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, 1998 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, 1998 - ------------------- ------------------------------------ <S> <C> Common Stock Par Value $1.25 46,753,711 Preferred Stock Purchase Rights 46,753,711 </TABLE> -1-
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) 1998 1997 - --------------------------------------------------------------------------------------- <S> <C> <C> REVENUES: Product sales .................................... $ 210,532 $ 208,257 Service sales .................................... 190,490 182,437 Other ............................................ 262 380 - --------------------------------------------------------------------------------------- TOTAL REVENUES ................................. 401,284 391,074 ======================================================================================= COSTS AND EXPENSES: Cost of products sold ............................ 162,106 159,393 Cost of services sold ............................ 144,153 139,381 Selling, general and administrative expenses ..... 51,552 52,725 Research and development expenses ................ 1,179 1,242 Facilities discontinuance and reorganization costs 245 2,455 - --------------------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES ....................... 359,235 355,196 ======================================================================================= INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST, INCOME TAXES AND MINORITY INTEREST 42,049 35,878 Interest income ...................................... 3,475 1,270 Interest expense ..................................... (3,882) (3,992) - --------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST ......... 41,642 33,156 Provision for income taxes ........................... 15,824 13,592 - --------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST .......................... 25,818 19,564 Minority interest in net income ...................... 1,476 1,436 - --------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS .............. 24,342 18,128 Income from discontinued defense business (net of income taxes of $5,735) ........................ -- 11,970 - --------------------------------------------------------------------------------------- NET INCOME ........................................... $ 24,342 $ 30,098 ======================================================================================= Average shares of common stock outstanding ........... 46,809 49,530 Basic earnings per common share: Income from continuing operations ................ $ .52 $ .37 Income from discontinued operations .............. -- .24 - --------------------------------------------------------------------------------------- BASIC EARNINGS PER COMMON SHARE .................. $ .52 $ .61 ======================================================================================= Diluted earnings per common share: Income from continuing operations ................ $ .52 $ .36 Income from discontinued operations .............. -- .24 - --------------------------------------------------------------------------------------- DILUTED EARNINGS PER COMMON SHARE ................ $ .52 $ .60 ======================================================================================= </TABLE> See accompanying notes to consolidated financial statements. -2-
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) 1998 1997 - -------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents .............................. $ 179,673 $ 221,565 Investments in debt securities ......................... 1,000 43,867 Receivables ............................................ 277,737 259,565 Inventories: Finished goods ...................................... 34,790 27,639 Work in process ..................................... 32,064 27,979 Raw material and purchased parts .................... 61,139 60,982 Stores and supplies ................................. 19,795 18,554 - ------------------------------------------------------------------------------------------------- Total inventories ................................ 147,788 135,154 Other current assets ................................... 53,322 53,501 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS ................................ 659,520 713,652 - ------------------------------------------------------------------------------------------------- Property, plant and equipment, at cost ..................... 1,217,975 1,202,783 Allowance for depreciation ................................. (704,347) (690,870) - ------------------------------------------------------------------------------------------------- 513,628 511,913 - ------------------------------------------------------------------------------------------------- Cost in excess of net assets of businesses acquired, net ... 187,559 187,666 Other assets ............................................... 98,222 63,957 - ------------------------------------------------------------------------------------------------- TOTAL ASSETS ........................................ $ 1,458,929 $ 1,477,188 ================================================================================================= LIABILITIES CURRENT LIABILITIES: Notes payable and current maturities ................... $ 24,358 $ 26,477 Accounts payable ....................................... 