1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 2000 Commission file number 1-3970 HARSCO CORPORATION (Exact name of registrant as specified in its charter) Delaware 23-1483991 (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) Camp Hill, Pennsylvania 17001-8888 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 717-763-7064 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common stock, par value $1.25 per share New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] 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 [ ] The aggregate market value of the Company's voting stock held by non-affiliates of the Company as of February 28, 2001 was $1,098,753,571. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Classes Outstanding at February 28, 2001 Common stock, par value $1.25 per share 39,809,912 Preferred stock purchase rights 39,809,912 Documents Incorporated by Reference Selected portions of the Notice of 2001 Meeting and Proxy Statement are Incorporated by Reference in Part III of this Report. The Exhibit index (Item No. 14) is located on pages 84 to 91.
2 HARSCO CORPORATION AND SUBSIDIARY COMPANIES INFORMATION REQUIRED IN REPORT PART I Item 1. Business: (a) Description of Business: Harsco Corporation ("the Company") is a diversified, multinational provider of industrial services and engineered products. The principal lines of business are: scaffolding, forming and shoring and other access services to the worldwide industrial maintenance and non-residential construction markets; outsourced, on-site mill services that are provided to steel and non-ferrous metal producers in over 30 countries; railway track maintenance services and equipment that are provided to railroad customers worldwide, gas control and containment products for customers worldwide; and several other lines of business including, but not limited to, industrial grating and bridge decking, industrial pipe fittings, slag abrasives and roofing granules. The Company's operations fall into three operating segments: Infrastructure, Mill Services and Gas and Fluid Control. The Company has over 400 locations in 38 countries, including the United States. In 2000, the Company acquired or divested the following businesses: On June 16, 2000 the Company received all required regulatory approvals and declared its offer to acquire SGB Group Plc (SGB) wholly unconditional. Harsco took majority ownership in SGB and subsequently acquired 100% of the shares. SGB, based in the United Kingdom (UK), is one of Europe's largest suppliers of scaffolding, forming and related access products and services. SGB also has operations in North America, the Middle East and the Asia Pacific region. SGB had 1999 sales of 283 million British pounds sterling (approximately $423 million using a December 31, 2000 exchange rate). In May 2000, the Company completed the acquisitions of Bergslagens Stalservice AB and Bergslagens Suomi Oy (collectively Bergslagens). The two companies provide specialized slag processing and metal recovery services to steel mills in Sweden and Finland, respectively. The two organizations together recorded 1999 sales of nearly $10 million. In June 2000, the Company completed the sales of Gunness Wharf Limited and Flixborough Wharf Limited, and in March 2000 completed the sale of its natural gas vehicle automotive valve product line. On April 6, 2000, the Company agreed to invest $20 million for a 49% interest in S3Networks, LLC, a start-up company providing internet and e-business infrastructure consulting services primarily to Fortune 1000 companies. Since the Company is principal provider of initial capital for S3 Network, LLC, the Company records 100% of the net losses to the extent of its initial $20 million investment. As of December 31, 2000 the Company has invested $10 million in S3Networks. There is no obligation for the Company to fund the venture beyond its $20 million investment. The Company reports information about its operating segments using the "management approach". The management approach is based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. The Company's reportable segments are identified based upon differences in products, services, and markets served. - 2 -
3 The operations of the Company in any one country, except the United States, did not account for more than 10% of sales in 1999 and 1998. In 2000, with the acquisition of SGB, the UK contributed sales of $286.5 million equal to 14% of total sales. No single customer represented 10% or more of the Company's sales during 2000, 1999, and 1998. There are no significant intersegment sales. (b) Financial Information about Industry Segments: Financial information concerning Industry Segments is included in Note 14 to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data". (c) Narrative Description of Business: (1) A narrative description of the businesses by operating segment is as follows: Infrastructure Major product classes in this segment are access services and equipment, railway track maintenance services and equipment, and industrial grating and bridge decking products. The June 2000 acquisition of SGB expands the Company's access services and equipment business to a worldwide level. SGB pioneered the introduction of traditional scaffolding in the UK and is the UK's largest supplier. The Company serves the non-residential construction, infrastructure, and industrial maintenance markets throughout Europe, the Middle East, and Asia with a full range of scaffolding, concrete formwork, shoring, and other construction-related services and products. SGB complements our Patent Construction Systems division's market leadership in North America to deliver total access solutions to customers on a worldwide basis, with increased geographic coverage and one of the broadest portfolios of services and equipment in the industry. Along with steel and aluminum support systems, the Company also provides design engineering services, on-site installation, and equipment management services. The Company's railway track maintenance services provide high technology comprehensive track maintenance and new track construction support to railroad customers worldwide. The railway track maintenance equipment product class includes specialized track maintenance equipment used by private and government-owned railroads and urban transit systems worldwide. The equipment manufactured by the Company includes a comprehensive range of specially-designed systems used in the construction and maintenance of track and railbeds. Included within this segment is the manufacture of a varied line of industrial grating products at several plants in North America. The Company produces a full range of riveted, pressure-locked and welded grating in steel, aluminum and fiberglass, used mainly in industrial flooring, safety, and security applications for power, paper, chemical, refining and processing applications. The Company also produces bridge decking and related products for bridge surfaces. The precast and prefabricated panels can arrive at the bridge site ready to be installed, minimizing traffic disruption. This segment also produces commercial and industrial boilers and hot water heaters, and blenders, dryers and mixers for the chemical and food processing industries. For 2000, the Infrastructure Segment's percentage of consolidated net sales was 35%. - 3 -
4 Mill Services This segment includes Heckett MultiServ the world's largest provider of outsourced, on-site mill services to the international steel and metals industry. Heckett MultiServ's experience, financial resources, and broad geographic coverage are important qualities to leading metals producers, who increasingly look to Heckett MultiServ's specialized services and technologies to enhance their productivity, product quality, environmental compliance and commercial competitiveness. Heckett MultiServ provides its services on a long-term contract basis, supporting each stage of the metal-making process from initial raw material handling to post-production by-product processing and recycling. Working exclusively as a specialized, high-value services provider, Heckett MultiServ does not trade steel or scrap, or take ownership of its customers' raw materials or finished products. The company's multi-year contracts, with estimated future revenues of $3.5 billion at December 31, 2000, provide Harsco with a substantial financial base of long-term revenues. Heckett MultiServ's geographic reach, more than 160 mills in over 30 countries, and its increasing range of services, provide financial and operating balance. The Company's flame and on-site recycling technologies along with computerized scrap handling are several examples of the specialized services the Company provides. These highly specialized services and technologies include: scarfing, ferrocut, carbofer, briquetting and scrap management. The Company provides in-plant transportation and other specialized services, including slab management systems, general plant services, and other recycling technology. Other services provided include metal reclamation; slag processing, marketing and utilization; raw material management and handling; by-product recovery and recycling; and finished product handling and transport. Highly specialized recovery and cleaning equipment, installed and operated on the property of steel producers, together with standard material handling equipment are employed to reclaim metal and handle material. The customer uses this reclaimed metal in its steel production process. The nonmetallic residual slag is graded into various sizes at on-site Company-owned processing facilities and then sold commercially. It is used as an aggregate material in asphalt paving applications, railroad ballast and building blocks. Similar services are also provided to non-ferrous metal industries, such as aluminum, copper, and nickel. This segment also provides roofing granules and slag abrasives. The Company's slag abrasives and roofing granules are produced from utility coal slag and natural rock materials at a number of locations throughout the United States. The Company's Black Beauty(TM) abrasives are used for industrial surface preparation, such as rust removal and cleaning of bridges, ship hulls, and various structures. Roofing granules are sold to residential roofing shingle manufacturers. For 2000, the Mill Services Segment's percentage of consolidated net sales was 38%. Gas and Fluid Control The segment's manufacturing and service facilities in the United States, Europe, Australia, Malaysia, and China comprise an integrated manufacturing network for gas containment and control products. This global operating presence and product breadth provide economies of scale and multiple code production capability, enabling the operating group to serve as a single source to the world's leading industrial gas producers and distributors, as well as regional and local customers on a worldwide basis. - 4 -
5 Gas containment products include cryogenic gas storage tanks, high pressure and acetylene cylinders, propane tanks and composite vessels for industrial and commercial gases and other products. Gas control products include valves and regulators serving a variety of markets, including the industrial gas, commercial refrigeration, life support, and outdoor recreation industries. Products are used in applications such as scuba diving equipment and outdoor barbecue grills. The segment also provides custom-designed and manufactured air-cooled heat exchangers, for the oil and gas industry, focusing on natural gas compressor, engine, and turbine applications for both domestic and international locations. This segment is also a major supplier of industrial pipe fittings and related products for the plumbing, hardware and energy industries. For 2000, the Gas and Fluid Control Segment's percentage of consolidated net sales was 27%. (1) (i) The products and services of Harsco include a number of classes. The product classes that contributed 10% or more as a percentage of consolidated net sales in any of the last three fiscal years are set forth in the following table: 2000 1999 1998 ---- ---- ---- Mill Services 35% 39% 40% Gas Control and Containment Equipment 27% 24% 21% Access Services and Equipment 21% 10% 9% (1) (ii) New products and services are added from time to time; however, in 2000 none required the investment of a material amount of the Company's assets. (1) (iii) The manufacturing requirements of the Company's operations are such that no unusual sources of supply for raw materials are required. The raw materials used by the Company include principally steel and to a lesser extent aluminum which usually are readily available. (1) (iv) While Harsco has a number of trademarks, patents and patent applications, it does not consider that any material part of its business is dependent upon them. (1) (v) Harsco furnishes building products and materials and certain industrial services that are seasonal in nature. In 2000, such operations accounted for 6% of total sales. (1) (vi) The practices of the Company relating to working capital items are similar to those practices of other service providers or manufacturers servicing mainly industrial and commercial markets. (1) (vii) No material part of the business of the Company is dependent upon a single customer or a few customers, the loss of any one of which would have a material adverse effect upon the Company. - 5 -
6 (1) (viii) Backlog of orders was $258.9 million and $231.6 million as of December 31, 2000 and 1999, respectively. It is expected that approximately 26% of the total backlog at December 31, 2000, will not be filled during 2001. There is no significant seasonal aspect to the Company's backlog. Backlog for scaffolding, shoring and forming services, and for roofing granules and slag abrasives is not included in the total backlog, because it is generally not quantifiable due to the nature of the products and services provided. Contracts for the Mill Services Segment are also excluded from the total backlog. These contracts have estimated future revenues of $3.5 billion at December 31, 2000. (1)(ix) At December 31, 2000, the Company had no material contracts that were subject to renegotiation of profits or termination at the election of the U.S. Government. (1) (x) The various businesses in which the Company operates are highly competitive and the Company encounters active competition in all of its activities from both larger and smaller companies who produce the same or similar products or services or who produce different products appropriate for the same uses. (1) (xi) The expense for product development activities was $5,714,000, $7,759,000 and $6,977,000 in 2000, 1999, and 1998, respectively. (1) (xii) The Company has become subject, as have others, to increasingly stringent air and water quality control legislation. In general, the Company has not experienced substantial difficulty in complying with these environmental regulations in the past and does not anticipate making any major capital expenditures for environmental control facilities. While the Company expects that environmental regulations may expand, and its expenditures for air and water quality control will continue, it cannot predict the effect on its business of such expanded regulations. For additional information regarding environmental matters see Note 10 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data". (1) (xiii) As of December 31, 2000, the Company had approximately 19,700 employees. (d) Financial Information about Foreign and Domestic Operations and Export Sales: Financial information concerning foreign and domestic operations is included in Note 14 to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data". Export sales totaled $104.6 million and $110.0 million in 2000 and 1999, respectively. - 6 -
7 Item 2. Properties: Information as to the principal plants owned and operated by the Company is summarized in the following table: <TABLE> <CAPTION> Floor Space Location (Sq. Ft.) Principal Products - -------- --------- ------------------ <S> <C> <C> Infrastructure: E. Syracuse, New York 48,000 Railroad Equipment Ludington, Michigan 159,000 Railroad Equipment Fairmont, Minnesota 312,000 Railroad Equipment West Columbia, South Carolina 224,000 Railroad Equipment Brendale, Australia 20,000 Railroad Equipment Nashville, Tennessee 246,000 Grating Charlotte, North Carolina 23,000 Grating Madera, California 48,000 Grating Leeds, Alabama 51,000 Grating Cheswick, Pennsylvania 56,000 Grating Channelview, Texas 86,000 Grating Marlboro, New Jersey 30,000 Grating Queretaro, Mexico 63,000 Grating Marion, Ohio 135,000 Construction Equipment Dosthill, England 468,000 Forms Thame, England 340,000 Cabins and Temporary Buildings East Stroudsburg, Pennsylvania 161,000 Process Equipment Mill Services: Moundsville, West Virginia 12,000 Roofing Granules/Abrasives Drakesboro, Kentucky 41,000 Roofing Granules Gary, Indiana 19,000 Roofing Granules/Abrasives Ione, California 33,000 Roofing Granules </TABLE> - 7 -
8 Item 2. Properties (continued): <TABLE> <CAPTION> Floor Space Location (Sq. Ft.) Principal Products - -------- --------- ------------------ <S> <C> <C> Gas and Fluid Control: West Jefferson, Ohio 148,000 Pipe Fittings Crowley, Louisiana 172,000 Pipe Fittings Houston, Texas 26,000 Pipe Fittings Chicago, Illinois 35,000 Pipe Fittings Hamden, Connecticut 47,000 Pipe Fittings Vanastra, Ontario, Canada 55,000 Pipe Fittings Port of Catoosa, Oklahoma 131,000 Heat Exchangers Sapulpa, Oklahoma 83,000 Heat Exchangers Lockport, New York 104,000 Valve Manufacturing Niagara Falls, New York 66,000 Valve Manufacturing Washington, Pennsylvania 112,000 Valve Manufacturing Jesup, Georgia 87,000 Propane Tanks Jesup, Georgia 65,000 Propane Tanks Jesup, Georgia 63,000 Cryogenic Storage Vessels Bloomfield, Iowa 48,000 Propane Tanks West Jordan, Utah 36,000 Propane Tanks Fremont, Ohio 69,000 Propane Tanks Pomona, California 56,000 Composite Pressure Vessels Gardena, California 26,000 Composite Pressure Vessels Long Beach, California 31,000 Natural Gas Vehicle Systems Harrisburg, Pennsylvania 245,000 Cylinders Huntsville, Alabama 220,000 Acetylene Tanks Theodore, Alabama 305,000 Cryogenic Storage Vessels Husum, Germany 61,000 Cryogenic Storage Vessels Shah Alam, Malaysia 34,000 Cryogenic Storage Vessels Shah Alam, Malaysia 29,000 Cylinders Beijing, China 134,000 Cryogenic Storage Vessels </TABLE> - 8 -
9 The Company also operates the following plants which are leased: <TABLE> <CAPTION> Expiration Floor Space Principal Date of Location (Sq. Ft.) Products Lease - -------- ------------ -------- ---------- <S> <C> <C> <C> Infrastructure: Nottingham, England 30,000 Railroad Equipment 10/23/01 Danbury, Connecticut 16,000 Railroad Equipment 11/30/01 Cosley, England 145,000 Steel Access Products 03/24/19 Maldon, England 348,000 Aluminum Access Products 09/28/17 DeLimiet, Netherlands 42,000 Powered Access Equipment 12/31/04 Tulsa, Oklahoma 10,000 Grating 04/28/01 Gas and Fluid Control: Lansing, Ohio 67,000 Pipe Fittings 01/31/03 Cleveland, Ohio 50,000 Brass Castings 09/30/05 </TABLE> The Company operates from a number of other plants, branches, warehouses and offices in addition to the above. The Company has over 160 locations related to mill services in over thirty countries, however since these facilities are on the property of the steel mill being serviced they are not listed. The Company considers all of its properties, at which operations are currently performed, to be in satisfactory condition. Item 3. Legal Proceedings: Information regarding legal proceedings is included in Note 10 to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data". Item 4. Submission of Matters to a Vote of Security Holders: There were no matters that were submitted during the fourth quarter of the year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. - 9 -
10 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters: Harsco common stock is traded on the New York, Pacific, Boston, and Philadelphia Stock Exchanges under the symbol HSC. At the end of 2000, there were 39,805,172 shares outstanding. In 2000, the stock traded in a range of $31 5/8 - $17 11/16 and closed at $24 11/16 at year-end. At December 31, 2000 there were approximately 18,000 shareholders. For additional information regarding Harsco common stock market price and dividends declared, see the Common Stock Price and Dividend Information under Part II, Item 8, "Financial Statements and Supplementary Data". - 10 -
11 Item 6. Selected Financial Data FIVE-YEAR STATISTICAL SUMMARY (ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> 2000 (a) 1999 1998 1997 1996 INCOME STATEMENT INFORMATION ------- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Net sales (b) $ 2,003,387 $ 1,749,888 $ 1,765,546 $ 1,659,729 $ 1,586,108 Income from continuing operations before interest, income taxes, and minority interest 192,708 169,736 191,901 179,888 166,057 Income from continuing operations 96,803 90,713 107,513 100,400 83,903 Income from discontinued defense business -- -- -- 28,424(c) 35,106 Gain on disposal of discontinued defense business -- -- -- 150,008 -- Net income 96,803 90,713 107,513 278,832 119,009 FINANCIAL POSITION AND CASH FLOW INFORMATION Working capital $ 190,236 $ 182,439 $ 112,619 $ 341,160 $ 214,519 Total assets 2,180,948 1,659,823 1,623,581 1,477,188 1,324,419 Long-term debt 774,450 418,504 309,131 198,898 227,385 Total debt 836,745 455,111 363,738 225,375 253,567 Depreciation and amortization 159,099 135,853 131,381 116,539 109,399 Capital expenditures 180,048 175,248 159,816 143,444 150,294 Cash provided by operating activities 259,448 213,953 189,260 148,541 217,202 Cash provided (used) by investing activities (459,052) (194,674) (233,490) 196,545 (153,225) Cash provided (used) by financing activities 210,746 (8,928) (134,324) (167,249) (92,944) RATIOS Return on net sales (1) 4.8% 5.2% 6.1% 6.0% 5.3% Return on average equity (2) 14.7% 13.9% 14.3% 15.1% 14.0% Return on average assets (3) 10.0% 10.7% 12.9% 14.3% 13.7% Current ratio 1.4:1 1.4:1 1.2:1 1.9:1 1.7:1 Total debt to total capital (4) 55.4% 41.2% 34.7% 22.4% 27.1% PER SHARE INFORMATION (d) Diluted - Income from continuing operations $ 2.42 $ 2.21 $ 2.34 $ 2.04 $ 1.67 - Income from discontinued defense business -- -- -- .58(c) .70 - Gain on disposal of discontinued defense business -- -- -- 3.05 -- . - Net income 2.42 2.21 2.34 5.67 2.37 Book value 16.94 16.22 16.22 16.64 13.73 Cash dividends declared .945 .91 .885 .82 .77 OTHER INFORMATION Basic average number of shares outstanding (d) 39,964,228 40,882,153 45,568,256 48,754,212 49,894,515 Diluted average number of shares outstanding (d) 40,021,803 41,017,067 45,910,531 49,191,872 50,317,664 Number of employees 19,700 15,700 15,300 14,600 14,200 Backlog (e) $ 258,858 $ 231,557 $ 188,594 $ 225,575 $ 211,734 </TABLE> - 11 -
