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 incorporation or organization)
(I.R.S.
employer identification number)
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:
Title of each
class
Name of each 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. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “large accelerated filer,”“accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated
filer x
Accelerated
filer o
Non-accelerated
filer o (Do not
check if a smaller reporting company)
Smaller reporting
company 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: Harsco Infrastructure
(formerly Access Services) and Harsco Metals (formerly Mill Services), plus an
“all other” category labeled Harsco Minerals & Rail. 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 (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 those
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
· Highly
engineered scaffolding, concrete forming and shoring, and other
access-related services, rentals and sales
· Infrastructure
and non-residential construction
· Infrastructure
plant maintenance requirements
· Outsourced,
on-site services to steel mills and other metals producers
· Global
metals production and capacity utilization
· Outsourcing
of services by metals producers
· Minerals
and recycling technologies
· Demand
for 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.
In 2008,
2007 and 2006, the United States contributed sales of $1.3 billion, $1.2 billion
and $1.0 billion, equal to 32%, 31% and 32% of total sales,
respectively. In 2008, 2007 and 2006, the United Kingdom contributed
sales of $0.7 billion in each year, equal to 17%, 20% and 22% of total sales,
respectively. One customer, ArcelorMittal, represented approximately
10% of the Company’s sales during 2008, 2007 and 2006. There were no
significant inter-segment sales.
3
(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:
Harsco
Infrastructure Segment – 39% of consolidated sales for 2008
The
Harsco Infrastructure Segment includes the Company’s brand names of SGB Group,
Hünnebeck Group and Patent Construction Systems. The Harsco
Infrastructure Segment is one of the world’s most complete knowledge-based
global organizations for highly engineered rental scaffolding, shoring, concrete
forming and other access-related solutions. The U.K.-based SGB Group
operates from a network of international branches throughout Europe, the Middle
East and Asia/Pacific; the Germany-based Hünnebeck Group serves Europe, the
Middle East and South America, while the U.S.-based Patent Construction Systems
serves North America including Mexico, Central America and the
Caribbean. Major services include the rental of concrete shoring and
forming systems; scaffolding for non-residential and infrastructure projects; as
well as a variety of other infrastructure services including project engineering
and equipment erection and dismantling and, to a lesser extent, equipment
sales.
The Company’s infrastructure services are provided
through branch locations in over 30 countries plus export sales
worldwide. In
2008, this Segment’s revenues
were generated in the following regions:
Harsco
Infrastructure Segment
2008
Percentage
Region
of
Revenues
Western
Europe
59%
North
America
20%
Middle
East and Africa
11%
Eastern
Europe
8%
Asia/Pacific
1%
Latin
America (a)
1%
(a)
Including Mexico.
For 2008,
2007 and 2006, the Harsco Infrastructure Segment’s percentage of the Company’s
consolidated sales was 39%, 39% and 36%, respectively.
Harsco
Metals Segment – 40% of consolidated sales for 2008
The
Harsco Metals Segment is the world’s largest provider of on-site, outsourced
services to the global metals industries. Harsco Metals 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, value-added services provider, Harsco Metals rarely takes ownership
of its customers’ raw materials or finished products. This Segment’s
multi-year contracts had estimated future revenues of $4.1 billion at December31, 2008. This provides the Company with a substantial base of
long-term revenues. Approximately 65% of these revenues are expected
to be recognized by December 31, 2011. The remaining revenues are
expected to be recognized principally between January 1, 2012 and December 31,2017.
4
Harsco
Metals operates in over 30 countries. In 2008, this Segment’s
revenues were generated in the following regions:
Harsco
Metals Segment
2008
Percentage
Region
of
Revenues
Western
Europe
52%
North
America
20%
Latin
America (a)
13%
Asia/Pacific
6%
Middle
East and Africa
5%
Eastern
Europe
4%
(a)
Including Mexico.
For 2008,
2007 and 2006, the Harsco Metals Segment’s percentage of the Company’s
consolidated sales was 40%, 41% and 45%, respectively.
All
Other Category - Harsco Minerals & Rail – 21% of consolidated sales for
2008
The All
Other Category includes the Excell Minerals, Reed Minerals, Harsco Rail, IKG
Industries, Air-X-Changers and Patterson-Kelley
Divisions. Approximately 84% of this category’s revenues originate in
the United States.
Export
sales for this Category totaled $102.7 million, $57.1 million and $96.6 million
in 2008, 2007 and 2006, respectively. In 2008, 2007 and 2006, export
sales for the Harsco Rail Division were $68.1 million, $21.8 million and $51.5
million, respectively, which included sales to Canada, Mexico, Europe, Asia, the
Middle East and Africa. A significant backlog exists at December 31,2008 in the Harsco Rail 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.
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
Rail 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.
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.
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.
For 2008,
2007 and 2006, the All Other Category’s percentage of the Company’s consolidated
sales was 21%, 20% and 19%, respectively.
5
(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
2008
2007
2006
Services
and equipment for infrastructure construction and
maintenance
39%
39%
36%
On-site
services to metal producers
40%
41%
45%
(1)
(ii)
New
products and services are added from time to time; however, in 2008 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 Harsco Infrastructure 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)
2008
2007
2006
2005
2004
First
Quarter Ended March 31
$
987.8
$
840.0
$
682.1
$
558.0
$
478.7
Second
Quarter Ended June 30
1,099.6
946.1
766.0
606.0
534.6
Third
Quarter Ended September 30
1,044.9
927.4
773.3
599.5
532.9
Fourth
Quarter Ended December 31
835.5
974.6
804.2
632.5
616.8
Totals
$
3,967.8
$
3,688.2
(a)
$
3,025.6
$
2,396.0
$
2,163.0
6
Historical
Cash Provided by Operations
(In
millions)
2008
2007
2006
2005
2004
First
Quarter Ended March 31
$
32.0
$
41.7
$
69.8
$
48.1
$
32.4
Second
Quarter Ended June 30
178.5
154.9
114.5
86.3
64.6
Third
Quarter Ended September 30
171.6
175.7
94.6
98.1
68.9
Fourth
Quarter Ended December 31
192.2
99.4
130.3
82.7
104.6
Totals
$
574.3
$
471.7
$
409.2
$
315.3
(a)
$
270.5
(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 approximately 10% of the Company’s
sales in 2008, 2007 and 2006. The Harsco Metals Segment is
dependent largely on the global steel industry, and in 2008, 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 numerous mill
sites. ArcelorMittal was one of those customers in 2008, 2007
and 2006. The
Company expects ArcelorMittal sales in 2009 to be less than 10% of the
Company’s sales due primarily to reduced steel production
levels; the Company’s exiting of certain underperforming
contracts with ArcelorMittal; and a stronger U.S.
dollar. 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. See Note 10, Commitments and Contingencies, to the
Consolidated Financial Statements under Part II, Item 8, “Financial
Statements and Supplementary Data” for additional Information regarding a
customer breach of contract.
(1)
(viii)
Backlog
of manufacturing orders from continuing operations was $639.7 million and
$448.1 million as of December 31, 2008 and 2007,
respectively. A significant backlog exists at December 31, 2008
in the Harsco Rail Group as a result of orders received in 2007 from the
Chinese Ministry of Railways. It is expected that approximately
47% of the total backlog at December 31, 2008 will not be filled during
2009. Exclusive of certain orders received by Harsco Rail 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 Harsco Infrastructure 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 Harsco Metals Segment
are also excluded from the total backlog. These contracts have
estimated future revenues of $4.1 billion at December 31,2008. 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 $5.3 million, $3.2 million
and $2.8 million in 2008, 2007 and 2006, 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 from the U.S. totaled $105.7 million, $61.7
million and $99.6 million in 2008, 2007 and 2006, respectively.
(e) Available
Information
Information
is provided in Part I, Item 1 (a), “General Development of
Business.”
Item
1A. Risk Factors.
Set forth
below and elsewhere in this report and in other documents the Company files with
the Securities and Exchange Commission are risks and uncertainties that could
cause the Company’s actual results to materially differ from the results
contemplated by the forward-looking statements contained in this report and in
other documents the Company files with the Securities and Exchange
Commission.
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 customer concentration in
Harsco Metals and certain businesses of the “All Other” Category, collectibility
of receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
The
financial markets in the United States, Europe and Asia experienced extreme
disruption in the last half of 2008 and into 2009, including, among other
things, severely diminished liquidity and credit availability for many business
entities, declines in consumer confidence, negative economic growth, declines in
real estate values, increases in unemployment rates, significant volatility in
equities, rating agency downgrades, and uncertainty about economic
stability. This has led to a global recession. Governments
across the globe have taken unprecedented actions, including economic stimulus
programs, intended to address these difficult market
conditions. These economic uncertainties affect all businesses in a
number of ways, making it difficult to accurately forecast and plan future
business activities.
8
The
continuing disruption in the credit markets has severely restricted access to
capital for many companies. If credit markets continue to
deteriorate, the Company’s ability to incur additional indebtedness to fund
operations or refinance maturing obligations as they become due may be
significantly constrained. The Company is unable to predict the
likely duration and severity of the current disruptions in the credit and
financial markets and adverse global economic conditions. While these
conditions have not impaired the Company’s ability to access credit markets and
finance operations at this time, if the current uncertain economic conditions
continue or further deteriorate, the Company’s business and results of
operations could be materially and adversely affected.
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 Harsco Infrastructure Segment may be adversely impacted by
slowdowns in non-residential or infrastructure construction and annual
industrial and building maintenance
cycles;
·
The
Company’s Harsco Metals Segment 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;
·
The
reclamation recycling services business may be adversely impacted by
slowdowns in customer production or 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;
·
The
roofing granules and abrasives 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 products 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. Therefore, a slowdown in
natural gas production could adversely affect this
business;
·
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. Further
financial market deterioration 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.
The
Company’s earnings may be positively or negatively impacted by the amount of
income or expense the Company records for defined benefit pension
plans. The Company calculates income or expense for the plans using
actuarial valuations that reflect assumptions relating to financial market and
other economic conditions. The most significant assumptions used to
estimate defined benefit pension income or expense for the upcoming year are the
discount rate and the expected long-term rate of return on plan
assets. If there are significant changes in key economic indicators,
these assumptions may materially affect the Company’s financial position,
results of operations, or cash flows. These key economic factors
would also likely affect the amount of cash the Company would contribute to the
defined benefit pension
9
plans. For
a discussion regarding how the Company’s financial statements can be affected by
defined benefit pension plan accounting policies, see the Pension Benefits
section of the Application of Critical Accounting Policies in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations”.
In
response to adverse market conditions during 2002 and 2003, the Company
conducted a comprehensive global review of its defined benefit pension plans in
order to formulate a plan to make its long-term pension costs more predictable
and affordable. In 2008, as a response to worsening economic
conditions, the Company implemented design changes for additional defined
benefit plans, of which the principal change involved converting future pension
benefits for many of the Company’s non-union employees in the United Kingdom
from a defined benefit plan to a defined contribution plan. Defined
benefit pension expense is expected to increase by approximately $28 million in
2009 when compared with 2008.
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. Additionally,
market conditions may affect the funded status of multi-employer plans and
consequently any Company withdrawal liability, if applicable. The
Company continues to monitor and 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;
·
fluctuations
in currency exchange rates;
·
imposition
of or increases in currency exchange controls and hard currency
shortages;
·
customs
matters and changes in trade policy or tariff
regulations;
·
changes
in regulatory requirements in the countries in which the Company does
business;
·
changes
in tax regulations, 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
regions or 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.
10
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 2008, 2007 and 2006,
the Company’s Middle East operations contributed approximately $66.7 million,
$44.6 million and $34.8 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”) and others). In
countries in which such outbreaks occur, 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 68% and 69% of the Company’s sales and
approximately 61% and 68% of the Company’s operating income from continuing
operations for the years ended December 31, 2008 and 2007, respectively, were
derived from operations outside the United States. More specifically,
approximately 17% and 20% of the Company’s revenues were derived from operations
in the United Kingdom during 2008 and 2007,
respectively. Additionally, approximately 26% of the Company’s
revenues were derived from operations with the euro as their functional currency
during both 2008 and 2007. 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.
Compared
with the corresponding period in 2007, the average values of major currencies
changed as follows in relation to the U.S. dollar during 2008, 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 2008, revenues would have been approximately 1% or
$30.8 million less and operating income would have been approximately 1% or $3.3
million less if the average exchange rates for 2007 were utilized. A
similar comparison for 2007 would have decreased revenues approximately 5% or
$166.9 million, while operating income would have been approximately 4% or $16.5
million less if the average exchange rates for 2007 would have remained the same
as 2006. 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.
11
Additionally,
based on current foreign currency exchange rates, earnings for 2009 will be
significantly negatively impacted in comparison to 2008. 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. The Company has a
Foreign Currency Risk Management Committee that develops and implements
strategies to mitigate these risks.
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 demand for the Company’s services, the
ability of the Company’s customers to meet
their obligations to the Company on a timely basis
and the valuation of the Company’s assets.
The
current tightening of credit in financial markets may lead businesses to
postpone spending, which may impact the Company’s customers, causing them to
cancel, decrease or delay their existing and future orders with the
Company. Continual decline in the economy may further 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. The risk remains that certain significant Harsco Metals
customers may file for bankruptcy protection, be acquired or consolidate in the
future. Additionally, the Company may be negatively affected by
contractual disputes with customers and attempts by customers to unilaterally
change the terms and pricing of certain contracts to their sole advantage
without adequate consideration to the Company which could have an adverse impact
on the Company’s income and cash flows. For more information concerning
contractual disputes, see Note 10, Commitments and Contingencies, to the
Consolidated Financial Statements under Part II, Item 8, “Financial
Statements and Supplementary Data.”
Furthermore,
this could negatively affect the forecasts used in performing the Company’s
goodwill impairment testing under SFAS No. 142, “Goodwill and Other Intangible
Assets.” In accordance with SFAS 142, the Company is required to test
acquired goodwill for impairment on an annual basis based upon a fair value
approach, rather than amortizing it over time. If the fair market
value of the Company’s reporting units is less than their book value, the
Company could be required to record an impairment charge. The
valuation of reporting units requires judgment in estimating future cash flows,
discount rates and other factors. 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. Additionally,
assessments of future cash flows would consider, but not be limited to the
following: infrastructure plant maintenance requirements; global metals
production and capacity utilization; global railway track maintenance-of-way
capital spending; and other drivers of the Company’s
businesses. Changes in the overall interest rate environment may also
impact the fair market value of the Company’s reporting units as this would
directly influence the discount rate utilized for discounting operating cash
flows, and ultimately determining a reporting unit’s fair value. The
Company’s overall market capitalization is also a factor in evaluating the fair
market values of the Company’s reporting units. While the
Company’s
stock price has declined approximately 57% during 2008, the Company’s market
capitalization continues to exceed its book value as of December 31, 2008. As a
result of this and other factors, the Company concluded that an interim
impairment test was not required subsequent to its annual test performed as of
October 1, 2008. Further significant declines in the overall market
capitalization of the Company could lead to the determination that the book
value of one or more of the Company’s reporting units exceeds their fair
value.
If
management determines that goodwill or other assets are impaired or that
inventories or 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. Although any potential
impairment would be a non-cash charge, the amount could be significant and could
have a significant adverse effect on the Company’s results of operations for the
period in which the charge is recorded.
12
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
Harsco Infrastructure Segment rents and sells equipment and provides
erection and dismantling services to principally the non-residential and
infrastructure construction and infrastructure plant maintenance
markets. Contracts are awarded based upon the Company’s
engineering capabilities, product availability and efficiency, 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
Harsco Metals Segment is sustained mainly through contract
renewals. Historically, the Company’s contract renewal rate has
averaged approximately 90% over the past few years. If the
Company is unable to renew its contracts at the historical rates or
renewals are at reduced prices, revenue may
decline. Additionally, the Company has been exiting certain
underperforming contracts in an effort to improve overall
profitability. The Company will continue to exit
underperforming contracts as considered necessary in achieving its
strategic initiatives.
·
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 Harsco Metals Segment may
adversely impact the Company’s future earnings and cash flows.
·
The
Harsco Metals Segment (and, to a lesser extent, the All Other Category)
has several large customers throughout the world with significant accounts
receivable balances. Company acquisitions in recent years have
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 recent years 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, but not eliminate, this
increased concentration of credit risk. In the Harsco
Infrastructure 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.
·
The
Company’s businesses may be negatively affected by contractual disputes
with customers and attempts by major customers to unilaterally change the
terms and pricing of certain contracts to their sole advantage without
adequate consideration to the Company. For more information
concerning contractual disputes, see Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II,
Item 8, “Financial
Statements and Supplementary Data.”
13
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 the
first half of 2008, unprecedented increases in oil prices were incurred, while
in the second half of 2008, oil prices declined sharply to levels below
2007. In 2008, 2007 and 2006, energy costs have approximated 4.5%,
3.7% and 3.9% of the Company’s revenue, respectively. To the extent
that increased energy costs cannot be passed to customers in the future, the
financial condition, results of operations and cash flows of the Company may be
adversely affected. To the extent that reduced energy costs are not
passed to customers in the future, this may have a favorable impact on the
financial condition, results of operations and cash flows of the
Company.
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, 2008 and 2007
include an accrual of $3.2 million and $3.9 million, respectively, for
environmental matters. The amounts charged against pre-tax earnings
related to environmental matters totaled $1.5 million, $2.8 million and $2.1
million for the years ended December 31, 2008, 2007 and 2006,
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.
14
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 stipulating 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 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, 2008, the Company was in compliance
with these covenants with a debt to capital ratio of 41.7%, and a net worth of
$1.4 billion. The Company had $340.8 million in outstanding
indebtedness containing these covenants at December 31, 2008.
Failure
of financial institutions to fulfill their commitments under committed credit
facilities and derivative financial instruments may adversely affect the
Company’s future earnings and cash flows.
The
Company has committed revolving credit facilities with financial institutions
available for its use, for which the Company pays commitment fees. Certain
facilities are provided by a syndicate of several financial institutions, with
each institution agreeing severally (and not jointly) to make revolving credit
loans to the Company in accordance with the terms of the related credit
agreement. If one or more of the financial institutions providing
these committed credit facilities were to default on its obligation to fund its
commitment, the portion of the committed facility provided by such defaulting
financial institution would not be available to the Company. The
Company periodically evaluates the credit worthiness of the financial
institution counterparty and does not expect default by
them. However, given the current global financial environment, such
default remains possible.
The
Company has foreign currency forward exchange contracts outstanding as part of a
worldwide program to minimize foreign currency exchange operating income and
balance sheet exposure. 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 unsecured contracts outstanding at December 31,2008 mature within nine 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. However, given the current global financial
environment, such default remains possible.
The
inability of a counterparty to fulfill this obligation under committed credit
facilities and derivative financial instruments may have a material adverse
effect on the Company’s financial condition, results of operations or cash
flows.
See Part
II, Item 7 (Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources) of this report for
more information.
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, 2008 and 2007, the Company had
recorded liabilities of $97.2 million and $112.0 million, respectively, related
to both asserted and unasserted insurance claims. Included in the
balance at December 31, 2008 and 2007 were $17.8 million and $25.9 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 Company periodically evaluates the
credit worthiness of the insurance providers and does not expect default by
them. However, given the current global financial environment, such
default remains possible.
15
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, 2008 was $1.0 billion. Of
this amount, approximately 12.0% had variable rates of interest and 88.0% had
fixed rates of interest. The weighted average interest rate of total
debt was approximately 5.8%. At current debt levels, a one-percentage
increase/decrease in variable interest rates would increase/decrease interest
expense by approximately $1.2 million per year. If the Company is
unable to successfully manage its exposure to variable interest rates, its
results of operations may suffer.
The
Company is subject to changes in legislative, regulatory, and legal developments
involving income taxes.
The
Company is subject to U.S. federal, state and international income, payroll,
property, sales and use, fuel, and other types of taxes. Changes in
tax rates, enactment of new tax laws, revisions of tax regulations, and claims
or litigation with taxing authorities could result in substantially higher taxes
and, therefore, could have a significant adverse effect on the Company’s results
of operations, financial condition and liquidity.
Further
tightening of credit, as well as downgrades in Harsco’s credit ratings could
increase Harsco’s cost of borrowing and could adversely affect Harsco’s future
earnings and ability to access the capital markets.