103,250 120,148 Accrued compensation ................................... 36,908 42,652 Income taxes ........................................... 33,619 30,572 Other current liabilities .............................. 150,483 152,643 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES ........................... 348,618 372,492 - ------------------------------------------------------------------------------------------------- Long-term debt ............................................. 199,113 198,898 Deferred income taxes ...................................... 38,285 36,594 Other liabilities .......................................... 87,718 87,502 - ------------------------------------------------------------------------------------------------- TOTAL LIABILITIES ................................... 673,734 695,486 - ------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock and additional paid-in capital ................ 162,874 161,678 Accumulated other comprehensive income (expense) ........... (52,032) (50,974) Retained earnings .......................................... 1,047,870 1,033,770 Treasury stock ............................................. (373,517) (362,772) - ------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY .......................... 785,195 781,702 - ------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $ 1,458,929 $ 1,477,188 ================================================================================================= </TABLE> See accompanying notes to consolidated financial statements. -3-
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) 1998 1997 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income .............................................................. $ 24,342 $ 30,098 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ........................................................ 26,265 26,252 Amortization ........................................................ 2,325 2,267 Equity in income of unconsolidated entities ......................... (129) (17,919) Dividends or distributions from unconsolidated entities ............. -- 9,325 Deferred income taxes ............................................... (87) 1,180 Other, net .......................................................... 1,782 46 Changes in assets and liabilities, net of acquisitions of businesses: Accounts receivable ............................................. (17,819) (19,828) Inventories ..................................................... (11,070) (7,856) Accounts payable ................................................ (6,183) (6,567) Other assets and liabilities .................................... (2,480) 61 - ------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES (1) ....................... 16,946 17,059 - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment .............................. (32,560) (37,530) Purchase of businesses, net of cash acquired ............................ (23,834) -- Maturities of investments available-for-sale ............................ 40,000 -- Investments held-to-maturity, net of purchases .......................... 3,010 250 Other investing activities .............................................. (6,301) 3,422 - ------------------------------------------------------------------------------------------------------------ NET CASH (USED) BY INVESTING ACTIVITIES ............................. (19,685) (33,858) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings, net .............................................. (2,597) 5,809 Current maturities and long-term debt: Additions ............................................................. 2,403 15,124 Reductions ............................................................ (7,037) (1,655) Cash dividends paid on common stock ..................................... (10,295) (9,909) Common stock issued-options ............................................. 863 2,076 Common stock acquired for treasury ...................................... (20,816) (12,152) Other financing activities .............................................. (1,341) -- - ------------------------------------------------------------------------------------------------------------ NET CASH (USED) BY FINANCING ACTIVITIES ............................. (38,820) (707) - ------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash .................................... (333) (189) - ------------------------------------------------------------------------------------------------------------ Net decrease in cash and cash equivalents .................................. (41,892) (17,695) Cash and cash equivalents at beginning of period ........................... 221,565 45,862 - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 179,673 $ 28,167 ============================================================================================================ </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-
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) 1998 1997 =============================================================================================== <S> <C> <C> Net income ..................................................... $ 24,342 $ 30,098 Other comprehensive income (expense): Foreign currency translation adjustments ................ (1,086) (9,418) Unrealized investment gains, net of deferred income taxes 28 -- - ----------------------------------------------------------------------------------------------- Other comprehensive income (expense) ........................... (1,058) (9,418) - ----------------------------------------------------------------------------------------------- TOTAL COMPREHENSIVE INCOME ..................................... $ 23,284 $ 20,680 =============================================================================================== </TABLE> See accompanying notes to consolidated financial statements. -5-
