<PAGE> 1
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, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-3970
HARSCO CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 23-1483991
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(State of incorporation) (I.R.S. Employer Identification No.)
Camp Hill, Pennsylvania 17001-8888
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number (717) 763-7064
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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 / /
<TABLE>
<CAPTION>
Title of Each Class Outstanding Shares at September 30, 1997
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<S> <C>
Common Stock Par Value $1.25 48,206,526
Preferred Stock Purchase Rights 48,206,526
</TABLE>
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<PAGE> 2
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(In thousands, except per share amounts) 1997 1996 1997 1996
===================================================================================================================
<S> <C> <C> <C> <C>
REVENUES:
Product sales............................................... $209,686 $205,877 $ 638,711 $ 582,540
Service sales............................................... 197,313 189,899 585,251 567,655
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NET SALES OF PRODUCTS AND SERVICES....................... 406,999 395,776 1,223,962 1,150,195
Other....................................................... 427 328 1,217 1,135
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TOTAL REVENUES........................................... 407,426 396,104 1,225,179 1,151,330
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COSTS AND EXPENSES:
Cost of products sold....................................... 159,289 156,354 487,446 444,916
Cost of services sold....................................... 147,973 143,983 441,347 427,346
Selling, general and administrative expenses................ 52,971 51,151 159,647 153,421
Research and development expenses........................... 1,562 1,896 3,695 3,505
Facilities discontinuance and reorganization costs.......... 178 176 3,233 1,711
Other....................................................... (251) 199 (820) (447)
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TOTAL COSTS AND EXPENSES................................. 361,722 353,759 1,094,548 1,030,452
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INCOME FROM CONTINUING OPERATIONS BEFORE
INTEREST, INCOME TAXES, AND MINORITY INTEREST......... 45,704 42,345 130,631 120,878
Interest income................................................. 1,079 1,483 3,521 5,275
Interest expense................................................ (4,148) (4,814) (12,661) (16,881)
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INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST ................... 42,635 39,014 121,491 109,272
Provision for income taxes...................................... 13,339 14,851 46,167 44,798
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INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST .................................... 29,296 24,163 75,324 64,474
Minority interest in net income................................. 1,555 1,625 4,701 3,909
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INCOME FROM CONTINUING OPERATIONS........................ 27,741 22,538 70,623 60,565
Discontinued operations:
Equity in income of United Defense, L.P. (net of
income taxes of $3,523 and $2,329 for the three
month periods, respectively, and $13,389 and
$12,439 for the nine month periods, respectively)........ 5,487 6,571 29,117 28,914
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NET INCOME...................................................... $ 33,228 $ 29,109 $ 99,740 $ 89,479
===================================================================================================================
Average shares of common stock outstanding...................... 48,768 49,730 49,113 49,989
Earnings per common share:
Income from continuing operations........................... $ .57 $ .46 $ 1.44 $ 1.21
Income from discontinued operations......................... .11 .13 .59 .58
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EARNINGS PER COMMON SHARE................................... $ .68 $ .59 $ 2.03 $ 1.79
===================================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ .20 $ .19 $ .60 $ .57
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 3
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
(IN THOUSANDS) 1997 1996
=========================================================================================================================
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.............................................. $ 30,560 $ 45,862
Receivables............................................................ 283,678 268,230
Inventories:
Finished goods...................................................... 32,449 24,743
Work in process..................................................... 31,400 25,843
Raw material and purchased parts.................................... 58,555 57,581
Stores and supplies................................................. 19,835 17,851
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Total inventories................................................ 142,239 126,018
Other current assets................................................... 57,082 68,436
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TOTAL CURRENT ASSETS................................................ 513,559 508,546
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Property, plant and equipment, at cost..................................... 1,210,973 1,187,452
Allowance for depreciation................................................. (698,282) (674,340)
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512,691 513,112
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Cost in excess of net assets of businesses acquired, net................... 181,834 195,387
Net assets of discontinued operations...................................... 47,739 54,376
Other assets............................................................... 51,182 52,998
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TOTAL ASSETS........................................................ $1,307,005 $1,324,419
=========================================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Notes payable and current maturities................................... $ 32,524 $ 26,182
Accounts payable....................................................... 102,906 111,912
Accrued compensation................................................... 44,786 44,501
Other current liabilities.............................................. 111,228 111,432
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TOTAL CURRENT LIABILITIES........................................... 291,444 294,027
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Long-term debt............................................................. 223,768 227,385
Deferred income taxes...................................................... 33,720 34,182
Other liabilities.......................................................... 87,085 87,538
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TOTAL LIABILITIES................................................... 636,017 643,132
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SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital................................ 160,349 150,974
Cumulative adjustments for translation and pension liability............... (44,239) (26,095)
