane business. Although revenue increased, operating
income and operating margins for the third quarter of 2004 declined in
comparison with the third quarter of 2003 due to significant increases in
commodity costs.
Contributing to the positive performance in both the third quarter and first
nine months of 2004 in the "All Other" Category was a turnaround to
profitability of the industrial grating business. The roofing granules and
abrasives business and the air-cooled heat exchangers business also contributed
higher revenues and operating income compared with the third quarter and first
nine months of 2003. Results in the boiler and process equipment business were
down slightly in the quarter from last year due to an unfavorable product mix;
however, for the first nine months of 2004, revenues and operating income have
increased compared with 2003. The railway track services and equipment business
performed below last year's results, reflecting the timing of product deliveries
to its international customers. A significant portion of this business' backlog
is expected to be shipped during the fourth quarter of 2004, which will
represent the strongest fourth quarter in the history of the railway track
services and equipment business. There is a risk that some orders could slip
into 2005.
The Company has received formal notice that the U.S. Government has accepted a
proposed settlement of the Federal Excise Tax (FET) case. As a result, the
Company expects to receive approximately $12.6 million pre-tax, including
accrued interest, during the fourth quarter of 2004. The Company recorded income
of $12.5 million pre-tax in discontinued operations as a result of this
settlement. This is more fully discussed in Note I, "Commitments and
Contingencies," in Part I, Item 1, Financial Statements.
The positive effect of foreign currency translation increased third quarter 2004
consolidated revenues by $24.3 million and pre-tax income by $0.7 million when
compared with the third quarter of 2003.
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
SEPTEMBER 30 2003 TO 2004
(DOLLARS IN MILLIONS) 2004 2003 VOLUME CURRENCY TOTAL
- -----------------------------------------------------------------------------------------------------------
U.S. $ 252.7 $ 225.1 12.3% 0.0% 12.3%
Europe 252.3 216.7 6.9 9.5 16.4
Latin America 32.2 26.3 24.1 (1.7) 22.4
Asia - Pacific 31.1 22.3 34.4 5.1 39.5
Middle East 19.1 13.2 45.2 (0.5) 44.7
Other 29.9 26.6 1.1 11.3 12.4
- -----------------------------------------------------------------------------------------------------------
Total $ 617.3 $ 530.2 11.8% 4.6% 16.4%
===========================================================================================================
The positive effect of foreign currency translation increased consolidated
revenues for the first nine months of 2004 by $83.0 million and pre-tax income
by $3.6 million when compared with the first nine months of 2003.
- -----------------------------------------------------------------------------------------------------------
REVENUES BY REGION
- -----------------------------------------------------------------------------------------------------------
TOTAL REVENUES
NINE MONTHS ENDED PERCENTAGE GROWTH FROM
SEPTEMBER 30 2003 TO 2004
(DOLLARS IN MILLIONS) 2004 2003 VOLUME CURRENCY TOTAL
- -----------------------------------------------------------------------------------------------------------
U.S $ 737.7 $ 658.7 12.0% 0.0% 12.0%
Europe 741.0 643.9 4.6 10.5 15.1
Latin America 88.0 74.0 19.1 (0.2) 18.9
Asia - Pacific 87.5 63.3 29.6 8.6 38.2
Middle East 51.6 36.8 41.5 (1.3) 40.2
Other 85.3 77.8 (4.1) 13.7 9.6
- -----------------------------------------------------------------------------------------------------------
Total $1,791.1 $1,554.5 9.9% 5.3% 15.2%
===========================================================================================================
2004 HIGHLIGHTS
The following significant items impacted the Company overall during the third
quarter and first nine months of 2004 in comparison with the third quarter and
first nine months of 2003, respectively:
Company Wide:
- -------------
o Strong worldwide economic activity, including increased steel production,
benefited the Company's Mill Services Segment and resulted in strong
demand for the Company's products. This included international demand for
concrete forming products and cryogenic equipment; and domestic demand for
roofing granules and industrial grating products.
o Due to strong worldwide demand, higher commodity and other material costs,
particularly steel, increased the Company's operating costs during the
third quarter and first nine months of 2004. Included in that increase
were higher fuel and energy-related costs of approximately $4 million and
$9 million during the third quarter and first nine months of 2004,
respectively. These increased costs were generally offset by increased
revenues during the first six months of 2004; however, during the third
quarter of 2004 operating income and margins were negatively impacted by
the increased costs, particularly in the Gas Technologies Segment. To the
extent that such costs cannot be passed to customers in the future,
operating income may be adversely affected. The Company uses the LIFO
method of inventory valuation for most of its manufacturing businesses.
LIFO matches the most recently incurred costs with current revenues by
charging cost of goods sold with the costs of goods most recently acquired
or produced. In periods of rising prices, reported costs under LIFO are
generally greater than under the FIFO method.
o During the first nine months of 2004, the Company was favorably affected
by pre-tax benefits of $2.2 million from the termination of certain
postretirement benefit plans. This compares with pre-tax benefits of $4.9
million during the first nine months of 2003 for similar plan
terminations.
o Total pension expense for the third quarter and first nine months of 2004
increased $0.6 million and $3.1 million from the third quarter and first
nine months of 2003, respectively. Defined benefit pension expense for the
third quarter and first nine months of 2004 decreased approximately $1.7
million and $5.5 million from the third quarter and first nine months of
2003, respectively. During the third quarter and first nine months of
2004, there were offsetting increases of approximately $2.0 million and
$6.6 million, respectively, in defined contribution plan expenses related
to the new defined contribution plans that commenced January 1, 2004.
During 2003, the Company restructured its pension
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
plans to make them more predictable and affordable. This is more fully
discussed under Part I, Item 1, Footnote L labeled "Employee Benefit
Plans."
o A decrease in the effective income tax rate, relating to continuing
operations, from 29.9% in the third quarter of 2003 to 27.1% in the third
quarter of 2004 resulted in approximately $1.3 million in lower income tax
expense for both the third quarter and first nine months of 2004. The
decrease in the effective income tax rate was primarily the result of a
change in estimate of the amount of international earnings subject to U.S.
income tax and favorable tax credits.
o Other than the impact on revenues, and included in the impact on pre-tax
income effect as discussed previously, positive foreign currency
translation in the third quarter and first nine months of 2004 resulted in
a pre-tax increase to interest expense of $0.7 million and $2.2 million,
respectively, compared with the corresponding 2003 periods.
Mill Services Segment:
- ----------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 244.9 $ 208.6 $ 723.4 $ 600.6
Operating income 25.0 20.7 75.1 63.1
Operating margin percent 10.2% 9.9% 10.4% 10.5%
=====================================================================================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 208.6 $ 600.6
Continued strong volume and new business 24.2 52.4
The benefit of positive foreign currency translation 12.2 44.9
The acquisition of the industrial services unit of C. J. Langenfelder and Sons, Inc.
in June 2003 -- 25.6
Other (0.1) (0.1)
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 244.9 $ 723.4
========================================================================================================================
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30:
o Continued strong volume and new business increased operating income in the
third quarter and first nine months of 2004 by $4.0 million and $10.1
million, respectively, when compared with the same 2003 periods.
o The benefit of positive foreign currency translation in the third quarter
and first nine months of 2004 resulted in increased operating income of
$0.8 million and $5.0 million, respectively, compared with the third
quarter and first nine months of 2003, respectively.
o During the third quarter and first nine months of 2003, the Segment was
unfavorably affected by $1.4 million and $3.3 million, respectively, in
pre-tax Other expenses. During the first nine months of 2004 (principally
the first half) only $1.3 million in similar expenses were incurred,
positively impacting the operating margin on a comparative basis. Other
expenses include impaired asset write-downs, employee termination benefit
costs and costs to exit activities, offset by net gains on the disposal of
non-core assets.
o The Segment was favorably affected by pre-tax benefits of $1.8 million
from the reversal of bad debt expense, and $1.4 million from the
termination of certain postretirement benefit plans in the first nine
months of 2003. No such benefits occurred in 2004, negatively impacting
the operating margin on a comparative basis.
o Compared with the third quarter and the first nine months of 2003, the
Segment's operating income in 2004 was negatively impacted by increased
fuel and energy-related costs of approximately $3 million and $7 million,
respectively.
o The Segment's operating income for the third quarter and first nine months
of 2004 was negatively impacted by increased maintenance and repair costs;
higher start-up costs for new contracts; and increased general and
administrative costs (including Sarbanes-Oxley Section 404-related costs).