6 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, and the United States Department of Justice concluded a settlement of Harsco's previously reported claims against the Army relating to Federal Excise Tax ("FET") arising under a completed 1986 contract for the sale of five-ton trucks to the Army. On September 27, 1995, the Army paid the Company $49 million in accordance with the settlement terms. The Company released the Army from any further liability for those claims, and the Department of Justice released the Company from a threatened action for damages and civil penalties based on an investigation conducted by the Department's Commercial Litigation Branch that had been pending for several years. During the performance of the five-ton truck contract, the Company recorded an account receivable of $62.5 million for its claims against the Army relating to Federal Excise Tax. As a result of accepting the $49 million in settlement, the Company recorded a non-recurring, pre-tax, non-cash charge of $13.5 million (after-tax charge of $8.2 million, $.16 per share) in 1995. The settlement preserves the rights of the parties to assert claims and defenses under the Internal Revenue Code, and rights of the Army and the Company to claim certain amounts that may be owed by either party to reconcile possible underpayments or overpayments on the truck contract as part of the formal contract close-out process. The settlement does not resolve the claim by the Internal Revenue Service that, contrary to the Company's position, certain cargo truck models sold by the Company should be considered to have gross vehicle weights in excess of the 33,000 pound threshold under the Federal Excise Tax law, are not entitled to an exemption from the Federal Excise Tax under any other theory, and therefore are taxable. On December 19, 1996, the District Director of the Internal Revenue Service issued a 30-day letter and examination report (the "Report") that proposed an increase in Federal Excise Tax of $33.7 million plus penalties of $6.9 million and applicable interest currently estimated by the Company to be $37.9 million, primarily on the grounds that those cargo truck models are subject to the Federal Excise Tax. This proposed increase in Federal Excise Tax takes into account offsetting credits of $9.2 million, based on a partial allowance of the Company's $23.4 million claim that certain truck components are exempt from the Federal Excise Tax. The Report disallowed in full the Company's additional claim that it is entitled to the entire $52 million of Federal Excise Tax (plus applicable interest currently estimated by the Company to be $32.8 million) the Company has paid on the five-ton trucks, on the grounds that such trucks qualify for the Federal Excise Tax exemption applicable to certain vehicles specially designed for the primary function of off-highway transportation. In the event that the Company ultimately receives from the Internal Revenue Service a refund of tax (including applicable interest) with respect to which the Company has already received reimbursement from the Army, the refund would be allocated between the Company and the Army. The Company plans to vigorously contest the findings of the District -6-
7 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) Director. On March 19, 1997, the Company filed its formal written protest to these findings with the Internal Revenue Service Office of the Regional Director of Appeals. Currently the Company is engaged in discussions concerning these findings with the IRS Appeals Officer assigned to this case. Although there is risk of an adverse outcome, the Company believes that the cargo trucks are not taxable. No recognition has been given in the accompanying financial statements for the Company's claim with the Internal Revenue Service. The settlement agreement with the Army preserves the Company's right to seek reimbursement of after-imposed tax from the Army in the event that the cargo trucks are determined to be taxable, but the agreement limits the reimbursement to a maximum of $21 million. Additionally, in an earlier contract modification, the Army accepted responsibility for $3.6 million of the potential tax, bringing its total potential responsibility up to $24.6 million. Under the settlement, the Army agreed that if the cargo trucks are determined to be taxable, the 1993 decision of the Armed Services Board of Contract Appeals (which ruled that the Company is entitled to a price adjustment to the contract for reimbursement of FET paid on vehicles that were to be delivered after October 1, 1988) will apply to the question of the Company's right to reimbursement from the Army for after-imposed taxes on the cargo trucks. In the Company's view, application of the 1993 decision will favorably resolve the principal issues regarding any such future claim by the Company. Therefore, the Company believes that even if the cargo trucks are ultimately held to be taxable, the Army would