Continued
tightening of the credit markets may adversely impact the Company’s access to
capital and the associated costs of borrowing; however this is somewhat
mitigated by the Company’s strong financial position. Harsco’s cost
of borrowing and ability to access the capital markets are affected not only by
market conditions but also by the short- and long-term debt ratings assigned to
Harsco’s debt by the major credit rating agencies. These ratings are
based, in part, on the company’s financial position and liquidity as measured by
credit metrics such as interest coverage and leverage ratios. For
further discussion on credit ratings and outlook, see the Liquidity and Capital
Resources section. An inability to access the capital markets could
have a material adverse effect on Harsco’s financial condition, results of
operations or cash flows.
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
Harsco
Infrastructure Segment
Marion,
Ohio
Infrastructure
Equipment Maintenance
Dosthill,
United Kingdom
Infrastructure
Equipment Maintenance
Trevoux,
France
Infrastructure
Equipment Maintenance
All
Other Category – Harsco Minerals
& Rail
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
Harsco
Infrastructure Segment
Vianen,
Netherlands
Infrastructure
Equipment Maintenance
Ratingen,
Germany
Infrastructure
Equipment Maintenance
Dubai,
United Arab Emirates
Infrastructure
Equipment Maintenance
All
Other Category – Harsco Minerals & Rail
Memphis,
Tennessee
Roofing
Granules/Abrasives
Moundsville,
West Virginia
Roofing
Granules/Abrasives
Fairless
Hills, Pennsylvania
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.”
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.
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 24, 2009, 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, G. D. H. Butler,
M. E. Kimmel, S. J. Schnoor, R. C. Neuffer and
R. M. Wagner were elected to their respective positions effective
April 22, 2008. All terms expire on April 28, 2009. There
are no family relationships between any of the executive officers.
Name
Age
Principal Occupation
or Employment
Executive
Officers:
S.
D. Fazzolari
56
Chairman
of the Company since April 22, 2008. Chief Executive Officer of
the Company since January 1, 2008. Served as President and
Chief Financial Officer of the Company from October 10, 2007 to December31, 2007. Served as President, Chief Financial Officer and
Treasurer from January 24, 2006 to October 9, 2007, and as a Director
since January 2002. Served as Senior Vice President, Chief
Financial Officer and Treasurer from August 1999 to January 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.
G.
D. H. Butler
62
President
of the Company and CEO of the Harsco Infrastructure and Harsco Metals
business groups since January 1, 2008. Served as Senior Vice
President-Operations of the Company from September 26, 2000 to December31, 2007 and as a 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 1994 to September 2000. Served as Managing Director -
Eastern Region of the Heckett MultiServ Division from January 1994 to June
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 1993.
M.
E. Kimmel
49
Senior
Vice President, Chief Administrative Officer, General Counsel and
Corporate Secretary since January 1, 2008. Served as General
Counsel and Corporate Secretary from January 1, 2004 to December 31,2007. Served as Corporate Secretary and Assistant General
Counsel from May 1, 2003 to December 31, 2003. Held various
legal positions within the Company since he joined Harsco in August
2001. Prior to joining the Company, he was Vice President,
Administration and General Counsel, New World Pasta Company from January
1999 to July 2001. Before joining New World Pasta, Mr. Kimmel
spent approximately 12 years in various legal positions with Hershey Foods
Corporation.
18
Name
Age
Principal Occupation
or Employment
S.
J. Schnoor
55
Senior
Vice President and Chief Financial Officer since January 1,2008. Served as Vice President and Controller of the Company
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 Company 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.
R.
C. Neuffer
66
Harsco
Senior Vice President since January 1, 2008 and Group CEO for the
Company’s Minerals & Rail Group since January 1,2009. Served as President of the Minerals & Rail 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 the
Company in 1991.
R.
M. Wagner
41
Vice
President and Controller since January 1, 2008. Mr. Wagner
joined the Company in 2007 as Assistant Controller. Prior to
joining the Company, 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.
Harsco
Corporation common stock is listed on the New York Stock Exchange. At
the end of 2008, there were 80,174,536 shares outstanding. In 2008,
the Company’s common stock traded in a range of $17.55 to $64.75 and closed at
$27.68 at year-end. At December 31, 2008 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.”
(c)
Issuer Purchases of Equity Securities
Period
Total
Number of Shares Purchased
Average
Price Paid per Share
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
The
Company’s share repurchase program was extended by the Board of Directors in
September 2008. The Board authorized an increase of 4,000,000 shares
to the 946,367 remaining from the Board’s previous stock repurchase
authorization. The repurchase program expires January 31,2010. As of December 31, 2008, there are 1,536,647 authorized shares
remaining in the program. Repurchases are made in open market
transactions at times and amounts as management deems appropriate, depending on
market conditions. Repurchases may be discontinued at any
time.
(In
thousands, except per share, employee information and
percentages)
2008
2007
(a)
2006
2005
(b)
2004
Income
Statement Information (c)
Revenues
from continuing operations
$
3,967,822
$
3,688,160
$
3,025,613
$
2,396,009
$
2,162,973
Income
from continuing operations
245,623
255,115
186,402
144,488
104,040
Income
(loss) from discontinued operations
(4,678
)
44,377
9,996
12,169
17,171
Net
income
240,945
299,492
196,398
156,657
121,211
Financial
Position and Cash Flow Information
Working
capital
$
317,062
$
471,367
$
320,847
$
352,620
$
346,768
Total
assets
3,562,970
3,905,430
3,326,423
2,975,804
2,389,756
Long-term
debt
891,817
1,012,087
864,817
905,859
594,747
Total
debt
1,012,883
1,080,794
1,063,021
1,009,888
625,809
Depreciation
and amortization (including discontinued operations)
337,949
306,413
252,982
198,065
184,371
Capital
expenditures
457,617
443,583
340,173
290,239
204,235
Cash
provided by operating activities
574,276
471,740
409,239
315,279
270,465
Cash
used by investing activities
(443,418
)
(386,125
)
(359,455
)
(645,185
)
(209,602
)
Cash
provided (used) by financing activities
(155,539
)
(77,687
)
(84,196
)
369,325
(56,512
)
Ratios
Return
on sales (d)
6.2
%
6.9
%
6.2
%
6.0
%
4.8
%
Return
on average equity (e)
15.2
%
19.2
%
17.2
%
15.3
%
12.7
%
Current
ratio
1.4:1
1.5:1
1.4:1
1.5:1
1.6:1
Total
debt to total capital (f)
41.7
%
40.8
%
48.1
%
50.4
%
40.6
%
Per
Share Information (g)
Basic-
Income from continuing operations
$
2.94
$
3.03
$
2.22
$
1.73
$
1.26
- Income from discontinued
operations
(0.06
)
0.53
0.12
0.15
0.21
- Net income
$
2.88
$
3.56
$
2.34
$
1.88
$
1.47
Diluted-
Income from continuing operations
$
2.92
$
3.01
$
2.21
$
1.72
$
1.25
- Income from discontinued
operations
(0.06
)
0.52
0.12
0.14
0.21
- Net income
$
2.87
(h)
$
3.53
$
2.33
$
1.86
$
1.46
Book
value
$
17.63
$
18.54
$
13.64
$
11.89
$
11.03
Cash
dividends declared
0.78
0.7275
0.665
0.6125
0.5625
Other
Information
Diluted
average number of shares outstanding (g)
84,029
84,724
84,430
84,161
83,196
Number
of employees
21,500
21,500
21,500
21,000
18,500
Backlog
from continuing operations (i)
$
639,693
$
448,054
$
236,460
$
230,584
$
194,336
(a)
Includes
Excell Minerals acquired February 1, 2007 (All Other Category - Harsco Minerals &
Rail).
(b)
Includes
the Northern Hemisphere mill services operations of Brambles Industrial
Services (BISNH) acquired December 29, 2005 (Harsco Metals) and Hünnebeck
Group GmbH acquired November 21, 2005 (Harsco
Infrastructure).
(c)
2006,
2005 and 2004 income statement information reclassified to reflect the Gas
Technologies Segment 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)
2006,
2005 and 2004 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 $4.1 billion at December 31, 2008 and $5.0
billion at December 31, 2007. Also excludes backlog of the
Harsco Infrastructure Segment and the roofing granules and industrial
abrasives business. These amounts are generally not
quantifiable due to the nature and timing of the products and services
provided.
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
21
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 integration of the
Company’s strategic acquisitions; (9) the amount and timing of repurchases of
the Company’s common stock, if any; (10) the current global financial and credit
crisis, which could result in our customers curtailing development projects,
construction, production and capital expenditures, which, in turn, could reduce
the demand for our products and services and, accordingly, our sales, margins
and profitability; (11) the financial condition of our customers, including the
ability of customers (especially those that may be highly leveraged and those
with inadequate liquidity) to maintain their credit availability; and (12) 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
Despite
the challenging macroeconomic operating environment encountered in the fourth
quarter of 2008, the Company’s 2008 revenues were a record $4.0
billion. This is an increase of $280 million or 8% over
2007. Organic growth contributed 5% to the growth in sales, while
acquisitions contributed 2% and favorable foreign currency translation effects
contributed 1%. This resulted from the Company’s continued strategy
of constructing a well-balanced industrial services-based portfolio of
businesses based on scalable operating platforms; focused organic growth; growth
through prudent acquisitions; and increased geographical
diversity. Income from continuing operations was $245.6 million for
2008 (which included $36.1 million of restructuring charges in the fourth
quarter) compared with $255.1 million in 2007, a decrease of 4%. The
Harsco Infrastructure Segment and All Other Category (Harsco Minerals &
Rail) led the Company’s performance. Diluted earnings per share from
continuing operations were $2.92 for 2008 (which included $0.28 of restructuring
charges in the fourth quarter), was a 3% decrease from 2007 diluted earnings per
share from continuing operations of $3.01.
During
2008, all major business platforms of the Company achieved increased sales over
2007, highlighting the diversity and balance of the Company. The
Company continued to make progress on its geographic expansion strategy as sales
in 2008 reflect an increasing geographic balance, especially in emerging
markets. Revenues outside Western Europe and North America were
approximately 21% of total revenues in 2008 compared with 18% in 2007. The
Company’s continued geographic expansion strategy is expected to result in a
significant increase to the Company’s presence in emerging markets to
approximately 30% of total Company revenues over the next three years, and
closer to 40% in the longer-term.
Overall,
the global markets in which the Company participates deteriorated in the fourth
quarter of 2008 due to the financial and economic crisis. To
counteract this, the Company initiated restructuring actions designed to improve
organizational efficiency and enhance profitability and stockholder value by
generating sustainable operating expense savings. Under this program,
the Company principally exited certain underperforming contracts with customers,
22
closed
certain facilities and reduced global workforce during the fourth quarter of
2008. The Company anticipates that these actions will generate
annualized savings of $50 million in 2009 and beyond. The cost
associated with these actions in the fourth quarter of 2008 was $36.1
million.
Furthermore,
the Company continues to minimize its cost structure, with such actions as the
redeployment of its mobile asset base in the Harsco Infrastructure and Harsco
Metals Segments to focus on market segments that remain strong and provide
growth opportunities, the LeanSigma® continuous improvement initiative and
prudent reductions in capital spending.
The
Company believes its strong balance sheet and liquidity position as well as a
lower cost structure put the Company in a strong position to execute its
long-term strategic initiatives and take advantage of near-term growth
opportunities. The Company continues to have available liquidity and
remains well-positioned from a financial flexibility perspective. The
Company successfully executed a $450 million, 10-year notes issue in the second
quarter of 2008, providing more financial flexibility and less exposure to
variable interest rates. The debt-to-capital ratio at December 31,2008 was 41.7%.
During
2008, the Company had record cash provided by operating activities of $574.3
million, a 22% increase over the $471.7 million achieved in 2007. The
Company expects continued strong cash flows from operating activities in 2009;
however, 2009 is not expected to be as strong as 2008. Additionally,
in 2008, the Company invested a record $457.6 million in capital expenditures
(over 54% of which was for revenue-growth projects). More
importantly, 43% of the revenue-growth capital expenditures were invested in
emerging economies. The Company also repurchased approximately 4.5
million shares during 2008 at a total cost of $129 million. The
Company’s cash flows are further discussed in the Liquidity and Capital
Resources section.
Segment
Overview
The
Harsco Infrastructure Segment’s revenues in 2008 were $1.5 billion compared with
$1.4 billion in 2007, a 9% increase. Operating income increased by 1%
to $185.4 million, from $183.8 million in 2007. Operating margins for
the Segment declined by 100 basis points to 12.0% from 13.0% in
2007. Operating margins declined partially due to 2008 pre-tax
restructuring costs of $5.0 million related to severance, contract exit costs
and asset disposals. Organic growth of 6% was generated primarily in
the Middle East and Asia/Pacific as these emerging economies continued to make
significant investment in infrastructure modernization and
expansion. Infrastructure maintenance activities, such as
petrochemical and power plants, remained strong particularly in North America
and Northern Europe. Harsco Infrastructure accounted for 39% of the
Company’s revenues and 45% of the operating income for 2008.
The
Harsco Metals Segment’s revenues in 2008 were $1.6 billion compared with $1.5
billion in 2007, a 4% increase. Operating income decreased by 37% to
$85.3 million, from $134.5 million in 2007. Operating margins for
this Segment decreased by 340 basis points to 5.4% from 8.8% in
2007. The decrease in operating income and margins was due to pre-tax
restructuring costs of $27.7 million, higher fuel costs and unprecedented
production cuts by steel mills across the globe, particularly in the fourth
quarter 2008. Restructuring charges primarily related to severance,
contract exit costs, assets disposals and charges related to defined benefit
pension plan changes. This Segment accounted for 40% of the Company’s
revenues and 21% of the operating income for 2008.
The All
Other Category’s revenues in 2008 were $849.6 million compared with $750.0
million in 2007, a 13% increase. Operating income increased by 6% to
$150.9 million, from $142.2 million in 2007. Operating margins
decreased by 120 basis points to 17.8% in 2008 from 19.0% in 2007 primarily due
to higher steel costs and lower volume and pricing in the minerals and recycling
technologies business. All six businesses contributed higher revenues
due to strong demand. Four of the six businesses contributed higher
operating income compared to 2007. This Category accounted for 21% of
the Company’s revenue and 37% of the operating income for 2008.
Despite
the significant strengthening of the U.S. dollar during the fourth quarter of
2008, the effect of foreign currency translation increased full year 2008
consolidated revenues by $30.8 million and pre-tax income by $3.8 million when
compared with 2007. If the U.S. dollar remains at current strong
levels or strengthens further, 2009 results will be significantly negatively
impacted.
Outlook
Overview
The
Company’s operations span several industries, products and end markets 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
infrastructure maintenance and capital improvement activities; worldwide steel
mill production and capacity utilization; industrial production volume and
maintenance activity; and the general business trend towards the outsourcing of
services. The overall outlook for 2009 is guarded as a result of the
deepening global financial and economic crisis that has created tremendous
uncertainty and volatility throughout the world.
23
Additionally,
the Company’s pension plans’ assets declined in value consistent with the
weakening economy and will result in significant increased pension expense
during 2009. The significant strengthening of the U.S. dollar in the
fourth quarter of 2008, and its continued appreciation in the first quarter of
2009, is expected to have a significant adverse impact on the 2009 Company’s
performance.
In
response to these events, the Company undertook a restructuring action during
the fourth quarter of 2008 that is expected to generate annual savings of
approximately $50 million in 2009 and beyond. The costs associated
with these actions were $36.1 million. The Company does not currently
expect to incur any significant restructuring charges during 2009, although the
Company continues to proactively and aggressively implement a number of
additional countermeasures designed to improve future financial
performance. These additional actions include: targeted reductions in
capital spending; executing LeanSigma continuous improvement initiatives; and
redeploying equipment from slowing markets into strategically important, growing
markets. Additionally, the All Other Category (Harsco Minerals &
Rail) is expected to benefit from declining steel prices in 2009. The
current economic conditions provide the Company with expansion opportunities to
pursue its prudent acquisition strategy of seeking further accretive bolt-on
acquisitions.
The
long-term outlook across the global footprint of the Harsco Infrastructure
business remains positive. The near-term outlook however, is
challenging due to the current economic and financial crisis. This
Segment will leverage its global breadth and mobile asset base to relocate
equipment to focus on emerging markets as well as market segments that remain
stable such as infrastructure maintenance services, and institutional services
such as hospitals and education, and global infrastructure
work. Operating performance for this Segment in the long term is
expected to continue to benefit from the execution of numerous global government
stimulus packages which are expected to fund much needed infrastructure projects
throughout the world; selective strategic investments and acquisitions in
existing and new markets; and enterprise business optimization opportunities
including new technology applications, consolidated procurement and logistics;
and LeanSigma continuous improvement initiatives.
The
long-term outlook for the Harsco Metals Segment remains stable as the global
steel market is expected to grow at reasonable rates over the next several
years. The key factor behind this anticipated growth is the demand
from emerging economies for significant infrastructure development
needs. The near-term outlook, however, is challenging due to the
deepening global economic and financial crisis which has caused reductions in
demand for steel and associated steel production. Steel mill
production declines reached unprecedented levels at the end of
2008. Reduced production volumes are expected to continue into the
first half of 2009. It is expected that some of this impact will be
mitigated by substantially lower fuel costs, improved contract performance, new
contract signings, and other cost optimization initiatives the Company is
currently implementing. Additionally, to ensure the segment will
operate at optimal efficiency in 2009 and beyond, significant restructuring
actions were executed during the fourth quarter of 2008. The recent
decline in oil prices, if sustained, should have a measurable effect on
operating results in the Segment in 2009. The Company continues to
engage in enterprise business optimization initiatives including introducing the
LeanSigma continuous improvement program, which over time is expected to result
in broad-scale improvement in business practices and consequently operating
margin. In addition, new contract signings and start-ups, as well as
the Company’s geographic expansion strategy, particularly in emerging markets,
are expected to gradually have a positive effect on results in the longer
term.
For the
All Other Category (Harsco Minerals & Rail), the long-term outlook remains
positive. Most end-market demand remains strong and backlogs continue
near record levels for the Category. The near-term outlook however,
for the Minerals business, which recovers and recycles high value metals, has
been negatively affected by the recent steep decline in metal
prices. The Company continues to experience strong bidding activity
in its railway track maintenance services and equipment business, new contract
opportunities for its minerals and recycling technologies business, and
potential geographic expansion opportunities within its industrial products
businesses.
24
Revenues
by Region
Total
Revenues
Twelve
Months Ended December 31
Percentage
Growth From
2007
to 2008
(Dollars
in millions)
2008
Percent
2007
Percent
Volume
Currency
Total
Western
Europe
$
1,770.8
45
%
$
1,758.5
48
%
0.0
%
0.7
%
0.7
%
North
America
1,370.0
35
1,244.9
34
10.0
0.0
10.0
Middle
East and Africa
257.5
6
196.4
5
35.0
(3.9
)
31.1
Latin
America (a)
253.7
6
213.5
6
15.5
3.3
18.8
Eastern
Europe
189.0
5
139.6
4
22.9
12.5
35.4
Asia/Pacific
126.8
3
135.3
3
(7.3
)
1.0
(6.3
)
Total
$
3,967.8
100
%
$
3,688.2
100
%
6.8
%
0.8
%
7.6
%
(a)
Includes
Mexico.
2008
Highlights
The
following significant items affected the Company overall during 2008 in
comparison with 2007:
Company
Wide:
·
Overall
stronger demand benefited the Company in the first three quarters of 2008,
in particular, increased infrastructure maintenance services and highly
engineered equipment rentals, especially in the Middle East and Eastern
Europe; as well as railway track equipment sales and increased demand for
air-cooled heat exchangers.
·
Operating
income and margins for the Harsco Metals Segment were negatively impacted
by unprecedented declines in global steel production during the fourth
quarter of 2008; costs of restructuring actions implemented in the fourth
quarter of 2008; increased operating expenses, mainly higher fuel costs;
as well as certain contracts with lower-than-acceptable
margins.
Harsco Infrastructure
Segment:
(Dollars
in millions)
2008
2007
Revenues
$
1,540.3
$
1,415.9
Operating
income
185.4
183.8
Operating
margin percent
12.0
%
13.0
%
Harsco Infrastructure Segment –
Significant Impacts on Revenues:
(In
millions)
Revenues
– 2007
$
1,415.9
Net
increased volume and new business
80.3
Impact
of foreign currency translation
28.5
Acquisitions
15.6
Revenues
– 2008
$
1,540.3
Harsco
Infrastructure Segment – Significant Impacts on Operating Income:
·
In
2008, the Segment’s operating results continued to improve due to
increased non-residential, and infrastructure construction throughout the
world, and in particular the Middle East, Asia/Pacific and certain parts
of Europe. The Company continues to benefit from its highly
engineered rental equipment capital investments made in both developed and
emerging markets. Additionally, infrastructure maintenance
activity remained strong in both North America and certain parts of
Western Europe.
