-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VCWNztpCu18tySOQXKjtH2Pu+6/bHkT5sADYiB/gTpQNraD4E0TI7UnziWSvbKYG 4u7mjvL8TtFCo1FVOeU8kg== 0000950123-00-002481.txt : 20000322 0000950123-00-002481.hdr.sgml : 20000322 ACCESSION NUMBER: 0000950123-00-002481 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000321 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARSCO CORP CENTRAL INDEX KEY: 0000045876 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED STRUCTURAL METAL PRODUCTS [3440] IRS NUMBER: 231483991 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03970 FILM NUMBER: 574225 BUSINESS ADDRESS: STREET 1: P O BOX 8888 CITY: CAMP HILL STATE: PA ZIP: 17001-8888 BUSINESS PHONE: 7177637064 MAIL ADDRESS: STREET 1: PO BOX 8888 CITY: CAMP HILL STATE: PA ZIP: 17001-8888 10-K 1 FORM 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1999 Commission file number 1-3970 ----------------- --------- HARSCO CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 23-1483991 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. employer identification number) incorporation or organization) Camp Hill, Pennsylvania 17001-8888 - ---------------------------------------- ---------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 717-763-7064 ---------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------------------------ Common stock, par value $1.25 per share New York Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE - ------------------------------------------------------------------------------- (Title of class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 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. [ ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The aggregate market value of the Company's voting stock held by non-affiliates of the Company as of February 29, 2000 was $991,080,725. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Classes Outstanding at February 29, 2000 ------- -------------------------------- Common stock, par value $1.25 per share 39,942,800 Preferred stock purchase rights 39,942,800
Documents Incorporated by Reference ----------------------------------- Selected portions of the Notice of 2000 Meeting and Proxy Statement are Incorporated by Reference in Part III of this Report. The Exhibit index (Item No. 14) is located on pages 89 to 96. -1- 2 HARSCO CORPORATION AND SUBSIDIARY COMPANIES INFORMATION REQUIRED IN REPORT -------- PART I Item 1. Business: (a) Description of Business: Harsco Corporation ("the Company") is a services and engineered products company. The principal lines of business are: mill services that are provided to steel and non-ferrous metal producers in over 30 countries, including the United States; gas control and containment products for customers worldwide; scaffolding services to the industrial maintenance and construction markets principally in North America; railway maintenance of way services and equipment that are provided to worldwide railroads; and several other lines of business including, but not limited to, process equipment, industrial grating and bridge decking, industrial pipe fittings, slag abrasives and roofing granules. The Company's operations fall into three operating segments: Harsco Mill Services, Harsco Gas and Fluid Control and Harsco Infrastructure. The Company has over 300 locations in 32 countries, including the United States. In 1999, the Company acquired three businesses and divested three small non-core operations. Harsco Infrastructure Segment - In October 1999, the Company acquired Charter plc's Pandrol Jackson railway track maintenance business. The transaction was completed for approximately $48 million in cash plus assumption of liabilities, for a total consideration of approximately $65 million. Pandrol Jackson manufactures and markets worldwide a wide range of equipment and services used in railway track maintenance. In December 1999, the Company completed the sale of the railway switch, crossing and transit grinding business obtained as part of the Pandrol Jackson railway maintenance acquisition. This business, with annual sales of approximately $6 million, was divested in accordance with an agreement with the Department of Justice as a condition to the acquisition of Pandrol Jackson. In July 1999, the Company acquired certain assets and assumed certain liabilities of Structural Accessories, Inc. The total consideration was approximately $2 million. Structural Accessories, Inc. manufactures and sells bridge bearings and expansion joints. Harsco Gas and Fluid Control Segment - In February 1999, the Company acquired certain assets and assumed certain liabilities of Natural Gas Vehicle Systems, Inc. Total consideration was approximately $3 million. Natural Gas Vehicle Systems, Inc. manufactures cylinders used in vehicles which use natural gas. The Company completed the sale of Astralloy Wear Technology in March 1999 and the sale of the pavement marking and vegetation control business of Chemi-Trol in August 1999. Harsco Mill Services Segment - The Manchester truck dealership was sold in September 1999. The Company reports information about its operating segments according to the "management approach". The management approach is based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. The Company's reportable segments are identified based upon differences in products, services, and markets served. -2- 3 The operations of the Company in any one country, except the United States, do not account for more than 10% of sales. No single customer represented 10% or more of the Company's sales during 1999, 1998, and 1997. There are no significant intersegment sales. (b) Financial Information about Industry Segments: Financial information concerning Industry Segments is included in Note 14 to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data". (c) Narrative Description of Business: (1) A narrative description of the businesses by operating segment is as follows: Harsco Mill Services This segment is the world leader in providing on-site highly specialized services and technology under long-term contracts to steel producers and non-ferrous metal industries. The Company's flame and recycling technologies along with computerized scrap handling are several examples of the specialized services the Company provides. These highly specialized services and technologies include: scarfing, ferrocut, carbofer, briquetting and scrap management. The Company provides in-plant transportation and other specialized services, including slab management systems, general plant services, and other recycling technology. Other services provided include metal reclamation; slag processing, marketing and utilization; raw material management and handling; by-product recovery and recycling; and finished product handling and transport. Highly specialized recovery and cleaning equipment, installed and operated on the property of steel producers, together with standard material handling equipment are employed to reclaim metal and handle material. The customer uses this reclaimed metal in its steel production process. The nonmetallic residual slag is graded into various sizes at on-site Company-owned processing facilities and then sold commercially. It is used as an aggregate material in asphalt paving applications, railroad ballast and building blocks. Similar services are also provided to non-ferrous metal industries, such as aluminum, copper, and nickel. This segment also provides roofing granules and slag abrasives. The Company's slag abrasives and roofing granules are produced from utility coal slag and natural rock materials at a number of locations throughout the United States. The Company's Black Beauty(TM) abrasives are used for industrial surface preparation, such as rust removal and cleaning of bridges, ship hulls, and various structures. Roofing granules are sold to residential roofing shingle manufacturers. This segment operates at more than 160 sites in over 30 countries. Also included is the Reed Minerals unit, which provides roofing granules and slag abrasives. For 1999, percentage of consolidated net sales was 42%. Harsco Gas and Fluid Control Major product classes in this segment are gas containment and control equipment, industrial pipe fittings, and process equipment, principally air-cooled heat exchangers. Gas containment products include cryogenic gas storage tanks, high pressure and acetylene cylinders, propane tanks, and composite vessels for industrial and commercial gases and other products. Gas control products include valves and regulators serving a variety of markets, including the industrial gas commercial refrigeration, life support, and outdoor recreation industries. Products are used in applications such as scuba diving equipment and outdoor barbecue grills. -3- 4 The segment provides custom designed and manufactured air-cooled heat exchangers, principally for applications on field-sited natural gas compression packages, for both domestic and international locations. The segment is a major supplier of industrial pipe fittings and related products for the plumbing, hardware and energy industries. For 1999, percentage of consolidated net sales was 33%. Harsco Infrastructure Major product classes in this segment are scaffolding, shoring and concrete forming services, railway maintenance-of-way services and equipment, and industrial grating and bridge decking products. The segment's scaffolding, shoring and concrete forming service products include steel and aluminum support systems that are leased or sold to customers through a North American network of some 50 branch service centers. The Company also provides design engineering services, on-site installation, and equipment management services. The Company's railway maintenance-of-way services provide high technology comprehensive track maintenance and new track construction support to railroad customers. The railway maintenance-of-way services and equipment product class includes specialized track maintenance equipment used by private and government-owned railroads and urban transit systems worldwide. The equipment manufactured by the Company includes a comprehensive range of specially-designed systems used in the construction and maintenance of track and railbeds. The segment manufactures a varied line of industrial grating products at several plants in North America. The Company produces a full range of riveted, pressure-locked and welded grating in steel, aluminum and fiberglass, used mainly in industrial flooring, safety, and security applications for power, paper, chemical, refining and processing applications. The Company also produces bridge decking and related products for bridge surfaces. This segment also produces commercial and industrial boilers and hot water heaters, and blenders, dryers and mixers for the chemical and food processing industries. For 1999, percentage of consolidated net sales was 25%. (1) (i) The products and services of Harsco include a number of classes. The product classes that contributed 10% or more as a percentage of consolidated net sales in any of the last three fiscal years are as set forth in the following table.
1999 1998 1997 ---- ---- ---- Mill Services 39% 40% 38% Gas Control and Containment Equipment 24% 21% 21%
(1) (ii) New products and services are added from time to time; however, in 1999 none required the investment of a material amount of the Company's assets. (1) (iii) The manufacturing requirements of the Company's operations are such that no unusual sources of supply for raw materials are required. The raw materials used by the Company include principally steel and to a lesser extent aluminum which usually are readily available. (1) (iv) While Harsco has a number of trademarks, patents and patent applications, it does not consider that any material part of its business is dependent upon them. -4- 5 (1) (v) Harsco furnishes building products and materials and a wide variety of specialized equipment for commercial, industrial, public works and non-residential construction which are seasonal in nature. In 1999, construction-related operations accounted for 12% of total sales. (1) (vi) The practices of the Company relating to working capital items are not unusual compared with those practices of other service providers or manufacturers servicing mainly industrial and commercial markets. (1) (vii) No material part of the business of the Company is dependent upon a single customer or a few customers, the loss of any one of which would have a material adverse effect upon the Company. (1) (viii) Backlog of orders was $231.6 million and $188.6 million as of December 31, 1999 and 1998, respectively. It is expected that approximately 18% of the total backlog at December 31, 1999, will not be filled during 2000. There is no significant seasonal aspect to the Company's backlog. Backlog for scaffolding, shoring and forming services, and for roofing granules and slag abrasives is not included in the total backlog, because it is generally not quantifiable due to the nature of the products and services provided. Contracts for the Harsco Mill Services Segment are also excluded from the total backlog. These Contracts have an estimated value of $3.6 billion at December 31, 1999. (1) (ix) At December 31, 1999, the Company had no material contracts that were subject to renegotiation of profits or termination at the election of the Government. (1) (x) The various businesses in which the Company operates are highly competitive and the Company encounters active competition in all of its activities from both larger and smaller companies who produce the same or similar products or services or who produce different products appropriate for the same uses. (1) (xi) The expense for product development activities was $7,759,000, $6,977,000, and $6,090,000 in 1999, 1998, and 1997, respectively. (1) (xii) The Company has become subject, as have others, to increasingly stringent air and water quality control legislation. In general, the Company has not experienced substantial difficulty in complying with these environmental regulations in the past and does not anticipate making any major capital expenditures for environmental control facilities. While the Company expects that environmental regulations may expand, and its expenditures for air and water quality control will continue, it cannot predict the effect on its business of such expanded regulations. For additional information regarding environmental matters see Note 10 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data". (1) (xiii) As of December 31, 1999, the Company had approximately 15,700 employees. -5- 6 (d) Financial Information about Foreign and Domestic Operations and Export Sales: Financial information concerning foreign and domestic operations is included in Note 14 to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data". Export sales totaled $110.0 million and $114.7 million in 1999 and 1998, respectively. Item 2. Properties: Information as to the principal plants owned and operated by the Company is summarized in the following table:
Floor Space Location (Sq. Ft.) Principal Products - -------- --------- ------------------ Harsco Infrastructure: E. Syracuse, New York 48,000 Railroad Equipment Ludington, Michigan 159,000 Railroad Equipment Fairmont, Minnesota 312,000 Railroad Equipment West Columbia, South Carolina 224,000 Railroad Equipment Brendale, Australia 20,000 Railroad Equipment Nashville, Tennessee 246,000 Grating Nashville, Tennessee 87,000 Grating Charlotte, North Carolina 23,000 Grating Madera, California 48,000 Grating Leeds, Alabama 51,000 Grating Cheswick, Pennsylvania 56,000 Grating Channelview, Texas 86,000 Grating Marlboro, New Jersey 30,000 Grating Queretaro, Mexico 63,000 Grating Marion, Ohio 135,000 Construction Equipment Harsco Mill Services: Moundsville, West Virginia 12,000 Roofing Granules/Abrasives Drakesboro, Kentucky 41,000 Roofing Granules Gary, Indiana 19,000 Roofing Granules/Abrasives Ione, California 33,000 Roofing Granules
-6- 7 Item 2. Properties (continued):
Floor Space Location (Sq. Ft.) Principal Products - -------- --------- ------------------ Harsco Gas and Fluid Control: West Jefferson, Ohio 148,000 Pipe Fittings Crowley, Louisiana 172,000 Pipe Fittings Houston, Texas 26,000 Pipe Fittings Chicago, Illinois 35,000 Pipe Fittings Hamden, Connecticut 47,000 Pipe Fittings Vanastra, Ontario, Canada 55,000 Pipe Fittings East Stroudsburg, Pennsylvania 172,000 Process Equipment Port of Catoosa, Oklahoma 131,000 Heat Exchangers Sapulpa, Oklahoma 83,000 Heat Exchangers Lockport, New York 104,000 Valve Manufacturing Niagara Falls, New York 66,000 Valve Manufacturing Washington, Pennsylvania 112,000 Valve Manufacturing Jesup, Georgia 87,000 Propane Tanks Jesup, Georgia 65,000 Propane Tanks Jesup, Georgia 63,000 Cryogenic Storage Vessels Bloomfield, Iowa 48,000 Propane Tanks West Jordan, Utah 36,000 Propane Tanks Fremont, Ohio 69,000 Propane Tanks Pomona, California 56,000 Composite Pressure Vessels Gardena, California 26,000 Composite Pressure Vessels Harrisburg, Pennsylvania 245,000 Cylinders Huntsville, Alabama 220,000 Acetylene Tanks Theodore, Alabama 305,000 Cryogenic Storage Vessels Husum, Germany 61,000 Cryogenic Storage Vessels Shah Alam, Malaysia 25,000 Cryogenic Storage Vessels Shah Alam, Malaysia 29,000 Cylinders Beijing, China 134,000 Cryogenic Storage Vessels
-7- 8 The Company also operates the following plants which are leased:
Expiration Floor Space Principal Date of Location (Sq. Ft.) Products Lease - -------- ----------- -------- ---------- Harsco Infrastructure: Nottingham, England 30,000 Railroad Equipment 10/23/00 Danbury, Connecticut 16,000 Railroad Equipment 11/30/01 Tulsa, Oklahoma 10,000 Grating 04/28/01 Harsco Gas and Fluid Control: Lansing, Ohio 67,000 Pipe Fittings 01/31/03 Cleveland, Ohio 50,000 Brass Castings 09/30/00
The Company operates from a number of other plants, branches, warehouses and offices in addition to the above. The Company has over 160 locations related to mill services in over thirty countries, however since these facilities are on the property of the steel mill being serviced they are not listed. The Company considers all of its properties, at which operations are currently performed, to be in satisfactory condition. Item 3. Legal Proceedings: Information regarding legal proceedings is included in Note 10 to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data". Item 4. Submission of Matters to a Vote of Security Holders: There were no matters that were submitted during the fourth quarter of the year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. -8- 9 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters: On November 19, 1996, the Board of Directors declared a two-for-one stock split on the Company's common stock. One additional share was issued for each share of common stock held by shareholders of record as of the close of business on January 15, 1997. New shares were distributed on February 14, 1997. Harsco common stock is traded on the New York, Pacific, Boston, and Philadelphia Stock Exchanges under the symbol HSC. At the end of 1999, there were 40,071,785 shares outstanding. In 1999, the stock traded in a range of $34-3/8 - $23-1/16 and closed at $31-3/4 at year-end. At December 31, 1999 there were approximately 21,000 shareholders. For additional information regarding Harsco common stock market price and dividends declared, see the Common Stock Price and Dividend Information under Part II, Item 8, "Financial Statements and Supplementary Data". -9- 10 Item 6. Selected Financial Data
FIVE-YEAR STATISTICAL SUMMARY - ----------------------------- (ALL DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 1996 1995 INCOME STATEMENT INFORMATION Net sales $ 1,716,688 $ 1,733,458 $ 1,627,478 $ 1,557,643 $ 1,495,466 Income from continuing operations before interest, income taxes, and minority interest 169,736 191,901 179,888 166,057 131,019 Income from continuing operations 90,713 107,513 100,400 83,903 61,318 Income from discontinued defense business - - 28,424(a) 35,106 36,059 Gain on disposal of discontinued defense business - - 150,008 - - Net income 90,713 107,513 278,832 119,009 97,377 - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL POSITION INFORMATION Working capital $ 182,439 $ 112,619 $ 341,160 $ 214,519 $ 145,254 Total assets 1,659,823 1,623,581 1,477,188 1,324,419 1,310,662 Long-term debt 418,504 309,131 198,898 227,385 179,926 Total debt 455,111 363,738 225,375 253,567 288,673 Depreciation and amortization 135,853 131,381 116,539 109,399 104,863 Capital expenditures 175,248 159,816 143,444 150,294 113,895 Cash provided by operating activities 213,953 189,260 148,541 217,202 258,815 Cash provided (used) by investing activities (194,674) (233,490) 196,545 (153,225) (97,331) Cash (used) by financing activities (8,928) (134,324) (167,249) (92,944) (128,068) - ------------------------------------------------------------------------------------------------------------------------------------ RATIOS Return on net sales(1) 5.3% 6.2% 6.2% 5.4% 4.1% Return on average equity(2) 13.9% 14.3% 15.1% 14.0% 10.7% Return on average assets(3) 10.7% 12.9% 14.3% 13.7% 10.8% Current ratio 1.4:1 1.2:1 1.9:1 1.7:1 1.4:1 Total debt to total capital(4) 41.2% 34.7% 22.4% 27.1% 31.6% - ------------------------------------------------------------------------------------------------------------------------------------ PER SHARE INFORMATION (b) Diluted - Income from continuing operations $ 2.21 $ 2.34 $ 2.04 $ 1.67 $ 1.20 - Income from discontinued defense business - - .58(a) .70 .71 - Gain on disposal of discontinued defense business - - 3.05 - - - Net income 2.21 2.34 5.67 2.37 1.91 Book value 16.22 16.22 16.64 13.73 12.49 Cash dividends declared .91 .885 .82 .77 .75 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER INFORMATION Basic average number of shares outstanding (b) 40,882,153 45,568,256 48,754,212 49,894,515 50,504,707 Diluted average number of shares outstanding (b) 41,017,067 45,910,531 49,191,872 50,317,664 50,856,929 Number of employees 15,700 15,300 14,600 14,200 13,200 Backlog (c) $ 231,557 $ 188,594 $ 225,575 $ 211,734 $ 157,129
-10- 11 FIVE-YEAR STATISTICAL SUMMARY (a) Includes income through August 1997 (the measurement date) from the discontinued defense business. (b) Reflects two-for-one stock split to shareholders of record January 15, 1997. (c) Excludes the estimated value of long-term mill service contracts, which had an estimated value of $3.6 billion at December 31, 1999. (1) "Return on net sales" is calculated by dividing income from continuing operations by net sales. (2) "Return on average equity" is calculated by dividing income from continuing operations by quarterly weighted average equity. (3) "Return on average assets" is calculated by dividing income from continuing operations before interest expense, income taxes, and minority interest by quarterly weighted average assets. (4) "Total debt to total capital" is calculated by dividing the sum of debt (short-term borrowings and long-term debt including current maturities) by the sum of equity and debt. -11- 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: FINANCIAL CONDITION AND LIQUIDITY The change in the Company's financial position and liquidity is summarized as follows:
DECEMBER 31 DECEMBER 31 INCREASE/ (DOLLARS ARE IN MILLIONS) 1999 1998 (DECREASE) ================================================================================= Current Assets $ 612.9 $ 587.4 $ 25.5 Current Liabilities 430.5 474.8 (44.3) - --------------------------------------------------------------------------------- Working Capital $ 182.4 $ 112.6 $ 69.8 Current Ratio 1.4:1 1.2:1 ================================================================================= Notes Payable and Current Maturities $ 36.6 $ 54.6 $(18.0) Long-term Debt 418.5 309.1 109.4 - --------------------------------------------------------------------------------- Total Debt 455.1 363.7 91.4 Total Equity 650.1 685.3 (35.2) - --------------------------------------------------------------------------------- Total Capital $ 1,105.2 $1,049.0 $ 56.2 Total Debt to Total Capital 41.2% 34.7% =================================================================================
The improvement in the Company's working capital position and current ratio during 1999 was due principally to a reduction in current liabilities of $44.3 million. Additionally, current assets increased, but at a lesser rate. The largest reduction within current liabilities was an $18.0 million decrease in notes payable and current maturities of long-term debt due principally to refinancing short term notes into long-term debt. The reduction in current liabilities also included $14.6 million of cash payments related to the discontinued defense business. This is reflected as a reduction in Other current liabilities in the Consolidated Balance Sheet. A strategic focus of the Company is the minimization of capital employed including inventory levels. Inventories decreased a net of $3.6 million despite an increase of $16.3 million related to a fourth quarter 1999 acquired company (acquisition). Receivables increased by $20.2 million principally due to the acquisition and the timing of sales. Sales in the last two months of 1999 substantially exceeded those in the last two months of 1998. Long-term debt increased in 1999 principally as a result of capital expenditures (investments), share repurchases and an acquisition in the fourth quarter of 1999. Capital investments for 1999 were a record $175.2 million compared with the previous record of $159.8 million in 1998. Investments were made for new mill services contracts and other business growth initiatives, information technology, new processes, and for productivity improvements. The Company acquired 2,326,798 shares of its common stock in 1999 at a cost of $66.4 million. Due to the timing of actual cash settlements for the purchase of the stock, the cash used in 1999 was $71.9 million. The capital investments, share repurchases and cash dividends demonstrate the Company's continued commitment to creating value through strategic investment and return of capital to shareholders. In the past six years, the Company has committed over $1.7 billion to increasing shareholder value. -12- 13
CASH UTILIZATION: FOR THE YEAR ENDED DECEMBER 31 (IN MILLIONS) 1999 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ Capital Investments $ 175.2 $ 159.8 $ 143.4 $ 150.3 $ 113.9 $ 90.9 Strategic Acquisitions 48.9 158.3 8.5 21.1 4.1 - Share Repurchases 71.9 169.3 113.2 30.7 14.1 - Cash Dividends 37.0 40.3 39.1 37.9 37.4 35.1 - ------------------------------------------------------------------------------------------------------ Total $ 333.0 $ 527.7 $ 304.2 $ 240.0 $ 169.5 $ 126.0 ======================================================================================================
The Company's debt as a percent of total capital changed as a result of increased debt and a decrease in equity capital due to the Company's share repurchases and $27.3 million resulting from foreign currency translation adjustments. The foreign currency translation adjustments are principally due to 1999's 14% decrease in the translated value of the euro and a 33% decrease in the translated value of the Brazilian real.