General and administrative costs
-22-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
increased $2.5 million and $8.7 million for the third quarter and first
nine months of 2004, respectively (including approximately $1 million and
$3 million, respectively, related to foreign currency translation).
Access Services Segment:
- ------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 176.3 $ 154.8 $ 517.3 $ 460.1
Operating income 13.4 11.0 31.2 26.4
Operating margin percent 7.6% 7.1% 6.0% 5.7%
=====================================================================================================================
THREE MONTHS NINE MONTHS
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 154.8 $ 460.1
The benefit of positive foreign currency translation 11.1 35.4
Net increased volume 7.2 15.7
Acquisitions (principally SGB Raffia in Australia) 3.4 6.1
Other (0.2) --
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 176.3 $ 517.3
========================================================================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30:
o In the third quarter and first nine months of 2004, the Segment was
positively impacted by the strength of the concrete forming business,
particularly in the Middle East and United Kingdom. Also, margins on the
international powered-access equipment rentals improved due to cost
restructuring actions implemented during 2003.
o The international access services business continued to increase outside
the U.K., predominantly in the Middle East, due to certain large projects
during 2004. During the first nine months of 2004, the international
operations outside of the U.K. had $160.6 million in revenues and $18.4
million in operating income. This compares with $127.3 million in revenues
and $11.7 million in operating income for the first nine months of 2003.
o In the first six months of 2004, there was a continued slowdown in the
U.S. non-residential construction markets. This slowdown had a negative
effect on volume (particularly equipment rental) which caused overall
margins in the U.S. to decline. The third quarter of 2004 showed initial
signs of strengthening of the non-residential construction market.
Equipment rentals, particularly in the construction sector, provide the
highest margins for this Segment. The decline in margins in the U.S. was
more than offset by improvements internationally.
o The U.S. was also negatively affected by decreased erection and
dismantling labor revenue during both the third quarter and first nine
months of 2004. This decrease was due primarily to delayed industrial
maintenance activities, particularly fewer maintenance outages at power
generation plants. The Company expects to see an increase in industrial
maintenance activities during mid-to-late 2005.
o The Segment was favorably affected by pre-tax income of $1.3 million from
the termination of certain postretirement benefit plans in principally the
second quarter of 2004. This compared with a pre-tax benefit of $0.5
million from the termination of similar plans in principally the first
quarter of 2003.
o During the first nine months of 2003, the Segment was favorably affected
by pre-tax income of $1.8 million from the sale of non-core assets. During
the first nine months of 2004, less than $0.1 million of similar benefits
occurred.
o The benefit of positive foreign currency translation in third quarter and
first nine months of 2004 resulted in increased operating income of $0.5
million and $0.6 million, respectively, when compared with corresponding
periods in 2003.
-23-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Gas Technologies Segment:
- -------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2004 2003(a) 2004 2003(a)
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 84.4 $ 74.2 $ 245.0 $ 212.1
Operating income 2.4 3.0 10.8 9.9
Operating margin percent 2.9% 4.0% 4.4% 4.7%
=====================================================================================================================
(a) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business is classified in
the Engineered Products & Services ("all other") Category.
THREE MONTHS NINE MONTHS
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 74.2 $ 212.1
Increased sales of propane tanks 2.1 20.9
Increased demand for cryogenics equipment and high-pressure cylinders 8.0 19.3
The benefit of positive foreign currency translation 0.3 1.2
Increased competition and decreased demand for certain valves and composite-
wrapped cylinders (0.1) (8.5)
Other (0.1) --
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 84.4 $ 245.0
========================================================================================================================
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30:
o Operating income increased in the first nine months of 2004 compared with
the same period of 2003, due mainly to increased volume for propane tanks.
o The increased volume for propane tanks as well as high-pressure cylinders
was partially driven by customers accelerating purchases in order to avoid
future price increases. The impact of this accelerated customer purchasing
may result in decreased sales in the fourth quarter of 2004 and the first
quarter of 2005.
o The international cryogenics business contributed significantly to the
increased performance of the Segment during the third quarter of 2004 when
compared with the third quarter of 2003.
o Raw material costs, particularly steel, increased during the third quarter
and first nine months of 2004. During the first six months of 2004 the
costs were generally offset by increased revenues. During the third
quarter of 2004, these increased costs resulted in decreased operating
income and margins. To the extent that such costs cannot be passed to
customers in the future, operating income may be adversely affected.
o Increased competition and decreased demand for certain valves and
composite-wrapped cylinders negatively impacted operating income for both
the third quarter and first nine months of 2004 compared with the same
periods of 2003. A strategic action plan has been developed to improve the
results of the valves business. This plan is further discussed in the
Outlook, Trends and Strategies section.
o During the first nine months of 2003, the Segment was favorably affected
by a pre-tax benefit of $0.6 million from the termination of certain
postretirement benefit plans. During the first nine months of 2004, no
such benefit occurred.
o Foreign currency translation in the third quarter and first nine months of
2004 did not have a material impact on operating income when compared with
the third quarter and first nine months of 2003.
-24-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Engineered Products & Services ("all other") Category:
- ------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ---------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2004 2003(a) 2004 2003(a)
- ---------------------------------------------------------------------------------------------------------------------
Revenues $ 111.6 $ 92.6 $ 305.5 $ 281.7
Operating income 13.7 11.2 33.0 24.7
Operating margin percent 12.2% 12.1% 10.8% 8.8%
=====================================================================================================================
(a) Segment information for prior periods has been reclassified to conform
with the current presentation. Due to management changes, effective
January 1, 2004, the air-cooled heat exchangers business is classified in
the Engineered Products & Services ("all other") Category.
THREE MONTHS NINE MONTHS
ENGINEERED PRODUCTS & SERVICES ("ALL OTHER") CATEGORY - ENDED ENDED
SIGNIFICANT IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
- ------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2003 $ 92.6 $ 281.7
Industrial grating products 5.6 13.9
Air-cooled heat exchangers 5.8 11.1
Boiler and process equipment -- 3.1
The benefit of positive foreign currency translation 0.7 1.7
Roofing granules and abrasives 0.3 1.5
Railway track services and equipment 6.7 (7.5)
Other due to rounding (0.1) --
- ------------------------------------------------------------------------------------------------------------------------
Revenues - 2004 $ 111.6 $ 305.5
========================================================================================================================
ENGINEERED PRODUCTS & SERVICES ("ALL OTHER") CATEGORY - SIGNIFICANT IMPACTS ON
OPERATING INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30:
o Operating income for the industrial grating products business increased
during the third quarter and first nine months of 2004 due to increased
prices; increased focus on high-margin standard product orders; reduced
low-margin fabrication orders; and internal restructuring and cost
reductions. This is in comparison with an operating loss in the third
quarter and first nine months of 2003. The first nine months of 2003
(principally the second quarter) included $2.2 million in additional
expense from reorganization costs and asset write-downs.
o Continued and consistent profitable results from the roofing granules and
abrasives business and the boiler and process equipment business were
attained in the third quarter and first nine months of 2004.
o Decreased third quarter and first nine months of 2004 operating income in
the railway track services and equipment business were due principally to
the timing of international sales during 2004. Sales are expected to
increase in the fourth quarter of 2004. Should unexpected events delay
shipment and/or acceptance of orders scheduled for the fourth quarter,
certain shipments may not be recognized until 2005.
o During the first nine months of 2003, this Category was favorably affected
by a pre-tax benefit of $1.1 million from the termination of certain
postretirement benefit plans. This compares with a $0.7 million pre-tax
benefit during the first nine months of 2004 for similar plan
terminations.
o The benefit of positive foreign currency translation in the first nine
months of 2004 resulted in increased operating income of $0.7 million when
compared with the first nine months of 2003. The impact on the third
quarter of 2004 was not material in comparison to the third quarter of
2003.
-25-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
OUTLOOK, TRENDS AND STRATEGIES
Looking to the remainder of 2004 and beyond, the following significant items,
trends and strategies are expected to affect the Company:
Company Wide:
- -------------
o A continued focus on expanding the higher-margin industrial services
businesses, with a particular emphasis on growing the Mill Services
Segment through the provision of additional services to existing
customers, new contracts and strategic acquisitions. Significant capital
investment is expected to be made to grow the Mill Services business.
o Continued focus on improving Economic Value Added (EVA(R)).
o The Company expects to achieve its target of a record $280 million in cash
provided by operating activities for 2004.
o Higher fuel, energy, transportation and material costs, particularly
steel, could increase the Company's operating costs and reduce
profitability to the extent that such costs cannot be passed to customers.
