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, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-3970
HARSCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
23-1483991
(I.R.S. Employer Identification No.)
Camp Hill, Pennsylvania
(Address of principal executive offices)
17001-8888
(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.
X YES NO
Title of Each Class Outstanding Shares at September 30, 1994
Common Stock Par Value $1.25 25,167,729
Preferred Stock Purchase Rights 25,167,729
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(In thousands) 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues:
Sales $ 348,073 $ 314,860 $ 1,004,801 $ 1,015,287
Equity in income of unconsolidated entities 16,904 410 52,728 2,003
Gain on sale of investments 99 8,584 5,966 17,555
Other revenues 12,267 399 16,615 1,293
__________ __________ __________ __________
Total revenues 377,343 324,253 1,080,110 1,036,138
__________ __________ __________ __________
Costs and expenses:
Cost of sales 270,228 242,272 788,758 789,052
Selling, administrative and general expenses 49,552 43,909 147,547 126,737
Research and development 1,213 932 3,936 3,440
Facilities discontinuance and reorganization costs 8,276 (157) 11,095 529
Other, net 548 (393) 672 (558)
__________ __________ __________ __________
Total costs and expenses 329,817 286,563 952,008 919,200
__________ __________ __________ __________
Income before interest, taxes, minority interest
and cumulative effect of accounting change 47,526 37,690 128,102 116,938
Interest income 1,854 2,492 4,710 6,685
Interest expense (8,826) (5,886) (25,961) (12,032)
__________ __________ __________ __________
Income before taxes, minority interest, and
cumulative effect of accounting change 40,554 34,296 106,851 111,591
Provision for income taxes 17,722 15,888 46,694 46,848
__________ __________ __________ __________
Income before minority interest and cumulative
effect of accounting change 22,832 18,408 60,157 64,743
Minority interest 494 150 1,644 47
__________ __________ __________ __________
Income before cumulative
effect of accounting change 22,338 18,258 58,513 64,696
Cumulative effect of change in
accounting for income taxes - - - 6,802
__________ __________ __________ __________
Net income $ 22,338 $ 18,258 $ 58,513 $ 71,498
__________ __________ __________ __________
__________ __________ __________ __________
Average shares of common stock outstanding 25,150 24,804 25,094 25,061
__________ __________ __________ __________
__________ __________ __________ __________
Earnings per common share:
Income before cumulative effect of accounting change $ .89 $ .74 $ 2.33 $ 2.58
Cumulative effect of change in accounting - - - .27
__________ __________ __________ __________
Net income per share $ .89 $ .74 $ 2.33 $ 2.85
__________ __________ __________ __________
__________ __________ __________ __________
Cash dividends declared per share $ .35 $ .35 $ 1.05 $ 1.05
__________ __________ __________ __________
__________ __________ __________ __________
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
(In thousands) 1994 1993
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,710 $ 58,740
Receivables 346,799 322,894
Inventories:
Long-term contract costs - 105,154
Less progress payment - U.S. Government - (16,662)
__________ __________
- 88,492
Finished goods 29,278 23,543
Work in process 33,578 25,612
Raw material and purchased parts 50,772 52,608
Stores and supplies 15,566 12,171
__________ __________
Total inventories 129,194 202,426
Other current assets 16,582 16,045
__________ __________
Total current assets 534,285 600,105
__________ __________
Property, plant and equipment, at cost 994,171 1,060,729
Allowance for depreciation (553,830) (569,074)
__________ __________
440,341 491,655
__________ __________
Cost in excess of net assets of
companies acquired, net 222,555 221,082
Insurance related assets 73,488 70,153
Equity in net assets of associated companies 49,542 5,920
Other assets 38,079 38,697
__________ __________
Total assets $ 1,358,290 $ 1,427,612
__________ __________
__________ __________
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
(In thousands) 1994 1993
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable and current maturities $ 30,261 $ 63,509
Accounts payable 82,035 98,021
Advances on long-term contracts 3,598 88,518
Accrued compensation 36,652 45,546
Other current liabilities 125,147 121,755
__________ __________
Total current liabilities 277,693 417,349
Long-term debt 397,529 364,869
Deferred income taxes 29,782 33,424
Insurance related liabilities 50,312 49,350
Other liabilities 37,109 39,536
__________ __________
792,425 904,528
__________ __________
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital 133,880 126,579
Cumulative adjustments (12,127) (16,166)
Retained earnings 635,273 603,158
Treasury stock (191,161) (190,487)
__________ __________
565,865 523,084
__________ __________
Total liabilities and shareholders equity $ 1,358,290 $ 1,427,612
__________ __________
__________ __________
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
(In thousands) 1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net income $ 58,513 $ 71,498
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 67,227 46,189
Amortization 6,796 2,707
Cumulative effect of change in accounting principle - (6,802)
Gain on sale of investments (5,966) (17,555)
Change in equity of entities (9,770) (1,384)
Other, net 2,140 (678)
Changes in assets and liabilities, net of acquisition
of a business and formation of a partnership:
Notes and accounts receivables (25,269) 68,008
Inventories (12,680) 5,462
Accounts payable 3,669 (1,840)
Accrued long-term contract costs - (2,784)
Advances on long-term contracts (5,878) 17,522
Other assets and liabilities (4,299) 2,455
__________ __________
Net cash provided by operating activities 74,483 182,798
__________ __________
Cash flows from investing activities:
Capital expenditures, net of disposals (56,949) (37,654)
Purchase of business, net of cash acquired - (327,571)
Proceeds from sale of investment 7,617 22,555
Other investing activities (7,142) 2,408
__________ __________
Net cash (used) by investing activities (56,474) (340,262)
__________ __________
Cash flows from financing activities:
Short-term borrowings, net (29,515) 2,564
Current maturities and long-term debt
Additions 94,954 253,366
Reductions (83,767) (403)
Cash dividends paid on common stock (26,328) (26,352)
Common stock issued-options 6,624 4,257
Common stock acquired for treasury - (36,322)
Other financing activities 2,593 (3,758)
__________ __________
Net cash provided (used) by financing activities (35,439) 193,352
__________ __________
Effect of exchange rate changes on cash 400 (329)
__________ __________
Net increase (decrease) in cash and cash equivalents (17,030) 35,559
Cash and cash equivalents at beginning of period 58,740 50,366
__________ __________
Cash and cash equivalents at end of period $ 41,710 $ 85,925
__________ __________
__________ __________
</TABLE>
See accompanying notes to consolidated financial statements.