FINANCIAL STATISTICS FOR THE YEAR ENDED DECEMBER 31 1999 1998 - --------------------------------------------------------------------------------- HARSCO STOCK PRICE HIGH-LOW $34.38 - $23.06 $47.25 - $23.00 - --------------------------------------------------------------------------------- RETURN ON AVERAGE EQUITY 13.9% 14.3% - --------------------------------------------------------------------------------- Return on Average Assets 10.7% 12.9% Return on Average Capital 10.0% 11.5%
Lower returns on average equity, assets, and capital are due principally to lower income in 1999 compared with the record income from continuing operations for 1998. More specifically, income was lower in the first half of 1999 compared to the first half of 1998. However, this was partially offset by higher income for the second half of 1999 than the same period of 1998. Return on average equity was positively affected by lower average equity due principally to share repurchases. The Company's book value per share was unchanged at $16.22 per share at December 31, 1998 and 1999.
(IN MILLIONS) 1999 1998 1997 - ------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATIONS: $214.0 $189.3 $148.5
Operating cash flows were a strong $214.0 million in 1999 compared with $189.3 million in 1998. These amounts include $14.6 million in 1999 and $13.6 million in 1998 of cash payments for the discontinued defense business. The increase in cash from operating activities was due principally to intensified efforts to reduce inventories in 1999. A strategic management initiative in 1999 has focused on a reduction of working capital components including inventory. This focus will continue in 2000 and beyond. Lower earnings in 1999, the timing of cash receipts from accounts receivable, and the timing of payments on accounts payable, partially offset the significant improvement in cash provided by operations. The Company has a U.S. commercial paper borrowing program under which it can issue up to $400 million of short-term notes in the U.S. commercial paper market. In addition, the Company has a three billion Belgian franc commercial paper program, equivalent to -13- 14 approximately U.S. $75 million at December 31, 1999. The Belgian program provides the capacity to borrow euros to fund the Company's European operations more efficiently. The Company limits the aggregate commercial paper and syndicated credit facility borrowings at any one time to a maximum $400 million. At December 31, 1999, the Company had $205.4 million of U.S. commercial paper debt outstanding, and $28.3 million of commercial paper debt outstanding under the Belgian program. The Company has available through a syndicate of banks a $400 million multi-currency five-year revolving credit facility, extending through July 2001. This facility serves as back-up to the Company's U.S. commercial paper program. As of December 31, 1999 there were no borrowings outstanding under this facility. The Company's outstanding long-term notes are rated A by Standard & Poor's, A by Fitch IBCA and A-3 by Moody's. The Company's commercial paper is rated A-1 by Standard & Poor's, F-1 by Fitch IBCA and P-2 by Moody's. A Form S-3 shelf registration is on file with the Securities and Exchange Commission for the possible issuance of up to an additional $200 million of new debt securities, preferred stock or common stock. As supported by the above, the Company's financial position and debt capacity should enable it to meet its current and future requirements. As additional resources are needed, the Company should be able to obtain funds readily and at competitive costs. The Company is positioned to continue to invest in strategic acquisitions, selective high return capital investments, and to issue cash dividends as means to enhance shareholder value. The Company recently completed its strategic initiative of purchasing 20% of the Company's outstanding shares. With the completion of this program, the Company intends to use future discretionary cash flow principally for debt reduction and acquisitions, although additional shares may be acquired from time to time. RESULTS OF OPERATIONS 1999 COMPARED WITH 1998
AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 1999 1998 (DECREASE) (DECREASE) ----------------------------------------- ---- ---- ---------- ---------- Revenues $ 1,720.8 $ 1,735.4 $ (14.6) (1%) Income before interest, income taxes, and minority interest 169.7 191.9 (22.2) (12%) Net income 90.7 107.5 (16.8) (16%) Basic earnings per common share 2.22 2.36 (.14) (6%) Diluted earnings per common share 2.21 2.34 (.13) (6%)
SUMMARY ANALYSIS OF RESULTS Despite improving conditions in the steel industry during the last six months of 1999, the Company's results for the full year of 1999 reflect the adverse effects of a steel industry affected by overcapacity, reduced prices and weak demand in certain parts of the world. These problems contributed to reduced steel production and financial stress at several steel mills. Certain customers in the United States were forced to file for bankruptcy protection. In the second half of 1999, increased levels of domestic steel production and capacity utilization -14- 15 favorably affected the Company's results. Second half net income and earnings per share for 1999 exceeded the same period of 1998. Soft market conditions in the industrial gas and oil industries contributed to lower results for 1999. However, the significant increase in crude oil prices that was experienced in late 1999 contributed to improved results for the second half. The Company's order backlog in the Harsco Gas and Fluid Control Segment as of December 31, 1999 is 27% higher than as of December 31, 1998, reflecting improved business conditions. In 1999, the strong U.S. dollar adversely impacted the foreign currency translation effect on results of operations in many countries in which the Company operates. Additionally, pre-tax pension expense for 1999, calculated in accordance with SFAS No. 87, was $10.6 million higher than 1998. The increase unfavorably impacted cost of services and products sold as well as selling, general, and administrative expenses. Despite decreases in the Company's revenues and income for 1999 when compared to 1998, certain economic and market conditions as of December 31, 1999, particularly for the Harsco Mill Services and the Harsco Gas and Fluid Control Segments, indicate that the unfavorable trends experienced in 1999 have begun to dissipate. -15- 16 COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS REVENUES Revenues for 1999 were $1.72 billion, slightly below 1998. The decrease reflects principally the unfavorable effects of market conditions in the steel, oil and gas industries during the first six months of 1999. Improvements in market conditions in the second half of 1999, as well as higher sales from acquisitions, net of dispositions of non-core businesses, partially offset the lower sales reported in the first six months of 1999. Excluding the adverse foreign exchange translation effect of the strengthening U.S. dollar, particularly relative to the Brazilian real, the euro, the South African rand and the British pound, revenues exceeded 1998. COST OF SALES AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Costs of services and products sold for 1999 approximated that of 1998. As a result of divesting certain non-core businesses and the Company's continuing cost reduction, process improvement, and reorganization efforts, selling, general, and administrative expenses decreased despite the inclusion of acquired companies. The total of cost of sales plus selling, general, and administrative expenses was lower than 1998, despite a significant increase in pension expense. NET SPECIAL CHARGES AND GAINS In 1999 the Company incurred $6.0 million of net pre-tax expense related to special charges and gains. Special charges include asset write-downs, employee termination benefit costs, costs to exit activities, and other reorganization-related costs resulting from the company's continuing efforts to consolidate and streamline its businesses. Gains result principally from the disposal of non-core businesses. In 1998 net special charges were $2.2 million. Net gains for 1998 of $29.1 million consist principally of a pre-tax net gain of $27 million recorded on the October 1998 sale of the Nutter Engineering unit of the Harsco Gas and Fluid Control Segment. Such gains are reflected as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows. Total proceeds associated with 1998 special gains were $42.9 million and are included in proceeds from the sale of businesses and property, plant and equipment in the investing activities section of the Consolidated Statement of Cash Flows. Net gains for 1999 were $0.6 million. Impaired asset write-downs for 1999 of $2.9 million include a $1.9 million pre-tax, non-cash, write-down of the Company's investment in Bio-Oxidation Services Inc. which is included in the Harsco Gas and Fluid Control Segment. The Company's investment in Bio-Oxidation Services Inc. is being held for disposal. The write-down amount was measured on the basis of the lower of carrying amount or fair value less cost to sell. Fair value was determined using available information based upon the estimated amount at which the assets could be sold in a current transaction between willing parties. For the year ended December 31, 1999, Bio-Oxidation Services Inc. recorded a pre-tax loss of $2.3 million which includes the asset write-down of $1.9 million. The Company estimates that the disposal will occur during 2000. Impaired asset write-downs of $14.4 million for 1998 include a $6.1 million pre-tax, non-cash, write-down of the Company's investment in Bio-Oxidation Services Inc. For the year ended December 31, 1998, Bio-Oxidation Services Inc. recorded a pre-tax loss of $9.8 million which includes the asset write-down of $6.1 million. Impaired asset write-downs for 1998 also include a $6.1 million pre-tax, non-cash, write-down of assets, principally property, plant and equipment in the Harsco Mill Services Segment. The -16- 17 write-down became necessary as a result of significant adverse changes in the international economic environment and the steel industry. Impairment loss was measured as the amount by which the carrying amount of assets exceeded their estimated fair value. Fair value was estimated based upon the expected future realizable net cash flows. In September 1999, assets associated with a substantial portion of this provision were sold in conjunction with the termination settlement of a contract in Russia. Employee termination benefit costs consist principally of severance arrangements to employees terminated as a result of management reorganization actions. Under these reorganization actions, the Company's management has established and approved specific plans of termination. Details of the termination benefit plans have been communicated to the affected employees prior to recognition of related provisions. Non-cash charges for employee termination benefit costs are included as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows. During 1999, $2.9 million of expense related to employee termination benefits was incurred principally in the Harsco Mill Services Segment, primarily in France and the United Kingdom. In 1999, 220 employees were included in employee termination arrangements initiated by the Company and approximately $1.8 million of cash payments were made under such arrangements. The payments are reflected as uses of operating cash in the Consolidated Statement of Cash Flows. During 1998, $6.5 million of expense related to employee termination benefits occurred principally in the Harsco Mill Services Segment, primarily in South Africa, United States, France, and Germany. In 1998, approximately 670 employees were included in employee termination arrangements initiated by the Company and approximately $2.4 million of cash payments were made under such arrangements. An additional $3.3 million was disbursed in 1999 for the 1998 reorganization actions. -17- 18 EMPLOYEE TERMINATION BENEFIT COSTS AND PAYMENTS
(IN MILLIONS) SUMMARY OF ACTIVITY ----------------------- Original reorganization action period 1999 1998 Employee termination benefits expense $ 2.9 $ 6.5 ------ ------ Payments: Disbursed in 1998 - (2.4) Disbursed in 1999 (1) (1.8) (3.3) ------ ------ Total payments (1.8) (5.7) Other - (0.4) ------ ------ Remaining payments as of December 31, 1999 (2) $ 1.1 $ 0.4 ====== ======
(1) - Disbursements in 1999 are categorized according to the original reorganization action period to which they relate (1999 or 1998). Cash severance payments in 1999 occurred principally in the Harsco Mill Services Segment in South Africa principally for 1998 reorganization actions. (2) - Remaining payments are categorized according to the original reorganization action period to which they relate (1999 or 1998). EMPLOYEE TERMINATIONS - NUMBER OF EMPLOYEES
SUMMARY OF ACTIVITY --------------------- Original reorganization action period 1999 1998 Employees affected by new reorganization actions 220 670 ---- ---- Employee terminations: Terminated in 1998 - (349) Terminated in 1999 (172) (352) ---- ---- Total terminations (172) (701) Other (9) 35 ---- ---- Remaining terminations as of December 31, 1999 39 4 ==== ====
INTEREST EXPENSE The Company's defense business was sold in the fourth quarter of 1997. This resulted in $344 million of pre-tax cash proceeds. The availability of a substantial portion of this cash in 1998 resulted in additional interest income, as well as reduced interest expense compared to 1999. Additionally, interest expense for 1999 was higher than 1998 as a result of increased borrowings for record capital expenditures (investments), the Company's share repurchase program and an acquisition in the fourth quarter of 1999. Capital investments, $175.2 million in 1999, were made for new mill services contracts, other business growth initiatives, information technology, new processes, and for productivity improvements. -18- 19 INCOME BEFORE INCOME TAXES AND MINORITY INTEREST As a result of factors disclosed in previous sections, income before income taxes and minority interest was down 18% from 1998. PROVISION FOR INCOME TAXES The effective income tax rate for 1999 was 35% versus 37.5% for 1998. The reduction in the income tax rate is due principally to lower effective income tax rates on domestic earnings. NET INCOME AND EARNINGS PER SHARE Net income of $90.7 million was below 1998. Basic earnings per common share were $2.22 down from $2.36 in 1998. Diluted earnings per common share were $2.21 down from $2.34 in 1998. SEGMENT ANALYSIS HARSCO MILL SERVICES SEGMENT
AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS) 1999 1998 (DECREASE) (DECREASE) - ------------------------- ---- ---- ---------- ---------- Sales $ 729.6 $ 751.9 $(22.3) (3%) Income before interest, income taxes, and minority interest 81.2 84.3 (3.1) (4%) Segment net income 45.1 43.3 1.8 4%
Sales of the Harsco Mill Services Segment were below 1998. The inclusion of sales from an acquired company for the full year 1999 was partially offset by the 1998 disposition of a non-core business. The decrease also reflects the unfavorable effects of foreign exchange translation and overcapacity in the steel industry which adversely affected worldwide steel prices and production. This is particularly true in the United States where the steel industry filed complaints with the government due to alleged unfairly low-priced imports. Lower steel production adversely affected volume and margins at most steel mills in the United States including many of the Company's customers. However, during the last six months of 1999, steel production and capacity utilization in the United States trended upwards reflecting the highest levels since the second quarter of 1998. Additionally, certain other key countries in which the Company conducts business also experienced upward trends in steel production in 1999. The Harsco Mill Services Segment fourth quarter 1999 results reflected this trend as revenues and income, excluding special charges and gains, exceeded the same period of 1998. Income before interest, income taxes, and minority interest of the Harsco Mill Services Segment was below 1998. Results in 1998 included $10.0 million of pre-tax, non-cash write-downs of assets, principally property, plant and equipment. Additionally, $4.9 million of employee termination benefit costs were included in net special charges and gains in 1998. Excluding net special charges and gains, income before interest, income taxes, and minority interest was $84.5 million in 1999 compared to $99.9 million in 1998. The decrease in income for 1999 reflected the adverse effects of lower steel production and prices in the first half of 1999. Results for 1999 include a foreign currency transaction gain in Brazil, while in 1998, net foreign currency translation exchange losses were incurred. The transaction gain in Brazil partially offset the net unfavorable foreign currency impact associated with translation of the results of operations of the Harsco Mill Services Segment. -19- 20 Net income of the Harsco Mill Services Segment was above 1998. Excluding net special charges and gains, net income in 1999 was $47.3 million compared to $52.9 million in 1998 reflecting the conditions previously disclosed. HARSCO GAS AND FLUID CONTROL SEGMENT
AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS) 1999 1998 (1) (DECREASE) (DECREASE) - ------------------------- ---- ---- ---------- ---------- Sales $560.9 $588.7 $(27.8) (5%) Income before interest, income taxes, and minority interest 47.5 72.3 (24.8) (34%) Segment net income 27.0 40.9 (13.9) (34%)
(1) Segment information for 1998 has been restated to reflect the realignment of the heat transfer and industrial blending equipment product lines from the Harsco Gas and Fluid Control Segment to the Harsco Infrastructure Segment. Sales of these product lines were $26.9 million and $29.2 million for the years 1999 and 1998, respectively. Sales of the Harsco Gas and Fluid Control Segment decreased from 1998. The inclusion of a full year's sales of three acquired companies was more than offset by lower sales of process equipment due in part to the disposition of three non-core businesses. Reduced sales of gas control and containment equipment and process equipment also reflected decreased demand in the industrial gas and oil industries. In late 1999, these industries were favorably affected by rising crude oil prices. Income before interest, income taxes, and minority interest of the Harsco Gas and Fluid Control Segment was below 1998 principally due to the inclusion in 1998 of gains on the disposal of two businesses. Excluding net special charges and gains, income before interest, income taxes, and minority interest was $50.0 million in 1999 compared to $54.1 million in 1998. The decrease reflected the adverse effects of reduced demand from customers in the industrial gas and oil industries. Segment net income was below 1998 principally due to the inclusion in 1998 of gains on the disposal of two businesses. Net income for 1999 was adversely affected, but to a lesser extent than 1998, by valuation provisions related to the write-down of assets held for disposal. Excluding net special charges and gains, net income in 1999 was $28.6 million compared to $30.0 million in 1998. -20- 21 HARSCO INFRASTRUCTURE SEGMENT
AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS) 1999 1998 (1) (DECREASE) (DECREASE) - ------------------------- ---- ---- ---------- ---------- Sales $ 426.2 $ 392.9 $ 33.3 8% Income before interest, income taxes, and minority interest 41.2 32.9 8.3 25% Segment net income 22.5 18.6 3.9 21%
(1) Segment information for 1998 has been restated to reflect the realignment of the heat transfer and industrial blending equipment product lines from the Harsco Gas and Fluid Control Segment to the Harsco Infrastructure Segment. Sales of these product lines were $26.9 million and $29.2 million for the years 1999 and 1998, respectively. The Harsco Infrastructure Segment's sales for 1999 exceeded 1998 due to increased sales of scaffolding, shoring and forming services, as well as sales of railway maintenance-of-way equipment and contract services which included the effect of an acquisition in the fourth quarter of 1999. Income before interest, income taxes, and minority interest of the Harsco Infrastructure Segment was significantly above 1998. Excluding net special charges and gains, income before interest, income taxes, and minority interest was $41.2 million compared to $37.7 million in 1998. The increase was due principally to improved margins on sales of grating products and, to a lesser extent, higher income for scaffolding, shoring and forming services. Segment net income was above 1998 due principally to improved margins on sales of grating products. Additionally, increased income was recorded for scaffolding, shoring and forming services. Excluding net special charges and gains, net income in 1999 was $22.5 million compared to $21.8 million in 1998. INDUSTRIAL SERVICES AND ENGINEERED PRODUCTS In addition to the segment reporting previously presented, the Company is a diversified industrial services and engineered products company. Total industrial services sales, include mill services, as well as scaffolding, shoring, and forming services and railway maintenance-of-way services. Engineered products include sales of the Reed Minerals unit in the Harsco Mill Services Segment, and product sales of the Harsco Infrastructure and the Harsco Gas and Fluid Control Segments. -21- 22
(DOLLARS ARE IN MILLIONS) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- SALES - ----- Industrial Services $ 864.0 50% $ 866.4 50% Engineered Products 852.7 50% 867.1 50 --------- ---------- ---------- ---------- Total sales $ 1,716.7 100% $ 1,733.5 100% ========== ========== =========== ========== INCOME - ------ Industrial Services $ 87.9 52% $ 80.2 42% Engineered Products 82.0 48% 109.3 58 --------- ---------- ---------- ---------- Total segment income before interest, income taxes, and minority interest $ 169.9 100% $ 189.5 100% ========== ========== =========== ==========
Industrial services income in 1999 was $87.9 million compared with $80.2 million in 1998. Excluding losses and impaired asset write-downs associated with the medical waste disposal service business, industrial services income was $90.2 million and $90.0 million for 1999 and 1998, respectively. Income for engineered products in 1998 included a pre-tax net gain of $27 million. -22- 23 RESULTS OF OPERATIONS 1998 COMPARED WITH 1997
AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS, EXCEPT PER SHARE) 1998 1997 (DECREASE) (DECREASE) - ------------------------------------------- ---- ---- ---------- ---------- Revenues $1,735.4 $1,629.1 $ 106.3 7% Income from continuing operations before interest, income taxes, and minority interest 191.9 179.9 12.0 7% Income from continuing operations 107.5 100.4 7.1 7% Basic earnings per common share from continuing operations 2.36 2.06 .30 15% Diluted earnings per common share from continuing operations 2.34 2.04 .30 15%
SUMMARY ANALYSIS OF RESULTS The Company's results for 1998 showed substantial improvement over 1997. The acquisition of Faber Prest Plc for the Harsco Mill Services Segment and three acquisitions for the Harsco Gas and Fluid Control Segment enhanced the market leading position of these segments, and contributed to the overall revenue growth. Strong results from scaffolding, shoring and forming services and process equipment also contributed to improved operating results. However, 1998 results were adversely affected by the Asian economic crisis, particularly its effects on the steel industry. Beginning in the third quarter of 1998, a significant decline in worldwide steel prices occurred due to overcapacity in the industry. Several mills temporarily idled capacity, impacting activity levels for the Harsco Mill Services Segment. The Asian economic crisis also impacted the results of the Harsco Gas and Fluid Control Segment's Asian operations, lowered export sales from certain domestic locations, and reduced margins of certain domestic operations adversely affected by low-priced imports. The strong U.S. dollar also adversely impacted 1998 results compared to 1997 for many of the company's international operations. COMPARATIVE ANALYSIS OF CONSOLIDATED RESULTS REVENUES Revenues from continuing operations for 1998 were $1.74 billion, 7% above 1997. The increase was due to the inclusion of acquired companies in 1998. Inclusion of the acquired companies increased revenues for the Harsco Mill Services Segment and for gas control and containment equipment in the Harsco Gas and Fluid Control Segment. Process equipment sales also increased. Sales of scaffolding, shoring, and forming services increased, but to a lesser extent. These increases were partially offset by lower sales of industrial fittings, railway maintenance-of-way equipment and contract services, and grating. Excluding the adverse foreign exchange translation effect of the strengthening U.S. dollar, revenues from continuing operations for 1998 were approximately 8% above 1997. -23- 24 COST OF SALES AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES Cost of products and services sold increased due to the inclusion of acquired companies. Selling, general, and administrative expenses were only slightly above 1997, despite the inclusion of acquired companies. This resulted from the Company's cost control efforts. Also included in 1998 were $1.7 million of net pre-tax foreign currency translation/transaction losses, principally due to the weakening of the Mexican new peso and the Russian ruble in relation to the U.S. dollar, as compared with $0.5 million of net foreign currency translation/transaction gains in 1997. NET SPECIAL CHARGES AND GAINS In 1998 the Company incurred $2.2 million of net pre-tax special charges including asset write-downs, employee termination benefit costs, costs to exit activities, and other reorganization-related costs, compared with $2.6 million in 1997. The charges were incurred as a result of the Company's continuing efforts to consolidate and streamline its businesses. The $2.2 million net special charges for 1998 include a $15.6 million net charge in the Harsco Mill Services Segment and a $4.8 million net charge in the Harsco Infrastructure Segment partially offset by an $18.2 million net gain in the Harsco Gas and Fluid Control Segment. This net gain included a $27 million gain associated with the sale of a business. The $2.6 million net special charges for 1997 include a $1.8 million net charge in the Harsco Gas and Fluid Control Segment, a $0.4 million net charge in the Harsco Mill Services Segment and a $0.7 million net charge in general Corporate expenses, partially offset by a $0.3 million net gain in the Harsco Infrastructure Segment. Net gains for 1998 consist principally of a pre-tax net gain of $27 million recorded on the October 1998 sale of the Nutter Engineering unit of the Harsco Gas and Fluid Control Segment. Such gains are reflected as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows. Total proceeds associated with special gains were $42.9 million and are included in proceeds from the sale of businesses and property, plant and equipment in the investing activities section of the Consolidated Statement of Cash Flows. Impaired asset write-downs for 1998 include a $6.1 million pre-tax, non-cash, write-down of the Company's investment in Bio-Oxidation Services Inc. which is included in the Harsco Gas and Fluid Control Segment. The write-down amount was measured on the basis of the lower of carrying amount or fair value less cost to sell. Fair value was determined using available information based upon the estimated amount at which the assets could be sold in a current transaction between willing parties. For the year ended December 31, 1998 Bio-Oxidation Services Inc. recorded a pre-tax loss of $9.8 million, which includes the asset write-down of $6.1 million. Impaired asset write-downs also include a fourth quarter 1998 $6.1 million pre-tax, non-cash, write-down of assets, principally property, plant and equipment, in the Harsco Mill Services Segment. The write-down became necessary as a result of significant adverse changes in the international economic environment and the steel industry. Impairment loss was measured as the amount by which the carrying amount of assets exceeded their estimated fair value. Fair value was estimated based upon the expected future realizable net cash flows. Non-cash impaired asset write-downs are generally included in Other (income) and expenses in the Consolidated Statement of Cash Flows as adjustments to reconcile net income to net cash provided by operating activities. -24- 25 Employee termination benefit costs consist principally of severance arrangements to employees terminated as a result of management reorganization actions. Under these reorganization actions, the Company's management has established and approved specific plans of termination. Details of the termination benefit plans have been communicated to the affected employees prior to recognition of related provisions. Non-cash charges for employee termination benefit costs are included as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows. During 1998, $6.5 million of reorganization expense related to employee termination benefits occurred principally in the Harsco Mill Services Segment, primarily in South Africa, United States, France, and Germany. In 1998, approximately 670 employees were included in employee termination arrangements initiated by the Company and approximately $2.4 million of cash payments were made under such arrangements. An additional $3.3 million was disbursed in 1999 for the 1998 reorganization actions. EMPLOYEE TERMINATION BENEFIT COSTS AND PAYMENTS
(IN MILLIONS) SUMMARY OF ACTIVITY - ------------- ------------------------- Employee termination benefits expense for 1998 $6.5 ---- Payments: Disbursed in 1998 (2.4) Disbursed in 1999 (3.3) ---- Total payments (5.7) Other (0.4) ---- Remaining payments as of December 31, 1999 $0.4 ====
EMPLOYEE TERMINATIONS - NUMBER OF EMPLOYEES
SUMMARY OF ACTIVITY ------------------------- Employees affected by 1998 reorganization actions 670 ---- Employee terminations: Terminated in 1998 (349) Terminated in 1999 (352) ---- Total terminations (701) Other 35 ---- Remaining terminations as of December 31, 1999 4 ====
-25- 26 Costs to exit activities consist of incremental direct costs of reorganization actions and lease run-out costs. Such costs are recorded when a specific exit plan is approved by management. Relocation expenses, such as employee moving costs, are classified as exit costs and are expensed as incurred. Other costs classified in this category are generally expensed as incurred. During 1998, $1.0 million and $0.8 million of exit costs, principally relocation expenses, were included in the Harsco Mill Services and Harsco Infrastructure Segments, respectively. During 1997, $1.5 million of exit costs were included in the Harsco Mill Services Segment. These costs resulted principally from the expiration or termination of contracts at certain mill sites, as well as facility relocation costs. INTEREST EXPENSE Interest expense increased in 1998 as a result of increased borrowings for the Company's share repurchase program and for the funding of acquisitions. INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST Income from continuing operations before income taxes and minority interest increased 5% from 1997 due principally to improved performance. Increased earnings were achieved due principally to improved results for scaffolding, shoring, and forming services and process equipment, as well as the inclusion of acquired companies. These increases were partially offset by lower results for metal reclamation and mill services, industrial fittings, grating, and gas control and containment equipment, as well as start-up losses and asset write-downs associated with the medical waste disposal services business. PROVISION FOR INCOME TAXES The effective income tax rate for continuing operations for 1998 was 37.5% versus 38% in 1997. The reduction in the income tax rate is due to lower effective income tax rates on state, as well as international earnings. INCOME FROM CONTINUING OPERATIONS Income from continuing operations was up 7% from 1997. Basic earnings per common share from continuing operations of $2.36 were up 15% from 1997. NET INCOME AND EARNINGS PER SHARE Net income of $107.5 million for 1998 was below 1997, which included $178.4 million of income and a gain from the Company's discontinued defense business. Basic earnings per common share were $2.36, down from $5.72 in 1997. Diluted earnings per common share were $2.34, down from $5.67 in 1997. -26- 27 SEGMENT ANALYSIS HARSCO MILL SERVICES SEGMENT
AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS) 1998 1997 (DECREASE) (DECREASE) - ------------------------- ---- ---- ---------- ---------- Sales $751.9 $672.7 $ 79.2 12% Income before interest, income taxes, and minority interest 84.3 99.1 (14.8) (15%) Segment net income 43.3 50.3 (7.0) (14%)
Sales of the Harsco Mill Services Segment were above 1997 despite the adverse effect of foreign exchange translation. The increase was due to the inclusion of an acquired company as of the second quarter of 1998. Income before interest, income taxes, and minority interest of the Harsco Mill Services Segment was below 1997. Excluding special charges and gains, income before interest, income taxes, and minority interest for 1998 was $99.9 million, a slight increase from $99.5 million for 1997. Increased income due to the inclusion of an acquired company was offset by the adverse foreign exchange translation effect of the strong U.S. dollar. Net income of the Harsco Mill Services Segment was below 1997. The decrease included after-tax net special charges of $9.8 million in 1998, as well as the adverse foreign exchange translation effect of the strong U.S. dollar, offset by the inclusion of an acquired company. The special charges included principally asset write-downs and employee termination benefit costs. HARSCO GAS AND FLUID CONTROL SEGMENT
AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS) 1998 (1) 1997 (1) (DECREASE) (DECREASE) - ------------------------- ---- ---- ---------- ---------- Sales $588.7 $558.3 $30.4 5% Income before interest, income taxes, and minority interest 72.3 51.3 21.0 41% Segment net income 40.9 29.5 11.4 39%
(1) Segment information for 1998 and 1997 has been restated to reflect the realignment of the heat transfer and industrial blending equipment product lines from the Harsco Gas and Fluid Control Segment to the Harsco Infrastructure Segment. Sales of these product lines were $29.2 million and $28.2 million for the years 1998 and 1997, respectively. Sales of the Harsco Gas and Fluid Control Segment increased from 1997 due to the inclusion of sales of three acquired companies and due to increased sales for process equipment. Income before interest, income taxes, and minority interest of the Harsco Gas and Fluid Control Segment was significantly above 1997's comparable amount due to the inclusion of special charges and gains, including a $27 million pre-tax net gain from the sale of a business. Excluding all special charges and gains, income before interest, income taxes, and minority interest was $54.1 million in 1998 compared to $53.1 million in 1997. This increase was due to improved results for process equipment. -27- 28 Net income of the Harsco Gas and Fluid Control Segment was significantly above 1997's comparable period due principally to an after-tax $16.9 million net gain arising from the sale of a business and, to a lesser extent, improved results for process equipment. Income increased despite start-up losses and asset write-downs associated with the medical waste disposal services business. HARSCO INFRASTRUCTURE SEGMENT
AMOUNT PERCENT INCREASE INCREASE (DOLLARS ARE IN MILLIONS) 1998 (1) 1997 (1) (DECREASE) (DECREASE) - ------------------------- ---- ---- ---------- ---------- Sales $392.9 $396.5 $(3.6) (1%) Income before interest, income taxes, and minority interest 32.9 29.7 3.2 11% Segment net income 18.6 15.5 3.1 20%
(1) Segment information for 1998 and 1997 has been restated to reflect the realignment of the heat transfer and industrial blending equipment product lines from the Harsco Gas and Fluid Control Segment to the Harsco Infrastructure Segment. Sales of these product lines were $29.2 million and $28.2 million for the years 1998 and 1997, respectively. Sales of the Harsco Infrastructure Segment were slightly below 1997. Sales of scaffolding, shoring, and forming services were above 1997. However, sales of railway maintenance-of-way equipment and contract services and grating products decreased from 1997. Income before interest, income taxes, and minority interest was above 1997. Special charges and gains for the Harsco Infrastructure Segment were $4.8 million in 1998, principally asset write-downs. Excluding special charges and gains, income before interest, income taxes, and minority interest was $37.7 million compared to $29.4 million in 1997. The increase was principally due to improved results for scaffolding, shoring, and forming services. Net income of the Harsco Infrastructure Segment in 1998 was above 1997. The increase is due to improved results for scaffolding, shoring, and forming services. -28- 29 INDUSTRIAL SERVICES AND ENGINEERED PRODUCTS In addition to the segment reporting previously presented, the Company is a diversified industrial services and engineered products company. Industrial services sales include mill services, as well as scaffolding, shoring, and forming services and railway maintenance-of-way services. Engineered products include sales of the Reed Minerals unit in the Harsco Mill Services Segment, and product sales of the Harsco Infrastructure and the Harsco Gas and Fluid Control Segments.
