================================================================================
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, 2006
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number 1-3970
--------------------
HARSCO CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-1483991
--------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
350 Poplar Church Road, Camp Hill, Pennsylvania 17011
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number (717) 763-7064
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [X] Accelerated filer [_] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [_] NO [X]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2006
----- -------------------------------
Common stock, par value $1.25 per share 42,013,540
================================================================================
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) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------------------------------
REVENUES FROM CONTINUING OPERATIONS:
Service sales $ 650,522 $ 472,183 $ 1,859,546 $ 1,440,543
Product sales 225,401 225,286 651,446 593,134
----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 875,923 697,469 2,510,992 2,033,677
----------------------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES FROM CONTINUING OPERATIONS:
Cost of services sold 472,678 350,169 1,352,635 1,069,975
Cost of products sold 173,285 182,477 513,939 482,633
Selling, general and administrative expenses 126,444 95,090 370,928 287,338
Research and development expenses 732 620 2,142 1,991
Other (income) expenses 2,592 (502) 6,138 347
----------------------------------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 775,731 627,854 2,245,782 1,842,284
----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME FROM CONTINUING OPERATIONS 100,192 69,615 265,210 191,393
Equity in income (loss) of unconsolidated entities, net 92 (29) 255 92
Interest income 857 879 2,665 2,024
Interest expense (15,255) (9,921) (43,962) (30,783)
----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST 85,886 60,544 224,168 162,726
Income tax expense (28,276) (18,624) (73,857) (51,380)
----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY
INTEREST 57,610 41,920 150,311 111,346
Minority interest in net income (1,795) (1,898) (6,189) (6,458)
----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 55,815 40,022 144,122 104,888
----------------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS:
Loss from operations of discontinued business (15) (111) (294) (452)
Gain on disposal of discontinued business -- 66 -- 261
Income/(loss) related to discontinued defense business (7) (6) (18) 26
Income tax benefit 8 19 117 62
----------------------------------------------------------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS (14) (32) (195) (103)
----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 55,801 $ 39,990 $ 143,927 $ 104,785
==================================================================================================================================
Average shares of common stock outstanding 42,010 41,693 41,932 41,603
Basic earnings per common share:
Continuing operations $ 1.33 $ 0.96 $ 3.44 $ 2.52
Discontinued operations -- -- -- --
----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ 1.33 $ 0.96 $ 3.43(A) $ 2.52
==================================================================================================================================
Diluted average shares of common stock outstanding 42,252 42,112 42,197 42,046
Diluted earnings per common share:
Continuing operations $ 1.32 $ 0.95 $ 3.42 $ 2.49
Discontinued operations -- -- -- --
----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 1.32 $ 0.95 $ 3.41(A) $ 2.49
==================================================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.325 $ 0.30 $ 0.975 $ 0.90
==================================================================================================================================
(a) Does not total due to rounding.
See accompanying notes to unaudited condensed consolidated financial statements.
-2-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2006 2005(A)
-------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 99,533 $ 120,929
Accounts receivable, net 754,808 666,252
Inventories, net 284,780 251,080
Other current assets 80,968 60,436
Assets held-for-sale 2,139 2,326
-------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,222,228 1,101,023
-------------------------------------------------------------------------------
Property, plant and equipment, net 1,264,596 1,139,808
Goodwill, net 585,557 559,629
Intangible assets, net 80,699 78,839
Other assets 103,275 96,505
-------------------------------------------------------------------------------
TOTAL ASSETS $ 3,256,355 $ 2,975,804
===============================================================================
LIABILITIES
CURRENT LIABILITIES:
Short-term borrowings $ 96,246 $ 97,963
Current maturities of long-term debt 12,352 6,066
Accounts payable 255,002 247,179
Accrued compensation 85,074 75,742
Income taxes payable 69,032 42,284
Dividends payable 13,654 13,580
Insurance liabilities 46,170 47,244
Other current liabilities 262,677 218,345
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TOTAL CURRENT LIABILITIES 840,207 748,403
-------------------------------------------------------------------------------
Long-term debt 935,145 905,859
Deferred income taxes 118,010 123,334
Insurance liabilities 59,557 55,049
Retirement plan liabilities 94,034 98,946
Other liabilities 54,410 50,319
-------------------------------------------------------------------------------
TOTAL LIABILITIES 2,101,363 1,981,910
-------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock 85,608 85,322
Additional paid-in capital 165,334 152,899
Accumulated other comprehensive loss (121,975) (167,318)
Retained earnings 1,629,209 1,526,216
Treasury stock (603,184) (603,225)
-------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,154,992 993,894
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,256,355 $ 2,975,804
===============================================================================
(a) Reclassified for comparative purposes.
See accompanying notes to unaudited condensed 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) 2006 2005
-------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 143,927 $ 104,785
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 180,901 145,307
Amortization 5,600 1,895
Equity in income of unconsolidated entities, net (255) (92)
Dividends or distributions from affiliates -- 60
Other, net 9,132 4,270
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (55,452) (57,577)
Inventories (22,447) (43,060)
Accounts payable (10,552) 2,654
Accrued interest payable 18,780 18,385
Accrued compensation 3,613 484
Other assets and liabilities 5,689 55,468
-------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 278,936 232,579
===========================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (256,479) (209,247)
Net use of cash associated with the purchases of businesses (11,421) (7,011)
Proceeds from sales of assets 11,423 17,353
Other investing activities 118 --
-------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (256,359) (198,905)
===========================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (11,796) (937)
Current maturities and long-term debt:
Additions 250,362 147,482
Reductions (258,443) (120,956)
Cash dividends paid on common stock (40,859) (37,407)
Common stock issued-options 11,255 8,336
Other financing activities (3,691) (3,532)
-------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (53,172) (7,014)
===========================================================================================
Effect of exchange rate changes on cash 9,199 (7,522)
-------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (21,396) 19,138
Cash and cash equivalents at beginning of period 120,929 94,093
===========================================================================================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 99,533 $ 113,231
===========================================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30
(IN THOUSANDS) 2006 2005
=======================================================================================
Net income $ 55,801 $ 39,990
---------------------------------------------------------------------------------------
Other comprehensive income (loss):
Foreign currency translation adjustments 15,798 1,737
Net gains (losses) on cash flow hedging instruments,
net of deferred income taxes of ($51) and $7 in 2006
and 2005, respectively 95 (14)
Pension liability adjustments, net of deferred
income taxes of $1,372 and ($1,256) in 2006 and 2005,
respectively (3,428) 2,962
Reclassification adjustment for (gain) loss on cash
flow hedging instruments included in net income, net of
deferred income taxes of ($32) and $1 in 2006 and 2005,
respectively 59 (1)
---------------------------------------------------------------------------------------
Other comprehensive income 12,524 4,684
---------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 68,325 $ 44,674
=======================================================================================
NINE MONTHS ENDED
SEPTEMBER 30
(IN THOUSANDS) 2006 2005
=======================================================================================
Net income $143,927 $104,785
---------------------------------------------------------------------------------------
Other comprehensive income (loss):
Foreign currency translation adjustments 57,153 (43,940)
Net gains (losses) on cash flow hedging instruments,
net of deferred income taxes of ($63) and $52 in 2006
and 2005, respectively 116 (96)
Pension liability adjustments, net of deferred income
taxes of $4,637 and ($4,895) in 2006 and 2005,
respectively (11,988) 11,437
Marketable securities, unrealized gain, net of deferred
income taxes of $1 and $0 in 2006 and 2005, respectively 1 --
Reclassification adjustment for (gain) loss on cash
flow hedging instruments included in net income, net of
deferred income taxes of ($32) and $2 in 2006 and 2005,
respectively 60 (4)
Other comprehensive income (loss) 45,342 (32,603)
---------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 189,269 $ 72,182
=======================================================================================
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
A. OPINION OF MANAGEMENT
Financial information furnished herein, which is unaudited, in the opinion of
management reflects all adjustments (all of which are of a normal recurring
nature) that are necessary to present a fair statement of the interim period.
The year-end condensed balance sheet information contained in this Form 10-Q was
derived from 2005 audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America for a year-end report. The unaudited interim information
contained herein should also be read in conjunction with the Company's 2005 Form
10-K filing.
B. RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform with
current year classifications. These reclassifications are not material and
relate principally to components of the Consolidated Balance Sheets. As a result
of these reclassifications, certain 2005 amounts presented for comparative
purposes will not individually agree with previously filed Forms 10-K or 10-Q.
C. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
"Share-Based Payments" (SFAS 123R), which replaced SFAS No. 123, "Accounting for
Stock-Based Compensation," and superseded Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). SFAS 123R
requires the cost of employee services received in exchange for an award of
equity instruments to be based upon the grant-date fair value of the award (with
limited exceptions). Additionally, this cost is to be recognized as expense over
the period during which an employee is required to provide services in exchange
for the award (usually the vesting period). However, this recognition period
would be shorter if the recipient becomes retirement-eligible prior to the
vesting date. SFAS 123R also requires that the additional tax benefits the
Company receives from stock-based compensation be recorded as cash inflows from
financing activities in the statement of cash flows. Prior to January 1, 2006,
the Company applied the provisions of APB 25 in accounting for awards made under
the Company's stock-based compensation plans.
The Company adopted the provisions of SFAS 123R using the modified-prospective
transition method. Under this method, results from prior periods have not been
restated. During 2002 and 2003, the Company ceased granting stock options to
employees and non-employee directors, respectively. As such, the effect of
adopting SFAS 123R was not material to the Company's income from continuing
operations, net income or cash flows from operating and financing activities for
the nine months ended September 30, 2006, and the cumulative effect of adoption
using the modified-prospective transition method was not material.
The Company currently grants performance-based restricted stock units as the
long-term equity component of compensation for non-employee directors, officers
and certain key employees. The restricted stock units require no payment from
the recipient and compensation cost is measured based on the market price on the
grant date and is generally recorded over the vesting period. The vesting period
for restricted stock units granted to non-employee directors is one year and
each restricted stock unit will be exchanged for a like number of shares of
Company stock following the termination of the participant's service as a
director. The vesting period for restricted stock units granted to officers and
certain key employees is three years, and upon vesting each restricted stock
unit will be exchanged for a like number of shares of the Company's stock. In
September 2006, the Board of Directors approved changes to the employee
restricted stock units program where future awards will vest on a pro rata basis
over a three-year period and the specified retirement age will be 62. This
compares with the current three-year cliff vesting and retirement age of 65.
Restricted stock units do not have an option for cash payment.
-6-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The following table summarizes restricted stock units issued and the
compensation expense recorded for the three months and nine months ended
September 30, 2006 and 2005:
STOCK-BASED COMPENSATION EXPENSE
--------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(IN THOUSANDS) (IN THOUSANDS)
-------------------------------------------------------------------------------------------------
RESTRICTED FAIR VALUE
STOCK UNITS PER UNIT 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------
Directors:
May 1, 2004 3,500 $ 43.42 $ -- $ -- $ -- $ 51
May 1, 2005 6,000 53.75 -- 81 108 134
May 1, 2006 8,000 82.59 165 -- 275 --
Employees:
January 24, 2005 32,700 50.41 120 123 356 379
January 24, 2006 46,550 67.70 236 -- 678 --
-------------------------------------------------------------------------------------------------
Total 96,750 $ 521 $ 204 $ 1,417 $ 564
=================================================================================================
Restricted stock unit activity for the nine months ended September 30, 2006 was
as follows:
WEIGHTED AVERAGE
RESTRICTED GRANT-DATE
STOCK UNITS FAIR VALUE
------------------------------------------------------------------------
Nonvested at January 1, 2006 31,750 $ 50.62
Granted 54,550 69.88
Vested (5,833) 69.94
Forfeited (3,350) 63.83
------------------------------------------------------------------------
Nonvested at September 30, 2006 77,117 $ 62.21
========================================================================
As of September 30, 2006, the total unrecognized compensation costs related to
nonvested restricted stock units was $3.3 million which is expected to be
recognized over a weighted-average period of approximately 1.9 years.
The following table summarizes the excess tax benefits, resulting principally
from stock options:
THREE MONTHS ENDED NINE MONTHS ENDED
(IN MILLIONS) SEPTEMBER 30 SEPTEMBER 30
--------------------------------------------------------------------------
2006 2005 2006 2005
--------------------------------------------------------------------------
Excess tax benefits $ 0.2 $ 0.9 $ 3.5 $ 2.9
No stock options have been granted to officers and employees since February
2002. No stock options have been granted to non-employee directors since May
2003. Prior to these dates, the Company had granted stock options for the
purchase of its common stock to officers, certain key employees and non-employee
directors under two stockholder-approved plans. The exercise price of the stock
options was the fair value on the grant date, which was the date the Board of
Directors approved the respective grants. The 1995 Executive Incentive
Compensation Plan authorizes the issuance of up to 4,000,000 shares of the
Company's common stock for use in paying incentive compensation awards in the
form of stock options or other equity awards such as restricted stock,
restricted stock units or stock appreciation rights. The 1995 Non-Employee
Directors' Stock Plan authorizes the issuance of up to 300,000 shares of the
Company's common stock for equity awards.
When the Company issued stock options, they were granted at fair market value on
the date of grant, which was the date the Board of Directors approved the
respective grants. Options issued under the 1995 Executive Incentive
Compensation Plan generally vested and became exercisable one year following the
date of grant except options issued in 2002 generally vested and became
exercisable two years following the date of grant. Options issued under the 1995
Non-
-7-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Employee Director's Stock Plan generally became exercisable one year following
the date of grant but vested immediately. The options under both Plans expire
ten years from the date of grant. At September 30, 2006, there were 1,239,731
and 148,500 shares available for granting equity awards under the 1995 Executive
Incentive Compensation Plan and the 1995 Non-Employee Directors' Stock Plan,
respectively. Generally, new shares are issued for exercised stock options and
treasury shares are issued for vested restricted stock units.
Stock option activity for the nine months ended September 30, 2006 was as
follows:
STOCK OPTIONS
------------------------------------------------------------
SHARES WEIGHTED AVERAGE AGGREGATE INTRINSIC
UNDER OPTION EXERCISE PRICE VALUE (IN MILLIONS)(b)
----------------------------------------------------------------------------------------------
Outstanding, December 31, 2005 749,025 (a) $31.93 $26.9
Exercised (229,319) 34.01 --
----------------------------------------------------------------------------------------------
OUTSTANDING, SEPTEMBER 30, 2006 519,706 $31.02 $24.8
==============================================================================================
(a) Included in options outstanding at December 31, 2005 were 681 options
granted to SGB key employees as part of the Company's acquisition of SGB in
2000. These options are not a part of the 1995 Executive Compensation Plan,
or the 1995 Non-Employee Directors' Stock Plan.
(b) Intrinsic value is defined as the difference between the current market
value and the exercise price.
The total intrinsic value of options exercised during the nine months ended
September 30, 2006 and 2005 was $10.6 million and $8.2 million, respectively.
Options to purchase 519,706 shares were exercisable at September 30, 2006. The
following table summarizes information concerning outstanding and exercisable
options at September 30, 2006.