12 FIVE-YEAR STATISTICAL SUMMARY (a) Includes SGB Group Plc since date of acquisition. (b) In order to comply with EITF Issue No. 00-10, all shipping and handling costs have been classified as cost of services sold or as cost of products sold rather than as reductions of sales. Sales for the five years have been reclassified to reflect this change. (c) Includes income through August 1997 (the measurement date) from the discontinued defense business. (d) Reflects two-for-one stock split to shareholders of record January 15, 1997. (e) Excludes the estimated amount of long-term mill service contracts, which had estimated future revenues of $3.5 billion at December 31, 2000. (1) "Return on net sales" is calculated by dividing income from continuing operations by net sales. (2) "Return on average equity" is calculated by dividing income from continuing operations by quarterly weighted average equity. (3) "Return on average assets" is calculated by dividing income from continuing operations before interest expense, income taxes, and minority interest by quarterly weighted average assets. (4) "Total debt to total capital" is calculated by dividing the sum of debt (short-term borrowings and long-term debt including current maturities) by the sum of equity and debt. - 12 -
13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: LIQUIDITY AND CAPITAL RESOURCES <TABLE> <CAPTION> DECEMBER 31 DECEMBER 31 (DOLLARS ARE IN MILLIONS) 2000 1999 INCREASE ________________________________________________________________________________________________________ <S> <C> <C> <C> Current Assets $ 726.4 $ 612.9 $ 113.5 Current Liabilities 536.2 430.5 105.7 ________________________________________________________________________________________________________ Working Capital $ 190.2 $ 182.4 $ 7.8 Current Ratio 1.4:1 1.4:1 Notes Payable and Current Maturities $ 62.3 $ 36.6 $ 25.7 Long-term Debt 774.4 418.5 355.9 ________________________________________________________________________________________________________ Total Debt 836.7 455.1 381.6 Total Equity 674.2 650.1 24.1 ________________________________________________________________________________________________________ Total Capital $ 1,510.9 $ 1,105.2 $ 405.7 Total Debt to Total Capital 55.4% 41.2% ________________________________________________________________________________________________________ </TABLE> The change in the components of the Company's working capital during 2000 is due principally to the strategic acquisition of SGB Group Plc (SGB) in June 2000. Current assets and current liabilities at December 31, 2000 include SGB amounts of $150.9 million and $110.6 million, respectively. The Company is continuing its strategic focus on the reduction of capital employed including inventory and receivable levels. As a result of this focus, excluding acquisitions, in 2000 the Company reduced accounts receivable by $15.9 million and inventories by $9.4 million. Long-term debt increased in 2000 principally as a result of financing the acquisitions of SGB, Bergslagens Stalservice AB and Bergslagens Suomi Oy (collectively Bergslagens), and to a lesser extent, capital investments. In October 2000, the Company financed the SGB acquisition with 200 million of British pound sterling 7.25% notes issued at 98.463% (approximately $294.1 million using the December 31, 2000 foreign exchange rate). The Bergslagens acquisition was financed by a private placement bond issued in June 2000. Capital investments in 2000 were a record $180.0 million. These investments were made for new mill services contracts, for SGB access equipment, other business growth initiatives and for productivity improvements. The strategic acquisitions, capital investments and cash dividends, paid at the same or increased rates for the 203rd consecutive quarter in February 2001, demonstrate the Company's continued commitment to creating shareholder value. - 13 -
14 <TABLE> <CAPTION> FOR THE YEAR ENDED DECEMBER 31 CASH UTILIZATION: ------------------------------ (IN MILLIONS) 2000 1999 1998 1997 1996 ________________________________________________________________________________________________ <S> <C> <C> <C> <C> <C> Strategic Acquisitions $302.5 $ 48.9 $158.3 $ 8.5 $ 21.1 Share Repurchases 7.9 71.9 169.3 113.2 30.7 Cash Dividends 37.6 37.0 40.3 39.1 37.9 Capital Investments 180.0 175.2 159.8 143.4 150.3 ________________________________________________________________________________________________ Total $528.0 $333.0 $527.7 $304.2 $240.0 ________________________________________________________________________________________________ </TABLE> The Company's debt as a percent of total capital increased as a result of the debt incurred to finance the strategic acquisitions. Also contributing to the change is a $28.3 million decrease in equity from foreign currency translation adjustments. These adjustments are principally due to a 6% decrease in the translated value of the euro, an 8% decrease in the British pound sterling and a 19% decrease in the South African rand from December 31, 1999 to December 31, 2000. To improve the debt to capital ratio, the Company has initiated a debt reduction program that is further described later in this section. FINANCIAL STATISTICS FOR THE YEAR ENDED DECEMBER 31 <TABLE> <CAPTION> 2000 1999 ---- ---- <S> <C> <C> Harsco stock price high-low $31.63 - $17.69 $34.38 - $23.06 Return on average equity 14.7% 13.9% Return on average assets 10.0% 10.7% Return on average capital 9.6% 10.0% </TABLE> Higher return on average equity is due to increased income in 2000 compared with 1999. Lower returns on average assets and average capital are due to the effect of the recent SGB acquisition which increased total assets and capital. The company's book value per share increased to $16.94 per share at December 31, 2000 from $16.22 at December 31, 1999 due principally to an increase in retained earnings resulting from increased income that was partially offset by foreign currency translation adjustments. These adjustments are recorded as part of other comprehensive income (expense). In the first quarter of 2001, the Company engaged Stern Stewart & Co. to assist in the implementation of the Economic Value Added (EVA(R)) measurement and management system. The EVA(R) program will result in a worldwide focus by employees to add shareholder value by increasing the return on capital. - 14 -
15 <TABLE> <CAPTION> (IN MILLIONS) 2000 1999 1998 - ------------ ---- ---- ---- <S> <C> <C> <C> NET CASH PROVIDED BY OPERATIONS: $259.4 $214.0 $189.3 </TABLE> Cash provided by operations in 2000 was a record $259.4 million, $45.4 million greater than in 1999. The increase in cash is due principally to the timing of receipts and payments for accounts receivable and accounts payable of $46.0 million and $11.4 million, respectively. Also affecting cash from operations was an increase in income before depreciation and amortization of $29.3 million and a $22.6 million increase in deferred income taxes. Partially offsetting these favorable variances was a $46.2 million use of cash related to other assets and liabilities and a $15.0 million variance related to the timing of payments for inventories. The decrease in other assets and liabilities is principally due to decreases in accrued taxes, payments related to facilities discontinuance and reorganizations including acquisitions, reduction of advance payments on contracts, and decreases in other current liabilities. The Company has a U.S. commercial paper borrowing program under which it can issue up to $350 million of short-term notes in the U.S. commercial paper market. In addition, the Company has a three billion Belgian franc commercial paper program, equivalent to approximately U.S. $70 million at December 31, 2000. The Belgian program provides the capacity for the Company to borrow euros to fund its European operations more efficiently. The Company limits the aggregate commercial paper and syndicated credit facility borrowings at any one time to a maximum $350 million. At December 31, 2000, the Company had $216.8 million of U.S. commercial paper debt outstanding, and $52.0 million of commercial paper debt outstanding under the Belgian program. In September 2000, the Company renewed its revolving credit facility in the amount of $350 million through a syndicate of 13 banks. This facility serves as back-up to the Company's U.S. commercial paper program. The facility is in two parts. One part amounts to $131,250,000 and is referred to as a 364-day credit agreement that extends maturity of any borrowings for up to two years. The second part is for $218,750,000 and is referred to as a 5-year credit agreement, that extends the maturity date of the facility for up to five years. As of December 31, 2000, there were no borrowings outstanding under this facility. Subsequent to December 31, 2000, the Company executed two $50 million credit facility agreements with European-based banks. Borrowings under these facilities, which expire in December 2001 and January 2002, are available in Eurocurrencies or U.S. dollars and will be primarily used to finance the Company's European operations. Borrowings outstanding at expiration may be repaid over the succeeding 4 years. Interest rates are based upon LIBOR plus a margin. A Form S-3 shelf registration is on file with the Securities and Exchange Commission for the possible issuance of up to an additional $200 million of new debt securities, preferred stock or common stock. - 15 -
16 Due to the Company's increased debt level resulting from the SGB acquisition, Standard & Poor's and Fitch lowered the Company's credit ratings slightly. Moody's ratings were unchanged. The Company's outstanding long-term notes are now rated A- by Standard & Poor's, A- by Fitch and A-3 by Moody's. The Company has undertaken a debt reduction program that includes working capital reductions through process improvements and the use of software tools, divestitures of non-core businesses and non-performing assets, and a complete reevaluation of the capital expenditure program. These actions are expected to enable the company to reduce debt levels in 2001. The Company's financial position and debt capacity should enable it to meet current and future requirements. As additional resources are needed, the Company should be able to obtain funds readily and at competitive costs. The Company is positioned to continue to invest strategically in high-return projects and acquisitions, and to pay cash dividends as a means to enhance shareholder value. In the near-term, the Company intends to use future discretionary cash flow principally for debt reduction. RESULTS OF OPERATIONS 2000 COMPARED WITH 1999 <TABLE> <CAPTION> AMOUNT PERCENT (DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 2000 1999 INCREASE INCREASE - ------------------------------------------ ---- ---- -------- -------- <S> <C> <C> <C> <C> Revenues $2,004.7 $1,751.0 $253.7 14% Operating income 194.7 166.7 28.0 17 Net income 96.8 90.7 6.1 7 Diluted earnings per common share 2.42 2.21 .21 10 </TABLE> SUMMARY ANALYSIS OF RESULTS The Company's revenues, operating income, operating income margin, net income and diluted earnings per share improved in 2000 compared with 1999. Results improved despite the negative impact on sales and earnings of the foreign currency translation effect of the strong U.S. dollar, the sale of six non-core businesses in 1999 and 2000 and the unfavorable effect of higher energy costs. On a comparative basis with 1999, the unfavorable effects of foreign currency translation reduced the Company's 2000 revenues and net income by approximately $45 million and $4.8 million, respectively. Net income in 2000 benefited from a lower effective income tax rate, principally on international earnings. Sales and operating income for 2000 benefited significantly from the results of the SGB acquisition in the second quarter of 2000 and the Pandrol Jackson acquisition in the fourth quarter of 1999. Increased sales and income were due in part to increased demand for services from the Company's worldwide mill services business, which generates approximately 75% of its revenues from outside the United States. Improved performance from the non-U.S. mill services operations allowed the Company to post increased results in 2000, despite a second half slowdown in the domestic steel industry. Additionally, increased demand for services and products in the domestic non-residential construction market favorably affected sales and income. Sales for most product lines in the Gas and Fluid Control Segment were below 1999 levels due to reduced demand and competitive pricing restraints due to a significant slowdown in the - 16 -
17 manufacturing sector in the fourth quarter of 2000. Additionally, the disposition of three non-core businesses contributed to the decrease in sales. The decrease in sales, as well as higher product cost of sales, resulted in lower operating income for the Gas and Fluid Control Segment. Interest expense in 2000 was significantly greater than in 1999, principally as a result of increased debt used to finance the SGB and Pandrol Jackson acquisitions. This increase offset a significant portion of the operating income increase. COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS REVENUES Revenues for 2000 were significantly above those recorded in 1999. Sales increased principally due to the addition of acquired companies. The improvement also resulted from increased demand in mill services and non-residential construction markets in the United States. Sales decreased in the United States for railway track maintenance contract services and equipment (excluding acquisitions) as well as for products in the Gas and Fluid Control Segment. These decreases principally resulted from softening demand due to high energy costs and the unfavorable effects of a fourth quarter 2000 economic slowdown in the United States manufacturing sector. Excluding the unfavorable foreign currency translation effect of the strengthening U.S. dollar, particularly relative to the euro, revenues increased by more than 17%. COST OF SALES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Cost of services and products sold increased, but at a lower rate than the increase in revenues, despite a significant increase in energy costs. Selling, general and administrative expenses increased due to the costs related to acquired companies. The Company's continuing cost reduction, process improvement and reorganization efforts slowed the growth rate of these costs. Excluding the net effects of business acquisitions and dispositions, selling, general and administrative expenses decreased approximately 3%. On a comparative basis, 2000 was unfavorably affected by higher product costs of $8 million due to LIFO inflation. This was offset by a one-time employee benefit plan change that reduced pre-tax costs by approximately $5.3 million, and by lower pension costs. OTHER INCOME AND EXPENSES In 2000, the Company incurred $1.3 million of net other expenses compared to $6 million in 1999. This income statement classification principally includes impaired asset write-downs, employee termination benefit costs and costs to exit activities, offset by net gains on the disposal of non-core assets. The decreased net expenses for 2000 principally results from a $3.8 million increase in net gains from asset disposals. INTEREST EXPENSE Interest expense in 2000 was higher than in 1999 due principally to additional borrowings as a result of business acquisitions, principally SGB and Pandrol Jackson. Higher interest rates also contributed to the increase. PROVISION FOR INCOME TAXES The effective income tax rate for 2000 was 31.5% versus 35% for 1999. The reduction in the income tax rate is due principally to lower rates on international earnings. - 17 -
18 NET INCOME AND EARNINGS PER SHARE Net income of $96.8 million and diluted earnings per share of $2.42 were above 1999 due to the factors previously disclosed. SEGMENT ANALYSIS INFRASTRUCTURE SEGMENT <TABLE> <CAPTION> AMOUNT PERCENT (DOLLARS ARE IN MILLIONS) 2000 1999 INCREASE INCREASE ----------------------- ---- ---- -------- -------- <S> <C> <C> <C> <C> Sales $703.6 $432.5 $271.1 63% Operating income 62.3 41.2 21.1 51 Segment net income 26.1 22.5 3.6 16 </TABLE> The significant increase in sales and operating income of the Infrastructure Segment for 2000 is due to the acquisition of SGB in the second quarter of 2000 and Pandrol Jackson in the fourth quarter of 1999. The acquisitions resulted in increased sales of scaffolding, shoring, and forming services and railway track maintenance contracting services and equipment. Excluding acquisitions, the operating income of the Infrastructure Segment decreased by $7.7 million in 2000. The decrease reflects reduced demand for railway track maintenance contracting services and equipment. This was experienced particularly in the United States where the Company's customers were confronted with a manufacturing sector economic slowdown in the fourth quarter of 2000 as well as significantly higher energy costs. Railroad customers delayed the purchase of equipment and deferred their maintenance programs for most of the year. Additionally, a pre-tax non-recurring asset write-down of $3.0 million was incurred in the third quarter of 2000 for the railway track maintenance business. Despite higher sales, operating income for the grating product line decreased due to higher material costs. The decrease in the Segment's operating income excluding acquisitions was partially offset by improved income for scaffolding services due to a continuing strong United States non-residential construction market. Net income of the Infrastructure Segment increased due to the conditions previously discussed. MILL SERVICES SEGMENT <TABLE> <CAPTION> AMOUNT PERCENT (DOLLARS ARE IN MILLIONS) 2000 1999 INCREASE INCREASE ----------------------- ---- ---- -------- -------- <S> <C> <C> <C> <C> Sales $ 757.4 $737.8 $19.6 3% Operating income 92.6 78.2 14.4 18 Segment net income 58.5 45.1 13.4 30 </TABLE> Sales of the Mill Services Segment in 2000 were above 1999 despite the unfavorable effect of foreign exchange translation and the disposition of two non-core businesses. Excluding these factors and the effects of an acquisition, sales increased by 10% in 2000. However, by year-end 2000 an oversupply of steel in the United States and Canada, due principally to a high level of imports, unfavorably affected prices, shipments and the profitability of many steel mills; consequently the demand for mill services began to decline and sales began to decrease. Economic conditions in the steel industry are forecasted to improve by the second half of 2001. - 18 -
19 Operating income of the Mill Services Segment for 2000 was significantly above 1999. The increase reflects the improved operating and economic environment for mill services in the first half of 2000 and the favorable effects of continuous process improvement programs and reorganization efforts that more than offset significantly higher energy costs. Excluding the unfavorable foreign currency translation effect of the strong U. S. dollar, the disposition of two non-core businesses and a business acquisition, operating income increased by approximately 28%. Net income of the Harsco Mill Services Segment for 2000 was also significantly above 1999. The increase reflects the conditions previously discussed. Additionally, a lower effective income tax rate in 2000 favorably affected international earnings. GAS AND FLUID CONTROL SEGMENT <TABLE> <CAPTION> AMOUNT PERCENT (DOLLARS ARE IN MILLIONS) 2000 1999 (DECREASE) (DECREASE) ----------------------- ---- ---- -------- -------- <S> <C> <C> <C> <C> Sales $542.4 $579.6 $(37.2) (6)% Operating income 41.1 47.5 (6.4) (13) Segment net income 23.9 27.0 (3.1) (11) </TABLE> The decrease in 2000 sales of the Harsco Gas and Fluid Control Segment is due principally to reduced demand and to competitive pricing restraints for most product lines, as well as the disposition of three non-core businesses. The decreases in operating income and net income reflect the unfavorable effect of lower sales which more than offset net gains associated with the sale of non-core businesses. Additionally higher manufacturing production costs contributed to the decrease in income. - 19 -
20 SERVICES AND ENGINEERED PRODUCTS ANALYSIS The Company is a diversified services and engineered products company. Over the last several years management has transformed the Company into a global services company. This is evidenced by recent acquisitions of service companies and related capital equipment. Sales, operating income and EBITDA for 2000 and 1999 are presented in the following table: <TABLE> <CAPTION> (DOLLARS ARE IN MILLIONS) 2000 1999 - ------------------------ AMOUNT PERCENT AMOUNT PERCENT ------ ------ ------ ------ <S> <C> <C> <C> <C> SALES Services $ 1,140.9 57% $ 866.8 50% Engineered products 862.5 43 883.1 50 ---------- -- ---------- ---- Total sales $ 2,003.4 100% $ 1,749.9 100% =========== ==== =========== ==== OPERATING INCOME Services $ 122.7 63% $ 84.9 51% Engineered products 73.3 37 82.0 49 ---------- -- ---------- -- Total segment operating income $ 196.0 100% $ 166.9 100% =========== ==== =========== ==== EBITDA* Services $ 248.0 71% $ 191.1 63% Engineered products 103.3 29 110.3 37 ---------- ----- ---------- ---- Total segment EBITDA $ 351.3 100% $ 301.4 100% =========== ==== =========== ==== </TABLE> * Earnings before interest, income taxes, depreciation and amortization (EBITDA) is not a measure of performance under generally accepted accounting principles, however, the Company and the investment community consider it an important calculation. Service sales, operating income and EBITDA in 2000 increased significantly from 1999. The increase reflects the effects of acquired companies, principally SGB and Pandrol Jackson, as well as improved economic conditions in certain markets served by the company. Operating income for 2000 for engineered products was down from 1999 due to reduced margins for certain products, principally grating and industrial fittings. - 20 -