(DOLLARS ARE IN MILLIONS) 1998 1997 - ------------------------------------------------------------------------------------------------------------------ AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- SALES - ----- Industrial Services $ 866.4 50% $ 782.4 48% Engineered Products 867.1 50 845.1 52 ----------- ------------ ----------- ---------- Total sales $ 1,733.5 100% $ 1,627.5 100% =========== ============ =========== ========== INCOME - ------ Industrial Services $ 80.2 42% $ 99.6 55% Engineered Products 109.3 58 80.5 45 ----------- ------------ ----------- ---------- Total segment income before interest, income taxes, and minority interest $ 189.5 100% $ 180.1 100% =========== ============ =========== =========
Industrial services income decreased 19% in 1998 compared to 1997 due to net special charges and gains. Net special charges and gains in 1998 included asset write-downs associated with the medical waste disposal services business and asset write-downs and employee termination benefit costs in the Harsco Mill Services Segment. Excluding net special charges and gains, industrial services income was $102.5 million in 1998 compared to $98.9 million in 1997. This increase was due to improved results for scaffolding, shoring, and forming services. Engineered products income increased 35% in 1998 compared to 1997. This increase was principally due to a $27 million pre-tax net gain from the sale of a business. Excluding net special charges and gains, engineered products income in 1998 was $89.2 million compared to $83.1 million in 1997. This increase was due to improved results for process equipment and the inclusion of acquired companies. ECONOMIC ENVIRONMENT The Company has currency exposures for its international operations which may be subject to volatility, such as the 1999 foreign exchange fluctuations experienced in Brazil and the decline of the euro. Such exposures may result in reduced sales, income, and cash flows. The situations in Brazil and Europe are not expected to have a material adverse impact on the Company's financial position or results of operations. However, these and similar risks could result in a material impact on the Company's financial position or results of operations in the future. Balance sheet translation adjustments for the Brazilian and European operations generally do not affect results of operations. In 1998 and early 1999 the worldwide steel industry experienced selling price reductions and production curtailments at many steel producers, particularly in the United States. The United States steel industry was unfavorably affected by imports of low-priced foreign steel. Additionally, certain steel producers were forced to file for bankruptcy protection. The situation improved in -29- 30 the second half of 1999. There is a risk that the Company's future results of operations or financial condition could be adversely affected if the steel industry's problems were to continue. The Harsco Mill Services Segment provides services at steel mills throughout the world. The future financial impact on the Company associated with these risks cannot be estimated. RESEARCH AND DEVELOPMENT The Company invested $7.8 million in internal research and development programs in 1999, an increase of 11% above 1998. Internal funding for the Harsco Infrastructure Segment amounted to $3.5 million, principally for railway maintenance-of-way equipment and services. Expenditures for the Harsco Mill Services and Harsco Gas and Fluid Control Segments were $3.2 million and $1.1 million, respectively. BACKLOG As of December 31, 1999, the Company's order backlog, exclusive of long-term mill services contracts, was $231.6 million compared to $188.6 million as of December 31, 1998, a 23% increase. The Harsco Infrastructure Segment order backlog at December 31, 1999 was $151.6 million, an increase of 24% over the December 31, 1998 backlog of $122.5 million. This increase principally results from the fourth quarter 1999 Pandrol Jackson acquisition. The Harsco Gas and Fluid Control Segment backlog increased approximately 27% to $80.0 million from $62.8 million as of December 31, 1998. The increase results from higher backlog for gas control and containment equipment. Backlog for scaffolding, shoring and forming services of the Harsco Infrastructure Segment and roofing granules and slag abrasives of the Harsco Mill Services Segment are excluded from the backlog amounts. They are generally not quantifiable due to the nature of the products and services provided. Metal reclamation and mill services contracts have an estimated value of $3.6 billion at December 31, 1999, an increase of approximately 9% over the December 31, 1998 amount of $3.3 billion. DIVIDEND ACTION The Company paid four quarterly cash dividends of $.225 per share in 1999, for an annual rate of $.90. This is an increase of 2.3% from 1998. At the November 1999 meeting, the Board of Directors increased the dividend 4.4% to an annual rate of $.94 per share. The Board normally reviews the dividend rate periodically during the year and annually at its November meeting. There are no material restrictions on the payment of dividends. The Company is proud of its history of paying dividends. The Company has paid dividends each year since 1939. The February 2000 payment marked the 199th consecutive quarterly dividend paid at the same or at an increased rate. During the five-year period ended December 31, 1999, dividends paid were increased five times. In 1999, the dividend payout rate was 41%. The Company is philosophically committed to maintaining or increasing the dividend at a sustainable level. YEAR 2000 READINESS The Company has taken steps to assure that its operations are not adversely impacted by potential Year 2000 computer failures. All phases of the Company's Year 2000 readiness process have been completed for information technology and non-information technology systems. Those phases included awareness, assessment, prioritization, remediation or replacement, testing and contingency planning. Additionally, Year 2000 readiness assessments have been completed of critical third parties including significant business -30- 31 partners, suppliers, and major customers. As of December 31, 1999, no mission critical third parties have indicated that they are not Year 2000 ready. Through March 16, 2000 the Company has not experienced any material Year 2000 failures. As of December 31, 1999, the Company has incurred approximately $3.3 million in cumulative Year 2000 readiness costs. The Company does not expect to incur additional Year 2000 readiness costs unless a material Year 2000 failure occurs. The Company believes that its major Year 2000 risks involve the continuing Year 2000 readiness and performance of third parties. The impact of such Year 2000 risks and potential failures on the Company's financial position or results of operations cannot be estimated. The Company has developed contingency plans to be invoked in the event of a material Year 2000 failure. However, if there is an extended Year 2000 failure by several third parties or of supporting infrastructures, there could be a material adverse impact on the Company's financial position or results of operations. Year 2000 Statements contained herein about Harsco products and services are Year 2000 Readiness Disclosures, pursuant to the Year 2000 Information and Readiness Disclosure Act, 15 U. S. C. 1-note. FORWARD LOOKING STATEMENTS The nature of the Company's operations and the many countries in which it operates subject it to changing economic, competitive, regulatory, and technological conditions, risks, and uncertainties. In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause future results to differ materially from the forward-looking statements, expectations, and assumptions expressed or implied herein. These include statements about our management confidence and strategies for performance; expectations for new and existing products, technologies, and opportunities; and expectations for market segment and industry growth and earnings. These factors include, but are not limited to: (1) changes in the worldwide business environment in which the Company operates, including import, licensing, and trade restrictions, currency exchange rates, interest rates, and capital costs; (2) changes in governmental laws and regulations, including taxes; (3) market and competitive changes, including market demand and acceptance for new products, services, and technologies; (4) effects of unstable governments and business conditions in emerging economies; and (5) other risk factors listed from time to time in the Company's SEC reports. The Company does not intend to update this information and disclaims any legal liability to the contrary. -31- 32 Item 7A. Quantitative And Qualitative Disclosures About Market Risk The Company is exposed to foreign currency risk in its international operations. The Company conducts business in over thirty foreign countries and approximately 36%, 37% and 36% of the Company's net revenues for the years ended December 31, 1999, 1998 and 1997, respectively, were derived from the Company's operations outside the United States. To illustrate the effect of foreign currency exchange rate changes due to the strengthening of the U.S. dollar, in 1999 sales would have been 2.5% greater using the average exchange rates for the year 1998. A similar comparison for the year 1998, would have increased sales one percent, if the average exchange rates for 1997 would have remained the same in 1998. The Company seeks to reduce exposures to foreign currency fluctuations, through the use of forward exchange contracts. At December 31, 1999, these contracts amounted to $19.2 million and all mature within 2000. 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. Also, the Company's cash flows and earnings are subject to changes in interest rates. Total debt of $455.1 million as of December 31, 1999 had interest rates ranging from 3.2% to 13.0%, of which approximately 35% were at fixed rates of interest. The weighted average interest rate of total debt was approximately 5.8%. At current debt levels, a one percentage increase in interest rates would increase interest expense by approximately three million dollars per year. For additional information, see Note 13, Financial Instruments, to the Consolidated Financial Statements under Item 8, "Financial Statements and Supplementary Data." The Company is also exposed to risks related to changing economic conditions and their effect on the markets it serves and on the Company's supply chain, and related costs. For additional information, see "Economic Environment" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." -32- 33 PART II Item 8. Financial Statements and Supplementary Data: Index to Consolidated Financial Statements and Supplementary Data
Consolidated Financial Statements of Harsco Corporation: Page ---- Report of Independent Accountants 34 Consolidated Balance Sheet December 31, 1999 and 1998 35 Consolidated Statement of Income for the years 1999, 1998, and 1997 36 Consolidated Statement of Cash Flows for the years 1999, 1998, and 1997 37 Consolidated Statement of Shareholders' Equity for the years 1999, 1998, and 1997 38 Consolidated Statement of Comprehensive Income for the years 1999, 1998, and 1997 39 Notes to Consolidated Financial Statements 40 - 81 Supplementary Data: Two-Year Summary of Quarterly Results (Unaudited) 82 Common Stock Price and Dividend Information 83
-33- 34 REPORT -------------------------------------- OF INDEPENDENT ACCOUNTANTS To the Shareholders of Harsco Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders' equity, of comprehensive income and of cash flows present fairly, in all material respects, the financial position of Harsco Corporation and Subsidiary Companies at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 27, 2000 -34- 35 HARSCO CORPORATION CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) DECEMBER 31 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 51,266 $ 41,562 Accounts receivable, net 331,123 310,935 Inventories 172,198 175,804 Other current assets 58,368 59,140 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 612,955 587,441 - ---------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 671,546 626,194 Cost in excess of net assets of businesses acquired, net 258,698 273,708 Other assets 116,624 136,238 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,659,823 $ 1,623,581 ============================================================================================================================ LIABILITIES CURRENT LIABILITIES Short-term borrowings $ 32,014 $ 46,766 Current maturities of long-term debt 4,593 7,841 Accounts payable 132,394 142,681 Accrued compensation 46,615 43,938 Income taxes 44,154 42,908 Dividends payable 9,417 9,506 Other current liabilities 161,329 181,182 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 430,516 474,822 - ---------------------------------------------------------------------------------------------------------------------------- Long-term debt 418,504 309,131 Deferred income taxes 52,932 55,195 Insurance liabilities 37,097 30,019 Other liabilities 70,653 69,115 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 1,009,702 938,282 - ---------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, Series A junior participating cumulative preferred stock - - Common stock, par value $1.25, issued 66,221,544 and 66,075,380 shares as of December 31, 1999 and 1998, respectively 82,777 82,594 Additional paid-in capital 88,101 85,384 Accumulated other comprehensive income (expense) (80,538) (55,045) Retained earnings 1,155,586 1,101,828 - ---------------------------------------------------------------------------------------------------------------------------- 1,245,926 1,214,761 Treasury stock, at cost (26,149,759 and 23,825,458 shares, respectively) (595,805) (529,462) - ---------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 650,121 685,299 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,659,823 $ 1,623,581 ============================================================================================================================
See accompanying notes to consolidated financial statements. -35- 36 HARSCO CORPORATION CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED DECEMBER 31 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- REVENUES Service sales $ 864,035 $ 866,404 $ 782,406 Product sales 852,653 867,054 845,072 Other 4,123 1,936 1,643 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 1,720,811 1,735,394 1,629,121 - --------------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Cost of services sold 666,560 666,806 584,290 Cost of products sold 662,972 660,536 645,044 Selling, general, and administrative expenses 207,765 213,438 211,231 Research and development expenses 7,759 6,977 6,090 Other (income) and expenses 6,019 (4,264) 2,578 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES 1,551,075 1,543,493 1,449,233 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST, INCOME TAXES, AND MINORITY INTEREST 169,736 191,901 179,888 Interest income 4,662 8,378 8,464 Interest expense (26,968) (20,504) (16,741) - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 147,430 179,775 171,611 Provision for income taxes 51,599 67,361 65,213 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 95,831 112,414 106,398 Minority interest in net income 5,118 4,901 5,998 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 90,713 107,513 100,400 Discontinued operations: Equity in income of defense business (net of income taxes of $14,082) - - 28,424 Gain on disposal of defense business (net of income taxes of $100,006) - - 150,008 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 90,713 $ 107,513 $ 278,832 ================================================================================================================================= Basic earnings per common share: Income from continuing operations $ 2.22 $ 2.36 $ 2.06 Income from discontinued operations - - .58 Gain on disposal of discontinued operations - - 3.08 - --------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER COMMON SHARE $ 2.22 $ 2.36 $ 5.72 ================================================================================================================================= Average shares of common stock outstanding 40,882 45,568 48,754 ================================================================================================================================= Diluted earnings per common share: Income from continuing operations $ 2.21 $ 2.34 $ 2.04 Income from discontinued operations - - .58 Gain on disposal of discontinued operations - - 3.05 - --------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS PER COMMON SHARE $ 2.21 $ 2.34 $ 5.67 ================================================================================================================================= Diluted average shares of common stock outstanding 41,017 45,911 49,192 =================================================================================================================================
See accompanying notes to consolidated financial statements. -36- 37 HARSCO CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS) YEARS ENDED DECEMBER 31 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 90,713 $ 107,513 $ 278,832 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 122,777 119,044 107,350 Amortization 13,076 12,337 9,189 Gain on disposal of defense business - - (250,014) Equity in income of unconsolidated entities (3,004) (1,354) (43,549) Dividends or distributions from unconsolidated entities 3,369 1,494 49,142 Deferred income taxes 193 3,893 (8,175) Other (income) and expenses 6,019 24,843 4,198 Gain on sale of non-defense businesses - (29,107) (1,620) Other, net 5,205 5,260 (8,192) Changes in assets and liabilities, net of acquisitions and dispositions of businesses: Accounts receivable (28,157) (15,718) (1,812) Inventories 15,934 (24,991) (13,042) Accounts payable (1,238) 8,379 4,840 Disbursements related to discontinued defense business (14,605) (13,642) (951) Other assets and liabilities 3,671 (8,691) 22,345 - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES (1) 213,953 189,260 148,541 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment (175,248) (159,816) (143,444) Purchase of businesses, net of cash acquired* (48,907) (158,291) (8,508) Proceeds from sale of businesses 17,718 39,500 345,189 Proceeds from sale of property, plant and equipment 14,381 13,033 14,433 Investments available-for-sale: Purchases - - (39,346) Maturities - 40,000 - Investments held-to-maturity: Purchases - - (42,241) Maturities - 4,010 71,469 Other investing activities (2,618) (11,926) (1,007) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (194,674) (233,490) 196,545 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Short-term borrowings, net (10,546) 16,131 8,291 Current maturities and long-term debt: Additions 214,133 172,709 61,310 Reductions (103,410) (116,163) (88,523) Cash dividends paid on common stock (37,022) (40,287) (39,120) Common stock issued-options 2,272 3,885 5,939 Common stock acquired for treasury (71,860) (169,258) (113,161) Other financing activities (2,495) (1,341) (1,985) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH (USED) BY FINANCING ACTIVITIES (8,928) (134,324) (167,249) - ------------------------------------------------------------------------------------------------------------------------------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (647) (1,449) (2,134) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 9,704 (180,003) 175,703 Cash and cash equivalents at beginning of year 41,562 221,565 45,862 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 51,266 $ 41,562 $ 221,565 ==================================================================================================================================== *PURCHASE OF BUSINESSES, NET OF CASH ACQUIRED Working capital, other than cash $ 18,078 $ 11,159 $ 2,807 Property, plant and equipment (36,417) (89,182) (833) Other noncurrent assets and liabilities, net (30,568) (80,268) (10,482) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED TO ACQUIRE BUSINESSES $ (48,907) $ (158,291) $ (8,508) ====================================================================================================================================
(1) Cash provided by operating activities for 1997 includes approximately $100 million of income taxes paid related to the gain on the disposal of the defense business, whereas the pre-tax cash proceeds are included under investing activities. See accompanying notes to consolidated financial statements. -37- 38 HARSCO CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE INCOME COMMON STOCK ADDITIONAL (EXPENSE) --------------------- PAID-IN -------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ISSUED TREASURY CAPITAL TRANSLATION - ------------------------------------------------------------------------------------------------- BALANCES, JANUARY 1, 1997 $ 81,823 $ (238,065) $ 69,151 $ (25,476) - ------------------------------------------------------------------------------------------------- Net income Cash dividends declared, $.82 per share Translation adjustments (24,201) Unrealized investment (losses), net of $18 deferred income taxes Pension liability adjustments, net of $412 deferred income taxes Acquired during the year, 3,080,642 shares (125,841) 34 Stock options exercised, 395,885 shares 495 9,299 Restricted stock, net, 57,487 shares 1,117 846 Other, 1,048 shares 17 30 - ------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 82,318 (362,772) 79,360 (49,677) - ------------------------------------------------------------------------------------------------- Net income Cash dividends declared, $.885 per share Translation adjustments (1,714) Unrealized investment gains, net of ($18) deferred income taxes Pension liability adjustments, net of $1,544 deferred income taxes Acquired during the year, 4,989,483 shares (168,405) Stock options exercised, 221,293 shares 276 5,913 Restricted stock, net, 40,324 shares 1,649 110 Other, 1,658 shares 66 1 - ------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 82,594 (529,462) 85,384 (51,391) - ------------------------------------------------------------------------------------------------- Net income Cash dividends declared, $.91 per share Translation adjustments (27,273) Pension liability adjustments, net of ($1,277) deferred income taxes Acquired during the year, 2,326,798 shares (66,441) Stock options exercised, 146,164 shares 183 2,740 Other, 2,497 shares 98 (23) - ------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1999 $ 82,777 $ (595,805) $ 88,101 $ (78,664) - -------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (EXPENSE) ------------------------------------ NET UNREALIZED INVESTMENT PENSION RETAINED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) GAINS (LOSSES) LIABILITY TOTAL EARNINGS - ---------------------------------------------------------------------------------------------------- BALANCES, JANUARY 1, 1997 $ - $ (619) $ (26,095) $ 794,473 - ---------------------------------------------------------------------------------------------------- Net income 278,832 Cash dividends declared, $.82 per share (39,535) Translation adjustments (24,201) Unrealized investment (losses), net of $18 deferred income taxes (28) (28) Pension liability adjustments, net of $412 deferred income taxes (650) (650) Acquired during the year, 3,080,642 shares Stock options exercised, 395,885 shares Restricted stock, net, 57,487 shares Other, 1,048 shares - ---------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 (28) (1,269) (50,974) 1,033,770 - ---------------------------------------------------------------------------------------------------- Net income 107,513 Cash dividends declared, $.885 per share (39,455) Translation adjustments (1,714) Unrealized investment gains, net of ($18) deferred income taxes 28 28 Pension liability adjustments, net of $1,544 deferred income taxes (2,385) (2,385) Acquired during the year, 4,989,483 shares Stock options exercised, 221,293 shares Restricted stock, net, 40,324 shares Other, 1,658 shares - ---------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 - (3,654) (55,045) 1,101,828 - ---------------------------------------------------------------------------------------------------- Net income 90,713 Cash dividends declared, $.91 per share (36,955) Translation adjustments (27,273) Pension liability adjustments, net of ($1,277) deferred income taxes 1,780 1,780 Acquired during the year, 2,326,798 shares Stock options exercised, 146,164 shares Other, 2,497 shares - ---------------------------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1999 $ - $ (1,874) $ (80,538) $ 1,155,586 - ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. -38- 39 HARSCO CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS) YEARS ENDED DECEMBER 31 1999 1998 1997 ========================================================================================================================= Net Income $ 90,713 $ 107,513 $ 278,832 - ------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (expense): Foreign currency translation adjustments (27,273) (1,714) (24,201) Unrealized investment gains (losses), net of deferred income taxes - 28 (28) Pension liability adjustments, net of deferred income taxes 1,780 (2,385) (650) - ------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (expense) (25,493) (4,071) (24,879) - ------------------------------------------------------------------------------------------------------------------------- Total comprehensive income $ 65,220 $ 103,442 $ 253,953 =========================================================================================================================
See accompanying notes to consolidated financial statements. -39- 40 HARSCO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of Harsco Corporation and its majority-owned subsidiaries ("Company"). Investments in unconsolidated entities (all of which are 20-50% owned) are accounted for under the equity method. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits, and short-term investments which are highly liquid in nature and have an original maturity of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. Inventories in the United States are accounted for using principally the last-in, first-out (LIFO) method. Other inventories are accounted for using the first-in, first-out (FIFO) or average cost methods. DEPRECIATION Property, plant and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using principally the straight-line method. When property is retired from service, generally the cost of the retirement is charged to the allowance for depreciation to the extent of the accumulated depreciation, and the balance is charged to income. Long-lived assets to be disposed are not depreciated while they are held for disposal. INTANGIBLE ASSETS Intangible assets consist principally of cost in excess of net assets of businesses acquired, which is amortized on a straight line basis over a period not to exceed 30 years. Accumulated amortization was $74.9 and $58.6 million at December 31, 1999 and 1998, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including cost in excess of net assets of businesses acquired and other intangible assets, used in the Company's operations are reviewed for impairment when events and circumstances indicate that the carrying amount of an asset may not be recoverable. The Company's policy is to record an impairment loss when it is determined that the carrying amount of the asset exceeds the sum of the expected undiscounted future cash flows resulting from use of the asset and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds its fair value. Long-lived assets to be disposed are reported at the lower of the carrying amount or fair value less cost to sell. REVENUE RECOGNITION Revenue is recognized for product sales generally when title and risk of loss transfer. Service sales are recognized over the contractual period or as services are performed. -40- 41 INCOME TAXES United States federal and state income taxes and non-U.S. income taxes are provided currently on the undistributed earnings of international subsidiaries and unconsolidated affiliated entities, giving recognition to current tax rates and applicable foreign tax credits, except when management has specific plans for reinvestment of undistributed earnings which will result in the indefinite postponement of their remittance. Deferred taxes are provided using the asset and liability method for temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. ACCRUED INSURANCE AND LOSS RESERVES The Company retains a significant portion of the risk for workers' compensation, automobile, general, and product liability losses. Reserves have been recorded which reflect the undiscounted estimated liabilities including claims incurred but not reported. Changes in the estimates of the reserves are included in net income in the period determined. Amounts estimated to be paid within one year have been classified as Other current liabilities, with the remainder included in Insurance liabilities. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's subsidiaries outside the United States, except for those subsidiaries located in highly inflationary economies, are principally measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates as of the balance sheet date. Resulting translation adjustments are recorded in the cumulative translation adjustment, a separate component of Other comprehensive income (expense). Income and expense items are translated at average monthly exchange rates. Gains and losses from foreign currency transactions are included in net income. For subsidiaries operating in highly inflationary economies, gains and losses on foreign currency transactions and balance sheet translation adjustments are included in net income. Effective January 1997, the Company's operations in Mexico were accounted for as a highly inflationary economy since the three-year cumulative rate of inflation at December 31, 1996 exceeded 100%. The functional currency for the Company's operations in Mexico was the U.S. dollar for 1997 and 1998. Effective January 1999, the three-year cumulative rate of inflation fell below 100%. As of January 1, 1999, the Company measures the financial statements of its Mexican entities using the Mexican new peso as the functional currency. Effective January 1998, the Company's operations in Brazil were no longer accounted for as a highly inflationary economy, because the three-year cumulative rate of inflation fell below 100%. The Company measures the financial statements of its Brazilian entities using the Brazilian real as the functional currency. -41- 42 FINANCIAL INSTRUMENTS AND HEDGING The Company has subsidiaries principally operating in North America, South America, Europe, and Asia-Pacific. These operations are exposed to fluctuations in related foreign currencies in the normal course of business. The Company seeks to reduce exposure to foreign currency fluctuations, through the use of forward exchange contracts. The Company does not hold or issue financial instruments for trading purposes, and it is the Company's policy to prohibit the use of derivatives for speculative purposes. The Company has a Foreign Currency Risk Management Committee that meets periodically to monitor foreign currency risks. The Company executes forward foreign exchange contracts to hedge transactions of its non-U.S. subsidiaries for firm purchase commitments and for export sales denominated in foreign currencies. These contracts generally are for 90 to 180 days or less. For those contracts that hedge an identifiable transaction, gains or losses are deferred and accounted for as part of the underlying transaction. The cash flows from these contracts are classified consistent with the cash flows from the transaction being hedged. The Company also enters into forward foreign exchange contracts for intercompany foreign currency commitments. These foreign exchange contracts do not qualify as hedges. Therefore, gains and losses are recognized in income based on fair market value. OPTIONS FOR COMMON STOCK The Company uses the intrinsic value based method to account for options granted for the purchase of common stock. No compensation expense is recognized on the grant date, since at that date, the option price equals the market price of the underlying common stock. The Company discloses the pro-forma effect of accounting for stock options under the fair value method. EARNINGS PER SHARE Basic earnings per share is calculated using the average shares of common stock outstanding, while diluted earnings per share reflects the potential dilution that could occur if stock options were exercised. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior years' amounts to conform with current year classifications. -42- 43 NEW FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), with an amended effective date for fiscal years beginning after June 15, 2000. SFAS 133 requires that an entity recognize on its balance sheet all derivative instruments as either assets or liabilities at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or Other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction, and, if it is, the type of hedge transaction. The Company will adopt SFAS 133 as of January 1, 2001. Due to the Company's limited use of derivative instruments, SFAS 133 is not expected to have a material effect on the financial position or results of operations of the Company. -43- 44 - -------------------------------------------------------------------------------- 2. DISCONTINUED DEFENSE BUSINESS On August 25, 1997, the Company and FMC Corporation signed an agreement to sell United Defense, L.P. for $850 million, and the sale was completed on October 6, 1997. Prior to the sale, FMC had been the managing general partner and 60% owner of United Defense, L.P., while the Company owned the balance of 40% as the limited partner. United Defense supplies ground combat and naval weapons systems for the U.S. and military customers worldwide. On the Consolidated Statement of Income under Discontinued Operations, "Equity in income of defense business" includes equity income through August 1997 (the measurement date) from the Company's 40% interest in United Defense, L.P. The sale resulted in pre-tax cash proceeds to the Company in 1997 of $344 million and resulted in an after tax gain on the sale of $150 million or $3.08 per share after taking into account certain retained liabilities from the partnership and estimated post-closing net worth adjustments, as well as pre-partnership formation contingencies and other defense business contingencies. On the Consolidated Statement of Cash Flows for 1997, equity in income of the defense business and distributions from the defense business through the measurement date are included in "Equity in income of unconsolidated entities" and "Dividends or distributions from unconsolidated entities", respectively. Disbursements related to the discontinued defense business, principally legal fees and settlements, are shown separately on the Consolidated Statement of Cash Flows for 1997, 1998, and 1999. -44- 45 - -------------------------------------------------------------------------------- 3. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS In October 1999, the Company acquired Charter plc's Pandrol Jackson railway track maintenance business. The transaction was completed for approximately $48 million in cash plus assumption of liabilities, for a total consideration of approximately $65 million. Pandrol Jackson manufactures and markets worldwide a wide range of equipment and services used in railway track maintenance. In December 1999, the Company completed the sale of the railway switch, crossing and transit grinding business obtained as part of the Pandrol Jackson railway maintenance acquisition. This business, with annual sales of approximately $6 million, was divested in accordance with an agreement with the Department of Justice as a condition to the acquisition of Pandrol Jackson. In July 1999, the Company acquired certain assets and assumed certain liabilities of Structural Accessories, Inc. The total consideration was approximately $2 million. Structural Accessories, Inc. manufactures and sells bridge bearings and expansion joints. In February 1999, the Company acquired certain assets and assumed certain liabilities of Natural Gas Vehicle Systems, Inc. Total consideration was approximately $3 million. Natural Gas Vehicle Systems, Inc. manufactures cylinders used in vehicles which use natural gas. In October 1998, the Company acquired Superior Valve Company from Amcast Industrial Corporation. Superior Valve designs, manufactures, and sells high pressure, precision valves for a range of commercial and industrial applications. In June 1998, the Company acquired Chemi-Trol Chemical Co. for approximately $46 million. Chemi-Trol's principal business is the production and distribution of steel pressure tanks for the storage of propane gas and anhydrous ammonia. In April 1998, the Company acquired Faber Prest Plc for approximately $98 million. Faber Prest is a UK-based provider of mill services to worldwide steel producers and integrated logistics services to the steel industry and other market sectors. In February 1998, the Company acquired EFI Corporation (EFIC) from Racal Electronics Plc for approximately $7.2 million. EFIC produces lightweight composite cylinders used extensively in firefighter breathing apparatus as well as other industrial and commercial applications. All acquisitions have been accounted for using the purchase method of accounting with cost in excess of net assets of businesses acquired totaling $9.4 million in 1999 and $94.6 million in 1998. Results of operations are included in income since the dates of acquisition. -45- 46 - -------------------------------------------------------------------------------- 3. ACQUISITIONS AND DISPOSITIONS (CONTINUED) The following unaudited pro-forma consolidated net sales, net income, and earnings per share data are presented as if the above businesses had been acquired at the beginning of the periods presented.
