<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, 2000
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 July 31, 2000
------------------- -----------------------------------
<S> <C>
Common Stock Par Value $1.25 39,972,150
Preferred Stock Purchase Rights 39,972,150
</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) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Service sales $ 255,854 $ 217,776 $ 486,713 $ 417,997
Product sales 201,184 212,902 419,460 417,312
Other 236 147 439 258
---------------------------------------------------------------------------------------------------------
TOTAL REVENUES 457,274 430,825 906,612 835,567
---------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of services sold 189,979 167,947 368,683 323,242
Cost of products sold 157,571 165,226 333,367 328,691
Selling, general, and administrative expenses 56,265 51,022 110,059 103,817
Research and development expenses 1,441 1,478 3,088 3,128
Other expense (income) (650) 1,309 (276) 2,721
---------------------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 404,606 386,982 814,921 761,599
---------------------------------------------------------------------------------------------------------
OPERATING INCOME 52,668 43,843 91,691 73,968
Equity in income (loss) of affiliates, net (1) (588) 610 (438) 960
Interest income 1,262 1,147 2,450 2,236
Interest expense (8,727) (6,865) (16,217) (13,078)
---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 44,615 38,735 77,486 64,086
Provision for income taxes 15,615 13,818 27,120 23,071
---------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 29,000 24,917 50,366 41,015
Minority interest in net income 769 1,094 1,933 2,393
---------------------------------------------------------------------------------------------------------
NET INCOME $ 28,231 $ 23,823 $ 48,433 $ 38,622
=========================================================================================================
Average shares of common stock outstanding 39,964 41,125 39,989 41,376
---------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ .71 $ .58 $ 1.21 $ .93
=========================================================================================================
Diluted average shares of common shares outstanding 40,048 41,308 40,067 41,525
---------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ .70 $ .58 $ 1.21 $ .93
=========================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE $ .235 $ .225 $ .47 $ .45
</TABLE>
(1) Equity in income (loss) of affiliates is now separately reported.
Previously, these amounts were included in operating income as other
revenues. Amounts previously reported as operating income for the three
months and six months ended June 30, 1999 were $44,453 and $74,928,
respectively.
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) 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 68,182 $ 51,266
Receivables, less allowance for doubtful accounts of
$26,027 in 2000 and $13,339 in 1999 435,609 331,123
Inventories 231,052 172,198
Other current assets 63,056 58,368
-------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 797,899 612,955
-------------------------------------------------------------------------------------
Property, plant and equipment, at cost 1,744,625 1,499,823
Allowance for depreciation 854,873 828,277
-------------------------------------------------------------------------------------
889,752 671,546
Cost in excess of net assets of businesses acquired, net 339,400 258,698
Other assets 203,983 116,624
-------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,231,034 $ 1,659,823
=====================================================================================
LIABILITIES
CURRENT LIABILITIES:
Notes payable and current maturities $ 260,016 $ 36,607
Accounts payable 229,863 132,394
Accrued compensation 42,810 46,615
Income taxes 48,090 44,154
Other current liabilities 183,498 170,746
-------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 764,277 430,516
-------------------------------------------------------------------------------------
Long-term debt 600,071 418,504
Deferred income taxes 91,113 52,932
Other liabilities 117,625 107,750
-------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,573,086 1,009,702
-------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock and additional paid-in capital 171,899 170,878
Accumulated other comprehensive income (expense) (99,483) (80,538)
Retained earnings 1,185,234 1,155,586
Treasury stock (599,702) (595,805)
-------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 657,948 650,121
-------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,231,034 $ 1,659,823
=====================================================================================
</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) 2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 48,433 $ 38,622
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 64,651 59,501
Amortization 6,753 6,448
Equity in (income) loss of affiliates, net 438 (960)
Dividends or distributions from affiliates 587 766
Deferred income taxes 9,194 1,588
Other, net (551) 509
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable 4,968 (22,200)
Inventories (18,332) 2,005
Accounts payable (4,976) (10,150)
Disbursements related to discontinued defense business (617) (13,249)
Other assets and liabilities (18,869) (13,786)
------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 91,679 49,094
------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (78,046) (73,837)
Purchase of business, net of cash acquired (263,711) (2,378)
Proceeds from sale of business 9,745 8,502
Other investing activities 2,503 3,607
------------------------------------------------------------------------------------------
NET CASH (USED) BY INVESTING ACTIVITIES (329,509) (64,106)
------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net 268,561 (11,530)
Current maturities and long-term debt:
Additions 59,971 121,956
Reductions (46,212) (21,757)
Cash dividends paid on common stock (18,808) (18,752)
Common stock issued-options 853 1,296
Common stock acquired for treasury (3,768) (42,831)
Other financing activities (3,114) (1,767)
------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 257,483 26,615
------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (2,737) (980)
------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 16,916 10,623
Cash and cash equivalents at beginning of period 51,266 41,562
------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,182 $ 52,185
==========================================================================================
</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) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 28,231 $ 23,823 $ 48,433 $ 38,622
Other comprehensive income (expense):
Foreign currency translation adjustments (11,318) (5,517) (18,945) (29,062)
----------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $ 16,913 $ 18,306 $ 29,488 $ 9,560
==============================================================================================
</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>
HARSCO HARSCO
MILL GAS AND HARSCO S3NETWORKS GENERAL CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 2000 SERVICES FLUID CONTROL INFRASTRUCTURE LLC CORPORATE TOTALS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS $195.2 $125.4 $136.4 $ -- $ -- $457.0
------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 27.2 $ 10.7 $ 14.5 $ -- $ 0.3 $ 52.7
EQUITY IN INCOME (LOSS) OF AFFILIATES, NET 0.3 -- -- (0.9) -- (0.6)
INTEREST INCOME 1.0 -- 0.2 -- -- 1.2
INTEREST EXPENSE (2.3) (1.0) (2.3) -- (3.1) (8.7)
INCOME TAX (EXPENSE) BENEFIT (8.7) (3.5) (4.5) 0.3 0.8 (15.6)
MINORITY INTEREST IN NET INCOME (0.7) -- (0.1) -- -- (0.8)
------------------------------------------------------------------------------------------------------------------------------------
SEGMENT NET INCOME (LOSS) $ 16.8 $ 6.2 $ 7.8 $ (0.6) $ (2.0) $ 28.2
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
HARSCO HARSCO
MILL GAS AND HARSCO S3NETWORKS GENERAL CONSOLIDATED
THREE MONTHS ENDED JUNE 30, 1999 SERVICES FLUID CONTROL INFRASTRUCTURE LLC CORPORATE TOTALS
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers $182.3 $139.1 $109.3 $ -- $ -- $430.7
----------------------------------------------------------------------------------------------------------------------------------
Operating income $ 19.0 $ 10.5 $ 13.8 $ -- $ 0.5 $ 43.8
Equity in income of affiliates, net (1) 0.6 -- -- -- -- 0.6
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 (1.1) -- -- -- -- (1.1)
----------------------------------------------------------------------------------------------------------------------------------
Segment net income (loss) $ 11.1 $ 5.5 $ 7.7 $ -- $ (0.5) $ 23.8
==================================================================================================================================
</TABLE>
(1) Equity in income (loss) of affiliates is now separately reported.