STOCK OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------------------------------------
NUMBER OUTSTANDING REMAINING CONTRACTUAL WEIGHTED AVERAGE
RANGE OF EXERCISABLE PRICES AND EXERCISABLE LIFE IN YEARS EXERCISE PRICE
----------------------------------------------------------------------------------------------------
$25.63 - $29.00 211,708 3.53 $27.47
29.31 - 32.65 246,394 5.24 32.54
32.81 - 46.16 61,604 4.01 37.11
----------------------------------------------------------------------------------------------------
519,706
====================================================================================================
D. REVIEW OF OPERATIONS BY SEGMENT
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
---------------------------------------------------------------------------------------------------------
Mill Services Segment $ 345,864 $ 37,343 $ 254,857 $ 23,095
Access Services Segment 278,627 35,447 195,353 20,867
Gas Technologies Segment 102,633 2,249 98,010 5,168
---------------------------------------------------------------------------------------------------------
Segment Totals 727,124 75,039 548,220 49,130
Engineered Products and Services
("all other") Category 148,799 25,241 149,249 20,872
General Corporate -- (88) -- (387)
---------------------------------------------------------------------------------------------------------
Consolidated Totals $ 875,923 $ 100,192 $ 697,469 $ 69,615
=========================================================================================================
-8-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2006 SEPTEMBER 30, 2005
OPERATING OPERATING
INCOME INCOME
(IN THOUSANDS) SALES (LOSS) SALES (LOSS)
---------------------------------------------------------------------------------------------------------
Mill Services Segment $1,016,394 $ 109,453 $ 794,778 $ 83,500
Access Services Segment 774,081 88,882 585,527 51,486
Gas Technologies Segment 289,616 5,799 270,178 10,896
---------------------------------------------------------------------------------------------------------
Segment Totals 2,080,091 204,134 1,650,483 145,882
Engineered Products and Services
("all other") Category 430,901 62,679 383,194 48,183
General Corporate -- (1,603) -- (2,672)
---------------------------------------------------------------------------------------------------------
Consolidated Totals $2,510,992 $ 265,210 $2,033,677 $ 191,393
=========================================================================================================
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) 2006 2005 2006 2005
-------------------------------------------------------------------------------------------------
Segment Operating Income $ 75,039 $ 49,130 $ 204,134 $ 145,882
Engineered Products & Services
("all other") Category 25,241 20,872 62,679 48,183
General Corporate (88) (387) (1,603) (2,672)
-------------------------------------------------------------------------------------------------
Operating income from continuing
operations 100,192 69,615 265,210 191,393
Equity in income (loss) of
unconsolidated entities, net 92 (29) 255 92
Interest income 857 879 2,665 2,024
Interest expense (15,255) (9,921) (43,962) (30,783)
-------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and minority interest $ 85,886 $ 60,544 $ 224,168 $ 162,726
=================================================================================================
E. ACCOUNTS RECEIVABLE AND INVENTORIES
At September 30, 2006 and December 31, 2005, accounts receivable of $754.8
million and $666.3 million, respectively, were net of an allowance for doubtful
accounts of $23.4 million and $24.4 million, respectively. Gross accounts
receivable included trade accounts receivable of $738.8 million and $638.5
million at September 30, 2006 and December 31, 2005, respectively. Also,
included in gross receivables were $18.8 million and $25.2 million of insurance
claim receivables at September 30, 2006 and December 31, 2005, respectively.
These insurance claim receivables were fully offset by current insurance
liabilities at September 30, 2006 and December 31, 2005. The provision for
doubtful accounts was $1.5 million and $1.3 million for the three months ended
September 30, 2006 and 2005, respectively. For nine months, the provision for
doubtful accounts was $5.9 million and $4.4 million, respectively.
-9-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Inventories consist of the following:
INVENTORIES
------------------------------------
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2006 2005
--------------------------------------------------------------------------------
Finished goods $ 106,105 $ 85,325
Work-in-process 46,138 43,830
Raw materials and purchased parts 95,389 87,251
Stores and supplies 37,148 34,674
--------------------------------------------------------------------------------
Total Inventories $ 284,780 $ 251,080
================================================================================
Inventories increased $33.7 million from December 31, 2005 due to the following
factors:
o Increased raw materials, finished goods and work-in-process inventories in
the Gas Technologies Segment due to higher material costs and to meet
expected customer demand.
o Increased finished goods and raw materials in the Engineered Products and
Services Category due to higher material costs and to meet expected
customer demand.
o Increased finished goods in the international Access Services business due
to the Cleton acquisition and to meet expected customer demand.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2006 2005
---------------------------------------------------------------------
Land and improvements $ 39,832 $ 39,306
Buildings and improvements 180,026 168,727
Machinery and equipment 2,563,747 2,291,294
Uncompleted construction 63,372 91,186
---------------------------------------------------------------------
Gross property, plant and equipment 2,846,977 2,590,513
Less accumulated depreciation (1,582,381) (1,450,705)
---------------------------------------------------------------------
Net property, plant and equipment $ 1,264,596 $ 1,139,808
=====================================================================
-10-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
G. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reflects the changes in carrying amounts of goodwill for the
nine months ended September 30, 2006:
GOODWILL BY SEGMENT
--------------------------------------------- --------------------------------------------------------------------------
ENGINEERED
PRODUCTS
MILL ACCESS GAS AND SERVICES
SERVICES SERVICES TECHNOLOGIES ("ALL OTHER") CONSOLIDATED
(IN THOUSANDS) SEGMENT SEGMENT SEGMENT CATEGORY TOTALS
------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 2005, net of
accumulated amortization $ 297,219 $ 217,580 $ 36,693 $ 8,137 $ 559,629
Changes to Goodwill (a) (591) (2,885) -- -- (3,476)
Other (b) -- (3,286) -- -- (3,286)
Foreign currency translation 15,323 17,367 -- -- 32,690
------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF SEPTEMBER 30, 2006, NET OF
ACCUMULATED AMORTIZATION $ 311,951 $ 228,776 $ 36,693 $ 8,137 $ 585,557
========================================================================================================================
(a) Relate principally to opening balance sheet adjustments for the BISNH and
Hunnebeck acquisitions and the acquisition of the Cleton business.
(b) Reduction of valuation allowance related to realization of a tax loss
carryback.
Goodwill is net of accumulated amortization of $107.2 million and $103.0 million
at September 30, 2006 and December 31, 2005, respectively.
The following table reflects intangible assets by major category:
INTANGIBLE ASSETS
------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2006 DECEMBER 31, 2005
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
(IN THOUSANDS) AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------------------------------------------------------------------------------------------------------
Customer Relationships $ 79,572 $ 5,389 $ 73,224 $ 1,262
Non-compete agreements 5,346 4,647 5,036 4,402
Patents 4,605 3,846 4,426 3,587
Other 8,384 3,325 7,962 2,558
------------------------------------------------------------------------------------------------------
Total $ 97,907 $ 17,207 $ 90,648 $ 11,809
======================================================================================================
During the first nine months of 2006, 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 $ 1,100 None 11 years
Non-compete agreements 300 None 5 years
Other 50 None 5 years
------------
Total $ 1,450
============
-11-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The above acquisitions were partially offset by the sale of certain intangible
assets in the Mill Services Segment.
There were no research and development assets acquired and written off in the
first nine months of 2006 or 2005.
Amortization expense for intangible assets was $5.0 million and $1.4 million for
the nine months ended September 30, 2006 and 2005, respectively. The following
table shows the estimated amortization expense for the next five fiscal years
based on current intangible assets:
(IN THOUSANDS) 2006 2007 2008 2009 2010
--------------------------------------------------------------------------------
Estimated Amortization Expense(a) $6,900 $6,700 $6,400 $6,100 $5,900
(a) These estimated amortization expense amounts do not reflect the potential
effect of future foreign currency exchange rate fluctuations.
H. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
In December 2005, the Company acquired the Northern Hemisphere steel mill
services operations of Brambles Industrial Services (BISNH), a unit of the
Sydney, Australia-based Brambles Industrial Limited, for (pound)136 million
(approximately $234 million), excluding acquisition costs. BISNH is included in
the Company's Mill Services Segment. The Company did not assume debt as part of
this acquisition. BISNH is a provider of on-site, outsourced mill services to
the steel and metals industries, operating at 19 locations in the U.K., France,
Holland and the United States. Goodwill recognized in this transaction (based on
foreign exchange rates at the transaction date) was $92.5 million, of which
$88.1 million is expected to be deductible for U. S. income tax purposes.
Because this acquisition occurred at the end of 2005, and due to
regulatory-imposed delays in early 2006 affecting our ability to integrate the
business, the purchase price allocations and goodwill balance have not been
finalized as of September 30, 2006, although no material changes are expected.
In November 2005, the Company acquired the Germany-based Hunnebeck Group GmbH
(Hunnebeck) for (euro)140 million (approximately $164 million), which included
the assumption of debt but excludes acquisition costs. Hunnebeck is included in
the Company's Access Services Segment. Hunnebeck is a provider of highly
engineered formwork and scaffolding equipment with more than 60 branches and
depots in 12 countries and export sales worldwide. Goodwill recognized in this
transaction (based on foreign exchange rates at the transaction date) was $67.9
million, none of which is expected to be deductible for U. S. income tax
purposes. Because this acquisition occurred near the end of 2005, the purchase
price allocations and goodwill balance have not been finalized as of September
30, 2006, although no material changes are expected.
In July 2006, the Company acquired the assets of UK-based Cape PLC's Cleton
industrial maintenance services (Cleton) subsidiaries in Holland, Belgium and
Germany. The terms of the transaction provide for an initial cash payment to
Cape PLC of (euro)8.2 million (approximately $10.3 million), which represents a
small premium to the net assets purchased, and is subject to adjustment for
final accounts up to a maximum of (euro)8.9 million (approximately $11.2
million). Cleton posted 2005 revenues in excess of $50 million and employs close
to 400 people. Cleton specializes in providing scaffolding and related
insulation services for the maintenance of large-scale industrial plants, and
serves some of the largest oil refinery, petrochemical, and process plant sites
in the Benelux countries. Cleton has been included in the SGB Division of the
Access Services Segment.
DISPOSITIONS - ASSETS HELD FOR SALE
Throughout the past several years, management approved the sale of certain
long-lived assets (primarily land and buildings) throughout the Company's
operations. The major classes of assets "held-for-sale" included in the
Consolidated Balance Sheets are as follows:
-12-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ASSETS "HELD-FOR-SALE"
------------------------------------------------------------------------
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 2006 2005
------------------------------------------------------------------------
ASSETS
Property, plant and equipment, net $ 2,139 $ 2,326
------------------------------------------------------------------------
TOTAL ASSETS "HELD-FOR-SALE" $ 2,139 $ 2,326
========================================================================
I. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its financial
exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheets at September 30, 2006 and December 31, 2005 include
accruals of $3.3 million and $2.8 million, respectively, for environmental
matters. The amounts charged against pre-tax income related to environmental
matters totaled $1.2 million and $0.8 million for the first nine months of 2006
and 2005, respectively.
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position,
results of operations or cash flows.
ROYALTY EXPENSE DISPUTE
The Company is involved in a royalty expense dispute with the Canada Revenue
Agency ("CRA"). The CRA is proposing to disallow certain royalty expense
deductions claimed by the Company's Canadian subsidiary on its 1994-1998 tax
returns. As of September 30, 2006, the maximum assessment from the CRA for the
period 1994-1998 is approximately $10.8 million, including tax and interest. The
Ontario Ministry of Finance ("Ontario") is also proposing to disallow these same
deductions for the period 1994-1998. As of September 30, 2006, the maximum
assessment from Ontario is approximately $3.4 million, including tax and
interest. The Company has filed administrative appeals and will vigorously
contest these disallowances.
The Company currently anticipates that, ultimately, it may have a liability for
some portion of the assessment in this royalty expense dispute. However, the
Company intends to utilize competent authority proceedings in the U.S. to
recover a portion of any required tax payment amount. The Company believes that
any amount not recovered through these proceedings has been fully reserved as of
September 30, 2006 and, therefore will not have a material adverse impact on the
Company's future results of operations or financial condition. In accordance
with Canadian tax law, the Company made a payment to the CRA in the fourth
quarter of 2005 of $5.0 million. Additionally, the Company made a payment to the
Ontario Ministry of Finance in the first quarter of 2006 for the entire disputed
amount. These payments were made for tax compliance purposes and to reduce
potential interest expense on the disputed amount. These payments in no way
reflect the Company's acknowledgement as to the validity of the assessed
amounts.
OTHER
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos over the past several decades. In their suits, the plaintiffs
have named as defendants, among others, many manufacturers, distributors and
installers of numerous types of equipment or products that allegedly contained
asbestos.
-13-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
The Company believes that the claims against it are without merit. The Company
has never been a producer, manufacturer or processor of asbestos fibers. Any
component within a Company product which may have contained asbestos would have
been purchased from a supplier. Based on scientific and medical evidence, the
Company believes that any asbestos exposure arising from normal use of any
Company product never presented any harmful levels of airborne asbestos
exposure, and moreover, the type of asbestos contained in any component that was
used in those products was protectively encapsulated in other materials and is
not associated with the types of injuries alleged in the pending suits. Finally,
in most of the depositions taken of plaintiffs to date in the litigation against
the Company, plaintiffs have failed to specifically identify any Company
products as the source of their asbestos exposure.
The majority of the asbestos complaints pending against the Company have been
filed in New York. Almost all of the New York complaints contain a standard
claim for damages of $20 million or $25 million against the approximately 90
defendants, regardless of the individual plaintiff's alleged medical condition,
and without specifically identifying any Company product as the source of
plaintiff's asbestos exposure.
As of September 30, 2006, there are 26,465 pending asbestos personal injury
claims filed against the Company. Of these cases, 26,147 were pending in the New
York Supreme Court (a trial court) for New York County in New York State. The
other claims, totaling 318, are filed in various counties in a number of state
courts, and in certain Federal District Courts (including New York), and those
complaints generally assert lesser amounts of damages than the New York State
court cases or do not state any amount claimed.
As of September 30, 2006, the Company has obtained dismissal by stipulation, or
summary judgment prior to trial, in 16,850 cases.
In view of the persistence of asbestos litigation nationwide, which has not yet
been sufficiently addressed either politically or legally, the Company expects
to continue to receive additional claims. However, there have been developments
during the past several years, both by certain state legislatures and by certain
state courts, which could favorably affect the Company's ability to defend these
asbestos claims in those jurisdictions. These developments include procedural
changes, docketing changes, proof of damage requirements and other changes that
require plaintiffs to follow specific procedures in bringing their claims and to
show proof of damages before they can proceed with their claim. An example is
the action taken by the New York Supreme Court, which is responsible for
managing all asbestos cases pending within New York County in the State of New
York. This Court issued an order in December of 2002 that created a Deferred or
Inactive Docket for all pending and future asbestos claims filed by plaintiffs
who cannot demonstrate that they have a malignant condition or discernable
physical impairment, and an Active or In Extremis Docket for plaintiffs who are
able to show such medical condition. As a result of this order, the majority of
the asbestos cases filed against the Company in New York County have been moved
to the Inactive Docket until such time as the plaintiff can show that they have
incurred a physical impairment. As of September 30, 2006, the Company has been
listed as a defendant in 153 Active or In Extremis asbestos cases in New York
County. The Court's Order has been challenged by plaintiffs.
The Company's insurance carrier has paid all legal and settlement costs and
expenses relating to the asbestos litigation to date. The Company has liability
insurance coverage available under various primary and excess policies that the
Company believes will be available, if necessary, to substantially cover any
liability that might ultimately be incurred on these claims.
The Company intends to continue its practice of vigorously defending these cases
as they are listed for trial. It is not possible to predict the ultimate outcome
of asbestos-related lawsuits, claims and proceedings due to the unpredictable
nature of personal injury litigation. Despite this uncertainty, and although
results of operations and cash flows for a given period could be adversely
affected by asbestos-related lawsuits, claims and proceedings, management
believes that the ultimate outcome of these cases will not have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
The Company is subject to various other claims and legal proceedings covering a
wide range of matters that arose in the ordinary course of business. In the
opinion of management, all such matters are adequately covered by insurance or
by accruals, and if not so covered, are without merit or are of such kind, or
involve such amounts, as would not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
Insurance liabilities are recorded in accordance with SFAS 5, "Accounting for
Contingencies." Insurance reserves have been estimated based primarily upon
actuarial calculations and reflect the undiscounted estimated liabilities for
ultimate losses including claims incurred but not reported. Inherent in these
estimates are assumptions which are based on the Company's history of claims and
losses, a detailed analysis of existing claims with respect to potential value,
and current
-14-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
legal and legislative trends. If actual claims differ from those projected by
management, changes (either increases or decreases) to insurance reserves may be
required and would be recorded through income in the period the change was
determined. When a recognized liability is covered by third-party insurance, the
Company records an insurance claim receivable to reflect the covered liability.
See Note 1, "Summary of Significant Accounting Policies," of the Company's Form
10-K for the year ended December 31, 2005 for additional information on Accrued
Insurance and Loss Reserves.
