<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 June 30, 1999
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 23-1483991
(State of incorporation) (I.R.S. Employer Identification No.)
Camp Hill, Pennsylvania 17001-8888
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number (717) 763-7064
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
<TABLE>
<CAPTION>
Title of Each Class Outstanding Shares at June 30, 1999
- ------------------- -----------------------------------
<S> <C>
Common Stock Par Value $1.25 41,079,370
Preferred Stock Purchase Rights 41,079,370
</TABLE>
-1-
<PAGE> 2
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(In thousands, except per share amounts) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $ 212,902 $ 220,953 $ 417,312 $ 431,485
Service sales 217,776 235,318 417,997 425,808
Other 757 610 1,218 872
--------- --------- --------- ---------
TOTAL REVENUES 431,435 456,881 836,527 858,165
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of products sold 165,226 165,746 328,691 327,852
Cost of services sold 167,947 178,652 323,242 322,805
Selling, general and administrative expenses 51,022 54,105 103,817 105,657
Research and development expenses 1,478 1,627 3,128 2,806
Other expense 1,309 43 2,721 288
--------- --------- --------- ---------
TOTAL COSTS AND EXPENSES 386,982 400,173 761,599 759,408
--------- --------- --------- ---------
INCOME BEFORE INTEREST, INCOME TAXES AND
MINORITY INTEREST 44,453 56,708 74,928 98,757
Interest income 1,147 1,950 2,236 5,425
Interest expense (6,865) (4,672) (13,078) (8,554)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST 38,735 53,986 64,086 95,628
Provision for income taxes 13,818 19,558 23,071 35,382
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 24,917 34,428 41,015 60,246
Minority interest in net income 1,094 1,354 2,393 2,830
--------- --------- --------- ---------
NET INCOME $ 23,823 $ 33,074 $ 38,622 $ 57,416
========= ========= ========= =========
Average shares of common stock outstanding 41,125 46,322 41,376 46,564
--------- --------- --------- ---------
BASIC EARNINGS PER COMMON SHARE $ .58 $ .71 $ .93 $ 1.23
========= ========= ========= =========
Diluted average shares of common stock outstanding 41,308 46,785 41,525 47,010
--------- --------- --------- ---------
DILUTED EARNINGS PER COMMON SHARE $ .58 $ .71 $ .93 $ 1.22
========= ========= ========= =========
CASH DIVIDENDS DECLARED PER COMMON SHARE $ .225 $ .22 $ .45 $ .44
</TABLE>
See accompanying notes to consolidated financial statements.
-2-
<PAGE> 3
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
(In thousands) 1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 52,185 $ 41,562
Receivables, less allowances for doubtful accounts of
$14,105 in 1999 and $13,602 in 1998 317,922 310,935
Inventories 166,931 175,804
Other current assets 59,122 59,140
----------- -----------
TOTAL CURRENT ASSETS 596,160 587,441
----------- -----------
Property, plant and equipment, at cost 1,425,887 1,438,102
Accumulated depreciation 808,297 811,908
----------- -----------
617,590 626,194
Cost in excess of net assets of companies acquired, net 260,914 273,708
Other assets 136,569 136,238
----------- -----------
TOTAL ASSETS $ 1,611,233 $ 1,623,581
=========== ===========
LIABILITIES
CURRENT LIABILITIES:
Notes payable and current maturities $ 39,128 $ 54,607
Accounts payable 120,180 142,681
Accrued compensation 42,978 43,938
Income taxes 31,999 42,908
Other current liabilities 179,766 190,688
----------- -----------
TOTAL CURRENT LIABILITIES 414,051 474,822
----------- -----------
Long-term debt 404,567 309,131
Deferred income taxes 61,042 55,195
Other liabilities 90,666 99,134
----------- -----------
TOTAL LIABILITIES 970,326 938,282
----------- -----------
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital 169,707 167,978
Accumulated other comprehensive income (expense) (84,107) (55,045)
Retained earnings 1,121,940 1,101,828
Treasury stock (566,633) (529,462)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 640,907 685,299
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,611,233 $ 1,623,581
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<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>
Six Months Ended
June 30
(In thousands) 1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,622 $ 57,416
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 59,501 56,634
Amortization 6,448 5,299
Deferred income taxes 1,588 2,697
Other, net 315 4,308
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable (22,200) (40,194)
Inventories 2,005 (16,195)
Accounts payable (10,150) 11,238
Disbursements related to discontinued defense
business (13,249) (6,259)
Other assets and liabilities (13,786) (16,677)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,094 58,267
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (73,837) (68,087)
Purchase of businesses, net of cash acquired (2,378) (123,584)
Maturities of investments available-for-sale -- 40,000
Investments held-to-maturity, net of purchases -- 4,010
Proceeds from sale of a business 8,502 --
Other investing activities 3,607 (5,090)
--------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES (64,106) (152,751)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (11,530) (8,735)
Current maturities and long term debt:
Additions 121,956 37,177
Reductions (21,757) (25,785)
Cash dividends paid on common stock (18,752) (20,539)
Common stock issued-options 1,296 2,078
Common stock acquired for treasury (42,831) (60,734)
Other financing activities (1,767) (1,341)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 26,615 (77,879)
--------- ---------
Effect of exchange rate changes on cash (980) (2,472)
--------- ---------
Net increase (decrease) in cash and cash equivalents 10,623 (174,835)
Cash and cash equivalents at beginning of period 41,562 221,565
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 52,185 $ 46,730
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 5
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(In thousands) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 23,823 $ 33,074 $ 38,622 $ 57,416
Other comprehensive income (expense):
Foreign currency translation adjustments (5,517) (5,050) (29,062) (6,136)
Unrealized investment gains, net of deferred income taxes -- -- -- 28
-------- -------- -------- --------
Other comprehensive (expense) (5,517) (5,050) (29,062) (6,108)
-------- -------- -------- --------
TOTAL COMPREHENSIVE INCOME $ 18,306 $ 28,024 $ 9,560 $ 51,308
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 6
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
REVIEW OF OPERATIONS BY SEGMENT*
(Unaudited)
<TABLE>
<CAPTION>
(IN MILLIONS)
MILL GAS AND GENERAL CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 1999 SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTALS
-------- ------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS $ 182.3 $ 139.1 $ 109.3 $ -- $ 430.7
-------- -------- -------- ------ --------
INCOME BEFORE INTEREST, INCOME TAXES, AND
MINORITY INTEREST $ 19.6 $ 10.5 $ 13.8 $ 0.5 $ 44.4
INTEREST INCOME 1.1 0.1 -- -- 1.2
INTEREST EXPENSE (2.9) (1.3) (1.6) (1.1) (6.9)
INCOME TAX (EXPENSE) BENEFIT (5.6) (3.8) (4.5) 0.1 (13.8)
MINORITY INTEREST IN NET (INCOME) LOSS (1.1) -- -- -- (1.1)
-------- -------- -------- ------ --------
SEGMENT NET INCOME (LOSS) $ 11.1 $ 5.5 $ 7.7 $ (0.5) $ 23.8
======== ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
MILL GAS AND GENERAL CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 1998* SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTALS
-------- ------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers $ 203.6 $ 145.7 $ 107.0 $ -- $ 456.3
-------- -------- -------- ------ --------
Income before interest, income taxes,
and minority interest $ 29.1 $ 16.4 $ 11.1 $ 0.1 $ 56.7
Interest income 1.3 -- 0.1 0.6 2.0
Interest expense (2.8) (0.7) (1.2) -- (4.7)
Income tax (expense) benefit (10.9) (6.1) (3.4) 0.8 (19.6)
Minority interest in net (income) loss (1.4) 0.1 -- -- (1.3)
-------- -------- -------- ------ --------
Segment net income $ 15.3 $ 9.7 $ 6.6 $ 1.5 $ 33.1
======== ======== ======== ====== ========
</TABLE>
* The 1998 segment information has been restated in accordance with the
Financial Accounting Standards Board SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information."
