<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 March 31, 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 March 31, 1999
- ------------------------------- ------------------------------------
<S> <C>
Common Stock Par Value $1.25 41,210,125
Preferred Stock Purchase Rights 41,210,125
</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
MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Product sales $ 204,410 $ 210,532
Service sales 200,221 190,490
Other 461 262
- ------------------------------------------------------------------------------------------
TOTAL REVENUES 405,092 401,284
- ------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of products sold 163,465 162,106
Cost of services sold 155,295 144,153
Selling, general, and administrative expenses 52,795 51,552
Research and development expenses 1,650 1,179
Other expense 1,412 245
- ------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 374,617 359,235
- ------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST, INCOME TAXES, AND MINORITY INTEREST 30,475 42,049
Interest income 1,089 3,475
Interest expense (6,213) (3,882)
- ------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 25,351 41,642
Provision for income taxes 9,253 15,824
- ------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 16,098 25,818
Minority interest in net income 1,299 1,476
- ------------------------------------------------------------------------------------------
NET INCOME $ 14,799 $ 24,342
==========================================================================================
Average shares of common stock outstanding 41,629 46,809
- ------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ .36 $ .52
==========================================================================================
Diluted average shares of common stock outstanding 41,745 47,237
- ------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ .35 $ .52
==========================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ .225 $ .22
</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>
MARCH 31 DECEMBER 31
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49,378 $ 41,562
Receivables, less allowances for doubtful accounts of $14,544
in 1999 and $13,602 in 1998 299,246 310,935
Inventories:
Finished goods 48,429 45,259
Work in process 36,566 36,060
Raw materials and purchased parts 64,447 71,576
Stores and supplies 23,593 22,909
- ------------------------------------------------------------------------------------------------------
Total inventories 173,035 175,804
Other current assets 58,558 59,140
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 580,217 587,441
- ------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost 1,403,187 1,438,102
Allowance for depreciation 791,046 811,908
- ------------------------------------------------------------------------------------------------------
612,141 626,194
Cost in excess of net assets of businesses acquired, net 265,782 273,708
Other assets 138,209 136,238
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,596,349 $ 1,623,581
======================================================================================================
LIABILITIES
CURRENT LIABILITIES:
Notes payable and current maturities $ 48,592 $ 54,607
Accounts payable 112,245 142,681
Accrued compensation 39,190 43,938
Income taxes 32,129 42,908
Other current liabilities 188,718 190,688
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 420,874 474,822
- ------------------------------------------------------------------------------------------------------
Long-term debt 387,884 309,131
Deferred income taxes 56,791 55,195
Other liabilities 94,616 99,134
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 960,165 938,282
- ------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital 169,083 167,978
Accumulated other comprehensive income (expense) (78,590) (55,045)
Retained earnings 1,107,359 1,101,828
Treasury stock (561,668) (529,462)
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 636,184 685,299
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,596,349 $ 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>
THREE MONTHS ENDED
MARCH 31
(IN THOUSANDS) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,799 $ 24,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 29,219 26,265
Amortization 3,163 2,325
Equity in income of unconsolidated entities (350) (129)
Dividends or distributions from unconsolidated entities 377 --
Deferred income taxes (1,032) (87)
Other, net 1,068 1,782
Changes in assets and liabilities, net of acquisitions and dispositions
of businesses:
Accounts receivable (2,398) (17,819)
Inventories (2,565) (11,070)
Accounts payable (18,683) (6,183)
Other assets and liabilities (12,255) (2,480)
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (1) 11,343 16,946
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (34,195) (32,560)
Purchase of businesses, net of cash acquired (2,903) (23,834)
Maturities of investments available-for-sale -- 40,000
Investments held-to-maturity, net of purchases -- 3,010
Proceeds from sales of businesses 8,502 --
Other investing activities 519 (6,301)
- ------------------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (28,077) (19,685)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (7,148) (2,597)
Current maturities and long-term debt:
Additions 84,249 2,403
Reductions (3,083) (7,037)
Cash dividends paid on common stock (9,479) (10,295)
Common stock issued-options 870 863
Common stock acquired for treasury (38,047) (20,816)
Other financing activities (1,767) (1,341)
- ------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 25,595 (38,820)
- ------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,045) (333)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,816 (41,892)
Cash and cash equivalents at beginning of period 41,562 221,565
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 49,378 $ 179,673
======================================================================================================
</TABLE>
(1) Cash provided by operating activities for the first quarter of 1998
includes approximately $4 million of income taxes paid related to the gain
on the disposal of the defense business.