Retained earnings.......................................................... 864,994 794,473
Treasury stock............................................................. (310,116) (238,065)
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TOTAL SHAREHOLDERS' EQUITY.......................................... 670,988 681,287
=========================================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $1,307,005 $1,324,419
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER
(IN THOUSANDS) 1997 1996
==========================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 99,740 $ 89,479
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................................................. 79,813 74,720
Amortization............................................................. 6,842 6,975
Equity in earnings of unconsolidated entities............................ (43,258) (41,906)
Dividends or distributions from unconsolidated entities.................. 49,142 27,363
Deferred income taxes.................................................... 1,180 2,612
Other, net............................................................... 3,557 2,200
Changes in assets and liabilities, net of acquisitions and dispositions
of businesses:
Accounts receivable.................................................. (24,875) (13,600)
Inventories.......................................................... (19,187) (5,140)
Accounts payable..................................................... (1,265) (4,776)
Other assets and liabilities......................................... (1,059) (13,146)
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NET CASH PROVIDED BY OPERATING ACTIVITIES................................ 150,630 124,781
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment............................... (105,742) (105,465)
Purchase of businesses, net of cash acquired................................. -- (21,030)
Investments held-to-maturity, net of purchases............................... 16,379 6,685
Proceeds from sale of businesses............................................. 1,236 1,793
Other investing activities................................................... 5,631 3,510
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NET CASH (USED) BY INVESTING ACTIVITIES.................................. (82,496) (114,507)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net................................................... 12,836 12,977
Current maturities and long-term debt:
Additions.................................................................. 56,430 185,900
Reductions................................................................. (56,760) (175,695)
Cash dividends paid on common stock.......................................... (29,504) (28,520)
Common stock issued-options.................................................. 5,228 4,581
Common stock acquired for treasury........................................... (69,109) (29,973)
Other financing activities................................................... (1,275) 500
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NET CASH (USED) BY FINANCING ACTIVITIES.................................. (82,154) (30,230)
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Effect of exchange rate changes on cash......................................... (1,282) (1,534)
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Net (decrease) in cash and cash equivalents..................................... (15,302) (21,490)
Cash and cash equivalents at beginning of period................................ 45,862 76,669
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CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 30,560 $ 55,179
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Cont'd.)
Notes to Consolidated Financial Statements
Commitments and Contingencies:
Federal Excise Tax and Other Matters Related to the Five-ton Truck Contract
In the third quarter of 1995, the Company, the United States Army, and the
United States Department of Justice concluded a settlement of Harsco's
previously reported claims against the Army relating to Federal Excise Tax
("FET") arising under a completed 1986 contract for the sale of five-ton trucks
to the Army. On September 27, 1995, the Army paid the Company $49 million in
accordance with the settlement terms. The Company released the Army from any
further liability for those claims, and the Department of Justice released the
Company from a threatened action for damages and civil penalties based on an
investigation conducted by the Department's Commercial Litigation Branch that
had been pending for several years. During the performance of the five-ton truck
contract, the Company recorded an account receivable of $62.5 million for its
claims against the Army relating to Federal Excise Tax. As a result of accepting
the $49 million in settlement, the Company recorded a non-recurring, pre-tax,
non-cash charge of $13.5 million (after-tax charge of $8.2 million, $.16 per
share), in the third quarter of 1995.
The settlement preserves the rights of the parties to assert claims and defenses
under the Internal Revenue Code, and rights of the Army and the Company to claim
certain amounts that may be owed by either party to reconcile possible
underpayments or overpayments on the truck contract as part of the formal
contract close-out process.
The settlement does not resolve the claim by the Internal Revenue Service that,
contrary to the Company's position, certain cargo truck models sold by the
Company should be considered to have gross vehicle weights in excess of the
33,000 pound threshold under the Federal Excise Tax law, are not entitled to an
exemption from the Federal Excise Tax under any other theory, and therefore are
taxable. On December 19, 1996, the District Director of the Internal Revenue
Service issued a 30-day letter and examination report (the "Report") that
proposed an increase in Federal Excise Tax of $33.7 million plus penalties of
$6.9 million and applicable interest currently estimated by the Company to be
$33.7 million, primarily on the grounds that those cargo truck models are
subject to the Federal Excise Tax. This proposed increase in Federal Excise Tax
takes into account offsetting credits of $9.2 million, based on a partial
allowance of the Company's $23.4 million claim that certain truck components are
exempt from the Federal Excise Tax. The Report disallowed in full the Company's
additional claim that it is entitled to the entire $52 million of Federal Excise
Tax (plus applicable interest currently estimated by the Company to be $29.9
million) the Company has paid on the five-ton trucks, on the grounds that such
trucks qualify for the Federal Excise Tax exemption applicable to certain
vehicles specially designed for the primary function of off-highway
transportation. In the event that the Company ultimately receives from the
Internal Revenue Service a refund of tax (including applicable interest) with
respect to which the Company has
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<PAGE> 6
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Cont'd.)
already received reimbursement from the Army, the refund would be allocated
between the Company and the Army. The Company plans to vigorously contest the
findings of the District Director. On March 19, 1997, the Company filed its
formal written protest to these findings with the Internal Revenue Service
Office of the Regional Director of Appeals. Although there is risk of an adverse
outcome, the Company believes that the cargo trucks are not taxable. No
recognition has been given in the accompanying financial statements for the
Company's claim or the dispute with the Internal Revenue Service.
