Annual Report — Form 10-K Filing Table of Contents
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(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)
350 Poplar Church Road, Camp Hill,
Pennsylvania
17011
(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
Title of each
class
exchange on which
registered
Common
stock, par value $1.25 per share
New
York Stock Exchange
Preferred
stock purchase rights
Securities
registered pursuant to Section 12(g) of the
Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES x NO o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO 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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer x
Accelerated
filer o
Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES o NO
x
Harsco
Corporation (“the Company”) is a
diversified, multinational provider of market-leading industrial services and
engineered products. The Company’s operations fall into two
reportable segments: Access Services and Mill Services, plus an “all other”
category labeled Minerals & Rail Services and Products. The
Company has locations in 50 countries, including the United
States. The Company was incorporated in 1956.
The
Company’s executive offices are located at 350 Poplar Church Road, Camp Hill,
Pennsylvania17011. The Company’s main telephone number is (717)
763-7064. The Company’s Internet website address is
www.harsco.com. Through this Internet website (found in the “Investor
Relations” link) the Company makes available, free of charge, its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
all amendments to those reports, as soon as reasonably practicable after these
reports are electronically filed or furnished to the Securities and Exchange
Commission. Information contained on the Company’s website is not
incorporated by reference into this Annual Report on Form 10-K, and should not
be considered as part of this Annual Report on Form 10-K.
The
Company’s principal lines of business and related principal business drivers are
as follows:
Principal
Lines of Business
Principal
Business Drivers
· Scaffolding,
forming, shoring and other access-related services, rentals and
sales
· Non-residential
and infrastructure construction
· Industrial
and building maintenance requirements
· Outsourced,
on-site services to steel mills and other metals producers
· Global
steel mill production and capacity utilization
· Outsourcing
of services by metals producers
· Minerals
and recycling technologies
· Outsourcing
of handling and recycling of industrial co-product materials
· Railway
track maintenance services and equipment
· Global
railway track maintenance-of-way capital spending
· Outsourcing
of track maintenance and new track construction by railroads
· Industrial
grating products
· Industrial
plant and warehouse construction and expansion
· Air-cooled
heat exchangers
· Natural
gas compression, transmission and demand
· Industrial
abrasives and roofing granules
· Industrial
and infrastructure surface preparation and restoration
· Residential
roof replacement
· Heat
transfer products and powder processing equipment
· Commercial
and institutional boiler and water heater requirements
· Pharmaceutical,
food and chemical production
The
Company reports segment information using the “management approach” in
accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information” (“SFAS 131”). This approach is based on the way
management organizes and reports 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. These segments and the types of products and
services offered are more fully described in section (c) below.
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In 2007,
2006 and 2005, the United States contributed sales of $1.2 billion, $1.0 billion
and $0.8 billion, equal to 31%, 32% and 35% of total sales,
respectively. In 2007, 2006 and 2005, the United Kingdom contributed
sales of $0.7 billion, $0.7 billion and $0.5 billion, respectively, equal to
20%, 22% and 23% of total sales, respectively. One customer,
ArcelorMittal, represented 10% or more of the Company’s sales during 2007 and
2006. No customer represented 10% or more of the Company’s sales in
2005. There were no significant inter-segment sales.
(b) Financial
Information about Segments
Financial
information concerning industry segments is included in Note 14, Information by
Segment and Geographic Area, to the Consolidated Financial Statements under Part
II, Item 8, “Financial Statements and Supplementary Data.”
(c) Narrative
Description of Business
(1) A
narrative description of the businesses by reportable segment is as
follows:
Access
Services Segment – 39% of consolidated sales for 2007
Harsco’s
Access Services Segment includes the Company’s brand names of SGB Group,
Hünnebeck Group and Patent Construction Systems Divisions. The
Company’s Access Services Segment is a leader in the construction services
industry as one of the world’s most complete providers of rental scaffolding,
shoring, forming and other access solutions. The U.K.-based SGB Group
Division operates from a network of international branches throughout Europe,
the Middle East and Asia/Pacific; the Germany-based Hünnebeck Division serves
Europe, the Middle East and South America, while the U.S.-based Patent
Construction Systems Division serves North America including Mexico, Central
America and the Caribbean. Major services include the rental of
concrete shoring and forming systems, scaffolding and powered access equipment
for non-residential and infrastructure projects; as well as a variety of other
access services including project engineering and equipment erection and
dismantling and, to a lesser extent, access equipment sales.
The Company’s access services
are provided through branch locations in over 30 countries plus export sales
worldwide. In
2007, this Segment’s revenues
were generated in the following regions:
Access
Services Segment
2007
Percentage
Region
of
Revenues
Western
Europe
65%
North
America
20%
Middle
East and Africa
7%
Eastern
Europe
6%
Asia/Pacific
1%
Latin
America (a)
1%
(a) Including Mexico.
For 2007,
2006 and 2005, the Access Services Segment’s percentage of the Company’s
consolidated sales was 39%, 36% and 33%, respectively.
Mill
Services Segment – 41% of consolidated sales for 2007
The Mill
Services Segment, which consists of the MultiServ Division, is the world’s
largest provider of on-site, outsourced mill services to the global steel and
metals industries. 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 on-site
recycling. Working as a specialized, high-value-added services
provider, MultiServ rarely takes ownership of its customers’ raw materials or
finished products. Similar services are provided to the producers of
non-ferrous metals, such as aluminum, copper and nickel. The
Company’s multi-year Mill Services contracts had estimated future revenues of
$5.0 billion at December 31, 2007. This provides the Company with a
substantial base of long-term revenues. Approximately 61% of these
revenues are expected to be recognized by December 31, 2010. The
remaining revenues are expected to be recognized principally between January 1,2011 and December 31, 2016.
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MultiServ’s
geographic reach to over 30 countries, and its increasing range of services,
enhance the Company’s financial and operating balance. In 2007, this
Segment’s revenues were generated in the following regions:
Mill
Services Segment
2007
Percentage
Region
of
Revenues
Western
Europe
53%
North
America
20%
Latin
America (a)
11%
Asia/Pacific
7%
Middle
East and Africa
6%
Eastern
Europe
3%
(a) Including Mexico.
For 2007,
2006 and 2005, the Mill Services Segment’s percentage of the Company’s
consolidated sales was 41%, 45% and 44%, respectively.
All
Other Category - Minerals & Rail Services and Products – 20% of consolidated
sales for 2007
The All
Other Category includes the Excell Minerals, Reed Minerals, Harsco Track
Technologies, IKG Industries, Patterson-Kelley and Air-X-Changers
Divisions. Approximately 84% of this category’s revenues originate in
the United States.
Export
sales for this Category totaled $57.1 million, $96.6 million and $116.6 million
in 2007, 2006 and 2005, respectively. In 2007, 2006 and 2005, export
sales for the Harsco Track Technologies Division were $21.8 million, $51.5
million and $80.0 million, respectively, which included sales to Canada, Mexico,
Europe, Asia, the Middle East and Africa. A significant backlog
exists at December 31, 2007 in the Harsco Track Technologies Division as a
result of orders received in 2007 from the Chinese Ministry of
Railways.
Excell
Minerals is a multinational company that extracts high-value metallic content
for production re-use on behalf of leading steelmakers and also specializes in
the development of minerals technologies for commercial applications, including
agriculture fertilizers and performance-enhancing additives for cement
products.
Reed
Minerals’ industrial abrasives and roofing granules are produced from
power-plant utility coal slag at a number of locations throughout the United
States. The Company’s BLACK BEAUTY® 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, primarily for the replacement roofing
market. This Division is the United States’ largest producer of slag
abrasives and third largest producer of residential roofing
granules.
Harsco
Track Technologies is a global provider of equipment and services to maintain,
repair and construct railway track. The Company’s railway track
maintenance services support 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.
IKG
Industries manufactures a varied line of industrial grating products at several
plants in North America. These products include a full range of bar
grating configurations, which are used mainly in industrial flooring, and safety
and security applications in the power, paper, chemical, refining and processing
industries.
Patterson-Kelley
is a leading manufacturer of heat transfer products such as boilers and water
heaters for commercial and institutional applications, and also powder
processing equipment such as blenders, dryers and mixers for the chemical,
pharmaceutical and food processing industries.
Air-X-Changers
is a leading supplier of custom-designed and manufactured air-cooled heat
exchangers for the natural gas industry. The Company’s heat
exchangers are the primary apparatus used to condition natural gas during
recovery, compression and transportation from underground reserves through the
major pipeline distribution channels.
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For 2007,
2006 and 2005, the All Other Category’s percentage of the Company’s consolidated
sales was 20%, 19% and 23%, respectively.
(1)
(i)
The
products and services of the Company include a number of product
groups. These product groups are more fully discussed in Note
14, Information by Segment and Geographic Area, to the Consolidated
Financial Statements under Part II, Item 8, “Financial Statements and
Supplementary Data.” The product groups that contributed 10% or
more as a percentage of consolidated sales in any of the last three fiscal
years are set forth in the following
table:
Percentage
of Consolidated Sales
Product
Group
2007
2006
2005
Access
Services
39%
36%
33%
Mill
Services
41%
45%
44%
(1)
(ii)
New
products and services are added from time to time; however, in 2007 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 for its limited product manufacturing
include principally steel and, to a lesser extent, aluminum, which are
usually readily available. The profitability of the Company’s
manufactured products is affected by changing purchase prices of steel and
other materials and commodities. If steel or other material
costs associated with the Company’s manufactured products increase and the
costs cannot be passed on to the Company’s customers, operating income
would be adversely impacted. Additionally, decreased
availability of steel or other materials could affect the Company’s
ability to produce manufactured products in a timely manner. If the
Company cannot obtain the necessary raw materials for its manufactured
products, then revenues, operating income and cash flows will be adversely
affected. Certain services performed by the Excell Minerals
Division result in the recovery, processing and sale of specialty steel
scrap concentrate and ferro alloys to its customers. The selling
price of the by-product material is principally market-based and varies
based upon the current market value of its components. Therefore,
the revenue amounts recorded from the sale of such by-product material
varies based upon the market value of the commodity components being
sold. The Company has executed hedging instruments designed to
reduce the volatility of the revenue from the sale of the by-products
material at varying market prices. However, there can be no
guarantee that such hedging strategies will be fully effective in reducing
the variability of revenues from period to
period.
(1)
(iv)
While
the Company 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)
The
Company furnishes products and materials and certain industrial services
within the Access Services and the All Other Category that are seasonal in
nature. As a result, the Company’s sales and net income for the
first quarter ending March 31 are normally lower than the second, third
and fourth quarters. Additionally, the Company has historically
generated the majority of its cash flows in the second half of the
year. This is a direct result of normally higher sales and
income during the latter part of the year. The Company’s
historical revenue patterns and cash provided by operating activities were
as follows:
Historical
Revenue from Continuing Operations Patterns
(In
millions)
2007
2006
2005
2004
2003
First
Quarter Ended March 31
$
840.0
$
682.1
$
558.0
$
478.7
$
419.7
Second
Quarter Ended June 30
946.1
766.0
606.0
534.6
466.7
Third
Quarter Ended September 30
927.4
773.3
599.5
532.9
456.0
Fourth
Quarter Ended December 31
974.6
804.2
632.5
616.8
482.1
Totals
$
3,688.2
(a)
$
3,025.6
$
2,396.0
$
2,163.0
$
1,824.6
(a)
- 5
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Historical
Cash Provided by Operations
(In
millions)
2007
2006
2005
2004
2003
First
Quarter Ended March 31
$
41.7
$
69.8
$
48.1
$
32.4
$
31.2
Second
Quarter Ended June 30
154.9
114.5
86.3
64.6
59.2
Third
Quarter Ended September 30
175.7
94.6
98.1
68.9
64.1
Fourth
Quarter Ended December 31
99.4
130.3
82.7
104.6
108.4
Totals
$
471.7
$
409.2
$
315.3
(a)
$
270.5
$
262.8
(a)
(a) Does not
total due to rounding.
(1)
(vi)
The
practices of the Company relating to working capital are similar to those
practices of other industrial service providers or manufacturers servicing
both domestic and international industrial services and commercial
markets. These practices include the
following:
·
Standard
accounts receivable payment terms of 30 days to 60 days, with progress
payments required for certain long-lead-time or large
orders. Payment terms are longer in certain international
markets.
·
Standard
accounts payable payment terms of 30 days to 90
days.
·
Inventories
are maintained in sufficient quantities to meet forecasted
demand. Due to the time required to manufacture certain railway
maintenance equipment to customer specifications, inventory levels of this
business tend to increase for an extended time during the production phase
and then decline when the equipment is
sold.
(1)
(vii)
One
customer, ArcelorMittal, represented 10% or more of the Company’s sales in
2007 and 2006. In 2005, no single customer represented 10% of
its sales. The Mill Services Segment is dependent largely on
the global steel industry, and in 2007 and 2006 there were two customers
that each provided in excess of 10% of this Segment’s revenues under
multiple long-term contracts at several mill sites. In 2005,
there were three customers that each provided in excess of 10% of this
Segment’s revenues. ArcelorMittal was one of those customers in
2007, 2006 and 2005. The loss of any one of the contracts would
not have a material adverse effect upon the Company’s financial position
or cash flows; however, it could have a material effect on quarterly or
annual results of operations. Additionally, these customers
have significant accounts receivable balances. Further
consolidation in the global steel industry is possible. Should
transactions occur involving some of the Company’s larger steel industry
customers, it would result in an increase in concentration of credit risk
for the Company. If a large customer were to experience
financial difficulty, or file for bankruptcy protection, it could
adversely impact the Company’s income, cash flows, and asset
valuations. As part of its credit risk management practices,
the Company closely monitors the credit standing and accounts receivable
position of its customer base.
(1)
(viii)
Backlog
of manufacturing orders from continuing operations was $448.1 million and
$236.5 million as of December 31, 2007 and 2006,
respectively. A significant backlog exists at December 31, 2007
in the Harsco Track Technologies Division as a result of orders received
in 2007 from the Chinese Ministry of Railways. It is expected
that approximately 55% of the total backlog at December 31, 2007 will not
be filled during 2008. Exclusive of certain orders received by
the Harsco Track Technologies Division such as the order from the Chinese
Ministry of Railways, the Company’s backlog is seasonal in nature and
tends to follow in the same pattern as sales and net income which is
discussed in section (1) (v) above. Order backlog for
scaffolding, shoring and forming services of the Access Services Segment
is excluded from the above amounts. These amounts are generally
not quantifiable due to short order lead times for certain services, the
nature and timing of the products and services provided and equipment
rentals with the ultimate length of the rental period often
unknown. Backlog for roofing granules and slag abrasives is not
included in the total backlog because it is generally not quantifiable,
due to the short order lead times of the products
provided. Backlog for minerals and recycling technologies is
not included in the total backlog amount because it is generally not
quantifiable due to short order lead times 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 $5.0 billion at December 31, 2007. For
additional information regarding backlog, see the Backlog section included
in Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of
Operations.”
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 $3.2 million, $2.8 million
and $2.4 million in 2007, 2006 and 2005, respectively. For
additional information regarding product development activities, see the
Research and Development section included in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results
of Operations.”
(1)
(xii)
The
Company has become subject, as have others, to stringent air and water
quality control legislation. In general, the Company has not
experienced substantial difficulty complying with these environmental
regulations in the past, and does not anticipate making any material
capital expenditures for environmental control
facilities. While the Company expects that environmental
regulations may expand, and that 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, Commitments and
Contingencies, to the Consolidated Financial Statements included in Part
II, Item 8, “Financial Statements and Supplementary
Data.”
Financial
information concerning foreign and domestic operations is included in Note 14,
Information by Segment and Geographic Area, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary
Data.” Export sales totaled $61.7 million, $99.6 million and $118.8
million in 2007, 2006 and 2005, respectively.
(e) Available
Information
Information
is provided in Part I, Item 1 (a), “General Development of
Business.”
Item
1A. Risk
Factors
Market
risk.
In the
normal course of business, the Company is routinely subjected to a variety of
risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
Cyclical
industry and economic conditions may adversely affect the Company’s
businesses.
The
Company’s businesses are subject to general economic slowdowns and cyclical
conditions in the industries served. In particular,
·
The
Company’s Access Services business may be adversely impacted by slowdowns
in non-residential or infrastructure construction and annual industrial
and building maintenance cycles;
·
The
Company’s Mill Services business may be adversely impacted by slowdowns in
steel mill production, excess capacity, consolidation or bankruptcy of
steel producers or a reversal or slowing of current outsourcing trends in
the steel industry;
·
The
railway track maintenance services and equipment business may be adversely
impacted by developments in the railroad industry that lead to lower
capital spending or reduced maintenance
spending;
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·
The
industrial abrasives and roofing granules business may be adversely
impacted by reduced home resales or economic conditions that slow the rate
of residential roof replacement, or by slowdowns in the industrial and
infrastructure refurbishment
industries;
·
The
industrial grating business may be adversely impacted by slowdowns in
non-residential construction and industrial
production;
·
The
air-cooled heat exchangers business is affected by cyclical conditions
present in the natural gas industry. A high demand for natural
gas is currently creating increased demand for the Company’s air-cooled
heat exchangers. However, a slowdown in natural gas production
could adversely affect this
business;
·
The
Excell Minerals business may be adversely impacted by a reduction in the
selling price of its materials, which is market-based and varies based
upon the current fair value of the components being
sold. Therefore, the revenue amounts recorded from the sale of
such recycled materials vary based upon the fair value of the commodity
components being sold; and
·
The
Company’s access to capital and the associated costs of borrowing may be
adversely impacted by the tightening of credit markets. Capital
constraints and increased borrowing costs may also adversely impact the
financial position and operations of the Company’s customers across all
business segments.
The
Company’s defined benefit pension expense is directly affected by the equity and
bond markets and a downward trend in those markets could adversely impact the
Company’s future earnings.
In
addition to the economic issues that directly affect the Company’s businesses,
changes in the performance of equity and bond markets, particularly in the
United Kingdom and the United States, impact actuarial assumptions used in
determining annual pension expense, pension liabilities and the valuation of the
assets in the Company’s defined benefit pension plans. If the
financial markets deteriorate, it would most likely have a negative impact on
the Company’s pension expense and the accounting for pension assets and
liabilities. This could result in a decrease to Stockholders’ Equity
and an increase in the Company’s statutory funding requirements.
In
response to the adverse market conditions, during 2002 and 2003 the Company
conducted a comprehensive global review of its pension plans in order to
formulate a plan to make its long-term pension costs more predictable and
affordable. The Company implemented design changes for most of these
plans during 2003. The principal change involved converting future
pension benefits for many of the Company’s non-union employees in both the
United Kingdom and United States from defined benefit plans to defined
contribution plans as of January 1, 2004. This conversion has made
the Company’s pension expense more predictable and less sensitive to changes in
the financial markets.
The
Company’s pension committee continues to evaluate alternative strategies to
further reduce overall pension expense including: conversion of certain
remaining defined benefit plans to defined contribution plans; the on-going
evaluation of investment fund managers’ performance; the balancing of plan
assets and liabilities; the risk assessment of all multi-employer pension plans;
the possible merger of certain plans; the consideration of incremental cash
contributions to certain plans; and other changes that are likely to reduce
future pension expense volatility and minimize risk.
In
addition to the Company’s defined benefit pension plans, the Company also
participates in numerous multi-employer pension plans throughout the world.
Within the United States, the Pension Protection Act of 2006 may require
additional funding for multiemployer plans that could cause the Company to be
subject to higher cash contributions in the future. The Company
continues to assess any full and partial withdrawal liability implications
associated with these plans.
The
Company’s global presence subjects it to a variety of risks arising from doing
business internationally.
The Company operates in
50 countries, including the
United
States. The Company’s
global footprint exposes it to a variety of risks that may adversely
affect results of operations, cash flows or financial position. These
include the following:
·
periodic
economic downturns in the countries in which the Company does
business;
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·
fluctuations
in currency exchange rates;
·
customs
matters and changes in trade policy or tariff
regulations;
·
imposition
of or increases in currency exchange controls and hard currency
shortages;
·
changes
in regulatory requirements in the countries in which the Company does
business;
·
higher
tax rates in certain jurisdictions and potentially adverse tax
consequences including restrictions on repatriating earnings, adverse tax
withholding requirements and “double
taxation”;
·
longer
payment cycles and difficulty in collecting accounts
receivable;
·
complications
in complying with a variety of international laws and
regulations;
·
political,
economic and social instability, civil unrest and armed hostilities in the
countries in which the Company does
business;
·
inflation
rates in the countries in which the Company does
business;
·
laws
in various international jurisdictions that limit the right and ability of
subsidiaries to pay dividends and remit earnings to affiliated companies
unless specified conditions are met;
and‚
·
uncertainties
arising from local business practices, cultural considerations and
international political and trade
tensions.
If the
Company is unable to successfully manage the risks associated with its global
business, the Company’s financial condition, cash flows and results of
operations may be negatively impacted.
The
Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq, Iran, Israel, Lebanon and other countries with a
continued high risk of armed hostilities. During 2007, 2006 and 2005,
the Company’s Middle East operations contributed approximately $44.6 million,
$34.8 million and $32.7 million, respectively, to the Company’s operating
income. Additionally, the Company has operations in and sales to
countries that have encountered outbreaks of communicable diseases (e.g.,
Acquired Immune Deficiency Syndrome (AIDS), avian influenza and
others). Should such outbreaks worsen or spread to other countries,
the Company may be negatively impacted through reduced sales to and within those
countries and other countries impacted by such diseases.
Exchange
rate fluctuations may adversely impact the Company’s business.
Fluctuations
in foreign exchange rates between the U.S. dollar and the over 40 other
currencies in which the Company conducts business may adversely impact the
Company’s operating income and income from continuing operations in any given
fiscal period. Approximately 69% and 68% of the Company’s sales and
approximately 68% and 71% of the Company’s operating income from continuing
operations for the years ended December 31, 2007 and 2006, respectively, were
derived from operations outside the United States. More specifically,
approximately 20% and 22% of the Company’s revenues were derived from operations
in the United Kingdom during 2007 and 2006,
respectively. Additionally, approximately 26% and 25% of the
Company’s revenues were derived from operations with the euro as their
functional currency during 2007 and 2006, respectively. Given the
structure of the Company’s revenues and expenses, an increase in the value of
the U.S. dollar relative to the foreign currencies in which the Company earns
its revenues generally has a negative impact on operating income, whereas a
decrease in the value of the U.S. dollar tends to have the opposite
effect. The Company’s principal foreign currency exposures are to the
British pound sterling and the euro.
- 9
-
Compared
with the corresponding period in 2006, the average values of major currencies
changed as follows in relation to the U.S. dollar during 2007, impacting the
Company’s sales and income:
The
Company’s foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies
change materially in relation to the U.S. dollar, the Company’s financial
position, results of operations, or cash flows may be materially
affected.
To
illustrate the effect of foreign currency exchange rate changes in certain key
markets of the Company, in 2007, revenues would have been approximately 5% or
$166.9 million less and operating income would have been approximately 4% or
$16.5 million less if the average exchange rates for 2006 were
utilized. A similar comparison for 2006 would have decreased revenues
approximately 1% or $34.1 million, while operating income would have been
approximately 1% or $3.9 million less if the average exchange rates for 2006
would have remained the same as 2005. If the U.S. dollar weakens in
relation to the euro and British pound sterling, the Company would expect to see
a positive impact on future sales and income from continuing operations as a
result of foreign currency translation. Currency changes also result
in assets and liabilities denominated in local currencies being translated into
U.S. dollars at different amounts than at the prior period end. If
the U.S. dollar weakens in relation to currencies in countries in which the
Company does business, the translated values of the related assets and
liabilities, and therefore stockholders’ equity, would
increase. Conversely, if the U.S. dollar strengthens in relation to
currencies in countries in which the Company does business, the translated
values of the related assets, liabilities, and therefore stockholders’ equity,
would decrease.
Although
the Company engages in foreign currency forward exchange contracts and other
hedging strategies to mitigate foreign exchange risk, hedging strategies may not
be successful or may fail to offset the risk.
In
addition, competitive conditions in the Company’s manufacturing businesses may
limit the Company’s ability to increase product prices in the face of adverse
currency movements. Sales of products manufactured in the United
States for the domestic and export markets may be affected by the value of the
U.S. dollar relative to other currencies. Any long-term strengthening
of the U.S. dollar could depress demand for these products and reduce sales and
may cause translation gains or losses due to the revaluation of accounts
payable, accounts receivable and other asset and liability
accounts. Conversely, any long-term weakening of the U.S. dollar
could improve demand for these products and increase sales and may cause
translation gains or losses due to the revaluation of accounts payable, accounts
receivable and other asset and liability accounts.
Negative economic
conditions may adversely impact the ability of the Company’s customers to meet
their obligations to the Company on a timely basis
and impact the valuation of the Company’s assets.
If a
downturn in the economy occurs, it may adversely impact the ability of the
Company’s customers to meet their obligations to the Company on a timely basis
and could result in bankruptcy filings by them. If customers are
unable to meet their obligations on a timely basis, it could adversely impact
the realizability of receivables, the valuation of inventories and the valuation
of long-lived assets across the Company’s businesses, as well as negatively
affect the forecasts used in performing the Company’s goodwill impairment
testing under SFAS No. 142, “Goodwill and Other Intangible
Assets.” If management determines that goodwill or other assets are
impaired or that inventories or
- 10
-
receivables
cannot be realized at recorded amounts, the Company will be required to record a
write-down in the period of determination, which will reduce net income for that
period. Additionally, the risk remains that certain Mill Services
customers may file for bankruptcy protection, be acquired or consolidate in the
future, which could have an adverse impact on the Company’s income and cash
flows.
A negative
outcome on personal injury claims against the Company may adversely
impact results of operations and financial condition.
The
Company has been named as one of many defendants (approximately 90 or more in
most cases) in legal actions alleging personal injury from exposure to airborne
asbestos. In their suits, the plaintiffs have named as defendants
many manufacturers, distributors and repairers of numerous types of equipment or
products that may involve asbestos. Most of these complaints contain
a standard claim for damages of $20 million or $25 million against the named
defendants. If the Company was found to be liable in any of these
actions and the liability was to exceed the Company’s insurance coverage,
results of operations, cash flows and financial condition could be adversely
affected. For more information concerning this litigation, see Note
10, Commitments and Contingencies, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary
Data.”
The
Company may lose customers or be required to reduce prices as a result of
competition.
The
industries in which the Company operates are highly competitive.
·
The
Company’s Access Services business rents and sells equipment and provides
erection and dismantling services to principally the non-residential and
infrastructure construction and industrial plant maintenance
markets. Contracts are awarded based upon the Company’s
engineering capabilities, product availability, safety record, and the
ability to competitively price its rentals and services. If the
Company is unable to consistently provide high-quality products and
services at competitive prices, it may lose customers or operating margins
may decline due to reduced selling
prices.
·
The
Company’s Mill Services business is sustained mainly through contract
renewals. Historically, the Company’s contract renewal rate has
averaged approximately 95%. If the Company is unable to renew
its contracts at the historical rates or renewals are at reduced prices,
revenue may decline.
·
The
Company’s manufacturing businesses compete with companies that manufacture
similar products both internationally and domestically. Certain
international competitors export their products into the United States and
sell them at lower prices due to lower labor costs and government
subsidies for exports. Such practices may limit the prices the
Company can charge for its products and services. Additionally,
unfavorable foreign exchange rates can adversely impact the Company’s
ability to match the prices charged by international
competitors. If the Company is unable to match the prices
charged by international competitors, it may lose
customers.
The
Company’s strategy to overcome this competition includes enterprise business
optimization programs, international customer focus and the diversification,
streamlining and consolidation of operations.
Increased
customer concentration and credit risk in the Mill Services Segment may
adversely impact the Company’s future earnings and cash flows.
The
Company’s Mill Services Segment (and, to a lesser extent, the All Other
Category) has several large customers throughout the world with significant
accounts receivable balances. In December 2005, the Company acquired the
Northern Hemisphere steel mill services operations of Brambles Industrial
Services, a unit of the Sydney, Australia-based Brambles Industrial
Limited. This acquisition has increased the Company’s corresponding
concentration of credit risk to customers in the steel industry.
Additionally, further consolidation in the global steel industry occurred
in 2006 and 2007 and additional consolidation is possible. Should
additional transactions occur involving some of the steel industry’s larger
companies, which are customers of the Company, it would result in an increase in
concentration of credit risk for the Company. If a large customer were to
experience financial difficulty, or file for bankruptcy protection, it could
adversely impact the Company’s income, cash flows and asset
valuations. As part of its credit risk management practices, the
Company developed strategies to mitigate this increased concentration of credit
risk. In the Access Services Segment, concentrations of credit risk
with respect to accounts receivable are generally limited due to the Company’s
large number of customers and their dispersion across different
geographies.
Increases
in energy prices could increase the Company’s operating costs and reduce its
profitability.