Segment information reflects the first quarter 1999 reorganization of the
Patterson-Kelley division. The reorganization resulted in the realignment
of the heat transfer and industrial blending equipment product lines from
the Gas and Fluid Control Segment to the Infrastructure Segment. Sales of
these product lines were $7.2 million and $7.5 million for the second
quarter of 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements.
-6-
<PAGE> 7
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
REVIEW OF OPERATIONS BY SEGMENT*
(Unaudited)
<TABLE>
<CAPTION>
(IN MILLIONS)
MILL GAS AND GENERAL CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 1999 SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTALS
-------- ------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS $ 355.4 $ 273.2 $ 206.7 $ -- $ 835.3
-------- -------- -------- ------ --------
INCOME BEFORE INTEREST, INCOME TAXES,
AND MINORITY INTEREST $ 36.1 $ 18.5 $ 20.1 $ 0.2 $ 74.9
INTEREST INCOME 2.0 0.1 0.1 0.1 2.3
INTEREST EXPENSE (5.7) (2.7) (3.0) (1.7) (13.1)
INCOME TAX EXPENSE (10.3) (6.0) (6.3) (0.5) (23.1)
MINORITY INTEREST IN NET (INCOME) LOSS (2.5) 0.1 -- -- (2.4)
-------- -------- -------- ------ --------
SEGMENT NET INCOME $ 19.6 $ 10.0 $ 10.9 $ (1.9) $ 38.6
======== ======== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
MILL GAS AND GENERAL CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 1998* SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTALS
-------- ------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers $ 367.5 $ 288.8 $ 201.0 $ -- $ 857.3
-------- -------- -------- ------ --------
Income before interest, income taxes,
and minority interest $ 51.6 $ 29.5 $ 17.8 $ (0.1) $ 98.8
Interest income 2.4 -- 0.2 2.8 5.4
Interest expense (4.7) (1.4) (2.5) -- (8.6)
Income tax expense (19.6) (11.2) (5.4) 0.8 (35.4)
Minority interest in net (income) loss (2.8) -- -- -- (2.8)
-------- -------- -------- ------ --------
Segment net income $ 26.9 $ 16.9 $ 10.1 $ 3.5 $ 57.4
======== ======== ======== ====== ========
</TABLE>
* The 1998 segment information has been restated in accordance with the
Financial Accounting Standards Board SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information."
Segment information reflects the first quarter 1999 reorganization of the
Patterson-Kelley division. The reorganization resulted in the realignment
of the heat transfer and industrial blending equipment product lines from
the Gas and Fluid Control Segment to the Infrastructure Segment. Sales of
these product lines were $12.7 million and $13.8 million for the first six
months of 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements.
-7-
<PAGE> 8
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories consist of:
<TABLE>
<CAPTION>
June 30 December 31
(in thousands) 1999 1998
-------- -----------
<S> <C> <C>
Finished Goods $ 46,703 $ 45,259
Work in process 35,793 36,060
Raw materials and purchased parts 60,850 71,576
Stores and supplies 23,585 22,909
-------- --------
$166,931 $175,804
======== ========
</TABLE>
Commitments and Contingencies
DISCONTINUED DEFENSE BUSINESS - CONTINGENCIES
FEDERAL EXCISE TAX AND OTHER MATTERS RELATED TO THE FIVE-TON TRUCK CONTRACT
In 1995, the Company, the United States Army ("Army"), and the United States
Department of Justice concluded a settlement of Harsco's previously reported
claims against the Army relating to Federal Excise Tax ("FET") arising under a
completed 1986 contract for the sale of five-ton trucks to the Army. On
September 27, 1995, the Army paid the Company $49 million in accordance with the
settlement terms. The Company released the Army from any further liability for
those claims, and the Department of Justice released the Company from a
threatened action for damages and civil penalties based on an investigation
conducted by the Department's Commercial Litigation Branch that had been pending
for several years.
The settlement 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
("IRS") that, contrary to the Company's position, certain cargo truck models
sold by the Company should be considered to have gross vehicle weights in excess
of the 33,000 pound threshold under FET law, are not entitled to an exemption
from FET under any other theory, and therefore are taxable. In March 1999, the
IRS assessed an increase in FET of $30.4 million plus penalties of $6.3 million
and applicable interest currently estimated by the Company to be $43.7 million.
-8-
<PAGE> 9
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
This increase in FET takes into account offsetting credits of $9.2 million,
based on a partial allowance of the Company's $28.7 million claim that certain
truck components are exempt from FET. The IRS disallowed in full the Company's
additional claim that it is entitled to the entire $52 million of FET (plus
applicable interest currently estimated by the Company to be $39.0 million) the
Company has paid on the five-ton trucks, on the grounds that such trucks qualify
for the FET exemption applicable to certain vehicles specially designed for the
primary function of off-highway transportation. In the event that the Company
ultimately receives from the IRS a refund of tax (including applicable interest)
with respect to which the Company has already received reimbursement from the
Army, the refund would be allocated between the Company and the Army. The
Company plans to vigorously contest the IRS assessment in Federal District Court
or the U.S. Court of Federal Claims. Although there is risk of an adverse
outcome, both the Company and the Army believe that the cargo trucks are not
taxable. No recognition has been given in the accompanying financial statements
for the Company's claims with the IRS.
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 $5.8 million plus penalties of $6.3 million and
applicable interest currently estimated by the Company to be $43.7 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.