be obligated to reimburse the Company for a majority of the tax, (but not interest or penalty, if any), resulting in a net maximum liability for the Company of $9.1 million plus penalties of $6.9 million and applicable interest currently estimated by the Company to be $37.9 million. The Company believes it is unlikely that resolution of this matter will have a material adverse effect on the Company's financial position, however, it could have a material effect on quarterly or annual results of operations. M9 Armored Combat Earthmover Claim The Company and its legal counsel are of the opinion that the U.S. Government did not exercise option three under the M9 Armored Combat Earthmover (ACE) contract in a timely manner, with the result that the unit prices for options three, four and five are subject to renegotiation. Claims reflecting the Company's position were filed with respect to all options purported to be exercised, totaling in excess of $60 million plus interest. In February 1998, the Armed Services Board of Contract Appeals denied the Company's claims. The Company intends to appeal the decision to the United States Court of Appeals for the Federal Circuit. No recognition has been given in the accompanying financial statements for any recovery on these claims. 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 the United States Claims Court in response to the Company's claim of approximately $5 million against the Government for costs incurred on this contract relating to the same issue. In May 1997, the Court issued a decision in the first phase -7-
8 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) of the case, denying the Company's claim for reimbursement and granting the Government's counterclaim for breach of contract and penalties under the False Claims Act. The Court will consider the amount of damages and penalties in the next phase of the case, and the decision will then be subject to the right of appeal. The Government has filed a brief seeking penalties and treble damages totaling $26 million. The Company intends to vigorously oppose this claim. The Company and its counsel believe that resolution of these claims will not have a material adverse effect on the Company's financial position, however, it could have a material effect on quarterly or annual results of operations. In 1992, the United States Government through its Defense Contract Audit Agency commenced an audit of certain contracts for sale of tracked vehicles by the Company to foreign governments, which were financed by the United States Government through the Defense Security Assistance Agency. The Company cooperated with the audit and responded to a number of issues raised by the audit. In September 1994, the Company received a subpoena issued by the Department of Defense Inspector General seeking various documents relating to sale contracts between the Company and foreign governments which were funded by the Defense Security Assistance Agency. The Company is continuing to cooperate and is responding to Government document requests. Based on discussions with the agent in charge and the Government auditors, it appears that the investigation focuses on whether the Company made improper certifications to the Defense Security Assistance Agency and other government contract accounting matters. The Government has not asserted any claims at this time and it is too early to know whether a claim will be asserted or what the nature of any such claim would be, however, the Company's management and its counsel believe it is unlikely that this issue will have a material adverse effect on the Company's financial position. In the fourth quarter of 1997, the Supreme Court of Switzerland upheld an International Court of Arbitration award to Iran's Ministry of Defense of a net amount of approximately $1.2 million. This consists of an award of $7.5 million to Iran, offset by an award of $6.3 million to the Company for damages and legal costs. The net liability for this award had been previously provided for by the Company. Continuing Operations - Contingencies In June 1994, the shareholder of the Ferrari Group, a Belgium holding company involved in steel mill services and other activities, filed a legal action in Belgium against Heckett MultiServ, S.A. and S.E.A.E., subsidiaries of MultiServ International N.V. (a subsidiary of the Company). The action alleges that these two subsidiaries breached contracts arising from letters of intent signed in 1992 and 1993 concerning the possible acquisition of the Ferrari Group, claiming that the subsidiaries were obligated to proceed with the acquisition and failed to do so. The action seeks damages of 504 million Belgian francs (approximately U.S. $13.6 million). The Company intends to vigorously defend against the action and believes that based on conditions contained in the letters of intent and other defenses it will prevail. The Company and its counsel believe that it is unlikely that these claims will have a material adverse effect on the Company's financial position or results of operations. -8-