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
MARCH 31
(IN THOUSANDS) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 14,799 $ 24,342
Other comprehensive income (expense):
Foreign currency translation adjustments (23,545) (1,086)
Unrealized investment gains, net of deferred income taxes -- 28
- ---------------------------------------------------------------------------------------
Other comprehensive (expense) (23,545) (1,058)
- ---------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (EXPENSE) $ (8,746) $ 23,284
=======================================================================================
</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>
MILL GAS AND GENERAL CONSOLIDATED
(IN MILLIONS) SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTALS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
- --------------------------------------------------------------------------------------------------------------
NET SALES TO UNAFFILIATED CUSTOMERS $173.1 $134.1 $ 97.4 $ - $404.6
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE INTEREST, INCOME TAXES,
AND MINORITY INTEREST $ 16.5 $ 8.0 $ 6.3 $ (0.3) $ 30.5
INTEREST INCOME 0.9 - 0.1 0.1 1.1
INTEREST EXPENSE (2.8) (1.4) (1.4) (0.6) (6.2)
INCOME TAX EXPENSE (4.7) (2.2) (1.8) (0.6) (9.3)
MINORITY INTEREST IN NET (INCOME) LOSS (1.4) 0.1 - - (1.3)
- --------------------------------------------------------------------------------------------------------------
SEGMENT NET INCOME $ 8.5 $ 4.5 $ 3.2 $ (1.4) $ 14.8
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
MILL GAS AND GENERAL CONSOLIDATED
(IN MILLIONS) SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTALS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers $163.9 $143.1 $ 94.0 $ - $401.0
- --------------------------------------------------------------------------------------------------------------
Income before interest, income taxes,
and minority interest $ 22.5 $ 13.1 $ 6.7 $(0.3) $ 42.0
Interest income 1.1 - 0.1 2.3 3.5
Interest expense (1.9) (0.7) (1.3) - (3.9)
Income tax expense (8.7) (5.1) (2.0) - (15.8)
Minority interest in net (income) loss (1.4) (0.1) - - (1.5)
- --------------------------------------------------------------------------------------------------------------
Segment net income $ 11.6 $ 7.2 $ 3.5 $ 2.0 $ 24.3
==============================================================================================================
</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 $5.5 million and $6.3 million for the first
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $41.7 million.
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 $37.7 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.
-7-
<PAGE> 8
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
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 $41.7 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 counterclaim for breach of contract and penalties under the False
Claims Act. If the parties are unable to agree upon a settlement of the
quantum, 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 approximately $26 million. The Company is currently engaged in
settlement discussions with the Government. If the parties are unable to
reach an acceptable settlement with the Government on the amount of the
Company's liability, 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.
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
-8-
<PAGE> 9
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
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. It is not yet known whether the Government will institute criminal or
civil action against the Company, nor is it known what the amount of claims,
fines or penalties, if any, would be or if any such actions 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 March 31, 1999 and December 31, 1998, includes an
accrual of $4.8 million and $4.9 million, respectively, for environmental
matters. The amounts charged to earnings on a pre-tax basis related to
environmental matters totaled $0.1 million for the three months of 1999 and $0.1
million for the three months of 1998.
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.
-9-
<PAGE> 10
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
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, 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 transactions. 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 March 31, 1999, the total of all forward exchange contracts amounted to
$2.3 million with a favorable mark-to-market fluctuation of $0.1 million.
-10-
<PAGE> 11
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 MARCH 31
(Dollars in thousands except per share) 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
Net income $ 14,799 $ 24,342
=========== ===========
Average shares of common stock
outstanding used to compute
basic earnings per common
share 41,629,301 46,808,859
Additional common shares to be
issued assuming exercise of
stock options, net of shares
assumed reacquired 115,366 428,407
----------- -----------
Shares used to compute dilutive
effect of stock options 41,744,667 47,237,266
=========== ===========
Basic earnings per common share $ .36 $ .52
=========== ===========
Diluted earnings per common share $ .35 $ .52
=========== ===========
</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), which
is effective for the fiscal years beginning after June 15, 1999. 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 2000. 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.
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.
-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.)