Previously, these amounts were included in operating income. Amounts
previously reported as operating income for the three months ended June 30,
1999 were $19.6 million for Harsco Mill Services Segment and a consolidated
total of $44.4 million. Reported operating income amounts for the other
segments are unchanged.
-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>
HARSCO HARSCO
MILL GAS AND HARSCO S3NETWORKS GENERAL CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 2000 SERVICES FLUID CONTROL INFRASTRUCTURE LLC CORPORATE TOTALS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET SALES TO UNAFFILIATED CUSTOMERS $386.8 $260.8 $258.6 $ -- $ -- $906.2
------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) $ 47.0 $ 21.8 $ 23.3 $ -- $ (0.5) $ 91.6
EQUITY IN INCOME (LOSS) OF AFFILIATES, NET 0.5 -- -- (0.9) -- (0.4)
INTEREST INCOME 2.1 0.1 0.2 -- -- 2.4
INTEREST EXPENSE (4.4) (2.0) (4.1) -- (5.7) (16.2)
INCOME TAX (EXPENSE) BENEFIT (15.4) (7.3) (6.9) 0.3 2.2 (27.1)
MINORITY INTEREST IN NET INCOME (1.8) -- (0.1) -- -- (1.9)
------------------------------------------------------------------------------------------------------------------------------------
SEGMENT NET INCOME (LOSS) $ 28.0 $ 12.6 $ 12.4 $ (0.6) $ (4.0) $ 48.4
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
HARSCO HARSCO
MILL GAS AND HARSCO S3NETWORKS GENERAL CONSOLIDATED
SIX MONTHS ENDED JUNE 30, 1999 SERVICES FLUID CONTROL INFRASTRUCTURE LLC CORPORATE TOTALS
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers $355.4 $273.2 $206.7 $ -- $ -- $835.3
----------------------------------------------------------------------------------------------------------------------------------
Operating income $ 35.1 $ 18.5 $ 20.1 $ -- $ 0.2 $ 73.9
Equity in income of affiliates, net (1) 1.0 -- -- -- -- 1.0
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) benefit (10.3) (6.0) (6.3) -- (0.5) (23.1)
Minority interest in net income (2.5) 0.1 -- -- -- (2.4)
----------------------------------------------------------------------------------------------------------------------------------
Segment net income (loss) $ 19.6 $ 10.0 $ 10.9 $ -- $ (1.9) $ 38.6
==================================================================================================================================
</TABLE>
(1) Equity in income (loss) of affiliates is now separately reported.
Previously, these amounts were included in operating income. Amounts
previously reported as operating income for the six months ended June 30,
1999 were $36.1 million for Harsco Mill Services Segment and a consolidated
total of $74.9 million. Reported operating income amounts for the other
segments are unchanged.
-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) 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 91,057 $ 37,715
Work-in-process 40,270 37,198
Raw materials and purchased parts 79,511 76,911
Stores and supplies 20,214 20,374
--------------------------------------------------------------------------------
$231,052 $172,198
================================================================================
</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 1999, the IRS
assessed an increase in FET of $30.4 million plus penalties of $10.4 million and
applicable interest currently estimated to be $49.5 million. In October 1999,
the Company posted an $80 million bond required as security by the IRS. This
increase in FET takes into account offsetting credits of $9.2 million, based on
a partial allowance of the Company's $31.9 million claim that certain truck
components are exempt from FET. The IRS
-8-
<PAGE> 9
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $44.8 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 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 and applicable interest
currently estimated to be $10.4 million and $49.5 million, respectively. 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 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. In September 1994,
the Company received a subpoena issued by the Department of Defense Inspector
General seeking various documents relating to issues raised in the audit.
-9-
<PAGE> 10
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Government subsequently subpoenaed a number of former employees of the
Company's divested defense business to testify before a grand jury and issued
grand jury subpoenas to the Company for additional documents. On December 22,
1999, the Company announced that it reached agreement with the U.S. Government
on behalf of its former BMY Combat Systems Division to settle the matter. Under
the agreement, BMY Combat Systems pled guilty to a one-count misdemeanor
relating to submitting advance payment certifications which resulted in BMY
receiving a portion of the payments for the contract prematurely. In June 2000,
the US District Court gave final approval to the settlement. In accordance with
the settlement, Harsco paid the Government a $200,000 fine in June 2000 and in
July 2000 paid the $10.8 million in damages for a total of $11 million.