OTHER DEFENSE BUSINESS 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 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
U.S. Court of Federal Claims issued a decision in the first phase of the case,
denying the Company's claim for reimbursement and granting the Government's
-9-
<PAGE> 10
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
counterclaim for breach of contract and penalties under the False Claims Act.
The Government had filed a brief seeking penalties and treble damages totaling
approximately $26 million. In May 1999, the Company reached an agreement with
the U.S. Government to settle the case. Under the settlement agreement, Harsco
paid the U.S. Government $11 million and both parties released all claims in the
case. The settlement payment was charged against an existing reserve in the
second quarter of 1999.
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 Government subsequently subpoenaed a
number of former employees of the Company's divested defense business to testify
before a grand jury and since October 1998, has issued grand jury subpoenas to
the Company for additional documents. The Company is continuing to cooperate and
is responding to Government document requests. Based on discussions with the
Government, Harsco is the target of this investigation which primarily focuses
on whether the Company made improper certifications to the Defense Security
Assistance Agency. The Company expects the Government to assert claims against
it, but it is not yet known what the amount of claims, fines or penalties would
be or if any such claims would have a material adverse effect on the Company's
financial position or results of operations.
CONTINUING OPERATIONS - CONTINGENCIES
ENVIRONMENTAL
The Company is involved in a number of environmental remediation investigations
and clean-ups and, along with other companies, has been identified as a
"potentially responsible party" for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its financial
exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods selected. The
Consolidated Balance Sheet at June 30, 1999 and December 31, 1998, includes an
accrual of $3.9 million and $4.9 million, respectively, for environmental
matters. The amounts affecting earnings on a pre-tax basis related to
environmental matters totaled $0.4 million of income for the six months of 1999
and $0.3 million of expense for the six months of 1998.
-10-
<PAGE> 11
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
The liability for future remediation costs is evaluated on a quarterly basis.
Actual costs to be incurred at identified sites in future periods may vary from
the estimates, given inherent uncertainties in evaluating environmental
exposures. The Company does not expect that any sum it may have to pay in
connection with environmental matters in excess of the amounts recorded or
disclosed above would have a material adverse effect on its financial position
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, that 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, 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 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
of 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 transaction. The cash flows from these contracts are classified
consistent with the cash flows from the transaction being hedged. The Company
also enters into forward exchange contracts for intercompany foreign currency
commitments. These foreign exchange contracts do not qualify as hedges,
therefore, gains and losses are recognized in income based on fair market value.
As of June 30, 1999, the total of all forward exchange contracts amounted to
$19.7 million with an unfavorable mark-to-market fluctuation of $27 thousand.
-11-
<PAGE> 12
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
Reconciliation of Basic and Diluted Shares
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Dollars in thousands, except per share) 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 23,824 $ 33,074 $ 38,622 $ 57,416
=========== =========== =========== ===========
Average shares of common stock
outstanding used to compute
basic earnings per common
share 41,124,688 46,322,100 41,375,601 46,564,135
Additional common shares to be
issued assuming exercise of
stock options, net of shares
assumed reacquired 182,815 462,679 149,825 445,638
----------- ----------- ----------- -----------
Shares used to compute dilutive
effect of stock options 41,307,503 46,784,779 41,525,426 47,009,773
=========== =========== =========== ===========
Basic earnings per common share $ .58 $ .71 $ .93 $ 1.23
=========== =========== =========== ===========
Diluted earnings per common share $ .58 $ .71 $ .93 $ 1.22
=========== =========== =========== ===========
</TABLE>
New Financial Accounting Standard Issued
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), with
an amended date effective for fiscal years beginning after June 15, 2000. SFAS
133 requires that an entity recognize all derivative instruments as either
assets or liabilities on its balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or Other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction, and, if it is, the type of hedge transaction. The Company
will adopt SFAS 133 by the first quarter of 2001. Due to the Company's limited
use of derivative instruments, SFAS 133 is not expected to have a material
effect on the financial position or results of operations of the Company.
-12-
<PAGE> 13
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
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.
-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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
The change in the Company's financial position and liquidity is summarized as
follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 INCREASE/
(DOLLARS ARE IN MILLIONS) 1999 1998 (DECREASE)
---------- ----------- ----------
<S> <C> <C> <C>
Current Assets $ 596.2 $ 587.4 $ 8.8
Current Liabilities 414.1 474.8 (60.7)
---------- ---------- -------
Working Capital $ 182.1 $ 112.6 $ 69.5
Current Ratio 1.4:1 1.2:1
---------- ---------- -------
Notes Payable and
Current Maturities $ 39.1 $ 54.6 $ (15.5)
Long Term Debt 404.6 309.1 95.5
---------- ---------- -------
Total Debt 443.7 363.7 80.0
Total Equity 640.9 685.3 (44.4)
---------- ---------- -------
Total Capital $ 1,084.6 $ 1,049.0 $ 35.6
Total Debt as a Percent of
Total Capital 40.9% 34.7%
---------- ---------- -------
</TABLE>
The improvement in the Company's working capital position and current ratio
during the first six months of 1999 was due to an overall decrease in current
liabilities of $60.7 million which included $13.2 million of cash payments
related to the discontinued defense business.
Long term debt increased principally as a result of capital expenditures and
share repurchases. Capital expenditures (investments) for the first half of 1999
were a record $73.8 million compared with $68.1 million in the first half of
1998. The Company acquired 1,202,850 shares of its common stock in the first
half of 1999 for $35.0 million. Due to the timing of actual payments for the
purchase of the stock, the cash flow used by financing activities in the first
six months of 1999 was $42.8 million. The Company's capital investments, share
repurchases and cash dividends demonstrate the Company's continued commitment to
creating value through strategic investment and return of capital to
shareholders.
-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 (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30 Year Ended Year Ended Year Ended
CASH UTILIZATION FOR THE PERIOD: 1999 December 31 1998 December 31 1997 December 31 1996
---------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Capital Investments $ 73.8 $ 159.8 $ 143.4 $ 150.3
Strategic Acquisitions 2.4 158.3 8.5 21.1
Share Repurchases 42.8 169.3 113.2 30.7
Cash Dividends 18.8 40.3 39.1 37.9
-------- -------- -------- --------
Total $ 137.8 $ 527.7 $ 304.2 $ 240.0
======== ======== ======== ========
</TABLE>
The Company's debt as a percent of capital increased as a result of the
increased debt and a decrease in equity due to the Company's share repurchases
and $29.1 million of other comprehensive expense resulting from foreign currency
translation adjustments. The foreign currency translation adjustments are
principally due to the 32% decrease in the translated value of the Brazilian
real and the 12% decrease in the translated value of the euro.