·
This
Segment benefited from $8.3 million of increased pretax net gain on the
sale of properties during 2008 compared with
2007.
·
The
impact of foreign currency translation in 2008 increased operating income
for this Segment by $5.1 million, compared with
2007.
·
In
2008, the segment’s operating results included $5.0 million of costs
related to the fourth quarter 2008 restructuring actions and increased
costs associated with new business optimization initiatives and further
process and technology
standardization.
25
Harsco Metals
Segment:
(Dollars
in millions)
2008
2007
Revenues
$
1,577.7
$
1,522.3
Operating
income
85.3
134.5
Operating
margin percent
5.4
%
8.8
%
Harsco Metals Segment –
Significant Effects on Revenues:
(In
millions)
Revenues
– 2007
$
1,522.3
Acquisitions
30.0
Net
increased volume and new business
18.6
Impact
of foreign currency translation
6.8
Revenues
– 2008
$
1,577.7
Harsco
Metals Segment – Significant Impacts on Operating Income:
·
Despite
overall increased volume, operating income and margins for the Harsco
Metals Segment were negatively impacted by unprecedented declines in
global steel production particularly during the fourth quarter of 2008;
increased operating expenses, mainly higher fuel costs; as well as certain
contracts with lower-than-acceptable
margins.
·
Operating
income for 2008 included higher severance and other restructuring charges
of $27.7 million related to the fourth quarter 2008 restructuring
actions.
·
The
2007 acquisition of Alexander Mill Services International (“AMSI”) was
accretive to earnings in 2008.
·
The
impact of foreign currency translation in 2008 increased operating income
for this segment by $4.1 million compared with
2007.
All Other
Category – Harsco Minerals
& Rail:
(Dollars
in millions)
2008
2007
Revenues
$
849.6
$
750.0
Operating
income
150.9
142.2
Operating
margin percent
17.8
%
19.0
%
All
Other Category – Harsco Minerals & Rail –
Significant Impacts on
Revenues:
(In
millions)
Revenues
– 2007
$
750.0
Railway
track maintenance services and equipment
46.8
Air-cooled
heat exchangers
22.0
Industrial
grating products
18.7
Acquisitions
12.9
Roofing
granules and abrasives
5.9
Boiler
and process equipment
4.3
Impact
of foreign currency translation
(4.5
)
Reclamation
and recycling services
(6.5
)
Revenues
– 2008
$
849.6
26
All
Other Category – Harsco Minerals & Rail – Significant Effects on Operating
Income:
·
The
railway track maintenance services and equipment business delivered
increased income in 2008 compared with 2007 due to increased rail
equipment sales and repair parts, partially offset by reduced contract
services sales and higher selling, general and administrative
expenses.
·
Strong
demand in the natural gas market resulted in increased volume and
operating income for the air-cooled heat exchangers business in
2008. These increases were partially offset by increased costs
principally due to overall higher steel costs in
2008.
·
The
industrial grating products business experienced higher sales as a result
increased pricing; however, operating income increases were partially
offset by higher costs principally due to overall higher steel costs in
2008.
·
Despite
lower volume for the roofing granules and abrasives business in 2008,
sales and operating income increased due to price increases, which were
partially offset by higher selling, general and administrative
expenses.
·
Operating
income for the boiler and process equipment business was higher in 2008
due to increased demand, partially offset by increased production costs
and selling, general and administrative
expenses.
·
Operating
income for the reclamation and recycling services was lower in 2008 due
principally to unprecedented fourth quarter steel mills production
declines and a significantly lower metal prices and product
mix.
·
The
impact of foreign currency translation in 2008 decreased operating income
by $2.1 million for this Category compared to
2007.
Outlook,
Trends and Strategies
Company
Wide:
Adverse
economic conditions precipitated by developments in the financial markets in the
United States have created tremendous uncertainty and anxiety throughout the
world. The erosion in confidence in the financial markets, the global
recession and the soaring U.S. dollar have caused the Company’s near-term
prospects to become more difficult. During the fourth quarter of 2008
there was an unprecedented reduction in global steel production as well as the
postponement of some construction projects and sales due to the tightening of
credit. In addition, the value of the U.S. dollar strengthened
significantly against many other currencies, including the major currencies in
key markets of the Company. The year 2009 is expected to be a very
challenging year, particularly in the first half. The major
challenges facing the Company include the following:
·
Overall
instability of the global financial markets and
economies
·
Continuing
strengthening of the U.S. dollar
·
Tightening
of credit markets that limit the ability of the Company’s customers to
obtain financing
·
Substantial
and unprecedented reductions in global steel
production
In
response to this global financial and economic crisis, the Company has and will
continue to proactively and aggressively implement a number of countermeasures
to reinforce 2009 performance, including:
·
During
the fourth quarter of 2008, the Company implemented a restructuring
program designed to improve organizational efficiency and enhance
profitability and stockholder value. Under the restructuring
program, the Company is principally exiting certain underperforming
contracts with customers, closing certain facilities, and reducing its
global workforce. The extent of the restructuring program
increased from previously announced estimates to include additional
actions taken as the global financial and economic crisis continued to
deepen. The Company recorded a pre-tax charge of $36.1 million
related to the restructuring program, or approximately $0.28 per diluted
share. The annualized benefits associated with this charge are
estimated to be $50 million, or approximately $0.45 per diluted share, and
are expected to be realized in 2009 and
beyond.
·
Cutting
costs across the enterprise, including reducing or eliminating
discretionary spending to match market
conditions.
·
Prudently
reducing growth capital expenditures in 2009 while redeploying equipment
from slowing markets to new projects in strategically important areas such
as the Middle East and Africa, Asia-Pacific, and several other key
countries.
·
Accelerating
growth initiatives, including projects in emerging
markets.
·
Selective,
prudent strategic acquisitions.
While the
global economic conditions remain uncertain and turbulent, the Company believes
it is well-positioned to capitalize on opportunities and execute strategic
initiatives based upon its strong balance sheet, available liquidity
and
27
its
ability to generate strong operating cash flows. The Company is
confident that the previously mentioned actions along with its new LeanSigma
continuous improvement program will significantly reduce the Company’s cost
structure further enhancing its financial strength. Additionally, the
Company’s global footprint; diversity of services and products; long-term mill
services contracts; portability of infrastructure services equipment; and large
infrastructure services customer base help mitigate its overall exposure to
changes in any one single economy. However, further deterioration of
the global economies could still have an adverse impact on the Company’s
operating results.
Looking
to 2009 and beyond, the following significant items, trends and strategies are
expected to affect the Company:
·
The
Company will continue its disciplined focus on expanding its industrial
services businesses, with a particular emphasis on prudently growing the
Harsco Infrastructure Segment, especially in emerging economies and other
targeted markets. Growth is expected to be achieved through the
provision of additional services to existing customers, new contracts in
both developed and emerging markets, and selective strategic bolt-on
acquisitions. Additionally, new higher-margin service and sales
opportunities in the minerals and rail businesses 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 anticipates global government stimulus packages to fund much
needed infrastructure projects throughout the world. The Harsco
Infrastructure Segment is well positioned with its engineering and
logistics expertise and the capital investment base to take advantage of
these expected opportunities.
·
The
implementation of the Company’s enterprise-wide LeanSigma continuous
improvement program in 2008 should provide long-term benefits and improve
the overall performance of the Company through a reduced cost structure
and increased efficiency.
·
In
addition to LeanSigma, the Company will continue to implement
enterprise-wide business optimization initiatives to further enhance
margins for most businesses. These initiatives include improved
supply-chain and logistics management; capital employed optimization; and
added emphasis on global
procurement.
·
The
Company will place a strong focus on corporate-wide expansion into
emerging economies in the coming years to better balance its geographic
footprint. More specifically, within the next three to five years,
the Company’s global growth strategies include steady, targeted expansion
in the Middle East and Africa, Asia/Pacific and Latin America to further
complement the Company’s already-strong presence throughout Western Europe
and North America. This strategy is expected to result in a
significant increase to the Company’s presence in these markets to
approximately 30% of total Company revenues over the next three years and
closer to 40% in the longer-term. Revenues in these markets
were almost 21% for 2008 compared with 18% for 2007. In the
long-term, the improved geographic footprint will also benefit the Company
as it further diversifies its customer
base.
·
Volatility
in energy and commodity costs (e.g., crude oil, 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 and services, to the extent that such costs
cannot be passed on to customers. Cost decreases could result
in increased operating income to the extent that such cost savings do not
need to be passed to customers. However, increased volatility
in energy and commodity costs may provide additional service opportunities
for the Harsco Metals Segment and several businesses in the All Other
Category (Harsco Minerals & Rail) 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. As part of the enterprise-wide
optimization initiatives discussed above, the Company is implementing
programs to help mitigate these
costs.
·
Foreign
currency translation had an overall minor favorable effect on the
Company’s sales and operating income during 2008 in comparison with
2007. However, due to the strengthening of the U.S. dollar near
the end of the third quarter of and through the fourth quarter 2008,
foreign currency translation had an overall unfavorable impact on the
Company’s stockholders’ equity and is expected to have a significant
negative impact on 2009 sales and earnings in relationship to
2008. If the U.S. dollar continues to strengthen (which it has
through mid-February 2009), particularly in relationship to the euro,
British pound sterling or the Eastern European currencies, the impact on
the Company would generally be negative in terms of reduced revenue,
operating income and stockholders’ equity. Additionally, even
if the U.S. dollar remains at its current value, the Company’s revenue and
operating income will be negatively impacted in comparison to
2008. Should the U.S. dollar weaken in relationship to these
currencies, the effect on the Company would generally be positive in terms
of higher revenue, operating income and stockholders’
equity.
·
Despite
the tightening of credit during the second half of the year (and slightly
higher borrowing rates during that time) overall variable borrowing rates
for 2008 have been lower than 2007. A one percentage point
change in variable interest rates would change interest expense by
approximately $1.2 million per year. This is substantially
lower than prior projected impacts as variable rate debt has been reduced
to approximately 12% of the Company’s
28
borrowings
as of December 31, 2008, compared to approximately 49% at December 31,2007. This decrease is due to the repayment of commercial paper
borrowings during the second quarter of 2008 with the proceeds from the
May 2008 U.S. senior notes offering coupled with strong operating cash
flows in 2008. 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.
·
Total
defined benefit pension expense for 2009 will be substantially higher than
the 2008 level due to the decline in pension asset values during the
second half of 2008. This decline was due to the financial
crisis and the deterioration of global economic conditions. In
an effort to mitigate a portion of this overall increased cost for 2009,
the Company implemented additional plan design changes for a certain
international defined benefit pension plan so that accrued service is no
longer granted for periods after December 31, 2008. This action
was part of the Company’s overall strategy to reduce pension expense and
volatility.
·
As
the Company continues the strategic expansion of its global footprint and
implements tax planning opportunities, the 2008 effective income tax rate
has been lower than 2007. The effective income tax rate for
continuing operations was 26.7% for 2008, compared with 30.7% for
2007. The decrease in the effective income tax rate for the
year 2008 was primarily due to increased earnings in jurisdictions with
lower tax rates; increased designation of certain international earnings
as permanently reinvested; and the recognition of previously unrecognized
tax benefits in certain state and foreign
jurisdictions. Looking forward into 2009 the effective income
tax rate is expected to be in the range of
28%.
·
The
Company expects continued strong cash flows from operating activities in
2009; however, 2009 is not expected to be as strong as the record 2008
cash flows. The Company plans to significantly reduce the
amount of cash invested for organic growth capital expenditures during
2009. The Company’s growth capital expenditures were
approximately $248 million in 2008. The Company expects growth
capital expenditures to approximate $100 million during
2009. The Company believes that the mobile nature of its
capital investment pool will facilitate strategic growth initiatives in
the near term, despite the reduction in growth capital expenditures for
2009.
Harsco Infrastructure
Segment:
·
The
strong U.S. dollar will continue to adversely affect sales and operating
income of Harsco Infrastructure, as approximately 80% of this business
operates outside the U.S. The near-term outlook for the Harsco
Infrastructure Segment will be negatively impacted by continued
uncertainty in the global credit markets, which has deferred equipment
sales and some construction projects. The current weakness in
the commercial construction market, particularly in Western Europe and the
United States, is being partially offset by a steady level of activity
from the Company’s infrastructure maintenance services, institutional and
global infrastructure projects, and continued overall growth in the Middle
East.
·
The
Company will continue to emphasize prudent expansion of its geographic
presence in this Segment through entering new markets and further
expansion in emerging economies, and will continue to leverage its
value-added services and highly engineered forming, shoring and
scaffolding systems to grow the
business.
·
The
Company will continue to diversify this business, focusing on growth in
institutional and global infrastructure projects and infrastructure
maintenance projects.
·
The
Company will continue to implement its LeanSigma continuous improvement
program and other key initiatives including: global procurement and
logistics; the sharing of engineering knowledge and resources; 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.
·
Operating
performance for this Segment in the long term is expected to benefit from
the execution of global government stimulus packages which should fund
much-needed infrastructure projects throughout the
world.
Harsco Metals
Segment:
·
The
strong U.S. dollar will continue to adversely affect the sales and
operating income of Harsco Metals, as over 80% of this business operates
outside the U.S. Adverse economic uncertainties developing
through the third and fourth quarters of 2008 have resulted in reduced
demand for steel, causing steel companies globally to significantly scale
back production. Mills have also been accelerating planned
maintenance outages in an effort to better balance production and
end-market demand. These customer actions had a significant
negative impact on the Harsco Metals Segment’s results in the fourth
quarter of 2008. Entering 2009, the Company continues to see
this Segment’s operations running at even lower capacity than December
2008. While global demand for steel remains weak, steel
production cuts of this depth and breadth are not expected to be
sustainable for long periods of time. The Company does not
foresee any measurable pick-up in this Segment’s operations until the
second half of 2009.
·
Benefits
from the restructuring program implemented in the fourth quarter of 2008
should improve the operational efficiency and enhance profitability of the
Harsco Metals Segment in 2009 and beyond. Initiatives included
the exit
29
of
underperforming contracts with customers and underperforming operations;
defined benefit pension plan design changes; overall reduction in global
workforce; and substantially reducing discretionary
spending.
·
The
Company will continue to place significant emphasis on improving operating
margins of this Segment. Margin improvements are most likely to
be achieved as a result of the recent decline in fuel costs; cost
reduction initiatives, renegotiating or exiting contracts with
lower-than-acceptable returns, principally in North America; internal
enterprise business optimization efforts; divesting low-margin product
lines; continuing to execute a geographic expansion strategy in the Middle
East and Africa, Latin America and Asia/Pacific; and implementing
continuous improvement initiatives including LeanSigma projects, global
procurement initiatives, site efficiency programs, technology
enhancements, maintenance best practices programs and reorganization
actions. Although the costs associated with these efforts have
reduced operating margins during 2008 when compared with 2007 due to
incremental costs, the overall margin enhancements are expected to be
recognized in the second half of 2009 and
beyond.
·
The
Company will continue to diversify its customer base by reallocating
assets to new customers in emerging
markets.
·
Further
consolidation in the global steel industry is possible. Should
additional consolidations 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.
·
ArcelorMittal
recently notified the Company that it would unilaterally revise the
fixed-fee provisions of certain contracts between the parties with the
intended effect resulting in a significant price reduction to the
Company. The Company has notified ArcelorMittal that their
actions are a breach of these contracts and that the Company will take all
necessary and appropriate actions to protect its legal
rights. Discussions between the parties continue, but it is
possible that the parties may need to resort to third-party resolution of
this issue. ArcelorMittal represented approximately 10% of the
Company’s sales in 2008, 2007 and 2006. The
Company expects ArcelorMittal sales in 2009 to be less than 10% of the
Company’s sales due primarily to reduced steel production
levels; the Company’s exiting of certain underperforming
contracts with ArcelorMittal; and a stronger U.S. dollar. It
is possible that the eventual outcome of this unprecedented breach of
contract could negatively impact the Company’s long-term relationship with
this customer and, as a result, the Company’s financial position, results
of operations and cash flows could be negatively impacted. Of
all of the Company’s major customers in the Harsco Metals Segment, the EVA
on contracts with ArcelorMittal are the lowest in the
portfolio. Contracts with ArcelorMittal are long-term
contracts, such that any impact on the Company’s future results of
operations would occur over a number of
years.
All Other
Category – Harsco Minerals
& Rail:
·
The
Company will emphasize prudent global expansion of its reclamation and
recycling value-added services for extracting high-value metallic content
from slag and responsibly handling and recycling residual
materials.
·
Low
metal prices and historical low production levels will continue to have a
negative effect on certain reclamation and recycling services in 2009,
which may adversely affect the revenues, operating income, cash flows and
asset valuations of this business.
·
Certain
businesses in this Category are dependant on a small group of key
customers. The loss of one of these customers due to
competition or due to financial difficulty, or the filing for bankruptcy
protection 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.
·
International
demand for the railway track maintenance services and equipment business’s
products and services is expected to be strong in both the near term and
the long term. A large multi-year 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 most of its revenues during 2009 through
2011. In addition, increased volume of contract services and
LeanSigma continuous improvement 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
has implemented certain strategies to help ensure continued product supply
to its customers and mitigate the potential impact that changes in steel
and other commodity prices could have on operating income. If
steel or other commodity 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. Conversely, reduced steel and other commodity costs
would improve operating income to the extent such savings do not have to
be passed to customers. Additionally, if the Company cannot obtain
the necessary raw materials for its manufactured products, then revenues,
operating income and cash flows could be adversely
affected.
30
·
Operating
margins of the abrasives business 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 stable natural gas market and additional North American
opportunities, demand for air-cooled heat exchangers is expected to remain
at least consistent with 2008
levels.
Results
of Operations for 2008, 2007 and 2006 (a)
(Dollars
are in millions, except per share information and
percentages)
2008
2007
2006
Revenues
from continuing operations
$
3,967.8
$
3,688.2
$
3,025.6
Cost
of services and products sold
2,926.4
2,685.5
2,203.2
Selling,
general and administrative expenses
602.2
538.2
472.8
Other
expenses
22.0
3.4
2.5
Operating
income from continuing operations
412.0
457.8
344.3
Interest
expense
73.2
81.4
60.5
Income
tax expense from continuing operations
91.8
117.6
93.4
Income
from continuing operations
245.6
255.1
186.4
Income
(loss) from discontinued operations
(4.7
)
44.4
10.0
Net
income
240.9
299.5
196.4
Diluted
earnings per common share from continuing operations
2.92
3.01
2.21
Diluted
earnings per common share
2.87
3.53
2.33
Effective
income tax rate for continuing operations
26.7
%
30.7
%
32.5
%
Consolidated
effective income tax rate
27.7
%
31.4
%
32.3
%
(a)
All historical amounts in the Results of Operations section have been
reclassified for comparative purposes to reflect discontinued
operations.
31
Comparative
Analysis of Consolidated Results
Revenues
2008 vs.
2007
Revenues
for 2008 increased $279.7 million or 8% from 2007, to a record
level. This increase was attributable to the following significant
items:
In
millions
Change
in Revenues 2008 vs. 2007
$
80.3
Net
increased revenues in the Harsco Infrastructure Segment due principally to
non-residential and infrastructure construction in international,
particularly in the Middle East and Europe, and North American
markets.
58.5
Effect
of business acquisitions. Increased revenues of $30.0 million,
$15.6 million and $12.9 million in the Harsco Metals Segment, Harsco
Infrastructure Segment and the All Other Category (Harsco Minerals &
Rail), respectively.
46.8
Increased
revenues in the railway track maintenance services and equipment business
due to a higher level of rail equipment shipments in 2008 and increased
repair parts sales, partially offset by decreased contract
services.
30.8
Effect
of foreign currency translation.
22.0
Increased
revenues of the air-cooled heat exchangers business due to a continued
strong natural gas market.
18.7
Increased
revenues of the industrial grating products business due to increased
prices.
18.6
Net
increased volume, new business and sales price changes in the Harsco
Metals Segment (excluding acquisitions).
5.9
Increased
revenues in the roofing granules and abrasives business resulting from
price increases and product mix.
4.6
Other
(minor changes across the various units not already
mentioned).
(6.5
)
Net
decreased revenues in the reclamation and recycling services business due
to lower metal prices and reduced volume.
$
279.7
Total
Change in Revenues 2008 vs. 2007
2007 vs.