The settlement agreement with the Army preserves the Company's right to seek
reimbursement of after-imposed tax from the Army in the event that the cargo
trucks are determined to be taxable, but the agreement limits the reimbursement
to a maximum of $21 million. Additionally, in an earlier contract modification,
the Army accepted responsibility for $3.6 million of the potential tax, bringing
its total potential responsibility up to $24.6 million.
Under the settlement, the Army agreed that if the cargo trucks are determined to
be taxable, the 1993 decision of the Armed Services Board of Contract Appeals
(which ruled that the Company is entitled to a price adjustment to the contract
for reimbursement of FET paid on vehicles that were to be delivered after
October 1, 1988) will apply to the question of the Company's right to
reimbursement from the Army for after-imposed taxes on the cargo trucks. In the
Company's view, application of the 1993 decision will favorably resolve the
principal issues regarding any such future claim by the Company. Therefore, the
Company believes that even if the cargo trucks are ultimately held to be
taxable, the Army would be obligated to reimburse the Company for a majority of
the tax, (but not interest or penalty, if any), resulting in a net maximum
liability for the Company of $9.1 million plus penalties of $6.9 million and
applicable interest currently estimated by the Company to be $33.7 million. The
Company believes it is unlikely that resolution of this matter will have a
material adverse effect on the Company's financial position, however, it could
have a material effect on quarterly or annual results of operations.
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 prices 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, totaling in excess of $60 million plus interest. No recognition has
been given in the accompanying financial statements for any recovery on these
claims. In July 1995, the Armed Services Board of Contract Appeals denied the
motions for summary judgment which had been filed by both the Company and the
Government. The Company is continuing to pursue its claim before the Armed
Services Board of Contract Appeals.
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<PAGE> 7
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Cont'd.)
Other Litigation
In 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 in response to the Company's claim of approximately $5
million against the Government for costs incurred on this contract relating to
the same issue. In May 1997, the Court issued a decision in the first phase of
the case, denying the Company's claim for reimbursement and granting the
Government's counterclaim for breach of contract and penalties under the False
Claims Act. The Court will consider the amount of damages and penalties in the
next phase of the case, and the decision will then be subject to the right of
appeal. The Government has filed a brief seeking penalties and treble damages
totaling $26 million. The Company intends to vigorously oppose this claim. The
Company and its counsel believe that resolution of these claims will not have a
material adverse effect on the Company's financial position, however, it could
have a material effect on quarterly or annual 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 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 also asserted a claim
for damages under other contracts for $76.3 million. The Company asserted
various defenses and also 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. At an arbitration hearing held in January 1996, Iran reduced the
$76.3 million portion of its claim to approximately $34.4 million. The
International Court of Arbitration took the case under advisement and in
September 1996, awarded Iran a net amount of approximately $1.2 million. This
represents an award of $7.5 million to Iran for the advance payment, offset by
an award of $6.3 million to the Company for damages and legal costs and the
denial of all pre-award interest claims for both parties. The Company and Iran
have each filed appeals in the Supreme Court of Switzerland. The Company's
management and its counsel believe it is unlikely that resolution of 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
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<PAGE> 8
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Cont'd.)
were funded by the Defense Security Assistance Agency. The Company is continuing
to cooperate and is responding to the subpoena. Based on discussions with the
agent in charge and the Government auditors, it appears that the investigation
focuses on whether the Company made improper certifications to the Defense
Security Assistance Agency and other government contract accounting matters. The
Government has not asserted any claims at this time and it is too early to know
whether a claim will be asserted or what the nature of any such claim would be,
however, the Company's management and its counsel believe it is unlikely that
this issue will have a material adverse effect on the Company's financial
position.
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 the Company). 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. $14 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 it is
unlikely that these claims will have a material adverse effect on the Company's
financial position or results of operations.
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, 1997 and December 31, 1996, include
an accrual of $3.4 million and $3.9 million respectively for environmental
matters. The amounts charged to earnings on a pre-tax basis related to
environmental matters totaled $0.4 million and $0.2 million for the nine months
of 1997 and 1996, 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. Subject to the imprecision in estimating future environmental costs,
the Company does not expect that any sum it may have to pay in
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<PAGE> 9
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Cont'd.)