Additionally, the reduced availability of ocean shipping could potentially
delay certain expected customer shipments during the fourth quarter of
2004, particularly in the railway equipment business.
o As discussed in Note I, "Commitments and Contingencies," in Part I, Item
1, Financial Statements, the Company has received formal notice that the
U.S. Government has accepted a proposed settlement of the Federal Excise
Tax (FET) case. As a result, the Company expects to receive approximately
$12.6 million pre-tax, including accrued interest, during the fourth
quarter of 2004. In the third quarter of 2004, the Company recorded income
of $12.5 million pre-tax in discontinued operations as a result of this
settlement.
o Cost reductions and Six Sigma continuous process improvement initiatives
across the Company should further enhance margins. This includes improved
supply chain management and additional outsourcing in the manufacturing
businesses.
o An increase in general and administrative expenses related to external
audit fees and internal costs for compliance with the Sarbanes-Oxley Act
of 2002, particularly Section 404, have been incurred during 2004. This
higher level of expense is expected to continue into 2005, but may be at a
reduced level due to completion of the start-up phase of the project.
o Pension expense in 2005 is expected to approximate 2004 costs. It is
currently anticipated that the discount rate for the U.S. defined benefit
pension plans will decline from 6.25% in 2004 and the discount rate for
the U.K. defined benefit pension plan will remain constant at 5.75%. Cost
savings in the U.K. and U.S. plans, as a result of the structural plan
changes made effective January 1, 2004, are expected to offset the
increased U.S. defined benefit plan costs resulting from the lower
discount rate.
o The American Jobs Creation Act of 2004 (the "Act") was signed into law on
October 22, 2004. The Company is currently assessing the impact the Act
will have on its effective income tax rate for 2004 and beyond.
Mill Services Segment:
- ----------------------
o Global steel demand and production is forecasted to remain strong in 2004
and 2005, and bidding activity for new mill services contracts and add-on
services is strong.
o The significantly increased energy-related costs this Segment is currently
experiencing are expected to persist through 2005.
o The risk remains that certain Mill Services customers may file for
bankruptcy protection, be acquired or consolidate in the future, which
could have an adverse effect on the Company's income and cash flows.
Access Services Segment:
- ------------------------
o The outlook for U.S. non-residential construction activity is expected to
improve during the fourth quarter of 2004 and throughout 2005. The
benefits of this will likely affect the Company's mid-to-late 2005
results.
o There is continued concern over the competitive environment in the United
States. International competitors have invested heavily in the U.S. access
services market, substantially increasing the supply of certain types of
rental equipment.
o The international access services business is expected to show continued
improvement through the rest of 2004 and into 2005.
Gas Technologies Segment:
- -------------------------
o An overall net decline in fourth quarter operating income (2004 vs. 2003)
in this Segment is expected due to increased raw material costs that
cannot be passed along to customers as price increases.
o Continued increases in steel prices and worldwide demand for steel could
have an adverse effect on future raw material costs, and this Segment's
ability to obtain the necessary raw materials.
o Weak market conditions for Liquid Propane Gas (LPG) valves; manufacturing
inefficiencies; new product start-up costs; and increased raw material
costs have impacted the valves business during the first nine months of
2004.
-26-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Several strategic actions are currently being executed to mitigate these
conditions. They include the following: development and marketing of new
products; focus on a new international customer base; outsourcing of
certain manufacturing processes; process improvements within the
manufacturing operations; and optimization of the organizational structure
of the business. If the current conditions persist despite execution of
the strategic action plan, the valuation of this business could be
negatively impacted.
Engineered Products & Services ("all other") Category:
- ------------------------------------------------------
o A continued positive outlook is anticipated for the railway track services
and equipment business as demand for products and services is expected to
grow throughout the world. Based on current backlog and projections, this
business will generate record revenues and operating income in the fourth
quarter of 2004. If certain shipments are delayed, they will be recorded
in 2005.
o The industrial grating business is expected to sustain continued
profitability for 2004 and 2005. However, the continued ability to pass
increased commodity costs (e.g., steel) to customers may decline,
resulting in sequentially reduced income in the fourth quarter of 2004 and
in 2005.
o Continued increases in steel prices and worldwide demand for steel could
have an adverse effect on raw material costs, and the ability to obtain
the necessary raw materials for most businesses in this Category.
o Consistent, profitable results are expected from the roofing granules and
abrasives business, the boiler and process equipment business and the
air-cooled heat exchangers business.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------
Revenues from continuing operations $ 617.3 $ 530.2 $ 1,791.1 $ 1,554.5
Cost of services and products sold 470.7 400.0 1,367.6 1,179.5
Selling, general and administrative expenses 90.6 81.6 268.1 243.5
Other expenses 0.9 2.2 4.5 4.5
Operating income from continuing operations 54.5 45.8 149.0 124.7
Income tax expense 12.1 10.8 35.6 29.3
Income from continuing operations 30.7 23.4 78.5 61.3
Income from discontinued operations 7.9 5.1 7.7 5.3
Net income 38.6 28.5 86.2 66.6
Diluted earnings per common share from continuing
operations 0.74 0.57 1.89 1.50
Diluted earnings per common share from
discontinued operations 0.19 0.12 0.19 0.13
Diluted earnings per common share 0.93 0.69 2.08 1.63
- --------------------------------------------------------------------------------------------------------------------------
-27-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
Third Quarter 2004 vs. Third Quarter 2003
- -----------------------------------------
Record revenues were recorded for the third quarter of 2004, up $87.1 million,
or 16%, from the third quarter of 2003. This increase was attributable to the
following significant items:
- --------------------------------------------------------------------------------
CHANGE IN REVENUES
IN MILLIONS THIRD QUARTER 2004 VS. THIRD QUARTER 2003
- --------------------------------------------------------------------------------
$ 24.3 Effect of positive foreign currency translation.
24.1 Net increased volume, new contracts and sales price changes in
the Mill Services Segment.
9.9 Net increased revenues in the Gas Technologies Segment due
principally to improved market conditions and selling price
increases, partially offset by decreased demand for liquid
propane gas (LPG) valves in the patio grill market and for
composite-wrapped cylinders.
7.0 Net increased revenues in the Access Services Segment due
principally to the strength of the concrete forming business,
particularly in the Middle East.
6.7 Net increased revenues in the railway track services and
equipment business due principally to increased contract
services and, to a lesser extent, increased rail equipment
sales.
5.8 Increased revenues of the air-cooled heat exchangers business
due to improving natural gas prices.
5.6 Increased revenues of the industrial grating products business
due to a focus on higher-margin standard product orders and
increased prices.
3.4 Net effect of business acquisitions resulted in increased
revenues in the Access Services Segment.
0.3 Other (minor changes across the various units not already
mentioned).
- --------------------------------------------------------------------------------
$ 87.1 Total Change in Revenues - Third Quarter 2004 vs. Third
Quarter 2003
================================================================================
Nine Months of 2004 vs. Nine Months of 2003
- -------------------------------------------
Record revenues were recorded for the first nine months of 2004, up $236.6
million, or 15%, from the first nine months of 2003. This increase was
attributable to the following significant items:
- --------------------------------------------------------------------------------
CHANGE IN REVENUES
IN MILLIONS NINE MONTHS OF 2004 VS. NINE MONTHS OF 2003
- --------------------------------------------------------------------------------
$ 83.1 Effect of positive foreign currency translation.
52.3 Net increased volume, new contracts and sales price changes in
the Mill Services Segment.
31.7 Net increased revenues in the Gas Technologies Segment due
principally to improving market conditions; selling price
increases; and customers accelerating purchases in order to
avoid future price increases for the propane and cylinders
businesses, partially offset by decreased demand for LPG
valves in the patio grill market and for composite-wrapped
cylinders.
31.6 Net effect of business acquisitions resulted in increased
revenues of $25.6 million and $6.0 million in the Mill
Services and Access Services Segments, respectively.
15.7 Net increased revenues in the Access Services Segment due to
the strength of the concrete forming business, particularly in
the Middle East and United Kingdom, partially offset by
continued slowdown in the U.S. non-residential construction
markets.