J. RECONCILIATION OF BASIC AND DILUTED SHARES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------------
Income from continuing operations $ 55,815 $ 40,022 $144,122 $104,888
================================================================================================================
Average shares of common stock outstanding used to
compute basic earnings per common share 42,010 41,693 41,932 41,603
Dilutive effect of stock-based compensation 242 419 265 443
----------------------------------------------------------------------------------------------------------------
Shares used to compute dilutive effect of
stock-based compensation 42,252 42,112 42,197 42,046
================================================================================================================
Basic earnings per common share from continuing operations $ 1.33 $ 0.96 $ 3.44 $ 2.52
================================================================================================================
Diluted earnings per common share from continuing operations $ 1.32 $ 0.95 $ 3.42 $ 2.49
================================================================================================================
All outstanding stock options and restricted stock units were included in the
computation of diluted earnings per share at September 30, 2006 and 2005.
K. EMPLOYEE BENEFIT PLANS
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U. S. PLANS INTERNATIONAL PLANS
--------------------------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005 2006 2005
--------------------------------------------------------------------------------------------
Service cost $ 921 $ 845 $ 2,303 $ 1,757
Interest cost 3,730 3,479 11,017 9,679
Expected return on plan assets (4,986) (4,778) (13,210) (10,674)
Recognized prior service costs 186 192 316 302
Recognized losses 737 904 3,304 3,006
Amortization of transition (asset) (90) (364) 9 11
Curtailment/settlement loss (gain) -- -- (13) 10
--------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 498 $ 278 $ 3,726 $ 4,091
============================================================================================
-15-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART 1 - FINANCIAL INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------------------------------
DEFINED BENEFIT PENSION EXPENSE (INCOME) U. S. PLANS INTERNATIONAL PLANS
------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005 2006 2005
------------------------------------------------------------------------------------------------------------------------------
Service cost $ 2,764 $ 2,535 $ 6,696 $ 5,322
Interest cost 11,190 10,436 32,035 29,933
Expected return on plan assets (14,957) (14,334) (38,437) (33,041)
Recognized prior service costs 557 576 919 937
Recognized losses 2,211 2,713 9,588 9,364
Amortization of transition liability (asset) (271) (1,092) 27 14
Curtailment/settlement loss 78 -- 223 37
------------------------------------------------------------------------------------------------------------------------------
Defined benefit plans pension expense $ 1,572 $ 834 $ 11,051 $ 12,566
==============================================================================================================================
Defined benefit pension expense in the third quarter of 2006 was $0.1 million
lower than the comparable 2005 period and, for the first nine months of 2006,
the defined benefit pension expense decreased $0.8 million from the comparable
2005 period. These decreases relate primarily to an increase in the expected
return on plan assets resulting from an increased fair value of plan assets as
of December 31, 2005. The increased fair value of plan assets as of December 31,
2005 resulted from 2005 actual return on plan assets of 15.6% (based on
beginning of the year fair value of plan assets) as well as 2005 Company cash
contributions of $48.8 million, including $16.9 million of voluntary
contributions. The global weighted average expected long-term rate of return on
plan assets was decreased to 7.6% for 2006 compared with 7.8% for 2005, for
reasons disclosed in the 2005 Form 10-K.
Contributions to defined benefit pension plans are as follows:
DEFINED BENEFIT PENSION PLAN CONTRIBUTIONS
----------------------------------------------------------------------------------------------------------------
(IN MILLIONS) U. S. PLANS INTERNATIONAL PLANS
----------------------------------------------------------------------------------------------------------------
First Quarter 2006 $ 0.2 $ 4.7
Second Quarter 2006 0.3 5.8
Third Quarter 2006 1.4 (a) 14.3 (b)
----------------------------------------------------------------------------------------------------------------
Nine Months 2006 1.9 24.8
Projected October - December 2006 0.3 5.8
----------------------------------------------------------------------------------------------------------------
Total Projected Year 2006 $ 2.2 $ 30.6
================================================================================================================
(a) Includes a $1.2 million voluntary contribution to the Company's U.S.
pension plans.
(b) Includes a $9.4 million voluntary contribution to the Company's U.K.
pension plan.
Contributions to multiemployer pension plans during the third quarter and nine
months ended September 30, 2006 were $4.3 million and $13.0 million,
respectively. Contributions for defined contribution pension plans during the
third quarter and nine months ended September 30, 2006 were $2.5 million and
$10.9 million, respectively.
The U.S. defined benefit pension plans assets include 382,640 shares of the
Company's stock valued at $29.7 million as of September 30, 2006, representing
approximately 11% of the total plan assets. As part of a rebalancing of the
pension fund to further diversify the plan assets, the Company is considering
selling some of the Company stock in the future.
On August 17, 2006, the Pension Protection Act of 2006 (the "Act") was signed
into law. Key provisions of the Act include a requirement to fully fund U.S.
defined benefit pension plans within seven years and an increase in the annual
income tax deduction limit applicable to pension plans. The Company is currently
evaluating the impact of the Act on its cash flows; however, it is not expected
to materially impact the Company's cash flows for any given period.
-16-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART 1 - FINANCIAL INFORMATION
THREE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) SEPTEMBER 30
---------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005
---------------------------------------------------------------------------------------------------------
Service cost $ 1 $ 1
Interest cost 46 48
Recognized prior service costs 1 1
Recognized gains (9) (9)
Curtailment gain (20) --
---------------------------------------------------------------------------------------------------------
Postretirement benefits expense $ 19 $ 41
=========================================================================================================
NINE MONTHS ENDED
POSTRETIREMENT BENEFITS EXPENSE (INCOME) SEPTEMBER 30
---------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 2006 2005
---------------------------------------------------------------------------------------------------------
Service cost $ 4 $ 5
Interest cost 140 151
Recognized prior service costs 2 7
Recognized gains (29) (27)
Curtailment gains (20) (318)
---------------------------------------------------------------------------------------------------------
Postretirement benefits expense (income) $ 97 $ (182)
=========================================================================================================
The curtailment gains of $0.3 million for 2005 were due to the termination of
certain postretirement health care plans.
In the quarter ended September 30, 2006, the Company contributed $62 thousand to
the postretirement plans. For the nine months ended September 30, 2006, the
Company contributed $201 thousand to the postretirement plans and anticipates
contributing approximately $125 thousand during the remainder of 2006.
L. NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments, an Amendment
--------------------------------------------------------------------------------
of FASB Statements No. 133 and 140" (SFAS 155)
----------------------------------------------
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
155, which amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." SFAS 155 addresses
several issues relating to the accounting for financial instruments, including
permitting fair value measurement for any hybrid financial instrument that
contains an embedded derivative, and eliminating the prohibition on a qualifying
special-purpose entity from holding certain derivative instruments. SFAS 155
also provides clarification that concentrations of credit risk in the form of
subordination are not embedded derivatives. SFAS 155 is effective for all
financial instruments issued or acquired after the fiscal year that begins after
September 15, 2006 (January 1, 2007 for the Company), with early adoption
permitted. The Company expects to adopt SFAS 155 effective January 1, 2007, and
has determined that it is not likely to materially impact the Company's
financial position, results of operations or cash flows.
SFAS No. 156, "Accounting for Servicing of Financial Assets, an Amendment of
----------------------------------------------------------------------------
FASB Statement 140" (SFAS 156)
------------------------------
In March 2006, the FASB issued SFAS 156, which amends SFAS No. 140, "Accounting
of Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS 156 requires, in certain specified situations, an entity to
recognize a servicing asset or servicing liability when it undertakes an
obligation to service a financial asset by entering into a servicing contract.
SFAS 156 also requires all separately recognized servicing assets and servicing
liabilities to be initially recognized at fair value, if practical, and allows
entities to choose either the amortization method or the fair value measurement
method for subsequent measurement. SFAS 156 is effective for all servicing
transactions occurring on or after the beginning of the first fiscal year that
begins after September 15, 2006 (January 1, 2007 for the Company), with
-17-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART 1 - FINANCIAL INFORMATION
early adoption permitted. The Company expects to adopt SFAS 156 effective
January 1, 2007, and has determined that it is not likely to materially impact
the Company's financial position, results of operations or cash flows.
FASB Interpretation ("FIN") 48, "Accounting for Uncertainty in Income Taxes-an
------------------------------------------------------------------------------
interpretation of FASB Statement No. 109" (FIN 48)
--------------------------------------------------
In July 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements in
accordance with SFAS No. 109, "Accounting for Income Taxes." It prescribes a
recognition threshold and measurement attribute for financial statement
recognition and disclosure of tax positions taken or expected to be taken on a
tax return. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company will adopt this interpretation in the first
quarter of 2007. The Company is currently evaluating the requirements of FIN 48
and has not yet determined the impact on the consolidated financial statements.
SFAS No. 157, "Fair Value Measurements" (SFAS 157)
--------------------------------------------------
In September 2006, the FASB issued SFAS 157 to provide a single definition of
fair value, establish a framework for measuring fair value in U.S. generally
accepted accounting principles (GAAP), and expand the disclosure requirements
regarding fair value measurements. SFAS 157 is applicable in the application of
other accounting pronouncements that require or permit fair value measurements,
but does not require new fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 (January 1, 2008 for the
Company), with limited retrospective application required. The Company is
currently evaluating the requirements of SFAS 157 and has not yet determined the
impact on the consolidated financial statements.
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year
-------------------------------------------------------------------------
Misstatements When Quantifying Misstatements in Current Year Financial
----------------------------------------------------------------------
Statements" (SAB 108)
---------------------
In September 2006, the SEC issued SAB 108 to provide guidance for quantifying
and evaluating the materiality of a misstatement. SAB 108 indicates that an
entity should use both a balance sheet (iron curtain) approach and an income
statement (rollover) approach when quantifying and evaluating the materiality of
a misstatement, and provides guidance for using the dual approach. SAB 108 also
provides transition guidance for correcting errors existing in prior years. SAB
108 is effective for annual financial statements covering the first fiscal year
ending after November 15, 2006 (December 31, 2006 for the Company). The Company
will adopt SAB 108 effective December 31, 2006, and has determined that it is
not likely to materially impact the Company's financial position, results of
operations or cash flows.
SFAS No. 158, "Employer's Accounting for Defined Benefit Pension and Other
--------------------------------------------------------------------------
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
--------------------------------------------------------------------------
132(R)" (SFAS 158)
------------------
The FASB is currently reconsidering the accounting for pensions and other
postretirement benefits in a two-phase project. Phase I of this project
primarily addresses the balance sheet recognition of a plan's overfunded or
underfunded status. Phase II will be a comprehensive reconsideration of all
elements of pension accounting, and is expected to take several years to
complete once Phase I is complete. As part of Phase I, the FASB issued SFAS 158
in September 2006. Included in SFAS 158 is a requirement for an entity to
recognize in its balance sheet, the overfunded or underfunded status of its
defined benefit postretirement plans measured as the difference between the fair
value of the plan assets and the benefit obligation. For a pension plan, this
would be the projected benefit obligation; for any other postretirement plan,
the benefit obligation would be the accumulated postretirement benefit
obligation. SFAS 158 also eliminates the early measurement dates by requiring
the pension plan obligation to be measured as of the date of the entity's
balance sheet. The requirement to recognize the funded status of the pension
plans is effective for publicly-held companies for fiscal years ending after
December 15, 2006 (December 31, 2006 for the Company). The requirement to
measure the pension obligation as of the entity's balance sheet date is
effective for fiscal years ending after December 15, 2008 (December 31, 2008 for
the Company). Although the Company continues to evaluate the effect that the
recognition of the funded status of its plans will have on the Company's
consolidated financial statements as of December 31, 2006, the Company estimates
that the adoption of SFAS 158 as of December 31, 2005 would have reduced the
Company's equity on an after-tax basis by approximately $64 million or 6.4%. The
results of operations would not be affected. This estimate as of December 31,
2005 does not take into consideration the actual return on plan assets, pension
contributions and actuarial calculations for 2006, so the actual impact as of
December 31, 2006 may differ significantly from this estimate. The Company does
not expect the adoption of SFAS 158 to have a negative impact on compliance with
the Company's debt covenants.
-18-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART 1 - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion should be read in conjunction with the accompanying
unaudited financial statements as well as the Company's annual Form 10-K for the
year ended December 31, 2005, which included additional information about the
Company's critical accounting policies, contractual obligations, practices and
the transactions that support the financial results, and provided a more
comprehensive summary of the Company's outlook, trends and strategies for 2006
and beyond.
FORWARD-LOOKING STATEMENTS
The nature of the Company's business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include statements
about our management confidence and strategies for performance; expectations for
new and existing products, technologies, and opportunities; and expectations
regarding growth, sales, cash flows, earnings and Economic Value Added (EVA(R)).
These statements can be identified by the use of such terms as "may," "could,"
"expect," "anticipate," "intend," "believe," or other comparable terms.
Factors which could cause results to differ include, but are not limited to: (1)
changes in the worldwide business environment in which the Company operates,
including general economic conditions; (2) changes in currency exchange rates,
interest rates and capital costs; (3) changes in the performance of stock and
bond markets that could affect the valuation of the assets in the Company's
pension plans and the accounting for pension assets, liabilities and expenses;
(4) changes in governmental laws and regulations, including taxes and import
tariffs; (5) market and competitive changes, including pricing pressures, market
demand and acceptance for new products, services and technologies; (6)
unforeseen business disruptions in one or more of the many countries in which
the Company operates due to political instability, civil disobedience, armed
hostilities or other calamities; and (7) other risk factors listed from time to
time in the Company's SEC reports. A further discussion of these, along with
other potential factors, can be found in Part II, Item 1A, "Risk Factors," of
this Form 10-Q. The Company cautions that these factors may not be exhaustive
and that many of these factors are beyond the Company's ability to control or
predict. Accordingly, forward-looking statements should not be relied upon as a
prediction of actual results. The Company undertakes no duty to update
forward-looking statements.
EXECUTIVE OVERVIEW
The Company's record performance in the third quarter and first nine months of
2006 reflected the execution of the Company's strategy of growth through
increased international diversity and a focused, industrial services-based
portfolio, augmented by selective strategic acquisitions. Also, during the first
nine months of 2006, the Company was generally able to manage increased
commodity and fuel costs in achieving record results. Although the outlook for
the full-year 2006 remains positive with record sales and income expected to be
achieved, the results for the fourth quarter of 2006 are expected to be lower
than the fourth quarter of 2005 which benefited from several special items.
These items include one-time tax benefits recognized in part from the American
Jobs Creations Act and the increased volume benefits from natural disasters like
Hurricane Katrina, as well as the timing of shipments for the railway track
maintenance services and equipment business, all of which were realized in the
fourth quarter of 2005. Commodity costs are also expected to be higher in the
fourth quarter of 2006, especially in the Gas Technologies Segment and the
Engineered Products and Services ("all other") Category. However, improved
fourth quarter results are expected from the Mill Services and Access Services
Segments, the two main growth platforms of the Company.
The Company's third quarter 2006 revenues were a record $875.9 million. This is
an increase of $178.5 million or 26% over the third quarter of 2005. Income from
continuing operations was a record $55.8 million compared with $40.0 million in
2005, an increase of 39%. Diluted earnings per share from continuing operations
were a record $1.32, a 39% increase.
Revenues for the first nine months of 2006 were a record $2.5 billion. This is
an increase of $477.3 million or 23% over the first nine months of 2005. Income
from continuing operations was a record $144.1 million compared with $104.9
million in 2005, an increase of 37%. Diluted earnings per share from continuing
operations were a record $3.42, a 37% increase from 2005.
Both the third quarter and first nine months of 2006 performance benefited from
the Company's November 21, 2005 acquisition of Hunnebeck Group GmbH (Hunnebeck)
and the December 29, 2005 acquisition of the Northern Hemisphere
-19-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART 1 - FINANCIAL INFORMATION
steel mill services operations of Brambles Industrial Services ("BISNH"). Both
of these acquisitions were accretive in the third quarter and first nine months
of 2006. Revenues in the third quarter and first nine months of 2006 were
reduced by the sale of the Company's U.K.-based Youngman manufacturing operation
on October 1, 2005. The net effect of business acquisitions and divestitures
increased revenues by $104.1 million and $287.5 million for the third quarter
and first nine months of 2006, respectively, compared with the same periods last
year.
During the third quarter of 2006, the Company had net cash provided by operating
activities of $94.6 million, a 3.5% decrease from the record $98.1 million
achieved in the third quarter of 2005 due in part to increased voluntary
contributions to the Company's defined benefit pension plans of $6.8 million.