9 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) 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, 1998 and December 31, 1997, includes an accrual of $3.3 million and $3.4 million, respectively, for environmental matters. The amounts charged to earnings on a pre-tax basis related to environmental matters totaled $0.1 million and $0.2 million for the three months of 1998 and 1997, respectively. The liability for future remediation costs is evaluated on a quarterly basis. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. The Company does not expect that any sum it may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse effect on its financial position or results of operations. Other The Company is subject to various other claims, legal proceedings and investigations covering a wide range of matters that arose in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or by accruals, and if not so covered, are without merit or are of such kind, or involve such amounts, 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, primarily the European currencies, through the use of forward exchange contracts. The Company does not hold or issue financial instruments for trading purposes, and it is the Company's policy to prohibit the use of derivatives for speculative purposes. The Company has a Foreign Currency Risk Management Committee that meets periodically to monitor foreign currency risks. The Company enters into forward foreign exchange contracts to hedge transactions 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. -9-
10 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) 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, and they are recognized in income based on their fair market value. As of March 31, 1998, the total of all forward exchange contracts amounted to $3.1 million with a favorable marked to market fluctuation of $0.1 million. Acquisitions On April 14, 1998, the Company announced that it had completed the acquisition of Faber Prest Plc for approximately $97 million. Faber Prest is a UK-based provider of services to worldwide steel producers and integrated logistics services to the steel industry and other market sectors. For the year ended September 30, 1997, Faber Prest recorded sales of approximately $137 million. Reconciliation of Basic and Diluted Shares <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 (Dollars in thousands except per share) 1998 1997 - ----------------------------------------------------------------------- <S> <C> <C> Income from continuing operations $ 24,342 $ 18,128 =========== =========== Average shares of common stock outstanding used to compute basic earnings per common share 46,808,859 49,529,970 Additional common shares to be issued assuming exercise of stock options, net of shares assumed reacquired 428,407 427,480 ----------- ----------- Shares used to compute dilutive effect of stock options 47,237,266 49,957,450 =========== =========== Basic earnings per common share from continuing operations $ .52 $ .37 =========== =========== Diluted earnings per common share from continuing operations $ .52 $ .36 =========== =========== </TABLE> -10-
11 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) New Financial Accounting Standard Issued During the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Consolidated Statement of Comprehensive Income is included with the financial statements, Part I, Item I. In February 1998 the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132), which is effective for fiscal years beginning after December 15, 1997. SFAS 132 revises the required disclosures about pension and other postretirement benefit plans. The Company plans to adopt SFAS 132 in the fourth quarter of 1998. 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-
12 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Net cash provided by operating activities was $16.9 million in the first quarter of 1998 compared with $17.1 million in 1997. Operating cash flows for 1998 showed considerable strength in comparison to the first quarter of 1997, which included $9.3 million distribution from the defense business which was sold in October 1997, and income tax payments made in the first quarter of 1998 of approximately $4 million related to the gain on the sale of the defense business. Capital expenditures for the first quarter of 1998 of $32.6 million were below last year's $37.5 million due to the timing of capital expenditures. For the year, capital expenditures are expected to exceed last year's amount. These investments reflect the Company's continuing program to achieve business growth and to improve productivity and product quality. The maturity of investments available for sale provide $40 million of cash from investing activities which was partially offset by $6.9 million for the acquisition of EFI Corporation and approximately $17 million reflecting the purchase of approximately 17% of Faber Prest shares in March. The remaining shares of Faber Prest were acquired in April to complete the acquisition. Cash used for financing activities included a net decrease in long-term debt of $4.6 million, a $2.6 million decrease in short-term debt, and $10.3 million of cash dividends paid on common stock, for the first quarter 1998. The Company has maintained a policy of reacquiring its common stock in unsolicited open market or privately-negotiated transactions at prevailing market prices for several years. In November 1997, the Board of Directors authorized the purchase, over a one-year period, of up to 2,000,000 shares of the Company's common stock. The number of shares purchased under this program during the three months ended March 31, 1998 was 287,700 shares of common stock for $11.9 million. Since Board approval in November, 1,226,441 shares of common stock have been purchased under this plan at an aggregate cost of $50.2 million. Cash and cash equivalents decreased $41.9 million to $179.7 million at March 31, 1998. Other matters which could affect cash flows in the future are discussed under Part 1, item 1 "Notes to Consolidated Financial Statements." Harsco continues to maintain a good financial position, with net working capital of $310.9 million, a decrease from the $341.2 million at December 31, 1997. Current assets amounted to $659.5 million, and current liabilities were $348.6 million, resulting in a current ratio of 1.9 to 1, the same as December 31, 1997. With total debt of $223.5 million and equity of $785.2 million at March 31, 1998, the total debt as a percent of capital was 22.2%, compared with 22.4% at December 31, 1997. -12-