The settlement ends the Government's investigation and releases Harsco and BMY
from further liability for the issues under investigation. Harsco charged the
payment against an existing reserve, resulting in no charge to the Company's
earnings.
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, 2000, and December 31, 1999 includes an
accrual of $4.7 million and $3.0 million, respectively, for environmental
matters. The increase from December 31, 1999 principally relates to
environmental liabilities of acquired companies. The amounts affecting pre-tax
earnings related to environmental matters totaled $1.2 million of expense for
the first six months of 2000, and $0.4 million of income for the first six
months of 1999.
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.
-10-
<PAGE> 11
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the first quarter of 2000 the U.S. Environmental Protection Agency issued a
Notice of Violation to the Company for violations of the Clean Air Act arising
from slag dust emissions at one of the Company's mill services locations. The
Agency is seeking abatement of dust emissions at the site and has advised that
it is seeking financial penalties which exceed $100,000. The Company is
cooperating with the mill and the Agency to abate the dust emissions and is in
settlement discussions with the Agency.
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
OFF BALANCE SHEET RISK
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 June 30, 2000, the total of all forward exchange contracts amounted to
$5.0 million with an unfavorable mark-to-market fluctuation of $56,000.
-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
(In thousands, except amounts per share) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $28,231 $23,823 $48,433 $38,622
======= ======= ======= =======
Average shares of common stock
outstanding used to compute basic
earnings per common share 39,964 41,125 39,989 41,376
Additional common shares to be
issued assuming exercise of
stock options, net of shares
assumed reacquired 84 183 78 149
------- ------- ------- -------
Shares used to compute dilutive
effect of stock options 40,048 41,308 40,067 41,525
======= ======= ======= =======
Basic earnings per common share $ .71 $ .58 $ 1.21 $ .93
======= ======= ======= =======
Diluted earnings per common share $ .70 $ .58 $ 1.21 $ .93
======= ======= ======= =======
</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
No. 133 was further amended by SFAS No. 138. 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.
New Staff Accounting Bulletin Issued
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the Commission. In June 2000, the SEC issued SAB
No. 101B, "Second Amendment: Revenue Recognition in Financial Statements". SAB
101B delays the implementation of SAB 101 until no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. Based on a review of
the Company's policies and practices and current interpretations of SAB 101, the
Company believes it is in general compliance with SAB 101.
-12-
<PAGE> 13
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Continued)
Acquisitions
In June 2000, the Company made its tender offer for SGB Group PLC (SGB)
unconditional and by June 30 had received acceptances for 94.8 percent of the
shares of SGB. The Company plans to compulsorily acquire the remaining shares in
the third quarter of 2000. SGB, based in the UK, is one of Europe's largest
suppliers of scaffolding, forming and related access products and services. SGB
also has operations in North America, the Middle East and the Asia Pacific
region. SGB had 1999 sales of [pound sterling] 283 million (approximately
$426 million U.S. dollars). Through June 30, 2000 the Company had borrowed
$255.1 million to finance the acquisition. Approximately $32 million of
additional funds will be borrowed in the third quarter to complete the purchase
of SGB's outstanding stock.
The acquisition of SGB has been accounted for using the purchase method of
accounting and accordingly, the operating results of SGB have been included in
the consolidated results of the Company from June 16, 2000, the date of
acquisition. The purchase price allocation is based upon preliminary appraisal
values and management estimates and is subject to reclassifications and
adjustments in the future. The purchase price has been allocated as follows:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Working capital, other than cash $(54.4)
Property, plant and equipment 221.0
Other assets 64.2
Goodwill 85.0
Noncurrent liabilities (58.8)
------
Purchase price, net of cash received $257.0
======
</TABLE>
Harsco management is in the process of finalizing fair value adjustments, asset
write downs, and its plan to exit certain activities of SGB. Estimates of the
associated costs have been included in the opening balance sheet. Management
expects to finalize the plan and the associated estimates by September 30, 2000.
In May 2000, the Company completed the acquisitions of Bergslagen Steelservice
AB and Bergslagen Suomi Oy (collectively Bergslagen). The two companies provide
specialized slag processing and metal recovery services to steel mills in Sweden
and Finland, respectively. The two organizations together recorded 1999 sales of
nearly $10 million.
In April 2000, the company agreed to invest $20 million for a 49 percent
ownership interest in S3Networks, LLC, a start-up company providing internet and
e-business infrastructure consulting services primarily to Fortune 1000
corporations. Cash of $8 million has been invested through June 30, 2000 with an
additional $12 million to be paid over a period not to exceed fifteen months
from the initial investment date. The investment is being accounted for under
the equity method. Since the Company is the principal provider of initial
capital for S3Networks, LLC, the Company will record 100% of net losses to the
extent of its initial $20 million investment. However, the Company will also
record 100% of subsequent net income until the entire initial investment amount
is reinstated. Subsequent to reinstatement of the initial investment amount, the
company will record net income to the extent of its ownership percentage of
S3Networks, LLC.
-13-
<PAGE> 14
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.