2006
Revenues
for 2007 increased $662.5 million or 22% from 2006. 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 (Harsco Minerals &
Rail), Harsco Infrastructure Segment and Harsco Metals Segment,
respectively.
209.6
Net
increased revenues in the Harsco Infrastructure 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 Harsco
Metals 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
32
Cost
of Services and Products Sold
2008 vs.
2007
Cost of
services and products sold for 2008 increased $240.9 million or 9% from 2007,
slightly higher than the 8% increase in revenues. This increase was
attributable to the following significant items:
In
millions
Change
in Cost of Services and Products Sold 2008 vs. 2007
$
129.5
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).
45.7
Business
acquisitions.
40.8
Other
(product/service mix and increased equipment maintenance costs, partially
offset by enterprise business optimization initiatives and volume-related
efficiencies).
24.9
Effect
of foreign currency translation.
$
240.9
Total
Change in Cost of Services and Products Sold 2008 vs.
2007
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
(increased equipment maintenance costs and product/service mix, 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
33
Selling,
General and Administrative Expenses
2008 vs.
2007
Selling,
general and administrative (“SG&A”) expenses for 2008 increased $63.9
million or 12% from 2007. This increase was attributable to the
following significant items:
In
millions
Change
in Selling, General and Administrative Expenses 2008 vs.
2007
$
23.5
Increased
compensation expense due to salary increases resulting from overall
business growth, partially offset by lower employee incentive plan
costs.
9.5
Increased
professional fees due to global optimization projects and global business
expansion.
6.8
Business
acquisitions.
4.7
Bad
debt expense.
3.6
Increased
travel expenses to support business expansion and optimization
projects.
3.2
Increased
commissions, largely related to increased revenues in the railway track
equipment business.
3.2
Higher
depreciation expense principally related to the implementation of
enterprise-wide information technology systems and related
hardware.
2.6
Effect
of foreign currency translation.
6.8
Other
expenses.
$
63.9
Total
Change in Selling, General and Administrative Expenses 2008 vs.
2007
2007 vs.
2006
Selling,
general and administrative (“SG&A”) expenses for 2007 increased $65.4
million or 14% from 2006. 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
expenses.
$
65.4
Total
Change in Selling, General and Administrative Expenses 2007 vs.
2006
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.
2008 vs.
2007
Net Other
Expenses of $22.0 million for 2008 increased $18.5 million from the $3.4 million
during 2007. This increase in other expenses primarily relates to
restructuring charges that the Company incurred during the fourth quarter of
2008.
2007 vs.
2006
Net Other
Expenses of $3.4 million in 2007 compared to $2.5 million in 2006, an increase
of $0.9 million, due principally to employee termination benefit
costs.
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.”
34
Interest
Expense
2008 vs.
2007
Interest
expense in 2008 was $8.2 million or 10% lower than in 2007. This was
principally due to lower overall debt levels in 2008 and, to a lesser extent,
lower interest rates on variable interest rate borrowings. The impact
of foreign currency translation also decreased interest expense by approximately
$0.5 million.
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.
Income
Tax Expense from Continuing Operations
2008 vs.
2007
The
decrease in 2008 of $25.8 million or 22% in the provision for income taxes from
continuing operations was primarily due to a lower effective income tax rate
from continuing operations and lower pre-tax income. The effective income
tax rate relating to continuing operations for 2008 was 26.7% versus 30.7% for
2007. The decrease in the effective income tax rate for the year 2008 was
primarily due to increased earnings in jurisdictions with lower tax rates;
increased designation of certain international earnings as permanently
reinvested; and the recognition of previously unrecognized tax benefits in
certain state and foreign jurisdictions.
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.
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
2008 vs.
2007
Income
from continuing operations in 2008 of $245.6 million was $9.5 million or 4%
lower than 2007. This decrease resulted from the overall economic
downturn during the fourth quarter and the restructuring charges taken by the
Company as a result of the downturn.
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.
Income
(Loss) from Discontinued Operations
2008 vs.
2007
A loss
from discontinued operations of $4.7 million was generated in 2008 due to
working capital adjustments and other costs associated with the disposition of
the Gas Technologies Segment, coupled with the tax effect from the final
purchase price allocation. This compares with income of $44.4 million
in 2007 due principally to the sale of the Company’s Gas Technologies Segment in
December 2007.
35
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 Segment, as
well as improved operating results for the business prior to the
divestiture.
Net
Income and Earnings Per Share
2008 vs.
2007
Net
income of $240.9 million and diluted earnings per share of $2.87 in 2008 were
lower than 2007 by $58.5 million or 20% and $0.66 or 19%, respectively, due to
decreased income from both continuing and discontinued operations for the
reasons described above.
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.
Liquidity
and Capital Resources
Overview
Global
financial markets have been under stress due to poor lending and investment
practices and sharp declines in real estate values. As a result,
broad-based tightening of credit conditions has occurred which has restrained
economic growth. In response to these changes in the global economic
conditions, the Company has undertaken several initiatives to conserve capital
and enhance liquidity including prudently reducing capital spending to only
critical projects where the highest returns can be achieved while redeploying
existing capital investments; optimizing worldwide cash positions; reducing or
eliminating discretionary spending; and additional scrutiny and tightening of
credit terms with customers. Despite the tightening of credit markets
around the world, the Company continues to have available liquidity and has been
able to issue commercial paper as needed. The Company currently
expects operational and business needs to be covered by cash from operations in
2009.
Building
on its consistent historical performance of strong operating cash flows, the
Company achieved a record $574.3 million in operating cash flow in
2008. This represents a 22% improvement over 2007’s operating cash
flow of $471.7 million. This increase was primarily due to lower
trade receivables, lower inventory levels and higher cash advances from
customers. These increases were partially offset by lower income tax
accruals, which included the effect of a $20 million income tax payment (as a
result of the December 2007 gain on the sale of the discontinued Gas
Technologies Segment), and reduced accounts payable levels.
In 2008,
the Company invested $457.6 million in capital expenditures (over 54% of which
were for revenue-growth projects) returned $128.6 million to stockholders
through the repurchase of Company stock; and paid $65.6 million in stockholder
dividends.
The
Company’s net cash borrowings increased $44.5 million in 2008. The
incremental borrowings and operating cash flows funded capital expenditures,
share repurchases, and stockholder dividends. Balance sheet debt,
which is affected by foreign currency translation, decreased $67.9 million from
December 31, 2007. Debt to total capital ratio increased to 41.7% as
of December 31, 2008, due principally to a $152.4 million decline in
Stockholders’ Equity. The decline in Stockholders’ Equity was
primarily due to foreign currency translation adjustments; actuarial losses on
pension obligations as a result of a decreased value of plan assets; and
repurchases of treasury stock, offset by higher retained earnings at the end of
2008. Debt to total capital was 40.8% at December 31,2007.
Despite
global economic conditions, the Company’s strategic objectives for 2009 include
generating strong operating cash flows. The Company plans to sustain
its balanced portfolio through its strategy of redeploying discretionary cash
for disciplined growth and international diversification in the Harsco
Infrastructure Segment; in long-term, high-return and high-renewal-rate services
contracts for the Harsco Metals Segment, principally in emerging economies or
for customer diversification; for growth and international diversification in
the All Other Category (Harsco Minerals & Rail); 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.
36
The
Company is also focused on improved working capital
management. Specifically, short-term and long-term enterprise
business optimization programs are being used to continue to further improve the
effective and efficient use of working capital, particularly accounts receivable
and inventories in the Harsco Infrastructure and Harsco Metals
Segments.
Cash
Requirements
The
following summarizes the Company’s expected future payments related to
contractual obligations and commercial commitments at December 31,2008.
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, 2008. 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 by the defined benefit plans for the
next 10 years.
(d)
This
amount represents the notional value of the foreign currency exchange
contracts outstanding at December 31, 2008. 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, 2008, in addition to the $0.9 million
classified as short-term, the Company had approximately $31.1 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, 2008. These amounts are not included in
the Company’s Consolidated Balance Sheets 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 Harsco Metals 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 Harsco Metals 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 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 share
repurchases and selective or bolt-on acquisitions as the appropriate
opportunities arise.
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.
In May
2008, the Company completed an offering in the United States of 5.75%, 10-year
senior notes totaling $450.0 million. After pricing and underwriting
discounts, the Company received a total of $446.6 million in cash proceeds from
the offering. The proceeds were used to reduce the Company’s U.S. and
euro commercial paper programs by $286.4 million and $160.2 million,
respectively.
38
The
following table illustrates the amounts outstanding under credit facilities and
commercial paper programs and available credit as of December 31,2008:
Summary
of Credit Facilities and Commercial Paper Programs
Although
the Company has significant available credit, for practical purposes, the
Company limits aggregate commercial paper and credit facility borrowings
at any one time to a maximum of $700 million (the aggregate amount of the
back-up facilities).
The
Company’s bilateral credit facility was renewed in December 2008. The
facility, in the amount of $30 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 2009, 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, 2008 and 2007, 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.
In
January 2009, Moody’s reaffirmed the Company’s long-term notes and U.S.
based commercial paper ratings, but changed its outlook from stable to
negative.
The
Company’s euro-based commercial paper program has not been rated since the euro
market does not require it. Fitch and Standard & Poor’s ratings
were reaffirmed as shown above in August and October 2008,
respectively. In January 2009, Moody’s reaffirmed the Company’s
long-term notes and U.S. based commercial paper ratings, but changed its outlook
from stable to negative. Any continued tightening of the credit
markets, which began during 2007 and significantly accelerated in 2008, may
adversely impact the Company’s access to capital and the associated costs of
borrowing; however this is somewhat mitigated by the Company’s strong financial
position. 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. Additionally, a downgrade in the Company’s credit ratings
could result in reduced access to credit markets.
39
Working Capital Position –
Changes in the Company’s working capital are reflected in the following
table:
(Dollars
are in millions)
December
31
2008
December
31
2007
Increase
(Decrease)
Current
Assets
Cash
and cash equivalents
$
91.3
$
121.8
$
(30.5
)
Trade
accounts receivable, net
648.9
779.6
(130.7
)
Other
receivables, net
46.0
44.5
1.5
Inventories
309.5
310.9
(1.4
)
Other
current assets
104.5
88.0
16.5
Assets
held-for-sale
5.3
0.5
4.8
Total
current assets
1,205.5
1,345.3
(139.8
)
Current
Liabilities
Notes
payable and current maturities
121.1
68.7
52.4
Accounts
payable
262.8
307.8
(45.0
)
Accrued
compensation
85.2
108.9
(23.7
)
Income
taxes payable
13.4
41.3
(27.9
)
Other
current liabilities
405.9
347.3
58.6
Total
current liabilities
888.4
874.0
14.4
Working
Capital
$
317.1
$
471.3
$
(154.2
)
Current
Ratio
1.4:1
1.5:1
Working
capital decreased 33% in 2008 due principally to the following
factors:
·
Cash
decreased $30.5 million principally due to foreign currency translation
and the Company’s objective to efficiently use cash by reducing global
cash balances.
·
Net
trade accounts receivable decreased $130.7 million primarily due to
foreign currency translation, the timing of collections and reduced sales
in the fourth quarter of 2008, partially offset by growth within the All
Other Category due to higher sales levels in these
businesses.
·
Other
current assets increased $16.5 million primarily due to higher prepayments
made by the Company, mark-to-market commodity hedging and tax
prepayments.
·
Notes
payable and current maturities increased $52.4 million due to the
anticipated payments of commercial paper borrowings during 2009, reduction
of other short-term borrowings and foreign currency
translation.
·
Accounts
payable decreased $45.0 million primarily due to reduced activity levels
in 2008 and foreign currency
translation.
·
Accrued
compensation decreased $23.7 million due principally to reduced 2008
incentive compensation accrual based on 2008 results and the payments of
incentive compensation earned during 2007, partially offset by normal
incentive compensation accruals within the All Other
Category.
·
Other
current liabilities increased $58.6 million due principally to advances on
contracts within the railway track maintenance services and equipment
business; partially offset by payments on existing accruals; decrease in
insurance liabilities; foreign currency translation and accrued
interest.
Certainty of Cash Flows – The
certainty of the Company’s future cash flows is underpinned by the long-term
nature of the Company’s metals services contracts and the strong discretionary
cash flows (operating cash flows in excess of the amounts necessary for capital
expenditures to maintain current revenue levels) generated by the
Company. Traditionally the Company has utilized these discretionary
cash flows for growth-related capital expenditures. At December 31,2008, the Company’s metals services contracts had estimated future revenues of
$4.1 billion, compared with $5.0 billion as of December 31, 2007. The
decline is primarily attributable to foreign currency translation
effects.
40
In
addition, as of December 31, 2008, the Company had an order backlog of $639.7
million in its All Other Category (Harsco Minerals & Rail). This
compares with $448.1 million as of December 31, 2007. The increase
from December 31, 2007 is due principally to increased demand for certain
products within the railway track maintenance services and equipment business,
as a result of new international orders, as well as increased demand for heat
exchangers. The railway track maintenance services and equipment
business backlog includes a significant portion that will not be realized until
2009 and later due to the long lead-time 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 services of high-value content from
steelmaking slag is excluded from the above amounts. These amounts
are generally not quantifiable due to the 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
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)
2008
2007
2006
Net
cash provided by (used in):
Operating
activities
$
574.3
$
471.7
$
409.2
Investing
activities
(443.4
)
(386.1
)
(359.4
)
Financing
activities
(155.6
)
(77.7
)
(84.2
)
Effect of exchange rate changes on
cash
(5.8
)
12.7
14.7
Net change in cash and cash
equivalents
$
(30.5
)
$
20.6
$
(19.7
)
Cash From Operating Activities
– Net cash provided by operating activities in 2008 was a record $574.3
million, an increase of $102.5 million from 2007. The increase was
primarily due to the following:
·
Improved
trade receivable collections coupled with lower sales volume during the
fourth quarter of 2008.
·
Reducing
inventory growth throughout the
Company.
·
Higher
levels of cash advances from customers received within the railway track
maintenance services and equipment
business.
These
benefits were partially offset by the following:
·
Lower
income tax accruals (including a $20 million income tax payment due to
gain on the 2007 sale of discontinued Gas Technologies
Segment).
·
Lower
net income in 2008 as compared with
2007.
·
Decrease
in accounts payable due to reduced activity levels in 2008 and foreign
currency translation.
Cash Used in Investing Activities –
Net cash used in investing activities in 2008 increased compared with
2007 due principally to the proceeds from the sale of the Company’s Gas
Technologies Segment in December 2007, partially offset by the purchase of
Excell Minerals in 2007. In 2008, cash used in investing activities
was $443.4 million consisting primarily of capital investments of $457.6
million. Capital investments were $14.0 million higher compared to
2007 and over 54% of the investments were for projects intended to grow future
revenues. Investments were made predominantly in the industrial
services businesses, with 50% in the Harsco Infrastructure Segment and 45% in
the Harsco Metals Segment. Throughout 2009, the Company plans to
continue to manage its balanced portfolio and consider opportunities to invest
in value creation projects including prudent, strategic, bolt-on acquisitions,
principally in the Harsco Infrastructure business. Additionally, the
Company will shift more growth investments into the All Other
41
Category
(Harsco Minerals & Rail) in 2009 and beyond, as this group continues to
expand globally and operate at near maximum capacity.
Cash Used in Financing Activities
– The following table summarizes the Company’s debt and capital positions
as of December 31, 2008 and 2007.
(Dollars
are in millions)
December
31
2008
December
31
2007
Notes
Payable and Current Maturities
$
121.1
$
68.7
Long-term
Debt
891.8
1,012.1
Total
Debt
1,012.9
1,080.8
Total
Equity
1,413.7
1,566.1
Total
Capital
$
2,426.6
$
2,646.9
Total
Debt to Total Capital
41.7
%
40.8
%
The
Company’s debt as a percentage of total capital increased in
2008. Total equity decreased due principally to foreign currency
translation, treasury stock purchases and pension liability adjustments
partially offset by current net income.
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%. At December 31, 2008, the Company was in
compliance with these covenants with a debt to capital ratio of 41.7% and total
net worth of $1.4 billion. Based on balances at December 31, 2008,
the Company could increase borrowings by approximately $1,108.2 million and
still be within its debt covenants. Alternatively, keeping all other
factors constant, the Company’s equity could decrease by approximately $739.1
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, and its 5.75% notes,
due May 2018, also include covenants that permit the note holders to redeem
their notes, at par and 101% of par, respectively, in the event of a change of
control of the Company or disposition of a significant portion of the Company’s
assets in combination with the Company’s credit rating downgraded to
non-investment grade. 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, although 2009 capital investments
are expected to significantly decline from 2008 as existing investments are used
more efficiently. The goal of this strategy is to improve the
Company’s EVA under the program adopted in 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.
The
Company currently expects to continue paying dividends to
stockholders. The Company has increased the dividend rate for fifteen
consecutive years, and in February 2009, the Company paid its 235th
consecutive quarterly cash dividend.
The
Company repurchased 4.5 million shares of the Company’s common stock under its
stock repurchase authorization. Repurchases were made in open market
transactions at times and amounts as management deemed appropriate, depending on
market conditions. The Company has authorization to repurchase up to
1.5 million of its shares through January 31, 2010. Future repurchase
may commence or be discontinued at any time. The Company will be
extremely prudent in any decision to resume repurchases.
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, generally in
emerging markets; and strategic acquisitions; to reduce debt; and pay cash
dividends as a means to enhance stockholder value.
42
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 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 $30.5 million and $42.0 million (including
$10.1 million of voluntary payments) during 2008 and 2007,
respectively. Additionally, the Company expects to make a minimum of
$37.9 million in cash contributions to its defined benefit pension plans during
2009.
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.
During
2008, the Company eliminated early measurement dates for its defined benefit
pension plans. In accordance with SFAS 158, all defined benefit
pension plans are now measured at the end-of-year balance sheet
date. The incremental effect of this transition resulted in an
increase of $0.9 million to beginning Stockholders’ Equity as of January 1,2008.
As of
December 31, 2008, the Company recorded an after-tax charge of $74.3 million to
accumulated other comprehensive loss. This is primarily due to
actuarial losses as a result of actual pension asset returns being lower than
assumed pension asset returns. Actual pension asset returns were
impacted by the 2008 financial crisis and the deterioration of global economic
conditions.
As a
result, total defined benefit pension expense for 2009 will be substantially
higher than the 2008 level due to the decline in pension asset values during the
second half of 2008. In an effort to mitigate a portion of this
overall increased cost for 2009, the Company implemented additional plan design
changes for a certain international defined benefit pension plans so that
accrued service is no longer granted for periods after December 31,2008. This action was a continuation of the Company’s overall
strategy to reduce overall pension expense and volatility.
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
43
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 December 31, 2008 measurement date for the U.K. and
U.S. defined benefit pension plans were 6.0% and 6.1%,
respectively. These rates were used in calculating the Company’s
projected benefit obligations as of December 31, 2008. 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, 2008, 2007 and 2006 were 6.1%,
5.9% and 5.3%, respectively. Annual pension expense is determined
using the discount rates as of the measurement date, which for 2008 was 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 2008, the global
weighted-average expected long-term rate-of-return on asset assumption was
7.6%. For 2009, the expected global long-term rate-of-return on
assets is 7.4%. This rate was determined based on a model of expected
asset returns for an actively managed portfolio.
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, 2008 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 2009 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 $1.5 million
Decrease
of $2.6 million
One-half
percent decrease
Increase
of $1.8 million
Increase
of $1.9 million
Expected long-term rate-of-return on plan
assets
One-half
percent increase
Decrease
of $0.9 million
Decrease
of $2.4 million
One-half
percent decrease
Increase
of $0.9 million
Increase
of $2.4 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
44
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, 2008 and 2007, trade accounts
receivable of $648.9 million and $779.6 million, respectively, were net of
reserves of $27.9 million and $25.6 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 2008, 2007
and 2006 were $12.5 million, $7.8 million and $9.2 million,
respectively. The increase from 2007 to 2008 is due to higher bad
debt expense in the Harsco Infrastructure Segment due principally to
deteriorating economic conditions in certain markets. The decrease
from 2006 to 2007 is due to lower bad debt expense in the Harsco Infrastructure
and Harsco Metals Segments.
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.