Worldwide
political and economic conditions, an imbalance in the supply and demand for
oil, extreme weather conditions, armed hostilities in oil-producing regions,
among other factors, may result in an increase in the volatility of energy
costs, both on a macro basis and for the Company specifically. In
2007, 2006 and 2005, energy costs have
- 11
-
approximated
3.7%, 3.9% and 3.5% of the Company’s revenue, respectively. To the
extent that such costs cannot be passed to customers in the future, operating
income and results of operations may be adversely affected.
Increases
or decreases in purchase prices (or selling prices) or availability of steel or
other materials and commodities may affect the Company’s
profitability.
The
profitability of the Company’s manufactured products is affected by changing
purchase prices of steel and other materials and commodities. If raw
material costs associated with the Company’s manufactured products increase and
the costs cannot be passed on to the Company’s customers, operating income would
be adversely affected. Additionally, decreased availability of steel
or other materials could affect the Company’s ability to produce manufactured
products in a timely manner. If the Company cannot obtain the necessary
raw materials for its manufactured products, then revenues, operating income and
cash flows will be adversely affected. Certain services performed by
the Excell Minerals Division result in the recovery, processing and sale of
specialty steel and other high-value metal by-products to its
customers. The selling price of the by-products material is
market-based and varies based upon the current fair value of its
components. Therefore, the revenue amounts recorded from the sale of
such by-products material vary based upon the fair value of the commodity
components being sold. The Company has executed hedging instruments
designed to reduce the volatility of the revenue from the sale of the
by-products material at varying market prices. However, there can be
no guarantee that such hedging strategies will be fully effective in reducing
the variability of revenues from period to period.
The Company is
subject to various environmental laws and the success of existing or future
environmental claims against it could adversely impact the Company’s
results of
operations and cash flows.
The
Company’s operations are subject to various federal, state, local and
international laws, regulations and ordinances relating to the protection of
health, safety and the environment, including those governing discharges to air
and water, handling and disposal practices for solid and hazardous wastes, the
remediation of contaminated sites and the maintenance of a safe work
place. These laws impose penalties, fines and other sanctions for
non-compliance and liability for response costs, property damages and personal
injury resulting from past and current spills, disposals or other releases of,
or exposure to, hazardous materials. The Company could incur
substantial costs as a result of non-compliance with or liability for
remediation or other costs or damages under these laws. The Company
may be subject to more stringent environmental laws in the future, and
compliance with more stringent environmental requirements may require the
Company to make material expenditures or subject it to liabilities that the
Company currently does not anticipate.
The
Company is currently 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 under the federal “Superfund”
law. At several sites, the Company is currently conducting
environmental remediation, and it is probable that the Company will agree to
make payments toward funding certain other of these remediation
activities. It also is possible that some of these matters will be
decided unfavorably to the Company and that other sites requiring remediation
will be identified. Each of these matters is subject to various
uncertainties and 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 Company has evaluated its potential
liability and the Consolidated Balance Sheets at December 31, 2007 and 2006
include an accrual of $3.9 million and $3.8 million, respectively, for
environmental matters. The amounts charged against pre-tax earnings
related to environmental matters totaled $2.8 million, $2.1 million and $1.4
million for the years ended December 31, 2007, 2006 and 2005,
respectively. The liability for future remediation costs is evaluated
on a quarterly basis. Actual costs to be incurred at identified sites
in future periods may be greater than the estimates, given inherent
uncertainties in evaluating environmental exposures.
Restrictions
imposed by the Company’s credit facilities and outstanding notes may limit the
Company’s ability to obtain additional financing or to pursue business
opportunities.
The
Company’s credit facilities and certain notes payable agreements contain a
covenant requiring a maximum debt to capital ratio of 60%. In
addition, certain notes payable agreements also contain a covenant requiring a
minimum net worth of $475 million. These covenants limit the amount
of debt the Company may incur, which could limit its ability to obtain
additional financing or pursue business opportunities. In addition,
the Company’s ability to comply with these ratios may be affected by events
beyond its control. A breach of any of these covenants or the
inability to comply with the required financial ratios could result in a default
under these credit facilities. In the event of any default under
these credit facilities, the lenders under those facilities could elect to
declare all borrowings outstanding, together with
- 12
-
accrued
and unpaid interest and other fees, to be due and payable, which would cause an
event of default under the notes. This could, in turn, trigger an
event of default under the cross-default provisions of the Company’s other
outstanding indebtedness. At December 31, 2007, the Company was in
compliance with these covenants with a debt to capital ratio of 40.8%, and a net
worth of $1.6 billion. The Company had $395.2 million in outstanding
indebtedness containing these covenants at December 31, 2007.
Higher
than expected claims under insurance policies, under which the Company retains a
portion of the risk, could adversely impact results of operations and cash
flows.
The
Company retains a significant portion of the risk for property, workers’
compensation, U.K. employers’ liability, automobile, general and product
liability losses. Reserves have been recorded which reflect the
undiscounted estimated liabilities for ultimate losses including claims incurred
but not reported. Inherent in these estimates are assumptions that
are based on the Company’s history of claims and losses, a detailed analysis of
existing claims with respect to potential value, and current legal and
legislative trends. At December 31, 2007 and 2006, the Company had
recorded liabilities of $112.0 million and $103.4 million, respectively, related
to both asserted and unasserted insurance claims. Included in the
balance at December 31, 2007 and 2006 were $25.9 million and $18.9 million,
respectively, of recognized liabilities covered by insurance
carriers. If actual claims are higher than those projected by
management, an increase to the Company’s insurance reserves may be required and
would be recorded as a charge to income in the period the need for the change
was determined. Conversely, if actual claims are lower than those
projected by management, a decrease to the Company’s insurance reserves may be
required and would be recorded as a reduction to expense in the period the need
for the change was determined.
The
seasonality of the Company’s business may cause its quarterly results to
fluctuate.
The
Company has historically generated the majority of its cash flows in the second
half of the year. This is a direct result of normally higher sales
and income during the second half of the year, as the Company’s business tends
to follow seasonal patterns. If the Company is unable to successfully
manage the cash flow and other effects of seasonality on the business, its
results of operations may suffer. The Company’s historical revenue
patterns and net cash provided by operating activities are included in Part I,
Item 1, “Business.”
The
Company’s cash flows and earnings are subject to changes in interest
rates.
The
Company’s total debt as of December 31, 2007 was $1.1 billion. Of
this amount, approximately 49.2% had variable rates of interest and 50.8% had
fixed rates of interest. The weighted average interest rate of total
debt was approximately 6.0%. At current debt levels, a one-percentage
increase/decrease in variable interest rates would increase/decrease interest
expense by approximately $5.3 million per year.
The
future financial impact on the Company associated with the above risks cannot be
estimated.
Information
as to the principal plants owned and operated by the Company is summarized in
the following table:
Location
Principal
Products
Access
Services Segment
Marion,
Ohio
Access
Equipment Maintenance
Dosthill,
United Kingdom
Access
Equipment Maintenance
- 13
-
Location
Principal
Products
All
Other Category - Minerals &
Rail Services and Products
Drakesboro,
Kentucky
Roofing
Granules/Abrasives
Gary,
Indiana
Roofing
Granules/Abrasives
Tampa,
Florida
Roofing
Granules/Abrasives
Brendale,
Australia
Rail
Maintenance Equipment
Fairmont,
Minnesota
Rail
Maintenance Equipment
Ludington,
Michigan
Rail
Maintenance Equipment
West
Columbia, South Carolina
Rail
Maintenance Equipment
Channelview,
Texas
Industrial
Grating Products
Leeds,
Alabama
Industrial
Grating Products
Queretaro,
Mexico
Industrial
Grating Products
East
Stroudsburg, Pennsylvania
Process
Equipment
Catoosa,
Oklahoma
Heat
Exchangers
Sarver,
Pennsylvania
Minerals
and Recycling Technologies
The
Company also operates the following plants which are leased:
Location
Principal
Products
Access
Services Segment
DeLimiet,
Netherlands
Access
Equipment Maintenance
Ratingen,
Germany
Access
Equipment Maintenance
All
Other Category - Minerals &
Rail Services and Products
Memphis,
Tennessee
Roofing
Granules/Abrasives
Moundsville,
West Virginia
Roofing
Granules/Abrasives
Eastwood,
United Kingdom
Rail
Maintenance Equipment
Tulsa,
Oklahoma
Industrial
Grating Products
Garrett,
Indiana
Industrial
Grating Products
Catoosa,
Oklahoma
Heat
Exchangers
Sapulpa,
Oklahoma
Heat
Exchangers
The above
listing includes the principal properties owned or leased by the
Company. The Company also operates from a number of other smaller
plants, branches, depots, warehouses and offices in addition to the
above. The Company considers all of its properties at which
operations are currently performed to be in satisfactory condition and suitable
for operations. Additionally, the Company has administrative offices
in Camp Hill, Pennsylvania and Leatherhead, United Kingdom.
Information
regarding legal proceedings is included in Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II, 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 to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
covered by this Report.
- 14
-
Supplementary
Item. Executive Officers of the Registrant (Pursuant to Instruction 3
to Item 401(b) of Regulation S-K)
Set forth
below, as of February 29, 2008, are the executive officers (this excludes six
corporate officers who are not deemed “executive
officers”
within the meaning of applicable Securities and Exchange Commission regulations)
of the Company and certain information with respect to each of
them. S. D. Fazzolari was elected to his new position effective
January 1, 2008. G. D. H. Butler, M. E. Kimmel, S. J. Schnoor and R.
C. Neuffer were elected to their respective offices effective on January 1,2008. R. M. Wagner was elected to his new position effective January1, 2008. All terms expire on April 22, 2008. There are no
family relationships between any of the executive officers.
Name
Age
Principal Occupation
or Employment
Executive
Officers:
S.
D. Fazzolari
55
Chief
Executive Officer of the Corporation effective January 1,2008. Served as President and Chief Financial Officer of the
Corporation from October 10, 2007 to December 31, 2007. Served
as President, Chief Financial Officer and Treasurer from January 24, 2006
to October 9, 2007, and Director since January 2002. Served as
Senior Vice President, Chief Financial Officer and Treasurer from August24, 1999 to January 23, 2006 and 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.
G.
D. H. Butler
61
President
of Harsco Corporation and CEO of the Access Services and Mill Services
business groups effective January 1, 2008. Served as Senior
Vice President-Operations of the Corporation from September 26, 2000 to
December 31, 2007 and Director since January 2002. Concurrently
served as President of the MultiServ and SGB Group
Divisions. From September 2000 through December 2003, he was
President of the Heckett MultiServ International and SGB Group
Divisions. 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 January1, 1994 to June 30, 1994. Served in various officer positions
within MultiServ International, N. V. prior to 1994 and prior to the
Company’s acquisition of that corporation in August
1993.
M.
E. Kimmel
48
Senior
Vice President, Chief Administrative Officer, General Counsel and
Corporate Secretary effective January 1, 2008. General Counsel
and Corporate Secretary since January 1, 2004. Served as
Corporate Secretary and Assistant General Counsel from May 1, 2003 to
December 31, 2003. Held various legal positions within the
Corporation since he joined the Company in August 2001. Prior
to joining Harsco, he was Vice President, Administration and General
Counsel, New World Pasta Company from January 1, 1999 to July
2001. Before joining New World Pasta, Mr. Kimmel spent
approximately 12 years in various legal positions with Hershey Foods
Corporation.
S.
J. Schnoor
54
Senior
Vice President and Chief Financial Officer effective January 1,2008. Served as Vice President and Controller of the
Corporation from May 15, 1998 to December 31, 2007. 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. Prior to joining Harsco, he
served in various auditing positions for Coopers & Lybrand from
September 1985 to April 1988. Mr. Schnoor is a Certified
Public Accountant.
- 15
-
Name
Age
Principal Occupation
or Employment
R.
C. Neuffer
65
Harsco
Senior Vice President and Group President for the Company’s Minerals &
Rail Services and Products group effective January 1,2008. Served as President of the Minerals & Rail Services
and Products business group since his appointment on January 24,2006. Previously, he led the Patterson-Kelley, IKG Industries
and Air-X-Changers units as Vice President and General Manager since
2004. In 2003, he was Vice President and General Manager of IKG
Industries and Patterson-Kelley. Between 1997 and 2002, he was
Vice President and General Manager of Patterson-Kelley. Mr.
Neuffer joined Harsco in 1991.
R.
M. Wagner
40
Vice
President and Controller effective January 1, 2008. Mr. Wagner
joined Harsco in 2007 as Assistant Controller. Prior to joining
Harsco, he held management responsibilities for financial reporting at
Bayer Corporation. He previously held a number of financial
management positions both in the United States and internationally with
Kennametal Inc., and also served as an audit manager with Deloitte &
Touche. Mr. Wagner is a Certified Public
Accountant.
Market
for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Harsco
Corporation common stock is listed on the New York Stock Exchange. At
the end of 2007, there were 84,459,866 shares outstanding. In 2007,
the Company’s common stock traded in a range of $36.90 to $66.51 (on a
post-split basis) and closed at $64.07 at year-end. At December 31,2007 there were approximately 22,000 stockholders. There are no
significant limitations on the payment of dividends included in the Company’s
loan agreements. For additional information regarding Harsco common
stock market price and dividends declared, see Dividend Action under Part II,
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” and the Common Stock Price and Dividend Information under Part
II, Item 8, “Financial
Statements and Supplementary Data.” For additional information on the
Company’s equity compensation plans see Part III, Item 11, “Executive
Compensation.”
The
Company’s share repurchase program was extended by the Board of Directors in
November 2007. The program authorizes the repurchase of up to
2,000,000 shares of the Company’s common stock and expires January 31,2009. As announced in February 2008, the Company plans to begin the
repurchase of an undetermined number of shares of the Company’s common stock
under the above mentioned stock repurchase authorization. Repurchases
will be made in open market transactions at times and amounts as management
deems appropriate, depending on market conditions. Any repurchase may
commence or be discontinued at any time.
(In
thousands, except per share, employee information and
percentages)
2007
(a)
2006
2005
(b)
2004
2003
Income
Statement Information (c)
Revenues
from continuing operations
$
3,688,160
$
3,025,613
$
2,396,009
$
2,162,973
$
1,824,551
Income
from continuing operations
255,115
186,402
144,488
104,040
77,133
Income
from discontinued operations
44,377
9,996
12,169
17,171
15,084
Net
income
299,492
196,398
156,657
121,211
92,217
Financial
Position and Cash Flow Information
Working
capital
$
471,367
$
320,847
$
352,620
$
346,768
$
269,276
Total
assets
3,905,430
3,326,423
2,975,804
2,389,756
2,138,035
Long-term
debt
1,012,087
864,817
905,859
594,747
584,425
Total
debt
1,080,794
1,063,021
1,009,888
625,809
613,531
Depreciation
and amortization (including discontinued operations)
306,413
252,982
198,065
184,371
168,935
Capital
expenditures
443,583
340,173
290,239
204,235
143,824
Cash
provided by operating activities
471,740
409,239
315,279
270,465
262,788
Cash
used by investing activities
(386,125
)
(359,455
)
(645,185
)
(209,602
)
(144,791
)
Cash
provided (used) by financing activities
(77,687
)
(84,196
)
369,325
(56,512
)
(125,501
)
Ratios
Return
on sales (d)
6.9
%
6.2
%
6.0
%
4.8
%
4.2
%
Return
on average equity (e)
19.2
%
17.2
%
15.3
%
12.7
%
10.9
%
Current
ratio
1.5:1
1.4:1
1.5:1
1.6:1
1.5:1
Total
debt to total capital (f)
40.8
%
48.1
%
50.4
%
40.6
%
44.1
%
Per
Share Information (g)
Basic-
Income from continuing operations
$
3.03
$
2.22
$
1.73
$
1.26
$
0.95
- Income from discontinued
operations
0.53
0.12
0.15
0.21
0.19
- Net income
$
3.56
$
2.34
$
1.88
$
1.47
$
1.13
(h)
Diluted-
Income from continuing operations
$
3.01
$
2.21
$
1.72
$
1.25
$
0.94
- Income from discontinued
operations
0.52
0.12
0.14
0.21
0.18
- Net income
$
3.53
$
2.33
$
1.86
$
1.46
$
1.13
(h)
Book
value
$
18.54
$
13.64
$
11.89
$
11.03
$
9.51
Cash
dividends declared
0.7275
0.665
0.6125
0.5625
0.5313
Other
Information
Diluted
average number of shares outstanding (g)
84,724
84,430
84,161
83,196
81,946
Number
of employees
21,500
21,500
21,000
18,500
17,500
Backlog
from continuing operations (i)
$
448,054
$
236,460
$
230,584
$
194,336
$
156,940
(a)
Includes
Excell Minerals acquired February 1, 2007 (All Other Category - Minerals & Rail
Services and Products).
(b)
Includes
the Northern Hemisphere mill services operations of Brambles Industrial
Services (BISNH) acquired December 29, 2005 (Mill Services) and Hünnebeck
Group GmbH acquired November 21, 2005 (Access
Services).
(c)
Income
statement information restated to reflect the Gas Technologies business
group as Discontinued Operations.
(d)
“Return
on sales” is calculated by dividing income from continuing operations by
revenues from continuing
operations.
(e)
“Return
on average equity” is calculated by dividing income from continuing
operations by quarterly weighted-average
equity.
(f)
“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.
(g)
Per
share information restated to reflect the 2-for-1 stock split effective in
the first quarter of 2007.
(h)
Does
not total due to rounding.
(i)
Excludes
the estimated amount of long-term mill service contracts, which had
estimated future revenues of $5.0 billion at December 31,2007. Also excludes backlog of the Access Services Segment and
the roofing granules and slag abrasives business. These amounts
are generally not quantifiable due to the nature and timing of the
products and services provided.
- 18
-
Item
7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of
risks, uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein.
Forward-Looking
Statements
The
nature of the Company’s business 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. Forward-looking statements contained herein could include
among other things, statements about our management confidence and strategies
for performance; expectations for new and existing products, technologies, and
opportunities; and expectations regarding growth, sales, cash flows, earnings
and Economic Value Added (EVA®). These statements can be identified
by the use of such terms as “may,”“could,”“expect,”“anticipate,”“intend,”“believe,” or other comparable terms.
Factors
which could cause results to differ include, but are not limited
to: (1) changes in the worldwide business environment in which the
Company operates, including general economic conditions; (2) changes in currency
exchange rates, interest rates and capital costs; (3) changes in the performance
of stock and bond markets that could affect, among other things, the valuation
of the assets in the Company’s pension plans and the accounting for pension
assets, liabilities and expenses; (4) changes in governmental laws and
regulations, including environmental, tax and import tariff standards; (5)
market and competitive changes, including pricing pressures, market demand and
acceptance for new products, services and technologies; (6) unforeseen business
disruptions in one or more of the many countries in which the Company operates
due to political instability, civil disobedience, armed hostilities or other
calamities; (7) the seasonal nature of the business; (8) the successful
integration of the Company’s strategic acquisitions; (9) the amount and timing
of repurchases of the Company’s common stock, if any; and (10) other risk
factors listed from time to time in the Company’s SEC reports. A
further discussion of these, along with other potential factors, can be found in
Part I, Item 1A, “Risk Factors,” of this Form 10-K. The Company
cautions that these factors may not be exhaustive and that many of these factors
are beyond the Company’s ability to control or predict. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results. The Company undertakes no duty to update forward-looking
statements except as may be required by law.
Executive
Overview
The
Company’s record performance in 2007 reflected the continued execution of the
Company’s strategy of growth through increased international diversity and a
balanced, industrial services-based portfolio, augmented by selective strategic
acquisitions. The 2007 results were led by the Access Services
Segment and All Other Category (Minerals & Rail Services and
Products).
The
Company’s 2007 revenues were a record $3.7 billion. This was an
increase of $662.5 million or 22% over 2006. Income from continuing
operations was a record $255.1 million for 2007 compared with $186.4 million in
2006, an increase of 37%. Diluted earnings per share from continuing
operations were a record $3.01 for 2007, a 36% increase from 2006.
Results
for 2007 benefited from continued improved performance in the Access Services
Segment and the February 1, 2007 acquisition of Excell Minerals. The
improved performance in the Access Services Segment was due to continued
strength in the Company’s global non-residential and infrastructure construction
and industrial services markets, and positive returns from the Company’s
increased investment in highly engineered formwork rental systems.
Overall,
the global markets in which the Company participates, remain strong and the
Company has expansion opportunities to pursue its prudent acquisition strategy
of seeking further accretive bolt-on acquisitions, as well as organic
investments in its industrial services platforms. The Company also expects
continued strength in its operations in 2008, particularly from the Access
Services Segment, as well as the All Other Category (Minerals & Rail
Services and Products). In addition, the Company expects gradual
improvement in 2008 from the Mill Services Segment, as global steel production
levels begin to increase from 2007 levels; the implementation of business
optimization
- 19
-
initiatives
continues; underperforming contracts are exited or renegotiated; certain low
margin businesses are divested; the effects of restructuring actions are
realized; and new contracts are signed and work begins as our geographic
expansion strategy in high-return regions continues.
During
2007, the Company had record net cash provided by operating activities of $471.7
million, a 15% increase over the $409.2 million achieved in 2006. The
Company expects continued strong cash flows from operating activities in
2008. The Company’s cash flows are further discussed in the Liquidity
and Capital Resources section.
The
record revenue, income from continuing operations and diluted earnings per share
for 2007 reflect the balance and geographic diversity of the Company’s
operations. This operating balance and geographic diversity, as well
as growth opportunities in the Company’s core services platforms, such as the
February 1, 2007 acquisition of Excell Minerals, provide a broad foundation for
future growth and a hedge against normal changes in economic and industrial
cycles. In addition, the Company’s value-based management system
continued to deliver significant improvement in Economic Value Added (“EVA®”)
during 2007.
On
December 7, 2007, the Company completed the sale of its Gas Technologies
business group to Wind Point Partners. The terms of the sale include
a total purchase price of $340 million, including $300 million paid in cash at
closing and $40 million in the form of an earnout, contingent on the Gas
Technologies business achieving certain performance targets in 2008 or
2009.
Effective
in the first quarter of 2007, there was a two-for-one split of the Company’s
common stock for which one additional share of common stock was issued to
stockholders as of March 26, 2007.
Segment
Overview
The
Access Services Segment’s revenues in 2007 were $1.4 billion compared with $1.1
billion in 2006, a 31% increase. Operating income increased by 53% to
$183.8 million, from $120.4 million in 2006. Operating margins for
the Segment improved by 190 basis points to 13.0% from 11.1% in
2006. These improvements were due principally to continued strength
in the Company’s global non-residential and infrastructure construction and
industrial services markets, particularly in Europe and North
America. This Segment accounted for 39% of the Company’s revenues and
40% of the operating income for 2007.
Mill
Services Segment revenues in 2007 were $1.5 billion compared with $1.4 billion
in 2006, an 11% increase. Operating income decreased by 9% to $134.5
million, from $147.8 million in 2006. Operating margins for this
Segment decreased by 200 basis points to 8.8% from 10.8% in 2006. The
decrease in operating income and margins was due to higher operating and
maintenance costs, as well as lower steel production in certain regions,
particularly North America. The 2007 results include pre-tax
restructuring charges of $4.7 million, primarily related to severance costs
associated with initiatives to improve operating results. This
Segment accounted for 41% of the Company’s revenues and 29% of the operating
income for 2007.
The All
Other Category’s revenues in 2007 were $750.0 million compared with $578.2
million in 2006, a 30% increase. Operating income increased by 84% to
$142.2 million, from $77.5 million in 2006. Operating margins
increased by 560 basis points to 19.0% in 2007 from 13.4% in
2006. The February 1, 2007 acquisition of Excell Minerals contributed
to this Category’s improved performance. Four of the five other
businesses contributed higher revenues, and all five businesses contributed
higher operating income in 2007 compared with 2006. This Category
accounted for 20% of the Company’s revenue and 31% of the operating income for
2007.
The
positive effect of foreign currency translation increased 2007 consolidated
revenues by $166.9 million and pre-tax income by $13.9 million when compared
with 2006.
Outlook
Overview
The
Company’s operations span several industries and products as more fully
discussed in Part I, Item 1, “Business.” On a macro basis, the
Company is affected by non-residential and infrastructure construction and
industrial maintenance and capital improvement activities; worldwide steel mill
production and capacity utilization; industrial production volume; and the
general business trend towards the outsourcing of services. The
overall outlook for 2008 continues to be positive for most of these business
drivers.
Both
international and domestic Access Services activity remains
strong. Operating performance in 2007 for this Segment has benefited,
and is expected to continue to benefit in 2008, from increased non-residential
and infrastructure construction spending and industrial services activity in the
Company’s major markets; selective strategic investments and acquisitions in
existing and new markets and expansion of current product lines; further market
penetration from new services; service cross-selling opportunities among the
markets served; and enterprise business
- 20
-
optimization
opportunities including new technology applications, consolidated procurement,
logistics and continuous process improvement initiatives. Further
prudent global expansion and market share gains are also expected from this
Segment.
Overall,
the outlook for the Mill Services Segment for 2008 remains
positive. However, margin improvement in this Segment in 2008 is
expected to be gradual as the effects of the margin-improvement plans previously
outlined are realized. During 2007, in order to maintain pricing
levels, a more disciplined and consolidated steel industry has been adjusting
production levels to bring inventories in-line with current
demand. The Company expects global steel production and consumption
to increase at a sustainable pace in 2008, which would generally have a
favorable effect on this Segment’s revenues. In addition, new
contract signings and start-ups, as well as the Company’s geographic expansion
strategy, particularly Eastern Europe and the Middle East, are expected to
gradually have a positive effect on results in the longer term. The
Company continues to engage in enterprise business optimization initiatives
designed to improve operating results and margins. However, the
Company may experience higher operating costs, such as maintenance and energy;
that could have a negative impact on operating margins, to the extent these
costs cannot be passed to customers.
The
outlook for the All Other Category (Minerals & Rail Services and Products)
remains positive. Excell Minerals is expected to continue to be
accretive to earnings in 2008, as full integration into the Company continues to
occur. Likewise, the railway track maintenance services and equipment
business should continue to see improved year-over-year operating performance in
2008. Contract opportunities for the business remain high (such as
the signing of significant orders from China in 2007), which also provides
confidence to the longer-term outlook. The remaining businesses
within this group are also expected to continue to operate at their current high
levels of operating effectiveness.
The
stable or improved market conditions for most of the Company’s services and
products and the significant investments made recently for acquisitions and
growth-related capital expenditures provide the base for achieving the Company’s
stated growth objectives. The record performance for revenue and
operating income achieved in 2007 provides momentum for continued improvement in
2008.
Revenues by
Region
Total
Revenues
Twelve
Months Ended December 31
Percentage
Growth From
2006
to 2007
(Dollars
in millions)
2007
2006
Volume
Currency
Total
Western
Europe
$
1,758.5
$
1,472.7
10.6
%
8.8
%
19.4
%
North
America
1,244.9
1,027.4
20.8
0.4
21.2
Latin
America (a)
213.5
165.4
21.8
7.3
29.1
Middle
East and Africa
196.4
159.5
24.1
(1.0
)
23.1
Eastern
Europe
139.6
92.3
39.0
12.2
51.2
Asia/Pacific
135.3
108.3
13.9
11.1
25.0
Total
$
3,688.2
$
3,025.6
16.4
%
5.5
%
21.9
%
(a)
Includes
Mexico.
2007
Highlights
The
following significant items affected the Company overall during 2007 in
comparison with 2006:
Company
Wide:
·
Continued
strong worldwide economic activity, as well as the strong earnings
performance of the Excell Minerals acquisition, benefited the Company in
2007. This included increased access equipment services,
especially in North America, Europe and the Middle East; and increased
demand for air-cooled heat exchangers and industrial grating
products.
·
As
expected, during 2007, the Company experienced higher fuel and
energy-related costs, as well as higher commodity costs for certain
manufacturing businesses. To the extent that such costs cannot
be passed to customers in the future, operating income may be adversely
affected.
·
Consistent
with its overall strategic focus on global industrial services, the
Company divested its Gas Technologies business group on December 7,2007.
·
During
2007, international sales and operating income were 69% and 68%,
respectively, of total sales and operating income. This
compares with 2006 levels of 68% of sales and 71% of operating
income.
- 21
-
Access Services
Segment:
(Dollars
in millions)
2007
2006
Revenues
$
1,415.9
$
1,080.9
Operating
income
183.8
120.4
Operating
margin percent
13.0
%
11.1
%
Access Services Segment –
Significant Impacts on Revenues:
(In
millions)
Revenues
– 2006
$
1,080.9
Increased
volume and new business
209.3
Impact
of foreign currency translation
72.2
Acquisitions
53.2
Other
0.3
Revenues
– 2007
$
1,415.9
Access
Services Segment – Significant Impacts on Operating Income:
·
In
2007, the international access services business, Europe and the Middle
East in particular, continued to improve due to increased non-residential,
multi-dwelling residential and infrastructure construction
spending. The Company has also benefited from its recent rental
equipment capital investments made in these markets. Equipment rentals,
particularly in the construction sector, are the highest margin revenue
source in this Segment.
·
Continued
strong North American non-residential and infrastructure construction and
industrial services markets had a positive effect on volume which caused
overall margins and operating income in North America to improve during
2007.