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position
or results of operations.
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.
Financial Instruments and Hedging
The Company has subsidiaries principally operating in North America and Latin
America, Europe and Asia-Pacific. These operations are exposed to fluctuations
in related foreign currencies, in the normal course of business. The Company
seeks to reduce exposure to foreign currency fluctuations, primarily the
European currencies, through the use of forward exchange contracts. The Company
does not hold or issue financial instruments for trading purposes, and it is the
Company's policy to prohibit the use of derivatives for speculative purposes.
The Company has a Foreign Currency Risk Management Committee that meets
periodically to monitor foreign currency risks.
The Company enters into forward foreign exchange contracts to hedge transactions
on its non-U.S. subsidiaries, for firm commitments to purchase equipment and for
export sales denominated in foreign currencies. These contracts generally are
for 90 to 180 days or less. For those contracts that hedge an identifiable
transaction, gains or losses are deferred and accounted for as part of the
underlying transactions. The cash flows from forward exchange contracts
accounted for as hedges of identifiable transactions are classified consistent
with the cash flows from the transaction being hedged. The Company also enters
into forward foreign exchange contracts for intercompany foreign currency
commitments. These foreign exchange contracts do not qualify as hedges for
financial reporting purposes, and any related gain or loss is included in income
on a current basis. As of September 30, 1997, the total of all forward exchange
contracts amounted to $5.6 million with a favorable marked to market fluctuation
of $0.1 million.
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<PAGE> 10
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Cont'd.)
Foreign Currency Translation:
Effective January 1, 1998, the Company's operations in Brazil will no longer be
accounted for as a highly inflationary economy in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation." Brazil is
no longer considered a highly inflationary economy because the three-year
cumulative rate of inflation is below 100%. As a result of this change, the
Company will measure the financial statements of its Brazilian entity using the
Brazilian real as the entity's functional currency.
Discontinued Operations:
On August 25, 1997, Harsco and FMC Corporation signed an agreement to sell
United Defense, L.P. to The Carlyle Group for $850 million, and the sale was
completed on October 6, 1997. Prior to the sale, FMC had been the managing
general partner and 60% owner of United Defense, L.P., while Harsco owned the
balance of 40% as the limited partner. United Defense supplies ground combat and
naval weapons systems for the U.S. and military customers around the world.
United Defense had 1996 sales of $1 billion.
On the Consolidated Statements of Income, "Equity in income of United Defense,
L.P." includes equity income through August 1997 (the measurement date) from
Harsco's 40% limited partnership interest in United Defense, L.P. The sale
resulted in pre-tax cash proceeds to Harsco of approximately $340 million and is
expected to result in an estimated after tax gain on the sale in the fourth
quarter of approximately $150 million or $3.05 per share after taking into
account certain retained liabilities and estimated post closing net worth
adjustments.
New Financial Accounting Standards Issued
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share" (SFAS 128) which is effective for periods ending after
December 15, 1997. The overall objective of SFAS 128 is to simplify the
calculation of earnings per share (EPS) and achieve comparability with
International Accounting Standards. The Company will be required to adopt SFAS
128 in the fourth quarter of 1997, but does not expect that the adoption will
have a material effect on earnings per share.
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 period.
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<PAGE> 11
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities was $150.6 million in the first nine
months of 1997 compared with $124.8 million in 1996. During the nine months of
1997, cash distributions, which were principally from the recently divested
Company's share of United Defense, L.P., of $49.1 million were received from
unconsolidated entities compared with $27.4 million in the first nine months of
1996. The increase in working capital requirements in the first nine months of
1997 compared with the comparable period in 1996 reflects the growth in the
business.
On October 6, 1997, the Company sold its 40% limited partnership interest in
United Defense, L.P. The sale resulted in pre-tax cash proceeds of approximately
$340 million which will be recorded as investing activity in the fourth quarter
of 1997.
Capital expenditures for the first nine months of 1997 were $105.7 million,
exceeding the previous record of $105.5 million in 1996, reflecting the
Company's continuing program to support growth, and to improve productivity and
product quality. Proceeds from the sale of property, plant and equipment in the
nine months of 1997 provided $6.4 million in cash compared with $2.5 million
during the first nine months of 1996. Cash used for financing activities for the
nine months of 1997 included a $12.8 million increase in short-term debt and
$29.5 million of cash dividends paid on common stock.
The Company has maintained a policy of reacquiring its common stock in
unsolicited open market or privately-negotiated transactions at prevailing
market prices for several years. In January 1997, the Board of Directors
authorized the purchase, over a one-year period, of up to 2,000,000 shares of
the Company's common stock. The total number of shares purchased under this
program for the nine months ended September 30, 1997 was 1,666,421 shares of
common stock for approximately $68.4 million. Cash and cash equivalents
decreased $15.3 million to $30.6 million at September 30, 1997.