Goodwill
The
Company’s net goodwill balances were $631.5 million and $720.1 million, as of
December 31, 2008 and 2007, respectively. The decline in goodwill is
due to foreign currency translation effects. 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. Additionally, assessments of future cash flows would
consider, but not be limited to the following: infrastructure plant maintenance
requirements; global metals production and capacity utilization; global railway
track maintenance-of-way capital spending; and other drivers of the Company’s
businesses. Changes in the overall interest rate environment may also
impact the fair market value of the Company’s reporting units as this would
directly influence the discount rate utilized for discounting operating cash
flows, and ultimately determining a reporting unit’s fair value. The
Company’s overall market capitalization is also a factor in evaluating the fair
market values of the Company’s reporting units. While the
Company’s
stock price has declined approximately 57% during 2008, the Company’s market
capitalization continues to exceed its book value as of December 31, 2008. As a
result of this and other factors, the Company concluded that an interim
impairment test was not required subsequent to its annual test performed as of
October 1, 2008. Further significant declines in the overall market
capitalization of the Company could lead to the determination that the book
value of one or more of the Company’s reporting unites exceeds their fair
value. The
45
Company’s
annual goodwill impairment testing, performed as of October 1, 2008 and 2007,
indicated that the fair value of all reporting units tested exceeded their
respective book values and therefore no additional goodwill impairment testing
was required.
The
Company’s customers may be impacted adversely by the current tightening of
credit in financial markets, which may result in postponed spending and
cancellation or delay of existing and future orders with the
Company. Continued economic decline could further impact the ability
of the Company’s customers to meet their obligations to the Company and possibly
result in bankruptcy filings by them. This, in turn, could negatively
impact the forecasts used in performing the Company’s goodwill impairment
testing. If management determines that goodwill is impaired, the
Company will be required to record a write-down in the period of determination,
which will reduce net income for that period. 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.
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 $12.6 million, $0.9 million and $0.2 million in 2008, 2007 and 2006,
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. If the undiscounted cash flows associated with an asset
do not exceed the book value, impairment loss estimates would be 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. SFAS 157 will affect the
methodology of assessments after its January 1, 2009 effective date, by
requiring consideration of all valuation techniques for which market participant
inputs can be obtained without undue cost and effort. The use of
discounted cash flows may be appropriate; however, methodologies other than
quoted market prices must also be considered.
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, 2008 and 2007, inventories of $309.5 million
and $310.9 million, respectively, are net of lower of cost or market reserves
and obsolescence reserves of $15.7 million and $13.9 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 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 $1.1 million, $1.4 million and $(2.3) million in
2008, 2007 and 2006, respectively.
The
Company has not materially changed its methodology for calculating inventory
reserves for the years presented.
46
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, 2008 and 2007, the Company has
recorded liabilities of $97.2 million and $112.0 million, respectively, related
to both asserted as well as unasserted insurance claims. At December31, 2008 and 2007, $17.8 million and $25.9 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 2008, 2007 and 2006, the Company recorded a
retrospective insurance reserve adjustment that decreased pre-tax insurance
expense from continuing operations for self-insured programs by $1.8 million,
$1.2 million and $1.3 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.
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
47
income
tax provision. As of December 31, 2008, 2007 and 2006, the Company’s
net effective income tax rate on income from continuing operations was 26.7%,
30.7% and 32.5%, 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 has not materially changed its methodology for
calculating income tax expense for the years presented.
The
Company records deferred tax assets to the extent the Company believes these
assets will more-likely-than-not be realized. In making such
determinations, the Company considers all available positive and negative
evidence, including future reversals of existing temporary differences,
projected future taxable income, tax planning strategies and recent financial
operating results. In the event the Company were to determine that it
would be able to realize deferred income tax assets in the future in excess of
their net recorded amount, an adjustment to the valuation allowance would be
made which would reduce the provision for income taxes. The valuation
allowance was $21.5 million and $15.3 million as of December 31, 2008 and 2007,
respectively. The valuation allowance is principally for state and
international tax net operating loss carryforwards.
FASB
Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109” (“FIN 48”) provides that a tax benefit
from an uncertain position may be recognized when it is more-likely-than-not
that the position will be sustained upon examination, including resolutions of
any related appeals or litigation processes, based on technical merits.
Income tax positions must meet a more-likely-than-not recognition threshold at
the effective date to be recognized upon the adoption of FIN 48 and in
subsequent periods. This interpretation also provides guidance on
measurement, derecognition, classification, interest and penalties, accounting
for interim periods, disclosure and transition. The Company adopted FIN 48
effective January 1, 2007. The unrecognized tax benefits that would
impact the effective income tax rate at December 31, 2008 is approximately $31
million including interest and penalties.
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.
Research
and Development
The
Company invested $5.3 million, $3.2 million and $2.8 million in internal
research and development programs in 2008, 2007 and 2006,
respectively. Internal funding for research and development was as
follows:
Research
and Development Expense
(In
millions)
2008
2007
2006
Harsco
Infrastructure Segment
$
2.0
$
0.7
$
0.7
Harsco
Metals Segment
1.6
1.3
1.1
Segment Totals
3.6
2.0
1.8
All
Other Category – Harsco
Minerals & Rail
1.7
1.2
1.0
Consolidated
Totals
$
5.3
$
3.2
$
2.8
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.
48
Backlog
As of
December 31, 2008, the Company’s order backlog, exclusive of long-term metals
industry services contracts, infrastructure-related services, roofing granules
and industrial abrasives products, and minerals and metal recovery technologies
services, was $639.7 million compared with $448.1 million as of December 31,2007, a 43% increase. Of the order backlog at December 31, 2008,
approximately $298.4 million or 47% is not expected to be filled in
2009. This backlog is expected to be filled in
2010.
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 air-cooled heat
exchangers due to stable demand in the natural gas compression
market. These were partially offset by decreased order backlog for
railway track maintenance services and industrial grating products.
Long-term
metals industry services contracts have an estimated future value of $4.1
billion at December 31, 2008 compared with $5.0 billion at December 31,2007. The decline is primarily attributable to foreign currency
translation effects. Approximately 65% of these revenues are expected
to be recognized by December 31, 2011. The majority of the remaining
revenues are expected to be recognized between January 1, 2012 and December 31,2017.
Order
backlog for infrastructure-related services, such as highly engineered
scaffolding, shoring and forming services of the Harsco Infrastructure Segment,
is excluded from the above, as 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. Order backlog for roofing
granules and industrial abrasives products, and for minerals and recycling
technologies services, is also not included in the total backlog amount above
because it is generally not quantifiable due to short order lead times of the
products and services provided. The minerals and recycling technology
business does enter into contracts for some of its services. These
contracts have estimated future revenues of $91.6 million as of December 31,2008 of which 85% is expected to be filled by December 31, 2011.
Dividend
Action
The
Company has paid dividends each year since 1939. Four quarterly cash
dividends of $0.195 were paid in 2008, for an annual rate of $0.78, or an
increase of 9.9% from 2007. In 2008, 27.2% of net earnings were paid
out in dividends. There are no significant restrictions on the
payment of dividends.
The
Company is philosophically committed to maintaining or increasing the dividend
at a sustainable level. The Board normally reviews the dividend rate
periodically during the year and annually at its November meeting. At
its November 2008 meeting, the Board of Directors declared the Company’s
235th
consecutive quarterly dividend, payable in February 2009, at $0.195 per
share.
In
December 2008, the Board increased the dividend rate to $0.20 per share to
become effective with the next scheduled quarterly dividend declaration in early
2009. The December 2008 action increased the dividend rate by 2.6% to
$0.80 per share on an annualized basis, and represented the Company’s 15th
consecutive year of dividend increases.
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, 2008 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, 2008.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
appearing in this Annual Report on Form 10-K, which expresses an unqualified
opinion on the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008.
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, 2008 and
2007, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008 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, 2008, 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 $(7,681), $2 and $(40) in 2008, 2007 and 2006,
respectively
20,859
(3
)
75
Reclassification
adjustment for (gain) loss on cash flow hedging instruments, net of
deferred income taxes of $26, $(66) and $(32) in 2008, 2007 and 2006,
respectively
(47
)
122
59
Pension
liability adjustments, net of deferred income taxes of $29,057, $(24,520)
and $1,307 in 2008, 2007 and 2006, respectively
(74,340
)
56,257
(5,523
)
Unrealized
gain (loss) on marketable securities, net of deferred income taxes of $38,
$(3) and $(1) in 2008, 2007 and 2006, respectively
(70
)
6
2
Other
comprehensive income (loss)
(208,170
)
166,833
86,191
Total
comprehensive income
$
32,775
$
466,325
$
282,589
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 $172.3 million, $117.0 million and $85.6
million, or 4.3%, 3.2% and 2.8% of the Company’s total revenues for the years
ended 2008, 2007 and 2006, 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 prior 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 Harsco Metals Segment and the All
Other Category (Harsco Minerals & Rail) and at the component level for the
Harsco Infrastructure Segment. 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.
59
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
revenues and service revenues 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 revenues include the
Harsco Metals and Harsco Infrastructure Segments as well as service revenues of
the All Other Category (Harsco Minerals & Rail). Product revenues
include the manufacturing businesses of the All Other Category (Harsco Minerals
& Rail).
Harsco Infrastructure
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.
Harsco Metals 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 (Harsco
Minerals & Rail) – This category includes the Harsco Rail, Excell
Minerals, Reed Minerals, IKG Industries, Patterson-Kelley, and Air-X-Changers
operating segments. These operating segments principally sell
products. Harsco Rail Division and the 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 Harsco Rail 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. Harsco Rail 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
The
Company accounts for income taxes under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of the events that have been included in the
consolidated financial statements. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statements and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment
date.
The
Company records deferred tax assets to the extent the Company believes these
assets will more-likely-than-not be realized. In making such
determinations, the Company considers all available positive and negative
evidence, including future reversals of existing temporary differences,
projected future taxable income, tax planning strategies and recent financial
operations. In the event the Company were to determine that it would be
able to realize deferred income tax assets in the future in excess of their net
recorded amount, an adjustment to the valuation allowance would be made which
would reduce the provision for income taxes.
60
FASB
Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109” (“FIN 48”) provides that a tax benefit
from an uncertain position may be recognized when it is more-likely-than-not
that the position will be sustained upon examination, including resolutions of
any related appeals or litigation processes, based on technical merits.
Income tax positions must meet a more-likely-than-not recognition threshold at
the effective date to be recognized upon the adoption of FIN 48 and in
subsequent periods. This interpretation also provides guidance on
measurement, derecognition, classification, interest and penalties, accounting
for interim periods, disclosure and transition. The Company adopted FIN 48
effective January 1, 2007.
The
Company recognizes interest and penalties related to unrecognized tax benefits
within Income tax expense in the accompanying Consolidated Statements of
Income. Accrued interest and penalties are included in Other liabilities
in the Consolidated Balance Sheets.
In
general, it is the practice and intention of the Company to reinvest the
undistributed earnings of its non-U.S. subsidiaries. Should the
Company repatriate undistributed earnings, such amounts become subject to U.S.
taxation giving recognition to current tax expense and foreign tax credits upon
remittance of dividends and under certain other circumstances.
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 2008, 2007 and 2006, the Company recorded insurance
expense from continuing operations related to these lines of coverage of
approximately $43 million, $37 million and $34 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 2008, 2007
and 2006, the Company recorded retrospective insurance reserve adjustments that
decreased pre-tax insurance expense from continuing operations for self insured
programs by $1.8 million, $1.2 million and $1.3 million,
respectively. At December 31, 2008 and 2007, the Company has recorded
liabilities of $97.2 million and $112.0 million, respectively, related to both
asserted as well as unasserted insurance claims. Included in the
balance at December 31, 2008 and 2007 were $17.8 million and $25.9 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, $2.9 million and
$4.8 million as of December 31, 2008, 2007 and 2006,
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, 2008, 2007 and 2006:
Warranty
Activity
(In
thousands)
2008
2007
2006
Balance
at the beginning of the period
$
2,907
$
4,805
$
4,962
Accruals
for warranties issued during the period
3,683
3,112
3,371
Reductions
related to pre-existing warranties
(1,524
)
(1,112
)
(868
)
Divestiture
—
(980
)
—
Warranties
paid
(2,157
)
(2,810
)
(2,731
)
Other
(principally foreign currency translation)
(46
)
(108
)
71
Balance
at end of the period
$
2,863
$
2,907
$
4,805
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
61
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.
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;
however, where appropriate longer-term contracts may be utilized. 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.
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 in the United States (“GAAP”) 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.
New
Financial Accounting Standards Issued
SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”)
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
157 which formally defines fair value, creates a standardized framework for
measuring fair value under GAAP, and expands fair value measurement
disclosures. SFAS 157 was amended by FASB Staff Position (“FSP”)
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 FSP No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP SFAS
157-2”). FSP SFAS 157-1 excludes SFAS No. 13, “Accounting for
Leases,” (“SFAS 13”) as well as other accounting pronouncements that address
fair value measurements on lease classification or measurement under SFAS 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).
SFAS 157,
as amended by FSP SFAS 157-2, was adopted by the Company as of January 1,2008. The adoption of SFAS 157, as it relates to financial assets and
financial liabilities, had no impact on the Company’s financial position,
results of operations or cash flows. The Company is still in the
process of evaluating the impact that SFAS 157 will have on nonfinancial assets
and liabilities not valued on a recurring basis (at least
annually). The disclosure requirements of SFAS 157 are presented in
Note 13, “Financial Instruments.”
In
December 2007, the FASB issued SFAS 160, which amends ARB No. 51, “Consolidated
Financial Statements.” SFAS 160 requires, among other items, that a
noncontrolling interest be included in the consolidated statement of financial
position within equity separate from the parent’s equity; consolidated net
income be reported at amounts inclusive of both the parent’s and noncontrolling
interest’s shares and, separately, the amounts of consolidated net income
attributable to the parent and noncontrolling interest all on the Consolidated
Statements of Income; if a subsidiary is deconsolidated, any retained
noncontrolling equity investment in the former subsidiary be measured at fair
value and a gain or loss be recognized in net income based on such fair value;
and changes in a parent’s ownership interest while the parent retains its
controlling interest are accounted for as equity transactions. SFAS
160 became effective for the Company on January 1, 2009. Adoption of
this statement had no material impact on the Company’s consolidated financial
position or results of operations when it became effective.
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 and measure the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, 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 income tax expense in that period
as opposed to being recorded to goodwill. SFAS 141(R) became
effective for the Company’s acquisitions that are completed on or after January1, 2009. The impact of adopting SFAS 141(R) will depend on the
nature, terms and size of business combinations that occur after the effective
date. The Company expensed acquisition-related costs for any business
combinations not concluded prior to the January 1, 2009 effective date in
accordance with the transition guidance of SFAS 141(R).
SFAS No. 161, “Disclosures
About Derivative Instruments and Hedging Activities – an amendment of FASB
Statement No. 133” (“SFAS 161”).
In March
2008, the FASB issued SFAS 161 which requires enhanced disclosures about the use
of derivative instruments, the accounting for derivatives, and how derivatives
impact financial statements to enable investors to better understand their
effects on a company’s financial position, financial performance and cash
flows. These requirements include the disclosure of the fair values
of derivative instruments and their gains and losses in a tabular
format. SFAS 161 became effective for the Company on January 1,2009. As SFAS 161 only requires enhanced disclosures, this standard
will only impact notes to the consolidated financial statements.
FSP No. FAS 142-3
“Determination of the Useful life of Intangible Assets” (“FSP FAS
142-3”)
In April
2008, the FASB issued FSP FAS 142-3, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS 142, in order to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS 141(R) and other GAAP. FSP FAS 142-3 is
effective prospectively for intangible assets acquired or renewed after
January 1, 2009. The effect of adopting FSP FAS 142-3 will
depend on the nature of intangible assets acquired after the effective
date.
FSP No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,” (“FSP EITF 03-6-1”)
In June
2008, the FASB issued FSP EITF 03-6-1 which states that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 became effective for the Company on
January 1, 2009. The adoption of FSP EITF 03-6-1 had no impact
on the consolidated financial statements.
63
2. Acquisitions
and Dispositions
Acquisitions
In April
2008, the Company acquired Sovereign Access Services Limited (“Sovereign”), a
United Kingdom-based provider of mastclimber work platform rental
equipment. Sovereign recorded revenues of approximately $7 million in
2007 and has been included in the Harsco Infrastructure Segment.
In March
2008, the Company acquired Romania-based Baviera S.R.L. (“Baviera”), a
distributor of formwork and scaffolding products in Romania. Baviera
recorded revenues of approximately $3 million in 2007 and has been included in
the Harsco Infrastructure Segment.
In
February 2008, the Company acquired Northern Ireland-based Buckley Scaffolding
(“Buckley”), a provider of scaffolding and erection and dismantling services to
customers in the construction, industrial and events
businesses. Buckley recorded revenues of approximately $3 million in
2007 and has been included in the Harsco Infrastructure Segment.
In August
2007, the Company acquired Alexander Mill Services International (“AMSI”), a
privately held company that provides services to some of the leading steel
producers in Poland and Romania. AMSI also provides mill services on
a smaller scale in Portugal. AMSI recorded 2006 revenues of
approximately $21 million and has been included in the Harsco Metals
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 Rail Group of the All Other Category (Harsco Minerals &
Rail).
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 has been included in the Harsco Metals 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
(Harsco Minerals & Rail) and has been renamed Excell Minerals to emphasize
its long-term growth strategy.
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 Segment 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
in the fourth quarter of 2007. In 2008, the Company recorded a loss
from discontinued operations of $4.7 million. This comprised $1.7
million of working capital adjustments and other costs associated with this
disposition, coupled with the tax effect from the final purchase price
allocation. The purchase price is not final at December 31, 2008 due
to final working capital adjustments as provided in the purchase agreement, and
the potential earnout. This business recorded revenues and operating
income of $384.9 million and $26.9 million and $397.7 million and $14.2 million,
respectively, for the years ended 2007 and 2006. The Consolidated
Statements of Income for the years ended 2008, 2007 and 2006 reflect the Gas
Technologies Segment’s results in discontinued operations.
64
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 throughout the Company’s operations. The net property, plant
and equipment reflected as assets held-for-sale in the December 31, 2008 and
2007 Consolidated Balance Sheets were $5.3 million and $0.5 million,
respectively.
3. Accounts
Receivable and Inventories
At
December 31, 2008 and 2007, Trade accounts receivable of $648.9 million and
$779.6 million, respectively, were net of allowances for doubtful accounts of
$27.9 million and $25.6 million, respectively. The decrease in
accounts receivable from December 31, 2007 related principally to foreign
currency translation and lower sales levels in the fourth
quarter. The provision for doubtful accounts was $12.5 million, $7.8
million and $9.2 million for 2008, 2007 and 2006, respectively. Other
receivables include insurance claim receivables, employee receivables, tax claim
receivables and other miscellaneous receivables not included in Trade accounts
receivable, net.
Inventories
consist of the following:
Inventories
(In
thousands)
2008
2007
Finished
goods
$
156,490
$
161,013
Work-in-process
21,918
23,776
Raw
materials and purchased parts
83,372
76,735
Stores
and supplies
47,750
49,407
Total
inventories
$
309,530
$
310,931
Valued
at lower of cost or market:
Last-in,
first out (“LIFO”) basis
$
105,959
$
99,433
First-in,
first out (“FIFO”) basis
15,140
16,742
Average
cost basis
188,431
194,756
Total
inventories
$
309,530
$
310,931
Inventories
valued on the LIFO basis at December 31, 2008 and 2007 were approximately $32.8
million and $23.4 million, respectively, less than the amounts of such
inventories valued at current costs.
65
As a
result of reducing certain inventory quantities valued on the LIFO basis, net
income increased from that which would have been recorded under the FIFO basis
of valuation by $0.3 million in 2008, less than $0.1 million in 2007 and $0.3
million in 2006.
4.