REVIEW OF OPERATIONS BY GROUP
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
SALES September 30 September 30
(In Millions) 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Metal Reclamation and Mill Services $ 135.9 $ 68.4 $ 383.4 $ 150.7
Infrastructure, Construction and Transportation 102.5 76.5 297.4 226.7
Process Industry Products 109.7 93.3 324.0 281.9
________ ________ ________ ________
348.1 238.2 1,004.8 659.3
Defense (F1> - 76.7 - 356.0
________ ________ ________ ________
Total $ 348.1 $ 314.9 $ 1,004.8 $ 1,015.3
________ ________ ________ ________
________ ________ ________ ________
INCOME BEFORE TAX AND MINORITY INTEREST
Group operating profit:
Metal Reclamation and Mill Services $ 16.6 $ 8.8 $ 33.5 $ 20.9
Infrastructure, Construction and Transportation 4.3 6.9 11.0 15.4
Process Industry Products 7.9 6.1 27.8 20.9
________ ________ ________ ________
28.8 21.8 72.3 57.2
Defense <F1> - 11.4 - 52.4
Facilities discontinuance and reorganization costs <F2> (8.3) .2 (11.1) (.4)
________ ________ ________ ________
Total group operating profit 20.5 33.4 61.2 109.2
Equity in income of unconsolidated entities <F3> 16.9 .4 52.7 2.0
Gain on sale of investments .1 8.6 6.0 17.6
Claim settlements (included in other revenues) 12.0 - 15.8 -
Interest expense (8.8) (5.9) (26.0) (12.0)
Unallocated expenses (.1) (2.2) (2.8) (5.2)
________ ________ ________ ________
Total pre-tax income $ 40.6 $ 34.3 $ 106.9 $ 111.6
________ ________ ________ ________
________ ________ ________ ________
<FN>
<F1> Effective January 1, 1994, Defense is no longer designated as a separate group.
This is due to the formation of our joint venture, United Defense, L.P., in which
Harsco has a 40% ownership, and the suspension of the five-ton truck production at
midyear in 1993. Any truck sales in 1994 are reflected under the Infrastructure,
Construction and Transportation Group.
<F2> Includes $3.7 million and $6.3 million, for the quarter and nine months ended
September 30, 1994, respectively, for discontinuance and rationalization of
administrative facilities and termination costs related to Metal Reclamation and
Mill Services Group, and a provision for the quarter and nine months of 1994 of
$4.7 million relating to the realizable value of the investment in the 5-ton truck
business and future anticipated costs associated with contract close-out and related
issues under the Infrastructure, Construction and Transportation Group.
<F3> Includes equity in income before tax of United Defense, L.P. of $16.4 million and
$51.0 million, for the quarter and nine months ended September 30, 1994, respectively.
</TABLE>
Notes to Consolidated Financial Statements
Cash Flow Information:
Cash payments for interest on all debt, net of amounts capitalized, were
$27,322,000 for the nine months of 1994 and $7,951,000 for the nine months of
1993. Cash payments for income taxes were $40,659,000 for the nine months of
1994 and $46,192,000 for the nine months of 1993.
Receivables:
As of September 30, 1994, Receivables include $62,415,000 of unbilled
receivables representing the Company's claim against the U.S. Government for
Federal Excise Taxes and related claims on the five-ton truck contract. See
"Commitments and Contingencies" for additional disclosure on this claim.
Formation of Defense Business Partnership and Acquisition of MultiServ
International, N.V.:
On January 28, 1994, FMC Corporation ("FMC") and Harsco Corporation ("Harsco")
announced completion of a series of agreements ("Agreements"), first announced
in December 1992, to combine certain assets and liabilities of FMC's Defense
Systems Group ("DSG") and Harsco's BMY-Combat Systems Division ("BMY-CS").
The effective date of the combination was January 1, 1994. The combined
company, United Defense, L.P. ("UDLP"), operates as a limited partnership.
FMC as the Managing General Partner has a 60 percent equity interest, and
Harsco Defense Holding, Inc., a wholly owned subsidiary of Harsco Corporation,
as the Limited Partner has a 40 percent equity interest. Harsco retained the
rights and any liabilities associated with certain pending major claims
between Harsco and the U.S. Government, and Harsco and the Government of Iran.
See "Commitments and Contingencies" for additional disclosure on these claims.