-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)
FINANCIAL CONDITION AND LIQUIDITY
Changes in the Company's financial position and liquidity are summarized as
follows:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 INCREASE/
(DOLLARS ARE IN MILLIONS) 2000 1999 (DECREASE)
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 797.9 $ 612.9 $ 185.0
Current liabilities 764.3 430.5 333.8
-----------------------------------------------------------------------------------
Working capital $ 33.6 $ 182.4 $ (148.8)
Current ratio 1.0:1 1.4:1
-----------------------------------------------------------------------------------
Notes payable and
current maturities $ 260.0 $ 36.6 $ 223.4
Long-term debt 600.1 418.5 181.6
-----------------------------------------------------------------------------------
Total debt 860.1 455.1 $ 405.0
Total equity 657.9 650.1 7.8
-----------------------------------------------------------------------------------
Total capital $1,518.0 $1,105.2 $ 412.8
Total debt to
total capital 56.7% 41.2%
-----------------------------------------------------------------------------------
</TABLE>
The change in the Company's working capital position and current ratio during
the first six months of 2000 was due principally to the acquisition of SGB Group
PLC (SGB) in June 2000. The increase in current assets was due to the addition
of SGB's current assets of $189.2 million, which consisted of $24.0 million in
cash, $110.7 million in receivables, $43.8 million of inventories and $10.7
million of other current assets. The $333.8 million increase in current
liabilities is due principally to the $222.7 million current liabilities
acquired from SGB, and short-term bridge loan financing of $88.5 million used to
finance the purchase of SGB. The total bridge loan including long-term portion
is $255.1 million. SGB current liabilities are principally short-term borrowings
of $123.0 million and accounts payable of $73.0 million.
The Company is continuing its strategic focus on the reduction of capital
employed including inventory and receivable levels. As a result of this focus,
excluding the recent SGB acquisition, the Company improved its inventory and
accounts receivable turnover ratios from 9.7 to 9.8 and 5.4 to 5.5,
respectively, from the first six months of 1999 to the first six months of 2000.
Long-term debt increased in the first six months of 2000 principally as a result
of financing the acquisitions of SGB, Bergslagen Steelservice AB and Bergslagen
Suomi Oy (collectively Bergslagen), and to a lesser extent, capital investments.
SGB was financed with a $255.1 million bridge loan, $166.6 million of which is
classified as long-term as of June 30, 2000. The Bergslagen acquisition was
financed through a bridge loan which was refinanced by a Swedish private
placement bond issued in June, also classified as long-term. Capital investments
for the first six months of 2000 were $78.0 million. Capital investments were
made for new mill
-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)
services contracts and other business growth initiatives, new
processes, and for productivity improvements. The capital investments,
acquisitions, share repurchases, and cash dividends paid at the same or
increased rates for the 200th consecutive quarter in May 2000, demonstrate the
Company's continued commitment to creating value through strategic investments
and return of capital to shareholders.
<TABLE>
<CAPTION>
FOR THE
PERIOD ENDED FOR THE YEAR ENDED DECEMBER 31
Cash Utilization: JUNE 30 -------------------------------------------------------------------
(In millions) 2000 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Capital investments $ 78.0 $ 175.2 $ 159.8 $ 143.4 $ 150.3 $ 113.9
Strategic acquisitions 263.7 48.9 158.3 8.5 21.1 4.1
Share repurchases 3.8 71.9 169.3 113.2 30.7 14.1
Cash dividends 18.8 37.0 40.3 39.1 37.9 37.4
----------------------------------------------------------------------------------------------------------------
Total $ 364.3 $ 333.0 $ 527.7 $ 304.2 $ 240.0 $ 169.5
================================================================================================================
</TABLE>
The Company's debt as a percent of total capital increased as a result of
greater debt. Also contributing to the increase in the debt to total capital is
an $18.9 million decrease in equity from foreign currency translation
adjustments. The foreign currency translation adjustments are principally due to
a 5% decrease in the translated value of the euro, a 6% decrease in the British
pound and a 10% decrease in the South African rand from December 31, 1999 to
June 30, 2000.
<TABLE>
<CAPTION>
Six Month Financial Statistics FOR THE PERIOD FOR THE PERIOD
ENDED JUNE 30 ENDED JUNE 30
2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Harsco stock price high-low $31.63 - $24.00 $34.375 - $23.06
Annualized return on average equity 14.9% 12.0%
Annualized return on average assets 10.7% 9.6%
Annualized return on average capital 9.8% 8.7%
</TABLE>
Higher annualized returns on average equity, assets, and capital are due
principally to increased income in the first six months of 2000 compared with
the first six months of 1999. The company's book value per share increased to
$16.46 per share at June 30, 2000 from $16.22 at December 31, 1999 due
principally to an increase in retained earnings partially offset by foreign
currency translation adjustments recorded as part of other comprehensive income
(expense).
-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)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
ENDED JUNE 30 ENDED JUNE 30
(In millions) 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Net cash provided by operations: $91.7 $49.1
</TABLE>
Operating cash flows were $42.6 million greater in the first six months of 2000
than the first six months of 1999. The increase in cash from operating
activities was due principally to greater income in the first six months of 2000
compared with the first six months of 1999, the timing of cash receipts from
receivables, and an increase in deferred taxes. Cash from operations also
benefited from lower disbursements related to the discontinued defense business
in the first six months of 2000 compared with the first six months of 1999.
These benefits were partially offset by the timing of payments for inventories.
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 three billion Belgian franc commercial
paper program, equivalent to approximately U.S. $71 million at June 30, 2000.
The Belgian program provides the capacity for the Company to borrow euros to
fund its 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, 2000, the Company had $224.9 million of U.S.
commercial paper debt outstanding, and $8.5 million of commercial paper debt
outstanding under the Belgian program.