Other matters which could affect cash flows in the future are discussed under
Part 1, item 1 "Notes to Consolidated Financial Statements."
The Company continues to maintain a good financial position, with net working
capital of $222.1 million, an increase from the $214.5 million at December 31,
1996. Current assets amounted to $513.5 million, and current liabilities were
$291.4 million, resulting in a current ratio of 1.8 to 1, up from 1.7 to 1 at
December 31, 1996. With total debt of $256.3 million and equity of $671.0
million at September 30, 1997, the total debt as a percent of capital was 27.6%,
compared with 27.1% at December 31, 1996.
-11-
<PAGE> 12
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
FINANCIAL CONDITION AND LIQUIDITY (continued)
The stock price range during the first nine months was 47 7/8 - 33 1/4. Harsco's
book value per share at September 30, 1997 was $13.92, compared with $13.73 at
December 31, 1996. The Company's annualized return on average equity for the
nine months of 1997 was 19.5%, compared with 18.2% for the year 1996. The
annualized return on average assets was 17.8%, compared with the 16.8% for the
year 1996. The annualized return on average capital for the nine months was
15.2%, compared with 14.1% for the year 1996.
The Company has available through a syndicate of banks a $400 million
multi-currency five-year revolving credit facility, extending through July 2001.
This facility serves as back-up to the Company's commercial paper program. As of
September 30, 1997, there were no borrowings outstanding under this facility.
The Company has a U.S. commercial paper borrowing program under which it can
issue up to $300 million of short-term notes in the U.S. commercial paper
market. In addition, the Company has a 3 billion Belgian Franc program,
equivalent to approximately US $83 million. The Belgian program will be used to
borrow a variety of Eurocurrencies in order to fund the Company's European
operations more efficiently and in appropriate currencies. The Company limits
the aggregate commercial paper and syndicated credit facility borrowings at any
one time to a maximum $400 million. At September 30, 1997, the Company had $76.3
million of commercial paper debt outstanding under the Commercial Paper
programs.
The Company's outstanding long-term notes are rated A by Standard & Poor's, A by
Fitch Investors Service and A-3 by Moody's. The Company's commercial paper is
rated A-1 by Standard & Poor's, F-1 by Fitch Investors Service and P-2 by
Moody's. The Company also has on file, with the Securities and Exchange
Commission a Form S-3 shelf registration for the possible issuance of up to an
additional $200 million of new debt securities, preferred stock or common stock.
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, the Company should be able to obtain funds readily and at
competitive costs.
-12-
<PAGE> 13
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
RESULTS OF OPERATIONS
THIRD QUARTER OF 1997 COMPARED
WITH THIRD QUARTER OF 1996
Revenues from continuing operations of $407.4 million for the third quarter of
1997, were 3% higher than last year's comparable period. The increase was due
principally to higher sales for gas control and containment equipment and metal
reclamation and mill services, despite the adverse effect of the strengthening
U.S. dollar. Other product classes with increased performance included
scaffolding, shoring and forming equipment, grating and process equipment.
Railway maintenance equipment experienced a decline in revenues. Excluding the
adverse effect of the strengthening U.S. dollar, revenues from continuing
operations were 6% above last year's comparable period.
Cost of products and services increased as a result of higher sales. Selling,
general and administrative expenses increased, as a result of higher
compensation and commission costs.
Income from continuing operations before income taxes and minority interest was
up 9% from the comparable period last year due to improved results for metal
reclamation, scaffolding, shoring and forming equipment, and gas control and
containment equipment. The effective income tax rate for continuing operations
for the third quarter 1997 decreased to 31% from 38% in 1996 due to lower
effective tax rates on United States and international earnings.
Income from continuing operations of $27.7 million, was up 23% from the
comparable period in 1996. Income from continuing operations per common share
was $.57, up 24% from $.46 which was recorded in 1996.
Income from discontinued operations which is the after-tax results of the
recently divested Company's share of United Defense, L.P. decreased principally
due to a change in income taxes and that 1997 results include equity income only
through August 1997, the measurement date. Income per common share from
discontinued operations was $.11, down from $.13 recorded in the third quarter
of 1996.
Net income of $33.2 million, a record third quarter was up 14% from the
comparable period in 1996. Net income per common share was $.68, up 15% from the
$.59 recorded in 1996.
Sales of the Metal Reclamation and Mill Services Group, at $154.8 million, were
3% above 1996's third quarter, as current and new contracts more than offset the
adverse effect of the strengthening U.S. dollar, principally against certain
European currencies. Sales for the Infrastructure and Construction Group, at
$107.7 exceed last years comparable period. Sales for the Process Industry
Products Group, at $144.5 were up 5% due to increased sales of gas control and
containment equipment.