(IN MILLIONS, EXCEPT PER SHARE DATA) PRO-FORMA INFORMATION FOR YEARS ENDED DECEMBER 31 1999 1998 - -------------------------------------------------------------------------------------------------- Net sales $ 1,767 $ 1,929 Net income 90 97 Basic earnings per share 2.20 2.13 Diluted earnings per share 2.19 2.12 - ---------------------------------------------------------------------------------------------------
The unaudited pro-forma information is not necessarily indicative of the results of operations that would have occurred had the purchases been made at the beginning of the periods presented, or of the future results of the combined operations. The pro-forma information includes the actual results of the acquired businesses prior to the acquisition dates. These results do not reflect the effect of reorganization actions, synergies, cost reductions and other benefits resulting from the combinations. Additionally, the pro-forma information reflects amortization of the cost in excess of net assets acquired and interest expense on assumed borrowings for acquisitions for the full periods presented. DISPOSITIONS In October 1998, the Company completed the sale of Nutter Engineering to the Sulzer Chemtech division of Swiss-based Sulzer Technology Corporation. Nutter had sales of approximately $25 million and $24 million in 1998 and 1997, respectively. The sale of HydroServ SAS was completed in December 1998. The Company completed the sales of Astralloy Wear Technology in March 1999; the pavement marking and vegetation control business of Chemi-Trol in August 1999; and the Manchester truck dealership in September 1999. Additionally, the Company plans to dispose of its investments in Bio-Oxidation Services Inc., Gunness Wharf Limited and Flixborough Wharf Limited. -46- 47 - -------------------------------------------------------------------------------- 4. ACCOUNTS RECEIVABLE AND INVENTORIES Accounts receivable are net of an allowance for doubtful accounts of $13.3 million and $13.6 million at December 31, 1999 and 1998, respectively. Inventories consist of:
(IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------------------- Finished goods $ 37,715 $ 45,259 Work-in-process 37,198 36,060 Raw materials and purchased parts 76,911 71,576 Stores and supplies 20,374 22,909 - ------------------------------------------------------------------------------------------------- $ 172,198 $ 175,804 ================================================================================================= Valued at lower of cost or market: LIFO basis $ 132,366 $ 129,708 FIFO basis 16,483 28,473 Average cost basis 23,349 17,623 - ------------------------------------------------------------------------------------------------- $ 172,198 $ 175,804 =================================================================================================
Inventories valued on the LIFO basis at December 31, 1999 and 1998 were approximately $28.4 million and $32.5 million, respectively, less than the amounts of such inventories valued at current costs. As a result of reducing certain inventory quantities valued on the LIFO basis, net income increased from that which would have been recorded under the FIFO basis of valuation, by $1.1 million, $0.2 million and $0.1 million in 1999, 1998, and 1997, respectively. -47- 48 - -------------------------------------------------------------------------------- 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of:
(IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------- Land and improvements $ 28,847 $ 31,048 Buildings and improvements 147,742 147,291 Machinery and equipment 1,243,437 1,196,223 Uncompleted construction 79,797 63,540 - ------------------------------------------------------------------------------------- 1,499,823 1,438,102 Less accumulated depreciation 828,277 811,908 - ------------------------------------------------------------------------------------- $ 671,546 $ 626,194 =====================================================================================
The estimated useful lives of different types of assets are generally: - ---------------------------------------------------------------------------- Land improvements 10 years Buildings and improvements 10 to 50 years Certain plant, buildings and installations (Principally Mill Services Segment) 3 to 15 years Machinery and equipment 3 to 20 years - ----------------------------------------------------------------------------
-48- 49 - -------------------------------------------------------------------------------- 6. DEBT AND CREDIT AGREEMENTS The Company has a $400 million Five-Year Competitive Advance and Revolving Credit Facility ("credit facility") maturing in July 2001. Borrowings under this agreement are available in U.S. dollars or Eurocurrencies and the credit facility serves as back-up to the Company's U.S. commercial paper program. Interest rates are either negotiated, based upon the U.S. federal funds interbank market, prime, or based upon the London Interbank Offered Rate (LIBOR) plus a margin. The Company pays a facility fee (0.08% per annum as of December 31, 1999) that varies based upon its credit ratings. At December 31, 1999 and 1998, there were no borrowings outstanding. The Company can also issue up to $400 million of short-term notes in the U.S. commercial paper market. In addition, the Company has a three billion Belgian franc commercial paper program (approximately U.S. $75 million at December 31, 1999) which is used to fund the Company's international operations. The Company limits the aggregate commercial paper and credit facility borrowings at any one time to a maximum of $400 million. Commercial paper interest rates, which are based on market conditions, have been lower than on comparable borrowings under the credit facility. At December 31, 1999 and 1998, $233.7 million and $108.8 million of commercial paper was outstanding, respectively. Commercial paper is classified as long-term debt at December 31, 1999 and 1998, because the Company has the ability and intent to refinance it on a long-term basis through existing long-term credit facilities. Short-term debt amounted to $32.0 million and $46.8 million at December 31, 1999 and 1998, respectively. The weighted average interest rate for short-term borrowings at December 31, 1999 and 1998 was 4.6% and 7.9%, respectively. -49- 50 - -------------------------------------------------------------------------------- 6. DEBT AND CREDIT AGREEMENTS (CONTINUED) Long-term debt consists of:
(IN THOUSANDS) 1999 1998 - --------------------------------------------------------------------------------------------------------- 6.0% notes due September 15, 2003 $ 150,000 $ 150,000 Commercial paper borrowings, with a weighted average interest rate of 5.8% as of December 31, 1999 233,746 108,784 Faber Prest loan notes due October 31, 2008 with interest based on Sterling LIBOR minus .75% (5.4% at December 31, 1999) 16,285 19,222 Industrial development bonds, payable in varying amounts from 2001 to 2005 with a weighted average interest rate of 6.4% as of December 31, 1999 11,400 11,400 Other financing payable in varying amounts to 2005 with a weighted average interest rate of 7.3% as of December 31, 1999 11,666 27,566 - --------------------------------------------------------------------------------------------------------- 423,097 316,972 Less current maturities 4,593 7,841 - --------------------------------------------------------------------------------------------------------- $ 418,504 $ 309,131 =========================================================================================================
The credit facility and certain notes payable agreements contain covenants restricting, among other things, the amount of debt as defined in the agreement that can be issued. At December 31, 1999, the Company was in compliance with these covenants. The maturities of long-term debt for the four years following December 31, 2000, are:
(IN THOUSANDS) - -------------------------------------------------------------------------------- 2001 $ 242,927 2003 $ 150,967 2002 $ 2,049 2004 $ 4,778 - --------------------------------------------------------------------------------
Cash payments for interest on all debt were (in millions) $25.0, $20.0, and $16.3 in 1999, 1998 and 1997, respectively. Capitalized interest was $893 thousand, $10 thousand, and zero in 1999, 1998, and 1997, respectively. The Company has on file with the Securities and Exchange Commission, a Form S-3 shelf registration for the possible issuance of up to an additional $200 million of new debt securities, preferred stock, or common stock. -50- 51 - -------------------------------------------------------------------------------- 7. LEASES The Company leases certain property and equipment under noncancelable operating leases. Rental expense under such operating leases was (in millions) $16.9, $17.6, and $13.5 in 1999, 1998 and 1997, respectively. Future minimum payments under operating leases with noncancelable terms are:
(IN THOUSANDS) - -------------------------------------------------------------------------------- 2000 $15,703 2001 12,534 2002 9,399 2003 7,268 2004 13,309 After 2004 16,598 - --------------------------------------------------------------------------------
-51- 52 - -------------------------------------------------------------------------------- 8. EMPLOYEE BENEFIT PLANS PENSION BENEFITS The Company has pension and profit sharing retirement plans, most of which are noncontributory, covering substantially all of its employees. The benefits for salaried employees generally are based on years of service and the employee's level of compensation during specified periods of employment. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The multi-employer plans in which the Company participates provide benefits to certain unionized employees. The Company's funding policy for qualified plans is consistent with statutory regulations and customarily equals the amount deducted for income tax purposes. The Company's policy is to amortize prior service costs over the average future service period of active plan participants.
(IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------- PENSION EXPENSE Defined benefit plans: Service cost $ 15,882 $ 13,785 $ 9,519 Interest cost 23,048 21,367 15,129 Expected return on plan assets (36,848) (39,859) (27,604) Recognized prior service costs 2,052 1,307 1,368 Recognized (gains) or losses 278 (4,034) (3,517) Amortization of transition asset (2,447) (2,453) (2,457) Curtailment (gains) or losses - 542 (5,468) - ------------------------------------------------------------------------------------------------- 1,965 (9,345) (13,030) Multi-employer plans 4,922 4,054 4,457 Defined contribution plans 4,466 6,043 4,131 - ------------------------------------------------------------------------------------------------- Pension (income) expense $ 11,353 $ 752 $ (4,442) =================================================================================================
In 1997, the curtailment gain of $5.5 million was the result of a sizable reduction in the number of employees under a plan related to a discontinued facility. This gain, along with certain costs, was recorded under Other (income) and expenses in the Consolidated Statement of Income. -52- 53 - -------------------------------------------------------------------------------- 8. EMPLOYEE BENEFIT PLANS (CONTINUED) The change in the financial status of the pension plans and amounts recognized in the Consolidated Balance Sheet at December 31, 1999 and 1998 are:
PENSION BENEFITS ---------------------------------- (IN THOUSANDS) 1999 1998 - -------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 371,454 $ 220,428 Service cost 15,882 13,785 Interest cost 23,048 21,367 Plan participants' contributions 1,887 1,452 Amendments 5,416 11,048 Actuarial (gain) loss (42,466) (3,824) Curtailment (gain) loss - 542 Benefits paid (15,229) (16,126) Obligations of acquired companies 8,574 122,388 Effect of foreign currency (5,598) 394 - -------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 362,968 $ 371,454 ======================================================================================================== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 458,241 $ 335,106 Actual return on plan assets 67,692 (16,342) Employer contributions 1,425 2,370 Plan participants' contributions 1,887 1,452 Benefits paid (15,103) (16,007) Plan assets of acquired companies 8,057 151,346 Effect of foreign currency (6,270) 316 - -------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 515,929 $ 458,241 ======================================================================================================== FUNDED STATUS Funded status at end of year $ 152,961 $ 86,787 Unrecognized net (gain) loss (92,817) (19,683) Unrecognized transition (asset) obligation (13,222) (15,657) Unrecognized prior service cost 25,534 22,446 - -------------------------------------------------------------------------------------------------------- Net amount recognized $ 72,456 $ 73,893 ======================================================================================================== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSIST OF: Prepaid benefit cost $ 85,914 $ 84,251 Accrued benefit liability (18,907) (19,576) Intangible asset 2,588 3,297 Accumulated other comprehensive income 2,861 5,921 - -------------------------------------------------------------------------------------------------------- Net amount recognized $ 72,456 $ 73,893 ========================================================================================================
Plan assets include equity and fixed-income securities. At December 31, 1999 and 1998, 732,640 shares of the Company's common stock with a fair market value of $23.3 million and $22.3 million, respectively, are included in plan assets. Dividends paid on such stock amounted to $0.7 million and $0.6 million in 1999 and 1998. -53- 54 - -------------------------------------------------------------------------------- 8. EMPLOYEE BENEFIT PLANS (CONTINUED) The actuarial assumptions used for the defined benefit pension plans, including international plans, are:
1999 1998 1997 - -------------------------------------------------------------------------------------------- Weighted average assumed discount rates 6.9% 6.3% 7.4% Weighted average expected long-term rates of return on plan assets 8.4% 8.2% 9.1% Rates of compensation increase 4.2% 4.4% 4.5% - --------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $33.6 million, $32.4 million, and $15.7 million, respectively, as of December 31, 1999, and $32.1 million, $30.1 million, and $11.6 million, respectively, as of December 31, 1998. -54- 55 - -------------------------------------------------------------------------------- 8. EMPLOYEE BENEFIT PLANS (CONTINUED) POSTRETIREMENT BENEFITS The Company has postretirement life insurance benefits for a majority of employees, and postretirement health care benefits for a limited number of employees mainly under plans related to acquired companies. The cost of life insurance and health care benefits are accrued for current and future retirees and are recognized as determined under the projected unit credit actuarial method. Under this method, the Company's obligation for postretirement benefits is to be fully accrued by the date employees attain full eligibility for such benefits. The Company's postretirement health care and life insurance plans are unfunded. The postretirement benefit expense (health care and life insurance) was $0.4 million in 1999, $0.3 million in 1998, and $0.2 million in 1997. The components of these expenses are not shown separately as they are not material. The changes in the postretirement benefit liability recorded in the Consolidated Balance Sheet are:
POSTRETIREMENT BENEFITS -------------------------------- (IN THOUSANDS) 1999 1998 - ----------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 6,421 $ 6,220 Service cost 129 107 Interest cost 466 431 Actuarial loss (gain) 319 49 Benefits paid (325) (386) Obligation of acquired company 3,294 - - ----------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 10,304 $ 6,421 =========================================================================================================== FUNDED STATUS Funded status at end of year $ (10,304) $ (6,421) Unrecognized prior service cost (39) (42) Unrecognized net actuarial (gain) (1,328) (1,861) - ----------------------------------------------------------------------------------------------------------- Net amount recognized as accrued benefit liability $ (11,671) $ (8,324) ===========================================================================================================
-55- 56 - -------------------------------------------------------------------------------- 8. EMPLOYEE BENEFIT PLANS (CONTINUED) The actuarial assumptions used for postretirement benefit plans are:
(DOLLARS IN THOUSANDS) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------- Assumed discount rate 7.75% 6.75% 7.25% Health care cost trend rate 7.50% 8.30% 8.70% Decreasing to ultimate rate 6.50% 5.50% 5.50% Effect of one percent increase in health care cost trend rate: On cost components $ 21 $ 21 $ 47 On accumulated benefit obligation $ 415 $ 185 $ 192 - ----------------------------------------------------------------------------------------------------
For 1999, a one percent decrease in the health care cost trend rate would decrease the cost component by $19 thousand and decrease the accumulated benefit obligation by $405 thousand. It is anticipated that the health care cost trend rate will decrease from 7.5% in 2000 to 6.5% in the year 2003. SAVINGS PLAN The Company has a 401(k) savings plan which covers substantially all U.S. employees with the exception of employees represented by a collective bargaining agreement, unless the agreement expressly provides otherwise. Employee contributions are generally determined as a percentage of covered employee's compensation. The expense for contributions to the plan by the Company was (in millions) $4.4, $4.8, and $4.5 for 1999, 1998, and 1997, respectively. EXECUTIVE INCENTIVE COMPENSATION PLAN Under the 1995 Executive Incentive Compensation Plan, the Management Development and Compensation Committee awarded 60% of the value of any earned annual incentive compensation award to be paid to participants in the form of cash and 40% in the form of restricted shares of the Company's common stock. Upon the request of the participant, the Committee was authorized to make the incentive award payable all in cash, subject to a 25% reduction in the total amount of the award. Awards were made in February of the following year. The Company accrued amounts based on performance reflecting the value of cash and common stock which was anticipated to be earned for the year. Compensation expense relating to these awards was (in millions) $3.8, $3.7, and $5.1 in 1999, 1998 and 1997, respectively. Effective January 1, 1999 the restricted stock portion of the compensation plan was discontinued and the terms of the plan were amended to provide for payment of the incentive compensation all in cash. On January 6, 1999 the Company repurchased from the participants, at the original award value, the restricted shares awarded in 1998. For all other shares, the restrictions were removed effective January 6, 1999. -56- 57 - -------------------------------------------------------------------------------- 9. INCOME TAXES Income from continuing operations before income taxes and minority interest in the Consolidated Statement of Income consists of:
(IN THOUSANDS) 1999 1998 1997 - ----------------------------------------------------------------------------------------- United States $ 78,689 $ 121,091 $ 93,386 International 68,741 58,684 78,225 - ----------------------------------------------------------------------------------------- $ 147,430 $ 179,775 $ 171,611 ========================================================================================= Provision for income taxes: Currently payable: Federal $ 22,474 $ 37,297 $ 21,627 State 1,743 2,835 4,309 International 25,203 23,468 30,538 - ----------------------------------------------------------------------------------------- 49,420 63,600 56,474 Deferred federal and state 3,890 6,552 9,426 Deferred international (1,711) (2,791) (687) - ----------------------------------------------------------------------------------------- $ 51,599 $ 67,361 $ 65,213 =========================================================================================
Cash payments for income taxes were (in millions) $50.7, $38.8, and $167.0, for 1999, 1998, and 1997, respectively. Approximately $5.4 million of the taxes paid in 1998 and $100.0 million of the taxes paid in 1997 are related to the gain on the disposal of the defense business. -57- 58 - -------------------------------------------------------------------------------- 9. INCOME TAXES (CONTINUED) The following is a reconciliation of the normal expected statutory U.S. federal income tax rate to the effective rate as a percentage of Income from continuing operations before income taxes and minority interest as reported in the Consolidated Statement of Income:
1999 1998 1997 - ------------------------------------------------------------------------------------------- U.S. federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 1.6 1.6 2.1 Export sales corporation benefit (.5) (.6) (.4) Losses for which no tax benefit was recorded .3 1.3 .4 Difference in effective tax rates on international earnings and remittances (1.9) (1.3) (.2) Nondeductible acquisition costs 2.1 2.0 1.8 Other, net (1.6) (.5) (.7) - ------------------------------------------------------------------------------------------- Effective income tax rate 35.0% 37.5% 38.0% ===========================================================================================
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, 1999 and 1998 are:
(IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------------------------ DEFERRED INCOME TAXES ASSET LIABILITY Asset Liability - ------------------------------------------------------------------------------------------------------ Depreciation $ - $ 36,580 $ - $ 42,284 Expense accruals 34,975 - 43,015 - Inventories 5,294 - 3,783 - Provision for receivables 3,867 - 2,986 - Postretirement benefits 4,221 - 3,235 - Deferred revenue - 4,196 - 4,447 Unrelieved foreign tax losses 6,694 - 3,729 - Unrelieved domestic tax losses 2,424 - 3,079 - Pensions - 22,923 - 18,917 Other - 1,913 - 2,120 - ------------------------------------------------------------------------------------------------------ 57,475 65,612 59,827 67,768 Valuation allowance (4,045) - (6,293) - - ------------------------------------------------------------------------------------------------------ Total deferred income taxes $53,430 $ 65,612 $ 53,534 $ 67,768 ======================================================================================================