21 RESULTS OF OPERATIONS 1999 COMPARED WITH 1998 <TABLE> <CAPTION> AMOUNT PERCENT (DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 1999 1998 (DECREASE) (DECREASE) ----------------------------------------- ---- ---- -------- -------- <S> <C> <C> <C> <C> Revenues $1,751.0 $1,766.1 $(15.1) (1)% Operating income 166.7 190.5 (23.8) (12) Net income 90.7 107.5 (16.8) (16) Diluted earnings per common share 2.21 2.34 (.13) (6) </TABLE> SUMMARY ANALYSIS OF RESULTS Despite improving conditions in the steel industry during the last six months of 1999, the Company's results for the full year of 1999 reflect the adverse effects of a steel industry affected by overcapacity, reduced prices and weak demand in certain parts of the world. These problems contributed to reduced steel production and financial stress at several steel mills. Certain customers in the United States were forced to file for bankruptcy protection. In the second half of 1999, increased levels of domestic steel production and capacity utilization favorably affected the Company's results. Second half net income and earnings per share for 1999 exceeded the same period of 1998. Soft market conditions in the industrial gas and oil industries contributed to lower results for 1999. However, the significant increase in crude oil prices that was experienced in late 1999 contributed to improved results for the second half. The Company's order backlog in the Gas and Fluid Control Segment as of December 31, 1999 was 27% higher than as of December 31, 1998, reflecting improved business conditions. In 1999, the strong U.S. dollar adversely impacted the foreign currency translation effect on results of operations in many countries in which the Company operates. Additionally, pre-tax pension expense for 1999, calculated in accordance with SFAS No. 87, was $10.6 million higher than 1998. The increase unfavorably impacted cost of services and products sold as well as selling, general, and administrative expenses. COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS REVENUES Revenues for 1999 were $1.75 billion, slightly below 1998. The decrease reflects principally the unfavorable effects of market conditions in the steel, oil and gas industries during the first six months of 1999. Improvements in market conditions in the second half of 1999, as well as higher sales from acquisitions, net of dispositions of non-core businesses, partially offset the lower sales reported in the first six months of 1999. Excluding the adverse foreign exchange translation effect of the strengthening U.S. dollar, particularly relative to the Brazilian real, the euro, the South African rand and the British pound, revenues exceeded 1998. - 21 -
22 COST OF SALES AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Costs of services and products sold for 1999 approximated that of 1998. As a result of divesting certain non-core businesses and the Company's continuing cost reduction, process improvement, and reorganization efforts, selling, general, and administrative expenses decreased despite the inclusion of acquired companies. The total of cost of sales plus selling, general, and administrative expenses was lower than 1998, despite a significant increase in pension expense. OTHER INCOME AND EXPENSES In 1999, the Company incurred $6.0 million of other expenses compared to $4.3 million of other income in 1998. This income statement classification principally includes impaired asset write-downs, employee termination benefit costs and costs to exit activities, offset by net gains on the disposal of non-core assets. Expenses for 1999 included $2.9 million of impaired asset write-downs, principally for the Company's investment in Bio-Oxidation Services Inc. which is included in the Gas and Fluid Control Segment. Additionally, $2.9 million of expense was incurred for employee termination benefits principally in the Mill Services Segment related to arrangements which included operations in France and the United Kingdom. In 1999, the Company did not benefit from any large gains related to either the sale of non-core businesses or redundant facilities or equipment. Other income for 1998 included a pre-tax net gain of $27 million recorded on the October 1998 sale of the Nutter Engineering unit of the Gas and Fluid Control Segment. This was substantially offset by $14.4 million of impaired asset write-downs including $6.1 million for the Company's investment in Bio-Oxidation Services Inc., as well as $6.1 million for principally buildings and equipment in the Mill Services Segment related primarily to the Company's operation in Russia. Also during 1998, $6.5 million of employee termination benefit expense was incurred principally in the Mill Services Segment, primarily in South Africa, United States, France and Germany. EMPLOYEE TERMINATION BENEFIT COSTS AND PAYMENTS <TABLE> <CAPTION> (IN MILLIONS) SUMMARY OF ACTIVITY - ------------ ------------------- <S> <C> <C> Original reorganization action period 1999 1998 Employee termination benefits expense $2.9 $6.5 Disbursements: In 1998 - (2.4) In 1999 (1) (1.8) (3.3) Total disbursements (1.8) (5.7) Other - (0.4) Remaining payments as of December 31, 1999 (2) $1.1 $0.4 </TABLE> (1) - Disbursements in 1999 are categorized according to the original reorganization action period to which they relate (1999 or 1998). (2) - Remaining payments are categorized according to the original reorganization action period to which they relate (1999 or 1998). - 22 -
23 EMPLOYEE TERMINATIONS - NUMBER OF EMPLOYEES <TABLE> <CAPTION> SUMMARY OF ACTIVITY ------------------- <S> <C> <C> Original reorganization action period 1999 1998 Employees affected by new reorganization actions 220 670 Employee terminations: In 1998 - (349) In 1999 (172) (352) Total terminations (172) (701) Other (9) 35 Remaining terminations as of December 31, 1999 39 4 </TABLE> INTEREST EXPENSE The Company's defense business was sold in the fourth quarter of 1997. This resulted in $344 million of pre-tax cash proceeds. The availability of a substantial portion of this cash in 1998 resulted in additional interest income, as well as reduced interest expense compared to 1999. Additionally, interest expense for 1999 was higher than 1998 as a result of increased borrowings for record capital investments, the Company's share repurchase program and an acquisition in the fourth quarter of 1999. Capital investments, $175.2 million in 1999, were made for new mill services contracts, other business growth initiatives, information technology, new processes, and productivity improvements. PROVISION FOR INCOME TAXES The effective income tax rate for 1999 was 35% versus 37.5% for 1998. The reduction in the income tax rate is due principally to lower effective income tax rates on domestic earnings. NET INCOME AND EARNINGS PER SHARE Net income of $90.7 million was below 1998. Diluted earnings per common share were $2.21, down from $2.34 in 1998. SEGMENT ANALYSIS INFRASTRUCTURE SEGMENT <TABLE> <CAPTION> AMOUNT PERCENT (DOLLARS ARE IN MILLIONS) 1999 1998 INCREASE INCREASE ----------------------- ---- ---- -------- -------- <S> <C> <C> <C> <C> Sales $ 432.5 $ 399.2 $33.3 8% Operating income 41.2 32.9 8.3 25 Segment net income 22.5 18.6 3.9 21 </TABLE> The Infrastructure Segment's sales for 1999 exceeded 1998 due to increased sales of scaffolding, shoring and forming services, as well as sales of railway track maintenance equipment and contracting services which included the effect of an acquisition in the fourth quarter of 1999. - 23 -
24 Operating income of the Infrastructure Segment was significantly above 1998. Excluding other income and expenses, operating income was $41.2 million compared to $34.8 million in 1998. The increase was due principally to improved margins on sales of grating products and, to a lesser extent, higher income for scaffolding, shoring and forming services. Additionally, the fourth quarter of 1998 included $2.9 million of principally inventory valuation adjustments due to a reorganization of the grating products business. Segment net income was above 1998 due principally to improved margins on sales of grating products. Additionally, increased income was recorded for scaffolding, shoring and forming services. Excluding other income and expenses, net income in 1999 was $22.5 million compared to $19.9 million in 1998. MILL SERVICES SEGMENT <TABLE> <CAPTION> AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS) 1999 1998 (DECREASE) (DECREASE) ----------------------- ---- ---- -------- -------- <S> <C> <C> <C> <C> Sales $737.8 $ 761.1 $(23.3) (3)% Operating income 78.2 82.9 (4.7) (6) Segment net income 45.1 43.3 1.8 4 </TABLE> Sales of the Mill Services Segment were below 1998. The inclusion of sales from an acquired company for the full year 1999 was partially offset by the 1998 disposition of a non-core business. The decrease also reflects the unfavorable effects of foreign exchange translation and overcapacity in the steel industry which adversely affected worldwide steel prices and production. This is particularly true in the United States where the steel industry filed complaints with the government due to alleged unfairly low-priced imports. Lower steel production adversely affected volume and margins at most steel mills in the United States including many of the Company's customers. However, during the last six months of 1999, steel production and capacity utilization in the United States trended upwards reflecting the highest levels since the second quarter of 1998. Additionally, certain other key countries in which the Company conducts business also experienced upward trends in steel production in 1999. The Mill Services Segment fourth quarter 1999 results reflected this trend as revenues and income, excluding other income and expenses, exceeded the same period of 1998. Operating income of the Mill Services Segment was below 1998. Results in 1998 included other expenses of $6.5 million of pre-tax, non-cash write-downs of assets, principally property, plant and equipment and $4.9 million of employee termination benefit costs. Excluding other income and expenses, operating income was $81.5 million in 1999 compared to $95.0 million in 1998. The decrease in income for 1999 reflected the adverse effects of lower steel production and prices in the first half of 1999. Results for 1999 include a foreign currency transaction gain in Brazil, while in 1998, net foreign currency translation exchange losses were incurred. The transaction gain in Brazil partially offset the net unfavorable foreign currency impact associated with translation of the results of operations of the Mill Services Segment. Net income of the Mill Services Segment was above 1998. Excluding other income and expenses, net income in 1999 was $47.3 million compared to $50.8 million in 1998, reflecting the conditions previously disclosed. - 24 -
25 GAS AND FLUID CONTROL SEGMENT <TABLE> <CAPTION> AMOUNT PERCENT (DOLLARS ARE IN MILLIONS) 1999 1998 (DECREASE) DECREASE) ----------------------- ---- ---- -------- -------- <S> <C> <C> <C> <C> Sales $579.6 $605.2 $(25.6) (4)% Operating income 47.5 72.3 (24.8) (34) Segment net income 27.0 40.9 (13.9) (34) </TABLE> Sales of the Gas and Fluid Control Segment decreased from 1998. The inclusion of a full year's sales of three acquired companies was more than offset by lower sales of process equipment due in part to the disposition of three non-core businesses. Reduced sales of gas control and containment equipment and process equipment also reflected decreased demand in the industrial gas and oil industries. In late 1999, these industries were favorably affected by rising crude oil prices. Operating income of the Gas and Fluid Control Segment was below 1998 principally due to the inclusion in 1998 of gains on the disposal of two businesses. Excluding other income and expenses, operating income was $50.0 million in 1999 compared to $54.1 million in 1998. The decrease reflected the adverse effects of reduced demand from customers in the industrial gas and oil industries. Segment net income was below 1998 principally due to the inclusion in 1998 of gains on the disposal of two businesses. Net income for 1999 was adversely affected, but to a lesser extent than 1998, by valuation provisions related to the write-down of assets held for disposal. Excluding other income and expenses, net income in 1999 was $28.6 million compared to $30.0 million in 1998. SERVICES AND ENGINEERED PRODUCTS ANALYSIS In addition to the segment reporting previously presented, the Company is a services and engineered products company. Total service sales include mill services, as well as scaffolding, shoring, and forming services and railway track maintenance services. Engineered products principally include product sales of the Infrastructure and the Gas and Fluid Control Segments. <TABLE> <CAPTION> (DOLLARS ARE IN MILLIONS) 1999 1998 - ------------------------ ---- ---- AMOUNT PERCENT AMOUNT PERCENT SALES ------ ------- ------ ------- - ----- <S> <C> <C> <C> <C> Services $ 866.8 50% $ 870.0 49% Engineered Products 883.1 50 895.5 51 -------- -------- --------- -------- Total sales $ 1,749.9 100% $ 1,765.5 100% ======== ======== ======= ======== OPERATING INCOME Services $ 84.9 51% $ 78.8 42% Engineered Products 82.0 49 109.3 58 -------- -------- --------- -------- Total segment operating income $ 166.9 100% $ 188.1 100% ========== ======== =========== ======== </TABLE> - 25 -
26 Services operating income in 1999 was $84.9 million compared with $78.8 million in 1998. Excluding losses and impaired asset write-downs associated with the medical waste disposal service business, services operating income was $87.2 million and $88.6 million for 1999 and 1998, respectively. Operating income for engineered products in 1998 included a pre-tax net gain of $27 million. ECONOMIC ENVIRONMENT The Company has currency exposures for its international operations which are subject to volatility, such as the foreign exchange fluctuations relative to the U.S. dollar experienced for the euro and British pound sterling in 2000 and for the Brazilian real and the euro in 1999. Such exposures may result in reduced sales, income, and cash flows. The aforementioned situations are not expected to have a material adverse impact on the Company's financial position or results of operations. However, these and similar risks could result in a material impact on the Company's financial position or results of operations in the future, if the currencies would continue to weaken in relation to the U.S. dollar. Balance sheet translation adjustments for the European and Brazilian operations generally do not affect results of operations. In the second half of 2000 the worldwide steel industry experienced selling price reductions and production curtailments at many steel producers, particularly in the United States. The United States steel industry was unfavorably affected by imports of low-priced foreign steel and a worldwide oversupply of steel. In 2000, United States steel imports were second only to the crisis year of 1998. Certain steel producers, including certain Company customers, were forced to file for bankruptcy protection. There is a risk that the Company's future results of operations or financial condition could be adversely affected if the steel industry's problems were to continue. This risk is mitigated since approximately 75% of the Company's mill services sales are generated outside the United States. The Mill Services Segment provides services at steel mills throughout the world. The future financial impact on the Company associated with these risks cannot be estimated. RESEARCH AND DEVELOPMENT The Company invested $5.7 million in internal research and development programs in 2000. Internal funding for the Infrastructure Segment amounted to $3.0 million, principally for railway track maintenance equipment and services. Expenditures for the Mill Services and Gas and Fluid Control Segments were $2.0 million and $0.7 million, respectively. BACKLOG As of December 31, 2000, the Company's order backlog, exclusive of long-term mill services contracts, was $258.9 million compared with $231.6 million as of December 31, 1999, a 12% increase. The Infrastructure Segment order backlog at December 31, 2000 was $181.7 million, an increase of 20% over the December 31, 1999 backlog of $151.6 million. This increase is principally due to an increase in railway track maintenance equipment and services. Backlog for scaffolding, shoring and forming services of the Infrastructure Segment is excluded from the reported amounts. These amounts are generally not quantifiable due to the nature of the products and services provided. Mill services contracts have estimated future revenues of $3.5 billion at December 31, 2000, which is slightly below the $3.6 billion at December 31, 1999, principally due to the effect of foreign currency translations. - 26 -
27 DIVIDEND ACTION The Company paid four quarterly cash dividends of $.235 per share in 2000, for an annual rate of $.94. This is an increase of 4.4% from 1999. At the November 2000 meeting, the Board of Directors increased the dividend 2.1% to an annual rate of $.96 per share. The Board normally reviews the dividend rate periodically during the year and annually at its November meeting. There are no material restrictions on the payment of dividends. The Company is proud of its history of paying dividends. The Company has paid dividends each year since 1939. The February 2001 payment marked the 203rd consecutive quarterly dividend paid at the same or at an increased rate. During the five-year period ended December 31, 2000, dividends paid were increased five times. In 2000, the dividend payout rate was 39%. The Company is philosophically committed to maintaining or increasing the dividend at a sustainable level. FORWARD LOOKING STATEMENTS The nature of the Company's operations and the many countries in which it operates subject it to changing economic, competitive, regulatory, and technological conditions, risks, and uncertainties. In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause future results to differ materially from the forward-looking statements, expectations, and assumptions expressed or implied herein. These include statements about our management confidence and strategies for performance; expectations for new and existing products, technologies, and opportunities; and expectations for market segment and industry growth, sales, earnings, and other financial performance measures. These factors include, but are not limited to: (1) changes in the worldwide business environment in which the Company operates, including general economic conditions, particularly in the mill services, infrastructure and industrial gas markets; currency exchange rates; interest rates; and capital costs; (2) changes in governmental laws and regulations, including taxes; (3) market and competitive changes, including pricing pressures, 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. Item 7A. Quantitative And Qualitative Disclosures About Market Risk The Company is exposed to foreign currency risk in its international operations. The Company conducts business in thirty-eight countries and approximately 42%, 36% and 37% of the Company's net revenues for the years ended December 31, 2000, 1999 and 1998, respectively, were derived from the Company's operations outside the United States. The June 2000 SGB acquisition has increased the Company's foreign currency exposure. In 2000, the British pound sterling decreased 8% and the euro declined 6% in relation to the U.S. dollar. These and other foreign currency exposures increase the risk of income statement, balance sheet and cash flow volatility. To illustrate the effect of foreign currency exchange rate changes due to the strengthening of the U.S. dollar, in 2000 sales would have been approximately 2.2% or $45 million greater using the average exchange rates for the year 1999. A similar comparison for the year 1999 would - 27 -
28 have increased sales approximately 2.5% if the average exchange rates for 1998 would have remained the same in 1999. The Company seeks to reduce exposures to foreign currency fluctuations through the use of forward exchange contracts. At December 31, 2000, these contracts amounted to $3.1 million and all mature within 2001. 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's cash flows and earnings are subject to changes in interest rates. Total debt of $836.7 million as of December 31, 2000 had interest rates ranging from 3.7% to 12.1%, of which approximately 54% were at fixed rates of interest. The weighted average interest rate of total debt was approximately 6.7%. At current debt levels, a one percentage increase in interest rates would increase interest expense by approximately $3.8 million per year. For additional information, see Note 13, Financial Instruments, to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." On April 6, 2000, the Company agreed to invest $20 million for a 49% interest in S3Networks, LLC, a start-up company providing internet and e-business infrastructure consulting services primarily to Fortune 1000 companies. This investment is subject to market risks inherent in any start-up company. Such risks include the ability to develop a revenue base sufficient to offset fixed expenses; the ability to hire and retain qualified employees; the ability to secure market share from established companies, etc. Since the Company is the principal provider of initial capital for S3Network, LLC, the Company records 100% of the net losses to the extent of its initial $20 million investment. The Company recorded $3.4 million of such pre-tax losses during 2000. There is no obligation for the Company to fund the venture beyond its $20 million investment. The Company is also exposed to risks related to changing economic conditions and their effect on the markets it serves and on the Company's supply chain, and related costs. For additional information, see "Economic Environment" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." - 28 -
29 PART II Item 8. Financial Statements and Supplementary Data: Index to Consolidated Financial Statements and Supplementary Data <TABLE> <CAPTION> Consolidated Financial Statements of Harsco Corporation: Page ---- <S> <C> Report of Independent Accountants 30 Consolidated Balance Sheet December 31, 2000 and 1999 31 Consolidated Statement of Income for the years 2000, 1999, and 1998 32 Consolidated Statement of Cash Flows for the years 2000, 1999, and 1998 33 Consolidated Statement of Shareholders' Equity for the years 2000, 1999, and 1998 34 Consolidated Statement of Comprehensive Income for the years 2000, 1999, and 1998 35 Notes to Consolidated Financial Statements 36-77 Supplementary Data: Two-Year Summary of Quarterly Results (Unaudited) 78 Common Stock Price and Dividend Information 79 </TABLE> - 29 -
30 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Harsco Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Harsco Corporation and Subsidiary Companies at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 30, 2001 - 30 -