The Company financed the purchase of SGB with bridge loan financing from Chase
Manhattan Bank. The bridge loan was $255.1 million as of June 30, 2000. Amounts
remaining to be paid for SGB at June 30, 2000 are $12.8 million in accounts
payable principally for SGB shares tendered but not paid at June 30, 2000, share
options buyouts of approximately $4.0 million, and approximately $15.0 million
for the remaining 5.2 percent of total shares of SGB that had not yet been
tendered but will be compulsorily acquired by the Company in the third quarter
of 2000.
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.
The Company is currently renegotiating this multi-year credit facility and
expects to execute a new agreement by September 30, 2000. As of June 30, 2000
there were no borrowings outstanding under this facility. A Form S-3 shelf
registration is on file with the Securities and Exchange Commission for the
possible issuance of up to an additional $200 million of new debt securities,
preferred stock or common stock.
Due to the Company's increased debt level resulting from the SGB acquisition,
Standard & Poor's and Fitch lowered the Company's credit ratings slightly. The
Company's outstanding long-term notes are now rated A- by Standard & Poor's, A-
by Fitch and A-3 by Moody's. The Company's commercial paper is rated A-2 by
Standard & Poor's, F-2 by Fitch and P-2 by Moody's. In order to restore the
prior credit ratings, the Company has implemented a debt reduction plan. The
plan includes selling non-core assets, improving cash from operations, and
lowering capital spending.
-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)
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 strategically in high return projects, and to
pay cash dividends as a means to enhance shareholder value. The Company intends
to use future discretionary cash flow principally for debt reduction.
-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)
RESULTS OF OPERATIONS
SECOND QUARTER OF 2000 COMPARED WITH SECOND QUARTER OF 1999
<TABLE>
<CAPTION>
AMOUNT PERCENT
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 2000 1999 INCREASE INCREASE
----------------------------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Revenues $457.3 $430.8 $26.5 6%
Operating income 52.7 43.8 8.9 20%
Net income 28.2 23.8 4.4 18%
Basic earnings per common share .71 .58 .13 22%
Diluted earnings per common share .70 .58 .12 21%
</TABLE>
SUMMARY ANALYSIS OF RESULTS
Second quarter 2000 revenues were $457.3 million, a 6% increase from last year's
comparable period. All three operating segments contributed to the 20% increase
in operating income and the 18% increase in net income. Adjusting for the
unfavorable effect of foreign currency translation, sales would have increased
8% and earnings would have increased approximately $0.15 per share.
Increased income resulted principally from strong demand for mill services
resulting from improved conditions in the steel industry. This is evidenced by
increased steel production and capacity utilization for many mills in the United
States and certain other countries.
Sales and income for the second quarter of 2000 also benefited significantly
from the results of the Pandrol Jackson acquisition in the fourth quarter of
1999 and the SGB Group PLC acquisition in the second quarter of 2000. Results of
these acquired companies are included in the Harsco Infrastructure Segment.
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
As noted above, revenues for 2000 increased from last year's comparable period.
The improvement results from increased volume for the Harsco Mill Services
Segment. The incremental sales of acquired companies also contributed to
improved revenues more than offsetting the divestiture of non-core businesses.
Sales of grating products and pipe fittings increased, while sales for certain
product lines of the Harsco Gas and Fluid Control Segment decreased.
COST OF SALES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Cost of services and products sold increased but at a lower rate than the
increase in total revenues. Selling, general and administrative expenses
increased due to the costs related to acquired companies and employee annual
salary increases. In total, the Company's continuing cost reduction, process
improvement and reorganization efforts contributed towards slowing the rate of
growth of these costs.
-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)
OPERATING INCOME
As a result of factors disclosed in previous sections, operating income
increased 20%.
EQUITY IN INCOME (LOSS) OF AFFILIATES
Equity in income of affiliates decreased from $0.6 million in income in the
second quarter of 1999 to a loss of $0.6 million in the comparable period of
2000. This is due to the losses being incurred by S3 Networks, an Internet
infrastructure services company in which Harsco is investing some $20 million in
start-up capital for a 49% ownership interest.
INTEREST EXPENSE
Interest expense was higher than last year's comparable period due to additional
borrowings as a result of increased capital expenditures (investments), the
acquisition of Pandrol Jackson in October 1999 and, to a lesser extent, share
repurchases. Also affecting interest expense was an interest rate increase of
approximately 1.25% from the second quarter of 1999. The funds borrowed for the
acquisition of SGB Group, PLC in late June 2000 did not materially affect the
second quarter's interest expense but will increase interest expense in the
third quarter of 2000.
PROVISION FOR INCOME TAXES
The effective income tax rate for the second quarter of 2000 was 35% versus
35.7% for the comparable period in 1999. The reduction in the income tax rate is
due principally to lower effective income tax rates on international earnings.
NET INCOME AND EARNINGS PER SHARE
Net income of $28.2 million was 18% above 1999 due to the factors previously
disclosed. Basic earnings per common share were $.71, significantly above the
$.58 in 1999. Diluted earnings per common share were $.70, 21% above the $.58
reported in 1999.
SEGMENT ANALYSIS
HARSCO MILL SERVICES SEGMENT
<TABLE>
<CAPTION>
AMOUNT PERCENT
(DOLLARS ARE IN MILLIONS) 2000 1999 INCREASE INCREASE
----------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $ 195.2 $ 182.3 $12.9 7%
Operating income 27.2 19.0 8.2 43%
Segment net income 16.8 11.1 5.7 51%
</TABLE>
Second quarter sales of the Harsco Mill Services Segment were 7% above last
year's comparable period. Sales increases resulted from new contracts and
additional services on existing contracts particularly for United States
operations. Sales reductions resulting from the divestitures of non-core
businesses in September 1999 and June 2000 were partially offset by the
Bergslagen acquisition in Scandinavia. Excluding the unfavorable effect of
foreign currency translation, sales would have increased 12% on a comparable
basis.