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>
MARCH 31, DECEMBER INCREASE/
(DOLLARS ARE IN MILLIONS) 1999 1998 (DECREASE)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Assets $ 580.2 $ 587.4 $ (7.2)
Current Liabilities 420.9 474.8 (53.9)
- ---------------------------------------------------------------------------------
Working Capital $ 159.3 $ 112.6 $ 46.7
Current Ratio 1.4:1 1.2:1
=================================================================================
Short Term Debt $ 48.6 $ 54.6 $ (6.0)
Long Term Debt 387.9 309.1 78.8
- ---------------------------------------------------------------------------------
Total Debt 436.5 363.7 72.8
Total Equity 636.2 685.3 (49.1)
- ---------------------------------------------------------------------------------
Total Capital $ 1,072.7 $1,049.0 $ 23.7
Total Debt as a Percent of
Total Capital 40.7% 34.7%
=================================================================================
</TABLE>
The improvement in the Company's current ratio during the first three months of
1999 was due to a decrease in accounts payable and accrued liabilities of $47.9
million.
Long term debt increased principally as a result of capital expenditures and the
purchase of treasury stock. Capital expenditures for the first quarter of 1999
were $34.2 million compared with $32.6 million in 1998. Capital expenditures for
the year 1999 are expected to approximate last year's record total of $159.8
million. The Company acquired 1,048,150 shares of its common stock in the first
quarter of 1999 for $30.2 million. Due to the timing of actual payments for the
purchase of common stock, the cash flow used by financing activities in the
first quarter was approximately $38.0 million. The Company's capital investments
and share repurchases demonstrate the Company's continued commitment to creating
value through strategic investment and return of capital to shareholders.
<TABLE>
<CAPTION>
CASH UTILIZATION FOR
THE PERIOD ENDED MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(DOLLARS IN MILLIONS) 1999 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Acquisitions $ 2.9 $158.3 $ 8.5 $ 21.1
Share Repurchases 38.0 169.3 113.2 30.7
Capital Investments 34.2 159.8 143.4 150.3
- --------------------------------------------------------------------------------
Total $ 75.1 $487.4 $265.1 $202.1
================================================================================
</TABLE>
-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.)
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 $23.5 million of other comprehensive expense resulting from foreign currency
translation adjustments. The foreign currency translation adjustments in the
first quarter of 1999 are principally due to the 31% decrease in the Brazilian
real.
FIRST QUARTER FINANCIAL STATISTICS
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Harsco Stock Price $25-$33 $37-1/2-46-1/8
Annualized Return on Average Equity 9.2% 12.4%
Annualized Return on Average Assets 7.9% 12.5%
Annualized Return on Average Capital 7.1% 10.6%
- --------------------------------------------------------------------------------
</TABLE>
Lower returns on equity, assets, and capital are due to lower earnings in the
first quarter of 1999 compared with the first quarter of 1998. In addition, the
Company's book value per share dropped from $16.22 per share at December 31,
1998 to $15.44 at March 31, 1999. This decrease was due principally to foreign
currency translation adjustments and stock repurchases.
Operating cash flows were $11.3 million in the first three months of 1999
compared with $16.9 million in the first three months of 1998. This decrease was
principally due to lower earnings in 1999 compared with 1998.
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. Beginning in the second quarter the Board of Directors has authorized an
increase in the program to $400 million. In addition, the Company has a 3
billion Belgian Franc program, equivalent to approximately U.S. $80 million. The
Belgian commercial paper program is used to borrow in 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 March 31, 1999, the Company had $190.6 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 March 31, 1999 there were no borrowings outstanding under this facility.
-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.)
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. 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.
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
PERCENT
INCREASE
(MILLIONS OF DOLLARS, EXCEPT PER SHARE) 1999 1998 (DECREASE)
- --------------------------------------- ---- ---- ----------
<S> <C> <C> <C>
Revenues $ 405.1 $ 401.3 1%
Net income $ 14.8 $ 24.3 (39)%
Basic earnings per common share $ .36 $ .52 (31)%
Diluted earnings per common share $ .35 $ .52 (33)%
</TABLE>
First quarter revenues for 1999 were $405.1 million, slightly above last year's
comparable period. The increase was due to the inclusion of acquired companies
in 1998. Inclusion of companies acquired increased revenues for the Mill
Services Segment and for gas control and containment equipment in the Gas and
Fluid Control Segment. In the Infrastructure Segment, sales of railway
maintenance of way equipment and contract services; grating; and scaffolding,
shoring and forming services increased, but to a lesser extent. These increases
were partially offset by lower sales of the Gas and Fluid Control Segment's
process equipment principally due to the divestment of a non-core business. The
segment also experienced lower sales of pipe fittings. Excluding the adverse
foreign exchange translation effect of the strengthening U.S. dollar,
particularly against the Brazilian real, revenues were 3% above the first
quarter 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
and reorganization efforts, selling, general and administrative expenses were
only slightly above 1998, despite the inclusion of acquired companies.