MultiServ International, N.V. was acquired by Harsco Corporation on August 31,
1993. The acquisition of MultiServ has been accounted for by the purchase
method of accounting, and operating results of this acquisition are included
in the Company's Consolidated Financial Statements since the date of
acquisition. The total consideration paid by the Company was approximately
$384,000,000 and consisted of: (i) approximately $333,000,000 in cash, (ii)
approximately $12,000,000 in Harsco Corporation Common Stock from treasury,
and (iii) the assumption of certain project financing indebtedness of
MultiServ in the amount of approximately $39,000,000. Approximately
$8,000,000 in closing and acquisition costs were also incurred. The funds
used by the Company to complete the acquisition consisted of approximately
$83,000,000 from cash balances of Harsco, and approximately $250,000,000
borrowed from a financial institution.
Pro forma information relative to United Defense, L.P. and MultiServ
International, N.V. presented for the first nine months of 1993, include
adjustments to reflect additional expenses associated with the amortization of
the created goodwill and the write-up of MultiServ fixed assets to fair market
value. The pro forma results also include additional provisions for interest
and debt expenses on the acquisition borrowings, the elimination of BMY-CS and
accounting for the 40% ownership interest of Harsco in UDLP on the equity
method of accounting.
The following represents the unaudited pro forma results of operations as if
the combinations had occurred at the beginning of 1993:
<TABLE>
<CAPTION>
Pro Forma
(Unaudited) Nine Months Ended
(In thousands, except per share amounts) September 30, 1993
<S> <C>
Total Revenues $ 1,053,156
__________
__________
Income before provision for income taxes,
minority interest, cumulative effect of
accounting change and extraordinary item 112,019
Provision for income taxes 55,538
Minority interest 763
__________
Income before cumulative effect of
accounting change and extraordinary item 55,718
Cumulative effect of change in
accounting for income taxes 6,802
Extraordinary item, net of taxes (2,277)
__________
Net income $ 60,243
__________
__________
Average shares of common stock outstanding 25,361,490
Earnings per common share:
Income before cumulative effect of accounting
change and extraordinary item $ 2.20
Cumulative effect of change in accounting .27
Extraordinary item (.09)
__________
Net income per share $ 2.38
__________
__________
</TABLE>
The pro forma operating results are not necessarily indicative of what would
have occurred had the combinations actually taken place on January 1, 1993.
Also, no adjustments have been made to operations for the impact of certain
anticipated operational and administrative efficiencies.
Commitments and Contingencies:
Federal Excise Tax and Other Matters Related to the Five-ton Truck Contract:
Subsequent to the award of the five-ton truck contract in 1986, the Federal
Excise Tax (FET) law, which was due to expire on October 1, 1988, was
extended. The Company and its legal counsel consider that the excise tax
required to be paid by the extension of the law constitutes an after-imposed
tax and therefore is subject to recovery by a price adjustment. In January
1993, the Armed Services Board of Contract Appeals decided in favor of the
Company's position, ruling that Harsco is entitled to a price adjustment to
the contract to reimburse FET paid on vehicles that were to be delivered after
October 1, 1988. The Government filed a motion requesting the Armed Services
Board of Contract Appeals to reopen the proceedings to admit additional
evidence or alternatively to reconsider its decision. On February 25, 1994,
the Armed Services Board of Contract Appeals denied the Government's motions.
In June 1994, the Government appealed these decisions to the Court of Appeals
for the Federal Circuit, but voluntarily withdrew its appeal effective August
16, 1994. The Government might renew the motions in the Armed Services Board
of Contract Appeals or seek to overturn the decision in a separate legal
action based upon the results of the continuing investigation described below.
As previously reported, the Company had already anticipated prevailing on its
claims and recorded as an account receivable the amount of the FET it has paid
on these vehicles of approximately $47 million, and the related claim arising
from changes in shipment destinations of approximately $15 million. The
January 1993 decision only rules upon the Company's claim for reimbursement of
the taxes paid without establishing the specific amount of the reimbursement.
Subject to the Company prevailing against any future Government motions or
other legal challenges to the judgment, the government contracting officer
will be required to determine the proper amount of the price adjustment
consistent with the ruling. Under applicable law, interest also accrues on
the amount owed. Although the January 1993 decision does not directly deal
with the claim for $15 million on the related destination change issue, the
Company believes that the ruling resolves the key factual issues in that claim
in favor of Harsco as well. The Company continues to anticipate favorable
resolution with respect to both claims. Final resolution of the issues in
favor of the Company would not result in the recording of additional income
other than any interest received, but would have a positive cash flow effect.
To the extent that any portion of the FET and related claims is not recovered,
additional losses on the contract will have to be recognized which could have
a material effect on quarterly or annual operating results.
The Commercial Litigation Branch of the Department of Justice is continuing to
conduct an investigation with respect to the facts underlying the Company's
claim for reimbursement of Federal Excise Tax payments and its related claim
regarding destination changes. In addition, the investigation is examining
the way the Company charged the Army for sales of certain cargo truck models
for which the Company did not pay Federal Excise Tax based upon an exemption
in the law. If the Government files a civil action against the Company as a
result of the civil investigation, it may seek various remedies including
forfeiture by the Company of its claims for reimbursement of FET and related
claims, treble damages, and civil penalties.