At December 31, 1999 and 1998, Other current assets included deferred income tax benefits of $35.0 million and $37.2 million, respectively. -58- 59 - -------------------------------------------------------------------------------- 9. INCOME TAXES (CONTINUED) At December 31, 1999, certain of the Company's subsidiaries had total available net operating loss carryforwards ("NOLs") of approximately $27.8 million, of which approximately $17.9 million may be carried forward indefinitely and $9.9 million have varying expiration dates. Included in the total are $8.7 million of preacquisition NOLs. During 1999 and 1998, $2.3 million and $4.4 million, respectively, of preacquisition NOLs were utilized by the Company, resulting in tax benefits of $0.8 million and $1.7 million, respectively. The valuation allowance of $4.0 million and $6.3 million at December 31, 1999 and 1998, respectively, relates principally to cumulative unrelieved tax losses which are uncertain as to realizability. To the extent that the preacquisition NOLs are utilized in the future and the associated valuation allowance reduced, the tax benefit will be allocated to reduce the cost in excess of net assets of businesses acquired. The change in the valuation allowances for 1999 and 1998 results primarily from the utilization of international tax loss carryforwards and the release of valuation allowances in certain international jurisdictions based on the Company's reevaluation of the realizability of future benefits. The release of valuation allowances in certain jurisdictions was allocated to reduce the cost in excess of net assets of businesses acquired by $0.3 million in 1999. There was no reduction in 1998. -59- 60 - -------------------------------------------------------------------------------- 10. COMMITMENTS AND CONTINGENCIES DISCONTINUED DEFENSE BUSINESS - CONTINGENCIES FEDERAL EXCISE TAX AND OTHER MATTERS RELATED TO THE FIVE-TON TRUCK CONTRACT In 1995, the Company, the United States Army ("Army"), and the United States Department of Justice concluded a settlement of Harsco's previously reported claims against the Army relating to Federal Excise Tax ("FET") arising under a completed 1986 contract for the sale of five-ton trucks to the Army. On September 27, 1995, the Army paid the Company $49 million in accordance with the settlement terms. The Company released the Army from any further liability for those claims, and the Department of Justice released the Company from a threatened action for damages and civil penalties based on an investigation conducted by the Department's Commercial Litigation Branch that had been pending for several years. The settlement preserves the rights of the parties to assert claims and defenses under the Internal Revenue Code, and rights of the Army and the Company to claim certain amounts that may be owed by either party to reconcile possible underpayments or overpayments on the truck contract as part of the formal contract close-out process. The settlement does not resolve the claim by the Internal Revenue Service ("IRS") that, contrary to the Company's position, certain cargo truck models sold by the Company should be considered to have gross vehicle weights in excess of the 33,000 pound threshold under FET law, are not entitled to an exemption from FET under any other theory, and therefore are taxable. In 1999, the IRS assessed an increase in FET of $30.4 million plus penalties of $9.3 million and applicable interest currently estimated to be $45.5 million. In October 1999, the Company posted an $80 million bond required as security by the IRS. This increase in FET takes into account offsetting credits of $9.2 million, based on a partial allowance of the Company's $31.9 million claim that certain truck components are exempt from FET. The IRS disallowed in full the Company's additional claim that it is entitled to the entire $52 million of FET (plus applicable interest currently estimated by the Company to be $41.7 million) the Company has paid on the five-ton trucks, on the grounds that such trucks qualify for the FET exemption applicable to certain vehicles specially designed for the primary function of off-highway transportation. In the event that the Company ultimately receives from the IRS a refund of tax (including applicable interest) with respect to which the Company has already received reimbursement from the Army, the refund would be allocated between the Company and the Army. The Company plans to vigorously contest the IRS assessment in the U.S. Court of Federal Claims. Although there is risk of an adverse outcome, both the Company and the Army believe that the cargo trucks are not taxable. No recognition has been given in the accompanying financial statements for the Company's claims with the IRS. -60- 61 - -------------------------------------------------------------------------------- 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) The settlement agreement with the Army preserves the Company's right to seek reimbursement of after-imposed tax from the Army in the event that the cargo trucks are determined to be taxable, but the agreement limits the reimbursement to a maximum of $21 million. Additionally, in an earlier contract modification, the Army accepted responsibility for $3.6 million of the potential tax, bringing its total potential responsibility up to $24.6 million. Under the settlement, the Army agreed that if the cargo trucks are determined to be taxable, the 1993 decision of the Armed Services Board of Contract Appeals (which ruled that the Company is entitled to a price adjustment to the contract for reimbursement of FET paid on vehicles that were to be delivered after October 1, 1988) will apply to the question of the Company's right to reimbursement from the Army for after-imposed taxes on the cargo trucks. In the Company's view, application of the 1993 decision will favorably resolve the principal issues regarding any such future claim by the Company. Therefore, the Company believes that even if the cargo trucks are ultimately held to be taxable, the Army would be obligated to reimburse the Company for a majority of the tax, (but not interest or penalty, if any), resulting in a net maximum liability for the Company of $5.8 million plus penalties and applicable interest currently estimated to be $9.3 million and $45.5 million, respectively. The Company believes it is unlikely that resolution of this matter will have a material adverse effect on the Company's financial position, however, it could have a material effect on quarterly or annual results of operations. OTHER DEFENSE BUSINESS LITIGATION In 1992, the U.S. Government filed a counterclaim against the Company in a civil suit alleging violations of the False Claims Act and breach of a contract to supply M109A2 Self-Propelled Howitzers. In May 1999, the Company and the U.S. Government settled. Under the settlement agreement, Harsco paid the U.S. Government $11 million and both parties released all claims in the case. The settlement payment was charged against an existing reserve in the second quarter of 1999. In 1992, the United States Government through its Defense Contract Audit Agency commenced an audit of certain contracts for sale of tracked vehicles by the Company to foreign governments, which were financed by the United States Government through the Defense Security Assistance Agency. In September 1994, the Company received a subpoena issued by the Department of Defense Inspector General seeking various documents relating to issues raised in the audit. -61- 62 - -------------------------------------------------------------------------------- 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Government subsequently subpoenaed a number of former employees of the Company's divested defense business to testify before a grand jury and issued grand jury subpoenas to the Company for additional documents. On December 22, 1999, the Company announced that it reached agreement with the U.S. Government on behalf of its former BMY Combat Systems Division to settle the matter. Under the agreement, BMY Combat Systems pled guilty to a one-count misdemeanor relating to submitting advance payment certifications which resulted in BMY receiving a portion of the payments for the contract prematurely. Harsco will pay the Government a $200,000 fine plus $10.8 million in damages for a total of $11 million. The settlement, which is subject to acceptance by the U.S. District Court, ends the Government's investigation and releases Harsco and BMY from further liability for the issues under investigation. Harsco will charge the payment against an existing reserve, resulting in no charge to the Company's earnings. Based on the terms of the settlement, the Company expects to pay the $11 million in the second quarter of 2000, following the Court's entry of judgment. CONTINUING OPERATIONS - CONTINGENCIES ENVIRONMENTAL The Company is involved in a number of environmental remediation investigations and clean-ups and, along with other companies, has been identified as a "potentially responsible party" for certain waste disposal sites. While each of these matters is subject to various uncertainties, it is probable that the Company will agree to make payments toward funding certain of these activities and it is possible that some of these matters will be decided unfavorably to the Company. The Company has evaluated its potential liability, and its financial exposure is dependent upon such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the allocation of cost among potentially responsible parties, the years of remedial activity required and the remediation methods selected. The Consolidated Balance Sheet at December 31, 1999, and 1998 includes an accrual of $3.0 million and $4.9 million, respectively, for environmental matters. The amounts affecting pre-tax earnings related to environmental matters totaled $0.7 million of income for the year 1999, $0.8 million of expense for the year 1998 and $1.7 million of expense for the year 1997. The liability for future remediation costs is evaluated on a quarterly basis. Actual costs to be incurred at identified sites in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures. The Company does not expect that any sum it may have to pay in connection with environmental matters in excess of the amounts recorded or disclosed above would have a material adverse effect on its financial position or results of operations. -62- 63 - -------------------------------------------------------------------------------- 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) OTHER The Company is subject to various other claims, legal proceedings, and investigations covering a wide range of matters that arose in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or by accruals, and if not so covered, are without merit or are of such kind, or involve such amounts, that would not have a material adverse effect on the financial position or results of operations of the Company. -63- 64 - -------------------------------------------------------------------------------- 11. CAPITAL STOCK The authorized capital stock consists of 150,000,000 shares of common stock and 4,000,000 shares of preferred stock, both having a par value of $1.25 per share. The preferred stock is issuable in series with terms as fixed by the Board of Directors. None of the preferred stock has been issued. On June 24, 1997, the Company adopted a revised Shareholder Rights Plan to replace the Company's 1987 Plan which expired on September 28, 1997. Under the new Plan, the Board declared a dividend to shareholders of record on September 28, 1997, of one right for each share of common stock. The rights may only be exercised if, among other things, a person or group has acquired 15% or more, or intends to commence a tender offer for 20% or more, of the Company's common stock. Each right entitles the holder to purchase 1/100th share of a new Harsco Junior Participating Cumulative Preferred Stock at an exercise price of $150. Once the rights become exercisable, if any person acquires 20% or more of the Company's common stock, the holder of a right will be entitled to receive common stock calculated to have a value of two times the exercise price of the right. The rights, which expire on September 28, 2007, do not have voting power, and may be redeemed by the Company at a price of $.05 per right at any time until the 10th business day following public announcement that a person or group has accumulated 15% or more of the Company's common stock. At December 31, 1999, 750,000 shares of $1.25 par value preferred stock were reserved for issuance upon exercise of the rights. In November 1998, the Board of Directors authorized the purchase, over a one-year period, of 2,000,000 shares of the Company's common stock. The Company purchased 877,500 shares of this authorization in 1998. The Board of Directors subsequently increased the authorization by 2,000,000 shares in January 1999. Through December 31, 1999, 3,143,646 shares of common stock were purchased under these authorizations. This leaves 856,354 shares remaining under the authorization. In January 2000, the Board of Directors extended the share purchase authorization through January 25, 2001. In 1999, additional share repurchases of 58,155, net of issues, were made principally as part of the 1995 Executive Compensation Plan.
COMMON STOCK SUMMARY - ------------------------------------------------------------------------------------- SHARES TREASURY SHARES BALANCES ISSUED SHARES OUTSTANDING - ------------------------------------------------------------------------------------- December 31, 1996 65,458,202 15,855,850 49,602,352 December 31, 1997 65,854,087 18,877,957 46,976,130 December 31, 1998 66,075,380 23,825,458 42,249,922 DECEMBER 31, 1999 66,221,544 26,149,759 40,071,785 - -------------------------------------------------------------------------------------
-64- 65 - -------------------------------------------------------------------------------- 11. CAPITAL STOCK (CONTINUED) The following is a reconciliation of the average shares of common stock used to compute basic earnings per common share to the shares used to compute diluted earnings per common share as shown on the Consolidated Statement of Income:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Income from continuing operations $ 90,713 $ 107,513 $ 100,400 =================================================================================================================== Average shares of common stock outstanding used to compute basic earnings per common share 40,882,153 45,568,256 48,754,212 Additional common shares to be issued assuming exercise of stock options, net of shares assumed reacquired 134,914 342,275 437,660 - ------------------------------------------------------------------------------------------------------------------- Shares used to compute dilutive effect of stock options 41,017,067 45,910,531 49,191,872 =================================================================================================================== Basic earnings per common share from continuing operations $ 2.22 $ 2.36 $ 2.06 =================================================================================================================== Diluted earnings per common share from continuing operations $ 2.21 $ 2.34 $ 2.04 ===================================================================================================================
-65- 66 - -------------------------------------------------------------------------------- 12. STOCK-BASED COMPENSATION The Company's net income and net income per common share would have been reduced to the pro forma amounts indicated below if compensation cost for the Company's stock option plan had been determined based on the fair value at the grant date for awards in accordance with the provisions of SFAS No. 123.
(IN THOUSANDS, EXCEPT PER SHARE) 1999 1998 1997 - ---------------------------------------------------------------------------------- Net income: As reported $ 90,713 $ 107,513 $ 278,832 Pro forma 89,113 105,736 277,101 Basic earnings per share: As reported 2.22 2.36 5.72 Pro forma 2.18 2.32 5.68 Diluted earnings per share: As reported 2.21 2.34 5.67 Pro forma 2.17 2.30 5.63 - ----------------------------------------------------------------------------------
The fair value of the options granted during 1999, 1998, and 1997 is estimated on the date of grant using the binomial option pricing model. The weighted-average assumptions used and the estimated fair value are as follows:
1999 1998 1997 - ------------------------------------------------------------------------------------- Expected term 4 YEARS 4 years 4 years Expected stock volatility 25.0% 16.0% 16.0% Risk free interest rate 4.65% 5.65% 6.46% Dividend $ .91 $ .88 $ .80 Rate of dividend increase 5% 5% 5% Fair value $5.18 $6.68 $6.55 - -------------------------------------------------------------------------------------
The Company has granted stock options to officers, certain key employees, and directors for the purchase of its common stock under two shareholder approved plans. The 1995 Executive Incentive Compensation Plan authorizes the issuance of up to 4,000,000 shares of the Company's common stock for use in paying incentive compensation awards in the form of restricted stock and stock options. The 1995 Non-Employee Directors' Stock Plan authorizes the issuance of up to 300,000 shares of the Company's common stock for stock option awards. Options are granted at fair market value at date of grant and become exercisable commencing one year later. The options expire ten years from the date of grant. Upon shareholder approval of these two plans in 1995, the Company terminated the use of the 1986 stock option plan for granting of stock option awards. At December 31, 1999, there were 2,729,158 and 220,000 shares available for granting stock options under the 1995 Executive Incentive Compensation Plan and the 1995 Non-Employee Directors' Stock Plan, respectively. -66- 67 - -------------------------------------------------------------------------------- 12. STOCK-BASED COMPENSATION (CONTINUED) Changes during 1999, 1998, and 1997 in options outstanding were:
SHARES UNDER WEIGHTED AVERAGE OPTION EXERCISE PRICE - ----------------------------------------------------------------------------------------------------- Outstanding, January 1, 1997 1,202,026 $22.24 Granted 294,600 34.41 Exercised (395,885) 20.81 Terminated and expired (15,280) 22.90 - ----------------------------------------------------------------------------------------------------- Outstanding, December 31, 1997 1,085,461 26.06 Granted 275,100 38.30 Exercised (221,293) 24.93 Terminated and expired (16,500) 35.73 - ----------------------------------------------------------------------------------------------------- Outstanding, December 31, 1998 1,122,768 29.14 Granted 428,400 26.92 Exercised (146,164) 19.06 Terminated and expired (68,400) 31.36 - ----------------------------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 1999 1,336,604 $28.97 =====================================================================================================
-67- 68 - -------------------------------------------------------------------------------- 12. STOCK-BASED COMPENSATION (CONTINUED) Options to purchase 932,704 shares, 857,168 shares and 793,061 shares were exercisable at December 31, 1999, 1998, and 1997, respectively. The following table summarizes information concerning outstanding and exercisable options at December 31, 1999.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- --------------------------------- REMAINING RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE EXERCISABLE PRICES OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------------------------------------------------------------------------------------------------------------------ $11.81 - $17.63 34,778 1.8 $15.39 34,778 $15.39 20.69 - 29.47 793,726 7.0 25.61 407,826 24.62 32.81 - 46.16 508,100 7.6 36.31 490,100 36.44 - ------------------------------------------------------------------------------------------------------------------------ 1,336,604 932,704 ========================================================================================================================
During 1999, 1998, and 1997, the Company had non-cash transactions related to stock option exercises of $0.5 million, $1.6 million, and $2.3 million, respectively, whereby old shares were exchanged for new shares. -68- 69 - -------------------------------------------------------------------------------- 12. STOCK-BASED COMPENSATION (CONTINUED) As of January 1, 1999, the restricted stock portion of the 1995 Executive Incentive Compensation Plan was discontinued. The following table summarizes the restricted stock activity for 1998 and 1997:
1998 1997 - ---------------------------------------------------------------------------------------------------------------- Restricted shares awarded 40,702 57,622 Restricted shares forfeited 378 135 Weighted average market value of stock on grant date $43.22 $36.69 - ----------------------------------------------------------------------------------------------------------------
During 1998 and 1997, the Company recorded $.1 million and $1.9 million respectively, in compensation expense related to restricted stock. -69- 70 - -------------------------------------------------------------------------------- 13. FINANCIAL INSTRUMENTS OFF-BALANCE SHEET RISK As collateral for performance and to ceding insurers, the Company is contingently liable under standby letters of credit and bonds in the amount of $165.9 million and $38.7 million at December 31, 1999 and 1998, respectively. These standby letters of credit and bonds 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 0.08 to 1.9 percent per annum of their face value. If the Company were required to obtain replacement standby letters of credit and bonds as of December 31, 1999 for those currently outstanding, it is the Company's opinion that the replacement costs would not vary significantly from the present fee structure. At December 31, 1999 and 1998, the Company had $19.2 million and $18.3 million, respectively, of forward foreign currency exchange contracts outstanding. These contracts are part of a worldwide program to minimize foreign currency exchange operating income and balance sheet exposure. The unsecured contracts mature within 12 months and are with major financial institutions. The Company is exposed to credit loss in the event of non-performance by the other parties to the contracts. The Company evaluates the credit worthiness of the counterparties' financial condition and does not expect default by the counterparties. FOREIGN EXCHANGE RISK MANAGEMENT The Company generally has currency exposures in thirty-two countries. The Company's primary foreign currency exposures are in United Kingdom, France, Canada, South Africa, Brazil, Germany, Australia, and Mexico. Forward foreign currency 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. -70- 71 - -------------------------------------------------------------------------------- 13. FINANCIAL INSTRUMENTS (CONTINUED) The following tables summarize by major currency the contractual amounts of the Company's forward exchange contracts in U.S. dollars as of December 31, 1999 and 1998. 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.
(IN THOUSANDS) AS OF DECEMBER 31, 1999 - ---------------------------------------------------------------------------------------------------------------------- U.S. DOLLAR RECOGNIZED UNREALIZED TYPE EQUIVALENT MATURITY GAIN (LOSS) GAIN (LOSS) - ---------------------------------------------------------------------------------------------------------------------- FORWARD EXCHANGE CONTRACTS: EUROS BUY $17,339 JANUARY 18, 2000 $(661) $ - BRITISH POUNDS BUY 1,506 VARIOUS IN 2000 79 - FRENCH FRANCS BUY 229 VARIOUS IN 2000 - (13) BRITISH POUNDS BUY 93 VARIOUS IN 2000 (2) - ---------------------------------------------------------------------------------------------------------------------- $19,167 $(582) $(15) ======================================================================================================================
At December 31, 1999, the Company had entered into forward exchange contracts in euros and British pounds, which were used to hedge certain future payments between the Company and its various subsidiaries. These forward contracts do not qualify as hedges for financial reporting purposes. At December 31, 1999, the Company had recorded net losses of $0.6 million on these contracts. These losses were generally offset by gains on the hedged items. In January 2000, the euro contract was extended to March 18, 2000. The Company also had forward exchange contracts in French francs and British pounds, which were used to hedge equipment purchases. Since these contracts hedge identifiable foreign currency firm commitments, the losses were deferred and will be accounted for as part of the underlying transactions.