Income before income taxes and minority interest was down 39% from the
comparable period in 1998 due principally to lower results for metal reclamation
and mill services, as well as gas
-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.)
control and containment equipment. Lower earnings were also experienced for
process equipment and railway maintenance of way equipment and contract
services. Improved results were achieved for grating products. On a comparative
basis, results for the first quarter of 1999 include a foreign currency
translation gain in Brazil, which offset the adverse effect of the strong
dollar. In the first quarter of 1998, net foreign currency translation exchange
losses were incurred. 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 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 quarter of 1998 resulted in additional
interest income, as well as reduced interest expense compared to the first
quarter of 1999.
The Company's results have been adversely affected by the global financial
crisis including its effects on world-wide steel prices and steel production.
That crisis contributed to reduced sales and income, exclusive of acquired
companies, in our United States, Asian, European and Australian operations.
The effective income tax rate for the first quarter of 1999 was 36.5% versus 38%
for 1998. The reduction in the income tax rate is due to lower effective income
tax rates on federal, international and state earnings.
Net income was down 39% from the first quarter of 1998. Basic earnings per
common share of $.36 were down 31% from last year. Diluted earnings per common
share of $.35 were down 33% 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.)
SEGMENT ANALYSIS
An analysis of the results for each of the Company's three business segments is
presented below.
MILL SERVICES SEGMENT
<TABLE>
<CAPTION>
PERCENT
INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE)
- --------------------- ---- ---- ----------
<S> <C> <C> <C>
Sales $173.1 $163.9 6%
Segment net income 8.5 11.6 (27)
</TABLE>
Sales of the Mill Services Segment were above 1998's first quarter despite the
adverse effects of foreign exchange translation and the global financial crisis
which has adversely affected world-wide steel prices and steel production. The
increase was due to the inclusion of an acquired company as of the second
quarter of 1998.
Net income from the Mill Services Segment was significantly below 1998's first
quarter. The decrease reflected the adverse effects of lower steel production
and prices. Also, interest expense increased from last year's first quarter.
GAS AND FLUID CONTROL SEGMENT
<TABLE>
<CAPTION>
PERCENT
INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE)
- --------------------- ---- ---- ----------
<S> <C> <C> <C>
Sales $134.1 $143.1 (6)%
Segment net income 4.5 7.2 (38)
</TABLE>
Sales of the Gas and Fluid Control Segment decreased from the first quarter 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 a non-core business, as well as reduced sales for pipe
fittings, and gas control and containment equipment.
Net income was below 1998's first quarter principally due to the sales reduction
discussed above which resulted from the adverse market conditions affecting the
industrial gas and oil industries, including unfavorable weather patterns and
reduced oil prices.
-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.)
INFRASTRUCTURE SEGMENT
<TABLE>
<CAPTION>
PERCENT
INCREASE
(MILLIONS OF DOLLARS) 1999 1998 (DECREASE)
- --------------------- ---- ---- ----------
<S> <C> <C> <C>
Sales $97.4 $94.0 4%
Segment net income 3.2 3.5 (9)
</TABLE>
Sales of the Infrastructure Segment were higher than last year's comparable
period due to increased sales for all product classes.
Net income was below 1998's first quarter due principally to reduced margins on
sales of railroad equipment and contracting services.
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, which include metal reclamation and mill services, as
well as scaffolding, shoring, and forming services and railway maintenance of
way services, were $200.2 million in the first quarter of 1999 and $190.5
million in the first quarter of 1998, or approximately 49% and 48% of net
sales, respectively. Excluding the adverse foreign exchange translation effect
of the strengthening U.S. dollar, total industrial service sales were
approximately 9% above last year. The total engineered products sales for the
first quarter of 1999 were $204.4 million, or approximately 51% of net sales
compared to $210.5 million in 1998, or 52% of net sales. 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.
Income before interest, income taxes and minority interest for industrial
services in the first quarter of 1999 was $17.6 million compared with $23.2
million in the first quarter of 1998, or approximately 57% and 55%,
respectively, of total segment income. Income before interest, income taxes and
minority interest from engineered products for 1999 was $13.2 million compared
with $19.1 million in 1998. These amounts are approximately 43% and 45%,
respectively, of total segment income.