13.9 Increased revenues in the industrial grating products business
due to increased demand, customers accelerating purchases in
anticipation of future price increases and a focus on
higher-margin standard product orders.
11.1 Increased revenues in the air-cooled heat exchangers business
due to increased volume as a result of improving natural gas
prices.
3.1 Increased revenues in the boiler and process equipment
business due to increased volume across all product lines.
(7.5) Net decreased revenues in the railway track services and
equipment business due principally to decreased rail equipment
sales.
1.6 Other (minor changes across the various units not already
mentioned).
- --------------------------------------------------------------------------------
$236.6 Total Change in Revenues - Nine Months of 2004 vs. Nine Months
of 2003
================================================================================
-28-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
COST OF SERVICES AND PRODUCTS SOLD
Third Quarter 2004 vs. Third Quarter 2003
- -----------------------------------------
Cost of services and products sold for the third quarter of 2004 increased $70.8
million, or 18%, from the third quarter of 2003, slightly above the 16% increase
in revenues. This increase was attributable to the following significant items:
- --------------------------------------------------------------------------------
CHANGE IN COST OF SERVICES AND PRODUCTS SOLD
IN MILLIONS THIRD QUARTER 2004 VS. THIRD QUARTER 2003
- --------------------------------------------------------------------------------
$ 47.0 Increased costs due to increased revenues (exclusive of the
effect of foreign currency translation and business
acquisitions).
17.8 Effect of foreign currency translation.
2.4 Effect of business acquisitions.
3.6 Other (due to product mix, increased fuel and energy-related
costs, increased commodity costs and minor changes across the
various units not already mentioned, partially offset by
stringent cost control, process improvements and
reorganization actions).
- --------------------------------------------------------------------------------
$ 70.8 Total Change in Cost of Services and Products Sold - Third
Quarter 2004 vs. Third Quarter 2003
================================================================================
Nine Months of 2004 vs. Nine Months of 2003
- -------------------------------------------
Cost of services and products sold for the first nine months of 2004 increased
$188.1 million, or 16%, from the first nine months of 2003, slightly above the
15% increase in revenues. This increase was attributable to the following
significant items:
- --------------------------------------------------------------------------------
CHANGE IN COST OF SERVICES AND PRODUCTS SOLD
IN MILLIONS NINE MONTHS OF 2004 VS. NINE MONTHS OF 2003
- --------------------------------------------------------------------------------
$ 94.9 Increased costs due to increased revenues (exclusive of the
effect of foreign currency translation and business
acquisitions). This includes a portion of increased steel and
commodity costs since the Company was generally able to
recover these costs with increased revenues during the first
six months of the year.
61.7 Effect of foreign currency translation.
29.3 Effect of business acquisitions.
2.2 Other (due to increased fuel and energy-related costs, product
mix and minor changes across the various units not already
mentioned partially offset by stringent cost controls, process
improvements and reorganization actions.
- --------------------------------------------------------------------------------
$188.1 Total Change in Cost of Services and Products Sold - Nine
Months of 2004 vs. Nine Months of 2003
================================================================================
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Third Quarter 2004 vs. Third Quarter 2003
- -----------------------------------------
Selling, general and administrative (SG&A) expenses for the third quarter of
2004 increased $9.0 million or 11% from the third quarter of 2003, less than the
16% increase in revenues. The lower relative increase in SG&A expenses (11%) as
compared with revenues (16%) was due to stringent cost controls, process
improvements and reorganization actions. The increase in SG&A expenses was
attributable to the following significant items:
- --------------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS THIRD QUARTER 2004 VS. THIRD QUARTER 2003
- --------------------------------------------------------------------------------
$ 4.2 Effect of foreign currency translation.
1.5 Increased professional fees due to higher external auditor
fees (related to Sarbanes-Oxley Section 404) and increased
consulting and legal expenses.
0.6 Effect of business acquisitions - principally SGB Raffia in
Australia.
0.3 Increased pension expense.
2.4 Other (including increased energy-related costs).
- --------------------------------------------------------------------------------
$ 9.0 Total Change in Selling, General and Administrative Expenses -
Third Quarter 2004 vs. Third Quarter 2003
================================================================================
-29-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Nine Months of 2004 vs. Nine Months of 2003
- -------------------------------------------
Selling, general and administrative (SG&A) expenses for the first nine months of
2004 increased $24.5 million or 10% from the first nine months of 2003, less
than the 15% increase in revenues. The lower relative increase in SG&A expenses
(10%) as compared with revenues (15%) was due to stringent cost controls,
process improvements and reorganization actions. The increase in SG&A expenses
was attributable to the following significant items:
- --------------------------------------------------------------------------------
CHANGE IN SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
IN MILLIONS NINE MONTHS OF 2004 VS. NINE MONTHS OF 2003
- --------------------------------------------------------------------------------
$ 13.9 Effect of foreign currency translation.
2.9 Increased professional fees due to higher external auditor
fees (related to Sarbanes-Oxley Section 404) and increased
consulting and legal expenses.
2.6 Increased bad debt expense due to a reversal of a provision
for uncollectible accounts receivable in the second quarter of
2003 that did not recur in the first nine months of 2004 and
increased provisions for certain uncollectible accounts
receivable during the first nine months of 2004.
1.7 Increased pension expense.
1.2 Effect of business acquisitions.
(1.1) Decreased insurance expense.
(0.5) Decreased costs on a comparative basis due to $1.6 million in
income generated by the termination of a postretirement
benefit plan in the first nine months of 2003 compared with
$2.1 million in the first nine months of 2004.
3.8 Other (including increased energy-related costs).
- --------------------------------------------------------------------------------
$ 24.5 Total Change in Selling, General and Administrative Expenses -
Nine Months of 2004 vs. Nine Months of 2003
================================================================================
================================================================================
OTHER EXPENSES
This income statement classification includes impaired asset write-downs,
employee termination benefit costs and costs to exit activities, offset by net
gains on the disposal of non-core assets. During the first nine months of 2004,
the Company continued its strategy to streamline operations. This strategy
included continued headcount reductions in both administrative and operating
positions. These actions resulted in net Other expenses of $0.9 million and $4.5
million in the third quarter and first nine months of 2004, respectively,
compared with $2.2 million and $4.5 million in the comparable 2003 periods.
Third Quarter 2004 vs. Third Quarter 2003
- -----------------------------------------
Other expenses for the third quarter of 2004 decreased $1.3 million or 58% from
the third quarter of 2003. This decrease was attributable to the following
significant items:
- --------------------------------------------------------------------------------
CHANGE IN OTHER EXPENSES
IN MILLIONS THIRD QUARTER 2004 VS. THIRD QUARTER 2003
- --------------------------------------------------------------------------------
$ (0.6) Decrease in employee termination benefit costs.
(0.5) Decrease in costs to exit activities.
(0.2) Decrease in other expenses.
- --------------------------------------------------------------------------------
$ (1.3) Total Change in Other Expenses - Third Quarter 2004 vs. Third
Quarter 2003
================================================================================
-30-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Nine Months of 2004 vs. Nine Months of 2003
- -------------------------------------------
Other expenses for the first nine months of 2004 decreased slightly from the
first nine months of 2003. This decrease was attributable to the following
significant items:
- --------------------------------------------------------------------------------
CHANGE IN OTHER EXPENSES
IN MILLIONS NINE MONTHS OF 2004 VS. NINE MONTHS OF 2003
- --------------------------------------------------------------------------------
$ 1.9 Decrease in net gains on disposals of non-core assets. This
decline was attributable to $2.1 million in net gains that
were realized in the first nine months of 2003 from the sale
of non-core assets within the Access Services and Mill
Services Segment compared with $0.2 million in the first nine
months of 2004.
(0.9) Decrease in costs to exit activities.
(0.9) Decrease in employee termination benefit costs.
(0.1) Decrease in other expenses.
- --------------------------------------------------------------------------------
$ - Total Change in Other Expenses -Nine Months of 2004 vs. Nine
Months of 2003
================================================================================
For additional information on employee termination benefits, see Note J, "Costs
Associated with Exit or Disposal Activities," in Part I, Item 1, Financial
Statements.