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 stock price range during the first quarter was 37 1/2 - 46 1/8. Harsco's book value per share at March 31, 1998, was $16.79, compared with $16.64 at December 31, 1997. The Company's annualized return on average equity from continuing operations for the first quarter of 1998 was 12.4%, compared with 11.6% for the first quarter of 1997. The annualized return on average assets from continuing operations was 12.5%, compared with 11.8% for the first quarter of 1997. The annualized return on average capital from continuing operations for the first quarter was 10.6%, compared with 9.4% for the first quarter of 1997. The Company has available through a syndicate of banks a $400 million multi-currency five-year revolving credit facility, extending through July 2001. This facility serves as back-up to the Company's commercial paper program. As of March 31, 1998, there were no borrowings outstanding under this facility. The Company has a U.S. commercial paper borrowing program under which it can issue up to $300 million of short-term notes in the U.S. commercial paper market. In addition, the Company has a 3 billion Belgian Franc program, equivalent to approximately U.S. $79 million. The Belgian program is used to borrow a variety of Eurocurrencies in order to fund the Company's European operations more efficiently and in appropriate currencies. The Company limits the aggregate commercial paper and syndicated credit facility borrowings at any one time to a maximum $400 million. At March 31, 1998, the Company had $28.3 million of commercial paper debt outstanding under the commercial paper programs. The Company's outstanding long-term notes are rated A by Standard & Poor's, A by Fitch 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. -13-
14 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) RESULTS OF OPERATIONS FIRST THREE MONTHS OF 1998 COMPARED WITH FIRST THREE MONTHS OF 1997 First quarter revenues from continuing operations for 1998 were $401.3 million, 3% above last year's comparable period. The increase was due to higher service sales for scaffolding, shoring and forming equipment, metal reclamation and mill services, railway maintenance contract services, and the inclusion of medical waste disposal service sales arising from an acquisition in December, 1997. Service sales in metal reclamation and mill services increased despite being adversely affected by the strengthening of the U.S. dollar, particularly against certain European currencies. In addition, higher product sales were recorded for railway maintenance of way equipment, process equipment, and the inclusion of an acquisition in February, 1998. These product sales more than offset lower product sales for gas control and containment equipment, and grating. Excluding the adverse effect of the strengthening U.S. dollar, revenues from continuing operations for the first quarter of 1998 were 5% above the first quarter of 1997. Costs of products and services sold increased, principally due to higher volume. Selling, general and administrative expenses decreased as a result of continuing efforts to reduce expenses which more than offset costs arising from the inclusion of acquired companies. Income from continuing operations before income taxes and minority interest was up 26% from 1997 due principally to improved performance. Interest income was up due to the increased amount of cash available for investment purposes which resulted from the disposal of the Company's defense business in the fourth quarter of 1997. On a comparative basis, results for the first quarter of 1997 were unfavorably affected by a $1.4 million provision for an impairment loss arising from the disposal of the Company's shell and tube business. Higher earnings from continuing operations in 1998 were due principally to higher results for scaffolding, shoring and forming equipment, metal reclamation and mill services and process equipment. These increases were partially offset by lower results for pipe fittings, railway maintenance of way equipment and services, and gas control and containment equipment. The effective income tax rate for continuing operations for 1998 was 38%, versus 41% in 1997. The reduction in the income tax rate is due principally to lower effective tax rates on international earnings. Income from continuing operations of $24.3 million in the first quarter for 1998 was up 34% from 1997. Basic income per common share from continuing operations was $.52, up 41% from the $.37 recorded in 1997. Income from discontinued operations, which reflects the after-tax results of the Company's divested defense business, reported no results in 1998 due to the disposal of the defense business in the fourth quarter of 1997. -14-
