1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1996 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 September 30, 1996 - ------------------- ---------------------------------------- <S> <C> Common Stock Par Value $1.25 24,776,569 Preferred Stock Purchase Rights 24,776,569 </TABLE> -1-
2 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (In thousands, except per share amounts) 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES: Net sales ............................................. $ 395,776 $ 374,147 $ 1,150,195 $ 1,108,308 Equity in income of unconsolidated entities ........... 9,059 10,939 41,906 38,682 Other ................................................. 169 411 582 1,162 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES .................................... 405,004 385,497 1,192,683 1,148,152 - -------------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES: Cost of sales ......................................... 300,337 284,326 872,262 852,504 Selling, general and administrative expenses .......... 51,151 47,147 153,421 145,555 Research and development expenses ..................... 1,896 1,088 3,505 3,431 Facilities discontinuance and reorganization costs .... 176 16,827 1,711 19,322 Other ................................................. 199 (451) (447) (4,831) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES .......................... 353,759 348,937 1,030,452 1,015,981 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INTEREST, TAXES, AND MINORITY INTEREST ........................ 51,245 36,560 162,231 132,171 Interest income ............................................ 1,483 1,647 5,275 5,020 Interest expense ........................................... (4,814) (7,356) (16,881) (22,376) - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES AND MINORITY INTEREST ......... 47,914 30,851 150,625 114,815 Provision for income taxes ................................. 17,180 12,032 57,237 44,778 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST ................... 30,734 18,819 93,388 70,037 Minority interest in net income ............................ 1,625 419 3,909 1,618 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME ........................................ $ 29,109 $ 18,400 $ 89,479 $ 68,419 - -------------------------------------------------------------------------------------------------------------------------------- Average shares of common stock outstanding ................. 24,865 25,313 24,994 25,262 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE .............................. $ 1.17 $ .73 $ 3.58 $ 2.71 - -------------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share ................. $ .38 $ .37 $ 1.14 $ 1.11 - -------------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. </TABLE> -2-
3 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 31 (In thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents ................................... $ 55,179 $ 76,669 Receivables ................................................. 283,192 272,858 Inventories: Finished goods ........................................... 30,741 25,996 Work in process .......................................... 31,864 24,640 Raw material and purchased parts ......................... 52,518 54,151 Stores and supplies ...................................... 18,941 18,498 - ------------------------------------------------------------------------------------------------- Total inventories .................................... 134,064 123,285 Other current assets ........................................ 62,901 60,954 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS ..................................... 535,336 533,766 - ------------------------------------------------------------------------------------------------- Property, plant and equipment, at cost .......................... 1,153,106 1,080,267 Allowance for depreciation ...................................... (661,595) (620,458) - ------------------------------------------------------------------------------------------------- 491,511 459,809 - ------------------------------------------------------------------------------------------------- Cost in excess of net assets of businesses acquired, net ........ 197,368 205,801 Investments in unconsolidated entities .......................... 60,165 45,604 Other assets .................................................... 55,033 65,682 - ------------------------------------------------------------------------------------------------- TOTAL ASSETS ............................................. $ 1,339,413 $ 1,310,662 - ------------------------------------------------------------------------------------------------- LIABILITIES CURRENT LIABILITIES: Notes payable and current maturities ........................ $ 27,142 $ 108,747 Accounts payable ............................................ 102,184 112,736 Accrued compensation ........................................ 42,164 41,304 Other current liabilities ................................... 106,353 125,725 - ------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES ................................ 277,843 388,512 - ------------------------------------------------------------------------------------------------- Long-term debt .................................................. 282,362 179,926 Deferred income taxes ........................................... 30,897 36,061 Other liabilities ............................................... 88,403 80,172 - ------------------------------------------------------------------------------------------------- TOTAL LIABILITIES ........................................ 679,505 684,671 - ------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock and additional paid-in capital ..................... 149,203 141,855 Cumulative adjustments for translation and pension liability .... (27,387) (20,265) Retained earnings ............................................... 774,849 713,774 Treasury stock .................................................. (236,757) (209,373) - ------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY ............................... 659,908 625,991 - ------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $ 1,339,413 $ 1,310,662 - ------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. -3-