SIX MONTHS ENDED JUNE 30 FINANCIAL STATISTICS
<TABLE>
<CAPTION>
JUNE 30 JUNE 30
1999 1998
------- -------
<S> <C> <C>
Harsco Stock Price High/Low $34 3/8 - $23 1/16 $47 - $37 1/2
Annualized Return on Average Equity 12.0% 14.8%
Annualized Return on Average Assets 9.6% 13.9%
Annualized Return on Average Capital 8.7% 12.2%
</TABLE>
Lower returns on average equity, assets, and capital are due principally to
lower earnings in the first half of 1999 compared with the record first half of
1998. To a lesser extent, annualized return on average equity was positively
affected by lower average equity due principally to share repurchases.
Annualized return on average assets was negatively affected by higher average
assets due to capital investments and purchases of businesses. Annualized return
on average capital was negatively impacted by higher average capital due to
increased debt financing. In addition, the Company's book value per share
dropped from $16.22 per share at December 31, 1998 to $15.60 at June 30, 1999.
This decrease was due principally to foreign currency translation adjustments
and share repurchases.
Operating cash flows were $49.1 million in the first six months of 1999 compared
with $58.3 million in the first six months of 1998. This decrease in cash from
operating activities was due principally to lower earnings in the first half of
1999 and timing differences in accounts payable disbursements. Also, in the
first half of 1999, the Company disbursed approximately $7 million in additional
payments related to the discontinued defense business than in the 1998
-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 (CONTINUED)
comparable period. The cash decreases were partially offset by the favorable
timing of cash payments for inventories and a lower accounts receivable increase
in the first half of 1999 than in the comparable period in 1998.
The Company has a U.S. commercial paper borrowing program under which it can
issue up to $400 million of short-term notes in the U.S. commercial paper
market. In addition, the Company has a 3 billion Belgian franc commercial paper
program, equivalent to approximately U.S. $77 million. The Belgian program
provides the capacity to borrow euros to fund the Company's European operations
more efficiently. The Company limits the aggregate commercial paper and
syndicated credit facility borrowings at any one time to a maximum $400 million.
At June 30, 1999, the Company had $211.4 million of commercial paper debt
outstanding under the commercial paper programs.
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 U.S. commercial paper program.
As of June 30, 1999 there were no borrowings outstanding under this facility.
The Company's outstanding long-term notes are rated A by Standard & Poor's, A by
Fitch IBCA and A-3 by Moody's. The Company's commercial paper is rated A-1 by
Standard & Poor's, F-1 by Fitch IBCA and P-2 by Moody's. These investment-grade
credit ratings have been recently reaffirmed. 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. The Company is positioned to continue to invest in strategic
acquisitions, capital investments, share repurchases and cash dividends as a
means to enhance shareholder value.
-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 (CONTINUED)
RESULTS OF OPERATIONS
SECOND QUARTER OF 1999 COMPARED
WITH SECOND QUARTER OF 1998
<TABLE>
<CAPTION>
PERCENT
INCREASE INCREASE
(MILLIONS OF DOLLARS, EXCEPT PER SHARE) 1999 1998 (DECREASE) (DECREASE)
---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 431.4 $ 456.9 $ (25.5) (6%)
Net income $ 23.8 $ 33.1 $ (9.3) (28%)
Basic earnings per common share $ .58 $ .71 $ (.13) (18%)
Diluted earnings per common share $ .58 $ .71 $ (.13) (18%)
</TABLE>
SUMMARY ANALYSIS OF RESULTS
Second quarter revenues for 1999 were $431.4 million, a 6% decrease from last
year's comparable period. The strong U.S. dollar continues to affect the
company's performance. The euro currency devalued further in the second quarter
and the Brazilian real, which showed some sign of recovery in April, fell in
value in May and June. As a result of this, and several other currencies that
devalued against the dollar, translated sales were lowered by over $10 million
in the second quarter. Softness in the steel and gas industries continued, but
there are some signs of an uptrend for the second half of 1999.
Net income at $23.8 million was down 28% from the second quarter of 1998. This
decrease reflects the global problems of the steel industry, which in the United
States, has led to bankruptcy filings for some steel producers. Also, the soft
market conditions in the industrial gas and oil industries reduced income. Steel
capacity utilization rates in the United States have begun to trend upward, and
while there is still market uncertainty for the gas and oil industries, the
Company's backlog trend has begun to improve.
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
As noted above, revenues for 1999 decreased from last year's comparable period.
The decrease was due to reduced volume for Mill Services, with approximately
half of this reduction related to foreign exchange translation effects. The
incremental sales of acquired companies more than offset the divestitures of
non-core businesses. Sales of scaffolding, shoring and forming services
increased while demand for grating products and pipe fittings decreased.
Excluding the adverse foreign exchange translation effect of the strengthening
U.S. dollar, particularly against the Brazilian real and the euro, consolidated
revenues were three percent below the second quarter of 1998.
-17-
<PAGE> 18
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Cost of services and products sold increased as a percent of sales due to the
inclusion of acquired companies and reduced volume. As a result of the Company's
continuing cost reduction, process improvement and reorganization efforts,
selling, general and administrative expenses were below 1998, despite the
inclusion of acquired companies.
Income before income taxes and minority interest was down 28% from the
comparable period in 1998 due principally to lower results for metal reclamation
and mill services, as well as gas control and containment equipment.
Additionally, the earnings of acquired companies were more than offset by
reduced earnings related to process equipment and pipe fittings. Interest income
was lower due to a decreased amount of cash available for investment purposes.
Interest expense was higher than last year's comparable period as a result of
increased borrowings for the Company's share repurchase program and for the
funding of capital expenditures.
The Company's results continued to be adversely affected by the effects of lower
worldwide steel prices and production. These problems contributed to reduced
sales and income, exclusive of acquired companies, in our United States, Asian,
European and Australian operations. A soft market for products related to the
oil and gas industries reduced profit margins in comparison to the 1998 second
quarter.
The effective income tax rate for the second quarter of 1999 was 35.7% versus
36.2% for 1998. The reduction in the income tax rate is composed of lower
effective income tax rates on international earnings.
SEGMENT ANALYSIS
An analysis of the results for each of the Company's three business segments is
presented below.
<TABLE>
<CAPTION>
Mill Services Segment PERCENT
INCREASE INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE) (DECREASE)
---- ---- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 182.3 $ 203.6 $ (21.3) (10%)
Segment net income 11.1 15.3 (4.2) (27%)
</TABLE>
Sales of the Mill Services Segment were below 1998's second quarter due to the
adverse effects of foreign exchange translation and the adverse effects of low
worldwide steel prices and production. Fluctuating foreign currency translation
rates, principally the Brazilian real and euro, reduced sales by $10.1 million
from the 1998 comparable period.