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.) Net income of $24.3 million for the first quarter of 1998, was below 1997 as a result of the inclusion of income from discontinued operations in 1997's first quarter results. Basic net income per common share was $.52, down from 1997. Sales of the Metal Reclamation and Mill Services Group, at $151.2 million, were above 1997's first quarter, despite the strengthening of the U.S. dollar, principally against certain European currencies. Sales for the Process Industry Products Group, at $149.4 million, were higher than last year's similar period due principally to the inclusion of sales arising from two acquisitions and increased sales for process equipment. Sales for the Infrastructure and Construction Group, at $100.4 million, which included higher sales for scaffolding, shoring and forming equipment, as well as railway maintenance of way equipment and services, were above 1997's first quarter. Sales for grating were down from last year's comparable period. Operating profit for the Metal Reclamation and Mill Services Group at $22.4 million exceeded 1997 despite the adverse effects of the strong U.S. dollar. Operating profit excluding the effect of items relating to facilities discontinuance and reorganization costs for the Process Industry Products Group at $14.3 million was below last year's comparable period due primarily to lower results for pipe fittings and the inclusion of start-up costs associated with the medical waste disposal service acquisition. After including the effect of facilities discontinuance and reorganization costs, operating profit of $14.3 million for the Process Industry Products Group was slightly above the amount recorded in 1997's first quarter which included a $1.4 million provision for an impairment loss arising from the disposal of the Company's shell and tube business. Operating profit in 1998 of $9.4 million for the Infrastructure and Construction Group was almost twice the amount recorded in 1997's first quarter. The increase primarily reflected significantly improved results for scaffolding and shoring and forming equipment. In addition to the Group reporting noted above, the Company views itself as a diversified industrial services and engineered products company. Total industrial service sales, which include the Metal Reclamation and Mill Services Group and Infrastructure and Construction Group service businesses, principally scaffolding services and railway maintenance of way services, were $190.5 million in 1998 and $182.4 million in 1997, or approximately 48% and 47% of net sales, respectively. Excluding the adverse effect of the strengthening U.S. dollar, total industrial service sales were approximately 9% above last year's comparable period. The total engineered products sales for 1998 were $210.5 million or approximately 52% of net sales, which includes sales from the Infrastructure and Construction Group and the Process Industry Products Group. The total engineered products sales for 1997 were $208.3 million or approximately 53% of net sales. The operating profit for industrial services for 1998 was $26.6 million compared with $20.0 million in 1997, or approximately 58% and 51%, respectively, of total Group operating profit. The operating profit from engineered products for 1998 was $19.4 million compared with $19.1 million in 1997, which included a $1.4 million provision for an impairment loss arising from the disposal of the Company's shell and tube business. These amounts are approximately 42% and 49%, respectively, of total Group operating profit. -15-
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.) 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. 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, 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. -16-
17 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 ACTION: On March 19, 1998, the Company announced that the Board of Directors declared a quarterly cash dividend of 22 cents per share, payable May 15, 1998, to shareholders of record on April 15, 1998. ITEM 6(a). EXHIBITS The following exhibits are attached: a.) Exhibit No. 2 Recommended Cash Offer by Lazard Brothers & Co., Limited on behalf of Heckett MultiServ Investment Limited, a wholly owned subsidiary of Harsco Corporation for Faber Prest Plc. b.) Exhibit No. 12 Computation of Ratios of Earnings to Fixed Charges. c.) Exhibit No. 27 Financial Data Schedule ITEM 6(b). REPORTS ON FORM 8-K A report on Form 8-K/A was filed January 5, 1998, amending the form 8-K (dated October 6, 1997 and filed by the Company on October 16, 1997) by providing the full text of two exhibits with respect to which the Company had previously sought confidential treatment. A report on Form 8-K dated March 4, 1998 was filed March 13, 1998 related to the announced tender offer by the Company for UK-based Faber Prest Plc. -17-
18 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 April 27, 1998 /S/ Leonard A. Campanaro ------------------------------- ------------------------ Leonard A. Campanaro President and Chief Operating Officer DATE April 27, 1998 /S/ Salvatore D. Fazzolari ------------------------------- -------------------------- Salvatore D. Fazzolari Senior Vice President and Chief Financial Officer -18-