31 HARSCO CORPORATION CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS) <TABLE> <CAPTION> DECEMBER 31 2000 1999 ----------- ----------- <S> <C> <C> ASSETS CURRENT ASSETS Cash and cash equivalents $ 56,422 $ 51,266 Accounts receivable, net 413,654 331,123 Inventories 199,117 172,198 Other current assets 57,222 58,368 ----------- ----------- TOTAL CURRENT ASSETS 726,415 612,955 ----------- ----------- Property, plant and equipment, net 896,781 671,546 Cost in excess of net assets of businesses acquired, net 369,199 258,698 Other assets 188,553 116,624 ----------- ----------- TOTAL ASSETS $ 2,180,948 $ 1,659,823 =========== =========== LIABILITIES CURRENT LIABILITIES Short-term borrowings $ 47,676 $ 32,014 Current maturities of long-term debt 14,619 4,593 Accounts payable 192,148 132,394 Accrued compensation 46,591 46,615 Income taxes 34,783 44,154 Dividends payable 9,553 9,417 Other current liabilities 190,809 161,329 ----------- ----------- TOTAL CURRENT LIABILITIES 536,179 430,516 ----------- ----------- Long-term debt 774,450 418,504 Deferred income taxes 88,480 52,932 Insurance liabilities 46,988 37,097 Other liabilities 60,672 70,653 ----------- ----------- TOTAL LIABILITIES 1,506,769 1,009,702 ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, Series A junior participating cumulative preferred stock -- -- Common stock, par value $1.25, issued 66,309,651 and 66,221,544 shares as of December 31, 2000 and 1999, respectively 82,887 82,777 Additional paid-in capital 90,000 88,101 Accumulated other comprehensive expense (109,377) (80,538) Retained earnings 1,214,659 1,155,586 ----------- ----------- 1,278,169 1,245,926 Treasury stock, at cost (26,504,479 and 26,149,759 shares, respectively) (603,990) (595,805) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 674,179 650,121 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,180,948 $ 1,659,823 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. - 31 -
32 HARSCO CORPORATION CONSOLIDATED STATEMENT OF INCOME <TABLE> <CAPTION> (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31 2000 1999 1998 ----------- ----------- ----------- REVENUES <S> <C> <C> <C> <C> Service sales (1) $ 1,140,922 $ 866,839 $ 869,987 Product sales (1) 862,465 883,049 895,559 Other 1,354 1,119 582 ----------- ----------- ----------- TOTAL REVENUES 2,004,741 1,751,007 1,766,128 ----------- ----------- ----------- COSTS AND EXPENSES Cost of services sold 840,501 669,364 670,389 Cost of products sold 688,385 693,368 689,041 Selling, general, and administrative expenses 274,079 207,765 213,438 Research and development expenses 5,714 7,759 6,977 Other (income) and expenses 1,334 6,019 (4,264) ----------- ----------- ----------- TOTAL COSTS AND EXPENSES 1,810,013 1,584,275 1,575,581 ----------- ----------- ----------- OPERATING INCOME 194,728 166,732 190,547 Equity in income (loss) of affiliates, net (2) (2,020) 3,004 1,354 Interest income 5,987 4,662 8,378 Interest expense (50,104) (26,968) (20,504) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 148,591 147,430 179,775 Provision for income taxes 46,805 51,599 67,361 ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST 101,786 95,831 112,414 Minority interest in net income 4,983 5,118 4,901 ----------- ----------- ----------- NET INCOME $ 96,803 $ 90,713 $ 107,513 =========== =========== =========== BASIC EARNINGS PER COMMON SHARE $ 2.42 $ 2.22 $ 2.36 =========== =========== =========== Average shares of common stock outstanding 39,964 40,882 45,568 =========== =========== =========== DILUTED EARNINGS PER COMMON SHARE $ 2.42 $ 2.21 $ 2.34 =========== =========== =========== Diluted average shares of common stock outstanding 40,022 41,017 45,911 =========== =========== =========== </TABLE> See accompanying notes to consolidated financial statements. (1) In order to comply with Emerging Issues Task Force (EITF) Issue No. 00-10, all shipping and handling costs have been classified as cost of services sold or as cost of products sold rather than as reductions of sales. The income statements for the twelve months ended December 31, 1999 and 1998 have been reclassified to reflect this change. The reclassification has no effect on previously reported operating income or net income for the twelve months ended December 31, 1999 and 1998. (2) Equity in income (loss) of affiliates is now separately reported. Previously these amounts were included in operating income as other revenues. Amounts previously reported as operating income for the twelve months ended December 31, 1999 and 1998 were $169,736 and $191,901, respectively. - 32 -
33 HARSCO CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS <TABLE> <CAPTION> (IN THOUSANDS) YEARS ENDED DECEMBER 31 2000 1999 1998 --------- --------- --------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 96,803 $ 90,713 $ 107,513 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 141,128 122,777 119,044 Amortization 17,971 13,076 12,337 Equity in (income) loss of affiliates, net 2,020 (3,004) (1,354) Dividends or distributions from affiliates 1,729 3,369 1,494 Deferred income taxes 22,806 193 3,893 Other (income) and expenses 3,397 6,019 24,843 Gain on sale of businesses (2,226) -- (29,107) Other, net 1,422 5,205 5,260 Changes in assets and liabilities, net of acquisitions and dispositions of businesses: Accounts receivable 17,811 (28,157) (15,718) Inventories 966 15,934 (24,991) Accounts payable 10,193 (1,238) 8,379 Net disbursements related to discontinued defense business (12,012) (14,605) (13,642) Other assets and liabilities (42,560) 3,671 (8,691) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 259,448 213,953 189,260 ========= ========= ========= CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (180,048) (175,248) (159,816) Purchase of businesses, net of cash acquired* (302,461) (48,907) (158,291) Proceeds from sale of businesses 11,512 17,718 39,500 Proceeds from sale of property, plant and equipment 10,957 14,381 13,033 Investments available-for-sale: Maturities -- -- 40,000 Investments held-to-maturity: Maturities -- -- 4,010 Other investing activities 988 (2,618) (11,926) --------- --------- --------- NET CASH (USED) BY INVESTING ACTIVITIES (459,052) (194,674) (233,490) ========= ========= ========= CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net 146,552 (10,546) 16,131 Current maturities and long-term debt: Additions 562,993 214,133 172,709 Reductions (448,366) (103,410) (116,163) Cash dividends paid on common stock (37,594) (37,022) (40,287) Common stock issued-options 1,792 2,272 3,885 Common stock acquired for treasury (7,917) (71,860) (169,258) Other financing activities (6,714) (2,495) (1,341) --------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 210,746 (8,928) (134,324) ========= ========= ========= EFFECT OF EXCHANGE RATE CHANGES ON CASH (5,986) (647) (1,449) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 5,156 9,704 (180,003) Cash and cash equivalents at beginning of year 51,266 41,562 221,565 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 56,422 $ 51,266 $ 41,562 ========= ========= ========= *PURCHASE OF BUSINESSES, NET OF CASH ACQUIRED Working capital, other than cash $ (20,249) $ 18,078 $ 11,159 Property, plant and equipment (215,065) (36,417) (89,182) Other noncurrent assets and liabilities, net (67,147) (30,568) (80,268) --------- --------- --------- NET CASH USED TO ACQUIRE BUSINESSES $(302,461) $ (48,907) $(158,291) ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 33 -
34 HARSCO CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY <TABLE> <CAPTION> ACCUMULATED OTHER COMPREHENSIVE INCOME (EXPENSE) -------------------------------------------- ADDITIONAL NET UNREALIZED COMMON STOCK PAID-IN INVESTMENT PENSION ---------------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ISSUED TREASURY CAPITAL TRANSLATION GAINS (LOSSES) LIABILITY ---------- ---------- ---------- ----------- --------------- ---------- <S> <C> <C> <C> <C> <C> <C> BALANCES, JANUARY 1, 1998 $ 82,318 $ (362,772) $ 79,360 $ (49,677) $ (28) $ (1,269) ---------- ---------- ---------- ---------- ---------- ---------- Net income Cash dividends declared, $.885 per share Translation adjustments (1,714) Unrealized investment gains, net of ($18) deferred income taxes 28 Pension liability adjustments, net of $1,544 deferred income taxes (2,385) Acquired during the year, 4,989,483 shares (168,405) Stock options exercised, 221,293 shares 276 5,913 Restricted stock, net, 40,324 shares 1,649 110 Other, 1,658 shares 66 1 ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, DECEMBER 31, 1998 82,594 (529,462) 85,384 (51,391) -- (3,654) ---------- ---------- ---------- ---------- ---------- ---------- Net income Cash dividends declared, $.91 per share Translation adjustments (27,273) Pension liability adjustments, net of ($1,277) deferred income taxes 1,780 Acquired during the year, 2,326,798 shares (66,441) Stock options exercised, 146,164 shares 183 2,740 Other, 2,497 shares 98 (23) ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, DECEMBER 31, 1999 82,777 (595,805) 88,101 (78,664) -- (1,874) ---------- ---------- ---------- ---------- ---------- ---------- Net income Cash dividends declared, $.945 per share Translation adjustments (28,327) Pension liability adjustments, net of $295 deferred income taxes (512) Acquired during the year, 355,695 shares (8,209) Stock options exercised, 88,107 shares 110 1,900 Other, 975 shares 24 (1) ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, DECEMBER 31, 2000 $ 82,887 $ (603,990) $ 90,000 $ (106,991) $ -- $ (2,386) ========== ========== ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> ACCUMULATED OTHER COMPREHENSIVE INCOME (EXPENSE) ----------------------------- RETAINED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) TOTAL EARNINGS ---------- ---------- <S> <C> <C> BALANCES, JANUARY 1, 1998 $ (50,974) $1,033,770 ---------- ---------- Net income 107,513 Cash dividends declared, $.885 per share (39,455) Translation adjustments (1,714) Unrealized investment gains, net of ($18) deferred income taxes 28 Pension liability adjustments, net of $1,544 deferred income taxes (2,385) Acquired during the year, 4,989,483 shares Stock options exercised, 221,293 shares Restricted stock, net, 40,324 shares Other, 1,658 shares ---------- ---------- BALANCES, DECEMBER 31, 1998 (55,045) 1,101,828 ---------- ---------- Net income 90,713 Cash dividends declared, $.91 per share (36,955) Translation adjustments (27,273) Pension liability adjustments, net of ($1,277) deferred income taxes 1,780 Acquired during the year, 2,326,798 shares Stock options exercised, 146,164 shares Other, 2,497 shares ---------- ---------- BALANCES, DECEMBER 31, 1999 (80,538) 1,155,586 ---------- ---------- Net income 96,803 Cash dividends declared, $.945 per share (37,730) Translation adjustments (28,327) Pension liability adjustments, net of $295 deferred income taxes (512) Acquired during the year, 355,695 shares Stock options exercised, 88,107 shares Other, 975 shares ---------- ---------- BALANCES, DECEMBER 31, 2000 $ (109,377) $1,214,659 ========== ========== </TABLE> See accompanying notes to consolidated financial statements. - 34 -
35 HARSCO CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME <TABLE> <CAPTION> (IN THOUSANDS) YEARS ENDED DECEMBER 31 2000 1999 1998 --------- --------- --------- <S> <C> <C> <C> Net Income $ 96,803 $ 90,713 $ 107,513 --------- --------- --------- Other comprehensive income (expense): Foreign currency translation adjustments (28,327) (27,273) (1,714) Unrealized investment gains, net of deferred income taxes -- -- 28 Pension liability adjustments, net of deferred income taxes (512) 1,780 (2,385) --------- --------- --------- Other comprehensive expense (28,839) (25,493) (4,071) --------- --------- --------- Total comprehensive income $ 67,964 $ 65,220 $ 103,442 ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. - 35 -
36 HARSCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Harsco Corporation and its majority-owned subsidiaries (the "Company"). Investments in unconsolidated entities (all of which are 20-50% owned) are accounted for under the equity method. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits, and short-term investments which are highly liquid in nature and have an original maturity of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. Inventories in the United States are accounted for using principally the last-in, first-out (LIFO) method. Other inventories are accounted for using the first-in, first-out (FIFO) or average cost methods. DEPRECIATION Property, plant and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method. When property is retired from service, generally the cost of the retirement is charged to the allowance for depreciation to the extent of the accumulated depreciation and the balance is charged to income. Long-lived assets to be disposed are not depreciated while they are held for disposal. INTANGIBLE ASSETS Intangible assets consist principally of cost in excess of net assets of businesses acquired, which is amortized on a straight line basis over a period not to exceed 30 years. Accumulated amortization was $91.0 and $74.9 million at December 31, 2000 and 1999, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including cost in excess of net assets of businesses acquired and other intangible assets, used in the Company's operations are reviewed for impairment when events and circumstances indicate that the carrying amount of an asset may not be recoverable. The Company's policy is to record an impairment loss when it is determined that the carrying amount of the asset exceeds the sum of the expected undiscounted future cash flows resulting from use of the asset and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds its fair value. Long-lived assets to be disposed are reported at the lower of the carrying amount or fair value less cost to sell. REVENUE RECOGNITION Revenue is recognized for product sales generally when title and risk of loss transfer. Service sales are generally recognized over the contractual period or as services are performed. Both product sales and service revenues are recognized when they our realized or realizable and when earned. Revenue generally is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement - 36 -
37 exists, delivery has occurred or services have been rendered, the Company's price to the buyer is fixed or determinable and collectibility is reasonably assured. INCOME TAXES United States federal and state income taxes and non-U.S. income taxes are provided currently on the undistributed earnings of international subsidiaries and unconsolidated affiliated entities, giving recognition to current tax rates and applicable foreign tax credits, except when management has specific plans for reinvestment of undistributed earnings which will result in the indefinite postponement of their remittance. Deferred taxes are provided using the asset and liability method for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. ACCRUED INSURANCE AND LOSS RESERVES The Company retains a significant portion of the risk for workers' compensation, automobile, general, and product liability losses. Reserves have been recorded which reflect the undiscounted estimated liabilities including claims incurred but not reported. Changes in the estimates of the reserves are included in net income in the period determined. Amounts estimated to be paid within one year have been classified as Other current liabilities, with the remainder included in Insurance liabilities. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's subsidiaries outside the United States, except for those subsidiaries located in highly inflationary economies, are principally measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates as of the balance sheet date. Resulting translation adjustments are recorded in the cumulative translation adjustment, a separate component of Other comprehensive income (expense). Income and expense items are translated at average monthly exchange rates. Gains and losses from foreign currency transactions are included in net income. For subsidiaries operating in highly inflationary economies, gains and losses on foreign currency transactions and balance sheet translation adjustments are included in net income. The functional currency for the Company's operations in Mexico was the U.S. dollar for 1997 and 1998. Effective January 1999, the three-year cumulative rate of inflation fell below 100%. As of January 1, 1999, the Company measures the financial statements of its Mexican entities using the Mexican new peso as the functional currency. Effective January 1998, the Company's operations in Brazil were no longer accounted for as a highly inflationary economy, because the three-year cumulative rate of inflation fell below 100%. The Company measures the financial statements of its Brazilian entities using the Brazilian real as the functional currency. - 37 -
38 FINANCIAL INSTRUMENTS AND HEDGING The Company has subsidiaries principally operating in North America, South America, Europe, and Asia-Pacific. These operations are exposed to fluctuations in related foreign currencies in the normal course of business. The Company seeks to reduce exposure to foreign currency fluctuations through the use of forward exchange contracts. The Company does not hold or issue financial instruments for trading purposes, and it is the Company's policy to prohibit the use of derivatives for speculative purposes. The Company has a Foreign Currency Risk Management Committee that meets periodically to monitor foreign currency risks. The Company executes foreign currency forward exchange contracts to hedge transactions of its non-U.S. subsidiaries for firm purchase commitments, to hedge variable cash flows of forecasted transactions and for export sales denominated in foreign currencies. These contracts generally are for 90 to 180 days or less. For those contracts that hedge an identifiable transaction, gains or losses are deferred and accounted for as part of the underlying transaction. The cash flows from these contracts are classified consistent with the cash flows from the transaction being hedged. The Company also enters into foreign currency forward exchange contracts for intercompany foreign currency commitments. These forward exchange contracts do not qualify as hedges. Therefore, gains and losses are recognized in income based on fair market value. OPTIONS FOR COMMON STOCK The Company uses the intrinsic value method to account for options granted to employees for the purchase of common stock. No compensation expense is recognized on the grant date, since at that date, the option price equals the market price of the underlying common stock. The Company discloses the pro forma effect of accounting for stock options under the fair value method. EARNINGS PER SHARE Basic earnings per share is calculated using the average shares of common stock outstanding, while diluted earnings per share reflects the potential dilution that could occur if stock options were exercised. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior years' amounts to conform with current year classifications. - 38 -
39 NEW FINANCIAL ACCOUNTING STANDARDS ISSUED In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), with an amended date effective for fiscal years beginning after June 15, 2000. SFAS No. 133 was amended by SFAS No. 138 (SFAS 138). SFAS 133 requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company has adopted SFAS 133 and SFAS 138 as of January 1, 2001. Due to the Company's limited use of derivative instruments, SFAS 133 and SFAS 138 did not have a material effect on the financial position or results of operations of the Company. The net cumulative effect adjustment as of January 1, 2001 was an expense of $21 thousand. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140), which replaces SFAS No. 125 (SFAS 125) with the same title. It revises the standards for securitizations and other transfers of financial assets and collateral and requires additional disclosures, but otherwise retains most of SFAS 125's provisions. The Company will adopt SFAS 140 in the second quarter of 2001. The adoption of SFAS 140 is not expected to have a material effect on the Company's financial position or results of operations. NEW STAFF ACCOUNTING BULLETIN ISSUED In December 1999, the Securities and Exchange Commission (the "Commission") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the Commission. The Company adopted SAB 101 in the fourth quarter of 2000 with no material effect on revenue. NEW EMERGING ISSUES TASK FORCE (EITF) CONSENSUS In July and September 2000, the EITF reached a consensus in EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs", by agreeing that shipping and handling fees billed to a customer in a sales transaction must be classified as revenues and that shipping costs should not be netted against sales. The EITF also requires that all costs incurred for shipping and handling be classified as expenses, preferably in cost of sales. It was determined that certain operations of the Company had previously recorded shipping and handling costs by netting them against revenues. The Company has reclassified these costs to cost of services sold or cost of products sold, as applicable. As a result, $34 million, $33 million and $32 million of shipping and handling costs associated with the sales of the Company's products and services for 2000, 1999 and 1998, respectively, have been reclassified. Pre-tax income, net income and earnings per share are not affected by this change. - 39 -
40 2. DISCONTINUED DEFENSE BUSINESS On August 25, 1997, the Company and FMC Corporation signed an agreement to sell United Defense, L.P. for $850 million, and the sale was completed on October 6, 1997. Prior to the sale, FMC had been the managing general partner and 60% owner of United Defense, L.P., while the Company owned the balance of 40% as the limited partner. United Defense supplies ground combat and naval weapons systems for the U.S. and military customers worldwide. Disbursements related to the discontinued defense business, principally claim settlements and legal fees, are shown separately on the Consolidated Statement of Cash Flows for 2000, 1999 and 1998. - 40 -