-18-
<PAGE> 19
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net income from the Mill Services Segment was significantly below 1998's second
quarter. The decrease reflected the adverse volume effects of lower worldwide
steel prices and production, particularly in the United States. The effect of
lower priced imported steel in the United States has resulted in several recent
customer bankruptcy filings. As a result, in the second quarter of 1999, the
provision for doubtful accounts was increased.
Gas and Fluid Control Segment
<TABLE>
<CAPTION>
PERCENT
INCREASE INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE) (DECREASE)
- --------------------- ---- ---- ---------- --------
<S> <C> <C> <C> <C>
Sales $ 139.1 $ 145.7 $ (6.6) (5%)
Segment net income 5.5 9.7 (4.2) (43%)
</TABLE>
This segment was adversely affected by soft market conditions affecting the
industrial gas and oil industries. Consequently, sales decreased from the second
quarter of 1998. Lower sales of process equipment, due in part to the divestment
of non-core businesses, as well as reduced sales for pipe fittings and gas
control and containment equipment, more than offset the inclusion of sales of
acquired companies.
The reduction in sales resulted in reduced net income from the second quarter of
1998. Also, a valuation provision related to the writedown of assets available
for sale reduced pre-tax income by $.9 million in the quarter.
Infrastructure Segment
<TABLE>
<CAPTION>
PERCENT
INCREASE INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE) (DECREASE)
- --------------------- ---- ---- ---------- --------
<S> <C> <C> <C> <C>
Sales $ 109.3 $ 107.0 $ 2.3 2%
Segment net income 7.7 6.6 1.1 17%
</TABLE>
Sales of the Infrastructure Segment were higher than last year's comparable
period due to increased revenues for scaffolding, shoring and forming services.
This reflects continued strength in demand for non-residential construction.
Net income was above 1998's second quarter due principally to cost reductions,
process improvements, reorganization actions as well as higher revenues.
-19-
<PAGE> 20
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INDUSTRIAL SERVICES AND ENGINEERED PRODUCTS
In addition to the segment reporting previously presented, the Company is a
diversified industrial services and engineered products company. Total
industrial service sales, include metal reclamation and mill services, as well
as scaffolding, shoring, and forming services and railway maintenance of way
services. Engineered products include sales of the Reed Minerals unit in the
Mill Services Segment, and product sales of the Infrastructure and the Gas and
Fluid Control Segments. Sales and income for the second quarter of 1999 and 1998
are presented in the following table:
INDUSTRIAL SERVICES AND ENGINEERED PRODUCTS
<TABLE>
<CAPTION>
SECOND QUARTER SECOND QUARTER
(MILLIONS OF DOLLARS) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
SALES
<S> <C> <C> <C> <C>
Industrial Services $ 217.8 51% $ 235.3 52%
Engineered Products 212.9 49% 221.0 48%
-------- --- ------- ---
Total sales $ 430.7 100% $ 456.3 100%
======== === ======= ===
INCOME
Industrial Services $ 22.4 51% $ 30.6 54%
Engineered Products 21.5 49% 26.0 46%
-------- --- ------- ---
Total segment income
before interest, income taxes,
and minority interest
$ 43.9 100% $ 56.6 100%
======== === ======= ===
</TABLE>
-20-
<PAGE> 21
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
FIRST SIX MONTHS OF 1999 COMPARED WITH FIRST SIX MONTHS OF 1998
<TABLE>
<CAPTION>
$ PERCENT
INCREASE INCREASE
(MILLIONS OF DOLLARS, EXCEPT PER SHARE) 1999 1998 (DECREASE) (DECREASE)
- --------------------------------------- ---- ---- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 836.5 $ 858.2 $ (21.7) (3%)
Net income $ 38.6 $ 57.4 $ (18.8) (33%)
Basic earnings per common share $ .93 $ 1.23 $ (.30) (24%)
Diluted earnings per common share $ .93 $ 1.22 $ (.29) (24%)
</TABLE>
SUMMARY ANALYSIS OF RESULTS
The Company's results for the first six months of 1999 reflect the adverse
effects of a steel industry affected by overcapacity, reduced prices and weak
demand in certain parts of the world. These problems contributed to lower
production and financial stress at many steel mills. In certain instances
customers in the United States were forced to file for bankruptcy protection.
Additionally, soft market conditions in the industrial gas and oil industries
reduced results from the prior year. Finally, the strong U.S. dollar continues
to adversely impact the foreign exchange effect at operations in many countries
in which the Company has operations. Indications late in the second quarter were
that certain of the aforementioned unfavorable trends were beginning to
dissipate.
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
Revenues for the first six months of 1999 were $836.5 million, slightly below
last year's comparable period. Revenues decreased despite the inclusion of
acquired companies. Excluding the adverse foreign exchange translation effect of
the strengthening U.S. dollar, particularly against the Brazilian real and the
euro, revenues approximated the first six months of 1998.
Costs of services and products sold increased, principally due to the inclusion
of acquired companies. As a result of the Company's continuing cost reduction,
process improvement, and reorganization efforts, selling, general and
administrative expenses decreased.
-21-
<PAGE> 22
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Income before income taxes and minority interest was down 33% from the
comparable period in 1998. Interest income was lower due to a decreased amount
of cash available for investment purposes. Interest expense was higher than last
year's comparable period as a result of increased borrowings for the Company's
share repurchase program and for capital expenditures. The Company's defense
business was sold in the fourth quarter of 1997. This resulted in $344 million
of pre-tax cash proceeds. The availability of a substantial portion of this cash
in the first six months of 1998 resulted in additional interest income, as well
as reduced interest expense compared to the first six months of 1999.
The effective income tax rate for the first six months of 1999 was 36% versus
37% for 1998. The reduction in the income tax rate is due principally to lower
effective income tax rates on international earnings.
SEGMENT ANALYSIS
An analysis of the results for each of the Company's three business segments is
presented below.
<TABLE>
<CAPTION>
$ PERCENT
Mill Services Segment INCREASE INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE) (DECREASE)
- -------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $355.4 $367.5 $(12.1) (3%)
Segment net income 19.6 26.9 (7.3) (27)
</TABLE>
Sales of the Mill Services Segment were below 1998's first six months despite
the inclusion of an acquired company for the full six months of 1999. This
decrease reflected the adverse effects of foreign exchange translation and
overcapacity in the steel industry which has adversely affected worldwide steel
prices and production. This is particularly true in the United States where the
steel industry filed complaints with the government due to alleged unfairly low
priced imports. Lower steel production adversely affected volume and margins at
most steel mills in the United States including many of the Company's customers.