================================================================================
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
Third Quarter 2004 vs. Third Quarter 2003
- -----------------------------------------
The increase in the third quarter of 2004 of $1.4 million or 13% in income tax
expense from continuing operations was due to increased earnings from continuing
operations for the reasons mentioned above. This was partially offset by a
decrease in the effective income tax rate relating to continuing operations from
29.9% in the third quarter of 2003 to 27.1% in the third quarter of 2004. The
decrease in the effective income tax rate was primarily a result of a change in
estimate of the amount of international earnings subject to U.S. income tax and
favorable tax credits.
Nine Months of 2004 vs. Nine Months of 2003
- -------------------------------------------
The increase in the first nine months of 2004 of $6.4 million or 22% in income
tax expense from continuing operations was due to increased earnings from
continuing operations for the reasons mentioned above. This was partially offset
by a decrease in the effective income tax rate relating to continuing operations
from 30.6% in the first nine months of 2003 to 29.6% in the first nine months of
2004. The decrease in the effective income tax rate was primarily a result of a
change in estimate of the amount of international earnings subject to U.S.
income tax and favorable tax credits.
================================================================================
INCOME FROM CONTINUING OPERATIONS
Third Quarter 2004 vs. Third Quarter 2003
- -----------------------------------------
Income from continuing operations in the third quarter of 2004 was $7.3 million
or 31% above the third quarter of 2003. This increase results from increased
revenues, a decreased effective income tax rate, stringent cost controls,
process improvements and reorganization actions that contained general and
administrative expenses growth to an 11% increase while revenue increased 16%.
Nine Months of 2004 vs. Nine Months of 2003
- -------------------------------------------
Income from continuing operations in the first nine months of 2004 was $17.2
million or 28% above the first nine months of 2003. This increase results from
increased revenues, a decreased effective income tax rate, stringent cost
controls, process improvements and reorganization actions that contained general
and administrative expenses growth to a 10% increase while revenue increased
15%.
================================================================================
-31-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NET INCOME AND EARNINGS PER SHARE
Third Quarter 2004 vs. Third Quarter 2003
- -----------------------------------------
Net income of $38.6 million and diluted earnings per share of $0.93 in the third
quarter of 2004 exceeded the third quarter of 2003 by $10.1 million and $0.24,
respectively, due to increased income from continuing operations for the reasons
described above and increased income from discontinued operations. The increased
income from discontinued operations related principally to recording $12.5
million pre-tax of the $12.6 million pre-tax settlement with the U.S. Government
regarding the long-standing Federal Excise Tax (FET) dispute. The Company
expects to receive payment of the settlement during the fourth quarter of 2004.
Nine Months of 2004 vs. Nine Months of 2003
- -------------------------------------------
Net income of $86.2 million and diluted earnings per share of $2.08 in the first
nine months of 2004 exceeded the first nine months of 2003 by $19.6 million and
$0.45, respectively, due to increased income from continuing operations for the
reasons described above and increased income from discontinued operations. The
increased income from discontinued operations related principally to recording
$12.5 million pre-tax of the $12.6 million pre-tax settlement with the U.S.
Government regarding the long-standing Federal Excise Tax (FET) dispute. The
Company expects to receive payment of the settlement during the fourth quarter
of 2004.
For additional information on FET settlement, see Note I, "Commitments and
Contingencies," in Part I, Item 1, Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's principal sources of liquidity are cash from operations and
short-term borrowings under its various credit agreements, augmented
periodically by cash proceeds from asset sales. Principal borrowings for working
capital requirements are commercial paper. During 2003, record net cash provided
by operating activities of $262.8 million enabled the Company to make
substantial payments on its outstanding debt. During the first nine months of
2004, cash provided by operating activities of $165.8 million was 7% higher than
in the first nine months of 2003. Due to record capital investments of $153.9
million for the first nine months of the year and the seasonal aspect of the
Company's cash flows in the first half of the year, the Company's net cash
borrowings increased $33.6 million in the first nine months of 2004.
The Company's management reaffirms its previously stated strategic objectives
for 2004 that include generating a record $280 million in cash provided by
operating activities, augmented by targeted asset sales. The Company's strategy
is to redeploy excess or discretionary cash to grow primarily the mill services
business and to further reduce debt. In 2004, the Company has targeted
approximately $200 million for capital investments, of which approximately 50
percent will be for growth initiatives.
As of September 30, 2004, the Company had approximately $110 million of debt
that can be paid prior to maturity. The balance of the debt, principally the
(pound)200 million notes and the $150 million notes, cannot be paid until
maturity in 2010 and 2013, respectively. The Company also plans to continue its
long history of paying dividends to shareholders.
On August 12, 2004, the Company renewed its $350 million revolving credit
facility through a syndicate of banks. The new facility is a three year facility
maturing on August 12, 2007. It replaced a two-part facility that included a
$131.3 million portion that matured on August 12, 2004 and a $218.8 million
portion that was scheduled to mature on September 29, 2005.
COMMERCIAL COMMITMENTS
As of September 30, 2004, there was an increase in the standby letters of credit
and performance bonds of approximately $15 million over the total $196.3 million
outstanding at December 31, 2003. This increase was due principally to increased
advance payment and performance bonds issued for the railway track services and
equipment business. In October 2004, the IRS agreed to release the Company from
maintaining an $80 million letter of credit as a result of the settlement
reached between the U.S. Department of Justice and the Company on its
long-standing Federal Excise Tax (FET) dispute.
These bonds and letters of credit are not included in the Company's Consolidated
Balance Sheet since there are no current circumstances known to management
indicating that the Company will be required to make payments on these
-32-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
contingent obligations. For additional information on the Company's settlement
with the government regarding the FET dispute, see Note I, "Commitments and
Contingencies," in Part I, Item 1, Financial Statements.
SOURCES AND USES OF CASH
The primary drivers of the Company's cash flow from operations are the Company's
sales and income, particularly in the services businesses. The Company's
long-term mill services contracts provide predictable cash flows for several
years into the future. Additionally, returns on capital investments made in
prior years, for which no cash is currently required, are a significant source
of operating cash. Depreciation related to these investments is a non-cash
charge. The Company also continues to maintain working capital at a manageable
level based upon the requirements and seasonality of the business.
Major uses of cash include payroll costs and related benefits; raw material
purchases for the manufacturing businesses; income tax payments; interest
payments; insurance premiums and payments of self-insured casualty losses; and
facility rental payments. Other primary uses of cash include capital
investments, principally in the industrial services businesses; debt payments;
and dividend payments.
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 on credit facilities and
commercial paper programs and available credit at September 30, 2004.
SUMMARY OF CREDIT FACILITIES AS OF SEPTEMBER 30, 2004
- ---------------------------------------------------------------------------------------------------------
FACILITY OUTSTANDING AVAILABLE
(IN MILLIONS) LIMIT BALANCE CREDIT
- ---------------------------------------------------------------------------------------------------------
U.S. commercial paper program $ 350.0 $ 43.9 $ 306.1
Euro commercial paper program 123.3 30.8 92.5
Revolving credit facility(a) 350.0 -- 350.0
Bilateral credit facility(b) 25.0 0.7 24.3
- ---------------------------------------------------------------------------------------------------------
TOTALS AT SEPTEMBER 30, 2004 $ 848.3 $ 75.4 $ 772.9(c)
=========================================================================================================
(a) U.S.-based program
(b) International-based program
(c) Although the Company has significant available credit, it is the Company's
policy to limit aggregate commercial paper and credit facility borrowings
at any one time to a maximum of $375 million.
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at September 30, 2004:
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) A- F-2 Stable
-------------------------------------------------------------------------------
(a) The Company's (pound)200 million notes are not rated by Fitch.
The euro commercial paper market does not require commercial paper to be rated;
accordingly, the Company's euro-based commercial paper program has not been
rated. In July 2004, Fitch reaffirmed its A- and F-2 ratings for the Company's
long-term notes and U.S. commercial paper, respectively, and its stable outlook.
S&P and Moody's reaffirmed their stable outlooks for the Company in September
2004. A downgrade to the Company's credit rating would probably increase the
costs to the Company to borrow funds. An improvement in the Company's credit
rating would probably decrease the costs to the Company to borrow funds.