In a related matter, the Internal Revenue Service is reviewing Harsco's
position that certain cargo truck models are not taxable due to a provision in
the tax law that exempts trucks having a gross vehicle weight of 33,000 pounds
or less, and has tentatively concluded that they appear to be taxable. If the
Internal Revenue Service asserts that tax is due on these vehicles, the total
claim could be $42 million plus interest and penalty, if any. The Company
plans to vigorously contest any such tax deficiency. Although there is risk
of an adverse outcome, the Company and its counsel believe that these trucks
are not taxable. Even if they are held to be taxable, the Company and its
counsel believe the Government would be obligated to reimburse the Company for
the majority of the tax because it would constitute an after-imposed tax that
would be subject to the ruling of the Armed Services Board of Contract Appeals
discussed above, resulting in a net maximum liability for Harsco of $16
million plus interest and penalty, if any.
The Company also filed other claims relating to the five-ton truck contract
totalling in excess of $55 million plus interest, with respect to contract
changes, inadequate technical data package, and delays and disruptions. On
August 26, 1994, the Company and the Government signed a modification to the
five-ton truck contract resolving all outstanding contractual matters
concerning that agreement with certain limited exceptions including FET
related matters. The contract modification includes resolution of the
Company's claims described in earlier Company filings for contract changes,
inadequate technical data package, and delays and disruptions. The
modification provides for an increase of $12.5 million in the contract price
and payment has been received. The price increase yielded net revenue to the
Company of approximately $12.0 million after related excise tax and other
associated costs.
M9 Armored Combat Earthmover Claim:
The Company and its legal counsel are of the opinion that the U.S. Government
did not exercise option three under the M9 Armored Combat Earthmover (ACE)
contract in a timely manner, with the result that the unit price for options
three, four and five are subject to renegotiation. Claims reflecting the
Company's position have been filed with respect to all options purported to be
exercised, totalling in excess of $60 million plus interest. No recognition
has been given in the accompanying financial statements for any recovery on
these claims. The Company is awaiting a decision on its Motion for Summary
Judgment relating to the late option exercise that is now pending before the
Armed Services Board of Contract Appeals.
In addition, the Company negotiated a settlement with the U. S. Government of
a smaller outstanding claim concerning this contract which provides for
payment of $3.8 million by the U.S. Government to Harsco. The Company
recognized that amount as revenue in the first quarter of this year and
payment has since been received.
Government Furnished Equipment Overcharge Claim:
The Company filed a claim in the Armed Services Board of Contract Appeals
asserting that the United States Government has overcharged Harsco in the sale
of government furnished equipment on various contracts, all of which have been
completed. The Company has advised the Government that the overpayment on
these contracts is approximately $24 million. The Government disputes the
Company's position, but the parties are exploring the possibility of settling
this case and similar issues relating to other completed contracts that are
not included in the litigation.
Other Litigation and Issues:
On March 13, 1992, the U.S. Government filed a counterclaim against the
Company in a civil suit alleging violations of the False Claims Act and breach
of a contract to supply M109A2 Self-Propelled Howitzers. The counterclaim was
filed in the United States Claims Court along with the Government's answer to
the Company's claim of approximately $5 million against the Government for
costs incurred on this contract relating to the same issue. The Government
claims breach of contract damages of $7.3 million and in addition seeks treble
that amount under the False Claims Act plus unquantified civil penalties which
the Company estimates to be approximately $3.3 million. The Company and its
counsel believe it is unlikely that these claims will have a material adverse
effect on the Company's financial position or results of operations.
Iran's Ministry of Defense initiated arbitration procedures against the
Company in 1991 under the rules of the International Chamber of Commerce for
damages allegedly resulting from breach of various contracts executed by the
Company and the Ministry of Defense between 1970 and 1978. The contracts were
terminated in 1978 and 1979 during the period of civil unrest in Iran that
preceded the Iranian revolution. Iran has asserted a claim under one contract
for repayment of a $7.5 million advance payment it made to the Company, plus
interest at 12% through June 27, 1991 in the amount of $25.3 million. Iran
has also asserted a claim for damages under other contracts for $76.3 million.
The Company intends to assert various defenses and also has filed
counterclaims against Iran for damages in excess of $7.5 million which it
sustained as a result of Iran's breach of contract, plus interest. The
Company's management and its counsel believe it is unlikely that these claims
will have a material adverse effect on the Company's financial position or
results of operations.
In 1992, the United States Government through its Defense Contract Audit
Agency commenced an audit of certain contracts for sale of tracked vehicles by
the Company to foreign governments, which were financed by the United States
Government through the Defense Security Assistance Agency. The Company
cooperated with the audit and responded to a number of issues raised by the
audit. In September 1994, the Company received a subpoena issued by the
Department of Defense Inspector General seeking various documents relating to
sale contracts between the Company and foreign governments which were funded
by the Defense Security Assistance Agency. The Company is continuing to
cooperate and is responding to the subpoena. The Company has insufficient
information to comment on the focus of the investigation at this time.
In June 1994, the shareholder of the Ferrari Group, a Belgium holding company
involved in steel mill services and other activities, filed a legal action in
Belgium against Heckett MultiServ, S.A. and S.E.A.E., subsidiaries of
MultiServ International N.V. (a subsidiary of Harsco Corporation). The action
alleges that these two subsidiaries breached contracts arising from letters of
intent signed in 1992 and 1993 concerning the possible acquisition of the
Ferrari Group, claiming that the subsidiaries were obligated to proceed with
the acquisition and failed to do so. The action seeks damages of 504 million
Belgian Francs (approximately U.S. $16 million). The Company intends to
vigorously defend against the action and believes that based on conditions
contained in the letters of intent and other defenses it will prevail. The
Company and its counsel believe that is unlikely that these claims will have a
material adverse effect on the Company's financial position or results of
operations.