4 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30 (In thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................................ $ 89,479 $ 68,419 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .......................................................... 74,720 70,721 Amortization .......................................................... 6,975 7,456 Equity in income of unconsolidated entities ........................... (41,906) (38,682) Dividends or distributions from unconsolidated entities ............... 27,363 27,245 Deferred income taxes ................................................. 2,612 5,268 Write-off of federal excise tax receivable ............................ -- 13,455 Other, net ............................................................ 2,200 (9,932) Changes in assets and liabilities, net of acquisitions and dispositions of businesses: Notes and accounts receivable ..................................... (13,600) 68,697 Inventories ....................................................... (5,140) (14,004) Accounts payable .................................................. (4,776) (9,851) Other assets and liabilities ...................................... (13,146) 10,039 - ----------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ............................. 124,781 198,831 - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant and equipment ............................ (105,465) (85,754) Purchase of businesses, net of cash acquired .............................. (21,030) (4,143) Investments held-to-maturity, net of purchases ............................ 6,685 572 Proceeds from sale of businesses .......................................... 1,793 839 Other investing activities ................................................ 3,510 7,812 - ----------------------------------------------------------------------------------------------------------------- NET CASH (USED) BY INVESTING ACTIVITIES ............................... (114,507) (80,674) - ----------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings, net ................................................ 12,977 (9,718) Current maturities and long-term debt Additions ............................................................... 185,900 47,134 Reductions .............................................................. (175,695) (119,112) Cash dividends paid on common stock ....................................... (28,520) (28,024) Common stock issued-options ............................................... 4,581 5,015 Common stock acquired for treasury ........................................ (29,973) -- Other financing activities ................................................ 500 1,107 - ----------------------------------------------------------------------------------------------------------------- NET CASH (USED) BY FINANCING ACTIVITIES ............................... (30,230) (103,598) - ----------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash ...................................... (1,534) 164 - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents ......................... (21,490) 14,723 Cash and cash equivalents at beginning of period ............................. 76,669 43,550 - ----------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................... $ 55,179 $ 58,273 - ----------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. -4-
5 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Continued) REVIEW OF OPERATIONS BY GROUP (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 (In millions) 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> NET SALES Metal Reclamation and Mill Services ....... $ 150.1 $ 153.1 $ 452.3 $ 446.0 Infrastructure and Construction (a) ....... 107.6 100.6 307.2 302.7 Process Industry Products ................. 138.1 120.4 390.7 359.6 - ------------------------------------------------------------------------------------------------------- Total .............................. $ 395.8 $ 374.1 $1,150.2 $1,108.3 - ------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES AND MINORITY INTEREST Metal Reclamation and Mill Services (b) ... $ 19.9 $ 22.9 $ 62.9 $ 60.2 Infrastructure and Construction (a) ....... 11.7 12.3 33.7 25.5 Process Industry Products ................. 14.2 10.9 37.2 32.0 - ------------------------------------------------------------------------------------------------------- 45.8 46.1 133.8 117.7 Facilities discontinuance and reorganization costs (c) .................. (.1) (16.7) (.7) (18.4) - ------------------------------------------------------------------------------------------------------- Total group operating profit ....... 45.7 29.4 133.1 99.3 Equity in income of unconsolidated entities 9.1 11.0 41.9 38.7 Interest expense .......................... (4.8) (7.4) (16.9) (22.4) General corporate expenses (d) ............ (2.1) (2.2) (7.5) (.8) - ------------------------------------------------------------------------------------------------------- TOTAL PRE-TAX INCOME ........ $ 47.9 $ 30.8 $ 150.6 $ 114.8 - ------------------------------------------------------------------------------------------------------- </TABLE> (a) Under the Infrastructure and Construction Group, the Company ceased all bus operations in June, 1995. For the nine months of 1995, the school bus operation had $15.7 million in sales and an operating loss of $6.2 million. (b) For the third quarter and the nine months of 1995, Group income before tax included a $0.2 million foreign currency translation exchange gain and a $2.9 million foreign currency translation exchange loss, respectively. Included in the $2.9 million loss, is a $3.5 million foreign currency translation exchange loss due to the devaluation of the Mexican peso. For the 1996 comparable periods, foreign currency translation exchange losses were $0.4 million for both the third quarter and nine months. (c) The third quarter and nine months ended September 30, 1995 includes a non-cash charge of $13.5 million relating to the settlement of the Federal Excise Tax reimbursement on the completed five-ton truck contract, and a $2.1 million provision for asset impairment relating to the remaining fixed assets of the school bus business. The nine months of 1995 also includes $2.6 million relating to the discontinuance of certain international facilities related to the Metal Reclamation and Mill Services Group. (d) General corporate expenses for the third quarter and the nine months of 1995, respectively, included a $0.3 million foreign currency translation exchange loss and a $5.9 million foreign currency translation exchange gain. For the 1996 comparable periods, foreign currency translation exchange losses were immaterial. -5-
6 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Cont'd.) Cash payments for interest on all debt, net of amounts capitalized were $19,812,000 for the nine months of 1996 and $21,963,000 for the nine months of 1995. Cash payments for income taxes were $62,987,000 for the nine months of 1996 and $36,915,000 for the nine months of 1995. Notes to Consolidated Financial Statements Commitments and Contingencies: Federal Excise Tax and Other Matters Related to the Five-ton Truck Contract In the third quarter of 1995, the Company, the United States Army, and the United States Department of Justice concluded a settlement of Harsco's previously reported claims against the Army relating to Federal Excise Tax arising under a completed 1986 contract for the sale of five-ton trucks to the Army. On September 27, 1995, the Army paid Harsco $49 million in accordance with the settlement terms. Harsco released the Army from any further liability for those claims, and the Department of Justice released Harsco 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, Harsco recorded a non-recurring, pre-tax, non-cash charge of $13.5 million (after-tax charge of $8.2 million, $.32 per share), in the third quarter of 1995. The settlement preserves the rights of the parties to assert claims and defenses under the Internal Revenue Code, and rights of the Army and Harsco 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 potential for a claim from the Internal Revenue Service that, contrary to the Company's position, certain cargo truck models have gross vehicle weights in excess of the 33,000 pound threshold under the Federal Excise Tax law, and therefore are taxable. As previously reported, the Internal Revenue Service is reviewing Harsco's position and has tentatively concluded that those cargo truck models are taxable. Assuming the Internal Revenue Service asserts that tax is due on these vehicles, the total claim could be approximately $42 million plus interest and penalty, if any. The Company plans to vigorously contest any such tax deficiency. Although there is risk of an adverse outcome, the Company believes that these trucks are not taxable. The settlement agreement 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 -6-
7 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Cont'd.) be delivered after October 1, 1988) will apply to the question of Harsco's right to reimbursement from the Army for after-imposed taxes on the cargo trucks. In Harsco's view, application of the 1993 decision will favorably resolve the principal issues regarding any such future claim by Harsco. Therefore, the Company believes that even if the cargo trucks are 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 Harsco of approximately $18 million plus interest and penalty, if any. 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. The Company has advised the Internal Revenue Service that it is in the process of preparing tax refund claims which will challenge the applicability of the Federal Excise Tax to any of the five-ton trucks based on a provision of the law which exempts certain vehicles specially designed for the primary function of off-highway transportation. An alternative claim for partial refund of the tax is also being prepared based on the exemption of certain of the truck components from tax. The Company has paid a total of $52 million of Federal Excise Tax on the five-ton trucks. Any such refund of tax and payment of interest by the Internal Revenue Service would be shared by the Army and the Company in amounts to be determined. M9 Armored Combat Earthmover Claim The Company and its legal counsel are of the opinion that the U.S. Government did not exercise option three under the M9 Armored Combat Earthmover (ACE) contract in a timely manner, with the result that the unit prices for options three, four and five are subject to renegotiation. Claims reflecting the Company's position have been filed with respect to all options purported to be exercised, totaling in excess of $60 million plus interest. No recognition has been given in the accompanying financial statements for any recovery on these claims. In July 1995, the Armed Services Board of Contract Appeals denied the motions for summary judgment which had been filed by both the Company and the Government. The Company is continuing to pursue its claim before the Armed Services Board of Contract Appeals. Other Litigation On March 13, 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 October 1995, Government counsel informed the Company's counsel that at trial it would claim breach of contract damages of $4.8 million plus damages and civil penalties under the False Claims Act totaling $6.8 million. This is a reduction from the previously asserted Government claim of $7.3 million in damages, trebled plus False Claims Act penalties. The trial commenced in July 1996 and a decision is expected in 1997. The Company and its counsel believe it is unlikely that resolution of these claims 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. -7-