Net income of the Mill Services Segment was significantly below 1998's first six
months. The decrease reflected the adverse effects of lower steel production and
prices, as well as increased provisions for doubtful accounts arising from
financial stress to customers. Also, interest expense increased from last year's
first six months. On a comparative basis, results for the first six months of
1999 include a foreign currency translation gain in Brazil, which offset the
adverse effect of the strong U.S. dollar, while in the first six months of 1998,
net foreign currency translation exchange losses were incurred.
-22-
<PAGE> 23
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Gas and Fluid Control Segment
<TABLE>
<CAPTION>
$ PERCENT
INCREASE INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE) (DECREASE)
- -------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $273.2 $288.8 $(15.6) (5%)
Segment net income 10.0 16.9 (6.9) (41)
</TABLE>
Sales of the Gas and Fluid Control Segment decreased from the first six months
of 1998 despite the inclusion of sales of three acquired companies. More than
offsetting the acquisitions were lower sales of process equipment due in part to
the divestment of two non-core businesses, as well as reduced sales of pipe
fittings, and gas control and containment equipment both of which reflected
reduced demand in the industrial gas and oil industries.
Net income was below 1998's first six months principally due to the sales
reduction discussed above. Net income was also below 1998, but to a lesser
extent, due to a valuation provision related to the writedown of assets
available for sale.
Infrastructure Segment
<TABLE>
<CAPTION>
$ PERCENT
INCREASE INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE) (DECREASE)
------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $206.7 $201.0 $ 5.7 3%
Segment net income 10.9 10.1 .8 8
</TABLE>
Sales of the Infrastructure Segment were higher than last year's comparable
period due to increased sales for scaffolding, shoring and forming services, as
well as sales of railway maintenance of way equipment and contract services.
Net income was above 1998's first six months due principally to improved margins
on sales of grating products. Income was lower for railway maintenance of way
equipment due principally to lower margins.
INDUSTRIAL SERVICES AND ENGINEERED PRODUCTS
In addition to the segment reporting previously presented, the Company is a
diversified industrial services and engineered products company. Total
industrial services sales, include metal reclamation and mill services, as well
as scaffolding, shoring, and forming services and railway maintenance of way
services. Engineered products include sales of the Reed Minerals unit in the
Mill Services Segment, and product sales of the Infrastructure and the Gas and
Fluid Control Segments.
-23-
<PAGE> 24
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Sales and income for the six months of 1999 and 1998 are presented in the
following table:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C>
SALES
Industrial Services $418.0 50% $425.8 50%
Engineered Products 417.3 50 431.5 50
------ --- ------ ---
Total sales $835.3 100% $857.3 100%
====== === ====== ===
INCOME
Industrial Services $40.0 54% $ 53.8 54%
Engineered Products 34.7 46 45.1 46
------ --- ------ ---
Total segment income before interest, income
taxes, and minority interest
$ 74.7 100% $ 98.9 100%
====== === ====== ===
</TABLE>
EMPLOYEE TERMINATION BENEFIT COSTS
Employee termination benefit costs consist principally of severance arrangements
to employees terminated as a result of management reorganization actions. Under
these reorganization actions, the Company and its management have established
and approved specific plans of termination. The affected employees have been
notified prior to recognition of related provisions. Non-cash charges for
employee termination benefit costs are included as adjustments to reconcile net
income to net cash provided by operating activities in the Consolidated
Statement of Cash Flows.
During the first six months of 1999, $1.2 million of reorganization expense
related to employee termination benefits was incurred primarily in the Mill
Services and Gas and Fluid Control Segments principally in the United States. In
the first six months of 1999, 122 employees were included in employee
termination arrangements initiated by the Company and approximately $0.8 million
cash payments were made under such arrangements. The payments are reflected as
uses of operating cash in the Consolidated Statement of Cash Flows. Under these
reorganization actions, 109 employees have been terminated as of June 30, 1999.
Approximately $0.4 million of additional cash payments related to the first six
months of 1999 reorganization actions are expected to be disbursed in the second
half of 1999.
Also during the first six months of 1999, $2.3 million of cash severance
payments were disbursed in connection with the termination of 310 employees that
had been included in employee termination actions initiated, recorded and
disclosed in 1998. The cash severance payments in the first six months occurred
principally in the Mill Services Segment in South Africa.
-24-
<PAGE> 25
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
EMPLOYEE TERMINATION BENEFITS COSTS AND PAYMENTS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
Activity Activity Summary of Activity Total
First Quarter Second Quarter as of Reorganization
1999 1999 June 30, 1999 Actions in
--------------- --------------- ------------- ----------
Original reorganization action period: 1998 1999 1998 1999 1998 1999 1998 - 1999
---- ---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Employee termination benefits expense: (1)$6.5 $1.2 N/A $ - (1)$6.5 $1.2 $7.7
==== ==== ---- ---- ----
Payments:
Disbursed in 1998: (2)(2.4) N/A N/A N/A (2)(2.4) N/A (2.4)
Disbursed in applicable period of 1999:(3) (1.9) (0.7) (0.4) (0.1) (2.3) (0.8) (3.1)
----- ----- ----- ----- ---- ---- ----
Total payments: $(4.3) $(0.7) $(0.4) $(0.1) (4.7) (0.8) (5.5)
===== ===== ===== =====
Other: 0.1 - 0.1
----- ---- ----
Remaining payments: (4) $ 1.9 $0.4 $2.3
===== ==== ====
</TABLE>
N/A - Not Applicable
(1) - This expense was recorded and disclosed in 1998.
(2) - Disbursements recorded in 1998.
(3) - Disbursements in 1999 are displayed under the quarter disbursed.
Disbursements are categorized according to the original reorganization
action period to which they relate (1998 or 1999).
(4) - Remaining payments are categorized according to the original
reorganization action period to which they relate (1998 or 1999).
EMPLOYEE TERMINATIONS - NUMBER OF EMPLOYEES
<TABLE>
<CAPTION>
Activity Activity Summary of Activity Total
First Quarter Second Quarter as of Reorganization
1999 1999 June 30, 1999 Actions in
--------------- --------------- ------------- ----------
Original reorganization action period: 1998 1999 1998 1999 1998 1999 1998 - 1999
---- ---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Employees affected: 670 108 N/A 14 670 122 792
==== === == --- --- ---
Employee terminations:
Terminated in 1998: (349) N/A N/A N/A (349) N/A (349)
Terminated in 1999: (303) (78) (7) (31) (310) (109) (419)
---- ---- --- ---- ---- ---- ----
Total terminations: (652) (78) (7) (31) (659) (109) (768)
==== ==== === ====
Other: 52 - 52
--- --- ---
Remaining terminations: 63 13 76
=== === ===
</TABLE>
N/A - Not Applicable
-25-
<PAGE> 26
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
ECONOMIC ENVIRONMENT
The Company has currency exposures for its international operations which may be
subject to volatility, such as the 1999 foreign exchange fluctuations
experienced in Brazil. Such exposures may result in reduced sales, income, other
comprehensive income and cash flows.