Property, Plant and Equipment
Property,
plant and equipment consists of the following:
(In
thousands)
2008
2007
Land
and improvements
$
41,913
$
47,250
Buildings
and improvements
167,606
175,744
Machinery
and equipment
2,905,398
2,997,425
Uncompleted
construction
75,210
75,167
Gross
property, plant and equipment
3,190,127
3,295,586
Less
accumulated depreciation
(1,707,294
)
(1,760,372
)
Net
property, plant and equipment
$
1,482,833
$
1,535,214
The
estimated useful lives of different types of assets are generally:
Land
improvements
Buildings
and improvements
Machinery
and equipment
Leasehold
improvements
5 to 20
years
5 to 40 years
3 to 20 years
Estimated useful life of the improvement
or, if shorter, the life of the
lease
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. The Company has determined that
the reporting units for goodwill impairment testing purposes are the Company’s
operating segments for the Harsco Metals Segment and the All Other Category and
the component level for the Harsco Infrastructure Segment. 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. 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. Assessments of future cash flows would consider, but not be
limited to the following: infrastructure plant maintenance requirements; global
metals production and capacity utilization; global railway track
maintenance-of-way capital spending; and other drivers of the Company’s
businesses. Changes in the overall interest rate environment may also
impact the fair market value of the Company’s reporting units as this would
directly influence the discount rate utilized for discounting operating cash
flows, and ultimately determining a reporting unit’s fair value. The
Company’s overall market capitalization is also a factor in evaluating the fair
market values of the Company’s reporting units. Significant declines
in the overall market capitalization of the Company could lead to the
determination that the book value of one or more of the Company’s reporting
units exceeds their fair value. The Company performed required annual
testing for goodwill impairment as of October 1, 2008 and 2007 and all reporting
units of the Company passed the step one testing thereby indicating that no
goodwill impairment exists. Additionally, the Company determined that
as of December 31, 2008 no interim
66
impairment
testing was necessary. 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, 2007 and 2008:
(a)
Relates principally to the Excell Minerals acquisition in the All Other Category
– Harsco Minerals
& Rail.
(b)
Relates principally to opening balance sheet adjustments.
(c)
Relates to the sale of the Company’s Gas Technologies Segment.
(d)
Relates to acquisitions of Baviera S.R.L., Buckley Scaffolding and Sovereign
Access Services Limited.
Goodwill
is net of accumulated amortization of $95.9 million and $103.7 million at
December 31, 2008 and 2007, respectively. The reduction in
accumulated amortization from December 31, 2007 is due to foreign currency
translation.
67
Intangible
assets totaled $141.5 million, net of accumulated amortization of $65.4 million
at December 31, 2008 and $189.0 million, net of accumulated amortization of
$45.2 million at December 31, 2007. The following table reflects
these intangible assets by major category:
The
decrease in intangible assets for 2008 was due principally to foreign currency
translation, partially offset by intangible assets acquired in the acquisitions
discussed in Note 2, “Acquisitions and Dispositions.” 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
$
2,087
None
6
years
Non-compete
agreements
78
None
2
years
Other
478
None
2
years
Total
$
2,643
There
were no research and development assets acquired and written off in 2008, 2007
or 2006.
Amortization
expense for intangible assets was $28.1 million, $27.4 million and $6.7 million
for the years ended December 31, 2008, 2007 and 2006,
respectively. The following table shows the estimated amortization
expense for the next five fiscal years based on current intangible
assets.
(In
thousands)
2009
2010
2011
2012
2013
Estimated
amortization expense (a)
$24,742
$24,308
$23,077
$10,908
$9,472
(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, 2008. These credit facilities and
programs are described in more detail below the table.
Although
the Company has significant available credit, in practice, the Company
limits aggregate commercial paper and credit facility borrowings at any
one time to a maximum of $700.0 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 $279.4 million at December 31, 2008,
which is used to fund the Company’s international operations. At
December 31, 2008 and 2007, the Company had $35.9 million and $333.4 million of
U.S. commercial paper outstanding, respectively; and $9.0 million and $132.8
million outstanding, respectively, under its European-based commercial paper
program. Additionally, the Company had $50.0 million outstanding
under its 364-day revolving credit facility at December 31,2008. These borrowings are 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, 2008 and 2007, the
Company classified $94.9 million and $8.0 million, respectively, of commercial
paper and advances as short-term debt. There was no remaining
commercial paper or advances to be reclassified as long-term debt at December31, 2008, while $458.2 million was reclassified at December 31,2007.
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, 2008) that varies based upon its credit
ratings. At December 31, 2008 and 2007, there were no borrowings
outstanding on this credit facility.
In
November 2008, the Company, Citibank N.A., as administrative agent, and a
syndicate of nine other banks entered into a 364-day credit agreement that
enables the Company to borrow up to $220 million. The facility
matures in November 2009. Any borrowings outstanding at the
termination of the facility may, at the Company’s option, be repaid over the
following 12 months. The Company has the option to increase the size
of the facility at a later date to up to $300 million with the consent of the
lenders. Interest rates on the facility are based upon the announced
Citibank Prime Rate plus a margin, the Federal Funds Effective rate plus a
margin, or LIBOR plus a margin. The Company pays a commitment fee
(0.125% per annum as of entry into the facility) that varies based upon its
credit ratings. At December 31, 2008, the Company had $50 million
outstanding under this facility.
The
Company’s bilateral credit facility was amended in December 2008 to extend the
maturity date to December 2009 and to reduce the amount of the credit facility
to $30 million from $50 million. The reduction in amount accommodates
the Company’s current anticipated liquidity needs and reduces borrowing
costs. The facility 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 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, 2008 and 2007, there were no
borrowings outstanding on this facility.
Short-term
borrowings amounted to $117.9 million and $60.3 million at December 31, 2008 and
2007, respectively. This included commercial paper and short-term
advances of $94.9 million and $8.0 million at December 31, 2008 and 2007,
respectively. Other than the commercial paper borrowings and
advances, short-term debt was principally bank overdrafts. The
weighted-average interest rate for short-term borrowings at December 31, 2008
and 2007 was 3.8% and 6.0%, respectively.
Other
financing payable in varying amounts due through 2013 with a weighted
average interest rate of 7.5% and 7.0% as of December 31, 2008 and 2007,
respectively
8,243
14,864
895,029
1,020,471
Less:
current maturities
(3,212
)
(8,384
)
$
891,817
$
1,012,087
As
reflected in the above table, in May 2008, the Company completed an offering in
the United States of 5.75%, ten-year senior notes totaling $450.0
million. Net proceeds of $446.6 million were used to reduce the
Company’s U.S. and euro commercial paper borrowings by $286.4 million and $160.2
million, respectively. The notes include a covenant that permits the
note holders to redeem their notes at 101% of par in the event of a change in
control of the Company, or disposition of a significant portion of the Company’s
assets in combination with a downgrade of the Company’s credit rating to
non-investment grade.
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, and its 5.75% notes,
due May 2018, also include covenants that permit the note holders to redeem
their notes, at par and 101% of par, respectively, in the event of a change of
control of the Company or disposition of a significant portion of the Company’s
assets in combination with the Company’s credit rating being downgraded to
non-investment grade. At December 31, 2008, the Company was in
compliance with these covenants.
The
maturities of long-term debt for the four years following December 31, 2009 are
as follows:
(In
thousands)
2010
$
293,192
2011
1,911
2012
699
2013
149,253
Cash
payments for interest on all debt from continuing operations were $71.6 million,
$80.3 million and $59.7 million in 2008, 2007 and 2006,
respectively.
7.
Leases
The
Company leases certain property and equipment under noncancelable operating
leases. Rental expense (for continuing operations) under such
operating leases was $65.0 million, $70.4 million and $69.6 million in 2008,
2007 and 2006, respectively.
70
Future
minimum payments under operating leases with noncancelable terms are as
follows:
(In
thousands)
2009
$
55,592
2010
36,200
2011
25,029
2012
18,133
2013
14,742
After
2013
37,811
Total
minimum rentals to be received in the future under non-cancelable subleases as
of December 31, 2008 are $8.9 million.
8.
Employee Benefit Plans
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.
SFAS 158
also requires the consistent measurement of plan assets and benefit obligations
as of the date of the Company’s fiscal year-end statement of financial position
effective for the year ending December 31, 2008. Since the Company
previously used an October 31 measurement date for its United States defined
benefit pension plans and a September 30 measurement date for most of its
international defined benefit pension plans, the standard required the Company
to change those measurement dates in 2008 to December 31. In order to
record the effects of the change to a December 31 measurement date, the Company
chose to use the measurements determined as of October 31, 2007 and September30, 2007 and estimate the net periodic benefit cost for the 14-month and
15-month periods, respectively, ending December 31, 2008, exclusive of any
curtailment or settlement gains or losses. Amounts allocated
proportionately to the 2-month and 3-month periods ended December 31, 2007
(the “short periods”) were recorded as an adjustment to retained earnings,
effective January 1, 2008. The remaining costs were recognized as net
periodic pension expense during the year ended December 31,2008. The following table sets forth the adjustments to retained
earnings and Accumulated other comprehensive income (“AOCI”) resulting from the
measurement date change, net of tax for the short periods:
Impact
of SFAS 158 Measurement Date Change
U.
S. Defined Benefit Pension Plans
International
Defined Benefit Pension Plans
Other
Post-Retirement
Benefit Plans
(In
thousands)
Retained
Earnings
AOCI
Retained
Earnings
AOCI
Retained
Earnings
AOCI
Service
cost, interest cost and expected return on plan assets
$
576
$
—
$
364
$
—
$
(21
)
$
—
Amortization
of prior service cost and actuarial gain (loss)
(169
)
169
(2,207
)
2,207
4
(4
)
Net
adjustment recognized
$
407
$
169
$
(1,843
)
$
2,207
$
(17
)
$
(4
)
Pension
Benefits
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. Defined benefit 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.
71
In an
effort to mitigate a portion of the increased pension expense for 2009, the
Company implemented plan design changes for certain international defined
benefit pension plans, principally in the Harsco Metals Segment, so that accrued
service is no longer granted for periods after December 31, 2008. As
a result, for most of the U.S. defined benefit pension plans and a majority of
international defined benefit pension plans, accrued service is no longer
granted. In place of these plans, the Company has established 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 2007 and 2006, 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
2008
2007
2006
2008
2007
2006
Pension
Expense (Income)
Defined
benefit plans:
Service cost
$
1,740
$
3,033
$
3,685
$
8,729
$
9,031
$
9,168
Interest cost
15,197
15,511
14,919
50,146
50,118
43,506
Expected return on plan
assets
(23,812
)
(22,943
)
(19,942
)
(58,166
)
(61,574
)
(52,081
)
Recognized prior service
costs
333
686
742
897
938
1,446
Recognized
losses
1,167
1,314
2,949
10,317
15,254
12,882
Amortization of transition
(asset) liability
—
—
(361
)
29
36
36
Settlement/Curtailment loss
(gain)
(620
)
2,091
78
1,536
—
(51
)
Defined
benefit plans pension (income) expense
(5,995
)
(308
)
2,070
13,488
13,803
14,906
Less
Discontinued Operations included in above
(694
)
2,748
1,848
—
477
447
Defined
benefit plans pension (income) expense – continuing
operations
(5,301
)
(3,056
)
222
13,488
13,326
14,459
Multi-employer
plans (a)
15,231
13,552
10,560
10,143
10,361
8,662
Defined
contribution plans (a)
6,969
8,999
7,544
7,894
7,589
6,518
Pension expense – continuing
operations
$
16,899
$
19,495
$
18,326
$
31,525
$
31,276
$
29,639
(a)
Excludes
discontinued operations.
In 2008,
the Company recognized a settlement gain of $0.9 million related to the Gas
Technologies Segment that was sold in December 2007. The settlement
gain was recognized upon final transfer of pension assets and liabilities to an
authorized trust established by the purchaser of the Segment and is included
above in U.S. Plans discontinued operations. Also in 2008, the
Company implemented plan design changes for certain domestic and international
defined benefit pension plans so that accrued service is no longer granted for
periods after December 31, 2008. These actions resulted in a net
curtailment loss of $1.5 million. See Note 17, “2008 Restructuring
Program” for additional information.
In 2007,
the Company recognized a $2.1 million curtailment loss in connection with the
remeasurement of plan obligations related to the divestiture of the Gas
Technologies Segment.
72
The
change in the financial status of the pension plans and amounts recognized in
the Consolidated Balance Sheets at December 31, 2008 and 2007 are as
follows:
Defined
Benefit Pension Benefits
U.
S. Plans
International
Plans
(In
thousands)
2008
2007
2008
2007
Change
in benefit obligation:
Benefit
obligation at beginning of year
$
268,710
$
266,441
$
987,894
$
981,618
Service
cost
1,740
3,033
8,729
9,031
Interest
cost
15,197
15,511
50,146
50,118
Plan
participants’ contributions
—
—
2,311
2,354
Amendments
890
349
(111
)
—
Adoption
of SFAS 158 measurement date change
598
—
5,154
—
Actuarial
loss (gain)
(10,145
)
(1,857
)
(58,507
)
(39,523
)
Settlements/curtailments
—
(1,315
)
(10,388
)
—
Benefits
paid
(15,721
)
(13,452
)
(35,695
)
(40,156
)
Divestiture
of Gas Technologies Segment
(22,922
)
—
(678
)
—
Effect
of foreign currency
—
—
(250,019
)
24,452
Benefit
obligation at end of year
$
238,347
$
268,710
$
698,836
$
987,894
Change
in plan assets:
Fair
value of plan assets at beginning of year
$
311,193
$
271,899
$
905,849
$
829,927
Actual
return on plan assets
(83,794
)
49,731
(99,645
)
58,477
Employer
contributions
1,600
3,015
28,865
39,016
Plan
participants’ contributions
—
—
2,310
2,354
Settlements/curtailments
—
—
(237
)
—
Benefits
paid
(15,721
)
(13,452
)
(34,182
)
(38,987
)
Adoption
of SFAS 158 measurement date change
(2,495
)
—
(5,946
)
—
Divestiture
of Gas Technologies Segment
(21,097
)
—
—
—
Effect
of foreign currency
—
—
(238,257
)
15,062
Fair
value of plan assets at end of year
$
189,686
$
311,193
$
558,757
$
905,849
Funded
status at end of year
$
(48,661
)
$
42,483
$
(140,079
)
$
(82,045
)
The
actual return on the Company’s U.S. and international plans’ assets reflects the
decline in pension asset values during the second half of 2008. This
decline was due to the financial crisis and the deterioration of global economic
conditions.
Defined
Benefit Pension Benefits
U.
S. Plans
International
Plans
(In
thousands)
2008
2007
2008
2007
Amounts
recognized in the Consolidated Balance Sheets consist of the
following:
Noncurrent
assets
$
232
$
70,154
$
5,072
$
9,604
Current
liabilities
(2,111
)
(1,172
)
(1,897
)
(1,446
)
Noncurrent
liabilities
(46,782
)
(26,499
)
(143,254
)
(90,203
)
Accumulated
other comprehensive loss before tax
109,523
9,947
260,765
246,526
73
Amounts
recognized in Accumulated other comprehensive loss consist of the
following:
U. S. Plans
International Plans
(In
thousands)
2008
2007
2008
2007
Net
actuarial loss
$
107,672
$
8,346
$
257,393
$
240,193
Prior
service cost
1,851
1,601
3,184
6,026
Transition
obligation
—
—
188
307
Total
$
109,523
$
9,947
$
260,765
$
246,526
The
estimated amounts that will be amortized from accumulated other comprehensive
loss into defined benefit pension expense in 2009 are as follows:
(In
thousands)
U.
S. Plans
International
Plans
Net
actuarial loss
$
10,098
$
15,206
Prior
service cost
351
357
Transition
obligation
—
26
Total
$
10,449
$
15,589
The
Company’s estimate of expected contributions to be paid in year 2009 for the
U.S. defined benefit plans is $4.4 million and for the international defined
benefit plans is $33.5 million.
Contributions
to multi-employer pension plans were $26.1 million, $24.2 million and $18.3
million in years 2008, 2007 and 2006, respectively. For defined
contribution plans, payments were $18.8 million, $16.6 million and $13.7 million
for years 2008, 2007 and 2006, 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
2009
$
15.8
$
32.8
2010
15.0
32.8
2011
16.1
34.6
2012
16.0
35.4
2013
17.8
35.1
2014
- 2018
90.0
184.0
74
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
2008
2007
2006
Discount
rates
5.9%
5.3%
5.3%
Expected
long-term rates of return on plan assets
7.6%
7.6%
7.6%
Rates
of compensation increase
3.6%
3.3%
3.4%
U.
S. Plans
December
31
International
Plans
December
31
2008
2007
2006
2008
2007
2006
Discount
rates
6.2%
5.9%
5.9%
5.8%
5.1%
5.2%
Expected
long-term rates of return on plan assets
8.3%
8.3%
8.3%
7.3%
7.3%
7.4%
Rates
of compensation increase
4.8%
4.5%
4.4%
3.5%
3.2%
3.2%
The
expected long-term rates of return on plan assets for the 2009 pension expense
are 8.00% for the U.S. plans and 7.1% 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
2008
2007
2006
Discount
rates
6.1%
5.9%
5.3%
Rates
of compensation increase
3.4%
3.6%
3.3%
U.
S. Plans
December
31
International
Plans
December
31
2008
2007
2006
2008
2007
2006
Discount
rates
6.1%
6.2%
5.9%
6.0%
5.8%
5.1%
Rates
of compensation increase
4.0%
4.8%
4.5%
3.4%
3.5%
3.2%
The U.S.
discount rate was determined using a yield curve that was produced from a
universe containing over 300 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 20 basis points from the prior year.
75
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
2008
$
237.8
$
687.7
2007
$
257.0
$
899.4
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)
2008
2007
2008
2007
Projected
benefit obligation
$
228.7
$
38.1
$
659.5
$
88.5
Accumulated
benefit obligation
228.5
34.8
656.1
83.1
Fair
value of plan assets
179.8
10.5
517.3
51.7
The asset
allocations attributable to the Company’s U.S. defined benefit pension plans at
December 31, 2008, and October 31, 2007 and the target allocation of plan assets
for 2009, by asset category, are as follows:
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 and accordingly adjusts investments among and within asset
categories to ensure the long-term 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 2009, the expected return-on-asset assumption for
U.S. plans is 8.00%, as compared with the expected return-on-asset assumption
for 2008 which was 8.25%. The decrease reflects the impact of the
financial crisis that began in the second half of 2008 and the long-term effect
on recovery.
The U.S.
defined benefit pension plans assets include 434,088 shares of the Company’s
stock valued at $12.0 million at December 31, 2008 and 765,280 shares of the
Company’s common stock valued at $46.4 million at October 31,2007. These shares represented 6.4% and 14.4%, respectively, of total
plan assets. Dividends paid to the pension plans on the Company stock
amounted to $0.3 million in 2008 and $0.5 million in 2007.
The asset
allocations attributable to the Company’s international defined benefit pension
plans at December 31, 2008 and September 30, 2007 and the target allocation of
plan assets for 2009, by asset category, are as follows:
Plan
assets as of December 31, 2008, in the U.K. defined benefit pension plan
amounted to 85.6% of the international pension assets. These 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 asset/liability modeling studies and accordingly
adjusts investment amounts within asset categories to ensure the long-term
investment strategy is 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 7.23% and
7.5% for 2009 and 2008, respectively. The remaining international
pension plans with assets representing 14.4% of the international pension assets
are under the guidance of professional investment managers and have similar
investment objectives.
The
impact of adopting the recognition provisions of SFAS 158 effective December 31,2006 has been reflected in the consolidated financial statements as of December31, 2008, 2007 and 2006 and the incremental effect of applying SFAS 158 to
pension benefits is disclosed below.
Incremental Effect on
Consolidated Balance Sheet of Adopting the Recognition Provisions of
SFAS 158 for
Pension Plans - December 31, 2006
(In
thousands)
Balance
Sheet Before Adopting SFAS 158
(a)
Adjustments
to Adopt
SFAS 158
Balance
Sheet After Adopting SFAS 158
(a)
Assets:
Other
assets
$
164,571
$
(92,881
)
$
71,690
Liabilities:
Other
current liabilities
$
210,061
$
1,716
$
211,777
Retirement
plan liabilities
186,014
3,443
189,457
Deferred
income tax liabilities
113,425
(9,833
)
103,592
Stockholders’
Equity:
Accumulated
other comprehensive loss
$
(81,127
)
$
(88,207
)
$
(169,334
)
(a) Balances
represent major captions as presented on the Consolidated Balance
Sheet.
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. Effective December 31,2008, the Company uses a December 31 measurement date for its postretirement
benefit plans in accordance with the provisions of SFAS 158.