8 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Cont'd.) Iran's Ministry of Defense initiated arbitration procedures against the Company in 1991 under the rules of the International Chamber of Commerce for damages allegedly resulting from breach of various contracts executed by the Company and the Ministry of Defense between 1970 and 1978. The contracts were terminated in 1978 and 1979 during the period of civil unrest in Iran that preceded the Iranian revolution. Iran asserted a claim under one contract for repayment of a $7.5 million advance payment it made to the Company, plus interest at 12% through June 27, 1991 in the amount of $25.3 million. Iran also asserted a claim for damages under other contracts for $76.3 million. The Company asserted various defenses and also filed counterclaims against Iran for damages in excess of $7.5 million which it sustained as a result of Iran's breach of contract, plus interest. At an arbitration hearing held in January 1996, Iran reduced the $76.3 million portion of its claim to approximately $34.4 million. The International Court of Arbitration took the case under advisement and in September 1996, awarded Iran a net amount of approximately $1.2 million. This represents an award of $7.5 million to Iran for the advance payment, offset by an award of $6.3 million to the Company for damages and legal costs and the denial of all pre-award interest claims for both parties. The Company and Iran have each filed appeals in the Supreme Court of Switzerland. The Company's management and its counsel believe it is unlikely that resolution of these claims will have a material adverse effect on the Company's financial position or results of operations. In 1992, the United States Government through its Defense Contract Audit Agency commenced an audit of certain contracts for sale of tracked vehicles by the Company to foreign governments, which were financed by the United States Government through the Defense Security Assistance Agency. The Company cooperated with the audit and responded to a number of issues raised by the audit. In September 1994, the Company received a subpoena issued by the Department of Defense Inspector General seeking various documents relating to sale contracts between the Company and foreign governments which were funded by the Defense Security Assistance Agency. The Company is continuing to cooperate and is responding to the subpoena. Based on discussions with the agent in charge and the Government auditors, it appears that the investigation focuses on whether the Company made improper certifications to the Defense Security Assistance Agency. The Government has not asserted any claims at this time and it is too early to know whether a claim will be asserted or what the nature of any such claim would be, however, the Company's management and its counsel believe it is unlikely that this issue will have a material adverse effect on the Company's financial position. In June 1994, the shareholder of the Ferrari Group, a Belgium holding company involved in steel mill services and other activities, filed a legal action in Belgium against Heckett MultiServ, S.A. and S.E.A.E., subsidiaries of MultiServ International N.V. (a subsidiary of the Company). The action alleges that these two subsidiaries breached contracts arising from letters of intent signed in 1992 and 1993 concerning the possible acquisition of the Ferrari Group, claiming that the subsidiaries were obligated to proceed with the acquisition and failed to do so. The action seeks damages of 504 million Belgian francs (approximately U.S. $16 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 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 (Cont'd.) On August 29, 1994, the Company filed a legal action in the United States District Court for the Southern District of New York against certain former shareholders of MultiServ International, N.V. seeking recovery of damages arising from misrepresentations which the Company claims were made to it in connection with its purchase of the MultiServ International, N.V. stock on August 31, 1993. The Complaint seeks damages in an amount to be determined. On April 4, 1995, the Court dismissed various elements of the Company's claims and allowed the Company to amend its complaint with respect to other elements. At the Company's request, the Court dismissed the remaining claims which then allowed the Company to file an appeal in the United States Court of Appeals for the Second Circuit. The Company has settled its claims with certain defendants, and continued to pursue its appeal with respect to claims against the other defendants. In August 1996, the Court of Appeals affirmed the lower court decision dismissing the Company's complaint. The Company is considering various options for further pursuit of its claim. Environmental The Company is involved in a number of environmental remediation investigations and clean-ups and, along with other companies, has been identified as a "potentially responsible party" for certain waste disposal sites. While each of these matters is subject to various uncertainties, it is probable that the Company will agree to make payments toward funding certain of these activities and it is possible that some of these matters will be decided unfavorably to the Company. The Company has evaluated its potential liability, and its financial exposure is dependent upon such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the allocation of cost among potentially responsible parties, the years of remedial activity required and the remediation methods selected. The Consolidated Balance Sheets at September 30, 1996 and December 31, 1995, include an accrual of $4.7 million and $5.3 million respectively for environmental matters. The amounts charged to earnings on a pre-tax basis related to environmental matters totaled $243,000 and $164,000 for the nine months of 1996 and 1995, respectively. The liability for future remediation costs is evaluated on a quarterly basis. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. Subject to the imprecision in estimating future environmental costs, the Company does not expect that any sum it may have to pay in 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. -9-