(IN THOUSANDS) AS OF DECEMBER 31, 1998 - ----------------------------------------------------------------------------------------------------------------- U.S. DOLLAR RECOGNIZED UNREALIZED TYPE EQUIVALENT MATURITY GAIN (LOSS) GAIN (LOSS) - ----------------------------------------------------------------------------------------------------------------- Forward exchange contracts: Belgian francs Sell $ 806 Various in 1999 $ 9 - British pounds Sell 1,466 Various in 1999 12 - French francs Sell 15,798 Various in 1999 46 - Norwegian kronor Sell 199 Various in 1999 2 - - ----------------------------------------------------------------------------------------------------------------- $18,269 $ 69 - =================================================================================================================
At December 31, 1998, the Company had entered into forward exchange contracts in Belgian francs, British pounds, French francs, and Norwegian kronor, which were used to hedge certain future payments between the Company and its various subsidiaries. These forward contracts did not qualify as hedges for financial reporting purposes. At December 31, 1998, the Company had recorded net gains of $0.1 million on these contracts. -71- 72 - -------------------------------------------------------------------------------- 13. FINANCIAL INSTRUMENTS (CONTINUED) CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments, and accounts receivable. The Company places its cash and cash equivalents with high quality financial institutions and, by policy, limits the amount of credit exposure to any one institution. Concentrations of credit risk with respect to accounts receivable are limited due to the Company's large number of customers and their dispersion across different industries and geographies. The Company generally does not require collateral or other security to support customer receivables. FAIR VALUE OF FINANCIAL INSTRUMENTS The major methods and assumptions used in estimating the fair values of financial instruments are: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value due to the relatively short period to maturity of these instruments. LONG-TERM DEBT The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. FOREIGN CURRENCY EXCHANGE CONTRACTS The fair value of foreign currency exchange contracts are estimated by obtaining quotes from brokers. -72- 73 - -------------------------------------------------------------------------------- 13. FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 1999 and 1998 are:
(IN THOUSANDS) 1999 1998 - ------------------------------------------------------------------------------------------------------------- CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 51,266 $ 51,266 $ 41,562 $ 41,562 Long-term debt 423,097 416,925 316,972 317,530 Foreign currency exchange contracts 19,167 18,571 18,269 18,336 - -------------------------------------------------------------------------------------------------------------
-73- 74 - -------------------------------------------------------------------------------- 14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA The Company reports information about its operating segments according to the "management approach". The management approach is based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. The Company's reportable segments are identified based upon differences in products, services, and markets served. The Company's business units are aggregated into three reportable segments. The three reportable segments and the type of products and services offered include: HARSCO MILL SERVICES This segment provides metal reclamation and other mill services, principally for the global steel industry. Mill services include slag processing, marketing, and disposal; slab management systems; materials handling and scrap management programs; in-plant transportation; and a variety of environmental services. Similar services are provided to non-ferrous metallurgical industries, such as aluminum, nickel, and copper. Also, slag recovery services are provided to electric utilities from which granules for asphalt roofing shingles and slag abrasives for industrial surface preparation are derived. HARSCO GAS AND FLUID CONTROL Major products and services are gas containment cylinders and tanks, including cryogenic equipment; valves, regulators, and gauges, including scuba and life support equipment; industrial pipe fittings; and air-cooled heat exchangers. Major customers include various industrial markets; hardware, plumbing, and petrochemical sectors; natural gas and process industries; propane, compressed gas, life support, scuba, and refrigerant gas industries; gas equipment companies; welding distributors; medical laboratories; beverage carbonation users; and the animal husbandry industry. HARSCO INFRASTRUCTURE Major products and services include railway maintenance-of-way equipment and services; scaffolding, shoring, and concrete forming products and erection and dismantling services; bridge decking and industrial grating; process equipment, including industrial blenders, dryers, mixers, water heaters, boilers, and heat transfer equipment. Products and services are provided to private and government-owned railroads worldwide; urban mass transit operators; public utilities; industrial plants; the oil, chemical, petrochemical, and process industries; bridge repair companies; commercial and industrial construction firms; and infrastructure repair and maintenance markets. Other customers include the chemical, food processing, and pharmaceutical industries; and institutional building and retrofit markets. -74- 75 - -------------------------------------------------------------------------------- 14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED) OTHER INFORMATION The measurement basis of segment profit or loss is income after taxes from continuing operations. Interest income is recorded by each segment as incurred. Interest expense is allocated to the segments based on actual interest expense incurred by international operations and based on internal borrowings at an estimated weighted average interest rate for domestic operations. Income taxes are allocated to the segments based on actual income tax expense incurred, or where aggregated for tax purposes, based on the effective income tax rates for the countries in which they operate. The operations of the Company in any one country, except the United States, do not account for more than 10% of sales and no single customer represented 10% or more of the Company's sales, during 1999, 1998, and 1997. There are no significant intersegment sales. Corporate assets include principally cash, investments, prepaid pension costs, and United States deferred taxes. Assets in the United Kingdom represent 12% of total segment assets as of December 31, 1999 and 1998 and are disclosed separately in the geographic area information. SEGMENT INFORMATION (1)(2)
SEGMENTS NET SALES TO UNAFFILIATED CUSTOMERS INCOME FROM CONTINUING OPERATIONS - ---------------------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) 1999 1998 1997 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Harsco Mill Services (3)(4) $ 729.6 $ 751.9 $ 672.7 $ 45.1 $ 43.3 $ 50.3 Harsco Gas and Fluid Control 560.9 588.7 558.3 27.0 40.9 29.5 Harsco Infrastructure (5) 426.2 392.9 396.5 22.5 18.6 15.5 - ---------------------------------------------------------------------------------------------------------------------------------- Segment totals $ 1,716.7 $ 1,733.5 $1,627.5 94.6 102.8 95.3 - ---------------------------------------------------------------------------------------------------------------------------------- General corporate income (expense) (3.9) 4.7 5.1 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations $ 90.7 $ 107.5 $ 100.4 ================================================================================================================================== SEGMENTS ASSETS DEPRECIATION AND AMORTIZATION CAPITAL EXPENDITURES - ------------------------------------------------------------------------------------------------------------------------------ (IN MILLIONS) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Harsco Mill Services (4) $ 934.6 $ 922.7 $ 715.3 $ 99.5 $ 98.2 $ 87.2 $ 134.9 $ 102.7 $ 94.8 Harsco Gas and Fluid Control 347.9 380.9 249.3 18.1 16.1 11.4 21.4 30.6 19.8 Harsco Infrastructure (5) 325.7 241.1 222.6 17.0 15.9 16.7 17.9 26.1 27.3 - ------------------------------------------------------------------------------------------------------------------------------ Segment totals 1,608.2 1,544.7 1,187.2 134.6 130.2 115.3 174.2 159.4 141.9 Corporate 51.6 78.9 290.0 1.3 1.2 1.2 1.0 .4 1.5 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 1,659.8 $ 1,623.6 $ 1,477.2 $ 135.9 $ 131.4 $ 116.5 $ 175.2 $ 159.8 $ 143.4 ==============================================================================================================================
(1) The 1997 segment information has been restated in accordance with the Financial Accounting Standards Board SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." (2) Segment information reflects the first quarter 1999 reorganization of the Patterson-Kelley division. Segment information for 1998 and 1997 has been restated to reflect this change. The reorganization resulted in the realignment of the heat transfer and industrial blending equipment product lines from the Harsco Gas and Fluid Control Segment to the Harsco Infrastructure Segment. Sales of these product lines were $26.9 million, $29.2 million, and $28.2 million for the years 1999, 1998, and 1997, respectively. (3) For the years ended December 31, 1999, 1998, and 1997 the Harsco Mill Services Segment included equity in income of unconsolidated entities of $3.0 million, $1.4 million, and $1.0 million, respectively. (4) A non-cash amount of $26.6 million of loan notes was issued for the Faber Prest acquisition related to the Harsco Mill Services Segment in 1998. (5) The Pandrol Jackson railway maintenance-of-way business was acquired in October 1999 and is included as part of the Harsco Infrastructure Segment. Pandrol Jackson sales were $12.4 million in 1999, and assets were $69.2 million as of December 31, 1999. -75- 76 - -------------------------------------------------------------------------------- 14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED) RECONCILIATION OF REPORTED INCOME BEFORE INTEREST, INCOME TAXES, AND MINORITY INTEREST TO SEGMENT INCOME
HARSCO HARSCO GAS AND HARSCO GENERAL CONSOLIDATED (IN MILLIONS) MILL SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTAL - ----------------------------------------------------------------------------------------------------------------------------- 1999 (1) INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST, INCOME TAXES, AND MINORITY INTEREST $ 81.2 $ 47.5 $ 41.2 $ (0.2) $ 169.7 INTEREST INCOME 4.3 0.1 0.2 0.1 4.7 INTEREST EXPENSE (10.8) (4.8) (6.3) (5.1) (27.0) INCOME TAX (EXPENSE) BENEFIT (24.4) (15.9) (12.6) 1.3 (51.6) MINORITY INTEREST IN NET (INCOME) LOSS (5.2) 0.1 - - (5.1) - ----------------------------------------------------------------------------------------------------------------------------- SEGMENT INCOME (LOSS) FROM CONTINUING OPERATIONS $ 45.1 $ 27.0 $ 22.5 $ (3.9) $ 90.7 =============================================================================================================================
HARSCO HARSCO GAS AND HARSCO GENERAL CONSOLIDATED (IN MILLIONS) MILL SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTAL - ------------------------------------------------------------------------------------------------------------------------------- 1998 (2) Income from continuing operations before interest, income taxes, and minority interest $ 84.3 $ 72.3 $ 32.9 $ 2.4 $ 191.9 Interest income 4.8 0.2 0.4 3.0 8.4 Interest expense (11.0) (4.1) (5.4) - (20.5) Income tax expense (29.9) (27.5) (9.3) (0.7) (67.4) Minority interest in net income (4.9) - - - (4.9) - ------------------------------------------------------------------------------------------------------------------------------- Segment income from continuing operations $ 43.3 $ 40.9 $ 18.6 $ 4.7 $ 107.5 ===============================================================================================================================
HARSCO HARSCO GAS AND HARSCO GENERAL CONSOLIDATED (IN MILLIONS) MILL SERVICES FLUID CONTROL INFRASTRUCTURE CORPORATE TOTAL - ------------------------------------------------------------------------------------------------------------------------------ 1997 (3) Income (loss) from continuing operations before interest, income taxes, and minority interest $ 99.1 $ 51.3 $ 29.7 $ (0.2) $ 179.9 Interest income 2.0 0.1 0.2 6.1 8.4 Interest expense (6.6) (3.1) (5.9) (1.1) (16.7) Income tax (expense) benefit (38.5) (18.5) (8.5) 0.3 (65.2) Minority interest in net income (5.7) (0.3) (6.0) - ------------------------------------------------------------------------------------------------------------------------------ Segment income from continuing operations $ 50.3 $ 29.5 $ 15.5 $ 5.1 $ 100.4 ==============================================================================================================================
(1) For 1999, segment income includes pre-tax special charges of $3.4 million and $2.5 million for the Harsco Mill Services Segment and Harsco Gas and Fluid Control Segment, respectively. (2) For 1998, segment income includes pre-tax special charges (gains) of $15.6 million, ($18.2) million, and $4.8 million for the Harsco Mill Services Segment, Harsco Gas and Fluid Control Segment and the Harsco Infrastructure Segment, respectively. (3) For 1997, segment income includes pre-tax special charges (gains) of $0.4 million, $1.8 million, and ($0.3) million for the Harsco Mill Services Segment, Harsco Gas and Fluid Control Segment and the Harsco Infrastructure Segment, respectively. See Note 15 for further information on special charges and (gains). -76- 77 - -------------------------------------------------------------------------------- 14. INFORMATION BY SEGMENT AND GEOGRAPHIC AREA (CONTINUED) INFORMATION BY GEOGRAPHIC AREA (4)
GEOGRAPHIC AREA NET SALES TO UNAFFILIATED CUSTOMERS SEGMENT ASSETS - ---------------------------------------------------------------------------------------------------------------------- (IN MILLIONS) 1999 1998 1997 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- United States $ 1,095.3 $ 1,085.6 $ 1,044.8 $ 797.1 $ 721.2 $ 569.4 United Kingdom 155.5 126.4 61.1 186.2 180.7 51.4 All Other 465.9 521.5 521.6 624.9 642.8 566.4 - ---------------------------------------------------------------------------------------------------------------------- Segment Totals $ 1,716.7 $ 1,733.5 $ 1,627.5 $ 1,608.2 $ 1,544.7 $ 1,187.2 ======================================================================================================================
(4) Revenues are attributed to individual countries based on the location of the facility generating the revenue. -77- 78 - -------------------------------------------------------------------------------- 15. OTHER (INCOME) AND EXPENSES AND SPECIAL CHARGES AND (GAINS) In the years 1999, 1998, and 1997, the Company recorded Other (income) and expenses of $6.0 million, $(4.3) million, and $2.6 million, respectively:
OTHER (INCOME) AND EXPENSES - ------------------------------------------------------------------------------------------ (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------ Net gains $ (560) $ (29,107) $ (1,620) Impaired asset write-downs 2,878 14,410 1,592 Employee termination benefit costs 2,889 6,543 (810) Costs to exit activities 502 2,792 3,313 Other 310 1,098 103 - ----------------------------------------------------------------------------------------- Total $ 6,019 $ (4,264) $ 2,578 =========================================================================================
Additionally, in 1998 the Company recorded $6.5 million of other special charges, of which $2.2 million is included in cost of products sold, $3.5 million in cost of services sold, and $.8 million in general and administrative expenses. For 1998, this resulted in net special charges of $2.2 million which includes Other (income) and expenses. The 1998 amounts were incurred principally in the fourth quarter in which results included $29.6 million of gains and other credits offset by $29.5 million of special charges. Other (income) and expenses and special charges and gains consist principally of gains on the sale of businesses, impaired asset write-downs, employee termination benefit costs, costs to exit activities, and other reorganization-related costs. Pre-tax amounts by operating segment include:
- ------------------------------------------------------------------------------------------------------------ SPECIAL CHARGES AND (GAINS) - ------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------ Harsco Mill Services $ 3,350 $ 15,618 $ 441 Harsco Gas and Fluid Control 2,452 (18,232) 1,766 Harsco Infrastructure (10) 4,826 (348) Corporate 227 (11) 719 - ------------------------------------------------------------------------------------------------------------ Total $ 6,019 $ 2,201 $ 2,578 ============================================================================================================
-78- 79 - -------------------------------------------------------------------------------- 15. OTHER (INCOME) AND EXPENSES AND SPECIAL CHARGES AND (GAINS) (CONTINUED) NET GAINS Net gains for 1998 consist principally of a pre-tax net gain of $27 million recorded on the October 1998 sale of the Nutter Engineering unit of the Harsco Gas and Fluid Control Segment. Such gains are reflected as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows. Total proceeds associated with 1998 special gains were $42.9 million and are included in proceeds from the sale of businesses and property, plant and equipment in the investing activities section of the Consolidated Statement of Cash Flows. Other related information concerning dispositions is discussed in Note 3. IMPAIRED ASSET WRITE-DOWNS Impaired asset write-downs for 1999 include a $1.9 million pre-tax, non-cash, write-down of the Company's investment in Bio-Oxidation Services Inc. which is included in the Harsco Gas and Fluid Control Segment. The Company's investment in Bio-Oxidation Services Inc. is being held for disposal. The write-down amount was measured on the basis of the lower of carrying amount or fair value less cost to sell. Fair value was determined using available information based upon the estimated amount at which the assets could be sold in a current transaction between willing parties. The investment carrying value as of December 31, 1999 was $6.6 million. For the year ended December 31, 1999, Bio-Oxidation Services Inc. recorded a pre-tax loss of $2.3 million which includes the asset write-down of $1.9 million. The Company estimates that the disposal will occur during 2000. Impaired asset write-downs for 1998 include a $6.1 million pre-tax, non-cash, write-down of the Company's investment in Bio-Oxidation Services Inc. The investment carrying value as of December 31, 1998 was $7.6 million. For the year ended December 31, 1998 Bio-Oxidation Services Inc. recorded a pre-tax loss of $9.8 million which includes the asset write-down of $6.1 million. Impaired asset write-downs for 1998 also include a $6.1 million pre-tax, non-cash, write-down of assets, principally property, plant and equipment in the Harsco Mill Services Segment. The write-down became necessary as a result of significant adverse changes in the international economic environment and the steel industry. Impairment loss was measured as the amount by which the carrying amount of assets exceeded their estimated fair value. Fair value was estimated based upon the expected future realizable net cash flows. In September 1999, assets associated with a substantial portion of this provision were sold in conjunction with the termination settlement of a contract in Russia. Non-cash impaired asset write-downs are included in Other (income) and expenses in the Consolidated Statement of Cash Flows as adjustments to reconcile net income to net cash provided by operating activities. -79- 80 - -------------------------------------------------------------------------------- 15. OTHER (INCOME) AND EXPENSES AND SPECIAL CHARGES AND (GAINS) (CONTINUED) EMPLOYEE TERMINATION BENEFIT COSTS Employee termination benefit costs consist principally of severance arrangements to employees terminated as a result of management reorganization actions. Under these reorganization actions, the Company's management has established and approved specific plans of termination. Details of the termination benefit plans have been communicated to the affected employees prior to recognition of related provisions. Non-cash charges for employee termination benefit costs are included as adjustments to reconcile net income to net cash provided by operating activities in the Consolidated Statement of Cash Flows. During 1999, $2.9 million of reorganization expense related to employee termination benefits was incurred, principally in the Harsco Mill Services Segment, primarily in France and the United Kingdom. In 1999, 220 employees were included in employee termination arrangements initiated by the Company and approximately $1.8 million of cash payments were made under such arrangements. The payments are reflected as uses of operating cash in the Consolidated Statement of Cash Flows. During 1998, $6.5 million of reorganization expense related to employee termination benefits was incurred, principally in the Harsco Mill Services Segment primarily in South Africa, United States, France, and Germany. In 1998, approximately 670 employees were included in employee termination arrangements initiated by the Company and approximately $2.4 million of cash payments were made under such arrangements. An additional $3.3 million was disbursed in 1999 for the 1998 reorganization actions. EMPLOYEE TERMINATION BENEFIT COSTS AND PAYMENTS
(IN MILLIONS) SUMMARY OF ACTIVITY ----------------------------------------- Original reorganization action period 1999 1998 Employee termination benefits expense $2.9 $6.5 --- --- Payments: Disbursed in 1998 - (2.4) Disbursed in 1999 (1) (1.8) (3.3) --- --- Total payments (1.8) (5.7) Other - (0.4) ---- --- Remaining payments as of December 31, 1999 (2) $1.1 $0.4 === ===
(1) - Disbursements in 1999 are categorized according to the original reorganization action period to which they relate (1999 or 1998). Cash severance payments in 1999 occurred principally in the Harsco Mill Services Segment in South Africa principally for 1998 reorganization actions. (2) - Remaining payments are categorized according to the original reorganization action period to which they relate (1999 or 1998). -80- 81 - -------------------------------------------------------------------------------- 15. OTHER (INCOME) AND EXPENSES AND SPECIAL CHARGES AND (GAINS) (CONTINUED) EMPLOYEE TERMINATIONS - NUMBER OF EMPLOYEES
SUMMARY OF ACTIVITY ---------------------------------------- Original reorganization action period 1999 1998 Employees affected by new reorganization actions 220 670 --- --- Employee terminations: Terminated in 1998 - (349) Terminated in 1999 (172) (352) --- --- Total terminations (172) (701) Other (9) 35 ---- ----- Remaining terminations as of December 31, 1999 39 4 ==== =====
COSTS TO EXIT ACTIVITIES Costs to exit activities consist of incremental direct costs of reorganization actions and lease run-out costs. Such costs are recorded when a specific exit plan is approved by management. Relocation expenses, such as employee moving costs, are classified as exit costs and are expensed as incurred. Other costs classified in this category are generally expensed as incurred. During 1998, $1.0 million and $0.8 million of exit costs, principally relocation expenses, were included in the Harsco Mill Services and Harsco Infrastructure Segments, respectively. During 1997, $1.5 million of exit costs were included in the Harsco Mill Services Segment. These costs resulted principally from the expiration or termination of contracts at certain mill sites, as well as facility relocation costs. -81- 82 TWO-YEAR SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 - ---------------------------------------------------------------------------------------------------------------- QUARTERLY FIRST SECOND THIRD FOURTH - ---------------------------------------------------------------------------------------------------------------- Net sales $404.6 $430.7 $423.9 $457.5 Gross profit (1) 82.8 94.7 93.7 102.2 Net income 14.8 23.8 26.1 26.0 Diluted earnings per share .35 .58 .64 .65 - ---------------------------------------------------------------------------------------------------------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1998 - ---------------------------------------------------------------------------------------------------------------- QUARTERLY FIRST SECOND THIRD FOURTH (2) - ---------------------------------------------------------------------------------------------------------------- Net sales $401.0 $456.3 $445.7 $430.5 Gross profit (1) 93.3 110.2 99.9 100.0 Net income 24.3 33.1 25.9 24.2 Diluted earnings per share .52 .71 .56 .55 - ----------------------------------------------------------------------------------------------------------------
Notes: (1) Gross profit is defined as Net sales less Cost of sales, Other (income) and expenses, and Research and development expenses. (2) The fourth quarter of 1998 included $29.6 million of special gains offset by $29.5 million of special charges. The gains included a pre-tax net gain of $27 million recorded on the sale of the Nutter Engineering unit of the Harsco Gas and Fluid Control Segment. The special charges included impaired asset write-downs, employee termination benefit costs, costs to exit activities and other reorganization-related expenses. Other information concerning special charges and (gains) is discussed in Management's Discussion and Analysis and Note 15. -82- 83 COMMON STOCK PRICE AND DIVIDEND INFORMATION
MARKET PRICE PER SHARE ---------------------- DIVIDENDS DECLARED HIGH LOW PER SHARE - ------------------------------------------------------------------------------------------------------------- 1999 First Quarter $ 33 $ 25 $ .225 Second Quarter 34 3/8 23 1/16 .225 Third Quarter 32 5/16 25 3/8 .225 Fourth Quarter 31 7/8 26 .235 1998 First Quarter $ 46 1/8 $ 37 1/2 $ .22 Second Quarter 47 41 5/16 .22 Third Quarter 47 1/4 23 .22 Fourth Quarter 35 28 .225 - -------------------------------------------------------------------------------------------------------------
-83- 84 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure: None. -84- 85 PART III Item 10. Directors and Executive Officers of the Registrant: (a) Identification of Directors: Information regarding the identification of directors and positions held is incorporated by reference to the 2000 Proxy Statement. (b) Identification of Executive Officers: Set forth below, as of March 2, 2000, are the executive officers (this excludes one corporate officer who is not deemed an "executive officer" within the meaning of applicable Securities and Exchange Commission regulations) of the Company and certain information with respect to each of them. The executive officers were elected to their respective offices on April 27, 1999, or at various times during the year as noted. All terms expire on April 25, 2000. There are no family relationships between any of the officers.