On August 29, 1994, the Company filed a legal action in the United States
District Court for the Southern District of New York seeking recovery of
damages arising from misrepresentations which the Company claims were made to
it in connection with its purchase of the stock of MultiServ International
N.V. on August 31, 1993. The Complaint names as defendants, Adrian H. H.
Bowden; The Dyson-Kissner-Moran Corporation and two of its affiliated
companies (MHC Holding Corp. And DKM-MLP Limited Partnership); Adler & Shaykin
Fund II, L.P.; and Rene Segui. The Complaint seeks damages in an amount to be
determined.
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 liability for future remediation costs
is evaluated on a quarterly basis and it is the opinion of management that any
liability over the amounts accrued will not have a material adverse effect on
the Company's financial position or results of operations. For the nine
months ended September 30, 1994, provisions amounting to $574,000 were
recorded for environmental matters.
Other:
The Company is subject to various other claims, legal proceedings and
investigations 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 or results of operations
of the Company.
OPINION OF MANAGEMENT:
Financial information furnished herein, which is unaudited, reflects in the
opinion of management all adjustments (all of which are of a recurring nature)
that are necessary to present a fair statement of the interim periods.
Subsequent Events:
Combat Engineering Sale
Effective October 14, 1994 the Company divested its Combat Engineering line of
business based in Bilston, United Kingdom, in a management buyout. The net
assets were sold for British Pounds Sterling 1.5 million ($2.4 million) in
cash. After cumulative translation adjustments, the Company will record a
minimal loss in the fourth quarter of approximately $0.1 million. The
business produced a line of industrial heaters, marketed principally in the
United Kingdom, with sales of approximately $5 million per annum. It had
operated at a marginal loss in recent years and was at break even in 1994.
Letter of Intent
On October 26, 1994, the Company signed a nonbinding letter of intent to
acquire all the assets of a process industry products manufacturer with annual
sales of approximately $20 million. The acquired business would be integrated
into an existing Division in the Process Products Industry Group upon
completion of the transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
Cash provided by operating activities was $74.5 million in the first nine
months of 1994, reflecting, among other things, a $41.6 million distribution
of earnings from United Defense, L.P., a $25.3 million increase in accounts
receivable and an $12.7 million increase in inventories. As previously
reported, included in receivables is $62.4 million for amounts expended, or
income not received, related to the Federal Excise Tax (FET) and related
claims for the completed five-ton truck contract. Final resolution of the FET
and related claims in favor of the Company would not result in the recording
of additional income other than any interest received, but would have a
positive cash flow effect. To the extent that any portion of the FET and
related claims is not recovered, additional losses on the contract will have
to be recognized, but there would be little impact on cash outflows.
Cash flow for investing activities included capital expenditures of $63.3
million and $7.6 million of proceeds from the sale of the remaining shares of
an investment in a marketable equity security. Investment activity also
included the cash contribution of $5.2 million for a portion of the initial
capitalization of United Defense, L.P. and a $1.7 million minority-interest
purchase in a metal reclamation and mill services business. Cash flow for
financing activities included a net increase in long-term debt of $11.2
million, a $29.5 million reduction of short-term debt, and $26.3 million of
cash dividends paid on common stock. Cash and cash equivalents decreased
$17.0 million to $41.7 million at September 30, 1994.
In conjunction with the formation of United Defense, L.P., in which Harsco
holds a 40% equity interest, the Company recognized a noncash contribution of
$24.4 million of net assets related to the BMY-Combat Systems Division of
Harsco Corporation. As discussed above, the Company also contributed cash of
$5.2 million to United Defense, L.P. During the first nine months for the
partnership, the Company received a $41.6 million distribution of earnings
from United Defense, L.P. The agreement stipulates, among other things, that
cash distributions of earnings will be made at certain minimum amounts of
income in the quarter subsequent to the quarter in which income is earned.
However, a special distribution, as allowed by the agreement, was received
during June 1994, due to strong cash flows of the Limited Partnership.
Other matters which could significantly affect cash flows in the future are
discussed in the 1993 Annual Report to Shareholders under Note 10,
"Commitments and Contingencies" and in Part 1, Item 1 of this Form 10Q.
During the first quarter, the Company negotiated a settlement with the U. S.
Government of a small portion of the outstanding issues concerning the M9
Armored Combat Earthmover (ACE) contract referred to in Note 10. Under this
settlement, the Government paid the Company $3.8 million. The Company's claim
in excess of $60 million against the Government on this contract for untimely
exercise of contract options has not yet been resolved. During the third
quarter, the Company reached a negotiated settlement with the U.S. Government
concerning contract changes, inadequate technical data package, and delays and
disruptions related to the five-ton truck contract and was paid a gross amount
of $12.5 million. This settlement resolves all outstanding contractual
matters concerning the five-ton truck agreement with certain limited
exceptions which include Federal Excise Tax related matters. Also, in August
1994, the Company filed a legal action seeking recovery of damages arising
from misrepresentations which the Company claims were made to it in connection
with its purchase of the stock of MultiServ International N.V. on August 31,
1993. The Company seeks damages in an amount to be determined.
Harsco continues to maintain a good financial position, with net working
capital of $256.6 million, up from the $182.8 million at December 31, 1993,
principally due to the conversion of $30.2 million of short-term debt to long-
term debt and the contribution of certain current assets and liabilities to
the formation of United Defense, L.P. Current assets amounted to $534.3
million, and current liabilities were $277.7 million, resulting in a current
ratio of 1.9 to 1, higher than the 1.4 to 1 at year-end 1993. With total debt
at $427.8 million and equity at $565.9 million at September 30, 1994, the
total debt as a percent of capital was 43.1%, which is slightly lower than the
45.0% at December 31, 1993.