-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)
Operating income of the Harsco Mill Services Segment was significantly above
1999. The increase reflects the improved operating and economic environment for
mill services, as well as the favorable effects of continuous process
improvement programs and reorganization efforts. On a comparative basis, second
quarter 1999 included provisions for doubtful accounts of $.6 million while the
second quarter of 2000 had income of $.4 million.
Net income of the Harsco Mill Services Segment was also significantly above
1999.
<TABLE>
<CAPTION>
HARSCO GAS AND FLUID CONTROL SEGMENT AMOUNT PERCENT
INCREASE INCREASE
(DOLLARS ARE IN MILLIONS) 2000 1999 (DECREASE) (DECREASE)
----------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $125.4 $139.1 $(13.7) (10%)
Operating income 10.7 10.5 0.2 2%
Segment net income 6.2 5.5 0.7 13%
</TABLE>
Sales of the Harsco Gas and Fluid Control Segment were adversely affected by
soft market conditions affecting gas control and containment equipment. The
divestitures of two non-core businesses partially contributed to the sales
decline.
Operating income of the Harsco Gas and Fluid Control Segment was slightly above
1999 due to cost containment. Additionally, on a comparative basis, 1999
included a valuation provision of $.9 million related to the write-down of
assets available for sale while 2000 included $.3 million for such write-downs.
Net income of the Harsco Gas and Fluid Control Segment increased by 13%.
-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)
HARSCO INFRASTRUCTURE SEGMENT
<TABLE>
<CAPTION>
AMOUNT PERCENT
(DOLLARS ARE IN MILLIONS) 2000 1999 INCREASE INCREASE
----------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $ 136.4 $ 109.3 $ 27.1 25%
Operating income 14.5 13.8 0.7 5%
Segment net income 7.8 7.7 0.1 1%
</TABLE>
Second quarter 2000 sales of the Harsco Infrastructure Segment increased 25%
from last year's comparable period. The increase is principally due to the June
acquisition of SGB Group, PLC (SGB). Sales of railway maintenance-of-way
services and equipment resulting from the fourth quarter 1999 acquisition of
Pandrol Jackson also contributed to the increase.
Operating income of the Harsco Infrastructure Segment increased 5% due to the
acquisitions of SGB and Pandrol Jackson. These operating income improvements
were partially offset by lower income for the grating product line caused by
increased material costs.
Segment net income increased slightly from the second quarter of 1999.
-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)
SERVICES AND ENGINEERED PRODUCTS ANALYSIS
In addition to the segment reporting previously presented, the Company is a
diversified industrial services and engineered products company. The company is
committed towards increasing its presence and strategic growth in
services-related businesses. This is evidenced by the June 2000 acquisition of
SGB, which is principally a services business. The acquisitions of Bergslagen
and Pandrol Jackson have also increased the Company's service revenue base. The
company has committed substantial capital investments in service businesses.
These investments, principally in scaffolding, forming and shoring services;
mill services; and railway maintenance-of-way services have contributed to
higher levels of sales and income. Sales and operating income for the second
quarter of 2000 and 1999 are presented in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
(DOLLARS ARE IN MILLIONS) JUNE 30, 2000 JUNE 30, 1999
---------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
SALES
Services $255.8 56% $217.8 51%
Engineered products 201.2 44 212.9 49
------ --- ------ ---
Total sales $457.0 100% $430.7 100%
====== === ====== ===
OPERATING INCOME
Services $ 33.6 64% $ 21.8 50%
Engineered products 18.8 36 21.5 50
------ --- ------ ---
Total segment operating income $ 52.4 100% $ 43.3 100%
====== === ====== ===
EBITDA*
Services $ 61.4 70% $ 48.6 63%
Engineered products 26.2 30 28.6 37
------ --- ------ ---
Total segment EBITDA $ 87.6 100% $ 77.2 100%
====== === ====== ===
</TABLE>
* Earnings before interest, income taxes, minority interest, depreciation and
amortization (EBITDA) is not a measure of performance under generally
accepted accounting principles, however, the Company and the investment
community consider it an important calculation.
Second quarter 2000 sales, operating income and EBITDA for services increased
substantially from the comparable period in 1999. The increases reflect improved
economic conditions in markets served by the company and the favorable effects
of cost reductions, process improvements and reorganization efforts.
-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)
RESULTS OF OPERATIONS
SIX MONTHS OF 2000 COMPARED WITH SIX MONTHS OF 1999
<TABLE>
<CAPTION>
AMOUNT PERCENT
(DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 2000 1999 INCREASE INCREASE
----------------------------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Revenues $906.6 $835.6 $71.0 8%
Operating income 91.7 74.0 17.7 24%
Net income 48.4 38.6 9.8 25%
Basic earnings per common share 1.21 .93 .28 30%
Diluted earnings per common share 1.21 .93 .28 30%
</TABLE>
SUMMARY ANALYSIS OF RESULTS
The Company's revenues, operating income, net income and operating income
margins for the first six months of 2000 compared with the first six months of
1999 improved significantly despite the negative impact on sales and earnings of
the foreign currency translation effect of the strong U.S. dollar, as well as
the sale of five non-core businesses in 1999 and 2000.
Increased sales and income were due in part to increased demand for mill
services resulting from improved conditions in the steel industry. This is
evidenced by increased steel production and capacity utilization for many mills
in the United States. Steel production also increased in several other countries
where the Company conducts business. In addition, increased demand for services
and products in the non-residential construction market as well as the
industrial gas and oil markets favorably affected sales and income.