41 3. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS On June 16, 2000 the Company received all required regulatory approvals and declared its offer to acquire SGB Group Plc (SGB) wholly unconditional. Harsco took majority ownership in SGB and subsequently acquired 100% of the shares. SGB, based in the UK, is one of Europe's largest suppliers of scaffolding, forming and related access products and services. SGB also has operations in North America, the Middle East and the Asia -Pacific region. SGB had 1999 sales of 283 million British pound sterling (approximately $423 million using a December 31, 2000 exchange rate). The acquisition of SGB has been accounted for using the purchase method of accounting, and accordingly, the operating results of SGB have been included in the consolidated results of the Company since the date of acquisition. The purchase price allocation is based upon appraisal values and management estimates. The purchase price of SGB has been allocated as follows: <TABLE> <S> <C> (IN MILLIONS) Working capital, other than cash $ 21.3 Property, plant and equipment 211.6 Other assets 45.3 Cost in excess of net assets acquired 127.1 Non-current liabilities (133.4) ----------- Purchase price, net of cash received $ 271.9 =========== </TABLE> The purchase price allocation was reclassified in the fourth quarter of 2000. The reclassification was due principally to the netting of deferred income taxes in the countries of origin. Additionally, cost in excess of net assets acquired increased by $14.2 million since September 30, 2000 due principally to a decrease in pension assets based upon an actuarial study. In May 2000, the Company completed the acquisitions of Bergslagens Stalservice AB and Bergslagens Suomi Oy (collectively Bergslagens). The two companies provide specialized slag processing and metal recovery services to steel mills in Sweden and Finland, respectively. The two organizations together recorded 1999 sales of nearly $10 million. In October 1999, the Company acquired Charter plc's Pandrol Jackson railway track maintenance business. The transaction was completed for approximately $48 million in cash plus assumption of liabilities, for a total consideration of approximately $65 million. Pandrol Jackson manufactures and markets worldwide a wide range of equipment and services used in railway track maintenance. In December 1999, the Company completed the sale of the railway switch, crossing and transit grinding business obtained as part of the Pandrol Jackson railway maintenance acquisition. This business with annual sales of approximately $6 million was divested in accordance with an agreement with the Department of Justice as a condition to the acquisition of Pandrol Jackson. - 41 -
42 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED) In July 1999 and February 1999, respectively, the Company acquired certain assets and assumed certain liabilities of Structural Accessories, Inc. and Natural Gas Vehicle Systems, Inc. The purchase prices for these acquisitions approximated $2 million and $3 million, respectively. All acquisitions have been accounted for using the purchase method of accounting with cost in excess of net assets of businesses acquired totaling $137.0 million in 2000 and $9.4 million in 1999. Results of operations are included in income since the dates of acquisition. The following unaudited pro forma consolidated net sales, net income, and earnings per share data are presented as if the above businesses had been acquired at the beginning of the periods presented. <TABLE> <CAPTION> (IN MILLIONS, EXCEPT PER SHARE DATA) PRO FORMA INFORMATION FOR YEARS ENDED DECEMBER 31 2000 1999 --------- --------- <S> <C> <C> Net sales $ 2,208 $ 2,220 Net income 93 101 Basic earnings per share 2.27 2.47 Diluted earnings per share 2.27 2.47 --------- --------- </TABLE> The unaudited pro forma information is not necessarily indicative of the results of operations that would have occurred had the purchases been made at the beginning of the periods presented, or of the future results of the combined operations. The unaudited pro forma information includes the actual results of the acquired businesses prior to the acquisition dates, which includes for the year 2000 approximately $4 million of non-tax deductible costs incurred by SGB in defense of the acquisition. These results do not reflect the effect of reorganization actions, synergies, cost reductions and other benefits resulting from the combinations. Additionally, the unaudited pro-forma information reflects amortization of the cost in excess of net assets acquired and interest expense on assumed borrowings for acquisitions for the full periods presented. - 42 -
43 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED) In April 2000, the Company agreed to invest $20 million for a 49 percent ownership interest in S3Networks, LLC, a start-up company providing internet and e-business infrastructure consulting services primarily to Fortune 1000 corporations. Cash of $10 million has been invested through December 31, 2000 with an additional $10 million due to be paid over a period not to exceed fifteen months from the initial investment date. The investment is being accounted for under the equity method. Since the Company is the principal provider of initial capital for S3Networks, LLC, the Company is recording 100% of net losses to the extent of its initial $20 million investment. However, the Company will also record 100% of subsequent net income until the entire initial investment amount is reinstated. Subsequent to reinstatement of the initial investment amount, the company will record net income to the extent of its ownership percentage of S3Networks, LLC. DISPOSITIONS In June 2000, the Company completed the sales of Gunness Wharf Limited and Flixborough Wharf Limited, and in March 2000 completed the sale of its natural gas vehicle automotive valve product line. The Company completed the sales of the Manchester truck dealership in September 1999; the pavement marking and vegetation control business of Chemi-Trol in August 1999; and Astralloy Wear Technology in March 1999. PENDING DIVESTITURES The Company announced on September 27, 2000 that its Board of Directors had approved plans to divest three non-core operations as part of Harsco's continuing strategic repositioning as a leading worldwide industrial services company. The operations include Capitol Manufacturing, which produces pipe fittings and related products for the industrial plumbing, electrical, and other markets; Patterson-Kelley, a manufacturer of industrial and commercial boilers, water heaters, and blenders; and Faber Prest Distribution, a UK-based materials transport business which Harsco acquired in 1998 as part of mill services provider Faber Prest Plc. In the first quarter of 2001, due to changing economic conditions, the Company reversed its decision to divest Capitol Manufacturing. - 43 -
44 4. ACCOUNTS RECEIVABLE AND INVENTORIES Accounts receivable are net of an allowance for doubtful accounts of $26.1 million and $13.3 million at December 31, 2000 and 1999, respectively. The acquisition of SGB increased the allowance for doubtful accounts by $15.8 million as of December 31, 2000. Inventories consist of: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 -------- -------- <S> <C> <C> Finished goods $ 68,519 $ 37,715 Work-in-process 36,751 37,198 Raw materials and purchased parts 73,265 76,911 Stores and supplies 20,582 20,374 -------- -------- $199,117 $172,198 ======== ======== Valued at lower of cost or market: LIFO basis $124,189 $132,366 FIFO basis 12,898 16,483 Average cost basis 62,030 23,349 -------- -------- $199,117 $172,198 ======== ======== </TABLE> Inventories valued on the LIFO basis at December 31, 2000 and 1999 were approximately $33.2 million and $28.4 million, respectively, less than the amounts of such inventories valued at current costs. As a result of reducing certain inventory quantities valued on the LIFO basis, net income increased from that which would have been recorded under the FIFO basis of valuation by $0.03 million, $1.1 million and $0.2 million in 2000, 1999 and 1998, respectively. - 44 -
45 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 ---------- ---------- <S> <C> <C> Land and improvements $ 46,609 $ 28,847 Buildings and improvements 168,719 147,742 Machinery and equipment 1,489,906 1,243,437 Uncompleted construction 66,260 79,797 ---------- ---------- 1,771,494 1,499,823 Less accumulated depreciation 874,713 828,277 ---------- ---------- $ 896,781 $ 671,546 ========== ========== </TABLE> The estimated useful lives of different types of assets are generally: <TABLE> <S> <C> Land improvements 5 to 20 years Buildings and improvements 10 to 50 years Certain plant, buildings and installations 3 to 10 years (Principally Mill Services Segment) Machinery and equipment 3 to 20 years </TABLE> - 45 -
46 6. DEBT AND CREDIT AGREEMENTS On October 27, 2000, the Company issued 200 million British pound sterling (U.S. $294 million) 7.25% notes due 2010. The interest payable annually commences on October 27, 2001. The net proceeds of the issue were used to refinance certain bank debt that was used to fund the acquisition of SGB Group. The Company has a $350 million credit facility through a syndicate of 13 banks. Borrowings under this agreement are available in U.S. dollars or Eurocurrencies and the credit facility serves as back-up to the Company's U.S. commercial paper program. The facility is in two parts. The first part, referred to as the 364-day credit agreement, permits borrowings up to $131 million and expires in September 2001. Borrowings outstanding at expiration may be repaid over the succeeding 12 months. The second part, referred to as the five-year credit agreement, permits borrowings up to $219 million and expires in September 2005. All borrowings under the five-year credit agreement are due at expiration. Interest rates are either negotiated, based upon the U.S. federal funds interbank market, prime, or based upon the London Interbank Offered Rate (LIBOR) plus a margin. The Company pays a facility fee (.0825% per annum as of December 31, 2000) that varies based upon its credit ratings. Prior to renegotiating the terms of its credit facility in September 2000, the Company formerly had a $400 million facility that would have matured in July 2001. At December 31, 2000 and 1999, there were no borrowings outstanding under either facility. The Company can also issue up to $350 million of short-term notes in the U.S. commercial paper market. In addition, the Company has a three billion Belgian franc commercial paper program (approximately U.S. $70 million at December 31, 2000) which is used to fund the Company's international operations. The Company limits the aggregate commercial paper and credit facility borrowings at any one time to a maximum of $350 million. Commercial paper interest rates, which are based on market conditions, have been lower than comparable rates available under the credit facility. At December 31, 2000 and 1999, $268.8 million and $233.7 million of commercial paper was outstanding, respectively. Commercial paper is classified as long-term debt at December 31, 2000 and 1999, because the Company has the ability and intent to refinance it on a long-term basis through existing long-term credit facilities. Subsequent to December 31, 2000 the Company executed two $50 million credit facility agreements with European-based banks. Borrowings under these facilities, which expire in December 2001 and January 2002, are available in Eurocurrencies or U.S. dollars and will be primarily used to finance the Company's European operations. Borrowings outstanding at expiration may be repaid over the succeeding 4 years. Interest rates are based upon LIBOR plus a margin. Short-term debt amounted to $47.7 million and $32.0 million at December 31, 2000 and 1999, respectively. The weighted average interest rate for short-term borrowings at December 31, 2000 and 1999 was 5.7% and 4.6%, respectively. - 46 -
47 6. DEBT AND CREDIT AGREEMENTS (CONTINUED) Long-term debt consists of: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 -------- -------- <S> <C> <C> 7.25% notes due October 27, 2010 $294,087 $ -- 6.0% notes due September 15, 2003 150,000 150,000 Commercial paper borrowings, with a weighted average interest rate of 7.0% as of December 31, 2000 268,794 233,746 Faber Prest loan notes due October 31, 2008 with interest based on Sterling LIBOR minus .75% (5.5% at December 31, 2000) 12,898 16,285 Industrial development bonds, payable in varying amounts from 2001 to 2010 with a weighted average interest rate of 6.2% as of December 31, 2000 13,400 11,400 Other financing payable in varying amounts to 2007 with a weighted average interest rate of 5.8% as of December 31, 2000 49,890 11,666 -------- -------- 789,069 423,097 Less: current maturities 14,619 4,593 -------- -------- $774,450 $418,504 ======== ======== </TABLE> The credit facility and certain notes payable agreements contain covenants restricting, among other things, the amount of debt, as defined in the agreement, that can be issued. At December 31, 2000, the Company was in compliance with these covenants. The maturities of long-term debt for the four years following December 31, 2001 are: <TABLE> <CAPTION> (IN THOUSANDS) <S> <C> <C> <C> 2002 $ 71,321 2004 $ 7,517 2003 $154,870 2005 $226,442 </TABLE> Cash payments for interest on all debt were (in millions) $44.7 , $25.0, and $20.0 in 2000, 1999 and 1998, respectively. Capitalized interest was (in thousands) $2, $893, and $10 in 2000, 1999, and 1998, respectively. The Company 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. - 47 -
48 7. LEASES The Company leases certain property and equipment under noncancelable operating leases. Rental expense under such operating leases was (in millions) $30.3, $16.9, and $17.6 in 2000, 1999 and 1998, respectively. Approximately $9.3 million of the increase for 2000 is due to the inclusion of the SGB acquisition as of June 2000. Future minimum payments under operating leases with noncancelable terms are: (IN THOUSANDS) <TABLE> <S> <C> 2001 $33,142 2002 27,056 2003 21,051 2004 21,808 2005 6,509 After 2005 23,816 </TABLE> - 48 -
49 8. EMPLOYEE BENEFIT PLANS PENSION BENEFITS The Company has pension and profit sharing retirement plans, most of which are noncontributory, covering substantially all of its employees. The benefits for salaried employees generally are based on years of service and the employee's level of compensation during specified periods of employment. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The multi-employer plans in which the Company participates provide benefits to certain unionized employees. The Company's funding policy for qualified plans is consistent with statutory regulations and customarily equals the amount deducted for income tax purposes. The Company's policy is to amortize prior service costs over the average future service period of active plan participants. A change to the pension information presented for 2000 is the inclusion of SGB pension income, obligations and pension assets acquired in June 2000. <TABLE> <CAPTION> (IN THOUSANDS) U. S. PLANS INTERNATIONAL PLANS ---------------------------------------- ---------------------------------------- 2000 1999 1998 2000 1999 1998 <S> <C> <C> <C> <C> <C> <C> PENSION EXPENSE Defined benefit plans: Service cost $ 8,017 $ 9,514 $ 7,971 $ 8,559 $ 6,369 $ 5,814 Interest cost 12,069 11,427 10,339 18,727 11,622 11,027 Expected return on plan assets (22,448) (20,012) (21,227) (30,054) (16,836) (18,632) Recognized prior service costs 1,368 1,309 1,219 949 742 88 Recognized (gains) or losses (1,853) 272 (2,026) (953) 5 (2,008) Amortization of transition asset (1,834) (1,834) (1,834) (567) (613) (618) Curtailment losses 360 -- 542 -- -- -- -------- -------- -------- -------- -------- -------- (4,321) 676 (5,016) (3,339) 1,289 (4,329) Multi-employer plans 4,334 3,853 3,011 1,039 1,069 1,043 Defined contribution plans 1,401 1,165 2,673 4,386 3,301 3,370 -------- -------- -------- -------- -------- -------- Pension expense $ 1,414 $ 5,694 $ 668 $ 2,086 $ 5,659 $ 84 ======== ======== ======== ======== ======== ======== </TABLE> - 49 -
50 8. EMPLOYEE BENEFIT PLANS (CONTINUED) The change in the financial status of the pension plans and amounts recognized in the Consolidated Balance Sheet at December 31, 2000 and 1999 are: <TABLE> <CAPTION> PENSION BENEFITS U. S. PLANS INTERNATIONAL PLANS -------------------------- -------------------------- (IN THOUSANDS) 2000 1999 2000 1999 <S> <C> <C> <C> <C> CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 159,055 $ 170,167 $ 203,913 $ 201,287 Service cost 8,017 9,514 8,558 6,368 Interest cost 12,069 11,427 18,728 11,621 Plan participants' contributions -- -- 2,673 1,887 Amendments 1,127 1,076 298 4,340 Actuarial (gain) (10,692) (35,638) (2,044) (6,828) Curtailment loss 360 -- -- -- Benefits paid (6,672) (6,065) (12,952) (9,164) Obligations of acquired companies -- 8,574 229,608 -- Effect of foreign currency -- -- (14,931) (5,598) --------- --------- --------- --------- Benefit obligation at end of year $ 163,264 $ 159,055 $ 433,851 $ 203,913 ========= ========= ========= ========= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 239,030 $ 211,785 $ 276,899 $ 246,456 Actual return on plan assets 6,506 24,522 38,420 43,170 Employer contributions 2,709 731 2,629 694 Plan participants' contributions -- -- 2,673 1,887 Benefits paid (6,672) (6,065) (12,808) (9,038) Plan assets of acquired companies -- 8,057 269,787 -- Effect of foreign currency -- -- (20,738) (6,270) --------- --------- --------- --------- Fair value of plan assets at end of year $ 241,573 $ 239,030 $ 556,862 $ 276,899 ========= ========= ========= ========= FUNDED STATUS: Funded status at end of year $ 78,310 $ 79,975 $ 123,011 $ 72,985 Unrecognized net (gain) (42,621) (49,724) (49,173) (43,092) Unrecognized transition (asset) (8,244) (10,078) (2,262) (3,144) Unrecognized prior service cost 10,900 11,142 12,683 14,392 --------- --------- --------- --------- Net amount recognized $ 38,345 $ 31,315 $ 84,259 $ 41,141 ========= ========= ========= ========= AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF Prepaid benefit cost $ 47,235 $ 40,066 $ 89,171 $ 45,848 Accrued benefit liability (14,416) (13,639) (5,825) (5,268) Intangible asset 2,178 2,027 539 561 Accumulated other comprehensive income 3,348 2,861 374 -- --------- --------- --------- --------- Net amount recognized $ 38,345 $ 31,315 $ 84,259 $ 41,141 ========= ========= ========= ========= </TABLE> Plan assets include equity and fixed-income securities. At December 31, 2000 and 1999, 732,640 shares of the Company's common stock with a fair market value of $18.1 million and $23.3 million, respectively, are included in plan assets. Dividends paid on such stock amounted to $0.7 million in both 2000 and 1999. - 50 -
51 8. EMPLOYEE BENEFIT PLANS (CONTINUED) The actuarial assumptions used for the defined benefit pension plans are: <TABLE> <CAPTION> U. S. PLANS INTERNATIONAL PLANS ------------------------------- ------------------------------ 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> Weighted average assumed discount rates 8.0% 7.75% 6.75% 6.2% 6.2% 6.0% Weighted average expected long-term rates of 9.5% 9.50% 9.50% 7.9% 7.5% 7.1% return on plan assets Rates of compensation increase 4.0% 4.00% 4.50% 4.4% 4.4% 4.2% </TABLE> For the U.S. plans, the projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $22.7 million, $21.9 million, and $9.0 million, respectively, as of December 31, 2000, and $24.8 million, $24.7 million, and $12.3 million, respectively, as of December 31, 1999. For the international plans, the projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $9.8 million, $8.8 million, and $3.9 million, respectively, as of December 31, 2000, and $8.9 million, $7.7 million, and $3.4 million, respectively, as of December 31, 1999. - 51 -
52 8. EMPLOYEE BENEFIT PLANS (CONTINUED) POSTRETIREMENT BENEFITS The Company has postretirement life insurance benefits for a number of employees, and postretirement health care benefits for a limited number of employees mainly under plans related to acquired companies. The cost of life insurance and health care benefits are accrued for current and future retirees and are recognized as determined under the projected unit credit actuarial method. Under this method, the Company's obligation for postretirement benefits is to be fully accrued by the date employees attain full eligibility for such benefits. The Company's postretirement health care and life insurance plans are unfunded. The postretirement benefit expense (health care and life insurance) was $0.7 million in 2000, $0.4 million in 1999, and $0.3 million in 1998. The components of these expenses are not shown separately as they are not material. The changes in the postretirement benefit liability recorded in the Consolidated Balance Sheet are: <TABLE> <CAPTION> POSTRETIREMENT BENEFITS (IN THOUSANDS) 2000 1999 -------- -------- <S> <C> <C> CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 10,304 $ 6,421 Service cost 182 129 Interest cost 761 466 Actuarial loss 231 319 Plan participants contributions 32 -- Benefits paid (660) (325) Plan amendments 403 -- Obligation of acquired company -- 3,294 -------- -------- Benefit obligation at end of year $ 11,253 $ 10,304 ======== ======== FUNDED STATUS: Funded status at end of year $(11,253) $(10,304) Unrecognized prior service cost 367 (39) Unrecognized net actuarial (gain) (902) (1,328) -------- -------- Net amount recognized as accrued benefit liability $(11,788) $(11,671) ======== ======== </TABLE> - 52 -
53 8. EMPLOYEE BENEFIT PLANS (CONTINUED) The actuarial assumptions used for postretirement benefit plans are: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) 2000 1999 1998 -------- -------- -------- <S> <C> <C> <C> Assumed discount rate 8.00% 7.75% 6.75% Health care cost trend rate 7.50% 7.50% 8.30% Decreasing to ultimate rate 6.50% 6.50% 5.50% Effect of one percent increase in health care cost trend rate: On cost components $ 41 $ 21 $ 21 On accumulated benefit obligation $ 510 $ 415 $ 185 -------- -------- -------- </TABLE> For 2000, a one percent decrease in the health care cost trend rate would decrease the cost component by $43 thousand and decrease the accumulated benefit obligation by $480 thousand. It is anticipated that the health care cost trend rate will decrease from 7.5% in 2001 to 6.5% in the year 2003. SAVINGS PLAN The Company has a 401(k) savings plan which covers substantially all U.S. employees with the exception of employees represented by a collective bargaining agreement, unless the agreement expressly provides otherwise. Employee contributions are generally determined as a percentage of covered employee's compensation. The expense for contributions to the plan by the Company was (in millions) $4.9, $4.4, and $4.8 for 2000, 1999, and 1998, respectively. OTHER EMPLOYEE BENEFIT PLANS The Company offers various other benefit plans to its employees. In 2000, the Company amended certain plans in the United States which resulted in a one-time pre-tax cost reduction of approximately $5.3 million. - 53 -
54 8. EMPLOYEE BENEFIT PLANS (CONTINUED) EXECUTIVE INCENTIVE COMPENSATION PLAN Under the 1995 Executive Incentive Compensation Plan, the Management Development and Compensation Committee awarded 60% of the value of any earned annual incentive compensation award to be paid to participants in the form of cash and 40% in the form of restricted shares of the Company's common stock. Upon the request of the participant, the Committee was authorized to make the incentive award payable all in cash, subject to a 25% reduction in the total amount of the award. Awards were made in February of the following year. The Company accrued amounts based on performance reflecting the value of cash and common stock which was anticipated to be earned for the year. Compensation expense relating to these awards was (in millions) $5.6, $3.8, and $3.7 in 2000, 1999 and 1998, respectively. Effective January 1, 1999, the restricted stock portion of the compensation plan was discontinued and the terms of the plan were amended to provide for payment of the incentive compensation all in cash. On January 6, 1999, the Company repurchased from the participants, at the original award value, the restricted shares awarded in 1998. For all other shares, the restrictions were removed effective January 6, 1999. - 54 -