For the first nine months of 2006, the Company had record net cash provided by
operating activities of $278.9 million compared with $232.6 million for the
first nine months of 2005, an increase of 19.9%. The Company has set a target of
$400 million for net cash provided by operating activities for the full year
2006, a 27% increase over the 2005 level. With historically strong cash flows
expected in the fourth quarter, the target should be achievable. The Company's
cash flows are further discussed in the Liquidity and Capital Resources section.
SEGMENT OVERVIEW
Revenues for the third quarter of 2006 for the Mill Services Segment were $345.9
million compared with $254.9 million in the third quarter of 2005, a 36%
increase. Operating income increased by 62% to $37.3 million, from $23.1 million
in the third quarter of 2005. In comparison with the first nine months of 2005,
this Segment achieved period-over-period revenue growth of $221.6 million or
28%, exceeding the $1 billion level, and operating income growth of $26.0
million or 31%. Third quarter operating margins for the Segment increased by 170
basis points to 10.8% from 9.1% in the third quarter of 2005. For the first nine
months, operating margins increased by 30 basis points to 10.8% from 10.5% for
the first nine months of 2005. The increase in operating margins was due to
improved overall operating performance at several locations. The overall effect
of acquisitions increased revenues for the Segment by $55.3 million and $163.7
million for the third quarter and first nine months of 2006, respectively,
compared with the same periods last year. BISNH was accretive during both the
third quarter and first nine months of 2006. The Segment accounted for 39% and
40% of the Company's revenues and 37% and 41% of the operating income for the
third quarter and first nine months of 2006, respectively.
The Access Services Segment's revenues in the third quarter of 2006 were $278.6
million compared with $195.4 million in the third quarter of 2005, a 43%
increase. Operating income increased by 70% to $35.4 million, from $20.9 million
in the third quarter of 2005. Operating margins for the Segment improved by 200
basis points to 12.7% from 10.7% in the third quarter of 2005. In comparison
with the first nine months of 2005, this Segment achieved period-over-period
revenue growth of $188.6 million or 32% and operating income growth of $37.4
million or 73%. Operating margins for the first nine months of 2006 improved by
270 basis points to 11.5% from 8.8% in the first nine months of 2005. These
improvements were broad-based, and were led by the North American and the
European operations. The net effect of business acquisitions and divestitures
increased revenues for this Segment by $48.8 million and $123.8 million for the
third quarter and first nine months of 2006, respectively, compared with the
same periods last year. Hunnebeck was accretive during both the third quarter
and first nine months of 2006. The Access Services Segment accounted for 32% and
31% of the Company's revenues and 35% and 34% of the operating income for the
third quarter and first nine months of 2006, respectively.
The Gas Technologies Segment's revenues in the third quarter of 2006 were $102.6
million compared with $98.0 million in the third quarter of 2005, a 5% increase.
Operating income decreased by 56% to $2.2 million, from $5.2 million in the
third quarter of 2005. In comparison with the first nine months of 2005, this
Segment's revenues increased $19.4 million or 7% in the first nine months of
2006. Operating income for the first nine months of 2006 decreased $5.1 million
or 47% compared with the first nine months of 2005. In the third quarter and
first nine months of 2006, operating income was negatively impacted by
restructuring costs associated with strategic initiatives including exiting a
non-performing product line, as well as higher commodity and energy costs. These
increased costs reduced operating margins for this Segment by 310 basis points
to 2.2% from 5.3%, and by 200 basis points to 2% from 4% for the third quarter
and first nine months of 2006, compared with the same periods last year,
respectively. This Segment accounted for 12% of the Company's revenues for both
the third quarter and first nine months of 2006, and 2% of the operating income
for both the third quarter and the first nine months of 2006.
Four of the five businesses in the Engineered Products and Services ("all
other") Category contributed higher revenues in the third quarter of 2006
compared with the comparable period in 2005, with only the railway track
maintenance services and equipment business showing lower revenues due
principally to the timing of equipment sales. All five businesses contributed
higher revenue in the first nine months of 2006 compared with 2005.
Additionally, all five businesses contributed higher income in the third quarter
and first nine months of 2006 when compared with the comparable periods in 2005.
Overall, operating margins for the Category in the third quarter of 2006
improved by 300 basis points to 17.0%
-20-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART 1 - FINANCIAL INFORMATION
from 14.0% in the third quarter of 2005. Operating margins for the first nine
months of 2006 improved by 190 basis points to 14.5% from 12.6% in the first
nine months of 2005.
In comparison to the third quarter of 2005, the impact of foreign currency
translation for the Company increased 2006 sales and pre-tax income by $17.6
million and $1.0 million, respectively. For the first nine months of 2006, the
impact of foreign currency translation increased sales and pre-tax income by
$5.2 million and $1.4 million, respectively, compared to the same period in
2005.
OUTLOOK OVERVIEW
The Company's operations span several industries and products as more fully
discussed in Part I, Item 1, "Business," of the Company's Form 10-K for the year
ended December 31, 2005. On a macro basis, the Company is affected by worldwide
steel mill production and capacity utilization; non-residential construction and
industrial maintenance activities; industrial production volume; and the general
business trend towards the outsourcing of services. The overall outlook for 2006
and into 2007 continues to be positive for these business drivers.
The Company's Mill Services Segment continues to benefit from consistent levels
of global steel production at mills served by the Company, new contract
signings, contract renewals and accretion from the December 29, 2005 acquisition
of BISNH. However, the Company may experience higher energy costs that could
have a negative impact on operating margins, to the extent these costs cannot be
passed to customers.
Both domestic and international Access Services activity remains strong.
Although the sale of the Youngman light-access manufacturing business in late
2005 has modestly affected 2006 revenues, operating performance in 2006 for the
Segment has benefited and will continue to benefit by accretion from the
November 21, 2005 Hunnebeck acquisition; increased non-residential construction
spending and industrial maintenance activity in the Company's major markets;
strategic investments or acquisitions in new markets and expansion of current
product lines; further market penetration from new products; product
cross-selling opportunities among the markets served by the three Access
Services businesses; and cost reduction opportunities through consolidated
procurement initiatives.
In the Gas Technologies Segment for the remainder of 2006, demand for industrial
cylinders and cryogenics equipment is expected to show continued improvement and
an overall improvement in the valves business is expected compared with the
prior year. International operations are expected to continue to perform well.
However, the risk remains that commodity cost inflation and the availability of
certain raw materials could continue to adversely affect this Segment's results.
The future outlook for the Engineered Products and Services ("all other")
Category is positive, although income in the fourth quarter of 2006 is expected
to be below the equivalent 2005 period. The Company's railway track maintenance
services and equipment business' income and margins are expected to continue to
benefit from the shift toward contract services, with several major contracts
having started in 2006. Notwithstanding this increase in contract services, the
timing of shipments in the fourth quarter of 2006 will likely result in lower
income than 2005's fourth quarter. The air-cooled heat exchangers business is
expected to continue to benefit from strong energy market demand due to
increased natural gas drilling and transmission. While not expecting a repeat of
the same level of benefits from post-Katrina rebuilding experienced in the
fourth quarter of 2005, the industrial grating products business is expected to
continue to post strong results into 2007 due to strong end-markets in energy
and non-residential construction. The roofing granules and abrasives business is
expected to continue to perform well long-term, although increased energy costs,
reduced volume on a comparative basis from post-Katrina rebuilding experienced
in the fourth quarter of 2005 and a fourth quarter 2006 slowdown in the roofing
granule business could reduce operating margins. The boiler and process
equipment business is also expected to continue its strong performance.
The stable or improved market conditions for most of the Company's services and
products and the significant investments made recently for acquisitions and
growth-related capital expenditures provide the base for achieving the Company's
stated objective of growth in diluted earnings per share from continuing
operations and net cash provided by operating activities for the full year 2006
and 2007. The record performance achieved in the first nine months of 2006
provides a solid foundation towards achieving the full-year objectives.
-21-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART 1 - FINANCIAL INFORMATION
---------------------------------------------------------------------------------------------------
REVENUES BY REGION
---------------------------------------------------------------------------------------------------
TOTAL REVENUES
THREE MONTHS ENDED PERCENTAGE GROWTH FROM
SEPTEMBER 30 2005 TO 2006
---------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005 PRICE/VOLUME CURRENCY TOTAL
---------------------------------------------------------------------------------------------------
Europe $ 409.6 $ 274.9 43.0% 6.0% 49.0%
North America 349.1 314.3 10.8 0.3 11.1
Latin America 41.5 37.5 7.0 3.7 10.7
Middle East and Africa 39.6 36.7 11.6 (3.6) 8.0
Asia/Pacific 36.1 34.1 5.6 0.3 5.9
---------------------------------------------------------------------------------------------------
Total $ 875.9 $ 697.5 23.1% 2.5% 25.6%
===================================================================================================
---------------------------------------------------------------------------------------------------
REVENUES BY REGION
---------------------------------------------------------------------------------------------------
TOTAL REVENUES
NINE MONTHS ENDED PERCENTAGE GROWTH FROM
SEPTEMBER 30 2005 TO 2006
---------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005 PRICE/VOLUME CURRENCY TOTAL
---------------------------------------------------------------------------------------------------
Europe $ 1,156.3 $ 831.5 39.4% (0.3)% 39.1%
North America 1,009.0 874.9 14.9 0.4 15.3
Latin America 123.0 111.0 4.0 6.8 10.8
Middle East and Africa 119.1 114.3 6.0 (1.8) 4.2
Asia/Pacific 103.6 102.0 3.2 (1.6) 1.6
---------------------------------------------------------------------------------------------------
Total $ 2,511.0 $ 2,033.7 23.2% 0.3% 23.5%
===================================================================================================
2006 HIGHLIGHTS
The following significant items affected the Company overall during the third
quarter and first nine months of 2006 in comparison with the third quarter and
first nine months of 2005, respectively:
Company Wide:
-------------
o Strong worldwide economic activity, as well as the accretive performance of
the Hunnebeck and BISNH acquisitions, benefited the Company in the third
quarter and first nine months of 2006. This included increased access
equipment services, sales and rentals, especially in North America, Europe
and the Middle East; net increased volume and new business in the Mill
Services Segment; and increased demand for air-cooled heat exchangers,
cryogenics equipment, industrial cylinders and industrial grating products.
o As expected, during the third quarter and first nine months of 2006, the
Company experienced higher fuel and energy-related costs, as well as higher
commodity costs for certain manufacturing businesses. To the extent that
such costs cannot be passed to customers in the future, operating income
may be adversely affected.
o Total pension expense for the first nine months of 2006 increased $3.7
million from the first nine months of 2005. Defined contribution and
multi-employer plan expenses for the first nine months of 2006 increased
approximately $4.4 million from the first nine months of 2005 due to
increased volume in the Mill Services and Access Services Segments. This
was partially offset by decreased defined benefit pension expense of
approximately $0.8 million due to improved returns on plan assets in 2005.
The Company is currently taking additional actions designed to further
mitigate pension expense volatility. This is more fully discussed in the
Outlook, Trends and Strategies section.
o During the first nine months of 2006, international sales and operating
income were 62% and 71%, respectively, of total sales and operating income.
This compares with the first nine months of 2005 levels of 59% of sales and
69% of operating income. As expected, the international percentages have
increased as a result of the Hunnebeck and BISNH acquisitions.
-22-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART 1 - FINANCIAL INFORMATION
MILL SERVICES SEGMENT:
----------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS) 2006 2005 2006 2005
------------------------------------------------------------------------------------
Revenues $ 345.9 $ 254.9 $ 1,016.4 $ 794.8
Operating income 37.3 23.1 109.5 83.5
Operating margin percent 10.8% 9.1% 10.8% 10.5%
====================================================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
------------------------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------------------------
Revenues - 2005 $ 254.9 $ 794.8
Acquisitions - (BISNH and Evulca SAS) 55.3 163.7
Increased volume and new business 27.7 53.0
Impact of foreign currency translation 8.0 4.9
------------------------------------------------------------------------------------
Revenues - 2006 $ 345.9 $ 1,016.4
====================================================================================
MILL SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o Operating income for the third quarter and first nine months of 2006
increased by $13.8 million and $29.4 million, respectively, as a result of
the BISNH acquisition, increased volumes and new business, particularly in
the United States and Europe, partially offset by increased operating costs
(as noted below).
o Compared with the third quarter and first nine months of 2005, the
Segment's operating income and margins in the third quarter and first nine
months of 2006 were negatively impacted by increased fuel and
energy-related costs (excluding increased costs due to acquisitions) of
approximately $3.5 million and $9.9 million, respectively. A portion of
this increase was growth-related. Despite the increased energy costs,
margins improved for the third quarter and first nine months of 2006, when
compared with the comparable period in 2005.
o In the first nine months of 2005, this Segment's operating income was
positively affected by $3.3 million in pre-tax income due to a net gain on
the disposal of assets related to exiting an underperforming contract. No
similar gains were recognized in the first nine months of 2006.
o Foreign currency translation in the third quarter and first nine months of
2006 increased operating income for this Segment by $0.7 million and $1.8
million, respectively, compared with the third quarter and first nine
months of 2005.
-23-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ACCESS SERVICES SEGMENT:
------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------------------
(IN MILLIONS) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------
Revenues $ 278.6 $ 195.4 $ 774.1 $ 585.5
Operating income 35.4 20.9 88.9 51.5
Operating margin percent 12.7% 10.7% 11.5% 8.8%
====================================================================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
-----------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------
Revenues - 2005 $ 195.4 $ 585.5
Net effect of acquisitions and divestitures (Hunnebeck and Cleton offset by
Youngman light-access manufacturing unit
divestiture) 48.8 123.8
Net increased volume and new business 26.1 64.7
Impact of foreign currency translation 8.4 0.1
Other (0.1) --
-----------------------------------------------------------------------------------------------------------------------
Revenues - 2006 $ 278.6 $ 774.1
=======================================================================================================================
ACCESS SERVICES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o In the first nine months of 2006, there was a continued strengthening in
the North American non-residential construction markets that started in
the latter half of 2004. This had a positive effect on volume
(particularly equipment rentals) which caused overall margins and
operating income in North America to improve. Equipment rentals,
particularly in the construction sector, provide the highest margins for
this Segment.
o The net effect of acquisitions and divestitures had a positive effect on
the third quarter and first nine months of 2006 operating income, with the
Hunnebeck business performing well.
o The international access services business continued to improve due to
increased non-residential construction spending and industrial maintenance
activity in the Company's major markets, as well as the Hunnebeck
acquisition.
o Operating income and margins were positively affected in the third quarter
of 2006 due to a $2.5 million gain on the disposal of assets, compared
with a similar gain of $1.6 million in the third quarter of 2005.
o Foreign currency translation in the third quarter and nine months of 2006
increased operating income for this Segment by $0.4 million and $0.3
million, respectively, compared with the third quarter and first nine
months of 2005.
-24-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
GAS TECHNOLOGIES SEGMENT:
-------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------------------
(IN MILLIONS) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------
Revenues $ 102.6 $ 98.0 $ 289.6 $ 270.2
Operating income 2.2 5.2 5.8 10.9
Operating margin percent 2.2% 5.3% 2.0% 4.0%
====================================================================================================
THREE MONTHS NINE MONTHS
ENDED ENDED
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
-----------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------
Revenues - 2005 $ 98.0 $ 270.2
Increased demand for cryogenics equipment and industrial cylinders 6.9 14.6
Increased demand for certain valves and composite-wrapped cylinders 1.8 9.0
Decreased demand for propane tanks in the third quarter of 2006 (4.6) (4.6)
Other 0.5 0.4
-----------------------------------------------------------------------------------------------------------------------
Revenues - 2006 $ 102.6 $ 289.6
=======================================================================================================================
GAS TECHNOLOGIES SEGMENT - SIGNIFICANT IMPACTS ON OPERATING INCOME:
o Operational improvements and the effect of increased sales were offset by
increased brass costs, higher insurance costs and restructuring costs
(principally in the third quarter) associated with strategic initiatives
in the valves business in the third quarter and first nine months of 2006
compared with the same prior-year periods. A strategic action plan has
been implemented to improve the results of the valves business. Cost
savings as a result of this plan helped decrease the impact of
significantly increased brass costs in 2006. In addition, certain product
lines are being rationalized which resulted in significant restructuring
costs incurred in the third quarter. This plan is further discussed in the
Outlook, Trends and Strategies section.
o The international businesses, principally in Europe and, to a lesser
extent, Asia, contributed to the improved performance of the cryogenics
business during the third quarter and first nine months of 2006 compared
with the third quarter and first nine months of 2005.
o Despite higher demand for industrial cylinders, operating income decreased
from the prior year in both the third quarter and first nine month of 2006
due mainly to the effect of equipment repairs and maintenance, product mix
and higher commodity and energy-related costs.
o Operating income decreased for propane tanks in the third quarter and
first nine months of 2006, due to decreased third quarter demand, as well
as increased commodity and insurance costs. The negative effect of these
items was partially offset by favorable product mix and process
improvement initiatives.
o Operating income increased in the third quarter and first nine months of
2006 for composite-wrapped cylinders due to increased sales and favorable
product mix, partially offset by higher raw material costs.
o The impact of foreign currency translation in the third quarter and first
nine months of 2006 did not have a material impact on operating income for
this Segment when compared with the third quarter and first nine months of
2005.