·
The
2006 MyATH (Chile) and Cleton (Northern Europe) acquisitions were
accretive to earnings in 2007.
·
The
impact of foreign currency translation in 2007 increased operating income
for this Segment by $7.6 million, compared with
2006.
Mill Services
Segment:
(Dollars
in millions)
2007
2006
Revenues
$
1,522.3
$
1,366.5
Operating
income
134.5
147.8
Operating
margin percent
8.8
%
10.8
%
Mill Services Segment –
Significant Effects on Revenues:
(In
millions)
Revenues
– 2006
$
1,366.5
Impact
of foreign currency translation
90.3
Acquisitions
34.7
Increased
volume and new business
30.7
Other
0.1
Revenues
– 2007
$
1,522.3
Mill
Services Segment – Significant Impacts on Operating Income:
·
Operating
income for 2007 was negatively impacted by increased operating and
maintenance expenses as well as lower steel production in certain regions,
particularly North America.
·
Operating
income for 2007 included higher severance and other restructuring charges
of $3.3 million compared with 2006.
- 22
-
·
The
fourth quarter 2006 acquisition of Technic Gum and the 2007 acquisitions
of Alexander Mill Services International (“AMSI”) and Performix increased
operating income in 2007 compared to
2006.
·
The
impact of foreign currency translation in 2007 increased operating income
for this Segment by $9.4 million compared with
2006.
All Other
Category - Minerals
& Rail Services and Products:
(Dollars
in millions)
2007
2006
Revenues
$
750.0
$
578.2
Operating
income
142.2
77.5
Operating
margin percent
19.0
%
13.4
%
All Other Category -
Minerals & Rail
Services and Products –
Significant Impacts on
Revenues:
(In
millions)
Revenues
– 2006
$
578.2
Acquisitions
– principally Excell Minerals
123.7
Air-cooled
heat exchangers
27.7
Industrial
grating products
23.8
Boiler
and process equipment
1.3
Roofing
granules and abrasives
(4.9
)
Railway
track maintenance services and equipment
(4.0
)
Impact
of foreign currency translation
4.4
Other
(0.2
)
Revenues
– 2007
$
750.0
All Other Category - Minerals & Rail Services and
Products – Significant Effects on Operating Income:
·
The
Excell Minerals acquisition was accretive to the Category’s performance in
2007. Excell Minerals had strong customer demand for its
high-value material recycling services, as well as favorable market
pricing.
·
Operating
income for the air-cooled heat exchangers business benefited in 2007 due
to increased volume resulting from a continued strong natural gas
market.
·
The
increase in 2007 operating income for the industrial grating products
business was due principally to strong demand, as well as lower raw
material costs and a gain on the sale of an
asset.
·
The
boiler and process equipment business delivered improved results in 2007
due to increased equipment sales and favorable product
mix.
·
Despite
lower volume for the roofing granules and abrasives business in 2007,
operating income increased due to price increases, which offset higher
costs.
·
Operating
income for the railway track maintenance services and equipment business
increased in 2007 compared with 2006 due to increased volume and reduced
operating expenses for contract services, partially offset by the impact
of reduced equipment sales volume. The business also benefited
from reduced raw material costs and a gain on the disposal of an
asset.
·
The
impact of foreign currency translation in 2007 increased operating income
by $0.6 million for this Category compared to
2006.
Outlook,
Trends and Strategies
Looking
to 2008 and beyond, the following significant items, trends and strategies are
expected to affect the Company:
Company
Wide:
·
The
Company will continue its disciplined focus on expanding its industrial
services businesses, with a particular emphasis on prudently growing the
Access Services Segment, especially in emerging economies and other
targeted markets. Growth is expected to be achieved through the
provision of additional services to
existing
- 23
-
customers,
new contracts in both developed and emerging markets, and selective
strategic acquisitions, such as the February 2007 acquisition of Excell
Minerals and the August 2007 acquisition of Alexander Mill Services
International. Additionally, new higher-margin service and
sales opportunities in railway track maintenance services and equipment
will be pursued globally.
·
The
Company will continue to invest in selective strategic acquisitions and
growth capital investments; however, management will continue to be very
selective and disciplined in allocating capital, choosing projects with
the highest Economic Value Added (“EVA®”)
potential.
·
The
Company will place a strong focus on corporate-wide expansion into
emerging economies in the coming years. More specifically, within
the next three to five years, the Company’s global growth strategies
include steady, targeted expansion in the Asia-Pacific,
Eastern Europe, Latin America, and Middle East and Africa to further
complement the Company’s already-strong presence throughout Europe and
North America. This strategy is expected to result in doubling the
Company’s presence in these markets to approximately 30% of total Company
revenues.
·
The
Company will continue to implement enterprise business optimization
initiatives across the Company to further enhance margins for most
businesses, especially the Mill Services Segment. These
initiatives include improved supply-chain and logistics management;
operating site and capital employed optimization; and added emphasis on
global procurement.
·
The
Company expects strong cash flow from operating activities in 2008,
exceeding the record of $472 million achieved in 2007. This
will support the Company’s growth initiatives and help reduce
debt.
·
The
continued growth of the Chinese steel industry, as well as other Asian
emerging economies, could impact the Company in several
ways. Increased steel mill production in China, and in other
Asian countries, may provide additional service opportunities for the Mill
Services Segment. However, increased Asian steel exports could
result in lower steel production in other parts of the world, affecting
the Company’s customer base. Additionally, continued increased
Chinese economic activity may result in increased commodity costs in the
future, which may adversely affect the Company’s manufacturing
businesses. The potential impact of these risks is currently
unknown.
·
Volatility
in energy and commodity costs (e.g., fuel, natural gas, steel, etc.) and
worldwide demand for these commodities could have an adverse impact on the
Company’s operating costs and ability to obtain the necessary raw
materials. Cost increases could result in reduced operating
income for certain products, to the extent that such costs cannot be
passed on to customers. The effect of continued Middle East
armed hostilities on the cost of fuel and commodities is currently
unknown, but it could have an adverse impact on the Company’s operating
costs. However, increased volatility in energy and commodity
costs may provide additional service opportunities for the Mill Services
Segment and several businesses in the All Other Category (Minerals &
Rail Services and Products) as customers may tend to outsource more
services to reduce overall costs. Such volatility may also
provide opportunities for additional petrochemical plant maintenance and
capital improvement projects.
·
The
armed hostilities in the Middle East could also have a significant effect
on the Company’s operations in the region. The potential impact
of this risk is currently unknown. This exposure is further
discussed in Part I, Item 1A, “Risk
Factors.”
·
Foreign
currency translation had an overall favorable effect on the Company’s
sales, operating income and Stockholders’ Equity during 2007 in comparison
to 2006. If the U.S. dollar strengthens, particularly in
relationship to the euro or British pound sterling, the impact on the
Company would generally be negative in terms of reduced sales, income and
Stockholders’ Equity. Should the U.S. dollar weaken further in
relationship to these currencies, the impact on the Company would
generally be positive in terms of higher sales, income and Stockholders’
Equity.
·
Total
pension expense (defined benefit, defined contribution and multi-employer)
for 2008 is expected to be higher than the 2007 level due to increased
volume which affects defined contribution and multi-employer pension
expense. On a comparative basis, total pension expense in 2007
was $2.8 million higher than 2006 due principally to increased
multi-employer and defined contribution pension expense resulting from
increased volume in the Access Services
Segment.
·
Defined
benefit pension expense decreased $4.4 million in 2007 compared to 2006
due primarily to higher plan asset bases in 2007 resulting from cash
contributions and significant returns on plan assets in
2006. The decreases were partially offset by plan curtailment
losses in the railway track maintenance services and equipment
business. Defined benefit pension expense is expected to
decline for the full year 2008 compared with 2007 due to the cash
contributions in 2007, including voluntary cash contributions to the
defined benefit pension plans (approximately $10.1 million during 2007 and
$10.6 million during 2006, mostly to the U.K. plan), coupled with the
higher-than-expected plan asset returns in
2007.
·
Financial
markets in the United States and in a number of other countries where the
Company operates have been volatile since mid-2007 due to the credit and
liquidity issues in the market place. This has adversely
impacted the outlook for the overall U.S. economy as economic activity
slowed, creating increased downside risk to growth. In Europe,
a more moderate pace of economic growth is expected in 2008 when compared
with 2007. While the Company’s global footprint; diversity of
services and products; long-term mill services contracts; and large
access
- 24
-
services
customer base mitigate the overall exposure to changes in any one single
economy, further deterioration of the global economies could have an
adverse impact on the Company’s operating
results.
·
Changes
in worldwide interest rates, particularly in the United States and Europe,
could have a significant effect on the Company’s overall interest expense,
as approximately 49% of the Company’s borrowings are at variable interest
rates as of December 31, 2007 (in comparison to approximately 48% at
December 31, 2006). The Company manages the mix of fixed-rate
and floating-rate debt to preserve adequate funding flexibility, as well
as control the effect of interest-rate changes on consolidated interest
expense. Strategies to further reduce related risks are under
consideration.
·
As
the Company continues the strategic expansion of its global footprint and
implements tax planning opportunities, the 2008 effective income tax rate
is expected to be lower than 2007.
·
The
implementation of the Company’s enterprise wide lean sigma program in 2008
should provide long-term efficiencies as the Company embraces its
enterprise optimization
initiatives.
Access Services
Segment:
·
Both
the international and domestic Access Services businesses have experienced
buoyant markets that are expected to remain stable into
2008. Specifically, international and North American
non-residential and infrastructure construction activity continues at high
volume levels. The North American industrial maintenance and
infrastructure activities are expected to remain at high
levels.
·
The
Company will continue to emphasize prudent expansion of our geographic
presence in this Segment through entering new markets and further
expansion in emerging economies, and will continue to leverage value-added
services and highly engineered forming, shoring and scaffolding systems to
grow the business.
·
The
Company will continue to implement continuous process improvement
initiatives including: global procurement and logistics; the sharing of
engineering knowledge and resources; continuous process improvement and
lean sigma initiatives; optimizing the business under one standardized
administrative and operating model at all locations worldwide; and
on-going analysis for other potential synergies across the
operations.
Mill Services
Segment:
·
To
maintain pricing levels, a more disciplined and consolidated steel
industry has been adjusting production levels to bring inventories in-line
with current demand. The Company expects global steel production to
increase modestly in 2008, as inventory levels have declined during
2007. Increased steel production would generally have a
favorable effect on this Segment’s
revenues.
·
Further
consolidation in the global steel industry is possible. Should
additional transactions occur involving some of the steel industry’s
larger companies that are customers of the Company, it would result in an
increase in concentration of revenues and credit risk for the
Company. If a large customer were to experience financial
difficulty, or file for bankruptcy protection, it could adversely impact
the Company’s income, cash flows and asset valuations. As part
of its credit risk management practices, the Company closely monitors the
credit standing and accounts receivable position of its customer
base. Further consolidation may also increase pricing pressure
on the Company and the competitive risk of services contracts which are
due for renewal. Conversely, such consolidation may provide
additional service opportunities for the Company as the Company believes
it is well-positioned
competitively.
·
The
Company will continue to place significant emphasis on improving operating
margins of this Segment and gradual improvement is expected in
2008. Margin improvements are most likely to be achieved
through internal enterprise business optimization efforts; renegotiating
or exiting underperforming contracts, principally in North America;
divesting low margin product lines; continuing to execute a geographic
expansion strategy in Eastern Europe, the Middle East and Africa, Latin
America and Asia Pacific; and implementing continuous process improvement
initiatives including: lean sigma projects, global procurement
initiatives, site efficiency programs, technology enhancements,
maintenance best practices programs, and reorganization
actions.
All Other Category - Minerals
& Rail Services and Products:
·
The
Company will emphasize prudent global expansion of Excell Minerals’
value-added services of extracting high-value metallic content from slag
and responsibly handling and recycling residual
materials.
·
Market
pricing volatility for some of the high-value materials involved in
certain Excell Minerals services could affect the operating results of
this business either favorably or
unfavorably.
·
International
demand for the railway track maintenance services and equipment business’s
products and services is expected to be strong in the long
term. A large equipment order signed in 2007 with China is an
example of the underlying strength of the international
markets. Due to long lead-times, this order is expected to
generate revenues beginning in 2008 and beyond. In addition,
increased volume of higher-margin contract services and enterprise
business optimization initiatives are expected to improve margins on a
long-term basis.
·
Worldwide
supply and demand for steel and other commodities could have an adverse
impact on raw material costs and the ability to obtain the necessary raw
materials for several businesses in this Category. The
Company
- 25
-
has
implemented certain strategies to help ensure continued product supply to
our customers and mitigate the potentially negative impact that rising
steel and other commodity prices could have on operating
income.
·
The
abrasives business is expected to continue to perform well in the
near-term, although operating margins could be impacted by volatile energy
prices that affect both production and transportation
costs. This business continues to pursue cost and site
optimization initiatives and the use of more energy-efficient equipment to
help mitigate future energy-related
increases.
·
Due
to a strong natural gas market and additional North American
opportunities, demand for air-cooled heat exchangers is expected to remain
strong into 2008.
Results
of Operations for 2007, 2006 and 2005 (a)
(Dollars
are in millions, except per share information and
percentages)
2007
2006
2005
Revenues
from continuing operations
$
3,688.2
$
3,025.6
$
2,396.0
Cost
of services and products sold
2,685.5
2,203.2
1,779.2
Selling,
general and administrative expenses
538.2
472.8
361.4
Other
expenses
3.4
2.5
1.9
Operating
income from continuing operations
457.8
344.3
251.0
Interest
expense
81.4
60.5
41.9
Income
tax expense from continuing operations
117.6
93.4
59.1
Income
from continuing operations
255.1
186.4
144.5
Income
from discontinued operations
44.4
10.0
12.2
Net
income
299.5
196.4
156.7
Diluted
earnings per common share from continuing operations
3.01
2.21
1.72
Diluted
earnings per common share
3.53
2.33
1.86
Effective
income tax rate for continuing operations
30.7
%
32.5
%
27.9
%
Consolidated
effective income tax rate
31.4
%
32.3
%
28.1
%
(a) All
historical amounts in the Results of Operations section have been restated for
comparative purposes to reflect discontinued operations.
- 26
-
Comparative
Analysis of Consolidated Results
Revenues
2007 vs.
2006
Revenues
for 2007 increased $662.5 million or 22% from 2006, to a record
level. This increase was attributable to the following significant
items:
In
millions
Change
in Revenues 2007 vs. 2006
$211.6
Business
acquisitions. Increased revenues of $123.7 million, $53.2
million and $34.7 million in the All Other Category (Minerals & Rail
Services and Products), Access Services Segment and Mill Services Segment,
respectively.
209.6
Net
increased revenues in the Access Services Segment due principally to the
continued strength of the non-residential and infrastructure construction
markets in both North America and internationally, particularly in Europe
and the Middle East (excluding acquisitions).
166.9
Effect
of foreign currency translation.
30.8
Net
increased volume, new business and sales price changes in the Mill
Services Segment (excluding acquisitions).
27.7
Increased
revenues of the air-cooled heat exchangers business due to a continued
strong natural gas market.
23.8
Increased
revenues of the industrial grating products business due to continued
strong demand.
(4.9)
Net
decreased revenues in the roofing granules and abrasives business
resulting from lower demand.
(3.0)
Other
(minor changes across the various units not already
mentioned).
$662.5
Total
Change in Revenues 2007 vs. 2006
2006 vs.
2005
Revenues
for 2006 increased $629.6 million or 26% from 2005. This increase was
attributable to the following significant items:
In
millions
Change
in Revenues 2006 vs. 2005
$405.2
Net
effect of business acquisitions and divestitures. Increased
revenues of $219.0 million and $186.2 million in the Mill Services and
Access Services Segments, respectively.
91.2
Net
increased revenues in the Access Services Segment due principally to
strong non-residential construction markets in North America and the
continued strength of the international business, particularly in Europe
(excluding the net effect of acquisitions and
divestitures).
68.7
Net
increased volume, new contracts and sales price changes in the Mill
Services Segment, particularly in Europe and the United States (excluding
acquisitions).
34.1
Effect
of foreign currency translation.
32.5
Increased
revenues of the air-cooled heat exchangers business due to a strong
natural gas market and increased prices.
8.4
Increased
revenues of the industrial grating products business due to increased
demand and, to a lesser extent, increased prices and a more favorable
product mix.
(17.0)
Net
decreased revenues in the railway track maintenance services and equipment
business due to decreased equipment sales, partially offset by increased
contract services as well as repair part sales in the United
Kingdom. Equipment sales declined due to a large order shipped
to China in 2005 which did not recur in 2006.
6.5
Other
(minor changes across the various units not already
mentioned).
$629.6
Total
Change in Revenues 2006 vs. 2005
- 27
-
Cost
of Services and Products Sold
2007 vs.
2006
Cost of
services and products sold for 2007 increased $482.3 million or 22% from 2006,
consistent with the 22% increase in revenues. This increase was
attributable to the following significant items:
In
millions
Change
in Cost of Services and Products Sold 2007 vs. 2006
$174.1
Increased
costs due to increased revenues (exclusive of the effect of foreign
currency translation and business acquisitions, and including the impact
of increased commodity and energy costs included in selling
prices).
144.4
Business
acquisitions.
124.5
Effect
of foreign currency translation.
39.3
Other
(product/service mix and increased equipment maintenance costs, partially
offset by enterprise business optimization initiatives and volume-related
efficiencies).
$482.3
Total
Change in Cost of Services and Products Sold 2007 vs.
2006
2006 vs.
2005
Cost of
services and products sold for 2006 increased $424.0 million or 24% from 2005,
slightly lower than the 26% increase in revenues. This increase was
attributable to the following significant items:
In
millions
Change
in Cost of Services and Products Sold 2006 vs. 2005
$281.8
Net
effect of business acquisitions and divestitures.
136.9
Increased
costs due to increased revenues (exclusive of the effect of foreign
currency translation and business acquisitions and including the impact of
increased costs included in selling prices).
24.9
Effect
of foreign currency translation.
(19.6)
Other
(due to product mix; stringent cost controls; process improvements; volume
related efficiencies; and minor changes across the various units not
already mentioned; partially offset by increased fuel and energy-related
costs not recovered through selling prices).
$424.0
Total
Change in Cost of Services and Products Sold 2006 vs.
2005
Selling,
General and Administrative Expenses
2007 vs.
2006
Selling,
general and administrative (“SG&A”) expenses for 2007 increased $65.4
million or 14% from 2006, a lower rate than the 22% increase in
revenues. The lower relative percentage increase in SG&A expense
as compared with revenue was due principally to economic business optimization
programs geared towards reducing costs. This increase was
attributable to the following significant items:
In
millions
Change
in Selling, General and Administrative Expenses 2007 vs.
2006
$
22.8
Effect
of foreign currency translation.
20.3
Increased
compensation expense due to salary increases and employee incentive plan
costs due to overall business growth and improved
performance.
19.2
Business
acquisitions.
7.9
Increased
professional fees due to global optimization projects.
(4.8)
Other.
$
65.4
Total
Change in Selling, General and Administrative Expenses 2007 vs.
2006
- 28
-
2006 vs.
2005
Selling,
general and administrative expenses for 2006 increased $111.3 million or 31%
from 2005, more than the 26% increase in revenues. The higher
relative percentage increase in SG&A expense as compared with revenue was
due principally to the effect of certain acquisitions which, by their nature,
have a higher percentage of SG&A-related costs. This increase was
attributable to the following significant items:
In
millions
Change
in Selling, General and Administrative Expenses 2006 vs.
2005
$
71.3
Net
effect of business acquisitions and dispositions
21.0
Increased
employee compensation expense due to salary increases, increased
headcount, higher commissions and employee incentive plan increases due to
improved performance.
5.4
Effect
of foreign currency translation.
3.7
Increased
space and equipment rentals, supplies, utilities and fuel
costs.
2.9
Increased
professional fees due to special projects.
2.7
Increased
travel expenses.
4.3
Other.
$111.3
Total
Change in Selling, General and Administrative Expenses 2006 vs.
2005
Other
Expenses
This
income statement classification 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. Net Other Expenses was $3.4 million
in 2007 compared with $2.5 million in 2006 and $1.9 million in
2005.
2007 vs.
2006
Net Other
Expenses for 2007 increased $1.0 million or 39% from 2006. This
increase was attributable to the following significant items:
In
millions
Change
in Other Expenses 2007 vs. 2006
$ 3.1
Increase
in employee termination benefit costs. This increase related
principally to restructuring actions in the Mill Services and Access
Services Segments.
0.7
Increase
in impaired asset write-downs in the Mill Services and Access Services
Segments.
(2.8)
Decrease
in other expenses, including costs to exit activities due to exit costs
incurred during 2006 at certain international locations not repeated in
2007.
$ 1.0
Total
Change in Other Expenses 2007 vs.
2006
2006 vs.
2005
Net Other
Expenses for 2006 increased $0.6 million or 31% from 2005. This
increase was attributable to the following significant items:
In
millions
Change
in Other Expenses 2006 vs. 2005
$ 4.2
Decrease
in net gains on disposals of non-core assets. This decrease was
attributable principally to $5.5 million in net gains that were realized
in 2006 from the sale of non-core assets compared with $9.7 million in
2005. The net gains for both years were principally within the
Access Services and Mill Services Segments.
1.9
Increase
in other expenses, including costs to exit activities.
(5.5)
Decrease
in employee termination benefit costs. This decrease related
principally to decreased costs in the Mill Services and Access Services
Segments.
$ 0.6
Total
Change in Other Expenses 2006 vs.
2005
For
additional information, see Note 15, Other (Income) and Expenses, to the
Consolidated Financial Statements under Part II, Item 8, “Financial Statements
and Supplementary Data.”
- 29
-
Interest
Expense
2007 vs.
2006
Interest
expense in 2007 was $20.9 million or 35% higher than in 2006. This
was principally due to increased borrowings to finance business acquisitions
made in 2007 and, to a lesser extent, higher interest rates on variable interest
rate borrowings. The impact of foreign currency translation also
increased interest expense by approximately $2.6 million.
2006 vs.
2005
Interest
expense in 2006 was $18.6 million or 44% higher than in 2005. This
was principally due to increased borrowings to finance acquisitions in the
fourth quarter of 2005 and, to a lesser extent, higher interest rates on
variable interest rate borrowings. This impact of foreign currency
translation also increased interest expense by approximately $0.6
million.
Income
Tax Expense from Continuing Operations
2007 vs.
2006
The
increase in 2007 of $24.2 million or 26% in the provision for income taxes from
continuing operations was due to increased earnings from continuing operations
for the reasons mentioned above, partially offset by a lower effective income
tax rate. The effective income tax rate relating to continuing
operations for 2007 was 30.7% versus 32.5% for 2006. The decrease
related principally from the Company increasing its designation of certain
international earnings as permanently reinvested.
2006 vs.
2005
The
increase in 2006 of $34.2 million or 58% in the provision for income taxes from
continuing operations was primarily due to increased earnings from continuing
operations and an increased effective income tax rate. The effective
income tax rate relating to continuing operations for 2006 was 32.5% versus
27.9% for 2005. The increase related principally to increased
effective income tax rates on international earnings and remittances due in part
to a one-time benefit recorded in the fourth quarter of 2005 of $2.7 million
associated with funds repatriated under the American Jobs Creation Act of 2004
(AJCA). Additionally, during the fourth quarter of 2005, consistent
with the Company’s strategic plan of investing for growth at certain
international locations, the Company received a one-time income tax benefit of
$3.6 million.
For
additional information, see Note 9, Income Taxes, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary
Data.”
Income
from Continuing Operations
2007 vs.
2006
Income
from continuing operations in 2007 of $255.1 million was $68.7 million or 37%
higher than 2006. This increase resulted from strong demand for most
of the Company’s services and products, and business acquisitions.
2006 vs.
2005
Income
from continuing operations in 2006 of $186.4 million was $41.9 million or 29%
higher than 2005. This increase resulted from strong demand for most
of the Company’s services and products, and the net effect of business
acquisitions and divestitures.
Income
from Discontinued Operations
2007 vs.
2006
Income
from discontinued operations for 2007 increased by $34.4 million or 344%
compared with 2006. The increase was primarily attributable to the
$26.4 million after-tax gain on the sale of the Gas Technologies business, as
well as improved operating results for the business prior to the
divestiture.
- 30
-
2006 vs.
2005
Income
from discontinued operations for 2006 decreased $2.2 million or 18% from
2005. This decrease was attributable principally to the write-down of
impaired assets associated with the exit of an underperforming product line in
the Gas Technologies business.
Net
Income and Earnings Per Share
2007 vs.
2006
Net
income of $299.5 million and diluted earnings per share of $3.53 in 2007
exceeded 2006 by $103.1 million or 52% and $1.20 or 52%, respectively, due to
increased income from both continuing and discontinued operations for the
reasons described above.
2006 vs.
2005
Net
income of $196.4 million and diluted earnings per share of $2.33 in 2006
exceeded 2005 by $39.7 million or 25% and $0.47 or 25%, respectively, primarily
due to increased income from continuing operations, partially offset by the
decrease in income from discontinued operations for the reasons described
above.
Liquidity
and Capital Resources
Overview
Building
on its consistent historical performance of strong operating cash flows, the
Company achieved a record $471.7 million in operating cash flow in
2007. This represents a 15% improvement over 2006’s operating cash
flow of $409.2 million. In 2007, this significant source of cash
combined with $317.2 million in proceeds from the sale of assets enabled the
Company to invest $443.6 million in capital expenditures (56% of which were for
revenue-growth projects); invest $254.6 million in business acquisitions; and
pay $59.7 million in stockholder dividends. These significant 2007
investments follow $340.2 million of capital expenditures (45% of which were for
revenue–growth projects); $54.5 million in stockholder dividends; and $34.3
million in business acquisitions invested in 2006. The Company
believes these investments provide a solid foundation for future revenue and
Economic Value Added (“EVA®”) growth.
During
2007, the Company’s value-based management system continued to deliver results
by creating increased economic value. Significant EVA® improvement
was achieved and the Company’s return on invested capital improved 240 basis
points from the year 2006.
The
Company’s net cash borrowings decreased $22.7 million in 2007. This
decrease is primarily due to the strong operating cash flows achieved in
2007. Balance sheet debt, which is affected by foreign currency
translation, increased $17.8 million from December 31, 2006. Debt to
total capital ratio decreased to 40.8% as of December 31, 2007, due principally
to a $419.8 increase in Stockholders’ Equity. Debt to total capital
was 48.1% at December 31, 2006.
In
December 2007, the Company completed the sale of its Gas Technologies business
group. The terms of the sale included a total sale price of $340
million, including $300 million paid in cash at closing and $40 million payable
in the form of an earnout, contingent on the Gas Technologies group achieving
certain performance targets in 2008 or 2009. Proceeds from the sale
have provided the Company with capital to immediately reduce short-term debt and
ultimately fund continuing organic growth initiatives and other opportunities in
its core businesses within its balanced portfolio, as well as debt
reduction.
The
Company’s strategic objectives for 2008 include again generating record cash
provided by operating activities. The Company plans to sustain its
balanced portfolio through its strategy of redeploying discretionary cash for
prudent growth and international diversification in the Access Services Segment;
in long-term, high-return and high-renewal-rate services contracts for the Mill
Services Segment, principally in emerging economies; for growth and
international diversification in the All Other Category (Minerals & Rail
Services and Products); and for selective bolt-on acquisitions in the industrial
services businesses. The Company also foresees continuing its long
and consistent history of paying dividends to stockholders, paying down debt and
repurchasing Company stock under its previously approved stock repurchase
authorization.
- 31
-
The
Company is also focused on improved working capital
management. Specifically, enterprise business optimization programs
are being used to improve the effective and efficient use of working capital,
particularly accounts receivable in the Access Services and Mill Services
Segments.
Cash
Requirements
The
following summarizes the Company’s expected future payments related to
contractual obligations and commercial commitments at December 31,2007.
See
Note 6, Debt and Credit Agreements; Note 7, Leases; Note 8, Employee
Benefit Plans; Note 9, Income Taxes; and Note 13, Financial Instruments,
to the Consolidated Financial Statements under Part II, Item 8, “Financial
Statements and Supplementary Data,” for additional disclosures on
short-term and long-term debt; operating leases; pensions and other
postretirement benefits; income taxes and foreign currency forward
exchange contracts, respectively.
(b)
The
total projected interest payments on Long-term Debt are based upon
borrowings, interest rates and foreign currency exchange rates as of
December 31, 2007. The interest rates on variable-rate debt and
the foreign currency exchange rates are subject to changes beyond the
Company’s control and may result in actual interest expense and payments
differing from the amounts projected
above.
(c)
Amounts
represent expected benefit payments for the next 10
years.
(d)
This
amount represents the notional value of the foreign currency exchange
contracts outstanding at December 31, 2007. Due to the nature
of these transactions, there will be offsetting cash flows to these
contracts, with the difference recognized as a gain or loss in the
consolidated income statement.