55 9. INCOME TAXES Income before income taxes and minority interest in the Consolidated Statement of Income consists of: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 1998 --------- --------- --------- <S> <C> <C> <C> United States $ 68,000 $ 78,689 $ 121,091 International 80,591 68,741 58,684 --------- --------- --------- $ 148,591 $ 147,430 $ 179,775 ========= ========= ========= Provision for income taxes: Currently payable: Federal $ 5,113 $ 22,474 $ 37,297 State (536) 1,743 2,835 International 21,803 25,203 23,468 --------- --------- --------- 26,380 49,420 63,600 Deferred federal and state 17,375 3,890 6,552 Deferred international 3,050 (1,711) (2,791) --------- --------- --------- $ 46,805 $ 51,599 $ 67,361 ========= ========= ========= </TABLE> Cash payments for income taxes were (in millions) $19.3, $50.7, and $38.8, for 2000, 1999, and 1998, respectively. Approximately $5.4 million of the taxes paid in 1998 are related to the gain on the disposal of the defense business. - 55 -
56 9. INCOME TAXES (CONTINUED) The following is a reconciliation of the normal expected statutory U.S. federal income tax rate to the effective rate as a percentage of Income before income taxes and minority interest as reported in the Consolidated Statement of Income: <TABLE> <CAPTION> 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> U.S. federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit .4 1.6 1.6 Export sales corporation benefit (.3) (.5) (.6) Losses for which no tax benefit was recorded 1.3 .3 1.3 Difference in effective tax rates on international earnings and remittances (5.7) (1.9) (1.3) Nondeductible acquisition costs 1.9 2.1 2.0 Other, net (1.1) (1.6) (.5) ------ ------ ------ Effective income tax rate 31.5% 35.0% 37.5% ====== ====== ====== </TABLE> The tax effects of the primary temporary differences giving rise to the Company's deferred tax assets and liabilities for the years ended December 31, 2000 and 1999 are: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 ------------------------ ------------------------ DEFERRED INCOME TAXES ASSET LIABILITY ASSET LIABILITY -------- --------- -------- --------- <S> <C> <C> <C> <C> Depreciation $ -- $ 48,918 $ -- $ 36,580 Expense accruals 29,796 -- 34,975 -- Inventories 3,224 -- 5,294 -- Provision for receivables 2,211 -- 3,867 -- Postretirement benefits 2,975 -- 4,221 -- Deferred revenue -- 4,181 -- 4,196 Unrelieved foreign tax credits 6,566 -- 1,264 -- Unrelieved foreign tax losses 4,749 -- 6,694 -- Unrelieved domestic tax losses 2,085 -- 2,424 -- Pensions -- 37,653 -- 22,923 Other 459 -- -- 1,913 -------- -------- -------- -------- 52,065 90,752 58,739 65,612 Valuation allowance (11,659) -- (5,309) -- -------- -------- -------- -------- Total deferred income taxes $ 40,406 $ 90,752 $ 53,430 $ 65,612 ======== ======== ======== ======== </TABLE> At December 31, 2000 and 1999, Other current assets included deferred income tax benefits of $29.8 million and $35.0 million, respectively. - 56 -
57 9. INCOME TAXES (CONTINUED) At December 31, 2000, certain of the Company's subsidiaries had total available net operating loss carryforwards ("NOLs") of approximately $27.1 million, of which approximately $14.8 million may be carried forward indefinitely and $12.3 million have varying expiration dates. Included in the total are $10.7 million of preacquisition NOLs. At December 31, 2000, certain of the Company's subsidiaries had total available foreign tax credit carryforwards of approximately $6.6 million, of which approximately $5.3 million may be carried forward five years and $1.3 million have varying expiration dates. During 2000 and 1999, $1.0 million and $2.3 million, respectively, of preacquisition NOLs were utilized by the Company, resulting in tax benefits of $0.4 million and $0.8 million, respectively. The valuation allowance of $11.7 million and $5.3 million at December 31, 2000 and 1999, respectively, relates principally to cumulative unrelieved foreign tax credits and tax losses which are uncertain as to realizability. To the extent that the preacquisition NOLs are utilized in the future and the associated valuation allowance reduced, the tax benefit will be allocated to reduce the cost in excess of net assets of businesses acquired. The change in the valuation allowances for 2000 and 1999 results primarily from the utilization of international tax loss carryforwards, generation of foreign tax credit carryforwards and the release of valuation allowances in certain international jurisdictions based on the Company's revaluation of the realizability of future benefits. The release of valuation allowances in certain jurisdictions was allocated to reduce the cost in excess of net assets of businesses acquired by $0.2 million, and $0.3 million in 2000 and 1999, respectively. - 57 -
58 10. COMMITMENTS AND CONTINGENCIES DISCONTINUED DEFENSE BUSINESS - CONTINGENCIES FEDERAL EXCISE TAX AND OTHER MATTERS RELATED TO THE FIVE-TON TRUCK CONTRACT In 1995, the Company, the United States Army ("Army"), and the United States Department of Justice concluded a settlement of Harsco's previously reported claims against the Army relating to Federal Excise Tax ("FET") arising under a completed 1986 contract for the sale of five-ton trucks to the Army. On September 27, 1995, the Army paid the Company $49 million in accordance with the settlement terms. The Company released the Army from any further liability for those claims, and the Department of Justice released the Company from a threatened action for damages and civil penalties based on an investigation conducted by the Department's Commercial Litigation Branch that had been pending for several years. The settlement preserves the rights of the parties to assert claims and defenses under the Internal Revenue Code, and rights of the Army and the Company to claim certain amounts that may be owed by either party to reconcile possible underpayments or overpayments on the truck contract as part of the formal contract close-out process. The settlement does not resolve the claim by the Internal Revenue Service ("IRS") that, contrary to the Company's position, certain cargo truck models sold by the Company should be considered to have gross vehicle weights in excess of the 33,000 pound threshold under FET law, are not entitled to an exemption from FET under any other theory, and therefore are taxable. In 1999, the IRS assessed an increase in FET of $30.4 million plus penalties of $9.3 million and applicable interest currently estimated to be $53.7 million. In October 1999, the Company posted an $80 million bond required as security by the IRS. This increase in FET takes into account offsetting credits of $9.2 million, based on a partial allowance of the Company's $31.9 million claim that certain truck components are exempt from FET. The IRS disallowed in full the Company's additional claim that it is entitled to the entire $52 million of FET (plus applicable interest currently estimated by the Company to be $48.2 million) the Company has paid on the five-ton trucks, on the grounds that such trucks qualify for the FET exemption applicable to certain vehicles specially designed for the primary function of off-highway transportation. In the event that the Company ultimately receives from the IRS a refund of tax (including applicable interest) with respect to which the Company has already received reimbursement from the Army, the refund would be allocated between the Company and the Army. In August 2000, the Company filed legal action against the Government in the U.S. Court of Federal Claims challenging the assessment and seeking a refund of all FET that the Company has paid on five-ton trucks. That action is proceeding. Although there is risk of an adverse outcome, both the Company and the Army believe that the cargo trucks are not taxable. No recognition has been given in the accompanying financial statements for the Company's claims with the IRS. -58-
59 COMMITMENTS AND CONTINGENCIES (CONTINUED) The settlement agreement with the Army preserved 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 limited 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. As of September 30, 2000, the Army paid Harsco this entire amount and Harsco paid those funds to the IRS, subject to its pending refund claim. Thus, the Company has satisfied a portion of the disputed tax assessment. If the Company succeeds in its refund claim against the IRS, it will owe the Army the amount recovered that corresponds to the $24.6 million. Even if the cargo trucks are ultimately held to be taxable, the Army's contribution of $24.6 million toward payment of the tax (but not interest or penalty, if any), would result in a net maximum liability for the Company of $5.8 million plus penalties and applicable interest currently estimated to be $11.5 million and $53.7 million, respectively. The Company believes it is unlikely that resolution of this matter will have a material adverse effect on the Company's financial position; however, it could have a material effect on quarterly or annual results of operations. OTHER DEFENSE BUSINESS LITIGATION In 1992, the United States Government through its Defense Contract Audit Agency commenced an audit of certain contracts for sale of tracked vehicles by the Company to foreign governments, which were financed by the United States Government through the Defense Security Assistance Agency. The U.S. Attorney's Office then commenced an investigation of those contracts. In December 1999, the Company announced that it reached agreement with the U.S. Government on behalf of its former BMY-Combat Systems Division (BMY) to settle the matter. Under the agreement, BMY pled guilty to a one-count misdemeanor relating to submitting advance payment certifications which resulted in BMY receiving a portion of the payments for the contract prematurely. In accordance with the settlement, Harsco paid the Government a $200,000 fine in June 2000 and in July 2000 paid the $10.8 million in damages for a total of $11 million. The settlement ends the Government's investigation and releases Harsco and BMY from further liability for the issues under investigation. Harsco charged the payment against an existing liability, resulting in no charge to the Company's earnings. -59-
60 COMMITMENTS AND CONTINGENCIES (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 December 31, 2000 and 1999 includes an accrual of $3.5 million and $3.0 million, respectively, for environmental matters. The amounts affecting pre-tax earnings related to environmental matters totaled $1.8 million of expense in 2000, $0.7 million of income in 1999, and $0.8 million of expense in 1998. The liability for future remediation costs is evaluated on a quarterly basis. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. The Company does not expect that any sum it may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse effect on its financial position or results of operations. In the first quarter of 2000 the U.S. Environmental Protection Agency issued a Notice of Violation to the Company for violations of the Clean Air Act arising from slag dust emissions at one of the Company's mill services locations. The Agency is seeking abatement of dust emissions at the site and has advised that it is seeking financial penalties which exceed $100,000. The Company is cooperating with the mill and the Agency to abate the dust emissions and is in settlement discussions with the Agency. OTHER The Company is subject to various other claims, legal proceedings, and investigations covering a wide range of matters that arose in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or by accruals, and if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position or results of operations of the Company. -60-
61 11. CAPITAL STOCK The authorized capital stock consists of 150,000,000 shares of common stock and 4,000,000 shares of preferred stock, both having a par value of $1.25 per share. The preferred stock is issuable in series with terms as fixed by the Board of Directors. None of the preferred stock has been issued. On June 24, 1997, the Company adopted a revised Shareholder Rights Plan. Under the new Plan, the Board declared a dividend to shareholders of record on September 28, 1997, of one right for each share of common stock. The rights may only be exercised if, among other things, a person or group has acquired 15% or more, or intends to commence a tender offer for 20% or more, of the Company's common stock. Each right entitles the holder to purchase 1/100th share of a new Harsco Junior Participating Cumulative Preferred Stock at an exercise price of $150. Once the rights become exercisable, if any person acquires 20% or more of the Company's common stock, the holder of a right will be entitled to receive common stock calculated to have a value of two times the exercise price of the right. The rights, which expire on September 28, 2007, do not have voting power, and may be redeemed by the Company at a price of $.05 per right at any time until the 10th business day following public announcement that a person or group has accumulated 15% or more of the Company's common stock. At December 31, 2000, 750,000 shares of $1.25 par value preferred stock were reserved for issuance upon exercise of the rights. In January 1999, the Board of Directors authorized the purchase, over a one-year period, of 2,000,000 shares of the Company's common stock. In January 2000, the Board of Directors extended the share purchase authorization through January 25, 2001 for the 856,354 shares remaining on the original authorization. In 2000, 351,200 shares were purchased under this authorization. In January 2001, the Board of Directors extended the share purchase authorization through January 22, 2002 for the 505,154 shares still remaining as of December 31, 2000 from the original authorization. In 2000, additional purchases of 3,520 shares, net of issues, were made principally as part of the 1995 Executive Compensation Plan. <TABLE> <CAPTION> COMMON STOCK SUMMARY - -------------------------------------------------------------------------------- SHARES TREASURY SHARES BALANCES ISSUED SHARES OUTSTANDING - -------------------------------------------------------------------------------- <S> <C> <C> <C> December 31, 1997 65,854,087 18,877,957 46,976,130 December 31, 1998 66,075,380 23,825,458 42,249,922 December 31, 1999 66,221,544 26,149,759 40,071,785 DECEMBER 31, 2000 66,309,651 26,504,479 39,805,172 - -------------------------------------------------------------------------------- </TABLE> -61-
62 11. CAPITAL STOCK (CONTINUED) The following is a reconciliation of the average shares of common stock used to compute basic earnings per common share to the shares used to compute diluted earnings per common share as shown on the Consolidated Statement of Income: <TABLE> <CAPTION> (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net Income $ 96,803 $ 90,713 $ 107,513 - -------------------------------------------------------------------------------------------------------------------- Average shares of common stock outstanding used to compute basic earnings per common share 39,964 40,882 45,568 Additional common shares to be issued assuming exercise of stock options, net of shares assumed reacquired 58 135 343 - -------------------------------------------------------------------------------------------------------------------- Shares used to compute dilutive effect of stock options 40,022 41,017 45,911 - -------------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 2.42 $ 2.22 $ 2.36 - -------------------------------------------------------------------------------------------------------------------- Diluted earnings per common share $ 2.42 $ 2.21 $ 2.34 </TABLE> -62-
63 12. STOCK-BASED COMPENSATION The Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below if compensation cost for the Company's stock option plan had been determined based on the fair value at the grant date for awards in accordance with the provisions of SFAS No. 123. <TABLE> <CAPTION> (IN THOUSANDS, EXCEPT PER SHARE) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net income: As reported $ 96,803 $ 90,713 $ 107,513 Pro forma 94,395 89,113 105,736 Basic earnings per share: As reported 2.42 2.22 2.36 Pro forma 2.36 2.18 2.32 Diluted earnings per share: As reported 2.42 2.21 2.34 Pro forma 2.36 2.17 2.30 - -------------------------------------------------------------------------------------------------------------- </TABLE> The fair value of the options granted during 2000, 1999 and 1998 is estimated on the date of grant using the binomial option pricing model. The weighted-average assumptions used and the estimated fair value are as follows: <TABLE> <CAPTION> 2000 1999 1998 - ---------------------------------------------------------------------------- <S> <C> <C> <C> Expected term 4 YEARS 4 years 4 years Expected stock volatility 30.5% 25.0% 16.0% Risk-free interest rate 6.44% 4.65% 5.65% Dividend $ .94 $ .91 $ .88 Rate of dividend increase 5% 5% 5% Fair value $7.13 $5.18 $6.68 - ---------------------------------------------------------------------------- </TABLE> The Company has granted stock options to officers, certain key employees, and directors for the purchase of its common stock under two shareholder-approved plans. The 1995 Executive Incentive Compensation Plan authorizes the issuance of up to 4,000,000 shares of the Company's common stock for use in paying incentive compensation awards in the form of stock options. The 1995 Non-Employee Directors' Stock Plan authorizes the issuance of up to 300,000 shares of the Company's common stock for stock option awards. Options are granted at fair market value at date of grant and become exercisable commencing one year later. The options expire ten years from the date of grant. Upon shareholder approval of these two plans in 1995, the Company terminated the use of the 1986 stock option plan for granting of stock option awards. At December 31, 2000, there were 2,368,060 and 206,000 shares available for granting stock options under the 1995 Executive Incentive Compensation Plan and the 1995 Non-Employee Directors' Stock Plan, respectively. -63-
64 12. STOCK-BASED COMPENSATION (CONTINUED) - -------------------------------------------------------------------------------- Changes during 2000, 1999, and 1998 in options outstanding were: <TABLE> <CAPTION> SHARES UNDER WEIGHTED AVERAGE OPTION EXERCISE PRICE - -------------------------------------------------------------------------------- <S> <C> <C> Outstanding, January 1, 1998 1,085,461 $ 26.06 Granted 275,100 38.30 Exercised (221,293) 24.93 Terminated and expired (16,500) 35.73 - -------------------------------------------------------------------------------- Outstanding, December 31, 1998 1,122,768 29.14 Granted 428,400 26.92 Exercised (146,164) 19.06 Terminated and expired (68,400) 31.36 - -------------------------------------------------------------------------------- Outstanding, December 31, 1999 1,336,604 28.97 Granted 539,247(1) 28.18 Exercised (88,107) 22.11 Terminated and expired (105,052) 33.01 - -------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 2000 1,682,692 $ 29.18 ================================================================================ </TABLE> (1) Included in the 2000 grant are 61,097 options granted to SGB key employees as part of the Company's acquisition of SGB. These options are not a part of the 1995 Executive Incentive Plan, or the 1995 Non-Employee Directors' Stock Plan. -64-
65 12. STOCK-BASED COMPENSATION (CONTINUED) Options to purchase 1,162,947 shares, 932,704 shares and 857,168 shares were exercisable at December 31, 2000, 1999, and 1998, respectively. The following table summarizes information concerning outstanding and exercisable options at December 31, 2000. <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- ------------------------------- REMAINING RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISABLE PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE <S> <C> <C> <C> <C> <C> $ 14.10 - $21.00 127,480 5.4 $ 19.63 77,480 $ 18.78 21.63 - 30.49 1,107,356 7.5 27.39 637,611 26.09 32.81 - 46.16 447,856 6.6 36.31 447,856 36.31 - ------------------------------------------------------------------------------------------------------------------- 1,682,692 1,162,947 - ------------------------------------------------------------------------------------------------------------------- </TABLE> During 2000, 1999, and 1998, the Company had non-cash transactions related to stock option exercises of $0.1 million, $0.5 million, and $1.6 million, respectively, whereby old shares were exchanged for new shares. -65-
66 12. STOCK-BASED COMPENSATION (CONTINUED) As of January 1, 1999, the restricted stock portion of the 1995 Executive Incentive Compensation Plan was discontinued. The following table summarizes the restricted stock activity for 1998: <TABLE> <CAPTION> 1998 - -------------------------------------------------------------------------------- <S> <C> Restricted shares awarded 40,702 Restricted shares forfeited 378 Weighted average market value of stock on grant date $43.22 - -------------------------------------------------------------------------------- </TABLE> During 1998, the Company recorded $.1 million in compensation expense related to restricted stock. -66-
67 13. FINANCIAL INSTRUMENTS OFF-BALANCE SHEET RISK As collateral for performance and to ceding insurers, the Company is contingently liable under standby letters of credit and bonds in the amount of $181.6 million and $165.9 million at December 31, 2000 and 1999, respectively. These standby letters of credit and bonds are generally in force for up to three years. Certain issues have no scheduled expiration date. The Company pays fees to various banks and insurance companies that range from 0.08 to 1.9 percent per annum of their face value. If the Company were required to obtain replacement standby letters of credit and bonds as of December 31, 2000 for those currently outstanding, it is the Company's opinion that the replacement costs would not vary significantly from the present fee structure. At December 31, 2000 and 1999, the Company had $3.1 million and $19.2 million, respectively, of foreign currency forward exchange contracts outstanding. These contracts are part of a worldwide program to minimize foreign currency exchange operating income and balance sheet exposure. The unsecured contracts mature within 12 months and are with major financial institutions. The Company is exposed to credit loss in the event of non-performance by the other parties to the contracts. The Company evaluates the credit worthiness of the counterparties' financial condition and does not expect default by the counterparties. FOREIGN EXCHANGE RISK MANAGEMENT The Company generally has currency exposures in 38 countries. The Company's primary foreign currency exposures are in United Kingdom, France, Canada, South Africa, Brazil, Germany, Australia, and Mexico. Foreign currency forward exchange contracts are used to hedge commitments, such as foreign currency debt, firm purchase commitments, and foreign currency cash flows for certain export sales transactions. -67-