-25-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY:
--------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------------------------------------------------------------------------------------
(IN MILLIONS) 2006 2005 2006 2005
----------------------------------------------------------------------------------------------------
Revenues $ 148.8 $ 149.2 $ 430.9 $ 383.2
Operating income 25.2 20.9 62.7 48.2
Operating margin percent 17.0% 14.0% 14.5% 12.6%
====================================================================================================
THREE MONTHS NINE MONTHS
ENGINEERED PRODUCTS & SERVICES ("ALL OTHER") CATEGORY - ENDED ENDED
SIGNIFICANT IMPACTS ON REVENUES SEPTEMBER 30 SEPTEMBER 30
-----------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------------------------------------------------------------------------
Revenues - 2005 $ 149.2 $ 383.2
Air-cooled heat exchangers 6.4 28.2
Industrial grating products 3.6 7.6
Boiler and process equipment 1.9 4.4
Roofing granules and abrasives 0.5 4.4
Railway track maintenance services and equipment (13.6) 3.4
Impact of foreign currency translation 0.7 (0.2)
Other 0.1 (0.1)
-----------------------------------------------------------------------------------------------------------------------
Revenues - 2006 $ 148.8 $ 430.9
=======================================================================================================================
ENGINEERED PRODUCTS AND SERVICES ("ALL OTHER") CATEGORY - SIGNIFICANT IMPACTS
ON OPERATING INCOME:
o Operating income for the air-cooled heat exchangers business improved in
the third quarter and first nine months of 2006 due to increased volume
resulting from an improved natural gas market.
o Increased third quarter and first nine months of 2006 operating income for
the industrial grating products business was due principally to higher
pricing consistent with higher commodity costs and an improved product
mix.
o Operating income for the railway track maintenance services and equipment
business was higher in the third quarter of 2006 compared with the same
period of 2005 due to increased contract services volume, partially offset
by reduced equipment sales due to the timing of orders. Operating income
for the first nine months of 2006 was also higher due to increased repair
parts volume and improved equipment sales mix, partially offset by reduced
contract services income due to higher maintenance and start-up costs of
new contracts.
o The boiler and process equipment business delivered improved third quarter
and first nine months 2006 results due to improved revenues from the
new-generation Mach boilers, Thermific boilers and process equipment.
o Higher pricing resulting from the pass through of higher energy costs for
roofing granules and abrasives again sustained profitable results for that
business in the third quarter and first nine months of 2006.
o The impact of foreign currency translation in the third quarter and first
nine months of 2006 did not have a material impact on operating income for
this Category when compared with the third quarter and first nine months
of 2005.
OUTLOOK, TRENDS AND STRATEGIES
Looking to the remainder of 2006 and beyond, the following significant items,
trends and strategies are expected to affect the Company:
Company Wide:
-------------
o In the fourth quarter of 2006, the Company expects continued strong
performance in the worldwide Mill Services and Access Services Segments.
However, results for the Engineered Products and Services ("all other")
Category will likely be below the fourth quarter of 2005 due to the timing of
orders and shipments for the railway track maintenance services and equipment
business; no repeat of the benefits from Hurricane Katrina for the industrial
grating business and the roofing granules and abrasives business; a fourth
quarter slow-down in the roofing granules market; and
-26-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
higher commodity costs than experienced in the fourth quarter of 2005. In
addition, the fourth quarter of 2005 benefited from a lower overall tax rate
due to the one-time impact of the American Jobs Creation Act and the one-time
benefit from designating certain international earnings as permanently
reinvested.
o The Company will continue its focus on expanding the industrial services
businesses, with a particular emphasis on growing the Mill Services Segment
and the Access Services Segment through the provision of additional services
to existing customers, new contracts in both developed and emerging markets
and strategic acquisitions. Additionally, new higher-margin service
opportunities in railway services will be pursued globally.
o The Company will continue to invest in strategic acquisitions and growth
capital investments; however, management will be very selective with the
capital investments, choosing those with the highest Economic Value Added
(EVA(R)).
o A greater focus on corporate-wide expansion into China and other emerging
economies (e.g., Brazil, India, etc.) is expected in the coming years. More
specifically, within the next three to five years, a focused strategy of the
Company will be to approximately double the presence in the Latin American,
Asia Pacific, Middle East and Africa, and Eastern European markets to
approximately 30% of total revenues.
o The continued growth of the Chinese steel industry, as well as other Asian
emerging economies, could impact the Company in several ways. Increased steel
mill production in China, and in other Asian countries, may provide
additional service opportunities for the Mill Services Segment. However,
increased Asian steel exports could result in lower steel production in other
parts of the world, affecting the Company's customer base. Additionally,
continued increased Chinese economic activity may result in increased
commodity costs in the future, which may adversely affect the Company's
manufacturing businesses. The potential impact of these risks is currently
unknown.
o Increases in energy and commodity costs (e.g., natural gas, steel, brass,
aluminum, etc.) and worldwide demand for these commodities could have an
adverse effect on the Company's raw material costs and ability to obtain the
necessary raw materials. Fuel and energy costs increased approximately $15
million in the first nine months of 2006 compared with the first nine months
of 2005 (excluding increased costs due to acquisitions). A portion of this
increase was growth-related. Should cost increases continue, it could result
in reduced operating income for certain products to the extent that such
costs cannot be passed on to customers. The effect of any Middle East armed
hostilities on the cost of fuel and commodities is currently unknown, but it
could have a significant effect. Certain commodity costs are anticipated to
increase in the last quarter of 2006 in comparison with the same period of
2005.
o The armed hostilities in the Middle East could have a significant effect on
the Company's operations in the region. The potential impact of this risk is
currently unknown. This exposure is further discussed in Part II, Item 1A,
"Risk Factors."
o Foreign currency translation had an overall favorable impact on the Company's
sales and operating income during the first nine months of 2006 compared with
the first nine months of 2005. If the U.S. dollar strengthens, particularly
in relationship to the euro or British pound sterling, the impact on the
Company would generally be negative in terms of reduced sales, income and
Stockholders' equity.
o An internal target of $400 million in net cash provided by operating
activities has been established for 2006. Currently, this target is expected
to be achieved, helping to support the Company's growth initiatives.
o Controllable cost reductions and continuous process improvement initiatives
across the Company are targeted to further enhance margins for most
businesses. These initiatives include improved supply chain management;
additional outsourcing in the manufacturing businesses; and an added emphasis
on corporate-wide procurement initiatives. The Company will use its increased
size and leverage due to recent acquisitions to reduce vendor costs and focus
on additional opportunities for cost reductions via procurement in low-cost
countries such as China and India.
o Total pension expense (defined benefit, defined contribution and
multi-employer) for 2006 is expected to approximate or be slightly higher
than the 2005 level. In the U.K., defined benefit pension expense is expected
to decline in 2006 due to the significant level of cash contributions,
including voluntary cash contributions (approximately $16.9 million during
2005 and $9.4 million in the third quarter of 2006, which, by itself, will
have a positive effect on future years' pension expense), to the defined
benefit pension plan as well as the improved 2005 performance of the plan's
assets. Domestically, the majority of the twenty-year amortization of the
transition asset (from the initial implementation of SFAS No. 87 in 1986) has
ceased during 2006. By itself, the elimination of this benefit is projected
to increase domestic defined-benefit pension expense by approximately $1.0
million when compared with 2005. The Company's pension task force continues
to evaluate alternative strategies to further mitigate overall pension
expense, including the on-going evaluation of investment fund managers'
performance; the balancing of plan assets and liabilities; the risk
assessment of all multi-employer pension plans; the possible merger of
certain plans; the consideration of incremental cash contributions to certain
plans; and other changes that should mitigate future volatility and expense.
On a comparative basis, total pension expense in the first nine months of
2006 was $3.7 million higher than the first nine months of 2005, partially
due to the effect of acquired companies.
o Changes in worldwide interest rates, particularly in the U.S. and Europe,
could have a significant effect on the Company's overall interest expense, as
currently approximately 48% of the Company's borrowings are at variable
interest rates (in comparison to approximately 50% at December 31, 2005 and
16% at September 30, 2005). The
-27-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
Company manages the mix of fixed rate and floating rate debt to preserve
adequate funding flexibility as well as control the effect of interest rate
changes on consolidated interest expense.
Mill Services Segment:
----------------------
o Further consolidation in the global steel industry is probable. Should
transactions occur involving some of the steel industry's larger companies
that are customers of the Company, it would result in an increase in
concentration of revenues and credit risk for the Company. If a large
customer were to experience financial difficulty, or file for bankruptcy
protection, it could adversely impact the Company's income, cash flows and
asset valuations. As part of its credit risk management practices, the
Company closely monitors the credit standing and accounts receivable position
of its customer base. Further consolidation may also increase the competitive
risk of services contracts which are up for renewal. Conversely, such
consolidation may provide additional service opportunities for the Company as
the Company believes it is well-positioned competitively.
o To maintain pricing levels, a more disciplined steel industry has been
adjusting production levels to bring inventories in-line with current demand.
However, based on current market conditions and industry reports, the Company
expects global steel production to remain stable for the remainder of 2006,
which would generally have a favorable effect on this Segment's revenues.
This is despite expected softness in the North America market for the
remainder of 2006.
o The increased energy-related costs this Segment experienced during the first
nine months of 2006 are expected to persist through the remainder of 2006. In
the first nine months of 2006, these costs increased approximately $10
million compared with the first nine months of 2005 (excluding increased
costs due to acquisitions). Some of these costs were passed on to customers
in the form of selling price increases. Given the volatility of such costs,
the future effect on the Company cannot be quantified.
o The Company has been placing significant emphasis on improving operating
margins of this Segment. Specific plans for 2006 and 2007 include global
procurement initiatives; process improvement programs; maintenance best
practices programs; and execution of its reorganization plan.
Access Services Segment:
------------------------
o Both the international and domestic Access Services businesses have
experienced buoyant markets during 2006 and that is expected to continue
during the remainder of the year and into 2007. Specifically, international
and especially North American non-residential construction activity continues
at historically high volume levels. Additionally, new product line additions
continue to benefit growth in North America.
Gas Technologies Segment:
-------------------------
o Worldwide supply and demand for steel, aluminum and, to a lesser extent, the
availability of carbon fiber used to manufacture filament-wound composite
cylinders could have adverse effects on future raw material costs and this
Segment's ability to obtain the necessary raw materials. Overall commodity
costs are expected to increase in the fourth quarter of 2006 compared with
the same period in the prior year. Additionally, the price of brass, a raw
material used for the production of certain valves, continued to increase
during the first nine months of 2006. Should brass prices continue to
increase during the remainder of 2006, this could result in reduced operating
income for certain products to the extent that such costs cannot be passed on
to customers.
o A comprehensive strategic plan to improve the performance of the valves
business was developed during the fourth quarter of 2005 and is currently
being executed. The plan includes the following: a new senior management
team; development and marketing of new products; focus on an expanded
international customer base; consolidating certain manufacturing processes;
process improvements within the manufacturing operations including
outsourcing; and optimization of the organizational structure of the
business. In addition, certain product lines are being rationalized in the
second half of 2006. If the business conditions encountered during 2005 and
the first nine months of 2006 persist, and raw material costs continue to
increase, despite execution of the strategic action plan and product-line
rationalization, the valuation of this business could be negatively impacted.
o The industrial cylinder and cryogenic equipment businesses are expected to
show continued improved performance for the remainder of 2006. The
international businesses will continue to contribute to the improved
performance of the cryogenic equipment business in the fourth quarter of
2006.
Engineered Products and Services ("all other") Category:
--------------------------------------------------------
o International demand for the railway track maintenance services and equipment
business' products and services has been strong and is expected to remain so.
However, on a comparative basis, fourth quarter 2006 sales and operating
income for this business are expected to be less than the comparable 2005
period due to the shipment of several large machine orders in 2005.
Nonetheless, operating income is expected to be higher for the year 2006
compared with 2005 due to increased volume of higher-margin industrial
services and manufacturing process improvements and
-28-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
efficiencies that are expected to improve margins on a long-term basis.
Additionally, higher-margin international equipment sales will continue to be
pursued by this business.
o The industrial grating business is expected to sustain improved operating
income for 2006, although operating income in the fourth quarter of 2006 will
likely be lower than the same period in 2005 due to the positive effect of
Hurricane Katrina rebuild activity in the fourth quarter of 2005 as well as
higher steel costs.
o Worldwide supply and demand for steel could have an adverse impact on raw
material costs and the ability to obtain the necessary raw materials for most
businesses in this Category. The Company has implemented certain strategies
and plans to help ensure continued product supply to our customers and
mitigate the potentially negative impact rising steel prices could have on
operating income.
o The roofing granules and abrasives business is expected to continue to
perform well long-term, although increased energy costs, reduced volume on a
comparative basis from post-Katrina rebuilding experienced in the fourth
quarter of 2005 and a fourth quarter 2006 slowdown in the roofing granule
business could reduce operating margins. This business is pursuing the use of
more energy-efficient equipment to help mitigate the increased energy-related
costs.
o Due to a strong natural gas market and additional North American
opportunities, demand for air-cooled heat exchangers is expected to remain
strong for the remainder of 2006.
RESULTS OF OPERATIONS
---------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE AND PERCENTAGES) 2006 2005 2006 2005
---------------------------------------------------------------------------------------------------------------------------------
Revenues from continuing operations $ 875.9 $ 697.5 $2,511.0 $2,033.7
Cost of services and products sold 646.0 532.6 1,866.6 1,552.6
Selling, general and administrative expenses 126.4 95.1 370.9 287.3
Other (income) expenses 2.6 (0.5) 6.1 0.3
Operating income from continuing operations 100.2 69.6 265.2 191.4
Interest expense 15.3 9.9 44.0 30.8
Income tax expense from continuing operations 28.3 18.6 73.9 51.4
Net income 55.8 40.0 143.9 104.8
Diluted earnings per common share 1.32 0.95 3.41 2.49
Consolidated effective income tax rate 32.9% 30.8% 32.9% 31.6%
---------------------------------------------------------------------------------------------------------------------------------
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
Revenues for the third quarter of 2006 increased $178.5 million or 26% from the
third quarter of 2005. Revenues for the first nine months of 2006 increased
$477.3 million or 23% from the first nine months of 2005. These increases were
attributable to the following significant items:
-29-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
CHANGES IN REVENUES - 2006 VS. 2005 THIRD QUARTER NINE MONTHS
----------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
Net effect of business acquisitions and divestitures in the Mill Services $ 104.1 $ 287.5
Segment ($55.3 million and $163.7 million, for the third quarter and nine
months, respectively) and the Access Services Segment ($48.8 million
and $123.8 million for the third quarter and nine months, respectively).
Net increased revenues in the Access Services Segment due principally to 26.1 64.7
improved markets in North America and the continued strength of the
international business, particularly in Europe (excluding the net effect of
acquisitions and divestitures).
Net increased volume, new contracts and sales price changes in the Mill 27.7 53.0
Services Segment, particularly the U.S. (excluding acquisitions).
Increased revenues of the air-cooled heat exchangers business due to an 6.4 28.2
improved natural gas market.