-33-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
WORKING CAPITAL POSITION - Changes in the Company's working capital are
reflected in the following table:
SEPTEMBER 30 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2004 2003 INCREASE
- -------------------------------------------------------------------------------
Current Assets $ 923.5 $ 764.4 $ 159.1
Less: Current Liabilities 573.9 495.1 78.8
- -------------------------------------------------------------------------------
Working Capital $ 349.6 $ 269.3 $ 80.3
Current Ratio 1.6:1 1.5:1
===============================================================================
Working capital increased approximately 30% in the first nine months of 2004 due
principally to the following factors:
o Receivables increased $80.1 million. These increases were across all
businesses, with the largest increases in the Mill Services and Access
Services Segments. Increases were due principally to increased sales and
the timing of cash receipts. The increase in receivables due to the timing
of cash receipts included certain extended credit terms in the propane
tank product line of the Gas Technologies Segment, and fewer prepayments
on track maintenance equipment shipped in September 2004 compared with
December 2003. Also contributing to the increase was a $12.5 million
receivable related to the recent settlement with the U.S. government on a
long-standing Federal Excise Tax dispute concerning U.S. Army five-ton
trucks formerly produced by the Company. For additional information on the
Company's settlement with the government, see Note I, "Commitments and
Contingencies," in Part I, Item 1, Financial Statements.
o Inventories increased $54.0 million due to the following factors:
increased raw material costs (e.g., steel) across all of the Company's
manufacturing operations; increased work-in-process inventories due to
long-lead-time orders currently being manufactured at the railway track
services and equipment business but not scheduled for delivery until
mainly the fourth quarter of 2004 or later; increases in the Gas
Technologies Segment due to normal increases from seasonal low levels at
the end of December 2003; and increases in industrial grating products as
result of an increase in orders and higher steel costs.
o Other current liabilities increased $37.6 million including a $17.9
million increase in accrued interest payable principally related to the
200 million British pound sterling notes (which is paid annually in
October) and increases to accrued taxes payable, accrued short-term
retirement plan liabilities, accrued professional fees and short-term
insurance accruals. The increase in accrued taxes includes increased
value-added taxes (VAT) on higher sales in the international portions of
the Mill Services and Access Services Segments. The increase in accrued
short-term retirement plan liabilities is due to the timing of funding
requirements, principally in the U.K. The increase in accrued professional
fees is due in part to increased audit fees related to the Sarbanes-Oxley
Section 404 audit.
o Accounts payable increased $16.3 million due principally to increased
inventory levels at the railway track services and equipment business and
industrial grating products business.
CERTAINTY OF CASH FLOWS - The certainty of the Company's future cash flows
is strengthened by the long-term nature of the Company's mill services
contracts. At September 30, 2004, the Company's mill services contracts had
estimated future revenues of $3.4 billion. Of that amount, over $200 million is
projected for the remainder of 2004 and approximately 61% is expected to be
recognized by December 31, 2007. In addition, the Company had an order backlog
of $299.6 million for its manufacturing businesses and railway track services at
September 30, 2004. This compares with $186.2 million at December 31, 2003. The
increase from December 31, 2003 is due principally to new orders for track
maintenance equipment. The railway track services and equipment business backlog
includes a significant portion that is long-term which will not be realized
until 2005 or later due to the long lead time necessary to build certain
equipment and the long-term nature of certain service contracts.
The types of products and services that the Company provides are not subject to
rapid technological change. This increases the stability of related cash flows.
Additionally, each of the Company's businesses is among the top three companies
(relative to sales) in the industries the Company serves. Due to these factors,
the Company is confident in its future ability to generate positive cash flows
from operations.
CASH FLOW SUMMARY
The Company's cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
-34-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SUMMARIZED CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30
- -------------------------------------------------------------------------------
(IN MILLIONS) 2004 2003
- -------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities $ 165.8 $ 154.4
Investing activities (155.5) (106.1)
Financing activities 4.8 (51.7)
Effect of exchange rate changes on cash (1.9) 9.8
- -------------------------------------------------------------------------------
Net change in cash and cash equivalents $ 13.2 $ 6.4
===============================================================================
CASH FROM OPERATING ACTIVITIES - Cash provided by operating activities in
the first nine months of 2004 was $165.8 million, an increase of $11.4 million
from the first nine months of 2003. Increased net income was the primary reason
for the increase in cash from operations. This was partially offset by the net
use of cash due to the changes in assets and liabilities, net of acquisitions.
An increase in receivables was due principally to increased sales in the Access
Services Segment. An increased use of cash for inventories was due to increased
work-in-process inventories for the railway track services and equipment
business to meet current long-lead-time orders, and the effects of higher steel
costs on the manufacturing businesses. The increased use of cash for inventories
was partially offset by a corresponding source of cash for accounts payable due
principally to the timing of payments for inventory purchases.
CASH USED IN INVESTING ACTIVITIES - Capital investments of $153.9 million
for the first nine months of 2004 were a record for the first nine months of a
year. This was an increase of $57.1 million over the first nine months of 2003.
Overall, approximately 49% of the 2004 investments were for projects intended to
grow future revenues. Investments were made predominantly in the industrial
services businesses with 57% in the Mill Services Segment and 25% in the Access
Services Segment. In the first nine months of 2004, cash paid for acquired
businesses was $18.4 million less than the same period of 2003. The decrease was
due principally to the acquisition of the mill services unit of C.J.
Langenfelder and Son, Inc. in June 2003. No acquisition of similar size occurred
during 2004. A decrease in proceeds from sales of assets in the first nine
months of 2004 was due principally to three significant sales of U.K. properties
in the first quarter of 2003 which did not recur in 2004. Throughout the
remainder of 2004, the Company plans to continue to invest in high-return
projects, principally in the industrial services businesses, and make targeted
asset sales.
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions at September 30, 2004 and December 31,
2003.
SEPTEMBER 30 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2004 2003
- -------------------------------------------------------------------------------
Notes Payable and Current Maturities $ 34.5 $ 29.1
Long-term Debt 612.7 584.4
- -------------------------------------------------------------------------------
Total Debt 647.2 613.5
Total Equity 837.6 777.0
- -------------------------------------------------------------------------------
Total Capital $1,484.8 $1,390.5
Total Debt to Total Capital 43.6% 44.1%
===============================================================================
The Company's debt as a percent of total capital as of September 30, 2004
decreased to 43.6% from 44.1% at December 31, 2003. Increased debt due to the
Company's increased capital investments was more than offset by increased equity
due principally to increased retained earnings.
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 September 30, 2004, the Company could
increase borrowings by approximately $609.2 million and still be within its debt
covenants. Alternatively, keeping all other factors constant, the Company's
equity could decrease by approximately $362.6 million and the Company would
still be within its covenants.
-35-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CASH AND VALUE-BASED MANAGEMENT
The Company plans to continue with its strategy of selective investing for
strategic purposes for the foreseeable future. The goal of this strategy is to
improve the Company's Economic Value Added (EVA(R)) under the program that
commenced January 1, 2002. Under this program, the Company evaluates strategic
investments based upon the investment's economic profit. EVA equals after-tax
operating profits less a charge for the use of the capital employed to create
those profits (only the service cost portion of defined benefit pension expense
is included for EVA purposes). Therefore, value is created when a project or
initiative produces a return above the cost of capital. In the first nine months
of 2004, seven of the Company's nine divisions improved their EVA from the
comparable 2003 period.
Through the use of EVA, the Company targets its capital investments where
management expects they will create the greatest value. In the first nine months
of 2004, the Company made approximately 57% of its capital investments in the
Mill Services Segment. The investments in this Segment continued to show
positive results as the Mill Services Segment generated a significant portion of
the Company's cash from operations in the first nine months of 2004. The Company
continues to target the industrial services businesses for the majority of its
capital investments.
The Company is committed to continue paying dividends to shareholders. The
Company has increased the dividend rate for ten consecutive years, and in August
2004, the Company paid its 217th consecutive quarterly cash dividend. In
September 2004, the Company declared its 218th consecutive quarterly cash
dividend. The Company also plans to continue paying down debt to the extent
possible. The Company also has authorization to repurchase up to 1,000,000 of
its shares through January 31, 2005.
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, reducing debt and paying cash dividends as a means to enhance
shareholder value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------------------
MARKET RISK.
In the normal course of business, the Company is routinely subjected to a
variety of risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE
COMPANY'S BUSINESSES.