Beginning in 1998 the world-wide steel industry experienced selling price
reductions and production curtailments at many steel producers, particularly in
the United States. The United States steel industry has been unfavorably
affected by imports of low-priced foreign steel. Additionally, certain steel
producers have been forced to file for bankruptcy protection. There is a risk
that the Company's future results of operations or financial condition may be
adversely affected if the steel industry's problems continue. Our Mill Services
Segment provides services at steel mills throughout the world. The future
financial impact on the Company associated with these risks cannot be estimated.
YEAR 2000 READINESS
Year 2000 Statements contained herein about Harsco products and services are
Year 2000 Readiness Disclosures, pursuant to the Year 2000 Information and
Readiness Disclosure Act, 15 U.S.C. 1-note.
The Year 2000 problem can be traced to the early days of computers, when memory
and data storage were very expensive. To conserve these limited resources,
computer programmers decided to use just two digits in date fields to identify a
calendar year. For example, 1999 would be identified as "99." The assumption is
that the date is within the 1900s. In the year 2000 this assumption will be
invalid and some systems will not properly recognize dates. On January 1, 2000,
many computer programs in mainframe, microcomputer, client/server, personal
computer, and embedded systems may recognize the year "00" as 1900 rather than
2000. Because many computer functions are date-sensitive, this error may cause
systems to process data inaccurately or shut down if they do not recognize the
date. If not corrected, many computer applications could fail or create
erroneous results as of or prior to the year 2000. Errors may occur in
chronological sorting, in date comparisons, duration calculations, and other
time and date-sensitive processing.
The Company is taking steps to ensure that its operations will not be adversely
impacted by potential Year 2000 computer failures. The Year 2000 readiness
project is overseen by the senior management of the Company with regular
progress reports made to the Board of Directors. Year 2000 readiness teams have
been working at various levels within the Company, as well as coordinating tasks
common to the total Company. The Year 2000 readiness process generally includes
the following phases for mission critical areas: awareness, assessment,
prioritization, remediation or replacement, testing, and contingency planning.
-26-
<PAGE> 27
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Information Technology
As of June 30, 1999, the Company is substantially complete in its Year 2000
readiness assessment and prioritization of information technology. The Company
has determined that it is necessary to modify, upgrade or replace portions of
its hardware and software so that its computer applications will properly
utilize dates beyond December 31, 1999, and is in the process of implementing
such changes. The majority of the software which is not Year 2000 ready is being
updated through normal software upgrades and replacements.
The Company is approximately 90% complete as of June 30, 1999 in the required
remediation or replacement and testing of information technology hardware and
software. It is estimated that the major information technology system
improvements and testing will be completed principally by the third quarter of
1999. Most replacement hardware and software has been purchased from vendors who
have asserted that their software is Year 2000 ready. As additional assurance,
our process includes an overall Year 2000 readiness assessment of critical
business partners including information technology vendors.
Non-Information Technology Systems
Included within the scope of our Year 2000 readiness plan are non-information
technology systems including office, operating, and production equipment with
embedded chips. Our assessment process generally includes inventorying such
equipment and making a determination, principally through supplier inquiry, as
to the Year 2000 readiness status of critical items. As of June 30, 1999, the
Company is substantially complete in the assessment of non-information
technology systems. Our process includes the testing, where possible, of
date-sensitive mission critical embedded chips. As of June 30, 1999, the Company
is approximately 95% complete in the necessary testing of date sensitive mission
critical equipment with embedded chips. It is estimated that testing will be
substantially completed by the third quarter of 1999. No required Year 2000
modifications or replacements of a material nature have been identified for
non-information technology systems.
Third Parties
The Company is also engaged in communications with its significant business
partners, suppliers, and major customers to determine the extent to which the
Company is vulnerable to such third parties' failure to address their own Year
2000 issues. The Company's assessment is based on information available from
such third parties. The Company is also seeking assurances from the third
parties that their computer applications will not fail due to Year 2000
problems. The third party assessment process is approximately 92% complete as of
June 30, 1999. It is estimated that the assessment process will be substantially
complete by the third quarter of 1999. No mission critical third parties have
indicated that they will not be Year 2000 ready by December 31, 1999.
-27-
<PAGE> 28
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 READINESS
<TABLE>
<CAPTION>
ESTIMATED PERCENTAGE COMPLETE
AS OF JUNE 30, 1999
------------------------------------------------------
SURVEYING AND REMEDIATION, REPLACEMENT,
PRIORITIZATION CORRECTION AND TESTING
-------------- ----------------------
<S> <C> <C>
Information Technology 100% 90%
Non-Information Technology Systems 100% 95%
Third Parties 92% -
</TABLE>
Costs
As of June 30, 1999, the Company has incurred approximately $2.3 million in
cumulative Year 2000 readiness costs. Based on the assessment of information
available as of June 30, 1999, the Company's cost to complete its Year 2000
readiness program is estimated to be an additional $1.1 million. Total Year 2000
readiness costs are estimated to be $3.4 million.
Risks
The Company believes that its major Year 2000 risk relates to the performance
and readiness status of third parties, particularly those based outside the
United States, and principally utilities providing power, water and
communication networks to Company facilities and operations. The impact of such
Year 2000 failures on the Company's financial position or results of operations
cannot be estimated.
Management has engaged the Company's Internal Audit Department to perform Year
2000 readiness audits and to identify other material Year 2000 risks.
Additionally, the Year 2000 readiness status of any companies acquired during
1999 may adversely affect the Company's percentage complete statistics,
readiness costs and estimated completion date. The Year 2000 status and risks of
such potential acquired companies will be assessed during the due diligence
process.
-28-
<PAGE> 29
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Contingency Plans
The Company is taking steps to mitigate the risk of a material impact of Year
2000 computer failures on its operations via the development of contingency
plans. Contingency plans have been developed for those mission critical
applications, functions, and resources for which the risk of a Year 2000-related
failure has not been reduced to an insignificant level. Such plans include
detailed alternative operating procedures to be invoked upon confirmation of a
critical Year 2000 failure. The plans, which are under management review, will
be updated as necessary as new information becomes available prior to 2000.
Certain resources, such as electricity, are not easily replaceable and there are
limited contingency planning options. If there is an extended Year 2000 failure
by several third parties or supporting infrastructures, there could be a
material adverse impact on the Company's financial position or results of
operations.