(In
thousands)
2008
2007
2006
Postretirement
Benefits Expense (Income)
Service cost
$
4
$
5
$
5
Interest cost
187
182
186
Recognized prior service
costs
3
3
3
Recognized gains
(26
)
(126
)
(38
)
Curtailment
gains
—
(82
)
(20
)
Postretirement
benefit expense (income)
$
168
$
(18
)
$
136
77
The
changes in the postretirement benefit liability recorded in the Consolidated
Balance Sheets are as follows:
Postretirement
Benefits
(In
thousands)
2008
2007
Change
in benefit obligation:
Benefit
obligation at beginning of year
$
3,202
$
3,193
Effect
of eliminating early measurement date
33
—
Service
cost
4
5
Interest
cost
187
182
Actuarial
loss
223
52
Benefits
paid
(260
)
(240
)
Acquisitions
—
85
Curtailment
—
(39
)
Settlement
—
(36
)
Benefit
obligation at end of year
$
3,389
$
3,202
Amounts
recognized in the statement of financial position consist of the
following:
Current
liability
$
(333
)
$
(300
)
Noncurrent
liability
(3,056
)
(2,902
)
Net
amount recognized
$
(3,389
)
$
(3,202
)
Postretirement
Benefits
(In
thousands)
2008
2007
Amounts
recognized in accumulated other comprehensive income consist of the
following:
Net
actuarial loss (gain)
$
198
$
(62
)
Prior
service cost
9
18
Net
amount recognized (before tax adjustment)
$
207
$
(44
)
The
estimated amounts that will be amortized from accumulated other
comprehensive income into net periodic benefit cost are as
follows:
2009
Actuarial
loss
$
3
Prior
service cost
2
Total
$
5
The
actuarial assumptions used to determine the postretirement benefit obligation
are as follows:
(Dollars
in thousands)
2008
2007
2006
Assumed
discount rate
6.10%
6.17%
5.87%
Health
care cost trend rate
8.50%
9.00%
9.00%
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
$
10
$
8
$
10
On
postretirement benefit obligation
202
164
144
Effect
of one percent decrease in health care cost trend rate:
On
total service and interest cost components
$
(9
)
$
(8
)
$
(9
)
On
postretirement benefit obligation
(182
)
(148
)
(130
)
It is
anticipated that the health care cost trend rate will decrease from 8.5% in 2009
to 5.0% in the year 2016.
78
The
assumed discount rates to determine the postretirement benefit expense for the
years 2008, 2007 and 2006 were 6.17%, 5.87% and 5.87%,
respectively.
The
Company’s expected benefit payments over the next ten years are as
follows:
(In
thousands)
Benefits
Payments
2009
$
333
2010
335
2011
334
2012
331
2013
326
2014
- 2018
1,482
During
2008, the Company decided to no longer file for Medicare Part D federal
subsidies that would provide retiree drug coverage, as the administrative cost
associated with pursuing the reimbursement is expected to exceed the benefits
received. Therefore, the Company does not expect any future subsidy
payments under the Medicare Modernization Act.
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 $0.8 million, $0.6
million and $0.6 million for 2008, 2007 and 2006, respectively.
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 $9.4 million, $12.1 million and $7.0
million in 2008, 2007 and 2006, 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.
79
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)
2008
2007
2006
United
States
$
98,842
$
110,926
$
69,620
International
244,495
271,513
217,984
Total
income before income taxes and minority interest
$
343,337
$
382,439
$
287,604
Income
tax expense (benefit):
Currently
payable:
Federal
$
33,873
$
37,917
$
33,525
State
1,988
8,670
2,338
International
54,817
68,688
56,156
Total
income taxes currently payable
90,678
115,275
92,019
Deferred
federal and state
1,478
(3,695
)
(1,328
)
Deferred
international
(336
)
6,018
2,663
Total income tax
expense
$
91,820
$
117,598
$
93,354
Cash
payments for income taxes, including Discontinued Operations, were $120.6
million, $125.4 million and $98.9 million for 2008, 2007 and 2006,
respectively.
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:
2008
2007
2006
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
(7.7)
(3.7)
(2.5)
FIN
48 tax contingencies and settlements
(0.5)
0.1
(0.3)
Cumulative
effect in change in statutory tax rates
(0.4)
(0.7)
—
Other,
net
(0.1)
(0.5)
0.2
Effective
income tax rate
26.7%
30.7%
32.5%
The
difference in effective tax rates on international earnings and remittances from
2006 to 2008 was primarily due to increased earnings in jurisdictions with lower
tax rates and the Company increasing its designation of certain international
earnings as permanently reinvested.
The
difference in effective tax rates for FASB Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”) tax contingencies and settlements from 2007 to
2008 resulted from the recognition of previously unrecognized tax benefits in
various state and foreign jurisdictions.
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, 2008 and
2007 are as follows:
80
(In
thousands)
2008
2007
Deferred
income taxes
Asset
Liability
Asset
Liability
Depreciation
$
—
$
152,750
$
—
$
142,102
Expense
accruals
30,371
—
32,074
—
Inventories
4,866
—
4,020
—
Provision
for receivables
2,587
—
2,093
—
Postretirement
benefits
1,223
—
1,157
—
Deferred
revenue
—
7,704
—
3,430
Operating
loss carryforwards
21,211
—
14,954
—
Deferred
foreign tax credits
3,601
—
—
—
Pensions
58,226
—
24,631
18,754
Currency
adjustments and outside basis differences on foreign
investments
71,030
—
—
13,120
Other
11,240
—
—
12,961
Subtotal
204,355
160,454
78,929
190,367
Valuation
allowance
(21,459
)
—
(15,317
)
—
Total
deferred income taxes
$
182,896
$
160,454
$
63,612
$
190,367
The
deferred tax asset and liability balances are included in the following
Consolidated Balance Sheets line items:
Deferred
income tax assets (liabilities)
December
31
(In
thousands)
2008
2007
Other
current assets
$
35,065
$
37,834
Other
assets
27,013
15,535
Other
current liabilities
(4,194
)
(5,701
)
Deferred
income taxes
(35,442
)
(174,423
)
At
December 31, 2008, the tax effected amount of net operating loss carryforwards
(“NOLs”) totaled $21.2 million. Tax affected NOLs from international
operations are $13.5 million. Of that amount, $12.7 million can be
carried forward indefinitely, and $0.8 million will expire at various times
between 2012 and 2023. Tax effected U.S. federal NOLs are $0.4
million, expire in 2018, and relate to preacquisition NOLs. Tax
effected U.S. state NOLs are $7.3 million. Of that amount, $0.1
million expire at various times between 2009 and 2015, $4.8 million expire at
various times between 2016 and 2023, and $2.4 million expire at various times
between 2024 and 2028.
The
valuation allowance of $21.5 million and $15.3 million at December 31, 2008 and
2007, respectively, related principally to NOLs and foreign investment tax
credits which are uncertain as to realizability.
The
change in the valuation allowances for 2008 and 2007 results primarily from the
increase in valuation allowances in certain jurisdictions based on the Company’s
evaluation of the realizability of future benefits partially offset by the
utilization of NOLs and the release of valuation allowances in certain
jurisdictions based on the Company’s revaluation 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, 2008 and 2007, such
earnings were approximately $741 million and $697 million,
respectively. If these earnings were repatriated at December 31,2008, the one time tax cost associated with the repatriation would be
approximately $99.6 million. The Company has various tax holidays in
the Middle East and Asia that expire between 2009 and 2012. The
Company no longer has tax holidays in Europe as they have all
expired. During 2008, 2007 and 2006, these tax holidays resulted in
approximately $0.2 million, $2.8 million and $2.3 million, respectively, in
reduced income tax expense.
81
The
Company adopted the provisions of 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
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”) 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, 2008, the company
recognized a benefit of $3.2 million for interest and
penalties. During the year ended December 31, 2007, the Company
recognized expense of $6.5 million for interest and penalties. The
company had $7.7 million and $10.9 million for the payment of interest and
penalties accrued at December 31, 2008 and 2007, respectively.
Additions
for tax positions related to the current year (includes currency
translation adjustment)
2,723
—
2,723
Additions
for tax positions related to prior years (includes currency translation
adjustment)
2,753
(629
)
2,124
Reductions
for tax positions related to acquired entities in prior years, offset to
goodwill
(92
)
—
(92
)
Other
reductions for tax positions related to prior years
(6,080
)
1,077
(5,003
)
Settlements
(5,181
)
705
(4,476
)
Total
unrecognized income tax benefits that, if recognized, would impact the
effective income tax rate as of December 31, 2008
$
24,299
$
(1,179
)
$
23,120
82
During
the third quarter of 2008, the U.S. Internal Revenue Service completed its audit
of the Company’s U.S. income tax returns for 2004 and 2005. The
resolution of the audit resulted in a payment of $2.8 million.
In July
2008, the Company and the Ontario Ministry of Finance settled its royalty
dispute matter consistent with the results obtained by the Company with the
Canada Revenue Agency (“CRA”). This matter is more fully discussed in
Note 10, “Commitments and Contingencies,” to the consolidated financial
statements.
The
Company filed voluntary disclosure agreements with various U.S. state
jurisdictions which resulted in a 2008 payment of $2.3 million and a realization
of UTBs of approximately $1.0 million.
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 2002.
Upon the
adoption of SFAS 141(R) on January 1, 2009, the resolution of all UTBs 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 income tax rate. The amount of
UTBs accounted for under FIN 48 from business combinations that may impact the
effective income tax rate as of December 31, 2008 is $4.6 million.
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
completed settlement discussions with the CRA which resulted in a resolution and
closure of the matter in the fourth quarter of 2007. The settlement
resulted in a refund to the Company in the amount of approximately $5.9 million
Canadian 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 of $0.6 million Canadian
dollars.
The
Ontario Ministry of Finance (“Ontario”) also proposed to disallow certain
expense deductions for the period 1994-1998. In July 2008, the
Company and Ontario settled this matter in a manner consistent with the results
obtained by the Company with the CRA. The settlement resulted in a total
refund to the Company of approximately $4.9 million Canadian dollars,
representing a refund of payments made to Ontario, plus accrued interest.
A portion of these amounts was utilized to satisfy the final assessment of $0.4
million Canadian dollars.
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, 2008 and
December 31, 2007 include accruals of $3.2 million and $3.9 million,
respectively, for environmental matters. The amounts charged against
pre-tax income related to environmental matters totaled $1.5 million, $2.8
million and $2.0 million in 2008, 2007 and 2006, respectively.
The
Company and an unrelated third party received a notice of violation in November
2007 from the United States Environmental Protection Agency (“the EPA”), in
connection with an alleged violation by the Company and such third party of
certain applicable federally enforceable air pollution control requirements in
connection with the operation of a slag processing area located on the third
party’s Pennsylvania facility. The Company and such third party have
promptly taken steps to remedy the situation. The Company and the
third party have reached an agreement in principle with the EPA to resolve this
matter and are in the process of finalizing this agreement. The
Company anticipates that its portion of any penalty would exceed $0.1
million. However, the Company does not expect that any sum it may
have to pay in connection with this matter would have a material adverse effect
on its financial position, results of operations or cash flows.
83
The
Company evaluates its liability for future environmental remediation costs 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 to
complete the clean-up have been recognized in the financial statements as of
December 31, 2008. Following the incident, the Company’s remaining
rail grinders were inspected by the Federal Railroad Administration (“FRA”) and
each grinder was found to be in compliance with legal
requirements. The Company also regularly inspects its grinders to
ensure they are in proper working condition and in compliance with contractual
commitments. The Company believes that the insurance proceeds already
received from the loss of the rail grinder have offset the majority of incurred
expenses, which have been recognized in the financial statements as of December31, 2008, and insurance proceeds should be available to cover any future
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.
ArcelorMittal
recently notified the Company that it would unilaterally revise the fixed fee
provisions of certain contracts between the parties with the intended effect
resulting in a significant price reduction to the Company. The
Company has notified ArcelorMittal that their actions are a breach of these
contracts and that the Company will take all necessary and appropriate actions
to protect its legal rights. Discussions between the parties continue
but it is possible that the parties may need to resort to third party resolution
of this issue. ArcelorMittal represented approximately 10% of the
Company’s sales in 2008, 2007 and 2006. The
Company expects ArcelorMittal sales in 2009 to be less than 10% of the Company’s
sales due primarily to reduced steel production levels; the Company’s
exiting of certain underperforming contracts with ArcelorMittal; and a stronger
U.S. dollar. It is possible that the eventual outcome of this
unprecedented breach of contract could negatively impact the Company’s long-term
relationship with this customer and, as a result, the Company’s financial
position, results of operations and cash flows could be negatively
impacted. Of all of the Company’s major customers in the Harsco
Metals Segment, the EVA on contracts with ArcelorMittal are the lowest in the
portfolio. Contracts with ArcelorMittal are long-term contracts, such
that any impact on the Company’s future results of operations would occur over a
number of years.
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
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, 2008, there are 26,235 pending asbestos personal injury claims
filed against the Company. Of these cases, 25,728 were pending in the
New York Supreme Court for New York County in New York State. The
other claims, totaling 507, 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, 2008, the Company has obtained dismissal by stipulation, or summary
judgment prior to trial, in 17,892 cases.
84
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, 2008, the Company has been listed as a defendant in 443 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. Insurance claim receivables are included in Other
receivables in the Company’s Consolidated Balance Sheets. See Note 1,
“Summary of Significant Accounting Policies,” for additional information on
Accrued Insurance and Loss Reserves.
As has
been indicated in previous disclosure filings, the working capital adjustments
associated with the Gas Technologies divestiture have not yet been
finalized. The Company has reflected a portion of the claimed amount
of the adjustment in the Company’s financial statements as of December 31,2008. Any additional final adjustment amounts are not expected to be
material to the Company’s financial position, results of operations or cash
flows. As part of its effort to resolve the working capital
adjustment claims, the Company recently submitted this matter to
arbitration. In response to this filing, Taylor-Wharton International, the
purchaser of the business, submitted certain counter-claims seeking damages
in excess of $30 million, relating primarily to the alleged breach of certain
representations and warranties made by the Company under the Purchase
Agreement. The Company intends to vigorously defend against the
counter-claims. The Company believes that it will be successful in
its defense of these claims and does not believe that any amount it will have to
pay in connection with these claims would have a material adverse effect on
its financial position, results of operations or cash flows.
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
85
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, 2008, 801,745 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)
Additional
Shares
Authorized
for
Purchase
No.
of Shares
Purchased
(a)
Remaining
No. of
Shares
Authorized
for
Purchase
December
31 (a)
2006
2,000,000
—
—
2,000,000
2007
2,000,000
—
—
2,000,000
2008
2,000,000
4,000,000
4,463,353
1,536,647
(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.
The
Company’s share repurchase program was extended by the Board of Directors in
September 2008. The Board authorized an increase of 4,000,000 shares
to the 946,367 remaining from the Board’s previous stock repurchase
authorization. The repurchase program expires January 31,2010.
In
addition to the above purchases, 29,346 shares were repurchased in 2008 in
connection with the issuance of shares as a result of vested restricted stock
units. In 2007 and 2006, 90 treasury shares and 1,766 treasury
shares, respectively, were issued in connection with SGB stock option exercises,
employee service awards, and shares related to vested restricted stock
units.
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.
86
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)
2008
2007
2006
(a)
Income
from continuing operations
$
245,623
$
255,115
$
186,402
(b)
Average
shares of common stock outstanding used to compute basic earnings per
common share
83,599
84,169
83,905
Dilutive
effect of stock options and restricted stock units
430
555
525
Average
shares of common stock outstanding used to compute dilutive earnings per
common share
84,029
84,724
84,430
Basic
earnings per common share from continuing operations
$
2.94
$
3.03
$
2.22
Diluted
earnings per common share from continuing operations
$
2.92
$
3.01
$
2.21
(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 adjusted to reflect reclassification
of Discontinued Operations for comparative
purposes.
All
outstanding stock options were included in the computation of average shares of
common stock outstanding used to compute diluted earnings per share at December31, 2008, 2007 and 2006.
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
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.
87
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, 2008, 2007 and 2006:
Restricted
stock units and fair values have been restated to reflect the March 2007
two-for-one stock split.
As of
December 31, 2008, the total unrecognized compensation cost related to nonvested
restricted stock units was $4.1 million which is expected to be recognized over
a weighted-average period of approximately 1.7 years.
As of
December 31, 2008, 2007 and 2006, excess tax benefits, resulting principally
from stock options were $1.7 million, $5.1 million and $3.6 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
88
shares of
the Company’s common stock for equity awards. At December 31, 2008,
there were 2,292,396 and 265,000 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 January 1, 2006 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 31,2008, 2007 and 2006 were $4.5 million, $17.1 million and $10.8 million,
respectively.
Options
to purchase 483,820 shares were exercisable at December 31, 2008. The
following table summarizes information concerning outstanding and exercisable
options at December 31, 2008.
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
219,715
1.43
$13.64
14.65
– 16.33
197,905
3.02
16.29
16.40
– 23.08
66,200
3.47
18.51
483,820
(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 $234.1 million and $159.2 million at December 31, 2008 and
89
2007,
respectively. These standby letters of credit, bonds and bank
guarantees are generally in force for up to four 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 1.60
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, 2008 for those currently outstanding, it is the
Company’s opinion that based on current economic conditions the replacement
costs would be higher than the present fee structure.
The
Company has currency exposures in approximately 50 countries. The
Company’s primary foreign currency exposures during 2008 were in the United
Kingdom, members of the European Economic and Monetary Union, Brazil, 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 revenues in the Company’s
Consolidated Statements of Income. The revenue the Company recorded
from these entities was $6.3 million, $3.0 million and $2.2 million for the
twelve months ended December 31, 2008, 2007 and 2006,
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, 2008 and 2007. 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 2008, September 2008 and November 2008.
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 were 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, 2008 and 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 were 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, 2008 and 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, 2008 and 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.
90
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 were 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, 2008
and 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.
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, 2008 or
2007.
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 conducts business in many different currencies and, accordingly, is
subject to the inherent risks associated with foreign exchange rate
movements. The financial position and results of operations of
substantially all of the Company’s foreign subsidiaries are measured using the
local currency as the functional currency. Foreign currency
denominated assets and liabilities are translated into U.S. dollars at the
exchange rates existing at the respective balance sheet dates, and income and
expense items are translated at the average exchange rates during the respective
periods. The aggregate effects of translating the balance sheets of
these subsidiaries are deferred as a separate component of stockholders’
equity.
The
Company has used derivative instruments, including swaps and forward contracts,
to manage certain foreign currency, commodity price and interest rate
exposures. Derivative instruments are viewed as risk management tools
by the Company and are not used for trading or speculative
purposes.
All
derivative instruments are recorded on the balance sheet at fair
value. Derivatives used to hedge foreign-currency-denominated balance
sheet items are reported directly in earnings along with offsetting transaction
gains and losses on the items being hedged. Derivatives used to hedge
forecasted cash flows associated with foreign currency commitments or forecasted
commodity purchases may be accounted for as cash flow hedges, as deemed
appropriate and if the criteria of SFAS 133 are met. Gains and losses
on derivatives designated as cash flow hedges are deferred as a separate
component of stockholders’ equity and reclassified to earnings in a manner that
matches the timing of the earnings impact of the hedged
transactions. The ineffective portion of all hedges, if any, is
recognized currently in earnings.
Commodity
Derivatives
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, which approves
the use of all commodity derivative instruments.
The
following tables summarize the open positions of contracts qualifying as cash
flow hedges at December 31, 2008 and 2007 under the requirements of SFAS
133. All contracts 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.
Cashless
Collars; unsecured, maturing monthly through November 2008
$
6,048
$
527
$
—
(a)
Notional
value is equal to the hedged volume multiplied by the strike price of the
derivative.
(b)
Amounts
are shown pre-tax.
Although
earnings volatility may occur between fiscal quarters due to hedge
ineffectiveness or 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.
The
Company may use derivative instruments to hedge cash flows related to foreign
currency fluctuations. At December 31, 2008 and 2007, the Company had
$293.9 million and $392.2 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, 2008 mature within nine 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, 2008 and
2007. 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, 2008, 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 $2.1
million at December 31, 2008. These forward contracts had a net
unrealized gain of $6 thousand that was included in Other comprehensive income
(loss), net of deferred taxes, at December 31, 2008. 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.
In
addition to foreign currency forward exchange contracts, the Company designates
certain loans as hedges of net investments in foreign
subsidiaries. The Company recorded charges of $7.6 million and $12.8
million during 2008 and 2007, respectively, as Accumulated other comprehensive
expense, which is a separate component of stockholders’ equity, related to
hedges of net investments.
Cross-Currency
Interest Rate Swap
In May
2008, the Company entered into a ten-year, $250.0 million cross-currency
interest rate swap in conjunction with the May 2008 note issuance (see Note 6,
“Debt and Credit Agreements”) in order to lock in a fixed euro interest rate for
$250.0 million of the borrowing. Under the swap, the Company receives
interest based on a fixed U.S. dollar rate and pays interest on a fixed euro
rate on the outstanding notional principal amounts in dollars and euros,
respectively. The cross-currency interest rate swap is recorded in
the consolidated balance sheet at fair value, with changes in value attributed
to the effect of the swaps’ interest spread recorded in Accumulated other
comprehensive income which is a separate component of stockholders’
equity. At December 31, 2008, the fair value asset of the swap was
$49.4 million.