(e)
On
January 1, 2007, the Company adopted the provisions of FIN
48. As of December 31, 2007, in addition to the $5.4 million
classified as short-term, the Company had approximately $31.8 million of
long-term tax liabilities, including interest and penalties, related to
uncertain tax positions. Because of the high degree of
uncertainty regarding the timing of future cash outflows associated with
these liabilities, the Company is unable to estimate the years in which
settlement will occur with the respective taxing
authorities.
Off-Balance Sheet Arrangements –
The following table summarizes the Company’s contingent commercial
commitments at December 31, 2007. These amounts are not included in
the Company’s Consolidated Balance Sheet since there are no current
circumstances known to management indicating that the Company will be required
to make payments on these contingent obligations.
Certain
guarantees and performance bonds are of a continuous nature and do not have a
definite expiration date.
Sources
and Uses of Cash
The
Company’s principal sources of liquidity are cash from operations and borrowings
under its various credit agreements, augmented periodically by cash proceeds
from asset sales. The primary drivers of the Company’s cash flow from
operations are the Company’s sales and income, particularly in the services
businesses. The Company’s long-term Mill Services contracts provide
predictable cash flows for several years into the future. (See
“Certainty of Cash Flows” section for additional information on estimated future
revenues of Mill Services contracts and order backlogs for the Company’s
manufacturing businesses and railway track maintenance services and equipment
business). Cash returns on capital investments made in prior years,
for which no cash is currently required, are a significant source of operating
cash. Depreciation expense related to these investments is a non-cash
charge. The Company also continues to maintain working capital at a
manageable level based upon the requirements and seasonality of the
business.
Major
uses of operating cash flows and borrowed funds include capital investments,
principally in the industrial services business; payroll costs and related
benefits; pension funding payments; inventory purchases; raw material purchases
for the manufacturing businesses; income tax payments; debt principal and
interest payments; insurance premiums and payments of self-insured casualty
losses; and machinery, equipment, automobile and facility rental
payments. Cash is also used for selective or bolt-on acquisitions as
the appropriate opportunities arise as well as funding of share
repurchases.
Resources available for cash
requirements – The Company meets its on-going cash requirements for
operations and growth initiatives by accessing the public debt markets and by
borrowing from banks. Public markets in the United States and Europe are
accessed through its commercial paper programs and through discrete term note
issuance to investors. Various bank credit facilities are available
throughout the world. The company expects to utilize both the public debt
markets and bank facilities to meet its cash requirements in the
future. The following chart illustrates the amounts outstanding under
credit facilities and commercial paper programs and available credit as of
December 31, 2007.
Summary
of Credit Facilities and Commercial Paper Programs
Although
the Company has significant available credit, practically, the Company
limits aggregate commercial paper and credit facility borrowings at any
one time to a maximum of $900 million (the aggregate amount of the back-up
facilities).
- 33
-
During
the fourth quarter of 2007, the Company entered into a new 364-day revolving
credit facility in the amount of $450 million, through a syndicate of 13 banks
which matures in November 2008. Any borrowings outstanding at the
termination of the facility may, at the Company’s option, be repaid over the
following 12 months.
The
Company’s bilateral credit facility (which expired in December 2007) was renewed
in February 2008. The facility, in the amount of $50 million, serves
as back-up to the Company’s commercial paper programs and also provides
available financing for the Company’s European operations. Borrowings
under this facility, which expires in December 2008, are available in most major
currencies with active markets at interest rates based upon LIBOR plus a
margin. Borrowings outstanding at expiration may be repaid over the
succeeding 12 months. As of December 31, 2007 and 2006, there were no
borrowings outstanding on this facility.
See Note
6, Debt and Credit Agreements, to the Consolidated Financial Statements under
Part II, Item 8, “Financial Statements and Supplementary Data,” for more
information on the Company’s credit facilities.
The
Company’s euro-based commercial paper program has not been rated since the euro
market does not require it. In May 2007, Moody’s reaffirmed its A3
and P-2 ratings for the Company’s long-term notes and U.S. commercial paper,
respectively, and its stable outlook. In August 2007, Fitch
reaffirmed its A- and F2 ratings for the Company’s long-term notes and U.S.
commercial paper, respectively, and its stable outlook. In February
2008, S&P reaffirmed its A- and A-2 ratings for the Company’s long-term
notes and U.S. commercial paper, respectively, and its stable
outlook. Any continued tightening of the credit markets, which began
during 2007, may adversely impact the Company’s access to capital and the
associated costs of borrowing, however this is mitigated by the Company’s strong
financial position and earnings outlook as reflected in the above-mentioned
credit ratings. A downgrade to the Company’s credit ratings would
probably increase borrowing costs to the Company, while an improvement in the
Company’s credit ratings would probably decrease borrowing costs to the
Company.
- 34
-
Working Capital Position –
Changes in the Company’s working capital are reflected in the following
table:
(Dollars
are in millions)
December
31
2007
December
31
2006
Increase
(Decrease)
Current
Assets
Cash
and cash equivalents
$
121.8
$
101.2
$
20.6
Accounts
receivable, net
824.1
753.2
70.9
Inventories
310.9
285.2
25.7
Other
current assets
88.0
88.4
(0.4
)
Assets
held-for-sale
0.5
3.6
(3.1
)
Total
current assets
1,345.3
1,231.6
113.7
Current
Liabilities
Notes
payable and current maturities
68.7
198.2
(129.5
)
Accounts
payable
307.8
287.0
20.8
Accrued
compensation
108.9
95.0
13.9
Income
taxes payable
41.3
62.0
(20.7
)
Other
current liabilities
347.3
268.6
78.7
Total
current liabilities
874.0
910.8
(36.8
)
Working
Capital
$
471.3
$
320.8
$
150.5
Current
Ratio
1.5:1
1.4:1
Working
capital increased 47% in 2007 due principally to the following
factors:
·
Cash
increased by $20.6 million due principally to higher foreign exchange
rates and business growth.
·
Net
receivables increased by $70.9 million due principally to higher sales
levels in the Access Services and Mill Services Segments; foreign currency
translation; and the Excell Minerals acquisition. Partially
offsetting these increases was a decrease due to the December sale of the
Gas Technologies Segment.
·
The
$25.7 million increase in inventory balances related principally to
increased demand in the Access Services and Mill Services Segments; a
build up of inventory in the railway track maintenance equipment business
to fulfill 2008 orders and, to a much lesser extent, both the acquisition
of Excell Minerals and foreign currency translation. Partially offsetting
these increases was a decrease due to the December sale of the Gas
Technologies Segment.
·
Notes
payable and current maturities decreased $129.5 million principally due to
a decline in short-term commercial
paper.
·
Other
current liabilities increased $78.7 million principally due to customer
advance payments in the railway track maintenance services and equipment
business and the Access Services Segment and foreign currency
translation. Partially offsetting this increase was a decrease
due to the sale of the Gas Technologies
Segment.
Certainty of Cash Flows – The
certainty of the Company’s future cash flows is underpinned by the long-term
nature of the Company’s mill services contracts. At December 31,2007, the Company’s mill services contracts had estimated future revenues of
$5.0 billion, compared with $4.4 billion as of December 31, 2006. In
addition, as of December 31, 2007, the Company had an order backlog of $448.1
million for its Minerals & Rail Products and Services. This
compares with $236.5 million as of December 31, 2006. This increase
is due principally to increased demand for certain products within the railway
track maintenance services and equipment business, as a result of orders from
the Chinese Ministry of Railways, as well as increased demand for heat
exchangers and industrial grating. The railway track maintenance
services and equipment business backlog includes a significant portion that is
long-term, which will not be realized until 2009 and later due to the long lead
times necessary to build certain equipment, and the long-term nature of certain
service contracts. Order backlog for scaffolding, shoring and forming
services; for roofing granules and slag abrasives; and the reclamation and
recycling of high-value content from steelmaking slag is excluded from the above
amounts. These backlog amounts are generally not relevant or
quantifiable due to short order lead times for
- 35
-
certain
services, the nature and timing of the products and services provided and
equipment rentals with the ultimate length of the rental period often
unknown.
The types
of products and services that the Company provides are not subject to rapid
technological change, which increases the stability of related cash
flows. Additionally, each of the Company’s businesses, in its
balanced portfolio, is among the top three companies (relative to sales) in the
industries and markets the Company serves. Due to these factors, the
Company is confident in its future ability to generate positive cash flows from
operations.
Cash
Flow Summary
The
Company’s cash flows from operating, investing and financing activities, as
reflected in the Consolidated Statements of Cash Flows, are summarized in the
following table:
Summarized
Cash Flow Information
(In
millions)
2007
2006
2005
Net
cash provided by (used in):
Operating
activities
$
471.7
$
409.2
$
315.3
Investing
activities
(386.1
)
(359.4
)
(645.2
)
Financing
activities
(77.7
)
(84.2
)
369.3
Effect of exchange rate changes on
cash
12.7
14.7
(12.6
)
Net change in cash and cash
equivalents
$
20.6
$
(19.7
)
$
26.8
Cash From Operating Activities
– Net cash provided by operating activities in 2007 was a record $471.7
million, an increase of $62.5 million from 2006. The increased cash
from operations in 2007 resulted from the following factors:
·
Increased
net income in 2007 compared with
2006.
·
Increase
in other liabilities primarily due to customer advance payments in the
railway track maintenance services and equipment
business.
·
Partially
offsetting the above cash sources were increased inventories due to the
timing of shipment at the railway track maintenance services and equipment
business as well as increased inventory purchases required to meet
customer demand, principally in the Access Services
Segment.
Cash Used in Investing Activities –
In 2007, cash used in investing activities consisted of a $254.6 million
use of cash, principally related to the purchase of Excell Minerals in February
2007. Also, capital investments in 2007 were $443.6 million, an
increase of $103.4 million from 2006. Approximately 56% of the
investments were for projects intended to grow future
revenues. Investments were made predominantly for the industrial
services businesses, with 51% in the Access Services Segment and 44% in the Mill
Services Segment. Partially offsetting these uses of cash were cash
proceeds of $301.8 million from the completion of the sale of the Gas
Technologies Segment. The Company plans to continue to manage its
balanced portfolio and invest in value-creation projects including prudent,
bolt-on acquisitions, principally in the industrial services
business. See Note 2, Acquisitions and Dispositions, to the
Consolidated Financial Statements under Part II, Item 8, “Financial Statements
and Supplementary Data,” for additional disclosures related to these
acquisitions and divestitures.
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-
Cash Used in Financing Activities
– The following table summarizes the Company’s debt and capital positions
as of December 31, 2007 and 2006.
(Dollars
are in millions)
December
31
2007
December
31
2006
Notes
Payable and Current Maturities
$
68.7
$
198.2
Long-term
Debt
1,012.1
864.8
Total
Debt
1,080.8
1,063.0
Total
Equity
1,566.1
1,146.4
Total
Capital
$
2,646.9
$
2,209.4
Total
Debt to Total Capital
40.8
%
48.1
%
The
Company’s debt as a percentage of total capital decreased in
2007. Overall debt increased due to foreign currency translation
resulting from the weakening of the U.S. dollar primarily in comparison with the
euro. Additionally, total equity increased due principally to
increased net income in 2007, foreign currency translation, and pension
adjustments related to the adoption of SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”), partially offset by
stockholder dividends.
Debt
Covenants
The
Company’s credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Based on balances at December 31, 2007, the
Company could increase borrowings by approximately $1,267.9 million and still be
within its debt covenants. Alternatively, keeping all other factors
constant, the Company’s equity could decrease by approximately $845.3 million
and the Company would still be within its covenants. Additionally,
the Company’s 7.25% British pound sterling-denominated notes due October 27,2010 include a covenant that permits the note holders to redeem their notes, at
par, in the event of a change of control of the Company or a disposition of a
significant portion of the Company’s assets. The Company expects to
be compliant with these debt covenants one year from now.
Cash
and Value-Based Management
The
Company plans to continue with its strategy of selective, prudent investing for
strategic purposes for the foreseeable future. The goal of this
strategy is to improve the Company’s EVA under the program that commenced
January 1, 2002. Under this program the Company evaluates strategic
investments based upon the investment’s economic profit. EVA equals
after-tax operating profits less a charge for the use of the capital employed to
create those profits (only the service cost portion of pension expense is
included for EVA purposes). Therefore, value is created when a
project or initiative produces a return above the cost of
capital. Consistent with the 2007 results, meaningful improvement in
EVA was achieved compared with 2006.
The
Company is committed to continue paying dividends to
stockholders. The Company has increased the dividend rate for
fourteen consecutive years, and in February 2008, the Company paid its 231st
consecutive quarterly cash dividend. The Company also plans to use
discretionary cash flows to pay down debt. Additionally, the Company
announced in February 2008, plans to begin the repurchase of an undetermined
number of shares of the Company’s common stock under its stock repurchase
authorization. Repurchases will be made in open market transactions
at times and amounts as management deems appropriate, depending on market
conditions. Any repurchase may commence or be discontinued at any
time. The Company has authorization to repurchase up to two million
of its shares through January 31, 2009.
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 well-positioned and intends to continue
investing prudently and strategically in high-return projects and acquisitions,
to reduce debt and pay cash dividends as a means to enhance stockholder
value.
Application
of Critical Accounting Policies
The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of
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-
contingent
liabilities. On an on-going basis the Company evaluates its
estimates, including those related to pensions and other postretirement
benefits, bad debts, goodwill valuation, long-lived asset valuations, inventory
valuations, insurance reserves, contingencies and income taxes. The
impact of changes in these estimates, as necessary, is reflected in the
respective segment’s operating income in the period of the
change. The Company bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different outcomes, assumptions or conditions.
The
Company believes the following critical accounting policies are affected by its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. Management has discussed the
development and selection of the critical accounting estimates described below
with the Audit Committee of the Board of Directors and the Audit Committee has
reviewed the Company’s disclosure relating to these estimates in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations. These items should be read in conjunction with Note 1,
Summary of Significant Accounting Policies, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary
Data.”
Pension
Benefits
The
Company has defined benefit pension plans in several countries. The
largest of these plans are in the United Kingdom and the United
States. The Company’s funding policy for these plans is to contribute
amounts sufficient to meet the minimum funding pursuant to U.K. and U.S.
statutory requirements, plus any additional amounts that the Company may
determine to be appropriate. The Company made cash contributions to
its defined benefit pension plans of $42.0 million (including $10.1 million of
voluntary payments) and $37.2 million (including $10.6 million voluntary
payments) during 2007 and 2006, respectively. Additionally, the
Company expects to make a minimum of $24.5 million in cash contributions to its
defined benefit pension plans during 2008 and will likely continue its practice
of voluntary payments of at least approximately $10 million.
For the
year 2005, the Company accounted for its defined benefit pension plans in
accordance with SFAS No. 87, “Employer’s Accounting for Pensions” (“SFAS 87”),
which requires that amounts recognized in financial statements be determined on
an actuarial basis. At December 31, 2005, the adjustment to recognize
the additional minimum liability required under SFAS 87 impacted accumulated
other comprehensive loss in the Stockholders’ Equity section of the Consolidated
Balance Sheets by $14.7 million, net of deferred income taxes.
As of
December 31, 2006, the Company accounted for its defined benefit pension plans
in accordance with SFAS 158, which requires the Company to recognize in its
balance sheet, the overfunded or underfunded status of its defined benefit
postretirement plans measured as the difference between the fair value of the
plan assets and the benefit obligation (projected benefit obligation for a
pension plan) as an asset or liability. The charge or credit is
recorded as adjustment to accumulated other comprehensive income (loss), net of
tax. This reduced the Company’s equity on an after-tax basis by
approximately $88.2 million compared with measurement under prior
standards. The results of operations were not
affected. The adoption of SFAS 158 did not have a negative impact on
compliance with the Company’s debt covenants.
As of
December 31, 2007, the Company recorded an after-tax credit of $56.3 million to
accumulated other comprehensive loss. This is due to actuarial gains
as a result of actual pension asset returns being higher than assumed pension
asset returns, coupled with a higher discount rate for estimating the defined
benefit pension obligations.
During
2008, the Company will eliminate the early measurement dates for its defined
benefit pension plans. In accordance with SFAS 158, the incremental
effect of this transition will result in an adjustment to beginning retained
earnings. The Company currently estimates that this change will
result in a net increase of approximately $0.7 million to beginning
Stockholders’ Equity as of January 1, 2008.
Management
implemented a three-part strategy in 2002 and 2003 to deal with the adverse
market forces that had increased the unfunded benefit obligations of the
Company. These strategies included pension plan design changes, a
review of funding policy alternatives and a review of the asset allocation
policy and investment manager structure. With regards to plan design,
the Company amended a majority of the U.S. defined benefit pension plans and
certain international defined benefit pension plans so that accrued service is
no longer granted for periods after December 31, 2003, although compensation
increases will continue to be recognized on actual service to-date (for the U.S.
plans this is limited to 10 years – through December 2013). In place
of these plans, the Company established, effective January 1, 2004, defined
contribution pension plans providing for the Company to contribute a specified
matching amount for participating employees’ contributions to the
plan. Domestically, this match is made on employee contributions up
to
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-
four
percent of their eligible compensation. Additionally, the Company may
provide a discretionary contribution of up to two percent of compensation for
eligible employees. Internationally, this match is up to six percent
of eligible compensation with an additional two percent going towards insurance
and administrative costs. The Company believes these new retirement
benefit plans will provide a more predictable and less volatile pension expense
than existed under the defined benefit plans.
The
Company’s pension task force continues to evaluate alternative strategies to
further reduce overall pension expense including the consideration of converting
the remaining defined benefit plans to defined contribution plans; the on-going
evaluation of investment fund managers’ performance; the balancing of plan
assets and liabilities; the risk assessment of all multi-employer pension plans;
the possible merger of certain plans; the consideration of incremental cash
contributions to certain plans; and other changes that could reduce future
pension expense volatility and minimize risk.
Critical
Estimate – Defined Benefit Pension Benefits
Accounting
for defined benefit pensions and other postretirement benefits requires the use
of actuarial assumptions. The principal assumptions used include the
discount rate and the expected long-term rate-of-return on plan
assets. Each assumption is reviewed annually and represents
management’s best estimate at that time. The assumptions are selected
to represent the average expected experience over time and may differ in any one
year from actual experience due to changes in capital markets and the overall
economy. These differences will impact the amount of unfunded benefit
obligation and the expense recognized.
The
discount rates as of the September 30, 2007 measurement date for the U.K.
defined benefit pension plan and the October 31, 2007 measurement date for the
U.S. defined benefit pension plans were 5.8% and 6.17%,
respectively. These rates were used in calculating the Company’s
projected benefit obligations as of December 31, 2007. The discount
rates selected represent the average yield on high-quality corporate bonds as of
the measurement dates. The global weighted-average of these assumed
discount rates for the years ending December 31, 2007, 2006 and 2005 were 5.9%,
5.3% and 5.3%, respectively. Annual pension expense is determined
using the discount rates as of the measurement date, which for 2008 is the 5.9%
global weighted-average discount rate. Pension expense and the
projected benefit obligation generally increase as the selected discount rate
decreases.
The
expected long-term rate-of-return on plan assets is determined by evaluating the
portfolios’ asset class return expectations with the Company’s advisors as well
as actual, long-term, historical results of asset returns for the pension
plans. The pension expense increases as the expected long-term
rate-of-return on assets decreases. For 2007, the global
weighted-average expected long-term rate-of-return on asset assumption was
7.6%. For 2008, the expected global long-term rate-of-return on
assets will remain the same at 7.6%. This rate was determined based
on a model of expected asset returns for an actively managed
portfolio.
Based on
the updated actuarial assumptions and the structural changes in the pension
plans mentioned previously, the Company’s 2008 defined benefit pension expense
is expected to stabilize. Total pension expense increased from 2006
to 2007 by $2.8 million due principally to increased multi-employer and defined
contribution pension plan costs resulting from increased volume in the Access
Services and Mill Services Segments, partially offset by lower defined benefit
pension expense in the United States and United Kingdom due to higher expected
returns on plan assets. From 2005 to 2006, pension expense increased
by $5.9 million due principally to increased multi-employer and defined
contribution pension plan costs resulting from increased volume in the Access
Services and Mill Services Segments.
Changes
in defined benefit pension expense may occur in the future due to changes in
actuarial assumptions and due to changes in returns on plan assets resulting
from financial market conditions. Holding all other assumptions
constant, using December 31, 2007 plan data, a one-half percent increase or
decrease in the discount rate and the expected long-term rate-of-return on plan
assets would increase or decrease annual 2008 pre-tax defined benefit pension
expense as follows:
Approximate Changes in Pre-tax Defined
Benefit
Pension
Expense
U.S.
Plans
U.K.
Plan
Discount
rate
One-half
percent increase
Decrease
of $0.1 million
Decrease
of $4.1 million
One-half
percent decrease
Increase
of $0.1 million
Increase
of $4.5 million
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-
Approximate Changes in Pre-tax Defined
Benefit
Pension
Expense
U.S.
Plans
U.K.
Plan
Expected long-term
rate-of-return on plan assets
One-half
percent increase
Decrease
of $1.4 million
Decrease
of $3.9 million
One-half
percent decrease
Increase
of $1.4 million
Increase
of $3.9 million
Should
circumstances change that affect these estimates, changes (either increases or
decreases) to the net pension obligations may be required and would be recorded
in accordance with the provisions of SFAS 87 and SFAS
158. Additionally, certain events could result in the pension
obligation changing at a time other than the annual measurement
date. This would occur when the benefit plan is amended or when plan
curtailments occur under the provisions of SFAS No. 88, “Employers’ Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits” (“SFAS 88”).
See Note
8, Employee Benefit Plans, to the Consolidated Financial Statements under Part
II, Item 8, “Financial Statements and Supplementary Data,” for additional
disclosures related to these items.
Notes
and Accounts Receivable
Notes and
accounts receivable are stated at their net realizable value through the use of
an allowance for doubtful accounts. The allowance is maintained for
estimated losses resulting from the inability or unwillingness of customers to
make required payments. The Company has policies and procedures in
place requiring customers to be evaluated for creditworthiness prior to the
execution of new service contracts or shipments of products. These
reviews are structured to minimize the Company’s risk related to realizability
of its receivables. Despite these policies and procedures, the
Company may at times still experience collection problems and potential bad
debts due to economic conditions within certain industries (e.g., construction
and steel industries) and countries and regions in which the Company
operates. As of December 31, 2007 and 2006, receivables of $824.1
million and $753.2 million, respectively, were net of reserves of $25.6 million
and $25.4 million, respectively.
Critical
Estimate – Notes and Accounts Receivable
A
considerable amount of judgment is required to assess the realizability of
receivables, including the current creditworthiness of each customer, related
aging of the past due balances and the facts and circumstances surrounding any
non-payment. The Company’s provisions for bad debts during 2007, 2006
and 2005 were $7.8 million, $9.2 million and $6.3 million,
respectively. The decrease from 2006 to 2007 is due to lower bad debt
expense in the Access Services and Mill Services Segments. The
increase from 2005 to 2006 related principally to the acquisition of businesses
in the fourth quarter of 2005 and overall increased revenues.
On a
monthly basis, customer accounts are analyzed for
collectibility. Reserves are established based upon a
specific-identification method as well as historical collection experience, as
appropriate. The Company also evaluates specific accounts when it
becomes aware of a situation in which a customer may not be able to meet its
financial obligations due to a deterioration in its financial condition, credit
ratings or bankruptcy. The reserve requirements are based on the
facts available to the Company and are re-evaluated and adjusted as additional
information is received. Reserves are also determined by using
percentages (based upon experience) applied to certain aged receivable
categories. Specific issues are discussed with Corporate Management
and any significant changes in reserve amounts or the write-off of balances must
be approved by a specifically designated Corporate Officer. All
approved items are monitored to ensure they are recorded in the proper
period. Additionally, any significant changes in reserve balances are
reviewed to ensure the proper Corporate approval has occurred.
If the
financial condition of the Company’s customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Conversely, an improvement in a customer’s ability to make
payments could result in a decrease of the allowance for doubtful
accounts. Changes in the allowance related to both of these
situations would be recorded through income in the period the change was
determined.
The
Company has not materially changed its methodology for calculating allowances
for doubtful accounts for the years presented.
See Note
3, Accounts Receivable and Inventories, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data,” for
additional disclosures related to these items.
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-
Goodwill
The
Company’s net goodwill balances were $720.1 million and $612.5 million, as of
December 31, 2007 and 2006, respectively. Goodwill is not amortized
but tested for impairment at the reporting unit level on an annual basis, and
between annual tests whenever events or circumstances indicate that the carrying
value of a reporting unit’s goodwill may exceed its fair value.
Critical
Estimate – Goodwill
A
discounted cash flow model is used to estimate the fair value of a reporting
unit. This model requires the use of long-term planning estimates and
assumptions regarding industry-specific economic conditions that are outside the
control of the Company. The annual test for impairment includes the
selection of an appropriate discount rate to value cash flow
information. The basis of this discount rate calculation is derived
from several internal and external factors. These factors include,
but are not limited to, the average market price of the Company’s stock, the
number of shares of stock outstanding, the book value of the Company’s debt, a
long-term risk-free interest rate, and both market and size-specific risk
premiums. The Company’s annual goodwill impairment testing, performed
as of October 1, 2007 and 2006, indicated that the fair value of all reporting
units tested exceeded their respective book values and therefore no additional
goodwill impairment testing was required. Due to uncertain market
conditions, it is possible that estimates used for goodwill impairment testing
may change in the future. Therefore, there can be no assurance that
future goodwill impairment tests will not result in a charge to
earnings.
The
Company has not materially changed its methodology for goodwill impairment
testing for the years presented. There are currently no known trends,
demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described
above.
See Note
5, Goodwill and Other Intangible Assets, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary Data,”
for additional information on goodwill and other intangible assets.
Asset
Impairment
Long-lived
assets are reviewed for impairment when events and circumstances indicate that
the book value of an asset may be impaired. The amounts charged
against pre-tax continuing operations income related to impaired long-lived
assets were $0.9 million, $0.2 million and $0.6 million in 2007, 2006 and 2005,
respectively.
Critical
Estimate – Asset Impairment
The
determination of a long-lived asset impairment loss involves significant
judgments based upon short-term and long-term projections of future asset
performance. Impairment loss estimates are based upon the difference
between the book value and the fair value of the asset. The fair
value is generally based upon the Company’s estimate of the amount that the
assets could be bought or sold for in a current transaction between willing
parties. If quoted market prices for the asset or similar assets are
unavailable, the fair value estimate is generally calculated using a discounted
cash flow model. Should circumstances change that affect these
estimates, additional impairment charges may be required and would be recorded
through income in the period the change was determined.
The
Company has not materially changed its methodology for calculating asset
impairments for the years presented. There are currently no known
trends, demands, commitments, events or uncertainties that are reasonably likely
to occur that would materially affect the methodology or assumptions described
above.
Inventories
Inventories
are stated at the lower of cost or market. Inventory balances are
adjusted for estimated obsolete or unmarketable inventory equal to the
difference between the cost of inventory and its estimated market
value. At December 31, 2007 and 2006, inventories of $310.9 million
and $285.2 million, respectively, are net of lower of cost or market reserves
and obsolescence reserves of $13.9 million and $14.3 million,
respectively.
Critical
Estimate – Inventories
In
assessing the ultimate realization of inventory balance amounts, the Company is
required to make judgments as to future demand requirements and compare these
with the current or committed inventory levels. If actual market
conditions are determined to be less favorable than those projected by
management, additional inventory write-downs may be required and would be
recorded through income in the period the determination is
made. Additionally, the Company records reserves to adjust a
substantial portion of its U.S. inventory balances to the last-in, first-out
(LIFO) method of inventory valuation. In adjusting these reserves
throughout the year, the Company estimates its year-end
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-
inventory
costs and quantities. At December 31 of each year, the reserves are
adjusted to reflect actual year-end inventory costs and
quantities. During periods of inflation, the LIFO expense usually
increases and during periods of deflation it decreases. These
year-end adjustments resulted in pre-tax income/(expense) of $1.4 million,
$(2.3) million and $3.5 million in 2007, 2006 and 2005,
respectively.
The
Company has not materially changed its methodology for calculating inventory
reserves for the years presented. There are currently no known
trends, demands, commitments, events or uncertainties that are reasonably likely
to occur that would materially affect the methodology or assumptions described
above.
See Note
3, Accounts Receivable and Inventories, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data,” for
additional disclosures related to these items.
Insurance
Reserves
The
Company retains a significant portion of the risk for property, workers’
compensation, U.K. employers’ liability, automobile, general and product
liability losses. At December 31, 2007 and 2006, the Company has
recorded liabilities of $112.0 million and $103.4 million, respectively, related
to both asserted as well as unasserted insurance claims. At December31, 2007 and 2006, $25.9 million and $18.9 million, respectively, is included in
insurance liabilities related to claims covered by insurance carriers for which
a corresponding receivable has been recorded.