-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 (Cont'd.)
INDUSTRIAL SERVICE AND ENGINEERED PRODUCTS
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1999 1998
- -------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C>
SALES
Industrial Services $ 200.2 49% $ 190.5 48%
Engineered Products 204.4 51 210.5 52
-------- --- -------- ---
Total sales $ 404.6 100% $ 401.0 100%
======== === ======== ===
INCOME
Industrial Services $ 17.6 57% $ 23.2 55%
Engineered Products 13.2 43 19.1 45
-------- --- -------- ---
Total segment income before
interest, income taxes, and
minority interest $ 30.8 100% $ 42.3 100%
======== === ======== ===
</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 quarter 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
quarter of 1999, 108 employees were included in employee termination
arrangements initiated by the Company and approximately $0.7 million of 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, 78 employees have been terminated as of March 31, 1999.
Approximately $0.5 million of additional cash payments related to first quarter
1999 reorganization actions will be incurred principally in the second quarter
of 1999.
Also in the first quarter of 1999, $1.9 million of cash severance payments were
disbursed in connection with the termination of 303 employees that were included
in employee termination actions initiated, recorded and disclosed in 1998. The
cash severance payments in the first quarter occurred principally in the Mill
Services Segment in South Africa.
-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 (Cont'd.)
SUMMARY TOTALS
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) NUMBER OF EMPLOYEES
--------------------- ---------------------
1998 1999 TOTAL 1998 1999 TOTAL
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
EMPLOYEE TERMINATION BENEFITS
EXPENSE DUE TO REORGANIZATION
ACTIONS: $ 6.5 $1.2 $ 7.7 670 108 778
(PAYMENTS/TERMINATIONS):
1998 (2.4) N/A (2.4) (349) N/A (349)
1999 (1.9) (.7) (2.6) (303) (78) (381)
--------------------- ---------------------
(4.3) (.7) (5.0) (652) (78) (730)
OTHER: .1 -- .1 52 -- 52
--------------------- ---------------------
REMAINING PAYMENTS AT
MARCH 31, 1999 $ 2.3 $ .5 $ 2.8 70 30 100
===================== =====================
</TABLE>
N/A - Not Applicable
ECONOMIC ENVIRONMENT
The Company has currency exposures for its international operations which may be
subject to volatility, such as the first quarter 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
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
-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 (Cont'd.)
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.
Information Technology
As of March 31, 1999, the Company is approximately 98% 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 70% complete as of March 31, 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 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 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. The Company is approximately 92%
complete in the assessment of non-information technology systems as of March 31,
1999. Our assessment is expected to be completed in the second quarter of 1999.
Our process includes the testing, where possible, of date-sensitive mission
critical 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.
-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 (Cont'd.)
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 81% complete as of
March 31, 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.
<TABLE>
<CAPTION>
YEAR 2000 READINESS
-------------------
ESTIMATED PERCENTAGE COMPLETE
AS OF MARCH 31, 1999
------------------------------------------
SURVEYING AND REMEDIATION, REPLACEMENT,
PRIORITIZATION CORRECTION AND TESTING
-------------- ----------------------
<S> <C> <C>
Information Technology 98% 70%
Non-Information Technology Systems 92% 83%
Third Parties 81% -
</TABLE>
Costs
As of March 31, 1999, the Company has incurred approximately $1.2 million in
cumulative Year 2000 readiness costs. Based on the assessment of information
available as of March 31, 1999, the Company's cost to complete its Year 2000
readiness program is estimated to be an additional $2.1 million. Total Year 2000
readiness costs are estimated to be $3.3 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 also engaged the Company's Internal Audit Department to perform
Year 2000 readiness audits and to identify other material Year 2000 risks.
-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 (Cont'd.)
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 are being 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 will include
detailed alternative operating procedures to be invoked upon confirmation of a
critical Year 2000 failure. The plans 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 quarter of 1999, 23% 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.
-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 (Cont'd.)
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.
-23-
<PAGE> 24
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 year 1997, would have increased sales three
percent, if the average exchange rates for 1996 would have remained the same in
1997.
The Company seeks to reduce exposures to foreign currency fluctuations, through
the use of forward exchange contracts. At March 31, 1999, these contracts
amounted to $2.3 million and all 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 $436.5 million as of March 31, 1999 had interest rates
ranging from 3.2% to 17.0%, of which approximately 38% were at fixed rates of
interest. The weighted average interest rate of total debt was approximately
5.7%. At current debt levels, a one percentage increase in interest rates would
increase annual interest expense by approximately $2.7 million.