10 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Cont'd.) 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. -10-
11 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION Net cash provided by operating activities was $124.8 million in the nine months of 1996 compared to $198.8 million in 1995. 1995 included the receipt of $20.4 million from a claim settlement with the U.S. Government and the $49 million Federal Excise Tax reimbursement on the completed five-ton truck contract. During the nine months of 1996, distributions of $27.4 million were received from unconsolidated entities, compared with $27.2 million during the same period last year. Capital expenditures for the nine months of 1996 were a record $105.5 million, compared with $85.8 million in 1995, reflecting the Company's program to achieve business growth and to improve productivity and quality. Cash used by investing activities included $19 million for the acquisition of substantially all of the assets and the assumption of certain liabilities of the Coyne Cylinder Business (Coyne) and $2 million for the acquisition of certain assets of a railway maintenance of way company. Total consideration for Coyne was $22.3 million with the assumption of certain liabilities. Proceeds from the sale of property, plant and equipment in the nine months of 1996 provided $2.5 million in cash compared to $6.3 million in 1995. Cash used for financing activities included $28.5 million of cash dividends paid on common stock and $30 million in stock acquired for treasury. These uses were partially offset by a $13 million increase in short term debt and an increase of $10.2 million in long term debt. Cash and cash equivalents decreased $21.5 million to $55.2 million at September 30, 1996. The Company has maintained a policy of reacquiring its common stock in unsolicited open market or privately-negotiated transactions at prevailing market prices for several years. In January 1996, the Board of Directors authorized the purchase, over a one-year period, of up to 1,000,000 shares of the Company's common stock. The total number of shares purchased under this program for the nine months ended September 30, 1996 was 436,600 shares of common stock at an average cost of $63.06 per share. Financing activities included $27.5 million in cash used to repurchase these shares, plus approximately $2.5 million which was payable at year end for shares purchased in 1995 and settled in 1996. Other matters which could affect cash flows in the future are discussed under Part I, Item 1 Notes to Consolidated Financial Statements "Commitments and Contingencies." -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 (Cont'd.) Harsco continues to maintain a good financial position, with net working capital of $257.5 million, up from the $145.3 million at December 31, 1995. The improvement is primarily due to the repayment of the $89,500,000 of 8.75% 10-year notes that matured in May 1996 which was financed through the issuance of commercial paper. Such borrowings are classified as long term debt due to the Company's intent and ability to refinance it on a long term basis through existing long term credit facilities. Current assets amounted to $535.3 million, and current liabilities were $277.8 million, resulting in a current ratio of 1.9 to 1, up from 1.4 at December 31, 1995. With total debt at $309.5 million and equity at $659.9 million at September 30, 1996, total debt as a percent of total capital was 31.9%, up slightly from 31.6% at December 31, 1995. The stock price range during the nine months was $69 7/8 - 58. Harsco's book value per share at September 30, 1996, was $26.63, compared with $24.99 at year-end 1995. The Company's annualized return on average equity for the nine months of 1996 was 18.0%, compared with 15.9% for the year 1995. The annualized return on average assets for the nine months of 1996 was 16.5%, compared with the 14.6% for the year 1995. The annualized return on capital for the nine months of 1996 was 13.9%, compared with 12.2% for year 1995. The Company in July 1996 renegotiated and increased to $400 million from $300 million its October 1993 credit facility with a syndicate of 18 banks led by Chase Manhattan Bank. The five-year facility, as amended, extends maturity to July 2001, provides for greater financial flexibility and reflects current favorable syndicated credit pricing. This renegotiated credit facility will serve as backup to Harsco's $300 million commercial paper program, which was increased from $150 million. In addition, the Company in September 1996 initiated a Belgian commercial paper program. The 3 billion Belgian Franc program is equivalent to approximately US $100 million. The Belgian program will be used to borrow a variety of Euro-currencies in order to fund the Company's European operations more efficiently and in appropriate currencies. The Company limits the aggregate commercial paper and credit facility borrowings at any one time to a maximum of $400 million. The credit facility has been increased to provide financing for general corporate needs and future growth opportunities. Harsco's outstanding long-term notes are rated A by Standard & Poor's, A by Fitch Investors Service and A-3 by Moody's. Harsco's commercial paper is rated A-1 by Standard & Poor's, F-1 by Fitch Investors Service and P-2 by Moody's. The Company also has on file, with the Securities and Exchange Commission, a Form S-3 shelf registration for the possible issuance of up to an additional $200 million of new debt securities, preferred stock or common stock. As indicated by the above, the Company's financial position and debt capacity should enable it to meet its current and future requirements. As additional resources are needed, the Company should be able to obtain funds readily and at competitive costs. -12-