Critical
Estimate – Insurance Reserves
Reserves
have been recorded based upon actuarial calculations which reflect the
undiscounted estimated liabilities for ultimate losses including claims incurred
but not reported. Inherent in these estimates are assumptions which
are based on the Company’s history of claims and losses, a detailed analysis of
existing claims with respect to potential value, and current legal and
legislative trends. If actual claims differ from those projected by
management, changes (either increases or decreases) to insurance reserves may be
required and would be recorded through income in the period the change was
determined. During 2007, 2006 and 2005, the Company recorded a
retrospective insurance reserve adjustment that decreased pre-tax insurance
expense from continuing operations for self-insured programs by $1.2 million,
$1.3 million, and $3.5 million, respectively. The Company has
programs in place to improve claims experience, such as aggressive claim and
insured litigation management and a focused approach to workplace
safety.
The
Company has not materially changed its methodology for calculating insurance
reserves for the years presented. There are currently no known
trends, demands, commitments, events or uncertainties that are reasonably likely
to occur that would materially affect the methodology or assumptions described
above.
Legal
and Other Contingencies
Reserves
for contingent liabilities are recorded when it is probable that an asset has
been impaired or a liability has been incurred and the loss can be reasonably
estimated. Adjustments to estimated amounts are recorded as necessary
based on new information or the occurrence of new events or the resolution of an
uncertainty. Such adjustments are recorded in the period that the
required change is identified.
Critical
Estimate – Legal and Other Contingencies
On a
quarterly basis, recorded contingent liabilities are analyzed to determine if
any adjustments are required. Additionally, functional department
heads within each business unit are consulted monthly to ensure all issues with
a potential financial accounting impact, including possible reserves for
contingent liabilities have been properly identified, addressed or disposed
of. Specific issues are discussed with Corporate Management and any
significant changes in reserve amounts or the adjustment or write-off of
previously recorded balances must be approved by a specifically designated
Corporate Officer. If necessary, outside legal counsel, other third
parties or internal experts are consulted to assess the likelihood and range of
outcomes for a particular issue. All approved changes in reserve
amounts are monitored to ensure they are recorded in the proper
period. Additionally, any significant changes in reported business
unit reserve balances are reviewed to ensure the proper Corporate approval has
occurred. On a quarterly basis, the Company’s business units submit a
reserve listing to the Corporate headquarters which is reviewed in
detail. All significant reserve balances are discussed with a
designated Corporate Officer to assess their validity, accuracy and
completeness. Anticipated changes in reserves are identified for
follow-up prior to the end of a reporting period. Any new issues that
may require a reserve are also identified and discussed to ensure proper
disposition. Additionally, on a quarterly basis, all significant
environmental reserve balances or issues are evaluated to assess their validity,
accuracy and completeness.
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-
The
Company has not materially changed its methodology for calculating legal and
other contingencies for the years presented. There are currently no
known trends, demands, commitments, events or uncertainties that are reasonably
likely to occur that would materially affect the methodology or assumptions
described above.
See Note
10, Commitments and Contingencies, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data,” for
additional disclosure on this uncertainty and other contingencies.
Income
Taxes
The
Company is subject to various federal, state and local income taxes in the
taxing jurisdictions where the Company operates. At the end of each
quarterly period, the Company makes its best estimate of the annual effective
income tax rate and applies that rate to year-to-date income before income taxes
and minority interest to arrive at the year-to-date income tax
provision. Income tax loss contingencies are recorded in the period
when it is determined that it is probable that a liability has been incurred and
the loss can be reasonably estimated. Adjustments to estimated
amounts are recorded as necessary based upon new information, the occurrence of
new events or the resolution of an uncertainty. As of December 31,2007, 2006 and 2005, the Company’s net effective income tax rate on income from
continuing operations was 30.7%, 32.5% and 27.9%, respectively.
A
valuation allowance to reduce deferred tax assets is evaluated on a quarterly
basis. The valuation allowance is principally for tax-loss
carryforwards which are uncertain as to realizability. The valuation
allowance was $15.3 million and $13.9 million as of December 31, 2007 and 2006,
respectively.
Critical
Estimate – Income Taxes
The
annual effective income tax rates are developed giving recognition to tax rates,
tax holidays, tax credits and capital losses, as well as certain exempt income
and non-deductible expenses in all of the jurisdictions where the Company does
business. The income tax provision for the quarterly period is the
change in the year-to-date provision from the previous quarterly
period.
The
Company considers future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation
allowance. In the event the Company were to determine that it would
more likely than not be able to realize its deferred tax assets in the future in
excess of its net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise,
should the Company determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to the deferred tax
assets would decrease income in the period in which such determination was
made.
The
Company has not materially changed its methodology for calculating income tax
expense for the years presented.
The
Company adopted the provisions of FASB Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”), effective January 1, 2007. As a result
of the adoption, the Company recognized a cumulative effect reduction to the
January 1, 2007 retained earnings balance of $0.5 million. As of the
adoption date, the Company had gross tax-affected unrecognized income tax
benefits of $46.0 million, of which $17.8 million, if recognized, would affect
the Company’s effective income tax rate. Of this amount, $0.8 million
was classified as current and $45.2 million was classified as non-current on the
Company’s balance sheet. While the Company believes it has adequately
provided for all tax positions, amounts asserted by taxing authorities could be
different than the accrued position.
See Note
9, Income Taxes, to the Consolidated Financial Statements under Part II, Item 8,
“Financial Statements and Supplementary Data,” for additional disclosures
related to these items.
New
Financial Accounting Standards Issued
See Note
1, Summary of Significant Accounting Policies, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary Data,”
for disclosures on new financial accounting standards issued and their effect on
the Company.
- 43
-
Research
and Development
The
Company invested $3.2 million, $2.8 million and $2.5 million in internal
research and development programs in 2007, 2006 and 2005,
respectively. Internal funding for research and development was as
follows:
Research
and Development Expense
(In
millions)
2007
2006
2005
Access
Services Segment
$
0.7
$
0.7
$
0.5
Mill
Services Segment
1.3
1.1
1.4
Segment Totals
2.0
1.8
1.9
All
Other Category - Minerals
& Rail Services and Products
1.2
1.0
0.6
Consolidated
Totals
$
3.2
$
2.8
$
2.5
Backlog
As of
December 31, 2007, the Company’s order backlog, exclusive of long-term mill
services contracts, access services, roofing granules and slag abrasives, and
minerals and recycling technologies services, was $448.1 million compared with
$236.5 million as of December 31, 2006, an 89% increase. Of the order
backlog at December 31, 2007, approximately $248.6 million or 55% is not
expected to be filled in 2008. Of the order backlog not expected to
be filled in 2008, approximately 74% and 26% is expected to be filled in 2009
and 2010, respectively.
The
increase in order backlog is principally due to increased order backlog for
railway track maintenance equipment as a result of orders from the Chinese
Ministry of Railways, along with increased order backlog of process equipment,
air-cooled heat exchangers and industrial grating products. These
were partially offset by decreased order backlog for railway track maintenance
services. Order backlog for roofing granules and slag abrasives is
excluded from the above amounts. Order backlog amounts for that
product group are generally not quantifiable due to the short order lead times
of the products provided. Backlog for minerals and recycling
technologies is not included in the total backlog amount because it is generally
not quantifiable due to short order lead times of the products and services
provided.
Order
backlog for scaffolding, shoring and forming services of the Access Services
Segment is excluded from the above amounts. These amounts are
generally not quantifiable due to short order lead times for certain services,
the nature and timing of the products and services provided and equipment
rentals with the ultimate length of the rental period often
unknown.
The
Company paid four quarterly cash dividends of $0.1775 per share in 2007, for an
annual rate of $0.71. This is an increase of 9.2% from
2006. Historical dividend data has been restated to reflect the
two-for-one stock split that was effective at the close of business March 26,2007. At the November 2007 meeting, the Board of Directors increased
the dividend by 9.9% to an annual rate of $0.78 per share. The Board
normally reviews the dividend rate periodically during the year and annually at
its November meeting. There are no significant restrictions on the
payment of dividends.
The
February 2008 payment marked the 231st
consecutive quarterly dividend paid at the same or at an increased
rate. In 2007, 19.9% of net earnings were paid out in
dividends. The Company is philosophically committed to maintaining or
increasing the dividend at a sustainable level. The Company has paid
dividends each year since 1939.
Item 7A. Quantitative and
Qualitative Disclosures about Market Risk
See Part
I, Item 1A, “Risk Factors,” for quantitative and qualitative disclosures about
market risk.
- 44
-
Item 8.
Financial Statements and Supplementary Data
Index
to Consolidated Financial Statements and Supplementary
Data
Page
Consolidated
Financial Statements of Harsco Corporation:
Management’s
Report on Internal Control Over Financial Reporting
46
Report
of Independent Registered Public Accounting Firm
Management
of Harsco Corporation, together with its consolidated subsidiaries (the
Company), is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over
financial reporting is a process designed under the supervision of the Company’s
principal executive and principal financial officers to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the Company’s financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles.
The
Company’s internal control over financial reporting includes policies and
procedures that:
·
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect transactions and dispositions of assets of the
Company;
·
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and the directors of the Company;
and
·
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the Company’s financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
Management
has assessed the effectiveness of its internal control over financial reporting
as of December 31, 2007 based on the framework established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management has
determined that the Company’s internal control over financial reporting is
effective as of December 31, 2007.
The
Company’s internal control over financial reporting as of December 31, 2007
has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report appearing below, which expresses an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007.
Report
of Independent Registered Public Accounting Firm
To The
Stockholders of Harsco Corporation:
In our
opinion, the accompanying consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Harsco Corporation and its subsidiaries at December 31, 2007 and
2006, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our
responsibility is to express opinions on these financial statements and on the
Company’s internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Net
gains (losses) on cash flow hedging instruments, net of deferred income
taxes of $2, $(40) and $79 in 2007, 2006 and 2005,
respectively
(3
)
75
(147
)
Reclassification
adjustment for (gain)/loss on cash flow hedging instruments, net of
deferred income taxes of $(66), $(32), and $3 in 2007, 2006 and 2005,
respectively
122
59
(5
)
Pension
liability adjustments, net of deferred income taxes of $(24,520), $1,307
and $(6,407) in 2007, 2006 and 2005, respectively
56,257
(5,523
)
14,724
Unrealized
gain on marketable securities, net of deferred income taxes of $(3) and
$(1) in 2007 and 2006, respectively
6
2
—
Other
comprehensive income (loss)
166,833
86,191
(39,827
)
Total
comprehensive income
$
466,325
$
282,589
$
116,830
See
accompanying notes to consolidated financial statements.
The
consolidated financial statements include the accounts of Harsco Corporation and
its majority-owned subsidiaries (the “Company”). Additionally, the
Company consolidates four entities in which it has an equity interest of 49% to
50% and exercises management control. These four entities had
combined revenues of approximately $117.0 million, $85.6 million and $81.5
million, or 3.2%, 2.8% and 3.4% of the Company’s total revenues for the years
ended 2007, 2006 and 2005, respectively. Investments in
unconsolidated entities (all of which are 40-50% owned) are accounted for under
the equity method. The Company does not have any off-balance sheet
arrangements with unconsolidated special-purpose entities.
Reclassifications
Certain
reclassifications have been made to prior years’ amounts to conform with current
year classifications. These reclassifications relate principally to
the Gas Technologies Segment that is currently classified as Discontinued
Operations in accordance with SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (“SFAS 144”) as discussed in Note 2,
“Acquisitions and Dispositions.” Additionally, all historical share
and per share data have been restated to reflect the two-for-one stock split
that was effective at the close of business on March 26, 2007. As a
result of these reclassifications, certain 2006 amounts presented for
comparative purposes will not individually agree with previously filed Forms
10-K or 10-Q.
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 principally 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, 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 of by sale are not
depreciated while they are held for sale.
Leases
The
Company leases certain property and equipment under noncancelable lease
agreements. All lease agreements are evaluated and classified as
either an operating lease or capital lease. A lease is classified as
a capital lease if any of the following criteria are met: transfer of
ownership to the Company by the end of the lease term; the lease contains a
bargain purchase option; the lease term is equal to or greater than 75% of the
asset’s economic life; or the present value of future minimum lease payments is
equal to or greater than 90% of the asset’s fair market
value. Operating lease expense is recognized ratably over the entire
lease term, including rent abatement periods and rent holidays.
Goodwill
and Other Intangible Assets
Goodwill
is not amortized but tested for impairment at the reporting unit
level. SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS
142”) defines a reporting unit as an operating segment or one level below an
operating segment (referred to as a component). A component of an
operating segment is a reporting unit if the component constitutes a business
for which discrete financial information is available and segment management
regularly reviews the operating results of that
component. Accordingly, the Company performs the goodwill impairment
test at the operating segment level for the Mill Services Segment, the Access
Services Segment and the All Other Category (Minerals & Rail Services and
Products). The goodwill impairment tests are performed on an annual
basis as of October 1 and between annual tests whenever events or circumstances
indicate that the carrying value of a reporting unit’s goodwill may exceed its
fair value. A discounted cash flow model is used to estimate the fair
value of a reporting unit. This model requires the use of long-term
planning forecasts and assumptions regarding industry-specific economic
conditions that are outside the control of the Company. See Note 5,
“Goodwill and Other Intangible Assets,” for additional information on intangible
assets and goodwill impairment testing. Finite-lived intangible
assets are amortized over their estimated useful lives.
- 53
-
Impairment
of Long-Lived Assets (Other than Goodwill)
Long-lived
assets 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 of are reported at the lower of the carrying amount or
fair value less cost to sell.
Revenue
Recognition
Product
sales and service sales are recognized when they are realized or realizable and
when earned. Revenue is realized or realizable and earned when all of
the following criteria are met: persuasive evidence of an arrangement
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. Service sales include sales of the Mill Services and Access
Services Segments as well as service sales of the All Other Category (Minerals
& Rail Services and Products). Product sales include the
manufacturing businesses of the All Other Category (Minerals & Rail Services
and Products).
Access Services
Segment – This Segment rents equipment under month-to-month rental
contracts, provides services under both fixed-fee and time-and-materials
short-term contracts and, to a lesser extent, sells products to
customers. Equipment rentals are recognized as earned over the
contractual rental period. Services provided on a fixed-fee basis are
recognized over the contractual period based upon the completion of specific
units of accounting (i.e., erection and dismantling of
equipment). Services provided on a time-and-materials basis are
recognized when earned as services are performed. Product sales
revenue is recognized when title and risk of loss transfer, and when all of the
revenue recognition criteria have been met.
Mill Services Segment
– This Segment provides services predominantly on a long-term,
volume-of-production contract basis. Contracts may include both fixed
monthly fees as well as variable fees based upon specific services provided to
the customer. The fixed-fee portion is recognized periodically as
earned (normally monthly) over the contractual period. The
variable-fee portion is recognized as services are performed and differs from
period-to-period based upon the actual provision of services.
All Other Category (Minerals
& Rail Services and Products) – This category includes the Harsco
Track Technologies, Reed Minerals, IKG Industries, Patterson-Kelley,
Air-X-Changers and Excell Minerals operating segments. These
operating segments principally sell products. The Harsco Track
Technologies Division and Excell Minerals Division sell products and provide
services. Product sales revenue for each of these operating segments
is recognized generally when title and risk of loss transfer, and when all of
the revenue recognition criteria have been met. Title and risk of
loss for domestic shipments generally transfers to the customer at the point of
shipment. For export sales, title and risk of loss transfer in
accordance with the international commercial terms included in the specific
customer contract. Revenue may be recognized subsequent to the
transfer of title and risk of loss for certain product sales of the Harsco Track
Technologies Division if the specific sales contract includes a customer
acceptance clause which provides for different timing. In those
situations revenue is recognized after transfer of title and risk of loss and
after customer acceptance. The Harsco Track Technologies Division
also provides services predominantly on a long-term, time-and-materials contract
basis. Revenue is recognized when earned as services are
performed. The Excell Minerals Division also provides services
predominantly on a long-term, volume-of-production contract
basis. Contracts may include both fixed monthly fees as well as
variable fees based upon specific services provided to the
customer. The fixed-fee portion is recognized periodically as earned
(normally monthly) over the contractual period. The variable-fee
portion is recognized as services are performed and differs from
period-to-period based upon the actual provision of services.
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. A valuation allowance to reduce deferred tax
assets is evaluated on a quarterly basis. The valuation allowance is
principally for tax loss carryforwards which are uncertain as to
realizability. Income tax loss contingencies are recorded in the
period when it is determined that it is probable that a liability has been
incurred and the loss can be reasonably estimated. Adjustments to
estimated amounts are recorded as necessary based upon new information, the
occurrence of new events or the resolution of an
uncertainty. Beginning in 2007, income tax contingencies were
measured under FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109” (“FIN
48”).
- 54
-
Accrued
Insurance and Loss Reserves
The
Company retains a significant portion of the risk for workers’ compensation,
U.K. employers’ liability, automobile, general and product liability
losses. During 2007, 2006 and 2005, the Company recorded insurance
expense from continuing operations related to these lines of coverage of
approximately $37 million, $34 million and $30 million,
respectively. Reserves have been recorded which reflect the
undiscounted estimated liabilities including claims incurred but not
reported. When a recognized liability is covered by third-party
insurance, the Company records an insurance claim receivable to reflect the
covered liability. Changes in the estimates of the reserves are
included in net income in the period determined. During 2007, 2006
and 2005, the Company recorded retrospective insurance reserve adjustments that
decreased pre-tax insurance expense from continuing operations for self insured
programs by $1.2 million, $1.3 million, and $3.5 million,
respectively. At December 31, 2007 and 2006, the Company has recorded
liabilities of $112.0 million and $103.4 million, respectively, related to both
asserted as well as unasserted insurance claims. Included in the
balance at December 31, 2007 and 2006 were $25.9 million and $18.9 million,
respectively, of recognized liabilities covered by insurance
carriers. Amounts estimated to be paid within one year have been
classified as current Insurance liabilities, with the remainder included in
non-current Insurance liabilities in the Consolidated Balance
Sheets.
Warranties
The
Company has recorded product warranty reserves of $2.9 million, $4.8 million and
$5.0 million as of December 31, 2007, 2006 and 2005,
respectively. The Company provides for warranties of certain products
as they are sold in accordance with SFAS No. 5, “Accounting for
Contingencies.” The following table summarizes the warranty activity
for the years ended December 31, 2007, 2006 and 2005:
Warranty
Activity
(In
thousands)
2007
2006
2005
Balance
at the beginning of the period
$
4,805
$
4,962
$
4,161
Accruals
for warranties issued during the period
3,112
3,371
3,851
Increase/(reductions)
related to pre-existing warranties
(1,112
)
(868
)
60
Divestiture
(980
)
—
—
Warranties
paid
(2,810
)
(2,731
)
(3,083
)
Other
(principally foreign currency translation)
(108
)
71
(27
)
Balance
at end of the period
$
2,907
$
4,805
$
4,962
Foreign
Currency Translation
The
financial statements of the Company’s subsidiaries outside the United States,
except for those subsidiaries located in highly inflationary economies and those
entities for which the U.S. dollar is the currency of the primary economic
environment in which the entity operates, are 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 account, a separate component of Other
comprehensive income (loss). 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, and those entities for which the
U.S. dollar is the currency of the primary economic environment in which the
entity operates, gains and losses on foreign currency transactions and balance
sheet translation adjustments are included in net income.
Financial
Instruments and Hedging
The
Company has operations throughout the world that 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.
- 55
-
The
Company executes foreign currency forward exchange contracts to hedge
transactions for firm purchase commitments, to hedge variable cash flows of
forecasted transactions and for export sales denominated in foreign
currencies. These contracts are generally for 90 days or
less. For those contracts that are designated as qualified cash flow
hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”), gains or losses are recorded in Other
comprehensive income (loss).
Amounts
recorded in Other comprehensive income (loss) are reclassified into income in
the same period or periods during which the hedged forecasted transaction
affects income. The cash flows from these contracts are classified
consistent with the cash flows from the transaction being hedged (e.g., the cash
flows related to contracts to hedge the purchase of fixed assets are included in
cash flows from investing activities, etc.). The Company also enters
into certain forward exchange contracts not designated as hedges under SFAS
133. Gains and losses on these contracts are recognized in income
based on fair market value. For fair value hedges of a firm
commitment, the gain or loss on the derivative and the offsetting gain or loss
on the hedged firm commitment are recognized currently in income.
Options
for Common Stock
In prior
years, when stock options were issued to employees, the Company used the
intrinsic value method to account for the options. No compensation
expense was recognized on the grant date, since at that date, the option price
equaled the market price of the underlying common stock. Effective in
2002 and 2003, the Company ceased granting stock options to employees and
non-employee directors, respectively.
The
Company’s net income and earnings 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 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”).
Pro
forma Impact of SFAS 123(R) on Earnings
(In
thousands, except per share)
2005
Net
income:
As
reported
$
156,657
Compensation
expense (a)
—
Pro
forma
$
156,657
Basic
earnings per share:
As
reported
$
1.88
Pro
forma
1.88
Diluted
earnings per share:
As
reported
1.86
Pro
forma
1.86
(a)
Total
stock-based employee compensation expense related to stock options
determined under fair value-based method for all awards, net of related
income tax effects.
In 2004,
the Board of Directors approved the granting of performance-based restricted
stock units as the long-term equity component of officer
compensation. See Note 12, “Stock-Based Compensation,” for additional
information on the Company’s equity compensation plans.
Earnings
Per Share
Basic
earnings per share are calculated using the average shares of common stock
outstanding, while diluted earnings per share reflect the dilutive effects of
restricted stock units and the potential dilution that could occur if stock
options were exercised. See Note 11, “Capital Stock,” for additional
information on earnings per share.
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. Actual results could
differ from those estimates.
- 56
-
New
Financial Accounting Standards Issued
FASB Interpretation (“FIN”)
48, “Accounting
for Uncertainty in Income Taxes-an interpretation of FASB Statement No.
109” (“FIN
48”)
In July
2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in
income taxes recognized in an entity’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” It prescribes a recognition
threshold and measurement attribute for financial statement recognition and
disclosure of tax positions taken or expected to be taken on a tax return.
The provisions of FIN 48 are required to be applied to all tax positions upon
initial adoption with any cumulative effect adjustment to be recognized as an
adjustment to retained earnings. FIN 48 is effective for fiscal
periods beginning after December 15, 2006 (January 1, 2007 for the
Company). The Company implemented FIN 48 effective January 1, 2007
and recognized a cumulative effect reduction to 2007 beginning retained earnings
of $0.5 million.
SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”)
In
September 2006, the FASB issued SFAS 157 to provide a single definition of fair
value, establish a framework for measuring fair value in U.S. generally accepted
accounting principles (“GAAP”), and expand the disclosure requirements regarding
fair value measurements. SFAS 157 is applicable in the application of
other accounting pronouncements that require or permit fair value measurements,
but does not require new fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 (January 1, 2008
for the Company), with limited retrospective application
required. SFAS 157 was amended by FASB Staff Position No.157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes of
Lease Classification or Measurement under Statement 13” (“FSP SFAS 157-1”) and
FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP
SFAS 157-2”). FSP SFAS 157-1 excludes FASB Statement No. 13,
“Accounting for Leases”, as well as other accounting pronouncements that address
fair value measurements on lease classification or measurement under Statement
13, from the scope of SFAS 157. FSP FAS 157-2 delays the effective date of SFAS
157 for all nonrecurring fair value measurements of nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15, 2008
(January 1, 2009 for the Company). The Company implemented SFAS 157
effective January 1, 2008, and it did not have a material impact on the
Company’s financial position, results of operations or cash flows.
SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS
159”).
In
February 2007, the FASB issued SFAS 159, which permits all entities to choose to
measure eligible items at fair value at specified election
dates. Unrealized gains and losses on items for which the fair value
option has been elected will be reported in earnings at each subsequent
reporting date. The fair value option may be applied financial
instrument by financial instrument (with limited exceptions), is generally
irrevocable, and must be applied to the entire financial
instrument. SFAS 159 is effective for fiscal years that begin after
November 15, 2007 (January 1, 2008 for the Company). The Company
implemented SFAS 159 effective January 1, 2008, and it did not have a material
impact on the Company’s financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS 160, which amends ARB No. 51, “Consolidated
Financial Statements.” SFAS 160 requires the reporting of
noncontrolling (minority) interest in subsidiaries to be measured at fair value
and classified as a separate component of equity. The accounting for
transactions between an entity and noncontrolling interest must be treated as
equity transactions. SFAS 160 is effective for fiscal years that
begin after December 15, 2008 (January 1, 2009 for the Company). The
Company is currently evaluating the requirements of SFAS 160, and has not yet
determined the impact on the consolidated financial statements.
In
December 2007, the FASB issued SFAS 141(R) which significantly modifies the
accounting for business combinations. SFAS 141(R) requires the
acquiring entity in a business combination to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions. Liabilities related to contingent consideration are
required to be recognized at acquisition and remeasured at fair value in each
subsequent reporting period. Restructuring charges, and all
pre-acquisition related costs (e.g., deal fees for attorneys, accountants and
investment bankers), must be expensed in the period they are
incurred. In addition, changes to acquisition-related deferred tax
assets and unrecognized tax benefits recorded under FIN 48 made subsequent to
the measurement period will generally impact
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income
tax expense in that period as opposed to being recorded to
goodwill. SFAS 141(R), is effective for fiscal years that begin
after December 15, 2008 (January 1, 2009 for the Company). The
Company is currently evaluating the requirements of SFAS 141(R), and has not yet
determined the impact on the consolidated financial statements.
2. Acquisitions
and Dispositions
Acquisitions
In August
2007, the Company acquired Alexander Mill Services International (“AMSI”), a
privately held company that provides mill services to some of the leading steel
producers in Poland and Romania. AMSI also provides mill services on
a smaller scale in Greece and Portugal. AMSI recorded 2006 revenues
of approximately $21 million and has been included in the Mill Services
Segment.
In August
2007, the Company acquired ZETA-TECH Associates, Inc. (“ZETA-TECH”), a Cherry
Hill, NJ-based niche technical services and applied technology company serving
the railway industry with specialized expertise in railway engineering services
and track maintenance software. ZETA-TECH produces a range of
proprietary software tools that are used by railways to regularly monitor and
evaluate the performance of their rail and track assets. ZETA-TECH
recorded 2006 revenues of approximately $4 million and has been included in
the Company’s Harsco Track Technologies Division of the All Other Category
(Minerals & Rail Services and Products).
In April
2007, the Company acquired Performix Technologies, Ltd. (“Performix”), an
Ohio-based company that is one of the United States’ leading producers of
specialty additives used by steelmakers in the ladle refining of molten
steel. Performix operates from two plants in the United States and
serves most of the major steelmakers in the upper Midwest and
Canada. Performix recorded 2006 sales of approximately $29 million
and employs approximately 60 people. Performix has been included in
the Mill Services Segment.
In
February 2007, the Company acquired Excell Materials, Inc. (“Excell”), a
Pittsburgh-based multinational company, for approximately $210 million, which
excluded direct acquisition costs. Excell specializes in the
reclamation and recycling of high-value content from principally steelmaking
slag. Excell is also involved in the development of mineral-based
products for commercial applications. Excell recorded 2006 sales in
excess of $100 million and maintains operations at nine locations in the United
States, Canada, Brazil, South Africa and Germany. Goodwill recognized
in this transaction (based on foreign exchange rates at the transaction date)
was $101.9 million, none of which is expected to be deductible for U.S. income
tax purposes. Excell has been included in the All Other Category
(Minerals & Rail Services and Products) and has been renamed Excell Minerals
to emphasize its long-term growth strategy.
In
November 2006, the Company acquired the Santiago, Chile-based company Moldajes y
Andamios TH S.A. (“MyATH”), a supplier of rental formwork, scaffolding and
related services to the construction, infrastructure and building maintenance
sectors. MyATH employs approximately 100 people and its annual
revenues are approximately $8 million. MyATH has been included in the
Access Services Segment.
In
November 2006, the Company acquired the conveyor services and trading arm of
Technic Gum, a Belgium-based provider of conveyor belt maintenance services for
the steel and cement-producing industries. Technic Gum recorded
revenues of approximately $8 million in 2005 and employs approximately 50
people. Technic Gum has been included in the Mill Services
Segment.
In July
2006, the Company acquired the assets of UK-based Cape PLC’s Cleton industrial
maintenance services (“Cleton”) subsidiaries in Holland, Belgium and Germany for
€8 million (approximately $10 million). Cleton posted 2005 revenues
in excess of $50 million and employs close to 400 people. Cleton
specializes in providing scaffolding and related insulation services for the
maintenance of large-scale industrial plants, and serves some of the largest oil
refinery, petrochemical, and process plant sites in the Benelux
countries. Cleton has been included in the Access Services
Segment.
Dispositions
Consistent
with the Company’s strategic focus to grow and allocate financial resources to
its industrial services businesses, on December 7, 2007, the Company sold the
Gas Technologies business group to Wind Point Partners, a private equity
investment firm with offices in Chicago, Illinois. The terms of the
sale include a total purchase price of $340 million, including $300 million paid
in cash at closing and $40 million payable in the form of an earnout, contingent
on the Gas Technologies group achieving certain performance targets in 2008 or
2009. The Company recorded a $26.4 million after-tax gain on the
sale. The amount of this gain is not final at December 31, 2007 due
to final working capital adjustments and the potential earnout. This
business recorded revenues and operating income of $384.9 million and $26.9
million, $397.7 million and $14.2 million and $370.2 million and $17.9 million,
respectively, for
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the years
ended 2007, 2006 and 2005. The Consolidated Statements of Income for
the years ended 2007, 2006 and 2005 have been restated to include the Gas
Technologies Segment’s results in discontinued operations.