Sales and income for the Infrastructure Segment for the first six months of 2000
benefited significantly from the results of the Pandrol Jackson acquisition in
the fourth quarter of 1999 and the SGB Group PLC acquisition in the second
quarter of 2000.
COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS
REVENUES
Revenues for the first six months of 2000 were significantly above the
comparable period in 1999. The improvement results from increased demand for
services and products in principally the steel, oil and gas and non-residential
construction markets. Sales of acquired companies, net of dispositions of
non-core businesses, also contributed to the increase in sales. Excluding the
unfavorable foreign exchange translation effect of the strengthening U.S.
dollar, particularly relative to the euro, revenues increased by more than 10%.
-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)
COST OF SALES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Cost of services and products sold, as well as selling, general and
administrative expenses increased but at lower rates than the increase in total
revenues. The Company's continuing cost reduction, process improvement and
reorganization efforts contributed to slowing the rate of growth of these costs.
The increase in selling, general and administrative expenses was due principally
to costs related to acquired companies and employee annual salary increases.
INTEREST EXPENSE
Interest expense was higher than last year's comparable period due to additional
borrowings as a result of increased capital expenditures (investments), share
repurchases and acquisitions.
OPERATING INCOME
As a result of factors disclosed in previous sections, operating income
increased.
PROVISION FOR INCOME TAXES
The effective income tax rate for the first six months of 2000 was 35% versus
36% for the comparable period in 1999. The reduction in the income tax rate is
due principally to lower effective income tax rates on international earnings.
NET INCOME AND EARNINGS PER SHARE
Net income of $48.4 million was significantly above 1999 due to the factors
previously disclosed. Basic earnings per common share were $1.21, significantly
above $.93 in 1999. Diluted earnings per common share were $1.21, significantly
above $.93 in 1999.
SEGMENT ANALYSIS
HARSCO MILL SERVICES SEGMENT
<TABLE>
<CAPTION>
AMOUNT PERCENT
(DOLLARS ARE IN MILLIONS) 2000 1999 INCREASE INCREASE
----------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $386.8 $355.4 $31.4 9%
Operating income 47.0 35.1 11.9 34%
Segment net income 28.0 19.6 8.4 43%
</TABLE>
-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)
Sales of the Harsco Mill Services Segment were significantly above 1999's first
six months despite the unfavorable effect of foreign exchange translation and
the disposition of two non-core businesses. Increased demand for services
resulted from improved domestic steel production levels and capacity
utilization. Additionally, steel production levels and the demand for mill
services increased at certain international locations. Excluding the unfavorable
foreign exchange translation effect of the strengthening U.S. dollar,
particularly relative to the euro, and the disposition of two non-core
businesses net of a small acquisition, sales increased by 16%.
Operating income of the Harsco Mill Services Segment was significantly above
1999. The increase reflected the improved operating and economic environment for
mill services, as well as the favorable effects of continuous process
improvement programs and reorganization efforts. On a comparative basis, 1999
included a foreign currency translation pre-tax gain in Brazil of $1.4 million.
Net income of the Harsco Mill Services Segment was also significantly above
1999. The increase reflects the conditions previously discussed.
<TABLE>
<CAPTION>
HARSCO GAS AND FLUID CONTROL SEGMENT AMOUNT PERCENT
INCREASE INCREASE
(DOLLARS ARE IN MILLIONS) 2000 1999 (DECREASE) (DECREASE)
----------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $260.8 $273.2 $(12.4) (5)%
Operating income 21.8 18.5 3.3 18%
Segment net income 12.6 10.0 2.6 26%
</TABLE>
Sales of the Harsco Gas and Fluid Control Segment were below 1999's first six
months. This included the unfavorable effect of lower sales due to the
disposition of three non-core businesses. Increased sales of industrial fittings
reflected improved demand in the industrial gas and oil markets which was more
than offset by reduced demand for other product lines. Excluding the unfavorable
effect of dispositions of three non-core businesses, sales decreased by only 1%.
Operating income of the Harsco Gas and Fluid Control Segment was significantly
above 1999 due to the inclusion of a $1.3 million pre-tax gain on the sale of a
non-core business, as well as strong cost controls and improved efficiencies.
Net income of the Harsco Gas and Fluid Control Segment was also significantly
above 1999. The increase reflects the conditions previously discussed.
-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)
HARSCO INFRASTRUCTURE SEGMENT
<TABLE>
<CAPTION>
AMOUNT PERCENT
(DOLLARS ARE IN MILLIONS) 2000 1999 INCREASE INCREASE
----------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Sales $258.6 $206.7 $51.9 25%
Operating income 23.3 20.1 3.2 16%
Segment net income 12.4 10.9 1.5 14%
</TABLE>
Sales of the Harsco Infrastructure Segment were significantly above last year's
comparable period due to increased sales of railway maintenance-of-way contract
services and equipment; scaffolding, shoring, and forming services; and grating
products. The significant increase in sales of railway maintenance-of-way
services and equipment includes the effect of the Pandrol Jackson acquisition in
the fourth quarter of 1999. Additionally, higher sales of scaffolding, shoring
and forming services was due principally to the SGB Group PLC acquisition late
in the second quarter of 2000.
Operating income of the Harsco Infrastructure Segment increased significantly.
The improvement reflects the inclusion of two acquisitions and the favorable
effects of reorganization efforts.
Net income of the Harsco Infrastructure Segment also increased significantly
reflecting the conditions previously discussed.