93
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 in the
Harsco Infrastructure Segment and the “All Other” Category due to the Company’s
large number of customers and their dispersion across different industries and
geographies. However, the Company’s Harsco Metals 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.
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
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, and short-term borrowings approximate fair value
due to the short-term maturities of these assets and liabilities. At
December 31, 2008 and 2007, total fair value of long-term debt, including
current maturities, was $900 million and $1,049 million, respectively, compared
to carrying value of $895 million and $1,020 million,
respectively. Fair values for debt are based on 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.
Effective
January 1, 2008, the Company adopted SFAS 157, as amended by FSP SFAS
157-2, which provides a framework for measuring fair value under
GAAP. As defined in SFAS 157, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit
price). The Company utilizes market data or assumptions that the
Company believes market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs
to the valuation technique.
This
standard is now the single source in GAAP for the definition of fair value,
except for the fair value of leased property as defined in SFAS
13. SFAS 157 establishes a fair value hierarchy that distinguishes
between (1) market participant assumptions developed based on market data
obtained from independent sources (observable inputs) and (2) an entity’s
own assumptions about market participant assumptions developed based on the best
information available in the circumstances (unobservable inputs). The
fair value hierarchy consists of three broad levels, which gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level
3). The three levels of the fair value hierarchy under SFAS 157 are
described below:
·
Level
1—Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or
liabilities.
·
Level
2—Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly,
including quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; inputs other than quoted prices that are
observable for the asset or liability (e.g., interest rates); and inputs
that are derived principally from or corroborated by observable market
data by correlation or other means.
·
Level
3—Inputs that are both significant to the fair value measurement and
unobservable.
In
instances in which multiple levels of inputs are used to measure fair value,
hierarchy classification is based on the lowest level input that is significant
to the fair value measurement in its entirety. The Company’s
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to
the asset or liability.
94
The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis at December 31, 2008, and indicates
the fair value hierarchy of the valuation techniques utilized by the Company to
determine such fair value.
The
Company primarily applies the market approach for recurring fair value
measurements and endeavors to utilize the best available
information. Accordingly, the Company utilizes valuation techniques
that maximize the use of observable inputs, such as forward rates, interest
rates, the Company’s credit risk and counterparties’ credit risks, and minimize
the use of unobservable inputs. The Company is able to classify fair
value balances based on the observability of those inputs. Commodity
derivatives, foreign currency forward exchange contracts, and cross-currency
interest rate swaps are classified as Level 2 fair value based upon pricing
models using market-based inputs. Model inputs can be verified and
valuation techniques do not involve significant management
judgment.
FSP SFAS
157-2, issued in February 2008, delayed until January 1, 2009 the effective date
of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are
measured on a nonrecurring basis. The Company’s nonfinancial assets
consist principally of property, plant and equipment, goodwill, and other
intangible assets associated with acquired businesses. For these
assets, measurement at fair value in periods subsequent to their initial
recognition will be applicable if one or more of these assets are determined to
be impaired. When and if recognition of these assets at their fair
value is necessary, such measurements would be determined utilizing principally
Level 3 inputs.
14.
Information
by Segment and Geographic Area
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.
The
Company’s has two reportable segments and an “All Other” category labeled Harsco
Minerals & Rail. These segments and the types of products and
services offered include the following:
Harsco
Infrastructure Segment
Major
services include project engineering and equipment installation; as well as the
rental and sale of scaffolding, shoring and concrete forming systems for
industrial maintenance and capital improvement projects, non-residential
construction, and international multi-dwelling residential construction
projects.
Services
are provided to industrial and petrochemical plants; the infrastructure
construction, repair and maintenance markets; commercial and industrial
construction contractors; and public utilities.
Harsco
Metals 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.
95
All Other Category - Harsco Minerals &
Rail
Major
products and services include railway track maintenance equipment and services;
minerals and recycling technologies; granules for asphalt roofing shingles and
abrasives for industrial surface preparation derived from coal slag; industrial
grating; air-cooled heat exchangers; and boilers, water heaters and process
equipment, including industrial blenders, dryers and mixers.
Major
customers include private and government-owned railroads and urban mass transit
systems worldwide; steel mills; 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 32% and 17%, respectively, in
2008; 31% and 20%, respectively, in 2007; and 32% and 22%, respectively, in
2006. There are no significant inter-segment sales.
In 2008,
2007 and 2006, sales to one customer, ArcelorMittal, principally in the Harsco
Metals Segment were $416.6 million, $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. In addition, the Harsco
Metals Segment is dependent largely on the global steel industry, and in 2008,
2007 and 2006 there were two customers, including ArcelorMittal, that each
provided in excess of 10% of this Segment’s revenues under multiple long-term
contracts at several mill sites. 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%, 24% and 30% of total net Property, Plant and
Equipment as of December 31, 2008, 2007 and 2006, respectively. Net
Property, Plant and Equipment in the United Kingdom represented 15%, 20% and 23%
of total Net Property, Plant and Equipment as of December 31, 2008, 2007 and
2006, respectively.
Reconciliation
of Segment Operating Income to Consolidated Income From Continuing
Operations
Before
Income Taxes and Minority Interest
Twelve
Months Ended December 31,
(In
thousands)
2008
2007
2006
Segment
operating income
$
270,726
$
318,256
$
268,180
All
Other Category - Harsco Minerals
& Rail
150,922
142,191
77,466
General
corporate expense
(9,660
)
(2,642
)
(1,337
)
Operating
income from continuing operations
411,988
457,805
344,309
Equity
in income of unconsolidated entities, net
901
1,049
192
Interest
income
3,608
4,968
3,582
Interest
expense
(73,160
)
(81,383
)
(60,479
)
Income
from continuing operations before income taxes and minority
interest
$
343,337
$
382,439
$
287,604
Segment
Information
Assets
Depreciation
and
Amortization
(a)
(In
thousands)
2008
2007
2006
2008
2007
2006
Harsco
Infrastructure Segment
$
1,607,171
$
1,563,630
$
1,239,892
$
110,227
$
90,477
$
69,781
Harsco
Metals Segment
1,338,633
1,585,921
1,401,603
181,180
167,179
151,005
Gas
Technologies Segment
—
—
271,367
—
—
—
Segment
Totals
2,945,804
3,149,551
2,912,862
291,407
257,656
220,786
All
Other Category - Harsco Minerals & Rail
565,348
587,182
287,482
42,580
44,498
18,922
Corporate
51,818
168,697
126,079
3,962
3,019
1,863
Total
$
3,562,970
$
3,905,430
$
3,326,423
$
337,949
$
305,173
$
241,571
(a)
Excludes
Depreciation and Amortization for the Gas Technologies Segment in the
amounts of $1.2 million and $11.4 million for 2007 and 2006, respectively
because this Segment was reclassified to Discontinued
Operations.
Capital
Expenditures
(In
thousands)
2008
2007
2006
Harsco
Infrastructure Segment
$
226,559
$
228,130
$
138,459
Harsco
Metals Segment
205,766
193,244
161,651
Gas
Technologies Segment
—
8,618
9,330
Segment
Totals
432,325
429,992
309,440
All
Other Category - Harsco Minerals
& Rail
23,025
11,263
27,635
Corporate
2,267
2,328
3,098
Total
$
457,617
$
443,583
$
340,173
97
Information
by Geographic Area (a)
Revenues
from
Unaffiliated
Customers
(b)
Net
Property, Plant
and
Equipment
(c)
(In
thousands)
2008
2007
2006
2008
2007
2006
United
States
$
1,260,967
$
1,152,623
$
959,486
$
361,071
$
364,950
$
401,997
United
Kingdom
677,598
746,261
676,520
225,368
312,375
298,582
All
Other
2,029,257
1,789,276
1,389,607
896,394
857,889
621,888
Totals
including
Corporate
$
3,967,822
$
3,688,160
$
3,025,613
$
1,482,833
$
1,535,214
$
1,322,467
(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.
Information
about Products and Services
Revenues
from Unaffiliated Customers (a)
(In
thousands)
2008
2007
2006
Product
Group
Services
and equipment for infrastructure construction and
maintenance
$
1,540,258
$
1,415,873
$
1,080,924
On-site
services to metal producers
1,577,720
1,522,274
1,366,530
Railway
track maintenance services and equipment
277,595
232,402
231,625
Heat
exchangers
174,513
152,493
124,829
Industrial
grating products
149,168
130,919
107,048
Minerals
and recycling technologies (b)
127,140
123,240
—
Industrial
abrasives and roofing granules
74,118
68,165
73,112
Powder
processing equipment and heat transfer products
47,070
42,778
41,545
General
Corporate
240
16
—
Consolidated
Revenues
$
3,967,822
$
3,688,160
$
3,025,613
(a)
Excludes the sales of the Gas Technologies Segment.
(b)
Acquired February 2007.
15.
Other
(Income) and Expenses
During
2008, 2007 and 2006, the Company recorded pre-tax Other (income) and expenses
from continuing operations of $22.0 million, $3.4 million and $2.5 million,
respectively. The major components of this income statement category
are as follows:
Other
(Income) and Expenses
(In
thousands)
2008
2007
2006
Net
gains
$
(15,923
)
$
(5,591
)
$
(5,450
)
Impaired
asset write-downs
12,588
903
221
Employee
termination benefit costs
19,027
6,552
3,495
Costs
to exit activities
5,269
1,278
1,290
Other
expense
989
301
2,920
Total
$
21,950
$
3,443
$
2,476
Net
Gains
Net gains
are recorded from the sales of redundant properties (primarily land, buildings
and related equipment) and non-core assets. In 2008, gains related to
assets sold principally in the United States, Australia and the United
Kingdom. In 2007, gains related to assets sold principally in the
United States and in 2006, gains related to assets principally in Europe, South
America and the United States.
98
Net
Gains
(In
thousands)
2008
2007
2006
Harsco
Infrastructure Segment
$
(10,399
)
$
(2,342
)
$
(2,510
)
Harsco
Metals Segment
(4,538
)
(3
)
(2,823
)
All
Other Category - Harsco Minerals
& Rail
(986
)
(3,246
)
(117
)
Total
$
(15,923
)
$
(5,591
)
$
(5,450
)
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. In 2008,
impaired asset write-downs of $12.6 million were recorded principally in the
Harsco Metals Segment due to contract terminations and costs associated with
existing underperforming contracts. Impaired asset write-downs
related to assets principally in Australia, the United Kingdom and the United
States.
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 2008, 2007
and 2006 is detailed in the table below. None of the actions are
expected to incur any additional costs. The terminations in 2008
related primarily to the fourth quarter 2008 restructuring program and occurred
globally, but primarily in Western Europe and the United States. The
terminations in 2007 and 2006 occurred principally in Europe and the United
States.
Employee
Termination Benefit Costs
(In
thousands)
2008
2007
2006
Harsco
Infrastructure Segment
$
5,317
$
1,130
$
799
Harsco
Metals Segment
11,961
4,935
1,820
All
Other Category - Harsco Minerals & Rail
1,648
382
821
Corporate
101
105
55
Total
$
19,027
$
6,552
$
3,495
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 value in the period in which the liability is
incurred. In 2008, $5.3 million of exit costs were incurred,
principally lease run-out costs and relocation costs for Corporate, and the
Harsco Infrastructure and Harsco Metals Segments. In 2007 and 2006,
exit costs incurred were $1.3 million in each year, and principally related to
relocation costs, lease run-out costs and lease termination costs.
99
Costs
Associated with Exit or Disposal Activities
(In
thousands)
2008
2007
2006
Harsco
Infrastructure Segment
$
1,724
$
803
$
146
Harsco
Metals Segment
1,092
375
189
All
Other Category - Harsco Minerals & Rail
5
100
955
Corporate
2,448
—
—
Total
$
5,269
$
1,278
$
1,290
See Note
17, “2008 Restructuring Program,” for additional information on net gains,
impaired asset write-downs, employee termination benefit costs and costs
associated with exit and disposal activities.
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
Total
Accumulated other comprehensive income (loss)
$
(208,299
)
$
(2,501
)
17.
2008
Restructuring Program
As a
result of the deepening financial and economic crisis, in the fourth quarter of
2008 the Company initiated a restructuring program designed to improve
organizational efficiency and enhance profitability and shareholder value by
generating sustainable operating expense savings. Under this program,
the Company is principally exiting certain underperforming contracts with
customers, closing certain facilities and reducing the global
workforce. Restructuring costs were incurred primarily at the Harsco
Metals and Harsco Infrastructure Segments. In the fourth quarter of
2008, the Company recorded net pre-tax restructuring and other related charges
totaling $36.1 million, including $28.0 million in Other expenses, $5.8 million
reduction in services revenue, a net $1.5 million related to pension
curtailments and $0.8 million of other costs. These restructuring
actions are expected to be completed over the next twelve months, but
principally in the first quarter of 2009.
At
December 31, 2008, the Company completed workforce reductions of 407 employees
of a total expected workforce reduction of 1,429 employees. The
majority of the remaining workforce reductions and cost to exit activities are
targeted for completion during 2009, principally in the first
quarter.
100
The
restructuring accrual attributable to each segment at December 31 is a
follows:
Cost
to exit activities and contracts and related impaired asset
write-downs
12,396
(11,740
)
—
656
Pension
curtailment charge
2,178
(2,178
)
—
—
Total
Harsco Metals Segment
27,653
(15,186
)
(1,923
)
10,544
All
Other Category - Harsco Minerals & Rail
Employee
termination benefit costs
654
—
(123
)
531
Pension
curtailment charge
246
(246
)
—
—
Total
All Other Category - Harsco Minerals & Rail
900
(246
)
(123
)
531
Corporate
Employee
termination benefit costs
113
—
—
113
Cost
to exit activities
2,448
—
—
2,448
Total
Corporate
2,561
—
—
2,561
Total
$
36,082
$
(15,606
)
$
(3,071
)
$
17,405
The
remaining cash expenditures related to the 2008 actions of $17.4 million are
expected to be paid within the next twelve months. The pension
curtailment (gains) charges were recorded primarily as a component of cost of
services sold. See Note 8, “Employee Benefit Plans,” for additional
information. Impaired asset write-downs are reflected in the
Consolidated Balance Sheets as a reduction in the value of the respective
long-term assets. The cost to exit activities in the Harsco Metals
Segment represents impaired asset write-downs of $5.9 million and a customer
concession of $5.8 million, which were both directly related to the exiting of
underperforming contracts. See Note 15, “Other (Income) and
Expenses,” for additional information.
Gross
profit is defined as Sales less costs and expenses associated directly
with or allocated to products sold or services
rendered.
(b)
In
the fourth quarter of 2008, the Company recorded after–tax restructuring
charges of $23.1 million, or $0.28 per basic and diluted
share.
(c)
Discontinued
operations related principally to the Gas Technologies
Segment. In the fourth quarter of 2007, the Company recorded an
after-tax gain of $26.4 million, or $0.31 per basic and diluted share, on
the sale of its Gas Technologies
Segment.
(d)
Does
not total due to rounding.
102
Common
Stock Price and Dividend Information
(Unaudited)
Market Price Per Share
Dividends
Declared
High
Low
Per
Share
2008
First
Quarter
$
64.50
$
46.10
$
0.1950
Second
Quarter
64.75
53.75
0.1950
Third
Quarter
56.32
33.50
0.1950
Fourth
Quarter
37.41
17.55
0.1950
2007
First
Quarter
$
45.325
$
36.90
$
0.1775
Second
Quarter
54.00
44.49
0.1775
Third
Quarter
59.99
47.85
0.1775
Fourth
Quarter
66.51
55.37
0.1950
Item 9. Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosures.
None.
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, 2008. 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 have materially
affected, or are reasonably likely to materially affect, internal control over
financial reporting during the fourth quarter of 2008.
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, 2008 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 31,2008.
Item
9B. Other
Information.
COMMON STOCK OPTION
DISCLOSURE
Salvatore
D. Fazzolari, the Company’s Chairman and CEO, holds options to purchase 40,000
shares of the Company’s common stock that will expire in January 2010. The
Company anticipates that, prior to such expiration date, Mr. Fazzolari will take
steps to exercise such options. The timing and nature of the exercise have
yet to be determined.
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 2009 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 2009 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 2009 Proxy
Statement.
Equity
Compensation Plan Information
The
Company maintains the 1995 Executive Incentive Compensation Plan, as amended and
the 1995 Non-Employee Directors’ Stock Plan, as amended, 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.
104
The
following table gives information about equity awards under these plans as of
December 31, 2008. All securities referred to are shares of Harsco
common stock.
Equity
Compensation Plan Information
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 (1)
741,550
$
24.43 (2)
2,557,396
Equity
compensation plans not approved by security holders
—
—
—
Total
741,550
$24.43
2,557,396
(1)
Plans
include the 1995 Executive Incentive Compensation Plan, as amended, and
the 1995 Non-Employee Directors’ Stock Plan, as
amended.
(2)
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.
Information
regarding certain relationships and related transactions is incorporated by
reference to the sections entitled “Transactions with Related Persons” and
“Corporate Governance” of the 2009 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 2009 Proxy
Statement.
1. The
Consolidated Financial Statements are listed in the index to Item 8,
“Financial Statements and Supplementary Data,” on page
50.
(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
Schedule
II - Valuation and Qualifying Accounts for the years 2008, 2007 and
2006
107
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.
(b)
Includes
principally valuation allowance established against the deferred tax asset
related to a net investment hedge.
107
(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 Form 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 Form 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 Form 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.
Exhibit
to Form 10-Q for the period ended June30, 2001
Form
of Change in Control Severance Agreement (CEO)
Exhibit
volume, 2008 Form 10-K
10(k)
Harsco
Corporation Supplemental Retirement Benefit Plan as amended and restated
January 1, 2009
Exhibit
volume, 2008 Form 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 Form 10-K
10(m)
Harsco
Corporation Supplemental Executive Retirement Plan as
amended
Exhibit
volume, 1991 Form 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 Form 10-K
10(o)
(i)
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(o)
(ii)
Amendment
No. 1 to the Harsco Corporation 1995 Executive Incentive Compensation
Plan
Exhibit
volume, 2008 Form 10-K
111
Exhibit
Number
Data
Required
Location
in Form 10-K
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, 2008 Form 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 (Chief Executive
Officer)
Exhibit
volume, 2008 Form 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 (Chief Financial
Officer)
Exhibit
volume, 2008 Form 10-K
32
Certifications
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief
Financial Officer)
Exhibit
volume, 2008 Form 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.
HARSCO
CORPORATION
(Registrant)
Date
2-24-2009
/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.
Signature
Capacity
Date
/S/
Salvatore
D. Fazzolari
Chairman,
Chief Executive Officer
2-24-2009
(Salvatore
D. Fazzolari)
and
Director
/S/
Geoffrey
D. H. Butler
President,
Harsco Corporation
2-24-2009
(Geoffrey
D. H. Butler)
CEO,
Harsco Infrastructure and Harsco Metals and
Director
/S/
Stephen
J. Schnoor
Senior
Vice President and
2-24-2009
(Stephen
J. Schnoor)
Chief
Financial Officer
(Principal
Financial Officer)
/S/
Richard
M. Wagner
Vice
President and Controller
2-24-2009
(Richard
M. Wagner)
(Principal
Accounting Officer)
/S/
Kathy
G. Eddy
Director
2-24-2009
(Kathy
G. Eddy)
/S/
Stuart
E. Graham
Director
2-24-2009
(Stuart
E. Graham)
/S/
Terry
D. Growcock
Director
2-24-2009
(Terry
D. Growcock)
/S/
Jerry
J. Jasinowski
Director
2-24-2009
(Jerry
J. Jasinowski)
/S/
Henry
W. Knueppel
Director
2-24-2009
(Henry
W. Knueppel)
/S/
D.
Howard Pierce
Director
2-24-2009
(D.
Howard Pierce)
/S/
Carolyn
F. Scanlan
Director
2-24-2009
(Carolyn
F. Scanlan)
/S/
James
I. Scheiner
Director
2-24-2009
(James
I. Scheiner)
/S/
Andrew
J. Sordoni, III
Director
2-24-2009
(Andrew
J. Sordoni, III)
/S/
Dr.
Robert C. Wilburn
Director
2-24-2009
(Dr.
Robert C. Wilburn)
114
Dates Referenced Herein and Documents Incorporated by Reference