-13-
<PAGE> 14
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
RESULTS OF OPERATIONS
THIRD QUARTER OF 1997 COMPARED
WITH THIRD QUARTER OF 1996 (continued)
Operating profit for the Metal Reclamation and Mill Services Group increased 12%
to $22.3 million. The Infrastructure and Construction Group posted an operating
profit of $12.2 million, 4% higher than the 1996 third quarter. Operating profit
for the Process Industry Products Group, at $14.5 million, was up 2% from the
prior year's third quarter, principally reflecting higher results for gas
control and containment equipment.
In addition to the Group reporting noted above, the Company views itself as a
diversified industrial services and manufacturing company. Total industrial
services sales, which include Metal Reclamation and Mill Services Group and
Infrastructure and Construction Group service businesses, principally
scaffolding services and railway maintenance of way services, were $197.3
million in the third quarter of 1997 and $189.9 million in 1996, or
approximately 48% of net sales. The total manufacturing sales for 1997 were
$209.7 million or approximately 52% of net sales, which includes sales from the
Infrastructure and Construction Group and the Process Industry Products Group.
The total manufacturing sales for the third quarter of 1996 were $205.9 million
or approximately 52% of net sales.
The operating profit for industrial services for 1997 was $26.6 million compared
with $23.2 million in 1996, or approximately 55% and 51%, respectively, of total
Group operating profit. The operating profit from manufacturing for 1997 was
$21.7 million compared with $22.5 million in 1996, which is approximately 45%
and 49%, respectively, of total Group operating profit.
-14-
<PAGE> 15
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1997 COMPARED
WITH FIRST NINE MONTHS OF 1996
Revenues from continuing operations for the first nine months of 1997 were $1.23
billion, 6% above last year's comparable period. The increase was due
principally to higher product sales of gas control and containment equipment,
which included an acquisition in April of 1996. Higher product sales were also
recorded for process equipment, grating, pipe fittings, railway maintenance of
way equipment, and roofing granules and slag abrasives. In addition, service
sales in metal reclamation and mill services increased despite being adversely
affected by the strengthening of the U.S. dollar, principally against certain
European currencies, as well as the divesting of certain non-core businesses in
Europe in April of 1996. Service sales for scaffolding, shoring and forming
equipment, as well as railway maintenance contract services, also increased.
Excluding the adverse effect of the strengthening of the U.S. dollar, revenues
from continuing operations for the first nine months of 1997 were 9% above last
year's comparable period.
Cost of products sold increased, principally due to higher volume which included
an acquisition in 1996. Cost of services sold also increased as a result of
increased sales of services. Selling, general and administrative expenses
increased, as a result of higher compensation costs and sales commissions, as
well as the inclusion of an acquired company.
Income from continuing operations before income taxes and minority interest was
up 11% from the comparable period last year due to improved performance. Higher
earnings from continuing operations in the first nine months of 1997 were due
principally to higher results for gas control and containment, as well as metal
reclamation and mill services. These items were partially offset by lower
results for process equipment and railway maintenance of way equipment and
contract services, as well as a $1.4 million provision ($.02 earnings per share)
for an impairment loss arising from the disposal of the Company's Shell and Tube
business. Interest expense decreased as a result of the continued reduction of
the Company's outstanding debt and average interest rate. The effective income
tax rate for continuing operations for 1997 was 38%, versus 41% in 1996. The
reduction in the income tax rate is primarily due to lower effective tax rates
on United States and international earnings.
Income from continuing operations of $70.6 million for the first nine months of
1997, was up 17% from the comparable period in 1996. Income per common share
from continuing operations was $1.44, up 19% from the $1.21 which was recorded
in 1996.
Income from discontinued operations which is the after-tax results of the
recently divested Company's share of United Defense, L.P. approximated the
results which were recorded in the first nine months in 1996. Income per common
share from discontinued operations was $.59, up slightly from last year.
-15-
<PAGE> 16
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
RESULTS OF OPERATIONS
FIRST NINE MONTHS OF 1997 COMPARED
WITH FIRST NINE MONTHS OF 1996 (continued)
Net income of $99.7 million, was up 11% from the comparable period in 1996 which
was the highest first nine months ever. Net income per common share was $2.03,
up 13% from $1.79 in 1996.
Sales of the Metal Reclamation and Mill Services Group, at $463.1 million, were
above 1996's first nine months, despite the strengthening of the U.S. dollar,
principally against certain European currencies and the divesting of certain
non-core businesses in Europe in April of 1996. Sales for the Infrastructure and
Construction Group, at $322.5 million which included higher sales for all
product classes were above last year's similar period. Sales for the Process
Industry Products Group, at $438.4 million, were higher than the prior year's
first nine months due principally to increased sales of gas control and
containment equipment, which included an acquisition in April of 1996.