13 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) RESULTS OF OPERATIONS THIRD QUARTER OF 1996 COMPARED WITH THIRD QUARTER OF 1995 Third quarter revenues of $405.0 million were 5% higher than last year's comparable period. The increase was due principally to higher sales for gas control and containment equipment, which included an acquisition made in April 1996. Other product classes with increases included railway maintenance equipment, pipe fittings, roofing granules and slag abrasives and scaffolding, shoring and forming equipment. Metal Reclamation and Mill Services, which includes the consolidation of a subsidiary in South Africa that had previously been reflected as an equity investment, incurred a decrease in revenues due to divestitures. Sales also decreased, but to a lesser extent, due to the strengthening of the U.S. dollar against certain European currencies. The Company acquired a majority ownership of the South African subsidiary in the fourth quarter of 1995. The South African revenues were more than offset by the divesting of certain non-core European businesses of the Metal Reclamation and Mill Services Group in the fourth quarter of 1995 and April 1996. Revenues were also affected by decreased earnings from the Company's equity investment in United Defense L.P. Selling, general and administrative expenses increased due to higher compensation costs and the inclusion of the acquisition made in April 1996. Income before taxes and minority interest increased 55% principally due to the decrease in facilities discontinuance and reorganization costs. For the comparative period in 1995, the Company incurred a non-cash charge of $13.5 million relating to the settlement of the Federal Excise Tax reimbursement on the completed five-ton truck contract (in which the Company accepted $49 million for the related $62.5 million receivable), and a $2.1 million provision for asset impairment relating to the remaining fixed assets of the school bus operation. Higher earnings were recorded by gas control and containment, roofing granules and slag abrasives, and process equipment. Interest expense decreased as a result of the reduction of the Company's average outstanding debt and average interest rate. Net income of $29.1 million, a record third quarter, was up 58% from the comparable period in 1995. The third quarter of 1995 included the after tax charge of $8.2 million ($.32 per share) related to the settlement of the Federal Excise Tax reimbursement on the completed five-ton truck contract. The effective income tax rate for the third quarter decreased from 39% in 1995 to 35.9% in 1996. The revised lower tax rate of 38% for the nine months of 1996, which was applied in the third quarter, is principally due to a reduction in losses sustained in certain international operations for which there is no tax benefit. Sales of the Metal Reclamation and Mill Services Group, were 2% below 1995's third quarter, as divestitures in the fourth quarter of 1995 and April 1996 amounting to $11.2 million more than offset the $8.0 million of sales from consolidating a subsidiary in South Africa, previously reflected as an equity investment. Sales for the Infrastructure and Construction Group, at $107.6 million were up 7% from last year's similar period. Higher sales were recorded for railway maintenance equipment, roofing granules and slag abrasives, and scaffolding, shoring and forming equipment. Sales for the Process Industry Products Group, at $138.1 million were up 14.7% principally due to an acquisition made in April of 1996 and higher demand for pipe fittings. -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 THIRD QUARTER OF 1996 COMPARED WITH THIRD QUARTER OF 1995 (Cont'd.) Operating profit for the Metal Reclamation and Mill Services Group was $19.9 million compared to $22.9 in 1995. This decrease reflects the divestiture of certain non-core European businesses in the fourth quarter of 1995 and April 1996 which would normally be at their peak in the third quarter, lower activity particularly in France and Belgium, and foreign currency translation exchange losses, as compared to gains in 1995. The Infrastructure and Construction Group operating profit of $11.7 million was 5% lower than in the third quarter of 1995, excluding the impact of expense items relating to facilities discontinuance and reorganization costs. Profit margins were affected by higher research and development expenses, and costs associated with bringing new products and services to the market place. After including the impact of facilities discontinuance and reorganization costs (which included the $13.5 million pre-tax charge for the Federal Excise Tax settlement and the $2.1 million pre-tax charge for the school bus operation) incurred in 1995, the Group comparison would be a $11.7 million operating profit in 1996 to a $3.2 million loss in 1995. Operating profit for the Process Industry Products Group, at $14.2 million, was up significantly from the $10.9 million in 1995. The gas control and containment product line was the major contributor to the operating profit improvement. In addition to the Group reporting noted above, the Company views itself as a diversified industrial services and manufacturing company. Total industrial services sales, which include Metal Reclamation and Mill Services Group and Infrastructure and Construction Group service businesses, principally scaffolding services