68 13. FINANCIAL INSTRUMENTS (CONTINUED) The following tables summarize by major currency the contractual amounts of the Company's forward exchange contracts in U.S. dollars as of December 31, 2000 and 1999. The "Buy" amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the "Sell" amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. <TABLE> <CAPTION> (IN THOUSANDS) AS OF DECEMBER 31, 2000 - -------------------------------------------------------------------------------------------------------------- U.S. DOLLAR RECOGNIZED UNREALIZED TYPE EQUIVALENT MATURITY GAIN (LOSS) GAIN (LOSS) - -------------------------------------------------------------------------------------------------------------- Forward exchange contracts: <S> <C> <C> <C> <C> <C> British pounds Buy $1,938 Various in 2001 $(74) $ -- British pounds Sell 501 Various in 2001 (2) -- Australian dollars Buy 199 Various in 2001 -- 2 Japanese yen Buy 186 January 4, 2001 -- (12) Euros Buy 160 January 4, 2001 -- 7 British pounds Sell 70 January 4, 2001 -- 2 - ------------------------------------------------------------------------------------------------------------- $3,054 $(76) $ (1) ============================================================================================================= </TABLE> At December 31, 2000, the Company had executed forward exchange contracts in British pounds, which were used to hedge certain future payments between the Company and its various subsidiaries. These forward contracts do not qualify as hedges for financial reporting purposes. At December 31, 2000, the Company had recorded net losses of $0.1 million on these contracts. The Company also had forward exchange contracts in British pounds, Japanese yen, euros and Australian dollars, which were used to hedge equipment purchases. Since these contracts hedge identifiable foreign currency firm commitments, the losses were deferred and will be accounted for as part of the underlying transactions. <TABLE> <CAPTION> (IN THOUSANDS) AS OF DECEMBER 31, 1999 - -------------------------------------------------------------------------------------------------------------- U.S. DOLLAR RECOGNIZED UNREALIZED TYPE EQUIVALENT MATURITY GAIN (LOSS) GAIN (LOSS) - -------------------------------------------------------------------------------------------------------------- Forward exchange contracts: <S> <C> <C> <C> <C> <C> Euros Buy $17,339 January 18, 2000 $(661) $ - British pounds Buy 1,506 Various in 2000 79 - French francs Buy 229 Various in 2000 - (13) British pounds Buy 93 Various in 2000 - (2) - ------------------------------------------------------------------------------------------------------------- $19,167 $(582) $(15) ============================================================================================================= </TABLE> -68-
69 13. FINANCIAL INSTRUMENTS (CONTINUED) At December 31, 1999, the Company had executed forward exchange contracts in euros and British pounds, which were used to hedge certain future payments between the Company and its various subsidiaries. These forward contracts did not qualify as hedges for financial reporting purposes. At December 31, 1999, the Company had recorded net losses of $0.6 million on these contracts. In January 2000, the euro contract was extended to March 18, 2000. The Company also had forward exchange contracts in French francs and British pounds, which were used to hedge equipment purchases. Since these contracts hedge identifiable foreign currency firm commitments, the losses were deferred and were accounted for as part of the underlying transactions. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments, and accounts receivable. The Company places its cash and cash equivalents with high quality financial institutions and, by policy, limits the amount of credit exposure to any one institution. Concentrations of credit risk with respect to accounts receivable are limited due to the Company's large number of customers and their dispersion across different industries and geographies. The Company generally does not require collateral or other security to support customer receivables. FAIR VALUE OF FINANCIAL INSTRUMENTS The major methods and assumptions used in estimating the fair values of financial instruments are: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value due to the relatively short period to maturity of these instruments. LONG-TERM DEBT The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. FOREIGN CURRENCY EXCHANGE CONTRACTS The fair value of foreign currency exchange contracts are estimated by obtaining quotes from brokers. The carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 2000 and 1999 are: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 - -------------------------------------------------------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Cash and cash equivalents $ 56,422 $ 56,422 $ 51,266 $ 51,266 Long-term debt 789,069 790,070 423,097 416,925 Foreign currency exchange contracts 3,054 2,973 19,167 18,571 - -------------------------------------------------------------------------------------------------- </TABLE> -69-
70 14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA The Company reports information about its operating segments according to the "management approach". This approach is based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. The Company's reportable segments are identified based upon differences in products, services, and markets served. The Company's business units are aggregated into three reportable segments. These segments and the type of products and services offered include: INFRASTRUCTURE Major products and services include scaffolding, powered access equipment, shoring, concrete forming products, erection and dismantling services and a variety of other access equipment; railway track maintenance equipment and services; industrial grating and bridge decking; process equipment, including industrial blenders, dryers, mixers, water heaters and boilers. Products and services are provided to the oil, chemical and petrochemical industries; commercial and industrial construction firms; public utilities; industrial plants; private and government-owned railroads worldwide; urban mass transit operators; process industries; bridge repair companies; and infrastructure repair and maintenance markets. Other customers include the chemical, food processing and pharmaceutical industries; and the institutional building and retrofit markets. MILL SERVICES This segment provides mill services, principally for the global steel industry. Mill services include slag processing, marketing, and disposal; metal reclamation; slab management systems; materials handling and scrap management programs; in-plant transportation; and a variety of other services. Similar services are provided to non-ferrous metallurgical industries, such as aluminum, nickel, and copper. Also, slag recovery services are provided to electric utilities from which granules for asphalt roofing shingles and slag abrasives for industrial surface preparation are derived. GAS AND FLUID CONTROL Major products and services are gas containment cylinders and tanks including cryogenic equipment; valves, regulators, and gauges, including scuba and life support equipment; industrial pipe fittings; and air-cooled heat exchangers. Major customers include various industrial markets; hardware, plumbing, and petrochemical sectors; natural gas and process industries; propane, compressed gas, life support, scuba, and refrigerant gas industries; gas equipment companies; welding distributors; medical laboratories; beverage carbonation users; and the animal husbandry industry. -70-
71 14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED) OTHER INFORMATION The measurement basis of segment profit or loss is net income. Interest income is recorded by each segment as incurred. Interest expense is allocated to the segments based on actual interest expense incurred by international operations and based on internal borrowings at estimated weighted average interest rates for domestic operations. Income taxes are allocated to the segments based on actual income tax expense incurred, or where aggregated for tax purposes, based on the effective income tax rates for the countries in which they operate. Sales of the Company in the United States and the United Kingdom exceed 10% of consolidated sales with 58% and 14%, respectively. No single customer represented 10% or more of the Company's sales during 2000, 1999, or 1998. There are no significant inter-segment sales. Corporate assets include principally cash, investments, prepaid pension costs, and United States deferred taxes. Assets in the United Kingdom represent 26% of total segment assets as of December 31, 2000, and 12% of total segment assets as of December 31, 1999, and are disclosed separately in the geographic area information. SEGMENT INFORMATION <TABLE> <CAPTION> (IN MILLIONS) INFRA- GAS AND S3 STRUCT MILL FLUID NETWORKS GENERAL CONSOLIDATED TWELVE MONTHS ENDED DECEMBER 31, 2000 (4) SERVICES CONTROL LLC CORPORATE TOTAL - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net sales to unaffiliated customers (1) $ 703.6 $ 757.4 $ 542.4 $ -- $ -- $ 2,003.4 - ------------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 62.3 $ 92.6 $ 41.1 $ -- $ (1.3) $ 194.7 Equity in income (loss) of affiliates, net (2) 0.6 0.8 -- (3.4) -- (2.0) Interest income 1.3 4.5 0.1 -- 0.1 6.0 Interest expense (24.1) (10.7) (3.6) -- (11.7) (50.1) Income tax (expense) benefit (13.8) (23.9) (13.7) 1.2 3.4 (46.8) Minority interest in net (income) loss (0.2) (4.8) -- -- -- (5.0) - ------------------------------------------------------------------------------------------------------------------------- Segment net income (loss) $ 26.1 $ 58.5 $ 23.9 $ (2.2) $ (9.5) $ 96.8 - ------------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> (IN MILLIONS) GAS AND S3 INFRA- MILL FLUID NETWORKS GENERAL CONSOLIDATED Twelve Months Ended December 31, 1999 (3) STRUC SERVICES CONTROL LLC CORPORATE TOTAL - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net sales to unaffiliated customers (1) $ 432.5 $ 737.8 $ 579.6 $ -- $ -- $ 1,749.9 - -------------------------------------------------------------------------------------------------------------------------- Operating income (loss) $ 41.2 $ 78.2 $ 47.5 $ -- $ (0.2) $ 166.7 Equity in income of affiliates, net (2) -- 3.0 -- -- -- 3.0 Interest income 0.2 4.3 0.1 -- 0.1 4.7 Interest expense (6.3) (10.8) (4.8) -- (5.1) (27.0) Income tax (expense) benefit (12.6) (24.4) (15.9) -- 1.3 (51.6) Minority interest in net (income) loss -- (5.2) 0.1 -- -- (5.1) - -------------------------------------------------------------------------------------------------------------------------- Segment net income (loss) $ 22.5 $ 45.1 $ 27.0 $ -- $ (3.9) $ 90.7 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> -71-
72 14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED) <TABLE> <CAPTION> (IN MILLIONS) GAS AND S3 INFRA- MILL FLUID NETWORKS GENERAL CONSOLIDATED Twelve Months Ended December 31, 1998 (3) STRUCT SERVICES CONTROL LLC CORPORATE TOTAL - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net sales to unaffiliated customers (1) $ 399.2 $ 761.1 $ 605.2 $ -- $ -- $ 1,765.5 - ---------------------------------------------------------------------------------------------------------------------------- Operating income $ 32.9 $ 82.9 $ 72.3 $ -- $ 2.4 $ 190.5 Equity in income of affiliates, net (2) -- 1.4 -- -- -- 1.4 Interest income 0.4 4.8 0.2 -- 3.0 8.4 Interest expense (5.4) (11.0) (4.1) -- -- (20.5) Income tax expense (9.3) (29.9) (27.5) -- (0.7) (67.4) Minority interest in net income -- (4.9) -- -- -- (4.9) - ----------------------------------------------------------------------------------------------------------------------------- Segment net income $ 18.6 $ 43.3 $ 40.9 $ -- $ 4.7 $ 107.5 ============================================================================================================================= </TABLE> (1) In order to comply with Emerging Issues Task Force (EITF) Issue No. 00-10, all shipping and handling costs have been classified as cost of services sold or as cost of products sold rather than as reductions of sales. The income statement for the twelve months ended December 31, 1999 and 1998 have been reclassified to reflect this change. The reclassification had no effect on previously reported operating income or net income for the twelve months ended December 31, 1999 and 1998. (2) Equity in income (loss) of affiliates is now separately reported. In prior years these amounts were classified in operating income. Amounts previously reported as operating income for the twelve months ended December 31, 1999 and 1998 were $81.2 million and $84.3 million, respectively for Mill Services Segment and a consolidated total of $169.7 million and $191.9 million, respectively. Reported operating income amounts for the other segments are unchanged. (3) Segment information reflects the first quarter 1999 reorganization of the Patterson-Kelley division. Segment information for 1998 has been reclassified to reflect this change. The reorganization resulted in the realignment of the heat transfer and industrial blending equipment product lines from the Gas and Fluid Control Segment to the Infrastructure Segment. Sales of these product lines were $27.3 million, $26.9 million, and $29.2 million for the years 2000, 1999, and 1998, respectively. (4) The SGB scaffolding and access service business was acquired in June 2000 and is included as part of the Infrastructure Segment. <TABLE> <CAPTION> SEGMENTS ASSETS DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES - ----------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) 2000 1999 1998 2000 1999 1998 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Infrastructure (a) (b) $ 906.4 $ 325.7 $ 241.1 $ 38.0 $ 17.0 $ 15.9 $ 53.8 $ 17.9 $ 26.1 Mill Services(c) 900.9 934.6 922.7 97.7 99.5 98.2 116.5 134.9 102.7 Gas and Fluid Control 312.3 347.9 380.9 19.6 18.1 16.1 9.4 21.4 30.6 - ----------------------------------------------------------------------------------------------------------------------- Segment totals 2,119.6 1,608.2 1,544.7 155.3 134.6 130.2 179.7 174.2 159.4 Corporate 61.3 51.6 78.9 3.8 1.3 1.2 0.3 1.0 0.4 - ----------------------------------------------------------------------------------------------------------------------- Total $ 2,180.9 $ 1,659.8 $ 1,623.6 $ 159.1 $ 135.9 $ 131.4 $ 180.0 $ 175.2 $ 159.8 ======================================================================================================================= </TABLE> (a) The Pandrol Jackson railway track maintenance business was acquired in October 1999 and is included as part of the Infrastructure Segment. (b) The SGB scaffolding and access service business was acquired in June 2000 and is included as part of the Infrastructure Segment. (c) A non-cash amount of $26.6 million of loan notes was issued for the Faber Prest acquisition related to the Mill Services Segment in 1998. -72-
73 14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED) INFORMATION BY GEOGRAPHIC AREA (1) <TABLE> <CAPTION> GEOGRAPHIC AREA NET SALES TO UNAFFILIATED CUSTOMERS SEGMENT ASSETS - ---------------------------------------------------------------------------------------------- (IN MILLIONS) 2000 (2)(3) 1999 (3) 1998 (3) 2000 (2) 1999 1998 - ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> United States $ 1,152.6 $ 1,126.4 $ 1,114.6 $ 810.6 $ 797.1 $ 721.2 United Kingdom 286.5 156.6 128.2 558.6 186.2 180.7 All Other 564.3 466.9 522.7 750.4 624.9 642.8 - ---------------------------------------------------------------------------------------------- Segment Totals $ 2,003.4 $ 1,749.9 $ 1,765.5 $ 2,119.6 $ 1,608.2 $ 1,544.7 ============================================================================================== </TABLE> (1) Revenues are attributed to individual countries based on the location of the facility generating the revenue. (2) Included in above amounts are sales and assets of SGB Group that was acquired in June 2000 with a major portion of sales and assets located in the United Kingdom. (3) In order to comply with EITF Issue No. 00-10, all shipping and handling costs have been classified as cost of services sold or as cost of products sold rather than as reductions of sales. Sales for 1999 and 1998 have been reclassified to reflect this change. -73-
74 15. OTHER (INCOME) AND EXPENSES In the years 2000, 1999, and 1998, the Company recorded Other (income) and expenses of $1.3 million, $6.0 million, and $(4.3) million, respectively: <TABLE> <CAPTION> OTHER (INCOME) AND EXPENSES - --------------------------------------------------------------------------------------------- (IN THOUSANDS) 2000 1999 1998 - --------------------------------------------------------------------------------------------- <S> <C> <C> <C> Net gains $ (4,325) $ (560) $ (29,107) Impaired asset write-downs 1,876 2,878 14,410 Employee termination benefit costs 3,854 2,889 6,543 Costs to exit activities 590 502 2,792 Other (661) 310 1,098 - -------------------------------------------------------------------------------------------- Total $ 1,334 $ 6,019 $ (4,264) ============================================================================================ </TABLE> NET GAINS Net gains for 2000 reflect gains in all three operating segments recorded principally on the sales of non-core product lines and redundant properties, primarily land, buildings and related equipment. Net gains for 1998 consist principally of a pre-tax net gain of $27 million recorded on the October 1998 sale of the Nutter Engineering unit of the Gas and Fluid Control Segment. Such gains are reflected as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows. Total proceeds associated with these gains are included in Proceeds from the sale of businesses and Proceeds from sale of property, plant and equipment in the investing activities section of the Consolidated Statement of Cash Flows. Total proceeds associated with 1998 gains were $42.9 million. Other related information concerning dispositions is discussed in Note 3, Acquisitions and Dispositions. IMPAIRED ASSET WRITE-DOWNS Impaired asset write-downs for 2000, 1999 and 1998 include $1.9 million, $1.9 million and $6.1 million, respectively, of pre-tax, non-cash, write-downs of the Company's investment in Bio-Oxidation Services Inc., which is held for disposal. Bio-Oxidation Services Inc. is included in the Gas and Fluid Control Segment. The write-down amounts were measured on the basis of the lower of carrying amount or fair value less costs to sell. Fair value was determined using available information based upon the estimated amount at which the assets could be sold in a current transaction between willing parties. The investment carrying values were $4.4 million, $6.6 million and $7.6 million as of December 31, 2000, 1999 and 1998, respectively. For the years 2000, 1999 and 1998, Bio-Oxidation Services Inc. recorded pre-tax losses of $1.9 million, $2.3 million and $9.8 million, respectively. The Company estimates that disposal will occur during 2001. -74-
75 15. OTHER (INCOME) AND EXPENSES (CONTINUED) Impaired asset write-downs for 1998 also include a $6.1 million pre-tax, non-cash, write-down of assets, principally property, plant and equipment in the Mill Services Segment. The write-down became necessary as a result of significant adverse changes in the international economic environment and the steel industry. The impairment loss was measured as the amount by which the carrying amount of assets exceeded their estimated fair value. Fair value was estimated based upon the expected future realizable net cash flows. In September 1999, assets associated with a substantial portion of this provision were sold in conjunction with the termination settlement of a contract in Russia. Non-cash impaired asset write-downs are included in Other (income) and expenses in the Consolidated Statement of Cash Flows as adjustments to reconcile net income to net cash provided by operating activities. EMPLOYEE TERMINATION BENEFIT COSTS Employee termination benefit costs consist principally of severance arrangements to employees terminated as a result of management reorganization actions. Under these reorganization actions, the Company's management has established and approved specific plans of termination. Details of the termination benefit plans have been communicated to the affected employees prior to recognition of related provisions. Non-cash charges for employee termination benefit costs are included as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows. During 2000, $3.9 million of employee termination benefit costs were incurred, principally in the Mill Services Segment, primarily in Holland, Belgium and Italy. Additionally, termination benefit costs were incurred in the United States in the Gas and Fluid Control Segment as well as at corporate headquarters. In 2000, approximately 294 employees were included in employee termination arrangements initiated by the Company and approximately $3.3 million of cash payments were made under such arrangements. The payments are reflected as uses of operating cash in the Consolidated Statement of Cash Flows. During 1999, $2.9 million of expense related to employee termination benefits was incurred, principally in the Mill Services Segment, primarily in France and the United Kingdom. In 1999, approximately 220 employees were included in employee termination arrangements initiated by the Company, and approximately $1.8 million of cash payments were made under such arrangements. An additional $0.8 million was disbursed in 2000 for the 1999 reorganization actions. -75-