Operating profit for the Metal Reclamation and Mill Services Group, at $66.8
million, exceeded 1996's first nine months despite the adverse effects of the
strong U.S. dollar. The Infrastructure and Construction Group posted an
operating profit of $31.3 million, which was lower than the $33.7 million
recorded in 1996's first nine months, due principally to lower results for
railway maintenance of way equipment and contract services, as well as
scaffolding, shoring and forming equipment. Operating profit for the Process
Industry Products Group, at $45.1 million, was significantly above the prior
year's first nine months and reflected principally higher results for gas
control and containment equipment, which included an acquisition and more than
offset lower income for process equipment.
In addition to the Group reporting noted above, the Company views itself as a
diversified industrial services and manufacturing company. Total industrial
service sales, which include Metal Reclamation and Mill Services Group and
Infrastructure and Construction Group service businesses, principally
scaffolding services and railway maintenance of way services, were $585.3
million in 1997 and $567.7 million in 1996, or approximately 48% and 49% of net
sales, respectively. The total manufacturing sales for 1997 were $638.7 million
or approximately 52% of net sales, which includes sales from the Infrastructure
and Construction Group and the Process Industry Products Group. The total
manufacturing sales for 1996 were $582.5 million or approximately 51% of net
sales.
The operating profit for industrial services for 1997 was $75.9 million compared
with $74.2 million in 1996, or approximately 54% and 56% respectively, of total
Group operating profit. The operating profit from manufacturing for 1997 was
$64.3 million compared with $58.9 million in 1996, which is approximately 46%
and 44%, respectively, of total Group operating profit.
-16-
<PAGE> 17
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd.)
Safe Harbor Statement:
The nature of the Company's operations and the many countries in which it
operates subject it to changing economic, competitive, regulatory, and
technological conditions, risks, and uncertainties. In connection 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. These include statements about our management confidence and strategies
for performance; expectations for new and existing products, technologies, and
opportunities; and expectations for market segment and industry growth.
These factors include, but are not limited to: (1) changes in the world-wide
business environment in which the Company operates, including import, licensing,
and trade restrictions, interest rates, and capital costs; (2) changes in
government laws and regulations, including taxes; (3) market and competitive
changes, including market demand and acceptance for new products, services, and
technologies, and (4) effects of unstable governments and business conditions in
emerging economies.
-17-
<PAGE> 18
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information on legal proceedings is included under Part I, Item 1., the section
labeled "Commitments and Contingencies."
ITEM 2. CHANGES IN SECURITIES
On June 24, 1997, the Company adopted a revised Shareholder Rights Plan to
replace the Company's 1987 Rights Plan at its expiration on September 28, 1997.
To implement the new Plan, the Board declared a dividend to shareholders of
record on September 28, 1997, of one Right for each share of common stock, which
under certain circumstances entitles the holder to purchase 1/100th of a share
of Harsco Junior Participating Cumulative Preferred Stock at an exercise price
of $150. Initially, the Rights are attached to the shares of common stock and
are not exercisable. Details concerning the potential exercisability of the
Rights and the other provisions of the Plan are provided in the Company's Form
10-Q for the period ending June 30, 1997, and the Form 8-A filed by the Company
with the Securities and Exchange Commission on September 26, 1997.
ITEM 5. OTHER INFORMATION
DIVIDEND ACTION:
On September 23, 1997, Harsco Corporation announced that the Board of Directors
declared a quarterly cash dividend of 20 cents per share, payable November 14,
1997, to shareholders of record on October 15, 1997.
ITEM 6(a). EXHIBITS
The following exhibits are attached:
a.) Exhibit No. 2 Agreements for Sale of United Defense, L.P. -
Incorporated by reference to 8-K filed October 16, 1997.
b.) Exhibit No. 4 Shareholder Rights Agreement dated as of September 28,
1997 - Incorporated by reference to Form 8-A filed September 26, 1997.
c.) Exhibit No. 11 Computation of Fully Diluted Net Income Per Common
Share.
d.) Exhibit No. 12 Computation of Ratios of Earnings to Fixed Charges.
e.) Exhibit No. 27 Financial Data Schedule.
ITEM 6(b) REPORTS ON FORM 8-K
a.) An 8-K was filed on September 3, 1997 announcing the signing of a
definitive agreement for the sale of United Defense, L.P. to the
Carlyle Group.
b.) An additional 8-K was filed on October 16, 1997 related to the
completion of the sale of United Defense, L.P. on October 6, 1997.