The major
classes of assets and liabilities sold as part of this transaction were as
follows:
Throughout
the past several years, management approved the sale of certain long-lived
assets (primarily land and buildings) throughout the Company’s
operations. The net property, plant and equipment reflected as assets
held-for-sale in the December 31, 2007 and 2006 Consolidated Balance Sheets were
$0.5 million and $3.6 million, respectively.
3. Accounts
Receivable and Inventories
At
December 31, 2007 and 2006, accounts receivable of $824.1 million and $753.2
million, respectively, were net of allowances for doubtful accounts of $25.6
million and $25.4 million, respectively. Gross accounts receivable
included trade accounts receivable of $805.2 million and $737.1 million at
December 31, 2007 and 2006, respectively. Other receivables included
insurance claim receivables of $20.2 million and $18.9 million at December 31,2007 and 2006, respectively. The increase in accounts receivable and
the allowance for doubtful accounts from December 31, 2006 related principally
to increased sales, and positive foreign currency translation, partially offset
by net effect of acquisitions and divestitures discussed in Note 2,
“Acquisitions and Dispositions.” The provision for doubtful accounts
was $7.8 million, $9.2 million and $6.3 million for 2007, 2006 and 2005,
respectively.
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Inventories
consist of the following:
Inventories
(In
thousands)
2007
2006
Finished
goods
$
161,013
$
117,072
Work-in-process
23,776
31,489
Raw
materials and purchased parts
76,735
96,750
Stores
and supplies
49,407
39,918
Total
inventories
$
310,931
$
285,229
Valued
at lower of cost or market:
Last-in,
first out (LIFO) basis
$
99,433
$
138,643
First-in,
first out (FIFO) basis
16,742
28,165
Average
cost basis
194,756
118,421
Total
inventories
$
310,931
$
285,229
The
increase in inventory balances related principally to increased demand in the
Access Services Segment, increased demand and acquisitions in the All Other
Category (Minerals & Rail Services and Products) and Mill Services Segment,
and positive foreign currency translation. These were partially
offset by the divestiture of the Gas Technologies Segment.
Inventories
valued on the LIFO basis at December 31, 2007 and 2006 were approximately $23.4
million and $46.1 million, respectively, less than the amounts of such
inventories valued at current costs. The significant change from 2006
to 2007 relates principally to the sale of the Gas Technologies
Segment.
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 less than $0.1 million in 2007, and $0.3 million and $1.4
million in 2006 and 2005, respectively.
4.
Property,
Plant and Equipment
Property,
plant and equipment consists of the following:
(In
thousands)
2007
2006
Land
and improvements
$
47,250
$
41,255
Buildings
and improvements
175,744
192,575
Machinery
and equipment
2,997,425
2,699,131
Uncompleted
construction
75,167
52,640
Gross
property, plant and equipment
3,295,586
2,985,601
Less
accumulated depreciation
(1,760,372
)
(1,663,134
)
Net
property, plant and equipment
$
1,535,214
$
1,322,467
The
increase in net property, plant and equipment from 2006 to 2007 related
principally to investments in the Access Services and Mill Services
Segments.
The
estimated useful lives of different types of assets are generally:
Land
improvements
5 to 20
years
Buildings and
improvements
5 to 40
years
Machinery and
equipment
3 to 20
years
Leasehold
improvements
Estimated useful
life of the improvement
or, if shorter, the
life of the lease
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5. Goodwill
and Other Intangible Assets
In
connection with the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets,” (“SFAS 142”) goodwill and intangible assets with indefinite useful
lives are no longer amortized. Goodwill is tested for impairment at
the reporting unit level on an annual basis, and between annual tests, whenever
events or circumstances indicate that the carrying value of a reporting unit’s
goodwill may exceed its fair value. This impairment testing is a
two-step process as outlined in SFAS 142. Step one is a comparison of
each reporting unit’s fair value to its book value. The Company has
determined that the reporting units for goodwill impairment testing purposes are
the Company’s operating segments. If the fair value of the reporting
unit exceeds the book value, step two of the test is not
required. Step two requires the allocation of fair values to assets
and liabilities as if the reporting unit had just been purchased resulting in
the implied fair value of goodwill. If the carrying value of the
goodwill exceeds the implied fair value, a write down to the implied fair value
would be required.
The
Company uses a discounted cash flow model to estimate the fair value of a
reporting unit in performing step one of the testing. This model
requires the use of long-term planning estimates and assumptions regarding
industry-specific economic conditions that are outside the control of the
Company. The Company performed required annual testing for goodwill
impairment as of October 1, 2007 and 2006 and all reporting units of the Company
passed the step one testing thereby indicating that no goodwill impairment
exists. However, there can be no assurance that future goodwill
impairment tests will not result in a charge to earnings.
The
following table reflects the changes in carrying amounts of goodwill by segment
for the years ended December 31, 2006 and 2007:
Goodwill
by Segment
(In
thousands)
Access
Services Segment
Mill
Services
Segment
All Other Category -
Minerals & Rail
Services and Products
(a)
Relate principally to opening balance sheet adjustments.
(b)
Reduction of valuation allowance related to realization of a tax loss
carryback.
(c)
Relates principally to the Excell Minerals acquisition in the All Other Category
- Minerals and Rail
Services and Products.
(d)
Relates to the sale of the Company’s Gas Technologies Segment.
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-
Goodwill
is net of accumulated amortization of $103.7 million and $109.3 million at
December 31, 2007 and 2006, respectively. The reduction in
accumulated amortization from December 31, 2006 is due to the sale of the Gas
Technologies Segment, partially offset by foreign currency
translation.
Intangible
assets totaled $189.0 million, net of accumulated amortization of $45.2 million
at December 31, 2007 and $88.2 million, net of accumulated amortization of $19.4
million at December 31, 2006. The following table reflects these
intangible assets by major category:
The
increase in intangible assets for 2007 was due principally to the acquisitions
discussed in Note 2, “Acquisitions and Dispositions,” and foreign currency
translation. As part of these transactions, the Company acquired the
following intangible assets (by major class) which are subject to
amortization:
Acquired
Intangible Assets
(In
thousands)
Gross
Carrying
Amount
Residual
Value
Weighted-average
amortization
period
Customer
relationships
$
66,753
None
6
years
Patents
2,010
None
10
years
Other (a)
52,906
None
9
years
Total
$
121,669
(a)
Principally unpatented technology and contractual revenue.
There
were no research and development assets acquired and written off in 2007, 2006
or 2005.
Amortization
expense for intangible assets was $27.4 million, $6.7 million and $2.0 million
for the years ended December 31, 2007, 2006 and 2005,
respectively. The following table shows the estimated amortization
expense for the next five fiscal years based on current intangible
assets.
(In
thousands)
2008
2009
2010
2011
2012
Estimated
amortization expense (a)
$
27,835
$
26,658
$
26,288
$
24,912
$
12,274
(a)
These
estimated amortization expense amounts do not reflect the potential effect
of future foreign currency exchange rate
fluctuations.
6. Debt
and Credit Agreements
The
Company has various credit facilities and commercial paper programs available
for use throughout the world. The following table illustrates the
amounts outstanding on credit facilities and commercial paper programs and
available credit at December 31, 2007. These credit facilities and
programs are described in more detail below the table.
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Summary
of Credit Facilities and Commercial Paper Programs
Although
the Company has significant available credit, practically, the Company
limits aggregate commercial paper and credit facility borrowings at any
one time to a maximum of $900 million (the aggregate amount of the back-up
facilities).
The
Company has a U.S. commercial paper borrowing program under which it can issue
up to $550 million of short-term notes in the U.S. commercial paper
market. In addition, the Company has a 200 million euro commercial
paper program, equivalent to approximately $292 million at December 31, 2007,
which is used to fund the Company’s international
operations. Commercial paper interest rates, which are based on
market conditions, have been lower than comparable rates available under the
credit facilities. At December 31, 2007 and 2006, the Company had
$333.4 million and $263.4 million of U.S. commercial paper outstanding,
respectively, and $132.8 million and $207.2 million outstanding, respectively,
under its European-based commercial paper program. Commercial paper
is classified as long-term debt when the Company has the ability and intent to
refinance it on a long-term basis through existing long-term credit
facilities. At December 31, 2007 and 2006, the Company classified $8.0
million and $161.5 million of commercial paper as short-term debt,
respectively. The remaining $458.2 million and $309.1 million in
commercial paper at December 31, 2007 and 2006, respectively, was classified as
long-term debt.
The
Company has a multi-year revolving credit facility in the amount of $450
million, through a syndicate of 16 banks, which matures in November
2010. This facility serves as back-up to the Company’s commercial
paper programs. Interest rates on the facility are based upon either
the announced JPMorgan Chase Bank Prime Rate, the Federal Funds Effective Rate
plus a margin or LIBOR plus a margin. The Company pays a facility fee
(.08% per annum as of December 31, 2007) that varies based upon its credit
ratings. At December 31, 2007 and 2006, there were no borrowings
outstanding on this credit facility.
During
the fourth quarter of 2007, the Company entered into a new 364-day revolving
credit facility in the amount of $450 million, through a syndicate of 13 banks,
which matures in November 2008. Any borrowings outstanding at the
termination of the facility may, at the Company’s option, be repaid over the
following 12 months. Interest rates on the facility are based upon
either the announced JPMorgan Chase Bank Prime Rate, the Federal Funds Effective
Rate plus a margin or LIBOR plus a margin. The Company pays a
facility fee (.07% per annum as of December 31, 2007) that varies based upon its
credit ratings. As of December 31, 2007, there were no borrowings
outstanding on this credit facility.
The
Company’s bilateral credit facility (which expired in December 2007) was renewed
in February 2008. The facility, in the amount of $50 million, serves
as back-up to the Company’s commercial paper programs and also provides
available financing for the Company’s European operations. Borrowings
under this facility, which expires in December 2008, are available in most major
currencies with active markets at interest rates based upon LIBOR plus a
margin. Borrowings outstanding at expiration may be repaid over the
succeeding 12 months. As of December 31, 2007 and 2006, there were no
borrowings outstanding on this facility.
Short-term
borrowings amounted to $60.3 million and $185.1 million (of which $8.0 million
and $161.5 million was commercial paper) at December 31, 2007 and 2006,
respectively. Other than the commercial paper borrowings, short-term
debt was principally bank overdrafts. The weighted-average interest
rate for short-term borrowings at December 31, 2007 and 2006 was 6.0% and 4.8%,
respectively.
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-
Long-term
debt consists of the following:
Long-term
Debt
(In
thousands)
2007
2006
7.25%
British pound sterling-denominated notes due October 27,2010
Commercial
paper borrowings, with a weighted average interest rate of 5.2% and 4.7%
as of December 31, 2007 and 2006, respectively
458,180
309,109
Faber
Prest loan notes due October 31, 2008 with interest based on sterling
LIBOR minus .75% (5.1% and 4.5% at December 31, 2007 and 2006,
respectively)
3,120
5,494
Industrial
development bonds, with a weighted average interest rate of 4.1% as of
December 31, 2006
—
6,500
Other
financing payable in varying amounts to 2012 with a weighted average
interest rate of 7.0% and 5.9% as of December 31, 2007 and 2006,
respectively
14,864
19,103
1,020,471
877,947
Less:
current maturities
(8,384
)
(13,130
)
$
1,012,087
$
864,817
The
Company’s credit facilities and certain notes payable agreements contain
covenants requiring a minimum net worth of $475 million and a maximum debt to
capital ratio of 60%. Additionally, the Company’s 7.25% British pound
sterling-denominated notes due October 27, 2010 include a covenant that permits
the note holders to redeem their notes, at par, in the event of a change of
control of the Company or a disposition of a significant portion of the
Company’s assets. At December 31, 2007, the Company was in compliance
with these covenants.
The
maturities of long-term debt for the four years following December 31, 2008 are
as follows:
(In
thousands)
2009
$
12,225
2010
848,063
2011
2,056
2012
633
Cash
payments for interest on all debt from continuing operations were $80.3 million,
$59.7 million and $42.2 million in 2007, 2006 and 2005,
respectively.
7. Leases
The
Company leases certain property and equipment under noncancelable operating
leases. Rental expense (for continuing operations) under such
operating leases was $70.4 million, $69.6 million and $49.9 million in 2007,
2006 and 2005, respectively.
Future
minimum payments under operating leases with noncancelable terms are as
follows:
(In
thousands)
2008
$
51,308
2009
45,403
2010
25,788
2011
17,506
2012
12,276
After
2012
28,619
Total
minimum rentals to be received in the future under non-cancelable subleases as
of December 31, 2007 are $14.5 million.
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8. Employee
Benefit Plans
Pension
Benefits
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (“SFAS 158”). The
Company adopted the recognition provisions of SFAS 158 effective December 31,2006.
The
Company has pension and profit sharing retirement plans covering a substantial
number of its employees. The defined 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 also makes periodic voluntary contributions as recommended by its
pension committee. The Company’s policy is to amortize prior service
costs of defined benefit pension plans over the average future service period of
active plan participants. The Company uses an October 31 measurement
date for its United States defined benefit pension plans and recently acquired
international plans. A September 30 measurement date is used for
other international defined benefit pension plans.
For a
majority of the U.S. defined benefit pension plans and certain international
defined benefit pension plans, accrued service is no longer granted for periods
after December 31, 2003. In place of these plans, the Company has
established, effective January 1, 2004, defined contribution pension plans
providing for the Company to contribute a specified matching amount for
participating employees’ contributions to the plan. Domestically,
this match is made on employee contributions up to four percent of their
eligible compensation. Additionally, the Company may provide a
discretionary contribution of up to two percent of compensation for eligible
employees. The two percent discretionary contribution was recorded
for the last three years, 2007, 2006 and 2005, and paid in February of the
subsequent year. Internationally, this match is up to six percent of
eligible compensation with an additional two percent going towards insurance and
administrative costs. The Company believes the defined contribution
plans will provide a more predictable and less volatile pension expense than
exists under the defined benefit plans.
(In
thousands)
U.S.
Plans
International
Plans
2007
2006
2005
2007
2006
2005
Pension
Expense (Income)
Defined
benefit plans:
Service cost
$
3,033
$
3,685
$
3,380
$
9,031
$
9,168
$
8,195
Interest cost
15,511
14,919
13,914
50,118
43,506
40,475
Expected return on plan
assets
(22,943
)
(19,942
)
(19,112
)
(61,574
)
(52,081
)
(44,796
)
Recognized prior service
costs
686
742
767
938
1,446
1,208
Recognized
losses
1,314
2,949
3,617
15,254
12,882
12,247
Amortization of transition
(asset) liability
—
(361
)
(1,455
)
36
36
117
Settlement/Curtailment loss
(gain)
2,091
78
(3
)
—
(51
)
50
Defined
benefit plans pension (income) expense
(308
)
2,070
1,108
13,803
14,906
17,496
Less
Discontinued Operations included in above
2,748
1,848
1,987
477
447
317
Defined
benefit plans pension (income) expense – continuing
operations
(3,056
)
222
(879
)
13,326
14,459
17,179
Multi-employer
plans (a)
13,552
10,560
8,156
10,361
8,662
5,579
Defined
contribution plans (a)
8,999
7,544
6,107
7,589
6,518
5,880
Pension expense – continuing
operations
$
19,495
$
18,326
$
13,384
$
31,276
$
29,639
$
28,638
(a)
2007,
2006 and 2005 exclude discontinued
operations.
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The
change in the financial status of the pension plans and amounts recognized in
the Consolidated Balance Sheets at December 31, 2007 and 2006 are as
follows:
Defined
Benefit Pension Benefits
U.
S. Plans
International
Plans
(In
thousands)
2007
2006
2007
2006
Change
in benefit obligation:
Benefit
obligation at beginning of year
$
266,441
$
255,629
$
981,618
$
798,334
Service
cost
3,033
3,686
9,031
9,102
Interest
cost
15,511
14,919
50,118
43,424
Plan
participants’ contributions
—
—
2,354
2,393
Amendments
349
1,159
—
(2,932
)
Actuarial
loss (gain)
(1,857
)
3,717
(39,523
)
57,593
Settlements/curtailments
(1,315
)
—
—
(994
)
Benefits
paid
(13,452
)
(12,669
)
(40,156
)
(37,639
)
Obligations
of added plans
—
—
—
4,204
Effect
of foreign currency
—
—
24,452
108,133
Benefit
obligation at end of year
$
268,710
$
266,441
$
987,894
$
981,618
Change
in plan assets:
Fair
value of plan assets at beginning of year
$
271,899
$
246,680
$
829,927
$
670,149
Actual
return on plan assets
49,731
35,685
58,477
72,112
Employer
contributions
3,015
2,203
39,016
34,992
Plan
participants’ contributions
—
—
2,354
2,393
Benefits
paid
(13,452
)
(12,669
)
(38,987
)
(36,725
)
Plan
assets of added plans
—
—
—
3,012
Effect
of foreign currency
—
—
15,062
83,994
Fair
value of plan assets at end of year
$
311,193
$
271,899
$
905,849
$
829,927
Funded
status at end of year
$
42,483
$
5,458
$
(82,045
)
$
(151,691
)
Defined
Benefit Pension Benefits
U.
S. Plans
International
Plans
(In
thousands)
2007
2006
2007
2006
Amounts
recognized in the Consolidated Balance Sheets consist of the
following:
Noncurrent
assets
$
70,154
$
36,966
$
9,604
$
5,840
Current
liabilities
(1,172
)
(1,135
)
(1,446
)
(1,090
)
Noncurrent
liabilities
(26,499
)
(30,373
)
(90,203
)
(156,441
)
Accumulated
other comprehensive loss before tax
9,947
43,650
246,526
295,102
Amounts
recognized in accumulated other comprehensive loss consist of the
following:
U.
S. Plans
International
Plans
(In
thousands)
2007
2006
2007
2006
Net
actuarial loss
$
8,346
$
39,620
$
240,193
$
288,216
Prior
service cost
1,601
4,030
6,026
6,512
Transition
obligation
—
—
307
374
Total
$
9,947
$
43,650
$
246,526
$
295,102
- 66
-
The
estimated amounts that will be amortized from accumulated other comprehensive
loss into defined benefit pension expense in 2008 are as follows:
(In
thousands)
U.
S. Plans
International
Plans
Net
actuarial loss
$
1,167
$
11,854
Prior
service cost
333
1,014
Transition
obligation
—
31
Total
$
1,500
$
12,899
Excluded
from the above table is the expected settlement gain to be recognized on the
final transfer of pension assets and liabilities to an authorized trust
established by Wind Point Partners as a result of the Company’s sale of the Gas
Technologies Segment. The timing of this settlement is dependant on
the establishment of the authorized trust, but is expected to occur in the first
half of 2008. Upon legal transfer of the assets and liabilities, the
Company expects to recognize approximately $0.5 million in settlement
gains.
The
Company’s best estimate of expected contributions to be paid in year 2008 for
the U.S. defined benefit plans is $1.2 million and for the international defined
benefit plans is $23.3 million.
Contributions
to multi-employer pension plans were $24.2 million, $18.3 million and $13.6
million in years 2007, 2006 and 2005, respectively. For defined
contribution plans, payments were $16.6 million, $13.7 million and $12.9 million
for years 2007, 2006 and 2005, respectively.
Future
Benefit Payments
The
expected benefit payments for defined benefit plans over the next ten years are
as follows:
(In
millions)
U.S.
Plans
International
Plans
2008
$
12.6
$
37.8
2009
14.3
40.1
2010
14.7
41.0
2011
15.8
42.4
2012
16.2
43.8
2013
- 2017
94.2
248.1
- 67
-
Net
Periodic Pension Expense Assumptions
The
weighted-average actuarial assumptions used to determine the net periodic
pension expense for the years ended December 31 were as follows:
Global
Weighted Average
December
31
2007
2006
2005
Discount
rates
5.3%
5.3%
5.7%
Expected
long-term rates of return on plan assets
7.6%
7.6%
7.8%
Rates
of compensation increase
3.3%
3.4%
3.4%
U.
S. Plans
December
31
International
Plans
December
31
2007
2006
2005
2007
2006
2005
Discount
rates
5.87%
5.87%
5.75%
5.1%
5.2%
5.7%
Expected
long-term rates of return on plan assets
8.25%
8.25%
8.75%
7.3%
7.4%
7.5%
Rates
of compensation increase
4.5%
4.36%
4.0%
3.2%
3.2%
3.3%
The
expected long-term rates of return on plan assets for the 2008 pension expense
are 8.25% for the U.S. plans and 7.3% for the international plans.
Defined
Benefit Pension Obligation Assumptions
The
weighted-average actuarial assumptions used to determine the defined benefit
pension plan obligations at December 31 were as follows:
Global
Weighted Average
December
31
2007
2006
2005
Discount
rates
5.9%
5.3%
5.3%
Rates
of compensation increase
3.6%
3.3%
3.4%
U.
S. Plans
December
31
International
Plans
December
31
2007
2006
2005
2007
2006
2005
Discount
rates
6.17%
5.87%
5.87%
5.8%
5.1%
5.2%
Rates
of compensation increase
4.8%
4.5%
4.36%
3.5%
3.2%
3.2%
The U.S.
discount rate was determined using a yield curve that was produced from a
universe containing over 500 U.S.-issued, AA-graded corporate bonds, all of
which were noncallable (or callable with make-whole provisions), and excluding
the 10% of the bonds with the highest yields and the 10% with the lowest
yields. The discount rate was then developed as the level-equivalent
rate that would produce the same present value as that using spot rates to
discount the projected benefit payments. For international plans, the
discount rate is aligned to Corporate bond yields in the local markets, normally
AA-rated Corporations. The process and selection seeks to approximate
the cash outflows with the timing and amounts of the expected benefit
payments. As of the measurement dates, these international rates have
increased by 70 basis points from the prior year.
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-
Accumulated
Benefit Obligations
The
accumulated benefit obligation for all defined benefit pension plans at December
31 was as follows:
(In
millions)
U.S.
Plans
International
Plans
2007
$257.0
$899.4
2006
252.1
880.2
Plans
with Accumulated Benefit Obligation in Excess of Plan Assets
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 at December 31 were as follows:
U.
S. Plans
International
Plans
(In
millions)
2007
2006
2007
2006
Projected
benefit obligation
$38.1
$70.3
$88.5
$945.6
Accumulated
benefit obligation
34.8
66.1
83.1
850.3
Fair
value of plan assets
10.5
39.0
51.7
787.3
The asset
allocations attributable to the Company’s U.S. defined benefit pension plans at
October 31, 2007 and 2006 and the target allocation of plan assets for 2008, by
asset category, are as follows:
U.S.
Plans
Asset
Category
Target
2008
Allocation
Percentage
of Plan Assets at October 31
2007
2006
Domestic
Equity Securities
45%
- 55%
54.1%
54.2%
Fixed
Income Securities
27%
- 37%
25.5%
27.5%
International
Equity Securities
4.5%
- 14.5%
13.0%
12.3%
Cash
& Cash Equivalents
0%
- 5%
0.9%
1.6%
Other
4%
- 12%
6.5%
4.4%
Plan
assets are allocated among various categories of equities, fixed income, cash
and cash equivalents with professional investment managers whose performance is
actively monitored. The primary investment objective is long-term
growth of assets in order to meet present and future benefit
obligations. The Company periodically conducts an asset/liability
modeling study to ensure the investment strategy is aligned with the profile of
benefit obligations.
The
Company reviews the long-term expected return-on-asset assumption on a periodic
basis taking into account a variety of factors including the historical
investment returns achieved over a long-term period, the targeted allocation of
plan assets and future expectations based on a model of asset returns for an
actively managed portfolio, inflation and administrative/other
expenses. The model simulates 500 different capital market results
over 15 years. For 2008, the expected return-on-asset assumption for
U.S. plans is 8.25%, consistent with the expected return-on-asset assumption for
2007.
The U.S.
defined benefit pension plans assets include 765,280 shares of the Company’s
stock valued at $46.4 million and $31.3 million on October 31, 2007 and 2006,
representing 14.4% and 11.5%, respectively, of total plan assets. As
part of a rebalancing of the pension fund to further diversify the plan assets,
approximately 316,000 shares of the pension fund’s holdings in the Company’s
stock were sold in the fourth quarter of 2007. As of December 31,2007, the Company’s stock represented 9.2% of total plan
assets. Dividends paid to the pension plans on the Company stock
amounted to $0.5 million in 2007 and $0.5 million in 2006.
The asset
allocations attributable to the Company’s international defined benefit pension
plans at September 30, 2007 and 2006 and the target allocation of plan assets
for 2008, by asset category, are as follows:
International
Plans
Asset
Category
Target
2008
Allocation
Percentage
of Plan Assets at September 30
2007
2006
Equity
Securities
50.0%
54.3%
54.1%
Fixed
Income Securities
40.0%
40.3%
39.9%
Cash
& Cash Equivalents
5.0%
0.7%
2.6%
Other
5.0%
4.7%
3.4%
- 69
-
Plan
assets as of September 30, 2007, in the U.K. defined benefit pension plan
amounted to 86.9% of the international pension assets. These assets
were divided into portfolios representing various categories of equities, fixed
income, cash and cash equivalents managed by a number of professional investment
managers.
The
primary investment objective is long-term growth of assets in order to meet
present and future benefit obligations. The Company periodically
conducts asset/liability modeling studies to ensure the investment strategies
are aligned with the profile of benefit obligations. For the
international long-term rate-of-return assumption, the Company considered the
current level of expected returns in risk-free investments (primarily government
bonds), the historical level of the risk premium associated with other asset
classes in which the portfolio is invested and the expectations for future
returns of each asset class and plan expenses. The expected return
for each asset class was then weighted based on the target asset allocation to
develop the expected long-term rate-of-return on assets. The
Company’s expected rate-of-return assumption for the U.K. plan was 7.5% for both
2008 and 2007. The remaining international pension plans with assets
representing 13.1% of the international pension assets are under the guidance of
professional investment managers and have similar investment
objectives.
The
impact of adopting SFAS 158 has been reflected in the consolidated financial
statements as of December 31, 2007 and 2006 and the incremental effect of
applying SFAS 158 to pension benefits is disclosed below.
Balance
sheet effect of SFAS 158 Adoption
Incremental
Effect on Consolidated Balance Sheet of Adopting SFAS 158 for Pension
Plans
(a) Balances
represent major captions as presented on the Consolidated Balance
Sheet.
During
2008, the Company will eliminate the early measurement dates for its defined
benefit pension plans. In accordance with SFAS 158, the incremental
effect of this transition will result in an adjustment to beginning retained
earnings. The Company currently estimates that this change will
result in a net increase of approximately $0.7 million to beginning
Stockholders’ Equity as of January 1, 2008.
Postretirement
Benefits
The
Company has postretirement health care benefits for a limited number of
employees mainly under plans related to acquired companies and postretirement
life insurance benefits for certain hourly employees. The costs of
health care and life insurance 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 Company uses an
October 31 measurement date for its postretirement benefit plans.
- 70
-
(In
thousands)
2007
2006
2005
Postretirement
Benefits Expense (Income)
Service cost
$
5
$
5
$
7
Interest cost
182
186
200
Recognized prior service
costs
3
3
7
Recognized gains
(126
)
(38
)
(37
)
Curtailment
gains
(82
)
(20
)
(318
)
Postretirement
benefit expense (income)
$
(18
)
$
136
$
(141
)
The
changes in the postretirement benefit liability recorded in the Consolidated
Balance Sheets are as follows:
Postretirement Benefits
(In
thousands)
2007
2006
Change
in benefit obligation:
Benefit
obligation at beginning of year
$
3,193
$
3,321
Service
cost
5
5
Interest
cost
182
186
Actuarial
(gain)/loss
52
(23
)
Plan
participants’ contributions
—
13
Benefits
paid
(240
)
(289
)
Acquisitions
85
—
Curtailment
(39
)
(20
)
Settlement
(36
)
—
Benefit
obligation at end of year
$
3,202
$
3,193
Amounts
recognized in the statement of financial position consist of the
following:
Current
liability
$
(300
)
$
(332
)
Noncurrent
liability
(2,902
)
(2,861
)
Net
amount recognized
$
(3,202
)
$
(3,193
)
Postretirement
Benefits
(In
thousands)
2007
2006
Amounts
recognized in accumulated other comprehensive income consist of the
following:
Net
actuarial gain
$
(62
)
$
(241
)
Prior
service cost
18
14
Net
amount recognized (before tax adjustment)
$
(44
)
$
(227
)
The
estimated amounts that will be amortized from accumulated other
comprehensive income into net periodic benefit cost are as
follows:
2008
Actuarial
gain
$
(28
)
Prior
service cost
2
Total
$
(26
)
- 71
-
The
actuarial assumptions used to determine the postretirement benefit obligation
are as follows:
(Dollars
in thousands)
2007
2006
2005
Assumed
discount rate
6.17%
5.87%
5.87%
Health
care cost trend rate
9.00%
9.00%
10.00%
Decreasing
to ultimate rate
5.00%
5.00%
5.00%
Effect
of one percent increase in health care cost trend rate:
On
total service and interest cost components
$
8
$
10
$
10
On
postretirement benefit obligation
$
164
$
144
$
166
Effect
of one percent decrease in health care cost trend rate:
On
total service and interest cost components
$
(8
)
$
(9
)
$
(9
)
On
postretirement benefit obligation
$
(148
)
$
(130
)
$
(149
)
It is
anticipated that the health care cost trend rate will decrease from 9% in 2008
to 5.0% in the year 2016.