Net increased revenues in the Gas Technologies Segment due principally to 4.2 19.0
increased demand for certain valves, cryogenics equipment and industrial
cylinders.
Increased revenues in the industrial grating products business due to improved 3.6 7.6
pricing as a result of higher commodity costs.
Effect of positive foreign currency translation. 17.6 5.2
Increased revenues in the railway track maintenance services and equipment -- 3.4
business due to increased contract services and repair parts sales,
partially offset by decreased rail equipment sales.
Decreased revenues in the railway track maintenance services and equipment (13.6) --
business due to decreased rail equipment sales, partially offset by
increased contract services.
Other (minor changes across the various units not already mentioned). 2.4 8.7
----------------------------------------------------------------------------------------------------------------------------
Total Change in Revenues - 2006 vs. 2005 $ 178.5 $ 477.3
============================================================================================================================
COST OF SERVICES AND PRODUCTS SOLD
Cost of services and products sold for the third quarter of 2006 increased
$113.3 million, or 21%, from the third quarter of 2005, a lower rate than the
26% increase in revenues. Cost of services and products sold for the first nine
months of 2006 increased $314.0 million, or 20%, from the first nine months of
2005, a lower rate than the 23% increase in revenues. These changes were
attributable to the following significant items:
CHANGES IN COST OF SERVICES AND PRODUCTS SOLD - 2006 VS. 2005 THIRD QUARTER NINE MONTHS
----------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
Net effect of business acquisitions and divestitures. $ 72.3 $ 196.4
Increased costs due to increased revenues (exclusive of the effect of foreign 40.8 138.0
currency translation and business acquisitions and including the impact of
increased commodity and energy costs included in selling prices).
Effect of foreign currency translation. 12.8 4.3
Other (due to product mix; cost controls; process improvements; volume- (12.6) (24.7)
related efficiencies and minor changes across the various units not already
mentioned; partially offset by increased fuel and energy-related costs not
recovered through selling prices).
----------------------------------------------------------------------------------------------------------------------------
Total Change in Cost of Services and Products Sold - 2006 vs. 2005 $ 113.3 $ 314.0
============================================================================================================================
-30-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third quarter of
2006 increased $31.4 million or 33% from the third quarter of 2005, a higher
rate than the 26% increase in revenues. SG&A expenses for the first nine months
of 2006 increased $83.6 million or 29% from the first nine months of 2005, a
higher rate than the 23% increase in revenues. These higher relative percentage
increases in SG&A expenses as compared with revenues were due principally to the
effect of certain acquisitions which, by their nature, have a higher percentage
of SG&A-related costs. The increases in SG&A expense amounts were attributable
to the following significant items with the principal driver being the continued
expansion of the business:
CHANGES IN SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES - 2006 VS. 2005 THIRD QUARTER NINE MONTHS
----------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
Net effect of business acquisitions and divestitures. $ 19.1 $ 53.7
Higher compensation expense due to salary increases, increased headcount, 5.1 17.7
higher commissions and employee incentive plan costs due to improved
performance.
Increased space and equipment rentals, supplies, utilities and fuel costs. 1.0 3.0
Increased professional fees. 1.4 2.6
Increased travel and entertainment expenses. 1.0 2.1
Effect of foreign currency translation. 2.8 0.3
Other. 1.0 4.2
----------------------------------------------------------------------------------------------------------------------------
Total Change in Selling, General and Administrative
Expenses - 2006 vs. 2005 $ 31.4 $ 83.6
============================================================================================================================
OTHER (INCOME) EXPENSES
This income statement classification includes impaired asset write-downs,
employee termination benefit costs and costs to exit activities, offset by net
gains on the disposal of non-core assets. Net Other expenses were $2.6 million
in the third quarter of 2006, compared with income of $0.5 million in the
comparable 2005 period. Net Other expenses were $6.1 million in the first nine
months of 2006, compared with $0.3 million in the first nine months of 2005.
These increases in net expenses were attributable to the following significant
items:
CHANGES IN OTHER (INCOME) EXPENSES - 2006 VS. 2005 THIRD QUARTER NINE MONTHS
----------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------------------------------------------------------------
Increase in impaired asset write-downs due principally to exiting an $ 4.3 $ 4.0
underperforming product line of the Gas Technologies Segment.
(Increase)/decrease in net gains on the disposal of non-core assets. (0.6) 1.6
Increase in other expenses due principally to certain contract termination costs
in the second and third quarters of 2006. 0.3 1.3
Increase/(decrease) in costs to exit activities. (0.3) 0.3
Decrease in employee termination benefit costs. (0.6) (1.4)
----------------------------------------------------------------------------------------------------------------------------
Total Change in Other (Income) Expenses - 2006 vs. 2005 $ 3.1 $ 5.8
============================================================================================================================
INTEREST EXPENSE
Interest expense for the third quarter of 2006 increased $5.3 million or 54% and
$13.2 million or 43% from the third quarter and first nine months of 2005,
respectively. These increases were principally due to increased borrowings to
finance business acquisitions made in the fourth quarter of 2005.
INCOME TAX EXPENSE FROM CONTINUING OPERATIONS
Income tax expense from continuing operations increased $9.7 million or 52% and
$22.5 million or 44%, for the third quarter and first nine months of 2006,
respectively. This was primarily due to increased earnings from continuing
operations and, to a lesser extent, an increased effective income tax rate from
continuing operations. The effective income tax rate of 32.9% for both the third
quarter and first nine months of 2006, compared with 30.8% and 31.6% for the
third quarter and first nine months of 2005, respectively. The increase in the
effective income tax rate for both the third
-31-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
quarter and first nine months 2006 was primarily due to a one-time tax benefit
in the third quarter of 2005 related to an approximately $1.0 million tax refund
from an international jurisdiction.
NET INCOME AND EARNINGS PER SHARE
Net income of $55.8 million and diluted earnings per share of $1.32 in the third
quarter of 2006 exceeded the third quarter of 2005 by $15.8 million or 40% and
$0.37 or 39%, respectively. Net income of $143.9 million and diluted earnings
per share of $3.41 in the first nine months of 2006 exceeded the first nine
months of 2005 by $39.1 million or 37% and $0.92 or 37%, respectively. These
increases are primarily due to strong demand for most of the Company's services
and products and the net effect of business acquisitions and divestitures.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Building on 2005's record cash provided by operations of $315.3 million, the
Company continued its momentum by achieving a record $278.9 million in operating
cash in the first nine months of 2006, 20% higher than the $232.6 million in the
first nine months of 2005. Since the fourth quarter has historically been the
most significant for cash flow generation, the Company's management reaffirms
its previously stated strategic objective for 2006 of generating a record $400
million in net cash provided by operating activities.
The significant source of cash generated in the first nine months of 2006
enabled the Company to invest $256.5 million in capital expenditures (over 44%
of which were for revenue-growth projects); pay $40.9 million in stockholder
dividends; invest $11.4 million in business acquisitions; and make $10.6 million
in voluntary contributions to the Company's defined benefit pension plans.
Additionally, the Company has generated $11.4 million of cash from the sale of
non-core assets during the first nine months of 2006, making substantial
progress towards the Company's 2006 target of $15 million.
The Company's net cash borrowings decreased $19.9 million in the first nine
months of 2006. Balance sheet debt, which is affected by foreign currency
translation, increased $33.9 million from December 31, 2005. However, for the
same period, the debt to total capital ratio declined from 50.4% to 47.5% as a
result of increased Stockholders' Equity.
The Company's strategy remains to redeploy excess or discretionary cash in
long-term, high renewal-rate services contracts for the Mill Services business;
for growth and international diversification in the Access Services Segment and
the railway track maintenance services and equipment business; and for sensible
bolt-on acquisitions in the industrial services businesses. The Company also
forsees continuing its long and consistent history of paying dividends to
stockholders and pay down debt to the extent possible.
The Company also intends to focus on improved working capital management.
Specifically, accounts receivable in the Access Services Segment and inventory
levels in the manufacturing businesses will continue to be scrutinized and
challenged to improve the Company's use of funds.
SOURCES AND USES OF CASH
The Company's principal sources of liquidity are cash from operations and
short-term borrowings under its various credit agreements, augmented
periodically by cash proceeds from asset sales. The primary drivers of the
Company's cash flow from operations are the Company's sales and income,
particularly in the services businesses. The Company's long-term Mill Services
contracts provide predictable cash flows for several years into the future. (See
"Certainty of Cash Flows" section for additional information on estimated future
revenues of Mill Services contracts and order backlogs for the Company's
manufacturing businesses and railway track maintenance services and equipment
business). Cash returns on capital investments made in prior years, for which no
cash is currently required, are a significant source of operating cash.
Depreciation expense related to these investments is a non-cash charge. The
Company also continues to maintain working capital at a manageable level based
upon the requirements and seasonality of the businesses.
Major uses of operating cash flows and borrowed funds include payroll costs and
related benefits; pension funding payments; raw material purchases for the
manufacturing businesses; income tax payments; interest payments; insurance
premiums and payments of self-insured casualty losses; and machinery, equipment,
automobile and facility rental payments. Other primary uses of cash include
capital investments, principally in the industrial services businesses; debt
principal and interest payments; and dividend payments. Cash will also be used
for bolt-on acquisitions as the appropriate opportunities arise.
-32-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
RESOURCES AVAILABLE FOR CASH REQUIREMENTS - The Company has various credit
facilities and commercial paper programs available for use throughout the world.
The following table illustrates the amounts outstanding under credit facilities
and commercial paper programs and available credit at September 30, 2006.
SUMMARY OF CREDIT FACILITIES AND
COMMERCIAL PAPER PROGRAMS AS OF SEPTEMBER 30, 2006
--------------------------------------------------------------------------------------------
(IN MILLIONS) FACILITY OUTSTANDING AVAILABLE
LIMIT BALANCE CREDIT
--------------------------------------------------------------------------------------------
U.S. commercial paper program $ 550.0(a) $ 266.9 $ 283.1
Euro commercial paper program 254.1 191.4 62.7
Revolving credit facility (b) 450.0 -- 450.0
Supplemental credit facility (b) 100.0 -- 100.0
Bilateral credit facility (c) 50.0 9.4 40.6
--------------------------------------------------------------------------------------------
TOTALS AT SEPTEMBER 30, 2006 $1,404.1 $ 467.7 $ 936.4(d)
============================================================================================
(a) Increased from $400 million to $550 million in June 2006.
(b) U.S.-based program
(c) International-based program
(d) Although the Company has significant available credit, it is the Company's policy to
limit aggregate commercial paper and credit facility borrowings at any one time to
a maximum of $600 million.
For more information on the Company's credit facilities, see Note 6, "Debt and
Credit Agreements," to the Company's Form 10-K for the year ended December 31,
2005.
CREDIT RATINGS AND OUTLOOK - The following table summarizes the Company's
debt ratings at September 30, 2006:
U.S.-BASED
LONG-TERM NOTES COMMERCIAL PAPER OUTLOOK
---------------------------------------------------------------------------------------------
Standard & Poor's (S&P) A- A-2 Stable
Moody's A3 P-2 Stable
Fitch A- F2 Stable
---------------------------------------------------------------------------------------------
The Company's euro-based commercial paper program has not been rated since the
euro market does not require it. In August 2006, S&P reaffirmed its A- and A-2
ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. In August 2006, Fitch reaffirmed its A-
and F2 ratings for the Company's long-term notes and U.S. commercial paper,
respectively, and its stable outlook. Moody's reaffirmed its ratings for the
Company in December 2005. A downgrade to the Company's credit ratings would
probably increase borrowing costs to the Company, while an improvement in the
Company's credit ratings would probably decrease borrowing costs to the Company.
-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 INCREASE
(DOLLARS ARE IN MILLIONS) 2006 2005 (DECREASE)
-------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 99.5 $ 120.9 $ (21.4)
Accounts receivable, net 754.8 666.3 88.5
Inventories 284.8 251.1 33.7
Other current assets 81.0 60.4 20.6
Assets held-for-sale 2.1 2.3 (0.2)
-------------------------------------------------------------------------------------------------
Total current assets 1,222.2 1,101.0 121.2
-------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Notes payable and current maturities 108.6 104.0 4.6
Accounts payable 255.0 247.2 7.8
Accrued compensation 85.1 75.7 9.4
Income taxes payable 69.0 42.3 26.7
Other current liabilities 322.5 279.2 43.3
-------------------------------------------------------------------------------------------------
Total current liabilities 840.2 748.4 91.8
-------------------------------------------------------------------------------------------------
WORKING CAPITAL $ 382.0 $ 352.6 $ 29.4
-------------------------------------------------------------------------------------------------
CURRENT RATIO 1.5:1 1.5:1
=================================================================================================
Working capital increased approximately 8% in the first nine months of 2006 due
principally to the following factors:
o Cash decreased by $21.4 million due principally to payments made to reduce
the Company's net cash borrowings.
o Net receivables increased by $88.5 million due principally to increases in
the Mill Services and Access Services Segments which were largely due to
higher sales, timing of collections, and foreign currency translation as a
result of the strengthening of the euro and the British pound sterling in
relation to the U.S. dollar. Partially offsetting these increases was the
timing of cash collections in the railway track maintenance services and
equipment business.
o Inventories increased $33.7 million from December 31, 2005 due to the
following factors:
- Increased raw materials, finished goods and work-in-process inventories
in the Gas Technologies Segment due to higher material costs and to
meet expected customer demand.
- Increased finished goods and raw materials in the Engineered Products
and Services Category due to higher material costs and to meet expected
customer demand.
- Increased inventories in the Access Services business due to the Cleton
acquisition and to meet expected customer demand.
o Income taxes payable increased $26.7 million due to increased earnings in
the third quarter of 2006 and certain tax reserves that were offset by an
increase in other current assets.
o Other current liabilities increased $43.3 million principally due to
accrued interest on the Company's borrowings and, to a lesser extent,
foreign currency translation and increased insurance liabilities.
CERTAINTY OF CASH FLOWS - The certainty of the Company's future cash flows is
underpinned by the long-term nature of the Company's mill services contracts. At
December 31, 2005, the Company's mill services contracts had estimated future
revenues of $4.3 billion. In addition, as of September 30, 2006, the Company had
an order backlog of $311.8 million for its manufacturing businesses and railway
track maintenance services and equipment business. This compares with $275.8
million at December 31, 2005 and $323.4 million at September 30, 2005. The
increase from December 31,
-34-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
2005 is due principally to increased demand for certain products within the Gas
Technologies Segment as well as heat exchangers and industrial grating within
the Engineered Products and Services ("all other") Category. The decrease from
September 30, 2005 is due principally to the timing of orders and shipments of
railway track maintenance equipment. The railway track maintenance services and
equipment business backlog includes a significant portion that will not be
realized until 2007 and later due to the long lead time necessary to build
certain equipment, and the long-term nature of certain service contracts.
Backlog for scaffolding, shoring and forming services and for roofing granules
and slag abrasives is not included in the total backlog because it is generally
not relevant, due to the short lead times between customer orders and the
provision of services or delivery of products.
The types of products and services that the Company provides are not subject to
rapid technological change, which increases the stability of related cash flows.
Additionally, each of the Company's businesses is among the top three companies
(relative to sales) in the industries the Company serves. Due to these factors,
the Company is confident in its future ability to generate positive cash flows
from operations.
CASH FLOW SUMMARY
The Company's cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows, are summarized
in the following table:
SUMMARIZED CASH FLOW INFORMATION
----------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30
(IN MILLIONS) 2006 2005
----------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 278.9 $ 232.6
Investing activities (256.4) (198.9)
Financing activities (53.2) (7.0)
Effect of exchange rate changes on cash 9.2 (7.5)
----------------------------------------------------------------------------------
Net change in cash and cash equivalents $ (21.4)(a) $ 19.1(a)
==================================================================================
(a) Does not total due to rounding
CASH FROM OPERATING ACTIVITIES - Net cash provided by operating activities in
the first nine months of 2006 was $278.9 million, an increase of $46.3 million
(20%) from the first nine months of 2005. The increased cash from operations was
a result of the following factors:
o Increased net income in the first nine months of 2006 compared with the
first nine months of 2005.
o The use of cash for net inventories in the first nine months of 2006 was
significantly less than the use of cash for net inventories for the
comparable period in 2005. This was due principally to the timing of
inventory purchases in the railway track maintenance services and
equipment business, partially offset by purchases for the industrial
grating business to take advantage of reduced pricing opportunities.
o Net receivables increased as of September 30, 2006 compared with December
31, 2005. This was due to overall increased sales during the third quarter
of 2006 compared with the fourth quarter of 2005 and the timing of cash
collections in the Mill Services and Gas Technologies Segments as well as
the international Access Services business.
o The source of cash for other assets and liabilities in the first nine
months of 2006 was significantly less than the source of cash for other
assets and liabilities for the comparable period in 2005. This was
principally due to an increase in insurance liabilities during 2005 not
repeated in 2006, partially offset by an increase in the tax provision due
to increased net income in 2006. The increased insurance liabilities
during 2005 were directly offset by increased third-party insurance claim
receivables.