-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)
In addition to the segment reporting previously presented, the Company is a
diversified industrial services and engineered products company. Sales and
operating income for the six months of 2000 and 1999 are presented in the
following table:
SERVICES AND ENGINEERED PRODUCTS ANALYSIS
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
(DOLLARS ARE IN MILLIONS) JUNE 30, 2000 JUNE 30, 1999
---------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
SALES
Services $486.7 54% $418.0 50%
Engineered products 419.5 46 417.3 50
------ --- ------ ---
Total sales $906.2 100% $835.3 100%
====== === ====== ===
OPERATING INCOME
Services $ 56.5 61% $ 39.0 53%
Engineered products 35.7 39 34.7 47
------ --- ------ ---
Total segment operating income $ 92.2 100% $ 73.7 100%
====== === ====== ===
EBITDA*
Services $111.5 69% $ 91.2 65%
Engineered products 51.0 31 48.8 35
------ --- ------ ---
Total segment EBITDA $162.5 100% $140.0 100%
====== === ====== ===
</TABLE>
* Earnings before interest, income taxes, minority interest, depreciation and
amortization (EBITDA) is not a measure of performance under generally
accepted accounting principles, however, the Company and the investment
community consider it an important calculation.
Sales, operating income and EBITDA for both services and engineered products
increased from the first six months of 1999. The increases reflect the effects
of acquisitions as well as improved economic conditions in certain markets
served by the company. Additionally, results benefited from the favorable
effects of cost reductions, process improvements and reorganization efforts.
-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)
FORWARD LOOKING STATEMENTS
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.
These factors include, but are not limited to: (1) changes in the worldwide
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, including market demand and acceptance for new
products, services, and technologies; (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.
-29-
<PAGE> 30
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
36%, 37% and 36% of the Company's net revenues for the years ended December 31,
1999, 1998 and 1997, respectively, were derived from the Company's operations
outside the United States. The June 2000 SGB acquisition has increased foreign
currency exposures. Foreign currency exposure increases the risk of income
statement, balance sheet and cash flow volatility. As an example in 1999 foreign
exchange fluctuations were experienced as the Brazilian real and the euro
declined in relation to the US dollar. The situations in Brazil and Europe are
not expected to have a material adverse impact on the Company's financial
position or results of operations. However, these and similar risks could result
in a material impact on the Company's financial position or results of
operations in the future.
To illustrate the recent effect of foreign currency exchange rate changes due to
the strengthening of the US dollar, in the first six months of 2000 sales would
have been 1.7 percent greater using the average exchange rates for the first
six months of 1999. A similar comparison for the year 1999, shows that sales
would have increased 2.5 percent, if the average exchange rates for 1999 would
have been the same as in 1998.
The Company seeks to reduce exposures to foreign currency fluctuations, through
the use of forward exchange contracts. At June 30, 2000, these contracts
amounted to $5.0 million and 91% of the amount will mature within 2000. 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 was $860.1 million as of June 30, 2000. The weighted average
interest rate of total debt was approximately 6.2%. At current debt levels, a
one percentage increase in interest rates would increase interest expense by
approximately $7.0 million per year on variable interest rate debt.
The Company is also exposed to risks related to changing economic conditions and
their effect on the markets it serves and on the Company's supply chain, and
related costs. As an example, in 1998 and early 1999 the worldwide steel
industry experienced selling price reductions and production curtailments at
many steel producers, particularly in the United States. The United States steel
industry was unfavorably affected by imports of low-priced foreign steel.
Additionally, certain steel producers were forced to file for bankruptcy
protection. The situation improved in the second half of 1999. There is a risk
that the Company's future results of operations or financial condition could be
adversely affected if the steel industry's problems recur. Harsco Mill Services
Segment provides services at steel mills worldwide. The future financial impact
on the Company associated with the risks cannot be estimated.
On April 6, 2000, the Company agreed to invest $20 million in S3Networks, LLC, a
start-up company providing internet and e-business consulting services primarily
to Fortune 1000 companies. This investment is subject to market risks inherent
in any start-up company. Such risks include the ability to develop a revenue
base sufficient to offset fixed expenses; the ability to hire and retain
qualified employees; the ability to secure market share from established
companies, etc.
-30-
<PAGE> 31
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 27, 2000, the Board of Directors declared a quarterly cash dividend of
23.5 cents per share, payable August 15, 2000, to shareholders of record on July
14, 2000.
SUBSEQUENT EVENT
On July 26, 2000, the Company announced the resignation of its President and
Chief Operating Officer, Leonard A. Campanaro on mutually agreed terms. Mr.
Campanaro agreed to step down in order to facilitate the Company's realignment
to put more responsibility with the Company's operations. The Company's Chairman
and CEO, Derek C. Hathaway has been appointed by the Board of Directors to the
additional duties of President of the Company. Mr. Campanaro also resigned from
the Board of Directors.
ITEM 6(a). EXHIBITS
The following exhibits are attached:
Exhibit No. 2 Cash Offer for SGB Group PLC
Exhibit No. 10 Settlement agreement with Leonard A. Campanaro
Exhibit No. 12 Computation of Ratios of Earnings to Fixed Charges.
Exhibit No. 27 Financial Data Schedule
ITEM 6(b). REPORTS ON FORM 8-K
A report on Form 8-K dated June 16, 2000 was filed on June 30, 2000 relating to
the acquisition of SGB Group PLC.
A report on Form 8-K dated May 16, 2000 was filed on May 26, 2000 relating to
the acquisition of SGB Group PLC.
-31-
<PAGE> 32
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART II - OTHER INFORMATION
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 18, 2000 /S/ Salvatore D. Fazzolari
----------------------- ----------------------------------------
Salvatore D. Fazzolari
Senior Vice President, Chief
Financial Officer and Treasurer
DATE August 18, 2000 /S/ Stephen J. Schnoor
----------------------- ----------------------------------------
Stephen J. Schnoor
Vice President and Controller
-32-