The stock price range during the first nine months was $46 3/8 - 38 1/2.
Harsco's book value per share at September 30, 1994, was $22.48, compared with
$20.95 at year-end 1993. The Company's annualized return on equity for the
first nine months of 1994 was 14.1%, compared with 17.3% for the year 1993.
The return on assets was 12.8%, compared with the 13.4% for the year 1993.
The Company has available through a syndicate of banks a $150 million 364-day
revolving line of credit and a $150 million, multi-currency five-year term
line of credit. During the second quarter, the Company successfully
negotiated with the banks to re-syndicate and amend this facility, to extend
maturity, update pricing for favorable bank market dynamics, make certain
technical adjustments to the documents and allow more flexibility to borrow in
additional European currencies and provide back-up for a commercial paper
program, which the company will implement during the fourth quarter, in lieu
of borrowing from the bank lines of credit. As of September 30, 1994, $83.9
million was outstanding under this syndicated credit facility. Harsco's
outstanding notes are rated A by Standard & Poor's and Baa1 by Moody's.
Harsco's commercial paper is rated A-1 by Standard & Poor's, F-1 by Fitch
Investors Service and P-2 by Moody's.
As indicated by the above, the Company's financial position and debt capacity
should enable it to meet its current and future requirements. As additional
resources are needed, Harsco should be able to obtain funds at competitive
costs.
RESULTS OF OPERATIONS
Third Quarter of 1994 Compared
with Third Quarter of 1993
Third quarter revenues of $377.3 million were 16% higher than last year's
comparable period. Higher sales were reported for each of the three operating
groups and for most product classes, particularly for gas control and
containment, scaffolding, shoring and forming equipment and process equipment.
The increase in sales from the acquisition of MultiServ International, N.V.,
as of August 31, 1993, and the new product line of school buses brought to
market during the third quarter of 1993, was offset by the absence of military
vehicle sales in 1994. Revenues for the period also increased due to Harsco's
$16.4 million share of the income from its investment in United Defense, L.P.,
a joint venture formed effective January 1, 1994, and $12.0 million from the
negotiated settlement with the U.S. Government concerning the completed five-
ton truck contract. Gain on sale of investments decreased from 1993 when a
$5.9 million gain on the sale of a marketable equity security investment was
recorded.
Cost of sales increased, principally due to higher volume. Selling expense
increased due to higher sales commissions, and administrative expense
increased as a result of the inclusion of acquired companies. Facilities
discontinuance and reorganization costs increased due to provisions relating
to the realizable value of the investment in the five-ton truck business,
future anticipated costs to complete associated contract close-out and related
issues, and for the discontinuance and rationalization of administrative
facilities at several foreign metal reclamation and mill service locations.
Income before taxes and minority interest increased 18.2% from the comparable
period last year, mainly due to the earnings from the equity investment in
United Defense, L.P. and the negotiated claim settlement with the U.S.
Government. Both these amounts exceeded income recorded in 1993 from military
tracked vehicles. Higher earnings were also recorded in the third quarter of
1994 for metal reclamation, scaffolding, shoring and forming equipment,
grating, roofing granules and abrasives and process equipment. An operating
loss was recorded in the third quarter for school buses during this period of
low production volume currently experienced by this new product line.
Net income of $22.3 million was up 22% from the comparable period in 1993.
The effective income tax rate for the third quarter of 1994 was 43.7%, versus
46.3% in 1993. The fluctuation of the tax rate was mainly due to the
cumulative catch-up of the income tax provision for the United States Federal
income tax increase enacted during the third quarter of 1993 and the
acquisition of MultiServ, N.V. on August 31, 1993.
Sales of the Metal Reclamation and Mill Services Group, at $135.9 million,
were significantly above 1993's third quarter, due to the acquisition of
MultiServ International, N.V. Sales for the Infrastructure, Construction and
Transportation Group, at $102.5 million, were substantially ahead of last
year's similar period, reflecting greater demand for all product classes,
particularly scaffolding, shoring, and forming equipment and also additional
sales of school buses. Sales for the Process Industry Products Group, at
$109.7 million, were well ahead of the prior year's third quarter, as each
Division posted higher volume.
Third quarter operating profit for the Metal Reclamation and Mill Services
Group was $16.6 million, up 88% from the comparable period last year, (before
unusual items of expense amounting to $3.7 million), principally due to the
acquisition of MultiServ International, N.V., the domestic and international
management reorganizations completed in July, and improving economic
conditions in Brazil and certain European countries. After including the
impact of the unusual items of expense, operating profit was $12.9 million, up
47% from the comparable period in 1993. The Infrastructure, Construction and
Transportation Group posted an operating profit of $4.3 million (before
unusual items of expense amounting to $4.5 million), which is below 1993's
third quarter. The significant improvement of the scaffolding, shoring and
forming equipment product line was more than offset by the $4.9 million
operating loss for school buses. After including the impact of the unusual
items of expense, the group experienced an operating loss of $.2 million
compared to operating profit of $7.2 million in 1993. Operating profit for
the Process Industry Products Group, at $7.9 million, was up 29% over the
prior year and reflected improved performance for all product classes.