76 15. OTHER (INCOME) AND EXPENSES (CONTINUED) During 1998, $6.5 million of expense related to employee termination benefits was incurred, principally in the Mill Services Segment primarily in South Africa, United States, France, and Germany. In 1998, approximately 670 employees were included in employee termination arrangements initiated by the Company and approximately $2.4 million of cash payments were made under such arrangements. An additional $0.2 million and $3.3 million were disbursed in 2000 and 1999, respectively, for the 1998 reorganization actions. EMPLOYEE TERMINATION BENEFIT COSTS AND PAYMENTS <TABLE> <CAPTION> (IN MILLIONS) SUMMARY OF ACTIVITY - -------------------------------------------------------------------------------- Original reorganization action period 2000 1999 1998 - -------------------------------------------------------------------------------- <S> <C> <C> <C> Employee termination benefits expense $ 3.9 $ 2.9 $ 6.5 - -------------------------------------------------------------------------------- Disbursements:(1) In 1998 -- -- (2.4) In 1999 -- (1.8) (3.3) In 2000 (3.3) (0.8) (0.2) - -------------------------------------------------------------------------------- Total disbursements (3.3) (2.6) (5.9) Other 0.3 (0.3) (0.4) - -------------------------------------------------------------------------------- Remaining payments as of December 31, 2000(2) $ 0.9 $ -- $ 0.2 ================================================================================ </TABLE> (1) - Disbursements are categorized according to the original reorganization action period to which they relate (2000, 1999 or 1998). Cash severance payments in 2000 occurred principally in the Mill Services Segment primarily in Europe. Cash severance payments in 1999 occurred principally in the Mill Services Segment in South Africa principally for 1998 reorganization actions. (2) - Remaining payments are categorized according to the original reorganization action period to which they relate (2000 or 1998). -76-
77 15. OTHER (INCOME) AND EXPENSES (CONTINUED) EMPLOYEE TERMINATIONS - NUMBER OF EMPLOYEES <TABLE> <CAPTION> SUMMARY OF ACTIVITY - -------------------------------------------------------------------------------- Original reorganization action period 2000 1999 1998 - -------------------------------------------------------------------------------- <S> <C> <C> <C> Employees affected by new reorganization actions 294 220 670 - -------------------------------------------------------------------------------- Employee terminations: In 1998 -- -- (349) In 1999 -- (172) (352) In 2000 (282) (39) (1) - -------------------------------------------------------------------------------- Total terminations (282) (211) (702) Other -- (9) 35 - -------------------------------------------------------------------------------- Remaining terminations as of December 31, 2000 12 -- 3 ================================================================================ </TABLE> COSTS TO EXIT ACTIVITIES Costs to exit activities consist of incremental direct costs of reorganization actions and lease run-out costs. Such costs are recorded when a specific exit plan is approved by management. Relocation expenses, such as employee moving costs, are classified as exit costs and are expensed as incurred. Other costs classified in this category are generally expensed as incurred. During 1998, $1.0 million and $0.8 million of exit costs, principally relocation expenses, were included in the Mill Services and Infrastructure Segments, respectively. -77-
78 TWO-YEAR SUMMARY OF QUARTERLY RESULTS (UNAUDITED) <TABLE> <CAPTION> (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2000 - -------------------------------------------------------------------------------- QUARTERLY FIRST SECOND THIRD FOURTH - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales(1) $457.5 $465.6 $541.4 $538.9 Gross profit(2) 92.6 108.7 133.0 133.2 Net income 20.2 28.2 22.3 26.1 Diluted earnings per share .50 .70 .56 .65 </TABLE> <TABLE> <CAPTION> (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 - -------------------------------------------------------------------------------- QUARTERLY FIRST SECOND THIRD FOURTH - -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales(1) $412.1 $438.8 $432.1 $466.9 Gross profit(2) 82.8 94.7 93.7 102.2 Net income 14.8 23.8 26.1 26.0 Diluted earnings per share .35 .58 .64 .65 </TABLE> Notes: (1) In order to comply with EITF Issue No. 00-10, all shipping and handling costs have been classified as cost of services sold or as cost of products sold rather than as reductions of sales. Sales for the first three quarters of 2000 and for the year 1999 have been reclassified to reflect this change. (2) Gross profit is defined as Net sales less Cost of sales, Other (income) and expenses, and Research and development expenses. -78-
79 COMMON STOCK PRICE AND DIVIDEND INFORMATION <TABLE> <CAPTION> MARKET PRICE PER SHARE ------------------------- DIVIDENDS DECLARED HIGH LOW PER SHARE - -------------------------------------------------------------------------------- <S> <C> <C> <C> 2000 First Quarter $ 31 5/8 $ 24 $ .235 Second Quarter 30 25 31/64 .235 Third Quarter 29 7/8 21 1/4 .235 Fourth Quarter 26 3/4 17 11/16 .24 1999 First Quarter $ 33 $ 25 $ .225 Second Quarter 34 3/8 23 1/16 .225 Third Quarter 32 5/16 25 3/8 .225 Fourth Quarter 31 7/8 26 .235 - -------------------------------------------------------------------------------- </TABLE> -79-
80 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: None. -80-
81 PART III Item 10. Directors and Executive Officers of the Registrant: (a) Identification of Directors: Information regarding the identification of directors and positions held is incorporated by reference to the 2001 Proxy Statement. (b) Identification of Executive Officers: Set forth below, as of March 2, 2001, are the executive officers (this excludes one corporate officer who is not deemed an "executive officer" within the meaning of applicable Securities and Exchange Commission regulations) of the Company and certain information with respect to each of them. The executive officers were elected to their respective offices on April 27, 2000, or at various times during the year as noted. All terms expire on April 25, 2001. There are no family relationships between any of the officers. <TABLE> <CAPTION> Name Age Principal Occupation or Employment - ---- --- ---------------------------------- <S> <C> <C> Corporate Officers: D. C. Hathaway 56 Chairman, President and Chief Executive Officer since July 31, 2000. Chairman and Chief Executive Officer from January 1, 1998 to July 31, 2000. Served as Chairman, President and Chief Executive Officer from April 1, 1994 to December 31, 1997, and President and Chief Executive Officer from January 1, 1994 to April 1, 1994. Director since 1991. From 1991 to 1993, served as President and Chief Operating Officer. From 1986 to 1991 served as Senior Vice President-Operations of the Corporation. Served as Group Vice President from 1984 to 1986 and as President of the Dartmouth Division of the Corporation from 1979 until 1984. G. D. H. Butler 55 Senior Vice President - Operations of the Corporation effective September 26, 2000. Concurrently serves as President of the Heckett MultiServ-East Division and President of the SGB Division. Was President of the Heckett MultiServ-East Division from July 1, 1994, to September 26, 2000. Served as Managing Director - Eastern Region of the Heckett MultiServ Division from January 1, 1994 to June 30, 1994. Served in various officer positions within MultiServ International, N. V. prior to 1994 and prior to Harsco's acquisition of that corporation in August, 1993. </TABLE> -81-
82 <TABLE> <CAPTION> Name Age Principal Occupation or Employment - ---- --- ---------------------------------- <S> <C> <C> P. C. Coppock 50 Senior Vice President, Chief Administrative Officer, General Counsel and Secretary of the Corporation effective January 1, 1994. Served as Vice President, General Counsel and Secretary of the Corporation from May 1, 1991 to December 31, 1993. From 1989 to 1991 served as Secretary and Corporate Counsel and as Assistant Secretary and Corporate Counsel from 1986 to 1989. Served in various Corporate Attorney positions for the Corporation since 1981. S. D. Fazzolari 48 Senior Vice President, Chief Financial Officer and Treasurer of the Corporation effective August 24, 1999. Served as Senior Vice President and Chief Financial Officer from January 1998 to August 1999. Served as Vice President and Controller from January 1994 to December 1997 and as Controller from January 1993 to January 1994. Previously served as Director of Auditing from 1985 to 1993, and served in various auditing positions from 1980 to 1985. R. W. Kaplan 49 Senior Vice President-Operations of the Corporation effective July 1, 1998. Concurrently serves as President of the Harsco Gas & Fluid Control Group and was President of the Taylor-Wharton Gas Equipment Division from February 1, 1994 to November 16, 1999. Served as Vice President and Treasurer of the Corporation from January 1992 to February 1994. Served as Treasurer of the Corporation from May 1991 to December 1992. Previously served as Vice President and General Manager of the Plant City Steel/Taylor-Wharton Division from 1987 to 1991 and Vice President and Controller of the Division from 1985 to 1987. Previously served in various Corporate treasury/financial positions since 1979. S. J. Schnoor 47 Vice President and Controller of the Corporation effective May 15, 1998. Served as Vice President and Controller of the Patent Construction Systems Division from February 1996 to May 1998 and as Controller of the Patent Construction Systems Division from January 1993 to February 1996. Previously served in various auditing positions for the Corporation from 1988 to 1993. </TABLE> -82-
83 (c) Beneficial Ownership Reporting Compliance Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the 2001 Proxy Statement. Item 11. Executive Compensation: Information regarding compensation of executive officers and directors is incorporated by reference to the sections entitled "Executive Compensation and Other Information" and "Directors' Compensation" of the 2001 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management: Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the section entitled "Share Ownership of Management" of the 2001 Proxy Statement. Item 13. Certain Relationships and Related Transactions: Information regarding certain relationships and related transactions is incorporated by reference to the section entitled "Employment Agreements with Officers of the Company" of the 2001 Proxy Statement. -83-
84 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K: (a) 1. The Consolidated Financial Statements are listed in the index to Item 8, "Financial Statements and Supplementary Data," on page 29. (a) 2. The following financial statement schedule should be read in conjunction with the Consolidated Financial Statements (see Item 8, "Financial Statements and Supplementary Data"): <TABLE> <CAPTION> Page ---- <S> <C> Report of Independent Accountants on Financial Statement Schedule 85 Schedule II - Valuation and Qualifying Accounts for the years 2000, 1999 and 1998 86 </TABLE> Schedules other than those listed above are omitted for the reason that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. Condensed financial information of the registrant is omitted since there are no substantial amounts of "restricted net assets" applicable to the Company's consolidated subsidiaries. Financial statements of 50% or less owned unconsolidated companies are not submitted inasmuch as (1) the registrant's investment in and advances to such companies do not exceed 20% of the total consolidated assets, (2) the registrant's proportionate share of the total assets of such companies does not exceed 20% of the total consolidated assets, and (3) the registrant's equity in the income from continuing operations before income taxes of such companies does not exceed 20% of the total consolidated income from continuing operations before income taxes. -84-
85 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Harsco Corporation: Our audits of the consolidated financial statements referred to in our report dated January 30, 2001 appearing on page 30 of this Form 10-K also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 30, 2001 -85-
86 SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS (dollars in thousands) <TABLE> <CAPTION> COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- Additions (Deductions) Additions ---------- ---------------------- Due to Balance at Charged to Currency Balance at Beginning Cost and Translation End of Description of Period Expenses Adjustments Other(1) Period ----------- --------- -------- ----------- -------- ------ <S> <C> <C> <C> <C> <C> For the year 2000: Deducted from Receivables: Uncollectible accounts $ 13,339 $ 3,997 $ (494) $ 9,236 (2) $ 26,078 ======== ======== ======== ======== ======== Deducted from Inventories: Inventory valuations $ 10,684 $ 2,121 $ (284) $ (3,483)(3) $ 9,038 ======== ======== ======== ======== ======== Other Reorganization and Valuation Reserves $ 17,080 $ 2,116 $ (666) $ 5,318 (4) $ 23,848 ======== ======== ======== ======== ======== For the year 1999: Deducted from Receivables: Uncollectible accounts $ 13,602 $ 4,844 $ (153) $ (4,954) $ 13,339 ======== ======== ======== ======== ======== Deducted from Inventories: Inventory valuations $ 5,777 $ 6,383 $ (132) $ (1,344) $ 10,684 ======== ======== ======== ======== ======== Other Reorganization and Valuation Reserves $ 25,316 $ 5,206 $ (389) $(13,053)(5) $ 17,080 ======== ======== ======== ======== ======== For the year 1998: Deducted from Receivables: Uncollectible accounts $ 6,834 $ 9,166 $ 9 $ (2,407) $ 13,602 ======== ======== ======== ======== ======== Deducted from Inventories: Inventory valuations $ 3,687 $ 6,871 $ (30) $ (4,751) $ 5,777 ======== ======== ======== ======== ======== Other Reorganization and Valuation Reserves $ 3,102 $ 16,423 $ 93 $ 5,698 (6) $ 25,316 ======== ======== ======== ======== ======== </TABLE> (1) Amounts charged to valuation account during the year. (2) Includes $18,791 increase due to opening balance sheet receivable reserves of SGB Group and $5,630 charged against those reserves. (3) Includes $3,309 increase due to opening balance sheet inventory reserves of SGB Group. (4) Includes $15,602 increase due to opening balance sheet reorganization reserves of SGB Group and $2,338 charged against those reserves. (5) Includes $5,942 of charges against the opening balance sheet reorganization reserves of Faber Prest acquired in 1998. (6) Includes $12,328 increase due to opening balance sheet reorganization reserves for companies acquired in 1998. -86-
87 (a) 3. Listing of Exhibits Filed with Form 10-K: <TABLE> <CAPTION> Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- <S> <C> <C> 3(a) Articles of Incorporation as Exhibit volume, 1990 10-K amended April 24, 1990 3(b) Certificate of Amendment of Exhibit volume, 1999 10-K Articles of Incorporation filed June 3, 1997 3(c) Certificate of Designation filed Exhibit volume, 1997 10-K September 25, 1997 3(d) By-laws as amended April 25, 1990 Exhibit volume, 1990 10-K 4(a) Harsco Corporation Rights Incorporated by reference to Agreement dated as of September Form 8-A, filed September 26, 1997 28, 1997, with Chase Mellon Shareholder Services L.L.C. 4(b) Registration of Preferred Stock Incorporated by reference to Purchase Rights Form 8-A dated October 2, 1987 4(c) Current Report on dividend Incorporated by reference to distribution of Preferred Form 8-K dated October 13, 1987 Stock Purchase Rights 4(d) Debt Securities Registered Incorporated by reference to under Rule 415 (6% Notes) Form S-3, Registration No. 33-42389 dated August 23, 1991 4(e) 6% 1993 Notes due September 15, Incorporated by reference to the 2003 described in Prospectus Prospectus Supplement dated Supplement dated September 8, September 8, 1993 to Form S-3, 1993 to Form S-3 Registration under Registration No. 33-42389 Rule 415 dated August 23, 1991 dated August 23, 1991 4(f) Debt and Equity Securities Registered Incorporated by reference to Form S-3, Registration No. 33-56885 dated December 15, 1994, effective date January 12, 1995 </TABLE> -87-
88 (a) 3. Listing of Exhibits Filed with Form 10-K (continued): <TABLE> <CAPTION> Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- <S> <C> <C> 4(g) Harsco Finance B. V. Exhibit to 10-Q for the period L200 million, 7.25% ended September 30, 2000 Guaranteed Notes due 2010 4(h) Cash Offer for SGB Group PLC Exhibit to 10-Q for the period ended June 30, 2000 Material Contracts - Credit facility 10(a) $50,000,000 Facility agreement dated Exhibit volume, 2000 10-K 15 December 2000 10(b) $50,000,000 Facility agreement dated Exhibit volume, 2000 10-K 12th January 2001 10(c) Commercial Paper Payment Agency Exhibit volume, 2000 10-K Agreement Dated October 1, 2000, Between Salomon Smith Barney Inc. and Harsco Corporation 10(d) Commercial Paper Dealer Agreement Exhibit volume, 1994 10-K Dated October 11, 1994, Between Lehman Brothers, Inc. and Harsco Corporation 10(e) Issuing and Paying Agency Agreement, Exhibit volume, 1994 10-K Dated October 12, 1994, Between Morgan Guaranty Trust Company of New York and Harsco Corporation 10(f) Commercial Paper Agreement with Exhibit to 10-Q for the period Banque Bruxelles Lambert S.A./Bank ended September 30, 1996 Brussel Lambert N.V. dated September 25, 1996. 10(g) 364-Day Credit Agreement Exhibit to 10-Q for the period ended September 30, 2000 10(h) Five Year Credit Agreement Exhibit to 10-Q for the period ended September 30, 2000 </TABLE> -88-
89 (a) 3. Listing of Exhibits Filed with Form 10-K (continued): <TABLE> <CAPTION> Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- <S> <C> <C> Material Contracts - Underwriting 10(i) Commercial Paper Placement Agency Exhibit volume, 1998 10-K Agreement dated November 6, 1998, between Chase Securities, Inc. and Harsco Corporation 10(j) Underwriting Agreement for Exhibit volume, 1987 10-K Debt Securities dated October 22, 1987 Material Contracts - Management Contracts and Compensatory Plans 10(k) Harsco Corporation Supplemental Exhibit volume, 1997 10-K Retirement Benefit Program as amended January 27, 1998 10(l) Trust Agreement between Harsco Exhibit volume, 1987 10-K Corporation and Dauphin Deposit Bank and Trust Company dated July 1, 1987 relating to the Supplemental Retirement Benefit Plan 10(m) Harsco Corporation Supplemental Exhibit volume, 1991 10-K Executive Retirement Plan as amended 10(n) Trust Agreement between Harsco Exhibit volume, 1988 10-K Corporation and Dauphin Deposit Bank and Trust Company dated November 22, 1988 relating to the Supplemental Executive Retirement Plan 10(o) 1995 Executive Incentive Compensation Proxy Statement dated March 22, Plan 1995 on Exhibit A pages A-1 through A-12 </TABLE> -89-
90 (a) 3. Listing of Exhibits Filed with Form 10-K (continued): <TABLE> <CAPTION> Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- <S> <C> <C> 10(p) Authorization, Terms and Conditions of Exhibit volume, 2000 10-K the Annual Incentive Awards, as amended and Restated January 1, 2001, under the 1995 Executive Incentive Compensation Plan Employment Agreements - 10(q) D. C. Hathaway Exhibit volume, 1989 10-K Uniform agreement, the same as shown for J. J. Burdge " L. A. Campanaro " " " P. C. Coppock " " " S. D. Fazzolari " " " R. W. Kaplan " " 10(r) Special Supplemental Retirement Exhibit Volume, 1988 10-K Benefit Agreement for D. C. Hathaway 10(s) Settlement Agreement with Exhibit to 10-Q for the period Leonard A. Campanaro ended June 30, 2000 Director Indemnity Agreements - 10(t) R. F. Nation Exhibit volume, 1989 10-K Uniform agreement, same as shown for J. J. Burdge " A. J. Sordoni, III " " " R. C. Wilburn " " " D. C. Hathaway " " " J. I. Scheiner " " " C. F. Scanlan " " " J. J. Jasinowski " " " J. P. Viviano " " 10(u) Harsco Corporation Deferred Exhibit volume, 2000 10-K Compensation Plan for Non-Employee Directors, as amended and restated June 27, 2000 </TABLE> -90-
91 (a) 3. Listing of Exhibits Filed with Form 10-K (continued): <TABLE> <CAPTION> Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- <S> <C> <C> 10(v) Harsco Corporation 1995 Non-Employee Proxy Statement dated Directors' Stock Plan March 22, 1995 on Exhibit B pages B-1 through B-6 12 Computation of Ratios of Exhibit volume, 2000 10-K Earnings to Fixed Charges 21 Subsidiaries of the Registrant Exhibit volume, 2000 10-K 23 Consent of Independent Accountants Exhibit volume, 2000 10-K 27 Financial Data Schedule Exhibit volume, 2000 10-K </TABLE> Exhibits other than those listed above are omitted for the reason that they are either not applicable or not material. The foregoing Exhibits are available from the Secretary of the Company upon receipt of a fee of $10 to cover the Company's reasonable cost of providing copies of such Exhibits. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 2000. -91-
92 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Date 3-15-01 By /S/ Salvatore D. Fazzolari ------------ ---------------------------------- Salvatore D. Fazzolari Senior Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURE CAPACITY DATE <S> <C> <C> /S/ Derek C. Hathaway Chairman, President and Chief 3-15-01 - ---------------------------------- --------- (Derek C. Hathaway) Executive Officer /S/ Salvatore D. Fazzolari Senior Vice President, Chief 3-15-01 - ---------------------------------- --------- (Salvatore D. Fazzolari) Financial Officer and Treasurer (Principal Financial Officer) /S/ Stephen J. Schnoor Vice President and Controller 3-15-01 - ---------------------------------- --------- (Stephen J. Schnoor) (Principal Accounting Officer) /S/ Jerry J. Jasinowski Director 3-15-01 - ---------------------------------- --------- (Jerry J. Jasinowski) /S/ Robert F. Nation Director 3-15-01 - ---------------------------------- --------- (Robert F. Nation) /S/ Carolyn F. Scanlan Director 3-15-01 - ---------------------------------- --------- (Carolyn F. Scanlan) /S/ James I. Scheiner Director 3-15-01 - ---------------------------------- --------- (James I. Scheiner) /S/ Andrew J. Sordoni III Director 3-15-01 - ---------------------------------- --------- (Andrew J. Sordoni III) /S/ Joseph P. Viviano Director 3-15-01 - ---------------------------------- --------- (Joseph P. Viviano) /S/ Dr. Robert C. Wilburn Director 3-15-01 - ---------------------------------- --------- (Dr. Robert C. Wilburn) </TABLE> -92-
93 HARSCO CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 Item 14(a) 3. Exhibits <TABLE> <CAPTION> Exhibit Document Number Pages <S> <C> <C> 10(a) $50,000,000 Facility Agreement dated 15 December 2000 1 - 60 10(b) $50,000,000 Facility Agreement dated 12th January 2001 1 - 58 10(c) Commercial Paper Payment Agency Agreement dated October 1, 2000, Between Salomon Smith Barney Inc. and Harsco Corporation 1 - 16 10(p) Authorization, Terms and Conditions of The Annual Incentive Awards, as Amended and Restated January 1, 2001, Under the 1995 Executive Incentive Compensation Plan 1 - 10 10(u) Harsco Corporation Deferred Compensation Plan for Non-Employee Directors, as Amended and Restated June 27, 2000 1 - 12 12 Computation of Ratios of Earnings to Fixed Charges 1 21 Subsidiaries of the Registrant 1 - 5 23 Consent of Independent Accountants 1 </TABLE>