The
assumed discount rates to determine the postretirement benefit expense for the
years 2007, 2006 and 2005 were 5.87%, 5.87% and 5.75%,
respectively.
The
Company’s expected benefit payments over the next ten years are as
follows:
(In
thousands)
Benefits
Payments
Before
Subsidy
Expected
Subsidy
Under
Medicare Modernization Act
2008
$
300
$
29
2009
303
30
2010
304
30
2011
303
31
2012
300
31
2013
- 2017
1,390
143
Savings
Plan
Prior to
January 1, 2004, the Company had a 401(k) Savings Plan (“the Savings Plan”)
which covered substantially all U.S. employees with the exception of employees
represented by a collective bargaining agreement, unless the agreement expressly
provides otherwise. Effective January 1, 2004, certain U.S. employees
previously covered by the Savings Plan were transferred into the Harsco
Retirement Savings and Investment Plan (“HRSIP”) which is a defined contribution
pension plan. The transferred employees were those whose credited
years of service under the qualified Defined Benefit Pension Plan were frozen as
of December 31, 2003. Employees whose credited service was not frozen
as of December 31, 2003 remained in the Savings Plan. The expenses
related to the HRSIP are included in the defined contribution pension plans
disclosure in the Pension Benefits section of this footnote.
Employee
contributions to the Savings Plan are generally determined as a percentage of
covered employees’ compensation. The continuing operations expense
for contributions to the Savings Plan by the Company was $0.6 million for 2007,
2006 and 2005.
- 72
-
Employee
directed investments in the Savings Plan and HRSIP include the following amounts
of Company stock:
The
amended 1995 Executive Incentive Compensation Plan provides the basis for
determination of annual incentive compensation awards under a performance-based
Economic Value Added (EVA®) plan. Actual cash awards are usually paid
in January or February of the following year. The Company accrues
amounts reflecting the estimated value of incentive compensation anticipated to
be earned for the year. Total executive incentive compensation
expense for continuing operations was $12.1 million, $7.0 million and $5.7
million in 2007, 2006 and 2005, respectively. The expenses include
performance-based restricted stock units (“RSUs”) that were granted to certain
officers and key employees of the Company. See Note 12, “Stock-Based
Compensation,” for additional information on the equity component of executive
compensation.
9.
Income
Taxes
Income
from continuing operations before income taxes and minority interest in the
Consolidated Statements of Income consists of the following:
(In
thousands)
2007
2006
2005
United
States
$
110,926
$
69,620
$
60,819
International
271,513
217,984
151,437
Total
income before income taxes and minority interest
$
382,439
$
287,604
$
212,256
Income
tax expense/(benefit):
Currently
payable:
Federal
$
37,917
$
33,525
$
17,874
State
8,670
2,338
401
International
68,688
56,156
35,304
Total
income taxes currently payable
115,275
92,019
53,579
Deferred
federal and state
(3,695
)
(1,328
)
4,655
Deferred
international
6,018
2,663
888
Total income tax
expense
$
117,598
$
93,354
$
59,122
Cash
payments for income taxes were $125.4 million, $98.9 million and $52.2 million,
for 2007, 2006 and 2005, respectively.
- 73
-
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 from continuing
operations before income taxes and minority interest as reported in the
Consolidated Statements of Income:
2007
2006
2005
U.S.
federal income tax rate
35.0%
35.0%
35.0%
State
income taxes, net of federal income tax benefit
Difference
in effective tax rates on international earnings and
remittances
(3.7)
(2.5)
(5.6)
FIN
48 tax contingencies and settlements
0.1
(0.3)
(0.9)
Cumulative
effect in change in statutory tax rates
(0.7)
—
—
Other,
net
(0.5)
0.2
(0.3)
Effective
income tax rate
30.7%
32.5%
27.9%
The
difference in effective tax rates on international earnings and remittances from
2005 to 2006 includes a one-time benefit recorded in the fourth quarter of 2005
of $2.7 million associated with funds repatriated under the American Jobs
Creation Act of 2004 (“AJCA”). Additionally, during the fourth
quarter of 2005, consistent with the Company’s strategic plan of investing for
growth, the Company designated certain international earnings as permanently
reinvested which resulted in a one-time income tax benefit of $3.6
million
The
difference in effective tax rates on international earnings and remittances from
2006 to 2007 resulted from the Company increasing its designation of certain
international earnings as permanently reinvested.
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, 2007 and
2006 are as follows:
(In
thousands)
2007
2006
Deferred
income taxes
Asset
Liability
Asset
Liability
Depreciation
$
—
$
142,102
$
—
$
146,301
Expense
accruals
32,074
—
29,853
—
Inventories
4,020
—
5,646
—
Provision
for receivables
2,093
—
3,060
—
Postretirement
benefits
1,157
—
—
79
Deferred
revenue
—
3,430
—
1,736
Operating
loss carryforwards
14,954
—
18,421
—
Deferred
foreign tax credits
—
—
7,681
—
Pensions
24,631
18,754
49,608
3,512
Currency
adjustments and outside basis differences on foreign
investments
—
13,120
—
3,258
Other
—
12,961
—
8,741
Subtotal
78,929
190,367
114,269
163,627
Valuation
allowance
(15,317
)
—
(13,892
)
—
Total
deferred income taxes
$
63,612
$
190,367
$
100,377
$
163,627
- 74
-
The
deferred tax asset and liability balances are included in the following
Consolidated Balance Sheets line items:
Deferred
income taxes
December
31
(In
thousands)
2007
2006
Other
current assets
$
37,834
$
33,226
Other
assets
15,535
11,710
Other
current liabilities
5,701
4,594
Deferred
income taxes
174,423
103,592
At
December 31, 2007, the tax effected amount of net operating loss carryforwards
(“NOLs”) totaled $14.9 million. Of that amount, $6.4 million is
attributable to international operations and can be carried forward
indefinitely. Tax effected U.S. federal NOLs are $0.6 million, expire
in 2018, and relate to preacquisition NOLs. Tax effected U.S. state
NOLs are $7.9 million. Of that amount, $0.4 million expire in
2008-2014, $0.5 million expire in 2015-2022, and $7.0 million expire in
2027.
The
valuation allowance of $15.3 million and $13.9 million at December 31, 2007 and
2006, respectively, related principally to NOLs and foreign investment tax
credits 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
goodwill.
The
change in the valuation allowances for 2007 and 2006 results primarily from the
utilization of NOLs, the release of valuation allowances in certain
jurisdictions based on the Company’s revaluation of the realizability of future
benefits and the increase in valuation allowances in certain jurisdictions based
on the Company’s evaluation of the realizability of future
benefits.
The
Company has not provided U.S. income taxes on certain of its non-U.S.
subsidiaries’ undistributed earnings as such amounts are permanently reinvested
outside the United States. At December 31, 2007 and 2006, such
earnings were approximately $697 million and $425 million,
respectively. If these earnings were repatriated at December 31,2007, the one time tax cost associated with the repatriation would be
approximately $86 million. The Company has various tax holidays in
Europe, the Middle East and Asia that expire between 2008 and
2010. During 2007, 2006 and 2005, these tax holidays resulted in
approximately $2.8 million, $2.3 million and $1.7 million, respectively, in
reduced income tax expense.
On
October 22, 2004, the AJCA was signed into law. The AJCA included a
deduction of 85% for certain international earnings that are repatriated, as
defined in the AJCA, to the United States The Company completed its
evaluation of the repatriation provisions of the AJCA and repatriated qualified
earnings of approximately $24 million in the fourth quarter of
2005. This resulted in the Company receiving a one-time income tax
benefit of approximately $2.7 million during the fourth quarter of
2005.
The
Company adopted the provisions of FASB Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”), effective January 1, 2007. As a result
of the adoption, the Company recognized a cumulative effect reduction to the
January 1, 2007 retained earnings balance of $0.5 million. As of the
adoption date, the Company had gross tax-affected unrecognized income tax
benefits of $46.0 million, of which $17.8 million, if recognized, would affect
the Company’s effective income tax rate. Of this amount, $0.8 million
was classified as current and $45.2 million was classified as non-current on the
Company’s balance sheet. While the Company believes it has adequately
provided for all tax positions, amounts asserted by taxing authorities could be
different than the accrued position.
The
company recognizes accrued interest and penalty expense related to unrecognized
income tax benefits (“UTB”) within its global operations in income tax
expense. In conjunction with the adoption of FIN 48, the total amount
of accrued interest and penalties resulting from such unrecognized tax benefits
was $4.4 million. During the year ended December 31, 2007, the
company recognized approximately $6.5 million in interest and
penalties. The company had approximately $10.9 million for the
payment of interest and penalties accrued at December 31, 2007.
Less: tax
attributable to timing items included above
—
—
—
Less: UTBs
included above that relate to acquired entities that would impact goodwill
if recognized
(4,682
)
57
(4,625
)
Total
UTBs that, if recognized, would impact the effective income tax rate as of
December 31, 2007
$
25,494
$
(2,275
)
$
23,219
During
the first quarter of 2007, the U.S. Internal Revenue Service commenced its audit
of the Company’s U.S. income tax returns for 2004 and 2005. It is
reasonably possible that this audit will be completed by the second quarter of
2008 and the resolution will result in a payment between $2.0 million and $4.0
million.
The
Company has settled its royalty dispute with the Canada Revenue Agency (“CRA”)
which resulted in a reduction to the UTB balance of approximately $7.2
million. This matter is more fully discussed in Note 10, “Commitments
and Contingencies,” to the consolidated financial statements.
The
Company files its income tax returns as prescribed by the tax laws of the
jurisdictions in which it operates. With few exceptions, the Company
is no longer subject to the U.S. and foreign examinations by tax authorities for
the years through 2000.
Upon the
adoption of SFAS 141(R) on January 1, 2009, the resolution of all UTB’s
accounted for under FIN 48 from business combinations and changes in valuation
allowances for acquired deferred tax assets will be recognized in income tax
expense rather than as an additional cost of the acquisition or
goodwill. Such adjustments will impact the effective tax
rate.
10.
Commitments
and Contingencies
Royalty
Expense Dispute
The
Company was involved in a royalty expense dispute with the Canada Revenue Agency
(“CRA”). The CRA disallowed certain expense deductions claimed by the
Company’s Canadian subsidiary on its 1994-1998 tax returns. The Company
has completed settlement discussions with the CRA which resulted in a resolution
and closure of the matter. The settlement resulted in a refund to the
Company in the amount of approximately $5.9 million Canadian
- 76
-
dollars,
representing a refund of the payment made to the CRA in the fourth quarter of
2005, with the interest accrued on the 2005 settlement being utilized to satisfy
the final assessment, which totaled $0.6 million Canadian dollars.
The
Ontario Ministry of Finance (“Ontario”) is also proposing to disallow royalty
expense deductions for the period 1994-1998. As of December 31, 2007, the
maximum assessment from Ontario is approximately $3.8 million Canadian dollars,
including tax and interest. The Company has filed an administrative appeal
of this assessment and will vigorously contest these disallowances. The
Company anticipates that Ontario will approach the settlement and resolution of
this matter in a manner consistent with the result obtained in the CRA
dispute.
The
Company believes that any amount of potential liability regarding the Ontario
matter has been fully reserved as of December 31, 2007 and, therefore will not
have a material adverse impact on the Company’s future results of operations or
financial condition. In accordance with Canadian tax law, the Company made
a payment to the Ontario Ministry of Finance in the first quarter of 2006 for
the entire disputed amounts. These payments were made for tax compliances
purposes and to reduce potential interest expense on the disputed amount.
These payments in no way reflect the Company’s acknowledgement as to the
validity of the assessed amounts.
Environmental
The
Company is involved in a number of environmental remediation investigations and
clean-ups and, along with other companies, has been identified as a “potentially
responsible party” for certain waste disposal sites. While each of
these matters is subject to various uncertainties, it is probable that the
Company will agree to make payments toward funding certain of these activities
and it is possible that some of these matters will be decided unfavorably to the
Company. The Company has evaluated its potential liability, and its
financial exposure is dependent upon such factors as the continuing evolution of
environmental laws and regulatory requirements, the availability and application
of technology, the allocation of cost among potentially responsible parties, the
years of remedial activity required and the remediation methods
selected. The Consolidated Balance Sheets at December 31, 2007 and
2006 include accruals of $3.9 million and $3.8 million, respectively, for
environmental matters. The amounts charged against pre-tax income
related to environmental matters totaled $2.8 million, $2.0 million and $1.4
million in 2007, 2006 and 2005, respectively.
The
liability for future remediation costs is evaluated on a quarterly
basis. Actual costs to be incurred at identified sites in future
periods may vary from the estimates, given inherent uncertainties in evaluating
environmental exposures. The Company does not expect that any sum it
may have to pay in connection with environmental matters in excess of the
amounts recorded or disclosed above would have a material adverse effect on its
financial position, results of operations or cash flows.
Derailment
One of
the Company’s production rail grinders derailed near Baxter, California on
November 9, 2006, resulting in two crew member fatalities and the near total
loss of the rail grinder. Government and private investigations into
the cause of the derailment are on-going. Most of the clean-up and
salvage efforts were completed during 2007, and the site is in a closure
monitoring phase. Estimated environmental remediation expenses have
been recognized as of December 31, 2007. All remaining Company rail
grinders have been inspected by the Federal Railroad Administration (“FRA”) and
each grinder is fully operational and in compliance with legal
requirements. The Company also regularly inspects its grinders to
ensure they are safe and in compliance with contractual
commitments. The Company believes that the insurance proceeds already
received from the loss of the rail grinder will offset the majority of incurred
expenses, which have been recognized as of December 31, 2007, and any contingent
liabilities. Therefore, the Company does not believe that the
derailment will have a material adverse effect on its financial position,
results of operations or cash flows.
Other
The
Company has been named as one of many defendants (approximately 90 or more in
most cases) in legal actions alleging personal injury from exposure to airborne
asbestos over the past several decades. In their suits, the
plaintiffs have named as defendants, among others, many manufacturers,
distributors and installers of numerous types of equipment or products that
allegedly contained asbestos.
The
Company believes that the claims against it are without merit. The
Company has never been a producer, manufacturer or processor of asbestos
fibers. Any component within a Company product which may have
contained asbestos would have been purchased from a supplier. Based
on scientific and medical evidence, the Company believes that any asbestos
exposure arising from normal use of any Company product never presented any
harmful levels of airborne asbestos exposure, and moreover, the type of asbestos
contained in any component that was used in those products was protectively
encapsulated in other materials and is not associated with the types of injuries
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alleged
in the pending suits. Finally, in most of the depositions taken of
plaintiffs to date in the litigation against the Company, plaintiffs have failed
to specifically identify any Company products as the source of their asbestos
exposure.
The
majority of the asbestos complaints pending against the Company have been filed
in New York. Almost all of the New York complaints contain a standard
claim for damages of $20 million or $25 million against the approximately 90
defendants, regardless of the individual plaintiff’s alleged medical condition,
and without specifically identifying any Company product as the source of
plaintiff’s asbestos exposure.
As of
December 31, 2007, there are 26,383 pending asbestos personal injury claims
filed against the Company. Of these cases, 25,927 were pending in the
New York Supreme Court for New York County in New York State. The
other claims, totaling 456, are filed in various counties in a number of state
courts, and in certain Federal District Courts (including New York), and those
complaints generally assert lesser amounts of damages than the New York State
court cases or do not state any amount claimed.
As of
December 31, 2007, the Company has obtained dismissal by stipulation, or summary
judgment prior to trial, in 17,385 cases.
In view
of the persistence of asbestos litigation nationwide, which has not yet been
sufficiently addressed either politically or legally, the Company expects to
continue to receive additional claims. However, there have been
developments during the past several years, both by certain state legislatures
and by certain state courts, which could favorably affect the Company’s ability
to defend these asbestos claims in those jurisdictions. These
developments include procedural changes, docketing changes, proof of damage
requirements and other changes that require plaintiffs to follow specific
procedures in bringing their claims and to show proof of damages before they can
proceed with their claim. An example is the action taken by the New
York Supreme Court (a trial court), which is responsible for managing all
asbestos cases pending within New York County in the State of New
York. This Court issued an order in December 2002 that created a
Deferred or Inactive Docket for all pending and future asbestos claims filed by
plaintiffs who cannot demonstrate that they have a malignant condition or
discernable physical impairment, and an Active or In Extremis Docket for
plaintiffs who are able to show such medical condition. As a result
of this order, the majority of the asbestos cases filed against the Company in
New York County have been moved to the Inactive Docket until such time as the
plaintiff can show that they have incurred a physical impairment. As
of December 31, 2007, the Company has been listed as a defendant in 368 Active
or In Extremis asbestos cases in New York County. The Court’s Order
has been challenged by plaintiffs.
The
Company’s insurance carrier has paid all legal and settlement costs and expenses
to date. The Company has liability insurance coverage under various
primary and excess policies that the Company believes will be available, if
necessary, to substantially cover any liability that might ultimately be
incurred on these claims.
The
Company intends to continue its practice of vigorously defending these cases as
they are listed for trial. It is not possible to predict the ultimate
outcome of asbestos-related lawsuits, claims and proceedings due to the
unpredictable nature of personal injury litigation. Despite this
uncertainty, and although results of operations and cash flows for a given
period could be adversely affected by asbestos-related lawsuits, claims and
proceedings, management believes that the ultimate outcome of these cases will
not have a material adverse effect on the Company’s financial condition, results
of operations or cash flows.
The
Company is subject to various other claims and legal proceedings 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, results of operations or cash flows of the
Company.
Insurance
liabilities are recorded in accordance with SFAS 5, “Accounting for
Contingencies.” Insurance reserves have been estimated based
primarily upon actuarial calculations and reflect the undiscounted estimated
liabilities for ultimate losses including claims incurred but not
reported. Inherent in these estimates are assumptions which are based
on the Company’s history of claims and losses, a detailed analysis of existing
claims with respect to potential value, and current legal and legislative
trends. If actual claims differ from those projected by management,
changes (either increases or decreases) to insurance reserves may be required
and would be recorded through income in the period the change was
determined. When a recognized liability is covered by third-party
insurance, the Company records an insurance claim receivable to reflect the
covered liability. See Note 1, “Summary of Significant Accounting
Policies,” for additional information on Accrued Insurance and Loss
Reserves.
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11. Capital
Stock
The
authorized capital stock of the Company 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 (the “Board”). None of the preferred
stock has been issued. On September 25, 2007, the Board approved a
revised Preferred Stock Purchase Rights Agreement (the
“Agreement”). Under the Agreement, the Board authorized and declared
a dividend distribution to stockholders of record on October 9, 2007, of one
right for each share of common stock outstanding on the record
date. The rights may only be exercised if, among other things and
with certain exceptions, a person or group has acquired 15% or more of the
Company’s common stock without the prior approval of the Board. Each
right entitles the holder to purchase 1/100th share of Harsco Series A Junior
Participating Cumulative Preferred Stock at an exercise price of
$230. Once the rights become exercisable, the holder of a right will
be entitled, upon payment of the exercise price, to purchase a number of shares
of common stock calculated to have a value of two times the exercise price of
the right. The rights, which expire on October 9, 2017, do not have
voting power, and may be redeemed by the Company at a price of $0.001 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. The Agreement also includes an exchange feature. At
December 31, 2007, 844,599 shares of $1.25 par value preferred stock were
reserved for issuance upon exercise of the rights.
On
January 23, 2007, the Company’s Board of Directors approved a two-for-one stock
split of the Company’s common stock. One additional share of common
stock was issued on March 26, 2007, for each share that was issued and
outstanding at the close of business on February 28, 2007. The
Company’s treasury stock was not included in the stock split.
The Board
of Directors has authorized the repurchase of shares of common stock as
follows:
No.
of Shares
Authorized
to be
Purchased
January
1 (a)
No.
of Shares
Purchased
(a)
Additional
Shares
Authorized
for
Purchase
Remaining
No. of
Shares
Authorized
for
Purchase
December
31 (a)
2005
2,000,000
(266)
(b)
—
2,000,000
2006
2,000,000
—
—
2,000,000
2007
2,000,000
—
—
2,000,000
(a)
Authorization
and number of shares purchased adjusted to reflect the two-for-one stock
split effective at the end of business on March 26,2007.
(b)
The
266 shares purchased were not part of the share repurchase program.
They were shares which a retired employee sold to the Company in order to
pay personal federal and state income taxes on shares issued to the
employee upon retirement.
In
November 2007, the Board of Directors extended the share purchase authorization
through January 31, 2009 for the 2,000,000 shares still remaining from the prior
authorization.
In 2007,
2006 and 2005, additional issuances of treasury shares of 90 shares, 1,766
shares and 5,306 shares, respectively, were made for SGB stock option exercises,
employee service awards and shares related to vested restricted stock
units.
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The
following table summarizes the Company’s common stock:
All
share data has been restated for comparison purposes to reflect the effect
of the March 2007 stock split.
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 Statements of
Income:
(Amounts
in thousands, except per share data)
2007
2006
(a)
2005
(a)
Income
from continuing operations
$
255,115
$
186,402
(b)
$
144,488
(b)
Average
shares of common stock outstanding used to compute basic earnings per
common share
84,169
83,905
83,284
Dilutive
effect of stock options and restricted stock units
555
525
877
Shares
used to compute dilutive effect of stock options
84,724
84,430
84,161
Basic
earnings per common share from continuing operations
$
3.03
$
2.22
$
1.73
Diluted
earnings per common share from continuing operations
$
3.01
$
2.21
$
1.72
(a)
Shares
have been adjusted for comparison purposes to reflect the effect of the
March 2007 stock split.
(b)
Income
from continuing operations has been restated for comparative
purposes.
All
outstanding stock options were included in the computation of diluted earnings
per share at December 31, 2007, 2006 and 2005.
12. Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payments” (“SFAS 123(R)”), which replaced SFAS No. 123, “Accounting for
Stock-Based Compensation,” and superseded Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB
25”). SFAS 123(R) requires the cost of employee services received in
exchange for an award of equity instruments to be based upon the grant-date fair
value of the award (with limited exceptions). Additionally, this cost
is to be recognized as expense over the period during which an employee is
required to provide services in exchange for the award (usually the vesting
period). However, this recognition period would be shorter if the
recipient becomes retirement-eligible prior to the vesting date. SFAS
123(R) also requires that the additional tax benefits the Company receives from
stock-based compensation be recorded as cash inflows from financing activities
in the statement of cash flows. Prior to January 1, 2006, the Company
applied the provisions of APB 25 in accounting for awards made under the
Company’s stock-based compensation plans.
The
Company adopted the provisions of SFAS 123(R) using the modified-prospective
transition method. Under this method, results from prior periods have
not been restated. During 2002 and 2003, the Company ceased
granting
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stock
options to employees and non-employee directors,
respectively. Primarily because of this, the effect of adopting SFAS
123(R) was not material to the Company’s income from continuing operations,
income before income taxes, net income, basic or diluted earnings per share or
cash flows from operating and financing activities for the year ended December31, 2006, and the cumulative effect of adoption using the modified-prospective
transition method was not material. In addition, the Company elected
to use the short-cut transition method for calculating the historical pool of
windfall tax benefits.
In 2004,
the Board of Directors approved the granting of performance-based restricted
stock units as the long-term equity component of director, officer and certain
key employee compensation. The restricted stock units require no
payment from the recipient and compensation cost is measured based on the market
price on the grant date and is generally recorded over the vesting
period. The vesting period for restricted stock units granted to
non-employee directors is one year and each restricted stock unit will be
exchanged for a like number of shares of Company stock following the termination
of the participant’s service as a director. The vesting period for
restricted stock units granted to officers and certain key employees is three
years, and, upon vesting, each restricted stock unit will be exchanged for a
like number of shares of the Company’s stock. In September 2006, the
Board of Directors approved changes to the employee restricted stock units
program where future awards will vest on a pro rata basis over a three-year
period and the specified retirement age will be 62. This compares
with the prior three-year cliff vesting and retirement age of 65 for awards
prior to September 2006. Restricted stock units do not have an option
for cash payment.
The
following table summarizes restricted stock units issued and the compensation
expense (including both continuing and discontinued operations) recorded for the
years ended December 31, 2007, 2006 and 2005:
Restricted
stock units and fair values have been restated to reflect the March 2007
two-for-one stock split.
As of
December 31, 2007, the total unrecognized compensation cost related to nonvested
restricted stock units was $3.0 million which is expected to be recognized over
a weighted-average period of approximately 1.7 years.
As of
December 31, 2007, 2006 and 2005, excess tax benefits, resulting principally
from stock options were $5.1 million, $3.6 million and $3.9 million,
respectively.
No stock
options have been granted to officers and employees since February
2002. No stock options have been granted to non-employee directors
since May 2003. Prior to these dates, the Company had granted stock
options for the purchase of its common stock to officers, certain key employees
and non-employee directors under two stockholder-approved plans. The
exercise price of the stock options was the fair value on the grant date, which
was the date the Board of Directors approved the respective
grants. The 1995 Executive Incentive Compensation Plan authorizes the
issuance of up to 8,000,000 shares of the Company’s common stock for use in
paying incentive compensation awards in the form of stock options or other
equity awards such as restricted stock, restricted stock units or stock
appreciation rights. The 1995 Non-Employee Directors’ Stock Plan
authorizes the issuance of up to 600,000 shares of the Company’s common stock
for equity awards. At December 31, 2007, there were 2,417,762 and
281,000 shares available for granting equity awards under the 1995 Executive
Incentive Compensation Plan and the 1995 Non-Employee Directors’ Stock Plan,
respectively. The above referenced authorized and available shares
for the Executive Incentive Compensation and Non-Employee Directors’ Stock Plans
are stated on a post-split basis. Generally, new shares are issued
for exercised stock options and vested restricted stock units.
Options
issued under the 1995 Executive Incentive Compensation Plan generally vested and
became exercisable one year following the date of grant except options issued in
2002 generally vested and became exercisable two years following the date of
grant. Options issued under the 1995 Non-Employee Director’s Stock
Plan generally became exercisable one year following the date of grant but
vested immediately. The options under both Plans expire ten years
from the date of grant.
Stock
options and weighted average exercise prices have been restated to reflect
the March 2007 two-for-one stock
split.
(b)
Intrinsic
value is defined as the difference between the current market value and
the exercise price.
(c)
Included
in options outstanding at December 31, 2004 were 5,107 options granted to
SGB key employees as part of the Company’s acquisition of SGB in
2000. These options were not a part of the 1995 Executive
Compensation Plan, or the 1995 Non-Employee Directors’ Stock
Plan.
(d)
Included
in options outstanding at December 31, 2005 were 681 options granted to
SGB key employees as part of the Company’s acquisition of SGB in
2000. These options were not a part of the 1995 Executive
Compensation Plan, or the 1995 Non-Employee Directors’ Stock
Plan.
The total
intrinsic value of options exercised during the twelve months ended December 31,2007, 2006 and 2005 were $17.1 million, $10.8 million and $11.1 million,
respectively.
Options
to purchase 604,996 shares were exercisable at December 31, 2007. The
following table summarizes information concerning outstanding and exercisable
options at December 31, 2007.
Stock
Options Outstanding and Exercisable (a)
Range
of Exercisable Prices
Number
Outstanding and Exercisable
Remaining
Contractual Life In Years
Weighted
Average Exercise Price
$12.81
– 14.50
283,938
2.40
$13.59
14.65
– 16.33
243,650
3.97
16.24
16.40
– 23.08
77,408
4.00
18.62
604,996
(a)
All
share and price values reflect the effect of the March 2007 two-for-one
stock split.
13.
Financial
Instruments
Off-Balance
Sheet Risk
As
collateral for the Company’s performance and to insurers, the Company is
contingently liable under standby letters of credit, bonds and bank guarantees
in the amounts of $159.2 million and $128.4 million at December 31, 2007 and
2006, respectively. These standby letters of credit, bonds and bank
guarantees 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 0.25 percent to 2.40
percent per annum of the instruments’ face value. If the Company were
required to obtain replacement standby letters of credit, bonds and bank
guarantees as of December 31, 2007 for those currently outstanding, it is the
Company’s opinion that the replacement costs would not vary significantly from
the present fee structure.
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The
Company has currency exposures in approximately 50 countries. The
Company’s primary foreign currency exposures during 2007 were in the United
Kingdom, members of the European Economic and Monetary Union, Brazil, Australia,
Canada, Poland and South Africa.