-24-
<PAGE> 25
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 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
At the annual meeting of shareholders held on April 27, 1999 in Camp Hill,
Pennsylvania, four members of the Board of Directors were reelected to terms
expiring in 2002 under the classified Board structure enacted at the 1986 Annual
Meeting. They include C. F. Scanlan, President and Chief Executive Officer of
the Health Alliance of Pennsylvania; A. J. Sordoni, III, Chairman, Sordoni
Construction Services, Inc.; J. P. Viviano, Vice Chairman, Hershey Foods
Corporation; and R. C. Wilburn, President and Chief Executive Officer of The
Colonial Williamsburg Foundation.
The Board of Directors voting tabulation is as follows:
<TABLE>
<CAPTION>
Broker
For Withheld No-Votes
Name No. of Shares No. of Shares No. of Shares
<S> <C> <C> <C>
C. F. Scanlan 33,030,650 211,761 -
A. J. Sordoni, III 33,049,247 193,164 -
J. P. Viviano 33,037,846 204,565 -
R. C. Wilburn 33,038,322 204,089 -
</TABLE>
Shareholders approved the appointment of PricewaterhouseCoopers L.L.P., as
independent accountants to audit the financial statements of the Company for the
fiscal year ending December 31, 1999 by the following vote:
<TABLE>
<CAPTION>
Broker
For Against Abstentions No-Votes
No. of Shares No. of Shares No. of Shares No. of Shares
<S> <C> <C> <C>
33,043,132 87,995 111,284 -
</TABLE>
ITEM 5. OTHER INFORMATION
DIVIDEND INFORMATION:
On March 19, 1999, the Company announced that the Board of Directors declared a
quarterly cash dividend of 22-1/2 cents per share, payable May 14, 1999, to
shareholders of record on April 15, 1999.
-25-
<PAGE> 26
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
There were no reports filed on Form 8-K during the first quarter ending March
31, 1999.
-26-
<PAGE> 27
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 May 6, 1999 /S/ Salvatore D. Fazzolari
----------------------------- -------------------------------
Salvatore D. Fazzolari
Senior Vice President and Chief
Financial Officer
DATE May 6, 1999 /S/ Stephen J. Schnoor
----------------------------- -------------------------------
Stephen J. Schnoor
Vice President and Controller
-27-
<PAGE> 1
HARSCO CORPORATION
Exhibit 12
Computation of Ratios of Earnings to Fixed Charges
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Three YEARS ENDED DECEMBER 31
Months Ended -------------------------------------------------------------
3/31/99 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) $ 24,052 $ 174,874 $ 165,613 $ 145,984 $ 107,073 $ 84,197
Add fixed charges computed below 8,478 28,417 24,263 26,181 33,121 37,982
Net adjustments for equity companies 27 139 (694) (181) (466) (134)
Net adjustments for capitalized
interest (30) (10) -- -- -- (274)
-------- --------- --------- --------- --------- ---------
Fixed Charges $ 32,527 $ 203,420 $ 189,182 $ 171,984 $ 139,728 $ 121,771
======== ========= ========= ========= ========= =========
Consolidated Fixed Charges:
Interest expense per financial
statements (1) $ 6,213 $ 20,504 $ 16,741 $ 21,483 $ 28,921 $ 34,048
Interest expense capitalized 29 128 128 131 134 338
Portion of rentals (1/3) representing
an interest factor 2,236 7,785 7,394 4,567 4,066 3,596
Interest expense for equity companies
whose debt is guaranteed (2) -- -- -- -- -- --
-------- --------- --------- --------- --------- ---------
Consolidated Fixed Charges $ 8,478 $ 28,417 $ 24,263 $ 26,181 $ 33,121 $ 37,982
======== ========= ========= ========= ========= =========
Consolidated Ratio of Earnings to
Fixed Charges 3.84 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 three months ended March 31, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 49,378
<SECURITIES> 0
<RECEIVABLES> 299,246
<ALLOWANCES> (14,544)
<INVENTORY> 173,035
<CURRENT-ASSETS> 580,217
<PP&E> 1,403,187
<DEPRECIATION> (791,046)
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0
0
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<INCOME-TAX> 9,253
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<EPS-PRIMARY> .36
<EPS-DILUTED> .35
</TABLE>