and railway maintenance of way services, were $190.0 million in the third quarter of 1996 and $189.5 million in 1995, or approximately 48% and 51% of net sales, respectively. The total manufacturing sales for 1996 were $205.8 million or approximately 52% of net sales, which includes sales from the Infrastructure and Construction Group and the Process Industry Products Group. The total manufacturing sales for the third quarter of 1995 were $184.6 million or approximately 49% of net sales. The operating profit including the effect of expense items relating to facilities discontinuance and reorganization costs for industrial services for 1996 was $23.2 million compared with $26.8 million in 1995, or approximately 51% and 91%, respectively, of total Group operating profit. The operating profit of manufacturing including the effect of expense items relating to facilities discontinuance and reorganization costs for 1996 was $22.5 million compared to $2.6 million in 1995, which is approximately 49% and 9%, respectively, of total Group operating profit. The operating profit for industrial services, excluding the effect of expense items relating to facilities discontinuance and reorganization costs, for 1996 was $25.0 million compared with $29.7 million in 1995, or approximately 55% and 64%, respectively, of total Group operating profit. The operating profit from manufacturing, excluding the effect of expense items relating to facilities discontinuance and reorganization costs, for 1996 was $20.8 million compared with $16.4 million in 1995, which is approximately 45% and 36%, respectively, of total Group operating profit. -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.) RESULTS OF OPERATIONS FIRST NINE MONTHS OF 1996 COMPARED WITH FIRST NINE MONTHS OF 1995 Revenues for the first nine months of $1.19 billion were 4% above last year's comparable period. The increase was due principally to higher sales for scaffolding, shoring and forming equipment, gas control and containment equipment, as well as metal reclamation and mill services, which included the consolidation of a subsidiary in South Africa that had previously been reflected as an equity investment. The Company acquired a majority ownership of the subsidiary in the fourth quarter of 1995. Fully offsetting the South Africa consolidation was the divesting of certain non-core European businesses in the Metal Reclamation and Mill Services Group, during the fourth quarter of 1995 and April 1996. In addition, higher sales were recorded for process equipment, railway maintenance of way equipment and services, and to a lesser extent, roofing granules and slag abrasives, pipe fittings and grating. Increased sales were also due in part to an acquisition made in 1996. Higher revenues included better than expected income from the Company's equity investment in United Defense, L.P. These increases were partially offset by the effect of ceasing school bus operations in June 1995. Sales also decreased, but to a lesser extent, due to the strengthening of the U.S. dollar against certain European currencies. Cost of sales increased primarily due to higher volume, but at a rate less than the increase in sales. Selling, general and administrative expenses increased, principally as a result of higher compensation costs and professional fees associated with certain previously disclosed legal matters. Income before income taxes and minority interest was up 31% from the comparable period last year. Higher earnings in the nine months of 1996 were due principally to higher operating results for pipe fittings, metal reclamation and mill services, process equipment and roofing granules and abrasives. Also contributing to the improvement in earnings, was the Company's share of income in its equity investment in United Defense, L. P. The Partnership's earnings include substantial dividend income from its investments in two international operations, which was more than twice the amount of dividend income that was received during the same period in 1995. Lower earnings were recorded for gas control and containment equipment, grating and scaffolding, shoring and forming equipment in 1996. On a comparative basis, unfavorably affecting 1995's nine months results were losses arising from ceasing the school bus business, as well as a $13.5 million non-cash pre-tax charge ($0.32 after tax earnings per share) arising from the settlement of a Federal Excise Tax claim with the U.S. Government. Income benefited in 1995 from the effect of a pre-tax $6.5 million net foreign currency translation exchange gain arising from the decline in the U.S. dollar against certain European currencies, which more than offset a pre-tax $3.5 million foreign currency translation exchange loss due to the devaluation of the Mexican peso. Interest expense decreased as a result of the continued reduction of the Company's outstanding debt and average interest rate. The effective income tax rate for 1996 at 38% was lower than the 1995 rate at 39%. -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.) RESULTS OF OPERATIONS FIRST NINE MONTHS OF 1996 COMPARED WITH FIRST NINE MONTHS OF 1995 (Cont'd.) Net income of $89.5 million, was up 31% from the comparable period in 1995. This net income was the highest first nine months performance in the history of the Company. Sales of the Metal Reclamation and Mill Services Group, at $452.3 million, were slightly above 1995's nine months. The rate of increase was unfavorably affected by the strengthening of the U.S. dollar against certain European currencies. Sales for the Infrastructure and Construction Group, at $307.2 million, were also slightly above last year's similar period, which included $15.7 million for the school bus business that ceased operation in June 1995. Higher sales were recorded for all other product classes, particularly scaffolding in 1996. Sales for the Process Industry Products Group, at $390.7 million, were higher