Off-Balance
Sheet Risk – Third Party Guarantees
In
connection with the licensing of one of the Company’s trade names and providing
certain management services (the furnishing of selected employees), the Company
guarantees the debt of certain third parties related to its international
operations. These guarantees are provided to enable the third parties
to obtain financing of their operations. The Company receives fees
from these operations, which are included as Services sales in the Company’s
Consolidated Statements of Income. The revenue the Company recorded
from these entities was $3.0 million, $2.2 million and $1.9 million for the
twelve months ended December 31, 2007, 2006 and 2005,
respectively. The guarantees are renewed on an annual basis and the
Company would only be required to perform under the guarantees if the third
parties default on their debt. The maximum potential amount of future
payments (undiscounted) related to these guarantees was $2.9 million at December31, 2007 and 2006. There is no recognition of this potential future
payment in the accompanying financial statements as the Company believes the
potential for making these payments is remote. These guarantees were
renewed in June 2007, September 2007 and November 2007.
The
Company provided an environmental indemnification for properties that were sold
to a third party in 2007. The maximum term of this guarantee is
twenty years, and the Company would only be required to perform under the
guarantee if an environmental matter is discovered on the
properties. The Company is not aware of environmental issues related
to these properties. There is no recognition of this potential future
payment in the accompanying financial statements as the Company believes the
potential for making this payment is remote.
The
Company provided an environmental indemnification for property that was sold to
a third party in 2006. The term of this guarantee is three years and
the Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property. The Company is
not aware of any environmental issues related to the property. The
maximum potential amount of future payments (undiscounted) related to this
guarantee is $0.2 million at December 31, 2007. There is no
recognition of this potential future payment in the accompanying financial
statements as the Company believes the potential for making this payment is
remote.
The
Company provided an environmental indemnification for property that was sold to
a third party in 2006. The term of this guarantee is indefinite, and
the Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property relating to the time the
Company owned the property. The Company is not aware of any
environmental issues related to this property. The maximum potential
amount of future payments (undiscounted) related to this guarantee is estimated
to be $3.0 million at December 31, 2007. There is no recognition of
this potential future payment in the accompanying financial statements as the
Company believes the potential for making this payment is remote.
The
Company provides guarantees related to arrangements with certain customers that
include joint and several liability for actions for which the Company may be
partially at fault. The terms of these guarantees generally do not
exceed four years and the maximum amount of future payments (undiscounted)
related to these guarantees is $3.0 million per occurrence. This
amount represents the Company’s self-insured maximum
limitation. There is no specific recognition of potential future
payments in the accompanying financial statements as the Company is not aware of
any claims.
The
Company provided a guarantee related to the payment of taxes for a product line
that was sold to a third party in 2005. The term of this guarantee is five
years, and the Company would only be required to perform under the guarantee if
taxes were not properly paid to the government while the Company owned the
product line in accordance with applicable statutes. The Company is
not aware of any instances of noncompliance related to these
statutes. The maximum potential amount of future payments
(undiscounted) related to this guarantee is estimated to be $1.3 million at
December 31, 2007. There is no recognition of any potential future
payment in the accompanying financial statements as the Company believes the
potential for making this payment is remote.
The
Company provided an environmental indemnification for property that was sold to
a third party in 2004. The term of this guarantee is seven years and
the Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property relating to the time the
Company owned the property that was not known by the buyer at the date of
sale. The Company is not aware of any environmental issues related to
this property. The maximum potential amount of future payments
(undiscounted) related to this guarantee is $0.8 million at December 31, 2007
and 2006. There is no recognition of this potential future payment in
the accompanying financial statements as the Company believes the potential for
making this payment is remote.
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Prior to
the Company’s acquisition of the business, Hünnebeck guaranteed certain third
party debt to leasing companies in connection with the sale of
equipment. The guarantee expires on December 1, 2008. At
December 31, 2007, the maximum potential amount of future payments
(undiscounted) related to this guarantee was $0.1 million. The
Company would only be required to perform under the guarantees if a customer
defaulted on the lease payments. There is no recognition of these
potential future payments in the accompanying financial statements as the
Company believes the potential for making these payments is remote.
Liabilities
for the fair value of each of the guarantee instruments noted above were
recognized in accordance with FASB Interpretation No. 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others” (“FIN 45”). These liabilities
are included in Other current liabilities or Other liabilities (as appropriate)
on the Consolidated Balance Sheets. The recognition of these
liabilities did not have a material impact on the Company’s financial condition
or results of operations for the twelve months ended December 31, 2007 or
2006.
In the
normal course of business, the Company provides legal indemnifications related
primarily to the performance of its products and services and patent and
trademark infringement of its goods and services sold. These
indemnifications generally relate to the performance (regarding function, not
price) of the respective goods or services and therefore no liability is
recognized related to the fair value of such guarantees.
Derivative
Instruments and Hedging Activities
The
Company may periodically use derivative instruments to hedge cash flows
associated with selling price exposure to certain commodities. The
Company’s commodity derivative activities are subject to the management,
direction and control of the Company’s Risk Management Committee (“the
Committee”). The Committee approves the use of all commodity
derivative instruments. During the third quarter of 2007, the Company
entered into cashless collars (purchased put options and written call options)
designed to hedge cash flows associated with the selling price exposure to
certain commodities. The unsecured contracts outstanding at December31, 2007 mature monthly through November 2008 and are with major financial
institutions.
Based on
the requirements of SFAS No. 133, “Accounting for Derivative Instrument and
Hedging Activities” (“SFAS 133”), these contracts qualified as cash flow hedges
for the year end December 31, 2007. The following table summarizes
the open positions as of December 31, 2007:
(a)
Notional value is equal to the hedged volume multiplied by the strike price of
the derivative.
Although
earnings volatility may occur between fiscal quarters if the derivatives do not
qualify as cash flow hedges under SFAS 133, the economic substance of the
derivatives provides more predictable cash flows by reducing the Company’s
exposure to the commodity price fluctuations.
In
addition, the Company may use derivative instruments to hedge cash flows related
to foreign currency fluctuations. The Company recorded a debit of
$12.8 million and a debit of $14.0 million during 2007 and 2006, respectively,
in the foreign currency translation adjustments line of Other comprehensive
income (loss) related to hedges of net investments.
At
December 31, 2007 and 2006, the Company had $392.2 million and $170.9 million
contracted amounts, 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 outstanding at December 31, 2007
mature within six months and are with major financial
institutions. The Company may be 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 and does not expect
default by them. 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.
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, 2007 and
2006. 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.
At
December 31, 2006, the Company held forward exchange contracts which were used
to offset certain future payments between the Company and its various
subsidiaries, vendors or customers. The Company had outstanding
forward contracts designated as SFAS 133 cash flow hedges in the amount of $1.1
million at December 31, 2006. These forward contracts had a net
unrealized gain of $5 thousand that was included in Other comprehensive income
(loss), net of deferred taxes, at December 31, 2006. The Company did
not elect to treat the remaining contracts as hedges under SFAS 133, and
mark-to-market gains and losses were recognized in net income.
Concentrations
of Credit Risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and cash equivalents 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 generally limited due to
the Company’s large number of customers and their dispersion across different
industries and geographies. However, the Company’s Mill Services
Segment has several large customers throughout the world with significant
accounts receivable balances. Additionally, consolidation in the
global steel industry has increased the Company’s exposure to specific
customers. Additional consolidation is possible. Should
transactions occur involving some of the steel industry’s larger companies,
which are customers of the Company, it would result in an increase in
concentration of credit risk for the Company.
- 86
-
The
Company generally does not require collateral or other security to support
customer receivables. If a receivable from one or more of the
Company’s larger customers becomes uncollectible, it could have a material
effect on the Company’s results of operations or cash flows.
Fair
Value of Financial Instruments
The major
methods and assumptions used in estimating the fair values of financial
instruments are as follows:
Cash
and cash equivalents
The
carrying amount approximates fair value due to the relatively short period to
maturity of these instruments.
The fair
value of foreign currency forward exchange contracts is estimated by obtaining
quotes from brokers.
Commodity
Collars
The fair
value of commodity collars is estimated by obtaining quotes from
brokers.
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.
The
carrying amounts and estimated fair values of the Company’s financial
instruments as of December 31, 2007 and 2006 are as follows:
The
Company reports information about its operating segments using the “management
approach” in accordance with SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS 131”). This approach is
based on the way management organizes and reports 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. There were
no significant inter-segment sales.
The
Company’s Divisions are aggregated into two reportable segments and an “all
other” category labeled Minerals & Rail Services and
Products. These segments and the types of products and services
offered include the following:
Access
Services Segment
Major
services include the rental and sale of scaffolding, shoring and concrete
forming systems for non-residential construction, international multi-dwelling
residential construction projects, industrial maintenance and capital
improvement projects, as well as a variety of other access services including
project engineering and equipment installation.
Products
and services are provided to commercial and industrial construction contractors;
public utilities; industrial and petrochemical plants; and the infrastructure
construction, repair and maintenance markets.
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Mill
Services Segment
This
segment provides on-site, outsourced services to steel mills and other metal
producers such as aluminum and copper. Services include slag
processing; semi-finished inventory management; material handling; scrap
management; in-plant transportation; and a variety of other
services.
All Other Category - Minerals & Rail Services and
Products
Major
products and services include minerals and recycling technologies; railway track
maintenance equipment and services; industrial grating; air-cooled heat
exchangers; granules for asphalt roofing shingles and abrasives for industrial
surface preparation derived from coal slag; and boilers, water heaters and
process equipment, including industrial blenders, dryers and
mixers.
Major
customers include steel mills; private and government-owned railroads and urban
mass transit systems worldwide; industrial plants and the non-residential,
commercial and public construction and retrofit markets; the natural gas
exploration and processing industry; asphalt roofing manufacturers; and the
chemical, food processing and pharmaceutical industries.
Other
Information
The
measurement basis of segment profit or loss is operating
income. Sales of the Company in the United States and the United
Kingdom exceeded 10% of consolidated sales with 31% and 20%, respectively, in
2007; 32% and 22%, respectively, in 2006; and 35% and 23%, respectively, in
2005. There are no significant inter-segment sales.
In 2007
and 2006, sales to one customer principally in the Mill Services Segment were
$396.2 million and $351.0 million, respectively, which represented more than 10%
of the Company’s consolidated sales for those years. These sales were
provided under multiple long-term contracts at several mill sites. No
single customer represented 10% or more of the Company’s sales in
2005. In addition, the Mill Services Segment is dependent largely on
the global steel industry, and in 2007 and 2006 there were two customers that
each provided in excess of 10% of this Segment’s revenues under multiple
long-term contracts at several mill sites. In 2005, there were three
customers that each provided in excess of 10% of this Segment’s
revenues. The loss of any one of these contracts would not have a
material adverse impact upon the Company’s financial position or cash flows;
however, it could have a material effect on quarterly or annual results of
operations. Additionally, these customers have significant accounts
receivable balances. Further consolidation in the global steel
industry is possible. Should transactions occur involving some of the
Company’s larger steel industry customers, it would result in an increase in
concentration of credit risk for the Company.
Corporate
assets include principally cash, insurance receivables, prepaid pension costs
and U.S. deferred income taxes. Net Property, Plant and Equipment in
the United States represented 24%, 30% and 33% of total net Property, Plant and
Equipment as of December 31, 2007, 2006 and 2005, respectively. Net
Property, Plant and Equipment in the United Kingdom represented 20%, 23% and 23%
of total Net Property, Plant and Equipment as of December 31, 2007, 2006 and
2005, respectively.
All
Other Category - Minerals & Rail Services and Products
749,997
142,191
578,159
77,466
546,905
69,699
General
Corporate
16
(2,642
)
—
(1,337
)
—
(2,996
)
Total
$
3,688,160
$
457,805
$
3,025,613
$
344,309
$
2,396,009
$
251,036
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-
Reconciliation
of Segment Operating Income to Consolidated Income From Continuing
Operations
Before
Income Taxes and Minority Interest
Twelve
Months Ended December 31,
(In
thousands)
2007
2006
2005
Segment
operating income
$
318,256
$
268,180
$
184,333
All
Other Category - Minerals &
Rail Services and Products
142,191
77,466
69,699
General
corporate expense
(2,642
)
(1,337
)
(2,996
)
Operating
income from continuing operations
457,805
344,309
251,036
Equity
in income of unconsolidated entities, net
1,049
192
74
Interest
income
4,968
3,582
3,063
Interest
expense
(81,383
)
(60,479
)
(41,917
)
Income
from continuing operations before income taxes and minority
interest
$
382,439
$
287,604
$
212,256
Segment
Information
Assets
Depreciation
and
Amortization
(a)
(In
thousands)
2007
2006
2005
2007
2006
2005
Access
Services Segment
$
1,563,630
$
1,239,892
$
976,936
$
90,477
$
69,781
$
53,263
Mill
Services Segment
1,585,921
1,401,603
1,273,522
167,179
151,005
114,952
Gas
Technologies Segment
—
271,367
253,276
—
—
—
Segment
Totals
3,149,551
2,912,862
2,503,734
257,656
220,786
168,215
All
Other Category - Minerals & Rail Services and Products
587,182
287,482
315,241
44,498
18,922
15,735
Corporate
168,697
126,079
156,829
3,019
1,863
1,505
Total
$
3,905,430
$
3,326,423
$
2,975,804
$
305,173
$
241,571
$
185,455
(a)
Excludes
Depreciation and Amortization for the Gas Technologies Segment in the
amounts of $1.2 million, $11.4 million and $12.6 million for 2007, 2006
and 2005, respectively because this Segment was reclassified to
Discontinued Operations.
Capital
Expenditures
(In
thousands)
2007
2006
2005
Access
Services Segment
$
228,130
$
138,459
$
86,668
Mill
Services Segment
193,244
161,651
155,595
Gas
Technologies Segment
8,618
9,330
6,438
Segment
Totals
429,992
309,440
248,701
All Other Category - Minerals & Rail
Services and Products
11,263
27,635
39,834
Corporate
2,328
3,098
1,704
Total
$
443,583
$
340,173
$
290,239
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-
Information
by Geographic Area (a)
Sales
to Unaffiliated Customers (b)
Net
Property, Plant and Equipment (c)
(In
thousands)
2007
2006
2005
2007
2006
2005
United
States
$
1,152,623
$
959,486
$
840,094
$
364,950
$
401,997
$
371,039
United
Kingdom
746,261
676,520
546,673
312,375
298,582
258,786
All
Other
1,789,276
1,389,607
1,009,242
857,889
621,888
509,983
Totals
including Corporate
$
3,688,160
$
3,025,613
$
2,396,009
$
1,535,214
$
1,322,467
$
1,139,808
(a)
Revenues
are attributed to individual countries based on the location of the
facility generating the revenue.
(b)
Excludes
the sales of the Gas Technologies
Segment.
(c)
Includes
net Property, Plant and Equipment for the Gas Technologies Segment for
2006 and 2005.
Information
about Products and Services
Sales
to Unaffiliated Customers (a)
(In
thousands)
2007
2006
2005
Product
Group
Access
services
$
1,415,873
$
1,080,924
$
788,750
Mill
services
1,522,274
1,366,530
1,060,354
Railway
track maintenance services and equipment
232,402
231,625
247,452
Heat
exchangers
152,493
124,829
92,339
Industrial
grating products
130,919
107,048
98,845
Minerals
and recycling technologies (b)
123,240
—
—
Industrial
abrasives and roofing granules
68,165
73,112
72,216
Powder
processing equipment and heat transfer products
42,778
41,545
36,053
General
Corporate
16
—
—
Consolidated
Sales
$
3,688,160
$
3,025,613
$
2,396,009
(a)
Excludes
the sales of the Gas Technologies
Segment.
(b)
Acquired
February 2007.
15.
Other
(Income) and Expenses
In the
years 2007, 2006 and 2005, the Company recorded pre-tax Other (income) and
expenses from continuing operations of $3.4 million, $2.5 million and $1.9
million, respectively. The major components of this income statement
category are as follows:
Other
(Income) and Expenses
(In
thousands)
2007
2006
2005
Net
gains
$
(5,591
)
$
(5,450
)
$
(9,674
)
Impaired
asset write-downs
903
221
579
Employee
termination benefit costs
6,552
3,495
8,953
Costs
to exit activities
1,278
1,290
1,028
Other
expense
301
2,920
1,005
Total
$
3,443
$
2,476
$
1,891
Net
Gains
Net gains
are recorded from the sales of redundant properties (primarily land, buildings
and related equipment) and non-core assets. In 2007, gains related to
assets sold principally in the United States. In 2006, gains related
to assets principally in Europe, South America and the United States, and in
2005, gains related to assets principally in the United States and
Europe.
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-
Net
Gains
(In
thousands)
2007
2006
2005
Access
Services Segment
$
(2,342
)
$
(2,510
)
$
(5,413
)
Mill
Services Segment
(3
)
(2,823
)
(4,202
)
All
Other Category - Minerals &
Rail Services and Products
(3,246
)
(117
)
(59
)
Corporate
—
—
—
Total
$
(5,591
)
$
(5,450
)
$
(9,674
)
Cash
proceeds associated with these gains are included in Proceeds from the sale of
assets in the investing activities section of the Consolidated Statements of
Cash Flows.
Impaired
Asset Write-downs
Impairment
losses are measured as the amount by which the carrying amount of assets
exceeded their fair value. Fair value is estimated based upon the
expected future realizable cash flows including anticipated selling
prices. Non-cash impaired asset write-downs are included in Other,
net in the Consolidated Statements of Cash Flows as adjustments to reconcile net
income to net cash provided by operating activities.
Employee
Termination Benefit Costs
SFAS No.
146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS
146”) addresses involuntary termination costs associated with one-time benefit
arrangements provided as part of an exit or disposal activity. These
costs and the related liabilities are recognized by the Company when a formal
plan for reorganization is approved at the appropriate level of management and
communicated to the affected employees. Additionally, costs
associated with on-going benefit arrangements, or in certain countries where
statutory requirements dictate a minimum required benefit, are recognized when
they are probable and estimable, in accordance with SFAS No. 112, “Employers’
Accounting for Postemployment Benefits,” (“SFAS 112”).
The total
amount of employee termination benefit costs incurred for the years 2007, 2006
and 2005 was as follows. None of the actions are expected to incur
any additional costs.
Employee
Termination Benefit Costs
(In
thousands)
2007
2006
2005
Access
Services Segment
$
1,130
$
799
$
1,647
Mill
Services Segment
4,935
1,820
4,827
All
Other Category - Minerals & Rail Services and Products
382
821
1,256
Corporate
105
55
1,223
Total
$
6,552
$
3,495
$
8,953
The
terminations for the years 2005 to 2007 occurred principally in Europe, Latin
America and the United States.
Costs
Associated with Exit or Disposal Activities
Costs
associated with exit or disposal activities are recognized in accordance with
SFAS 146, which addresses involuntary termination costs (as discussed above) and
other costs associated with exit or disposal activities (exit
costs). Costs to terminate a contract that is not a capital lease are
recognized when an entity terminates the contract or when an entity ceases using
the right conveyed by the contract. This includes the costs to
terminate the contract before the end of its term or the costs that will
continue to be incurred under the contract for its remaining term without
economic benefit to the entity (e.g., lease run-out costs). Other
costs associated with exit or disposal activities (e.g., costs to consolidate or
close facilities and relocate equipment or employees) are recognized and
measured at their fair
- 91
-
value in
the period in which the liability is incurred. In 2007,
$1.3 million of exit costs were incurred, principally relocation costs and
lease run-out costs for the Access Services and Mill Services
Segments.
In 2006
and 2005, exit costs incurred were $1.3 million and $1.0 million, respectively,
principally lease run-out costs, lease termination costs and relocation
costs. In 2006, the majority of these costs were incurred in the
Mineral & Rail Services and Products Category. In 2005, these
costs were incurred across each of the Access Services and Mill Services
Segments and the Minerals & Rail Services and Products
Category.
16.
Components
of Accumulated Other Comprehensive Income
(Loss)
Total
Accumulated other comprehensive income (loss) is included in the Consolidated
Statements of Stockholders’ Equity. The components of Accumulated
other comprehensive income (loss) are as follows:
Accumulated
Other Comprehensive Income (Loss) – Net of Tax
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosures
None.
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-
Item
9A. Controls and
Procedures
The
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of disclosure controls and
procedures as of December 31, 2007. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective. There have been no
changes in internal control over financial reporting that could materially
affect, or are likely to materially affect, internal control over financial
reporting during the fourth quarter of 2007.
Management’s
Report on Internal Controls Over Financial Reporting is included in Part II,
Item 8, “Financial Statements and Supplementary Data.” The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
appearing in Part II, Item 8, “Financial Statements and Supplementary Data,”
which expresses an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31,2007.
Item
9B. Other
Information
None.
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-
PART
III
Item 10. Directors, Executive
Officers and Corporate Governance.
Information
regarding executive officers required by this Item is set forth as a
Supplementary Item at the end of Part I hereof (pursuant to Instruction 3 to
Item 401(b) of Regulation S-K). Other information required by this
Item is incorporated by reference to the sections entitled “Corporate
Governance,”“Nominees for Director,”“Report of the Audit Committee” and
“Section 16(a) Beneficial Ownership Reporting Compliance” of the 2008 Proxy
Statement.
The
Company’s Code of Ethics for the Chief Executive Officer and Senior Financial
Officers (the “Code”) may be found on the Company’s internet website,
www.harsco.com. The Company intends to disclose on its website any
amendments to the Code or any waiver from a provision of the
Code. The Code is available in print to any stockholder who requests
it.
Information
regarding compensation of executive officers and directors is incorporated by
reference to the sections entitled “Compensation Discussion and Analysis,”“Compensation Committee Report,”“Executive Compensation,”“Non-Employee
Director Compensation” and “Compensation Committee Interlocks and Insider
Participation” of the 2008 Proxy Statement.
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
Information
regarding security ownership of certain beneficial owners and management is
incorporated by reference to the section entitled “Share Ownership of Directors,
Management and Certain Beneficial Owners” of the 2008 Proxy
Statement.
Equity
Compensation Plan Information
The
Company maintains the 1995 Executive Incentive Compensation Plan and the 1995
Non-Employee Directors’ Stock Plan, which allow the Company to grant equity
awards to eligible persons. Upon stockholder approval of these two
plans in 1995, the Company terminated the use of the 1986 Stock Option Plan for
granting stock option awards.
The
Company also assumed options under the SGB Group Plc Discretionary Share Option
Plan 1997 (the “SGB Plan”) upon the Company’s acquisition of SGB Group Plc
(“SGB”) in 2000. The SGB Plan terminated in accordance with its terms
when the remaining Harsco Replacement Options were exercised on August 30,2006.
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-
The
following table gives information about equity awards under these plans as of
December 31, 2007. All securities referred to are shares of Harsco
common stock.
Equity
Compensation Plan Information (1)
Column
(a)
Column
(b)
Column
(c)
Plan
category
Number
of securities to be
issued
upon exercise of
outstanding
options,
warrants
and rights
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
Number
of securities
remaining
available for
future
issuance under
equity
compensation plans
(excluding
securities
reflected
in Column (a))
Equity
compensation plans approved by security holders (2)
816,930
$ 20.18 (3)
2,698,762
Equity
compensation plans not approved by security holders
—
—
—
Total
816,930
$
20.18
2,698,762
(1)
Amounts
restated to reflect the March 2007 stock
split.
(2)
Plans
include the 1995 Executive Incentive Compensation Plan, as amended, and
the 1995 Non-Employee Directors’ Stock Plan, as
amended.
(3)
Includes
the average of the weighted average exercise price for stock options and
the weighted average grant-date fair value for the restricted stock
units.
Item 13. Certain
Relationships and Related Transactions, and Director
Independence
Information
regarding certain relationships and related transactions is incorporated by
reference to the sections entitled “Transactions with Related Persons” and
“Corporate Governance” of the 2008 Proxy Statement.
Item
14.
Principal Accountant Fees and Services
Information
regarding principal accounting fees and services is incorporated by reference to
the sections entitled “Report of the Audit Committee” and “Fees Billed by the
Independent Auditor for Audit and Non-Audit Services” of the 2008 Proxy
Statement.
The
Consolidated Financial Statements are listed in the index to Item 8,
“Financial Statements and Supplementary Data,” on page
45.
(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”):
Page
Report of Independent Registered
Public Accounting Firm
47
Schedule II - Valuation and
Qualifying Accounts for the years 2007, 2006 and 2005
98
Schedules
other than that 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 “restricted net
assets” of consolidated subsidiaries does not exceed 25% of consolidated
net assets.
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.
Includes
principally the use of previously reserved amounts and changes related to
acquired companies.
- 98
-
(a) 3. Listing
of Exhibits Filed with Form 10-K
Exhibit
Number
Data
Required
Location in Form
10-K
2(a)
Share
Purchase Agreement between Sun HB Holdings, LLC, Boca Raton, Florida,
United States of America and Harsco Corporation, Camp Hill, Pennsylvania,
United States of America dated September 20, 2005 regarding the sale and
purchase of the issued share capital of Hünnebeck Group GmbH, Ratingen,
Germany.
Agreement,
dated as of December 29, 2005, by and among the Harsco Corporation (for
itself and as agent for each of MultiServ France SA, Harsco Europa BV and
Harsco Investment Limited), Brambles U.K. Limited, a company incorporated
under the laws of England and Wales, Brambles France SAS, a company
incorporated under the laws of France, Brambles USA, Inc., a Delaware
corporation, Brambles Holdings Europe B.V., a company incorporated under
the laws of the Netherlands, and Brambles Industries Limited, a company
incorporated under the laws of Australia. In accordance with
Item 601(b)(2) of Regulation S-K, the registrant hereby agrees to furnish
supplementally a copy of any omitted schedule to the Commission upon
request. Portions of Exhibit 2(a) have been omitted pursuant to
a request for confidential treatment. The omitted portions have
been filed separately with the Securities and Exchange
Commission.
Exhibit
volume, 2005 10-K
2(c)
Stock
Purchase Agreement among Excell Materials, Inc., the Stockholders of
Excell Materials, Inc. and Harsco Corporation dated as of January 4,2007.
Exhibit
volume, 2006 10-K
2(d)
Asset
and Stock Purchase Agreement By and Between Harsco Corporation and
Taylor-Wharton International LLC dated as of November 28,2007
Indenture,
dated as of May 1, 1985, by and between Harsco Corporation and The Chase
Manhattan Bank (National Association), as trustee (incorporated herein by
reference to Exhibit 4(d) to the Registration Statement on Form S-3, filed
by Harsco Corporation on August 23, 1991 (Reg. No.
33-42389))
First
Supplemental Indenture, dated as of April 12, 1995, by and among Harsco
Corporation, The Chase Manhattan Bank (National Association), as resigning
trustee, and Chemical Bank, as successor trustee
Commercial
Paper Dealer Agreement dated September 24, 2003, between ING Belgium SA/NV
and Harsco Finance B.V.
Exhibit
volume, 2003 10-K
10(b)(i)
Commercial
Paper Dealer Agreement dated September 24, 2003, between ING Belgium SA/NV
and Harsco Finance B.V. – Supplement No. 1 to the Dealer
Agreement
Commercial
Paper Dealer Agreement dated June 7, 2001, between Citibank International
plc, National Westminster Bank plc, The Royal Bank of Scotland plc and
Harsco Finance B.V.
Harsco
Corporation Supplemental Retirement Benefit Plan as amended October 4,2002
Exhibit
volume, 2002 10-K
10(l)
Trust
Agreement between Harsco Corporation and Dauphin Deposit Bank and Trust
Company dated July 1, 1987 relating to the Supplemental Retirement Benefit
Plan
Exhibit
volume, 1987 10-K
10(m)
Harsco
Corporation Supplemental Executive Retirement Plan as
amended
Exhibit
volume, 1991 10-K
10(n)
Trust
Agreement between Harsco Corporation and Dauphin Deposit Bank and Trust
Company dated November 22, 1988 relating to the Supplemental Executive
Retirement Plan
Exhibit
volume, 1988 10-K
10(o)
Harsco
Corporation 1995 Executive Incentive Compensation Plan As Amended and
Restated
Proxy
Statement dated March 23, 2004 on Exhibit B pages B-1 through
B-15
10(p)
Authorization,
Terms and Conditions of the Annual Incentive Awards, as Amended and
Restated April 27, 2004, under the 1995 Executive Incentive Compensation
Plan
Authorization,
Terms and Conditions of Other Performance Awards under the Harsco
Corporation 1995 Executive Incentive Compensation Plan (as amended and
restated)
Consent
of Independent Registered Public Accounting Firm
Exhibit
volume, 2007 10-K
31(a)
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit
volume, 2007 10-K
31(b)
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit
volume, 2007 10-K
32(a)
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit
volume, 2007 10-K
32(b)
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit
volume, 2007 10-K
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.
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.
Date
2-29-08
HARSCO
CORPORATION
By
/S/ Stephen J.
Schnoor
Stephen
J. Schnoor
Senior
Vice President and Chief Financial
Officer
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
capacity and on the dates indicated.