The Company's businesses are vulnerable to general economic slowdowns and
cyclical conditions in the industries served. In particular,
o The Company's mill services business may be adversely affected 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 affected by
slowdowns in non-residential construction and annual industrial and
building maintenance cycles;
o The Company's gas technologies business may be adversely affected by
reduced industrial production, and lower demand for industrial gases,
slowdowns in demand for medical cylinders, valves and consumer barbecue
grills, or lower demand for natural gas vehicles;
o The industrial grating business may be adversely affected by slowdowns in
non-residential construction and industrial production;
o The railway track maintenance business may be adversely affected by
developments in the railroad industry that lead to lower capital spending
or reduced maintenance spending; and
-36-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
o The industrial abrasives and roofing granules business may be adversely
affected by slower home resales or economic conditions that slow the rate
of residential roof replacement, or by slowdowns in the industrial and
infrastructure refurbishment industries.
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 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 million for calendar year 2002
compared with 2001 and $17.7 million for calendar year 2003 compared with 2002.
Should another downward cycle in capital markets occur, future unfunded
obligations and pension expense would likely increase. This could result in an
additional reduction to shareholders' equity and increase the Company's
statutory funding requirements. If the financial markets improve, it would most
likely have a positive impact on the Company's pension expense and the
accounting for pension assets and liabilities. This could result in an increase
to shareholders' equity and a decrease 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 GLOBAL PRESENCE SUBJECTS IT TO A VARIETY OF RISKS ARISING
FROM DOING BUSINESS INTERNATIONALLY.
The Company operates in over 400 locations in over 40 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 foreign 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 foreign jurisdictions that limit the right and ability of
foreign subsidiaries to pay dividends and remit earnings to affiliated
companies unless specified conditions are met; and,
-37-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 suffer.
The Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq and other countries with a continued high risk of
armed hostilities. During the first nine months of 2004 and 2003, these
countries contributed approximately $17.5 million and $12.0 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)). Should
these outbreaks worsen or spread to other countries, the Company may be
negatively impacted through reduced sales to and within these countries and
other countries affected by such diseases.
EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS.
Fluctuations in foreign exchange rates between the U.S. dollar and the
approximately 35 other currencies in which the Company conducts business may
adversely affect the Company's operating income and income from continuing
operations in any given fiscal period. Approximately 59% and 58% of the
Company's sales and approximately 69% and 65% of the Company's operating income
from continuing operations for the nine months ended September 30, 2004 and
2003, respectively, were derived from operations outside the United States.
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.
Compared with the corresponding period in 2003, the average values of major
currencies changed as follows in relation to the U.S. dollar during 2004,
impacting the Company's sales and income:
o British pound sterling Strengthened by 11%
o euro Strengthened by 8%
o South African rand Strengthened by 14%
o Brazilian real Strengthened by 5%
o Australian dollar Strengthened by 13%
The Company's foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies change
materially in relation to the U.S. dollar, the Company's financial position,
results of operations, or cash flows may be materially affected.
To illustrate the effect of foreign currency exchange rate changes in certain
key markets of the Company, in the first nine months of 2004, revenues would
have been approximately 5% or $83.1 million less and income from continuing
operations would have been approximately 5% or $3.6 million less if the average
exchange rates for the first nine months of 2003 were utilized. In a similar
comparison for the first nine months of 2003 revenues would have decreased
approximately 6% or $86.0 million while income from continuing operations would
have been approximately 8% or $4.9 million less if the average exchange rates
for the first nine months of 2003 would have remained the same as the first nine
months of 2002. In the first nine months of 2004, the U.S. dollar weakened
against the British pound sterling and strengthened against the euro, compared
with rates at December 31, 2003. 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 net income as a result of foreign currency
translation.
Currency changes result in assets and liabilities denominated in local
currencies being translated into U.S. dollars at different amounts than at the
prior period end. These currency changes resulted in decreased net assets of
$3.1 million and increased net assets of $37.3 million, at September 30, 2004
and 2003, respectively, when compared with December 31, 2003 and 2002,
respectively.
The Company seeks to reduce exposures to foreign currency transaction
fluctuations through the use of forward exchange contracts. At September 30,
2004, the notional amount of these contracts was $80.0 million, and all will
mature in the fourth quarter of 2004 or first quarter of 2005. 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.
-38-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
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 price in the face of adverse
currency movements. Sales of products manufactured in the United States for the
domestic and export markets may be affected by the value of the U.S. dollar
relative to other currencies. Any long-term strengthening of the U.S. dollar
could depress demand for these products and reduce sales and may cause
translation gains or losses due to the revaluation of accounts payable, accounts
receivable and other asset and liability accounts. Conversely, any long-term
weakening of the U.S. dollar could improve demand for these products and
increase sales and may cause translation gains or losses due to the revaluation
of accounts payable, accounts receivable and other asset and liability accounts.
NEGATIVE ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE ABILITY OF THE
COMPANY'S CUSTOMERS TO MEET THEIR OBLIGATIONS TO THE COMPANY ON A TIMELY
BASIS AND AFFECT THE VALUATION OF THE COMPANY'S ASSETS.
If a downturn in the economy occurs, it may adversely affect 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." If management determines
that goodwill or assets are impaired or that inventories or receivables cannot
be realized at recorded amounts, the Company will be required to record a
write-down in the period of determination, which will reduce net income for that
period.
A NEGATIVE OUTCOME ON PERSONAL INJURY CLAIMS AGAINST THE COMPANY MAY
ADVERSELY AFFECT 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 more against the named defendants. The
Company has not paid any amounts in settlement of these cases, with the
exception of two settlements totaling less than $10,000 paid by the insurance
carrier prior to 1998. However, 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 these litigations, see Note I,
"Commitments and Contingencies," in Part 1, Item 1, Financial Statements.
THE COMPANY MAY LOSE CUSTOMERS OR BE REQUIRED TO REDUCE PRICES AS A RESULT
OF COMPETITION.
The industries in which the Company operates are highly competitive. 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
prices 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 foreign competitors. If the
Company is unable to match the prices charged by foreign competitors, it may
lose customers. The Company's strategy to overcome this competition includes Six
Sigma continuous process improvement and cost reduction programs, international
customer focus and the diversification, streamlining and consolidation of
operations.
INCREASES IN ENERGY PRICES COULD INCREASE THE COMPANY'S OPERATING COSTS
AND REDUCE ITS PROFITABILITY.
Worldwide political and economic conditions, among other factors, may result in
an increase in the volatility of energy costs, both on a macro basis and for the
Company specifically. In 2004 and 2003, direct energy-related costs have
approximated 3.5% and 3.4%, respectively, of the Company's revenues. To the
extent that such costs cannot be passed on to customers in the future, operating
income and results of operations may be adversely affected.
-39-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
INCREASES OR DECREASES IN PURCHASE PRICES OR AVAILABILITY OF STEEL OR
OTHER MATERIALS AND COMMODITIES MAY AFFECT THE COMPANY'S PROFITABILITY.
The profitability of the Company's manufactured products are affected by
changing purchase prices of steel and other materials and commodities. In the
first nine months of 2004, the price paid for steel and certain other
commodities has increased significantly. 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, then operating income will
be adversely affected. Additionally, decreased availability of steel or other
materials could affect the Company's ability to produce manufactured products in
a timely manner. If the Company encounters difficulty in obtaining the necessary
raw materials for its manufactured products, then revenues, operating income and
cash flows will be adversely affected.
THE COMPANY IS SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND THE SUCCESS OF
EXISTING OR FUTURE ENVIRONMENTAL CLAIMS AGAINST IT COULD ADVERSELY AFFECT
THE COMPANY'S RESULTS OF OPERATIONS AND CASH FLOWS.
The Company's operations are subject to various federal, state, local and
foreign laws, regulations and ordinances relating to the protection of health,
safety and the environment, including those governing discharges to air and
water, handling and disposal practices for solid and hazardous wastes, the
cleaning up 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 cleanup 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 sheet
at September 30, 2004 and December 31, 2003 includes an accrual of $3.2 million
and $3.3 million, respectively, for environmental matters. The amounts charged
against pre-tax earnings related to environmental matters totaled $1.4 million
and $0.7 million for the nine months ended September 30, 2004 and 2003,
respectively. The liability for future remediation costs is evaluated on a
quarterly basis. Actual costs to be incurred at identified sites in future
periods may be greater than the estimates, given inherent uncertainties in
evaluating environmental exposures.