CASH USED IN INVESTING ACTIVITIES - Capital investments for the first nine
months of 2006 were $256.5 million. This was an increase of $47.2 million (23%)
over the first nine months of 2005. Over 44% of the investments were for
projects intended to grow future revenues. Investments were made predominantly
in the industrial services businesses, with 47% in the Mill Services Segment and
40% in the Access Services Segment. Throughout the remainder of 2006 and into
-35-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
2007, the Company plans to continue to invest in high-return projects and
bolt-on acquisitions, principally in the industrial services businesses.
CASH USED IN FINANCING ACTIVITIES - The following table summarizes the
Company's debt and capital positions at September 30, 2006 and December 31,
2005.
SEPTEMBER 30 DECEMBER 31
(DOLLARS ARE IN MILLIONS) 2006 2005
----------------------------------------------------------------------------------
Notes Payable and Current Maturities $ 108.6 $ 104.0
Long-term Debt 935.1 905.9
----------------------------------------------------------------------------------
Total Debt 1,043.7 1,009.9
Total Equity 1,155.0 993.9
----------------------------------------------------------------------------------
Total Capital $2,198.7 $2,003.9(a)
Total Debt to Total Capital 47.5% 50.4%
==================================================================================
(a) Does not total due to rounding
The Company's debt as a percent of total capital as of September 30, 2006
decreased from December 31, 2005. Balance sheet debt increased due to foreign
currency translation resulting from the weakening of the U.S. dollar in
comparison with the euro and the British pound sterling. Additionally, total
equity increased due principally to increased net income for the nine months
ended September 30, 2006, and positive foreign currency translation, and to a
lesser extent, increases in additional paid-in capital for stock option
exercises.
DEBT COVENANTS
The Company's credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Based on balances at September 30, 2006, the Company could
increase borrowings by approximately $688.3 million and still be within its debt
covenants. Alternatively, keeping all other factors constant, the Company's
equity could decrease by approximately $457.9 million and the Company would
still be within its covenants. The Company's 7.25% British pound
sterling-denominated notes due October 27, 2010 also include a covenant that
permits the note holders to redeem their notes, at par, in the event of a change
of control of the Company. The Company expects to be compliant with these debt
covenants one year from now.
CASH AND VALUE-BASED MANAGEMENT
The Company plans to continue with its strategy of selective investing for
strategic purposes for the foreseeable future. The goal of this strategy is to
improve the Company's Economic Value Added (EVA(R)) under the program that
commenced January 1, 2002. Under this program, the Company evaluates strategic
investments based upon the investment's economic profit. EVA equals after-tax
operating profits less a charge for the use of the capital employed to create
those profits (only the service cost portion of pension expense is included for
EVA purposes). Therefore, value is created when a project or initiative produces
a return above the cost of capital. Consistent with the third quarter and the
first nine months of 2006 results, meaningful improvement in EVA was achieved
compared with the third quarter and the first nine months of 2005.
The Company is committed to continue paying dividends to stockholders. The
Company has increased the dividend rate for twelve consecutive years, and in
August 2006, the Company paid its 225th consecutive quarterly cash dividend. In
September 2006, the Company declared its 226th consecutive quarterly cash
dividend. The Company also plans to pay down debt to the extent possible.
Additionally, the Company has authorization to repurchase up to one million of
its shares through January 1, 2007.
The Company's financial position and debt capacity should enable it to meet
current and future requirements. As additional resources are needed, the Company
should be able to obtain funds readily and at competitive costs. The Company is
well-positioned and intends to continue investing strategically in high-return
projects and acquisitions, reducing debt to the extent possible, and paying cash
dividends as a means to enhance stockholder value.
NEW FINANCIAL ACCOUNTING STANDARDS ISSUED
Information on new financial accounting standards issued is included in Note L,
"New Financial Accounting Standards Issued," in Part I, Item 1, Financial
Statements.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------------------
See Part II, Item 1A, "Risk Factors," for quantitative and qualitative
disclosures about market risk.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------------------
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures as of September 30, 2006. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective. There have been no
significant changes in internal controls over financial reporting that could
materially affect, or are likely to materially affect, internal control over
financial reporting during the third quarter of 2006.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------------------
Information on legal proceedings is included under Part I, Item 1, Footnote I
labeled "Commitments and Contingencies."
ITEM 1A. RISK FACTORS
------------------------
MARKET RISK.
In the normal course of business, the Company is routinely subjected to a
variety of risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY IMPACT THE COMPANY'S
BUSINESSES.
The Company's businesses are subject to general economic slowdowns and cyclical
conditions in the industries served. In particular,
o The Company's Mill Services business may be adversely impacted by slowdowns
in steel mill production, excess capacity, consolidation or bankruptcy of
steel producers or a reversal or slowing of current outsourcing trends in the
steel industry;
o The Company's Access Services business may be adversely impacted by slowdowns
in non-residential construction and annual industrial and building
maintenance cycles;
o The railway track maintenance services and equipment business may be
adversely impacted by developments in the railroad industry that lead to
lower capital spending or reduced maintenance spending;
o The industrial abrasives and roofing granules business may be adversely
impacted by reduced home resales or economic conditions that slow the rate of
residential roof replacement, or by slowdowns in the industrial and
infrastructure refurbishment industries;
o The industrial grating business may be adversely impacted by slowdowns in
non-residential construction and industrial production;
o The air-cooled heat exchangers business is affected by cyclical conditions
present in the natural gas industry. A high demand for natural gas is
currently creating increased demand for the Company's air-cooled heat
exchangers. However, a slowdown in natural gas production could adversely
affect this business; and
o The Company's Gas Technologies business may be adversely impacted by reduced
industrial production, and lower demand for industrial gases, slowdowns in
demand for medical cylinders, valves, or lower demand for natural gas
vehicles.
THE COMPANY'S DEFINED BENEFIT PENSION EXPENSE IS DIRECTLY AFFECTED BY THE
EQUITY AND BOND MARKETS AND A DOWNWARD TREND IN THOSE MARKETS COULD ADVERSELY
IMPACT THE COMPANY'S FUTURE EARNINGS. AN UPWARD TREND IN THE EQUITY AND BOND
MARKETS COULD POSITIVELY AFFECT THE COMPANY'S FUTURE EARNINGS.
In addition to the economic issues that directly affect the Company's
businesses, changes in the performance of equity and bond markets, particularly
in the United Kingdom and the United States, impact actuarial assumptions used
in determining annual pension expense, pension liabilities and the valuation of
the assets in the Company's defined benefit pension plans. The downturn in
financial markets during 2000, 2001 and 2002 negatively impacted the Company's
pension expense and the accounting for pension assets and liabilities. This
resulted in an increase in pre-tax defined benefit pension expense from
continuing operations of approximately $20.8 million for calendar year 2002
compared with 2001 and $17.7 million for calendar year 2003 compared with 2002.
The upturn in certain financial markets beginning in 2003 and certain plan
design changes (discussed below) contributed to a decrease in pre-tax defined
benefit pension expense from continuing operations of approximately $3.8 million
for 2005 compared with 2004, and approximately $5.4 million for 2004 compared
with 2003. Additionally, defined benefit pension expense declined $0.8 million
for the first nine
-38-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
months of 2006 compared with the first nine months of 2005. An upward trend in
capital markets would likely result in a decrease in future unfunded obligations
and pension expense. This could also result in an increase to Stockholders'
Equity and a decrease in the Company's statutory funding requirements. If the
financial markets deteriorate, it would most likely have a negative impact on
the Company's pension expense and the accounting for pension assets and
liabilities. This could result in a decrease to Stockholders' Equity and an
increase in the Company's statutory funding requirements.
In response to the adverse market conditions, during 2002 and 2003 the Company
conducted a comprehensive global review of its pension plans in order to
formulate a plan to make its long-term pension costs more predictable and
affordable. The Company implemented design changes for most of these plans
during 2003. The principal change involved converting future pension benefits
for many of the Company's non-union employees in both the U.K. and U.S. from
defined benefit plans to defined contribution plans as of January 1, 2004. This
conversion is expected to make the Company's pension expense more predictable
and affordable and less sensitive to changes in the financial markets.
The Company's pension committee continues to evaluate alternative strategies to
further reduce overall pension expense including the on-going evaluation of
investment fund managers' performance; the balancing of plan assets and
liabilities; the risk assessment of all multi-employer pension plans; the
possible merger of certain plans; the consideration of incremental cash
contributions to certain plans; and other changes that are likely to reduce
future pension expense volatility and minimize risk.
Changes in the related pension benefit costs may occur in the future due to
changes in the assumptions and due to changes in returns on plan assets
resulting from financial market conditions. Using the expense calculated for
calendar year 2006 and holding all other assumptions constant, a one-half
percent increase or decrease in the discount rate and the expected long-term
rate of return on plan assets would increase or decrease annual pre-tax defined
benefit pension expense as follows:
APPROXIMATE CHANGES IN PRE-TAX DEFINED BENEFIT
----------------------------------------------
PENSION EXPENSE
---------------
U.S. PLANS U.K. PLAN
---------- ---------
Discount rate
-------------
One-half percent increase Decrease of $1.8 million Decrease of $4.8 million
One-half percent decrease Increase of $2.0 million Increase of $5.2 million
Expected long-term rate of return on plan assets
------------------------------------------------
One-half percent increase Decrease of $1.2 million Decrease of $3.0 million
One-half percent decrease Increase of $1.2 million Increase of $3.0 million
Should circumstances change that affect these estimates, changes (either
increases or decreases) to the net pension obligations may be required and would
be recorded in accordance with the provisions of SFAS 87 and SFAS 158. For more
information on the impact of SFAS 158 see note L, "New Financial Accounting
Standards Issued," in Part I, Item I, Financial Statements. Additionally,
certain events could result in the pension obligation changing at a time other
than the annual measurement date. This would occur when the benefit plan is
amended or when plan curtailments occur under the provisions of SFAS 88.
THE COMPANY'S GLOBAL PRESENCE SUBJECTS IT TO A VARIETY OF RISKS ARISING FROM
DOING BUSINESS INTERNATIONALLY.
The Company operates in 45 countries, including the United States. The Company's
global footprint exposes it to a variety of risks that may adversely impact
results of operations, cash flows or financial position. These include the
following:
o periodic economic downturns in the countries in which the Company does
business;
o fluctuations in currency exchange rates;
o customs matters and changes in trade policy or tariff regulations;
o imposition of or increases in currency exchange controls and hard currency
shortages;
-39-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
o changes in regulatory requirements in the countries in which the Company
does business;
o higher tax rates and potentially adverse tax consequences including
restrictions on repatriating earnings, adverse tax withholding
requirements and "double taxation ";
o longer payment cycles and difficulty in collecting accounts receivable;
o complications in complying with a variety of international laws and
regulations;
o political, economic and social instability, civil unrest and armed
hostilities in the countries in which the Company does business;
o inflation rates in the countries in which the Company does business;
o laws in various international jurisdictions that limit the right and
ability of subsidiaries to pay dividends and remit earnings to affiliated
companies unless specified conditions are met; and,
o uncertainties arising from local business practices, cultural
considerations and international political and trade tensions.
If the Company is unable to successfully manage the risks associated with its
global business, the Company's financial condition, cash flows and results of
operations may be negatively affected.
The Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq, Iran, Israel, Lebanon and other countries with a
continued high risk of armed hostilities. During the first nine months of 2006,
2005 and 2004, these countries contributed approximately $26.2 million, $23.8
million and $17.5 million, respectively, to the Company's operating income.
Additionally, the Company has operations in and sales to countries that have
encountered outbreaks of communicable diseases (e.g., Acquired Immune Deficiency
Syndrome (AIDS) and others). Should these outbreaks worsen or spread to other
countries, the Company may be negatively impacted through reduced sales to and
within those countries and other countries impacted by such diseases.
EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY IMPACT THE COMPANY'S BUSINESS.
Fluctuations in foreign exchange rates between the U.S. dollar and the
approximately 40 other currencies in which the Company conducts business may
adversely impact the Company's operating income and income from continuing
operations in any given fiscal period. Approximately 62% and 59% of the
Company's sales and approximately 71% and 69% of the Company's operating income
from continuing operations for the nine months ended September 30, 2006 and
2005, respectively, were derived from operations outside the United States. More
specifically, during the nine months ended September 30, 2006 and 2005,
approximately 20% and 21%, respectively, of the Company's revenues were derived
from operations in the U.K. Additionally, approximately 22% and 18% of the
Company's revenues were derived from operations with the euro as their
functional currency during the nine months ended September 30, 2006 and
September 30, 2005, respectively. Given the structure of the Company's revenues
and expenses, an increase in the value of the U.S. dollar relative to the
foreign currencies in which the Company earns its revenues generally has a
negative impact on operating income, whereas a decrease in the value of the U.S.
dollar tends to have the opposite effect. The Company's principal foreign
currency exposures are to the British pound sterling and the euro, and the
exposure to these currencies, as well as other foreign currencies, has increased
in 2006 due to the acquisitions of Hunnebeck and the Northern Hemisphere mill
services operations of Brambles Industrial Services ("BISNH") in the fourth
quarter of 2005 and the acquisition of Cleton in the third quarter of 2006.
-40-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
Compared with the corresponding period in 2005, the average values of major
currencies changed as follows in relation to the U.S. dollar during the third
quarter and the first nine months of 2006, impacting the Company's sales and
income:
THREE MONTHS ENDED NINE MONTHS ENDED
FOREIGN CURRENCY SEPTEMBER 30 SEPTEMBER 30
-------------------------------------------------------------------------------------------------------
British pound sterling Strengthened by 6% Weakened by less than 1%
euro Strengthened by 5% Weakened by less than 1%
South African rand Weakened by 11% Weakened by 6%
Brazilian real Strengthened by 7% Strengthened by 12%
Australian dollar Strengthened by less than 1% Weakened by 2%
Compared with exchange rates at December 31, 2005, the values of major
currencies changed as follows as of September 30, 2006:
o British pound sterling Strengthened by 8%
o euro Strengthened by 7%
o South African rand Weakened by 21%
o Brazilian real Strengthened by 7%
o Australian dollar Strengthened by 2%
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 2006, revenues would
have been approximately 0.2% or $5.2 million lower while operating income would
have been approximately 0.5% or $1.2 million lower if the average exchange rates
for the first nine months of 2005 were utilized. A similar comparison for the
first nine months of 2005 would have decreased revenues approximately 2% or
$34.6 million while operating income would have been approximately 2% or $4.0
million less if the average exchange rates would have remained the same as the
first nine months of 2004.
Currency changes result in assets and liabilities denominated in local
currencies being translated into U.S. dollars at different amounts than at the
prior period end. These currency changes resulted in increased net assets of
$45.2 million and decreased net assets of $32.5 million, at September 30, 2006
and 2005, respectively, when compared with December 31, 2005 and 2004,
respectively.
The Company seeks to reduce exposures to foreign currency transaction
fluctuations through the use of forward exchange contracts. At September 30,
2006, the notional amount of these contracts was $125.8 million, and over 99%
will mature in the fourth quarter of 2006. The Company does not hold or issue
financial instruments for trading purposes, and it is the Company's policy to
prohibit the use of derivatives for speculative purposes.
Although the Company engages in foreign currency forward exchange contracts and
other hedging strategies to mitigate foreign exchange risk, hedging strategies
may not be successful or may fail to offset the risk.