-18-
<PAGE> 19
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 October 28, 1997 /S/ Leonard A. Campanaro
--------------------------- ----------------------------------------
Leonard A. Campanaro
Senior Vice President and
Chief Financial Officer
DATE October 28, 1997 /S/ Salvatore D. Fazzolari
--------------------------- ----------------------------------------
Salvatore D. Fazzolari
Vice President and Controller
-19-
<PAGE> 20
EXHIBIT INDEX
-------------
Exhibit No. 2 Agreements for Sale of United Defense, L.P. -
Incorporated by reference to 8-K filed October 16, 1997.
Exhibit No. 4 Shareholder Rights Agreement dated as of September 28,
1997 - Incorporated by reference to Form 8-A filed September
26, 1997.
Exhibit No. 11 Computation of Fully Diluted Net Income Per Common
Share.
Exhibit No. 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit No. 27 Financial Data Schedule.
<PAGE> 1
Exhibit 11
HARSCO CORPORATION
COMPUTATION OF FULLY DILUTED NET INCOME PER COMMON SHARE
(dollars in thousands except per share)
<TABLE>
<CAPTION>
3 MONTHS ENDED SEPT. 30 9 MONTHS ENDED SEPT. 30
----------------------------------- -----------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 33,228 $ 29,109 $ 99,740 $ 89,479
============== ============== ============== ==============
Average shares of common stock
outstanding used to compute
earnings per common share 48,768,453 49,730,240 49,113,259 49,988,524
Additional common shares to be
issued assuming exercise of
stock options, net of shares
assumed reacquired 482,319 380,070 440,929 409,034
------------- ------------- ------------- -------------
Shares used to compute dilutive
effect of stock options 49,250,772 50,110,310 49,554,188 50,397,558
============= ============= ============= =============
Fully diluted net income per
common share $ .67 $ .59 $ 2.01 $ 1.78
============== ============== ============== ==============
Net income per common share $ .68 $ .59 $ 2.03 $ 1.79
============== ============== ============== ==============
</TABLE>
<PAGE> 1
HARSCO CORPORATION
Exhibit 12
Computation of Ratios of Earnings to Fixed Charges
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months YEARS ENDED DECEMBER 31
Ended ------------------------------------------------------------
9/30/97 1996 1995 1994 1993 1992
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Earnings:
Pre-tax income from continuing
operations (1) $ 116,790 $ 145,984 $ 107,073 $ 84,197 $ 73,108 $ 106,880
Add fixed charges computed below 18,440 26,181 33,121 37,982 23,879 22,425
Net adjustments for equity companies (735) (181) (466) (134) (363) (454)
Net adjustments for capitalized
interest -- -- -- (274) (172) (134)
--------- --------- --------- --------- -------- ---------
Consolidated Earnings Available for
Fixed Charges $ 134,495 $ 171,984 $ 139,728 $ 121,771 $ 96,452 $ 128,717
========= ========= ========= ========= ======== =========
Consolidated Fixed Charges:
Interest expense per financial
statements (2) $ 12,661 $ 21,483 $ 28,921 $ 34,048 $ 19,974 $ 18,882
Interest expense capitalized 96 131 134 338 332 355
Portion of rentals (1/3 ) representing
an interest factor 5,683 4,567 4,066 3,596 3,573 3,188
Interest expense for equity companies
whose debt is guaranteed (3) -- -- -- -- -- --
--------- --------- --------- --------- -------- ---------
Consolidated Fixed Charges $ 18,440 $ 26,181 $ 33,121 $ 37,982 $ 23,879 $ 22,425
========= ========= ========= ========= ======== =========
Consolidated Ratio of Earnings to
Fixed Charges 7.29 6.57 4.22 3.21 4.04 5.74
========= ========= ========= ========= ======== =========
</TABLE>
(1) 1992 excludes the cumulative effect of change in accounting method for
postretirement benefits other than pensions.
(2) Includes amortization of debt discount and expense.
(3) No fixed charges were associated with debt of less than fifty percent
owned companies guaranteed by the Company during the five year period
1992 through 1996, and the nine months ended September 30, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 30,560
<SECURITIES> 0
<RECEIVABLES> 291,416
<ALLOWANCES> (7,738)
<INVENTORY> 142,239
<CURRENT-ASSETS> 513,559
<PP&E> 1,210,973
<DEPRECIATION> (698,282)
<TOTAL-ASSETS> 1,307,005
<CURRENT-LIABILITIES> 291,444
<BONDS> 223,768
0
0
<COMMON> 82,250
<OTHER-SE> 588,738
<TOTAL-LIABILITY-AND-EQUITY> 1,307,005
<SALES> 1,223,962
<TOTAL-REVENUES> 1,225,179
<CGS> 928,793
<TOTAL-COSTS> 1,094,548
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,428
<INTEREST-EXPENSE> 12,661
<INCOME-PRETAX> 121,491
<INCOME-TAX> 46,167
<INCOME-CONTINUING> 70,623
<DISCONTINUED> 29,117
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 99,740
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.01
</TABLE>