than the prior year's comparable period and were led by gas control and containment equipment and process equipment. The increased Process Industry Products Group's sales in 1996 included the effect of an acquisition made in April 1996. Operating profit, excluding the effect of expense items relating to facilities discontinuance and reorganization costs for the Metal Reclamation and Mill Services Group, was ahead of 1995's nine months, which included $3.5 million of foreign currency translation exchange losses due to the devaluation of the Mexican peso. The increase also includes higher income in 1996 due to the consolidation of a subsidiary in South Africa. After including the effect of facilities discontinuance and reorganization costs, operating profit of $62.7 million for the Group was up 9% from the first nine months of 1995. The Infrastructure and Construction Group posted an operating profit of $33.7 million, excluding the effect of expense items relating to facilities discontinuance and reorganization costs. This was significantly more than 1995's first nine months, which included losses arising from the school bus operation. Additionally, improved results for roofing granules and slag abrasives, as well as railroad equipment contributed to the higher operating profit of the Group. After including the effect of facilities discontinuance and reorganization costs, operating profit of $33.5 million was more than three times the amount recorded in the first nine months of 1995, which included $16.8 million of pre-tax facilities discontinuance and reorganization cost charges due principally to a $13.5 million non-cash pre-tax charge arising from the settlement of a Federal Excise Tax claim with the U.S. Government. Operating profit for the Process Industry Products Group, at $37.2 million, was up 16% from the prior year's nine months, and reflected higher earning for pipe fittings and process equipment, which more than offset lower earnings for gas control and containment equipment, principally due to a five month strike at one plant that was settled in August 1996. -16-
17 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) RESULTS OF OPERATIONS FIRST NINE MONTHS OF 1996 COMPARED WITH FIRST NINE MONTHS OF 1995 (Cont'd.) In addition to the Group reporting noted above, the Company views itself as a diversified industrial services and manufacturing company. Total industrial service sales, which include Metal Reclamation and Mill Services Group and Infrastructure and Construction Group service businesses, principally scaffolding services and railway maintenance of way services, were $567.7 million in 1996 and $547.3 million in 1995, or approximately 49% of net sales in each of the periods. The total manufacturing sales for 1996 were $582.5 million or approximately 51% of net sales, which includes sales from the Infrastructure and Construction Group and the Process Industry Products Group. The total manufacturing sales for 1995 were $561.0 million, also approximately 51% of net sales. The operating profit excluding the effect of expense items relating to facilities discontinuance and reorganization costs for industrial services for 1996 was $74.6 million compared with $71.3 million in 1995, or approximately 56% and 61%, respectively, of total Group operating profit. The operating profit excluding the effect of expense items relating to facilities discontinuance and reorganization costs from manufacturing for 1996 was $59.2 million compared with $46.4 million in 1995, which is approximately 44% and 39%, respectively, of total Group operating profit. The operating profit including the effect of expense items relating to facilities discontinuance and reorganization costs for industrial services for 1996 was $74.2 million compared with $68.7 million in 1995, or approximately 56% and 69%, respectively, of total Group operating profit. The operating profit including the effect of expense items relating to facilities discontinuance and reorganization costs from manufacturing for 1996 was $58.9 million compared with $30.6 million in 1995, which is approximately 44% and 31%, respectively, of total Group operating profit. -17-
18 HARSCO CORPORATION AND SUBSIDIARY COMPANIES PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information on legal proceedings is included under Part I, Item 1., the section labeled "Commitments and Contingencies." ITEM 5. OTHER INFORMATION DIVIDEND ACTION: On September 24, 1996, Harsco Corporation announced that the Board of Directors declared a quarterly cash dividend of 38 cents per share, payable November 15, to shareholders of record on October 15, 1996. ITEM 6(a.) EXHIBITS The following exhibits are attached: a.) Exhibit No. 10 Material Contracts - Commercial Paper Agreement with Banque Bruxelles Lambert S.A./Bank Brussel Lambert N.V. dated September 25, 1996. b.) Exhibit No. 11 Computation of Net Income Per Common Share. c.) Exhibit No. 12 Computation of Ratios of Earnings to Fixed Charges. d.) Exhibit No. 27 Financial Data Schedule. ITEM 6(b.) Reports on Form 8-K a.) There were no reports filed on Form 8-K during the third quarter ending September 30, 1996. -18-
19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARSCO CORPORATION ------------------------ (Registrant) DATE November 5, 1996 /S/ Leonard A. Campanaro - -------------------------- ----------------------------- Leonard A. Campanaro Senior Vice President and Chief Financial Officer DATE November 5, 1996 /S/ Salvatore D. Fazzolari - -------------------------- ----------------------------- Salvatore D. Fazzolari Vice President and Controller -19-
20 EXHIBIT INDEX Exhibit No. 10 Material Contracts - Commercial Paper Agreement with Banque Bruxelles Lambert S.A./Bank Brussel Lambert N.V. dated September 25, 1996. Exhibit No. 11 Computation of Net Income Per Common Share. Exhibit No. 12 Computation of Ratios of Earnings to Fixed Charges. Exhibit No. 27 Financial Data Schedule.