RESTRICTIONS IMPOSED BY THE COMPANY'S CREDIT FACILITIES AND OUTSTANDING
NOTES MAY LIMIT THE COMPANY'S ABILITY TO OBTAIN ADDITIONAL FINANCING OR TO
PURSUE BUSINESS OPPORTUNITIES.
The Company's credit facilities and certain notes payable agreements contain a
covenant requiring a maximum debt to capital ratio of 60%. In addition, certain
notes payable agreements also contain a covenant requiring a minimum net worth
of $475 million. These covenants limit the amount of debt the Company may incur,
which could limit its ability to obtain additional financing or to pursue
business opportunities. In addition, the Company's ability to comply with these
ratios may be affected by events beyond its control. A breach of any of these
covenants or the inability to comply with the required financial ratios could
result in a default under these credit facilities. In the event of any default
under these credit facilities, the lenders under those facilities could elect to
declare all borrowings outstanding, together with accrued and unpaid interest
and other fees, to be due and payable, which would cause an event of default
under the notes. This could in turn trigger an event of default under the
cross-default provisions of the Company's other outstanding indebtedness. At
September 30, 2004, the Company was in compliance with these covenants and
$363.2 million in indebtedness containing these covenants was outstanding.
-40-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
HIGHER THAN EXPECTED CLAIMS UNDER INSURANCE POLICIES, UNDER WHICH THE
COMPANY RETAINS A PORTION OF RISK, COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS AND CASH FLOWS.
The Company retains a significant portion of the risk for property, workers'
compensation, 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 September 30, 2004 and December 31,
2003, the Company had recorded liabilities of $75.6 million and $69.3 million,
respectively, related to both asserted and unasserted insurance claims. 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 from
operations 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 and third quarters (periods ending June 30 and September 30) of the
year, as the Company's business tends to follow seasonal patterns. Contrary to
this pattern, the Company projects fourth quarter 2004 sales and income to be
higher than historical amounts. This is principally due to the timing of certain
rail equipment sales and expanded mill services activities. If the Company is
unable to successfully manage the cash flow and other effects of seasonality on
the business, its results of operations may suffer.
HISTORICAL REVENUE PATTERNS
IN MILLIONS 2004 2003 2002 2001
- ------------------------------------------------------------------------------
First Quarter Ended March 31 $ 556.3 $ 487.9 $ 458.6 $ 505.0
Second Quarter Ended June 30 617.6 536.4 510.3 510.1
Third Quarter Ended September 30 617.3 530.2 510.5 510.3
Fourth Quarter Ended December 31 -- 564.0 497.3 499.7
HISTORICAL CASH PROVIDED BY OPERATIONS
IN MILLIONS 2004 2003 2002 2001
- ------------------------------------------------------------------------------
First Quarter Ended March 31 $ 32.4 $ 31.2 $ 9.0 $ 2.6
Second Quarter Ended June 30 64.6 59.2 71.4 65.1
Third Quarter Ended September 30 68.9 64.1 83.3 66.1
Fourth Quarter Ended December 31 -- 108.4 90.1 106.9
THE COMPANY'S CASH FLOWS AND EARNINGS ARE SUBJECT TO CHANGES IN INTEREST
RATES.
The Company's total debt as of September 30, 2004 was $647.2 million. Of this
amount, approximately 18% had variable rates of interest and 82% had fixed rates
of interest. The weighted average interest rate of total debt was approximately
5.9%. At current debt levels, a one-percentage increase/decrease in variable
interest rates would increase/decrease interest expense by approximately $1.2
million per year.
The future financial impact on the Company associated with the above risks
cannot be estimated.
-41-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 4. CONTROLS AND PROCEDURES
- -----------------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures as of September 30, 2004. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date of their evaluation.
-42-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -----------------------------
Information on legal proceedings is included under Part I, Item 1, Footnote I
labeled "Commitments and Contingencies."
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- -----------------------------------------------------------------------
(c). Issuer Purchases of Equity Securities
TOTAL NUMBER OF MAXIMUM NUMBER
TOTAL SHARES PURCHASED OF SHARES THAT
NUMBER OF AVERAGE AS PART OF PUBLICLY MAY YET BE PURCHASED
SHARES PRICE PAID ANNOUNCED PLANS OR UNDER THE PLANS
PERIOD PURCHASED PER SHARE PROGRAMS OR PROGRAMS
- -----------------------------------------------------------------------------------------------------------------------------------
January 1, 2004 - January 31, 2004 - - - 1,000,000
February 1, 2004 - February 29, 2004 - - - 1,000,000
March 1, 2004 - March 31, 2004 - - - 1,000,000
April 1, 2004 - April 30, 2004 - - - 1,000,000
May 1, 2004 - May 31, 2004 - - - 1,000,000
June 1, 2004 - June 30, 2004 - - - 1,000,000
July 1, 2004 - July 31, 2004 - - - 1,000,000
August 1, 2004 - August 31, 2004 - - - 1,000,000
September 1, 2004 - September 30, 2004 - - - 1,000,000
- ------------------------------------------------------------------------------------------------------
Total - - -
- ------------------------------------------------------------------------------------------------------
The Company's share repurchase program was extended by Board of Directors in
January 2004. This was announced to the public on March 11, 2004 as part of the
Company's Annual Report on Form 10-K. The program authorizes the repurchase of
up to 1,000,000 shares of the Company's common stock and expires January 31,
2005.
ITEM 5. OTHER INFORMATION
- -----------------------------
DIVIDEND INFORMATION
- --------------------
On September 28, 2004, the Board of Directors declared a quarterly cash dividend
of $0.275 per share, payable November 15, 2004, to shareholders of record as of
October 15, 2004.
10b5-1 Plan
- -----------
The Chief Financial Officer (CFO) of the Company adopted in the Third Quarter of
2004, a personal trading plan, as part of a long-term strategy for asset
diversification and liquidity, in accordance with the Securities and Exchange
Commission's Rule 10b5-1. Under the plan, the CFO will exercise, under
pre-arranged terms, up to 40,000 options in open market transactions, some of
which are set to expire in the next fourteen months. The 40,000 options
represent approximately 30% of his total holdings. The trading plan will expire
in February 2005. As of November 4, 2004, 30,000 shares have been sold under the
trading plan.
Rule 10b5-1 allows officers and directors, at a time when they are not in
possession of material nonpublic information, to adopt written plans to sell
shares on a regular basis under pre-arranged terms, regardless of any subsequent
nonpublic information they may receive. Exercises of stock options by the CFO
pursuant to the terms of the plan will be disclosed publicly through Form 144
and Form 4 filings with the Securities and Exchange Commission.
-43-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
- --------------------
Listing of Exhibits filed with Form 10-Q:
Exhibit
Number Data Required Location
------ ------------- --------
31(a) Certification Pursuant to Rule 13a-14(a) and Exhibit
15d-14(a) as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31(b) Certification Pursuant to Rule 13a-14(a) and Exhibit
15d-14(a) as Adopted Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32(a) Certification Pursuant to 18 U.S.C. Section 1350, Exhibit
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32(b) Certification Pursuant to 18 U.S.C. Section 1350, Exhibit
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
-44-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARSCO CORPORATION
--------------------------------
(Registrant)
DATE November 4, 2004 /S/ Salvatore D. Fazzolari
----------------------- --------------------------------
Salvatore D. Fazzolari
Senior Vice President, Chief
Financial Officer and Treasurer
DATE November 4, 2004 /S/ Stephen J. Schnoor
----------------------- --------------------------------
Stephen J. Schnoor
Vice President and Controller
-45-
EXHIBIT 31.(a)
--------------
CERTIFICATIONS
--------------
I, Derek C. Hathaway, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harsco Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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) 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
(c) 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.
November 4, 2004
/s/ Derek C. Hathaway
- -----------------------------
Derek C. Hathaway
Chief Executive Officer
EXHIBIT 31.(b)
--------------
CERTIFICATIONS
--------------
I, Salvatore D. Fazzolari, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Harsco Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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) 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
(c) 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.
November 4, 2004
/s/ Salvatore D. Fazzolari
- -------------------------------
Salvatore D. Fazzolari
Chief Financial Officer
EXHIBIT 32.(a)
--------------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harsco Corporation (the "Company") on
Form 10-Q for the period ending September 30, 2004 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
November 4, 2004
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 Quarterly Report of Harsco Corporation (the "Company") on
Form 10-Q for the period ending September 30, 2004 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
November 4, 2004