RESULTS OF OPERATIONS
First Nine Months of 1994 Compared
with First Nine Months of 1993
Revenues for the first nine months were $1.08 billion, up 4% from last year's
comparable period. The increase was due principally to higher sales for all
three operating groups which were well ahead of the prior year's first nine
months. Total revenues increased despite a substantial absence from sales of
military vehicles in 1994.
Sales increased in 1994 for our three operating groups, due to acquisitions in
1993, principally MultiServ International, N.V., as of August 31, 1993, and
higher sales from scaffolding, shoring and forming equipment, railway
maintenance equipment, gas control and containment equipment, process
equipment, metal reclamation and mill services, and pipe fittings. Revenues
in 1994 include Harsco's $51.0 million share of the income from its equity
investment in United Defense, L.P., as well as $15.8 million of revenues
resulting from the negotiated settlement of two claims relating to the five-
ton truck and Armored Combat Earthmover contracts with the U.S. Government.
Cost of sales is lower, principally reflecting the substantial absence of
military vehicles. Selling and administrative expenses increased, as a result
of the inclusion of acquired companies. Also contributing to the increase
were higher sales commissions and compensation costs. On a comparative basis,
administrative expenses in 1993 were reduced by the collection of $3.1 million
of previously reserved bad debts related to discontinued operations.
Income before taxes and minority interest was down 4% from the comparable
period last year, despite overall increased operating profits in 1994 for the
three operating groups. The decrease reflects significantly higher interest
expense, due to the debt incurred in conjunction with the acquisition and
operations of MultiServ International, N.V. On a comparative basis,
scaffolding, shoring and forming equipment recorded income in 1994 as compared
with an operating loss in 1993. Additionally, higher earnings in the first
nine months of 1994 were recorded for gas control and containment equipment,
railway maintenance equipment, process equipment, roofing granules, and
abrasives and pipe fittings. Results in 1994 were unfavorably impacted by the
school bus business which incurred an operating loss of $11.5 million during
the low volume of production associated with this new business, as compared to
income recorded for military trucks in last year's first nine months, for
which production was suspended in June 1993. Income from the Company's equity
investment in United Defense, L. P. exceeded amounts recorded in 1993 from
military tracked vehicles. Unusual items impacting earnings for the 1994 nine
months results included $15.8 million of pre-tax income, resulting from the
negotiated settlements with the U.S. Government concerning two completed
contracts. Also, a $4.7 million pre-tax provision was recorded for the
realizable value of the Company's investment in the 5-ton truck business and
costs to complete certain contract close-out and related issues, as well as a
$6.3 million pre-tax charge for the discontinuance and rationalization of
administrative facilities at several foreign metal reclamation and mill
service locations. Finally, profits from the sale of our remaining holdings
of an investment in a marketable equity security were lower than the prior
year principally due to fewer shares being sold in 1994.
Net income of $58.5 million ($2.33 per share) was down 18% from the comparable
period in 1993, the highest nine months ever which included an after-tax gain
of $11.0 million ($.43 per share) on the partial sale of an investment in a
marketable equity security and the favorable effect of an accounting change of
$6.8 million ($.27 per share). Results for the first nine months of 1994 were
favorably affected by higher earnings from operations for our three groups
overall, as well as the net favorable effect of unusual items that included
after-tax negotiated settlements of $8.9 million ($.35 per share) of claims
with the U.S. Government and an after-tax gain of $3.5 million ($.14 per
share) on the sale of the remaining shares of an investment in a marketable
equity security, partially offset by after-tax provisions of $6.2 million
($.25 per share) for the unusual items of expense for the five-ton truck and
metal reclamation and mill service businesses as discussed above. The
effective income tax rate before minority interest for 1994 was 43.7%, versus
42.0% in 1993. The higher income tax rate is due to losses sustained in
certain foreign operations, in part from new project start-up costs, for which
there is no tax benefit and the nondeductibility of certain acquisition costs.
Sales of the Metal Reclamation and Mill Services Group, at $383.4 million,
were significantly greater than 1993's first nine months, due to the
acquisition of MultiServ International, N.V. Sales for the Infrastructure,
Construction and Transportation Group, at $297.4 million, and Process Industry
Products Group, at $324.0 million, were well ahead of the prior year's nine
months due to greater demand for most product classes.
Operating profit, excluding the impact of the unusual items of expense, for
the Metal Reclamation and Mill Services Group was $33.5 million, up 60% from
1993's first nine months, principally due to the acquisition of MultiServ
International, N.V. After including the impact of the unusual items of
expense, operating profit was $27.2 million, up 31% from the comparable
period. Performance was adversely affected by the ongoing rationalization of
the European steel industry, as well as weak economic conditions experienced
principally in the first six months of this year in certain countries in
Europe, the adverse impact of foreign currency devaluations and hyperinflation
in Brazil particularly during the first half of 1994, and the ongoing
expensing of start-up costs for new contracts. The Infrastructure,
Construction and Transportation Group with an operating profit of $11.0
million, excluding the impact of an unusual expense item relating to the
completed five-ton truck contract was 29% below 1993's first nine months,
despite most product classes posting significantly improved results, with the
exception of the new product line of school buses, where the Company
experienced an operating loss ($11.5 million), and grating. After including
the impact of the unusual item of expense, operating profit was $6.3 million,
59% below 1993's first nine months. Operating profit for the Process Industry
Products Group, at $27.8 million, was up 33% over the prior year's first nine
months and reflected improved performance for all product classes.
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information on legal proceedings is included above under Part I, Item 1., the
section labeled "Commitments and Contingencies."