EURO CURRENCY CONVERSION
On January 1, 1999, certain countries of the European Monetary Union established
fixed conversion rates between their legacy currencies and one common currency,
the euro. The euro now trades on currency exchanges and may be used in business
transactions. Beginning in January 2002, new euro-denominated notes and coins
will be issued and the existing legacy currency notes and coins will be
withdrawn from circulation by July 1, 2002. The Company's arrangements for euro
bank accounts and the modification of certain loan arrangements to accommodate
the euro have been completed. The Company is evaluating other systems and
business issues raised by the euro conversion. These issues include the need to
adapt computer and other business systems and equipment and the long-term
competitive implications of conversion. In 1998, the Company derived
approximately 22% of its sales from the European geographic area, including
non-European Monetary Union countries. In the first six months 1999, 22% of
sales were from the European geographic area. The Company believes the euro
conversion will not have a material effect on the Company's financial position
or results of operations.
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 accordance with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company provides the following cautionary remarks regarding important factors
which, among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. 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, sales,
and earnings.
-29-
<PAGE> 30
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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, currency exchange rates, interest rates, and capital
costs; (2) changes in governmental laws and regulations, including taxes; (3)
market and competitive changes, particularly in the steel producing, industrial
gas, and infrastructure industries which the Company serves; (4) effects of
unstable governments and business conditions in emerging economies; and (5)
other risk factors listed from time to time in the Company's SEC reports. The
Company does not intend to update this information and disclaims any legal
liability to the contrary.
-30-
<PAGE> 31
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to foreign currency risk in its international operations.
The Company conducts business in over thirty foreign countries and approximately
37%, 36% and 37% of the Company's net revenues for the years ended December 31,
1998, 1997 and 1996, respectively, were derived from the Company's operations
outside the United States. To illustrate the effect of foreign currency exchange
rate changes due to the strengthening of the U.S. dollar, in 1998 sales would
have been 1% greater in comparison with the average exchange rates for the year
1997. A similar comparison for the first six months ended June 30, 1999, would
have increased sales 2.3%, if the average exchange rate for 1998 would have
remained the same for the first six months of 1999.
The Company seeks to reduce exposures to foreign currency fluctuations, through
the use of forward exchange contracts. At June 30, 1999, these contracts
amounted to $19.7 million and all will mature within 1999. 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.
Also, the company's cash flows and earnings are subject to changes in interest
rates. Total debt of $443.7 million as of June 30, 1999 had interest rates
ranging from 2.9% to 16.5%, of which approximately 37% were at fixed rates of
interest. The weighted average interest rate of total debt was approximately
5.3%. At current debt levels, a one percentage increase in interest rates would
increase annual interest expense by approximately $2.8 million.
-31-
<PAGE> 32
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 5. OTHER INFORMATION
DIVIDEND INFORMATION:
On June 23, 1999, the Company announced that the Board of Directors declared a
quarterly cash dividend of 22 1/2 cents per share, payable August 13, 1999, to
shareholders of record on July 15, 1999.
ITEM 6(a). EXHIBITS
The following exhibits are attached:
a.) Exhibit No. 12 Computation of Ratios of Earnings to Fixed Charges.
b.) Exhibit No. 27 Financial Data Schedule
ITEM 6(b). REPORTS ON FORM 8-K
A report on Form 8-K dated May 25, 1999 was filed on June 3, 1999 relating to a
settlement with the United States Government of litigation in the U.S. Court of
Federal Claims involving a sale of howitzers in the 1980s by the Company's
former BMY division to the U.S. Government.
-32-
<PAGE> 33
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 August 3, 1999 /S/ Salvatore D. Fazzolari
----------------------------- -----------------------------------
Salvatore D. Fazzolari
Senior Vice President and Chief
Financial Officer
DATE August 3, 1999 /S/ Stephen J. Schnoor
----------------------------- -----------------------------------
Stephen J. Schnoor
Vice President and Controller
-33-
<PAGE> 1
Exhibit 12
HARSCO CORPORATION
Computation of Ratios of Earnings to Fixed Charges
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Six YEARS ENDED DECEMBER 31
Months Ended ------------------------------------------------------------------
6/30/99 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Pre-tax income from continuing
operations (net of minority interest
in net income) $ 61,693 $ 174,874 $ 165,613 $ 145,984 $ 107,073 $ 84,197
Add fixed charges computed below 17,758 28,417 24,263 26,181 33,121 37,982
Net adjustments for equity companies (194) 139 (694) (181) (466) (134)
Net adjustments for capitalized
interest (58) (10) -- -- -- (274)
--------- --------- --------- --------- --------- ---------
Consolidated Earnings Available
for Fixed Charges $ 79,199 $ 203,420 $ 189,182 $ 171,984 $ 139,728 $ 121,771
========= ========= ========= ========= ========= =========
Consolidated Fixed Charges:
Interest expense per financial
statements (1) $ 13,078 $ 20,504 $ 16,741 $ 21,483 $ 28,921 $ 34,048
Interest expense capitalized 58 128 128 131 134 338
Portion of rentals (1/3) representing
an interest factor 4,622 7,785 7,394 4,567 4,066 3,596
Interest expense for equity companies
whose debt is guaranteed (2) -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Consolidated Fixed Charges $ 17,758 $ 28,417 $ 24,263 $ 26,181 $ 33,121 $ 37,982
========= ========= ========= ========= ========= =========
Consolidated Ratio of Earnings to
Fixed Charges 4.46 7.16 7.80 6.57 4.22 3.21
========= ========= ========= ========= ========= =========
</TABLE>
(1) Includes amortization of debt discount and expense.
(2) No fixed charges were associated with debt of less than fifty percent
owned companies guaranteed by the Company during the five year period 1994
through 1998, and the six months ended June 30, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 52,185
<SECURITIES> 0
<RECEIVABLES> 332,027
<ALLOWANCES> 14,105
<INVENTORY> 166,931
<CURRENT-ASSETS> 596,160
<PP&E> 1,425,887
<DEPRECIATION> (808,297)
<TOTAL-ASSETS> 1,611,233
<CURRENT-LIABILITIES> 414,051
<BONDS> 404,567
0
0
<COMMON> 82,705
<OTHER-SE> 558,202
<TOTAL-LIABILITY-AND-EQUITY> 1,611,233
<SALES> 835,309
<TOTAL-REVENUES> 836,527
<CGS> 651,933
<TOTAL-COSTS> 761,599
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,568
<INTEREST-EXPENSE> 13,078
<INCOME-PRETAX> 64,086
<INCOME-TAX> 23,071
<INCOME-CONTINUING> 38,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,622
<EPS-BASIC> .93
<EPS-DILUTED> .93
</TABLE>