In addition, competitive conditions in the Company's manufacturing businesses
may limit the Company's ability to increase product prices in the face of
adverse currency movements. Sales of products manufactured in the United States
for the domestic and export markets may be affected by the value of the U.S.
dollar relative to other currencies. Any long-term strengthening of the U.S.
dollar could depress demand for these products and reduce sales and may cause
translation gains or losses due to the revaluation of accounts payable, accounts
receivable and other asset and liability accounts. Conversely, any long-term
weakening of the U.S. dollar could improve demand for these products and
increase sales and may cause translation gains or losses due to the revaluation
of accounts payable, accounts receivable and other asset and liability accounts.
NEGATIVE ECONOMIC CONDITIONS MAY ADVERSELY IMPACT THE ABILITY OF THE
COMPANY'S CUSTOMERS TO MEET THEIR OBLIGATIONS TO THE COMPANY ON A TIMELY
BASIS AND IMPACT THE VALUATION OF THE COMPANY'S ASSETS.
If a downturn in the economy occurs, it may adversely impact the ability of the
Company's customers to meet their obligations to the Company on a timely basis
and could result in bankruptcy filings by them. If customers are unable to
-41-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
meet their obligations on a timely basis, it could adversely impact the
realizability of receivables, the valuation of inventories and the valuation of
long-lived assets across the Company's businesses, as well as negatively affect
the forecasts used in performing the Company's goodwill impairment testing under
SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). If management
determines that goodwill or assets are impaired or that inventories or
receivables cannot be realized at recorded amounts, the Company will be required
to record a write-down in the period of determination, which will reduce net
income for that period. Additionally, the risk remains that certain Mill
Services customers may file for bankruptcy protection, be acquired or
consolidate in the future, which could have an adverse impact on the Company's
income and cash flows. The potential financial impact of this risk has increased
with the Company's acquisition of BISNH in December 2005. Conversely, such
consolidation may provide additional service opportunities for the Company.
A NEGATIVE OUTCOME ON PERSONAL INJURY CLAIMS AGAINST THE COMPANY MAY
ADVERSELY IMPACT RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The Company has been named as one of many defendants (approximately 90 or more
in most cases) in legal actions alleging personal injury from exposure to
airborne asbestos. In their suits, the plaintiffs have named as defendants many
manufacturers, distributors and repairers of numerous types of equipment or
products that may contain asbestos. Most of these complaints contain a standard
claim for damages of $20 million or more against the named defendants. If the
Company was found to be liable in any of these actions and the liability was to
exceed the Company's insurance coverage, results of operations, cash flows and
financial condition could be adversely affected. For more information concerning
this litigation, see Note I, "Commitments and Contingencies," in Part 1, Item 1,
Financial Statements.
THE COMPANY MAY LOSE CUSTOMERS OR BE REQUIRED TO REDUCE PRICES AS A RESULT OF
COMPETITION.
The industries in which the Company operates are highly competitive.
o The Company's Mill Services business is sustained mainly through contract
renewals. Historically, the Company's contract renewal rate has averaged
approximately 95%. If the Company is unable to renew its contracts at the
historical rates or renewals are at reduced prices, revenue may decline.
o The Company's Access Services business rents and sells equipment and provides
erection and dismantling services to principally the non-residential
construction and industrial plant maintenance markets. Contracts are awarded
based upon the Company's engineering capabilities, product availability,
safety record, and the ability to competitively price its rentals and
services. Commencing in 2000, due to economic downturns in their home
markets, certain international competitors exported significant quantities of
rental equipment to the markets the Company serves, particularly the U.S.
This resulted in an oversupply of certain equipment and a consequential
reduction in product and rental pricing in the markets receiving the excess
equipment. The effect of these actions was mitigated, to some extent, in 2005
and the first nine months of 2006 due to a buoyant U.S. non-residential
construction market. However, if the Company is unable to consistently
provide high-quality products and services at competitive prices, it may lose
customers or operating margins may decline due to reduced selling prices.
o The Company's manufacturing businesses compete with companies that
manufacture similar products both internationally and domestically. Certain
international competitors export their products into the United States and
sell them at lower prices due to lower labor costs and government subsidies
for exports. Such practices may limit the prices the Company can charge for
its products and services. Additionally, unfavorable foreign exchange rates
can adversely impact the Company's ability to match the prices charged by
international competitors. If the Company is unable to match the prices
charged by international competitors, it may lose customers.
The Company's strategy to overcome this competition includes continuous process
improvement and cost reduction programs, international customer focus and the
diversification, streamlining and consolidation of operations.
INCREASED CUSTOMER CONCENTRATION AND CREDIT RISK IN THE MILL SERVICES SEGMENT
MAY ADVERSELY AFFECT THE COMPANY'S FUTURE EARNINGS AND CASH FLOWS.
Concentrations of credit risk with respect to accounts receivable are generally
limited due to the Company's large number of customers and their dispersion
across different industries and geographies. However, the Company's Mill
Services Segment has several large customers throughout the world with
significant accounts receivable balances. In December 2005, the Company acquired
BISNH. This acquisition has increased the Company's corresponding concentration
of credit risk to customers in the steel industry. Additionally, further
consolidation in the global steel industry is probable. Should transactions
occur involving some of the steel industry's larger companies, which are
customers of the Company, it would result in an increase in concentration of
credit risk for the Company. If a large customer were to experience
-42-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
financial difficulty, or file for bankruptcy protection, it could adversely
impact the Company's income, cash flows and asset valuations. As part of its
credit risk management practices, the Company is developing strategies to
mitigate this increased concentration of credit risk.
INCREASES IN ENERGY PRICES COULD INCREASE THE COMPANY'S OPERATING COSTS AND
REDUCE ITS PROFITABILITY.
Worldwide political and economic conditions, an imbalance in the supply and
demand for oil, extreme weather conditions, armed hostilities in oil-producing
regions, among other factors, may result in an increase in the volatility of
energy costs, both on a macro basis and for the Company specifically. In the
first nine months of 2006 and 2005, energy-related costs have approximated 4.1%
and 3.7% of the Company's revenue, respectively. To the extent that such costs
cannot be passed to customers in the future, operating income and results of
operations may be adversely affected.
INCREASES OR DECREASES IN PURCHASE PRICES OR AVAILABILITY OF STEEL OR OTHER
MATERIALS AND COMMODITIES MAY AFFECT THE COMPANY'S PROFITABILITY.
The profitability of the Company's manufactured products is affected by changing
purchase prices of steel and other materials and commodities. Beginning in 2004,
the price paid for steel and certain other commodities increased significantly
compared with prior years. Although these costs moderated in 2005, such costs
increased during the first nine months of 2006 and the current outlook for the
fourth quarter of 2006 indicates that the cost increases will continue on a
comparative basis with 2005. If raw material costs associated with the Company's
manufactured products continue to increase and the costs cannot be passed on to
the Company's customers, operating income would be adversely affected.
Additionally, decreased availability of steel or other materials, such as carbon
fiber used to manufacture filament-wound composite cylinders, could affect the
Company's ability to produce manufactured products in a timely manner. If the
Company cannot obtain the necessary raw materials for its manufactured products,
then revenues, operating income and cash flows will be adversely affected.
THE COMPANY IS SUBJECT TO VARIOUS ENVIRONMENTAL LAWS AND THE SUCCESS OF
EXISTING OR FUTURE ENVIRONMENTAL CLAIMS AGAINST IT COULD ADVERSELY IMPACT THE
COMPANY'S RESULTS OF OPERATIONS AND CASH FLOWS.
The Company's operations are subject to various federal, state, local and
foreign laws, regulations and ordinances relating to the protection of health,
safety and the environment, including those governing discharges to air and
water, handling and disposal practices for solid and hazardous wastes, the
remediation of contaminated sites and the maintenance of a safe work place.
These laws impose penalties, fines and other sanctions for non-compliance and
liability for response costs, property damages and personal injury resulting
from past and current spills, disposals or other releases of, or exposure to,
hazardous materials. The Company could incur substantial costs as a result of
non-compliance with or liability for remediation or other costs or damages under
these laws. The Company may be subject to more stringent environmental laws in
the future, and compliance with more stringent environmental requirements may
require the Company to make material expenditures or subject it to liabilities
that the Company currently does not anticipate.
The Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a "potentially responsible party" for certain waste disposal sites
under the federal "Superfund" law. At several sites, the Company is currently
conducting environmental remediation, and it is probable that the Company will
agree to make payments toward funding certain other of these remediation
activities. It also is possible that some of these matters will be decided
unfavorably to the Company and that other sites requiring remediation will be
identified. Each of these matters is subject to various uncertainties and
financial exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Company has evaluated its potential liability and the Consolidated Balance
Sheets for September 30, 2006 and December 31, 2005 include an accrual of $3.3
million and $2.8 million for environmental matters, respectively. The amounts
charged against pre-tax earnings related to environmental matters totaled $1.2
million and $0.8 million for the nine months ended September 30, 2006 and 2005,
respectively. The liability for future remediation costs is evaluated on a
quarterly basis. Actual costs to be incurred at identified sites in future
periods may be greater than the estimates, given inherent uncertainties in
evaluating environmental exposures.
-43-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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, 2006, the Company was in compliance with a debt to capital ratio
of 47.5% and a net worth of $1,155.0 million. The company had $378.9 million in
outstanding indebtedness containing these covenants at September 30, 2006.
HIGHER THAN EXPECTED CLAIMS UNDER INSURANCE POLICIES, UNDER WHICH THE COMPANY
RETAINS A PORTION OF RISK, COULD ADVERSELY IMPACT RESULTS OF OPERATIONS AND
CASH FLOWS.
The Company retains a significant portion of the risk for property, workers'
compensation, U.K. employers' liability, automobile, general and product
liability losses. Reserves have been recorded which reflect the undiscounted
estimated liabilities for ultimate losses including claims incurred but not
reported. Inherent in these estimates are assumptions that are based on the
Company's history of claims and losses, a detailed analysis of existing claims
with respect to potential value, and current legal and legislative trends. At
September 30, 2006 and December 31, 2005, the Company had recorded liabilities
of $105.7 million and $102.3 million, respectively, related to both asserted and
unasserted insurance claims. Included in the balances at September 30, 2006 and
December 31, 2005 were $20.8 million and $25.2 million, respectively, of
recognized liabilities covered by insurance carriers. If actual claims are
higher than those projected by management, an increase to the Company's
insurance reserves may be required and would be recorded as a charge to income
in the period the need for the change was determined. Conversely, if actual
claims are lower than those projected by management, a decrease to the Company's
insurance reserves may be required and would be recorded as a reduction to
expense in the period the need for the change was determined.
THE SEASONALITY OF THE COMPANY'S BUSINESS MAY CAUSE ITS QUARTERLY RESULTS TO
FLUCTUATE.
The Company has historically generated the majority of its cash flows in the
third and fourth quarters (periods ending September 30 and December 31). This is
a direct result of normally higher sales and income during the second half of
the year, as the Company's business tends to follow seasonal patterns. If the
Company is unable to successfully manage the cash flow and other effects of
seasonality on the business, its results of operations may suffer.
HISTORICAL REVENUE PATTERNS
(IN MILLIONS) 2006 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
First Quarter Ended
March 31 $ 769.6 $ 640.1 $ 556.3 $ 487.9 $ 458.6 $ 505.0
Second Quarter Ended 865.5 696.1 617.6 536.4 510.3 510.1
June 30
Third Quarter Ended 875.9 697.5 617.3 530.2 510.5 510.3
September 30
Fourth Quarter Ended -- 732.5 710.9 564.0 497.3 499.7
December 31
-------------------------------------------------------------------------------------------------------------------------------
Totals $ -- $2,766.2 $2,502.1 $2,118.5 $1,976.7 $2,025.2(a)
===============================================================================================================================
(a) Does not total due to rounding.
-44-
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
HISTORICAL CASH PROVIDED BY OPERATIONS
(IN MILLIONS) 2006 2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
First Quarter Ended
March 31 $ 69.8 $ 48.1 $ 32.4 $ 31.2 $ 9.0 $ 2.6
Second Quarter Ended 114.5 86.3 64.6 59.2 71.4 65.1
June 30
Third Quarter Ended 94.6 98.1 68.9 64.1 83.3 66.1
September 30
Fourth Quarter Ended -- 82.7 104.6 108.4 90.1 106.9
December 31
-------------------------------------------------------------------------------------------------------------------------------
Totals $ -- $ 315.3(a) $ 270.5 $ 262.8(a) $ 253.8 $ 240.6(a)
===============================================================================================================================
(a) Does not total due to rounding.
THE COMPANY'S CASH FLOWS AND EARNINGS ARE SUBJECT TO CHANGES IN INTEREST
RATES.
The Company's total debt as of September 30, 2006 was $1,043.7 million. Of this
amount, approximately 48.3% had variable rates of interest and 51.7% had fixed
rates of interest. The weighted average interest rate of total debt was
approximately 5.6%. At current debt levels, a one-percentage increase/decrease
in variable interest rates would increase/decrease interest expense by
approximately $5.0 million per year.
The future financial impact on the Company associated with the above risks
cannot be estimated.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------------------
(c). Issuer Purchases of Equity Securities
TOTAL NUMBER OF MAXIMUM NUMBER OF
TOTAL SHARES PURCHASED SHARES THAT MAY YET
NUMBER OF AVERAGE AS PART OF PUBLICLY BE PURCHASED UNDER
SHARES PRICE PAID ANNOUNCED PLANS OR THE PLANS OR
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS
---------------------------------------------------------------------------------------------------------------------------------
July 1, 2006 - July 31, 2006 - - - 1,000,000
August 1, 2006 - August 31, 2006 - - - 1,000,000
September 1, 2006 - September 30, 2006 - - - 1,000,000
--------------------------------------------------------------------------------------------------------
Total - - -
--------------------------------------------------------------------------------------------------------
The Company's share repurchase program was extended by the Board of Directors in
November 2005. The program authorizes the repurchase of up to 1,000,000 shares
of the Company's common stock and expires January 31, 2007.
ITEM 5. OTHER INFORMATION
-----------------------------
DIVIDEND INFORMATION
--------------------
On September 27, 2006, the Board of Directors declared a quarterly cash dividend
of $0.325 per share, payable November 15, 2006, to stockholders of record as of
October 16, 2006.
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HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
10b5-1 Plan
-----------
The Chief Executive Officer (CEO) of the Company adopted in the First Quarter of
2006, a personal trading plan, as part of a long-term strategy for asset
diversification and liquidity, in accordance with the Securities and Exchange
Commission's Rule 10b5-1. Under the plan, which expired in July 2006, the CEO
exercised, under pre-arranged terms, 100,000 options in open market
transactions. All 100,000 shares have been sold under the trading plan.
The President and Chief Financial Officer (CFO) of the Company adopted in the
First Quarter of 2006, a personal trading plan, as part of a long-term strategy
for asset diversification and liquidity, in accordance with the Securities and
Exchange Commission's Rule 10b5-1. Under the plan, which expired in August 2006,
the President and CFO exercised, under pre-arranged terms, 28,000 options in
open market transactions. All 28,000 shares have been sold under the trading
plan.
Rule 10b5-1 allows officers and directors, at a time when they are not in
possession of material non-public information, to adopt written plans to sell
shares on a regular basis under pre-arranged terms, regardless of any subsequent
non-public information they may receive. Exercises of stock options by the CEO
or President and CFO pursuant to the terms of their respective plans were
disclosed publicly through Form 144 and Form 4 filings with the Securities and
Exchange Commission.
ITEM 6. EXHIBITS
--------------------
Listing of Exhibits filed with Form 10-Q:
Exhibit
Number Data Required Location
------ ------------- --------
31 (a) Certification Pursuant to Rule 13a-14(a) Exhibit
and 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) Exhibit
and 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 Exhibit
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32 (b) Certification Pursuant to 18 U.S.C. Section Exhibit
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
-46-
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 3, 2006 /S/ Salvatore D. Fazzolari
------------------------------- ----------------------------------
Salvatore D. Fazzolari
President, Chief Financial
Officer and Treasurer
DATE November 3, 2006 /S/ Stephen J. Schnoor
------------------------------- ----------------------------------
Stephen J. Schnoor
Vice President and Controller
-47-