ITEM 5. OTHER INFORMATION
a.) On September 27, 1994, Harsco Corporation announced that the Board of
Directors declared a quarterly cash dividend of 35 cents per share, payable
November 15, to shareholders of record on October 14, 1994.
ITEM 6. EXHIBITS
The following exhibits are attached:
a.) Exhibit No. 11. Computation of Net Income Per Common Share.
b.) Exhibit No. 12. Computation of Ratios of Earnings to Fixed Charges.
c.) An 8-K was filed September 2, 1994 dealing with various legal issues.
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 10, 1994 /S/ Leonard A. Campanaro
Leonard A. Campanaro
Senior Vice President and
Chief Financial Officer
DATE November 10, 1994 /S/ Salvatore D. Fazzolari
Salvatore D. Fazzolari
Vice President and Controller
HARSCO CORPORATION
COMPUTATION OF NET INCOME PER COMMON SHARE
(dollars in thousands except per share)
<TABLE>
<CAPTION>
3 MONTHS ENDED SEPT. 30 9 MONTHS ENDED SEPT. 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Income before cumulative effect of accounting change $ 22,338 $ 18,258 $ 58,513 $ 64,696
Cumulative effect of a change in accounting for income taxes - - - 6,802
__________ __________ __________ __________
Net income $ 22,338 $ 18,258 $ 58,513 $ 71,498
__________ __________ __________ __________
__________ __________ __________ __________
Average shares of common stock outstanding used to compute
earnings per common share 25,150,174 24,803,813 25,093,574 25,061,193
Additional common shares to be issued assuming exercise of
stock options, net of shares assumed reacquired 79,399 139,024 93,336 164,653
__________ __________ __________ __________
Shares used to compute dilutive effect of stock options 25,229,573 24,942,837 25,186,910 25,225,846
__________ __________ __________ __________
__________ __________ __________ __________
Fully diluted income per share before cumulative
effect of accounting change $ 0.88 $ 0.73 $ 2.32 $ 2.56
Fully diluted income per share of cumulative effect
of change in accounting for income taxes - - - 0.27
__________ __________ __________ __________
Fully diluted net income per common share $ 0.88 $ 0.73 $ 2.32 $ 2.83
__________ __________ __________ __________
__________ __________ __________ __________
Income per share before cumulative effect of accounting change $ 0.89 $ 0.74 $ 2.33 $ 2.58
Income per share of cumulative effect of change in accounting
for income taxes - - - 0.27
__________ __________ __________ __________
Net income per common share $ 0.89 $ 0.74 $ 2.33 $ 2.85
__________ __________ __________ __________
__________ __________ __________ __________
</TABLE>
HARSCO CORPORATION
Computation of Ratios of Earnings to Fixed Charges
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Nine
Months
YEARS ENDED DECEMBER 31 Ended
1989 1990 1991 1992 1993 9-30-94
<S> <C> <C> <C> <C> <C> <C>
Consolidated Earnings:
Pre-tax income from continuing operations <F1> $ 22,173 $ 115,587 $ 119,647 $ 140,576 $ 137,151 $ 105,207
Add fixed charges computed below 20,693 21,864 23,544 22,425 23,879 28,571
Net adjustments for equity companies (483) (532) (439) (454) (363) (7,933)
Net adjustments for capitalized interest (215) (255) (469) (134) (172) (274)
________ ________ ________ ________ ________ ________
Consolidated Earnings Available for Fixed Charges $ 42,168 $ 136,664 $ 142,283 $ 162,413 $ 160,495 $ 125,571
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
Consolidated Fixed Charges:
Interest expense per financial statements <F2> $ 16,412 $ 17,506 $ 18,925 $ 18,882 $ 19,974 $ 25,961
Interest expense capitalized 287 345 574 355 332 322
Portion of rentals (1/3) representing an
interest factor 3,994 4,013 4,045 3,188 3,573 2,288
Interest expense for equity companies
whose debt is guaranteed <F3> - - - - - -
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
Consolidated Fixed Charges $ 20,693 $ 21,864 $ 23,544 $ 22,425 $ 23,879 $ 28,571
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
Consolidated Ratio of Earnings to Fixed Charges 2.04 6.25 6.04 7.24 6.72 4.40
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
<FN>
<F1> 1992 excludes the cumulative effect of change in accounting method for
postretirement benefits other than pensions.
<F2> Includes amortization of debt discount and expense.
<F3> No fixed charges were associated with debt of less than fifty percent
owned companies guaranteed by Harsco during the five year period 1989
through 1993 and during the first nine months of 1994.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 41,710
<SECURITIES> 0
<RECEIVABLES> 354,834
<ALLOWANCES> (8,035)
<INVENTORY> 129,194
<CURRENT-ASSETS> 534,285
<PP&E> 994,171
<DEPRECIATION> (553,830)
<TOTAL-ASSETS> 1,358,290
<CURRENT-LIABILITIES> 277,693
<BONDS> 397,529
<COMMON> 40,412
0
0
<OTHER-SE> 525,453
<TOTAL-LIABILITY-AND-EQUITY> 1,358,290
<SALES> 1,004,801
<TOTAL-REVENUES> 1,080,110
<CGS> 788,758
<TOTAL-COSTS> 952,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,522
<INTEREST-EXPENSE> 25,961
<INCOME-PRETAX> 106,851
<INCOME-TAX> 46,694
<INCOME-CONTINUING> 58,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,513
<EPS-PRIMARY> 2.33
<EPS-DILUTED> 2.32
</TABLE>