Name Age Principal Occupation or Employment - ---- --- ---------------------------------- Corporate Officers: D. C. Hathaway 55 Chairman and Chief Executive Officer effective January 1, 1998. Served as Chairman, President and Chief Executive Officer from April 1, 1994 to December 31, 1997, and President and Chief Executive Officer from January 1, 1994 to April 1, 1994. Director since 1991. From 1991 to 1993, served as President and Chief Operating Officer. From 1986 to 1991 served as Senior Vice President-Operations of the Corporation. Served as Group Vice President from 1984 to 1986 and as President of the Dartmouth Division of the Corporation from 1979 until 1984.
-85- 86
Name Age Principal Occupation or Employment - ---- --- ---------------------------------- L. A. Campanaro 51 President, Chief Operating Officer and Director of the Corporation effective January 1, 1998. Served as Senior Vice President and Chief Financial Officer from December 1992 to December 1997, and as Vice President and Controller from April 1992 to November 1992. Served as Vice President of the BMY-Wheeled Vehicles Division from February 1992 to March 1992, and previously served as Vice President and Controller of the BMY-Wheeled Vehicles Division from 1988 to 1992, Vice President Cryogenics of the Plant City Steel Division from 1987 to 1988, Senior Vice President of the Taylor-Wharton Division from 1985 to 1987, Vice President and Controller of Taylor-Wharton from 1982 to 1985, and Director of Auditing of the Corporation from 1980 to 1982. P. C. Coppock 49 Senior Vice President, Chief Administrative Officer, General Counsel and Secretary of the Corporation effective January 1, 1994. Served as Vice President, General Counsel and Secretary of the Corporation from May 1, 1991 to December 31, 1993. From 1989 to 1991 served as Secretary and Corporate Counsel and as Assistant Secretary and Corporate Counsel from 1986 to 1989. Served in various Corporate Attorney positions for the Corporation since 1981. S. D. Fazzolari 47 Senior Vice President, Chief Financial Officer and Treasurer of the Corporation effective August 24, 1999. Served as Senior Vice President and Chief Financial Officer from January 1998 to August 1999. Served as Vice President and Controller from January 1994 to December 1997 and as Controller from January 1993 to January 1994. Previously served as Director of Auditing from 1985 to 1993, and served in various auditing positions from 1980 to 1985.
-86- 87
Name Age Principal Occupation or Employment - ---- --- ---------------------------------- R. W. Kaplan 48 Senior Vice President-Operations of the Corporation effective July 1, 1998. Concurrently serves as President of the Harsco Gas & Fluid Control Group and was President of the Taylor-Wharton Gas Equipment Division from February 1, 1994 to November 16, 1999. Served as Vice President and Treasurer of the Corporation from January 1992 to February 1994. Served as Treasurer of the Corporation from May 1991 to December 1992. Previously served as Vice President and General Manager of the Plant City Steel/Taylor-Wharton Division from 1987 to 1991 and Vice President and Controller of the Division from 1985 to 1987. Previously served in various Corporate treasury/financial positions since 1979. S. J. Schnoor 46 Vice President and Controller of the Corporation effective May 15, 1998. Served as Vice President and Controller of the Patent Construction Systems Division from February 1996 to May 1998 and as Controller of the Patent Construction Systems Division from January 1993 to February 1996. Previously served in various auditing positions for the Corporation from 1988 to 1993.
(c) Beneficial Ownership Reporting Compliance Information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" of the 2000 Proxy Statement. -87- 88 Item 11. Executive Compensation: Information regarding compensation of executive officers and directors is incorporated by reference to the sections entitled "Executive Compensation and Other Information" and "Directors' Compensation" of the 2000 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management: Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the section entitled "Share Ownership of Management" of the 2000 Proxy Statement. Item 13. Certain Relationships and Related Transactions: Information regarding certain relationships and related transactions is incorporated by reference to the section entitled "Employment Agreements with Officers of the Company" of the 2000 Proxy Statement. -88- 89 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K: (a) 1. The Consolidated Financial Statements are listed in the index to Item 8, "Financial Statements and Supplementary Data," on page 33. (a) 2. The following financial statement schedule should be read in conjunction with the Consolidated Financial Statements (see Item 8, "Financial Statements and Supplementary Data"):
Page -------- Report of Independent Accountants on Schedule II 90 Schedule II - Valuation and Qualifying Accounts for the years 1999, 1998 and 1997 91
Schedules other than those listed above are omitted for the reason that they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. Condensed financial information of the registrant is omitted since there are no substantial amounts of "restricted net assets" applicable to the Company's consolidated subsidiaries. Financial statements of 50% or less owned unconsolidated companies are not submitted inasmuch as (1) the registrant's investment in and advances to such companies do not exceed 20% of the total consolidated assets, (2) the registrant's proportionate share of the total assets of such companies does not exceed 20% of the total consolidated assets, (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. -89- 90 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Harsco Corporation Our report on the consolidated financial statements of Harsco Corporation and Subsidiary Companies (the "Company"), is included on page 34 of this Form 10-K. In connection with our audits of such consolidated financial statements, we have also audited the related consolidated financial statement schedule listed in the index (Item 14(a) 2.) on page 89 of this Form 10-K. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 27, 2000 -90- 91 SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS (dollars in thousands) ----------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- Additions (Deductions) Additions --------- -------------------------- Due to Balance at Charged to Currency Balance at Beginning Cost and Translation End of Description of Period Expenses Adjustments Other (1) Period ----------- --------- -------- ----------- --------- ------ For the year 1999: Deducted from Receivables: -------------------------- Uncollectible accounts $ 13,602 $ 4,844 $ (153) $ (4,954) $ 13,339 ========= ========= ========= ========= ========= Deducted from Inventories: -------------------------- Inventory valuations $ 5,777 $ 6,383 $ (132) $ (1,344) $ 10,684 ========= ========= ========= ========= ========= Other Reorganization and ------------------------ Valuation Reserves $ 25,316 $ 5,206 $ (389) $ (13,053)(2) $ 17,080 ------------------ ========= ========= ========= ========= ========= For the year 1998: Deducted from Receivables: -------------------------- Uncollectible accounts $ 6,834 $ 9,166 $ 9 $ (2,407) $ 13,602 ========= ========= ========= ========= ========= Deducted from Inventories: -------------------------- Inventory valuations $ 3,687 $ 6,871 $ (30) $ (4,751) $ 5,777 ========= ========= ========= ========= ========= Other Reorganization and ------------------------ Valuation Reserves $ 3,102 $ 16,423 $ 93 $ 5,698(3) $ 25,316 ------------------ ========= ========= ========= ========= ========= For the year 1997: Deducted from Receivables: -------------------------- Uncollectible accounts $ 8,549 $ 1,916 $ (188) $ (3,443) $ 6,834 ========= ========= ========= ========= ========= Deducted from Inventories: -------------------------- Inventory valuations $ 5,381 $ 1,645 $ (129) $ (3,210) $ 3,687 ========= ========= ========= ========= ========= Other Reorganization and ------------------------ Valuation Reserves $ 2,300 $ 3,232 $ (86) $ (2,344) $ 3,102 ------------------ ========= ========= ========= ========= =========
(1) Amounts charged to valuation account during the year. (2) Includes $5,942 of charges against the opening balance sheet reorganization reserves of Faber Prest acquired in 1998. (3) Includes $12,328 increase due to opening balance sheet reorganization reserves for companies acquired in 1998. -91- 92 (a) 3. Listing of Exhibits Filed with Form 10-K:
Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- 3(a) Articles of Incorporation as Exhibit volume, 1990 10-K amended April 24, 1990 3(b) Certificate of Amendment of Exhibit volume, 1999 10-K Articles of Incorporation filed June 3, 1997 3(c) Certificate of Designation filed Exhibit volume, 1997 10-K September 25, 1997 3(d) By-laws as amended April 25, 1990 Exhibit volume, 1990 10-K 4(a) Harsco Corporation Rights Agreement dated as Incorporated by reference to Form of September 28, 1997, with Chase Mellon 8-A, filed September 26, 1997 Shareholder Services L.L.C. 4(b) Registration of Preferred Stock Incorporated by reference to Form Purchase Rights 8-A dated October 2, 1987 4(c) Current Report on dividend Incorporated by reference to Form distribution of Preferred 8-K dated October 13, 1987 Stock Purchase Rights 4(d) Debt Securities Registered Incorporated by reference to Form under Rule 415 (6% Notes) S-3, Registration No. 33-42389 dated August 23, 1991
-92- 93 (a) 3. Listing of Exhibits Filed with Form 10-K (continued):
Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- 4(e) 6% 1993 Notes due September 15, Incorporated by reference to the 2003 described in Prospectus Prospectus Supplement dated Supplement dated September 8, September 8, 1993 to Form S-3, 1993 to Form S-3 Registration under Registration No. 33-42389 dated Rule 415 dated August 23, 1991 August 23, 1991 4(f) Debt and Equity Securities Registered Incorporated by reference to Form S-3, Registration No. 33-56885 dated December 15, 1994, effective date January 12, 1995 Material Contracts - Credit facility 10(a) Amendment Agreement dated July 16, Exhibit to 10-Q for the period 1996 to the amended and restated ended June 30, 1996 Credit Agreement dated as of August 24, 1993, as amended and restated as of June 21, 1994, and as amended by an Amendment Agreement dated as of June 20, 1995 and a second Amendment Agreement dated as of February 29, 1996 among Harsco Corporation, the lenders named therein and Chase Manhattan Bank. 10(b) Commercial Paper Dealer Agreement Exhibit volume, 1994 10-K Dated October 11, 1994, Between J.P. Morgan Securities, Inc. and Harsco Corporation 10(c) Commercial Paper Dealer Agreement Exhibit volume, 1994 10-K Dated October 11, 1994, Between Lehman Brothers, Inc. and Harsco Corporation 10(d) Issuing and Paying Agency Agreement, Exhibit volume, 1994 10-K Dated October 12, 1994, Between Morgan Guaranty Trust Company of New York and Harsco Corporation
-93- 94 (a) 3. Listing of Exhibits Filed with Form 10-K (continued):
Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- 10(e) Commercial Paper Agreement with Exhibit to 10-Q for the period Banque Bruxelles Lambert S.A./Bank ended September 30, 1996 Brussel Lambert N.V. dated September 25, 1996. Material Contracts - Underwriting 10(f) Commercial Paper Placement Agency Exhibit volume, 1998 10-K Agreement dated November 6, 1998, between Chase Securities, Inc. and Harsco Corporation 10(g) Underwriting Agreement for Exhibit volume, 1987 10-K Debt Securities dated October 22, 1987 Material Contracts - Management Contracts and Compensatory Plans 10(h) Harsco Corporation Supplemental Exhibit volume, 1997 10-K Retirement Benefit Program as amended January 27, 1998 10(i) Trust Agreement between Harsco Exhibit volume, 1987 10-K Corporation and Dauphin Deposit Bank and Trust Company dated July 1, 1987 relating to the Supplemental Retirement Benefit Plan 10(j) Harsco Corporation Supplemental Exhibit volume, 1991 10-K Executive Retirement Plan as amended 10(k) Trust Agreement between Harsco Exhibit volume, 1988 10-K Corporation and Dauphin Deposit Bank and Trust Company dated November 22, 1988 relating to the Supplemental Executive Retirement Plan 10(l) 1995 Executive Incentive Compensation Proxy Statement dated March 22, 1995 Plan on Exhibit A pages A-1 through A-12
-94- 95 (a) 3. Listing of Exhibits Filed with Form 10-K (continued):
Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- 10(m) Authorization, Terms and Conditions of Exhibit volume, 1998 10-K the Annual Incentive Awards, as amended and Restated January 1, 1999, under the 1995 Executive Incentive Compensation Plan Employment Agreements - 10(n) D. C. Hathaway Exhibit volume, 1989 10-K Uniform agreement, the same as shown for J. J. Burdge " L. A. Campanaro " " " P. C. Coppock " " " S. D. Fazzolari " " " R. W. Kaplan " " 10(o) Special Supplemental Retirement Exhibit Volume, 1988 10-K Benefit Agreement for D. C. Hathaway Director Indemnity Agreements - 10(p) R. F. Nation Exhibit volume, 1989 10-K Uniform agreement, same as shown for J. J. Burdge " A. J. Sordoni, III " " " R. C. Wilburn " " " D. C. Hathaway " " " J. I. Scheiner " " " C. F. Scanlan " " " J. J. Jasinowski " " " J. P. Viviano " "
-95- 96 (a) 3. Listing of Exhibits Filed with Form 10-K (continued):
Exhibit Number Data Required Location in 10-K - ------ ------------- ---------------- 10(q) Harsco Corporation Deferred Exhibit volume, 1994 10-K Compensation Plan for Non-Employee Directors 10(r) Harsco Corporation 1995 Non-Employee Proxy Statement dated Directors' Stock Plan March 22, 1995 on Exhibit B pages B-1 through B-6 12 Computation of Ratios of Exhibit volume, 1999 10-K Earnings to Fixed Charges 21 Subsidiaries of the Registrant Exhibit volume, 1999 10-K 23 Consent of Independent Accountants Exhibit volume, 1999 10-K 27 Financial Data Schedule Exhibit volume, 1999 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. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 31, 1999. -96- 97 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HARSCO CORPORATION Date 3-16-00 By /S/ Salvatore D. Fazzolari ----------------------------- ---------------------------------- Salvatore D. Fazzolari Senior Vice President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE /S/ Derek C. Hathaway Chairman and Chief 3-16-00 - ------------------------------------ Executive Officer -------------------- (Derek C. Hathaway) /S/ Leonard A. Campanaro President, Chief Operating 3-16-00 - ------------------------------------ Officer and Director -------------------- (Leonard A. Campanaro) /S/ Salvatore D. Fazzolari Senior Vice President, Chief 3-16-00 - ------------------------------------ Financial Officer and Treasurer -------------------- (Salvatore D. Fazzolari) (Principal Financial Officer) /S/ Stephen J. Schnoor Vice President and Controller 3-16-00 - ------------------------------------ (Principal Accounting Officer) -------------------- (Stephen J. Schnoor) /S/ Jerry J. Jasinowski Director 3-16-00 - ------------------------------------ -------------------- (Jerry J. Jasinowski) /S/ Robert F. Nation Director 3-16-00 - ------------------------------------ -------------------- (Robert F. Nation) /S/ Carolyn F. Scanlan Director 3-16-00 - ------------------------------------ -------------------- (Carolyn F. Scanlan) /S/ James I. Scheiner Director 3-16-00 - ------------------------------------ -------------------- (James I. Scheiner) /S/ Andrew J. Sordoni III Director 3-16-00 - ------------------------------------ -------------------- (Andrew J. Sordoni III) /S/ Joseph P. Viviano Director 3-16-00 - ------------------------------------ -------------------- (Joseph P. Viviano) /S/ Dr. Robert C. Wilburn Director 3-16-00 - ------------------------------------ -------------------- (Dr. Robert C. Wilburn)
-97- 98 HARSCO CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 Item 14(a) 3. Exhibits
Exhibit Document Number Pages - ------ -------- 3(b) Certificate of Amendment of Articles of Incorporation filed June 3, 1997 1 - 2 12 Computation of Ratios of Earnings to Fixed Charges 1 21 Subsidiaries of the Registrant 1 - 4 23 Consent of Independent Accountants 1 27 Financial Data Schedule 1
EX-3.B 2 CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORP. 1 EXHIBIT 3(b) CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION ***** Harsco Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Harsco Corporation on January 28, 1997, resolutions were duly adopted setting forth a proposed amendment to the Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Restated Certificate of Incorporation of Harsco Corporation, as heretofore amended, be, and the same hereby is, further amended by deleting the introductory paragraph of Article FOURTH thereof and substituting, in lieu thereof, the following: "FOURTH: The total number of shares of all classes of stock which this Corporation shall have authority to issue is 154,000,000 shares, of which 4,000,000 shares are to be Preferred Stock of the par value of $1.25 per share and 150,000,000 shares are to be Common Stock of the par value of $1.25 per share." SECOND: That thereafter, pursuant to resolution of its Board of Directors, an Annual Meeting of the stockholders of said corporation was duly called and held April 30, 1997, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. -1- 2 IN WITNESS WHEREOF, said Harsco Corporation has caused this certificate to be signed by Derek C. Hathaway, its Chairman, President and Chief Executive Officer, this 20th day of May, 1997. /s/ Derek C. Hathaway -------------------------------- Derek C. Hathaway Chairman, President and Chief Executive Officer ATTEST: /s/ Paul C. Coppock - ------------------------------------- Paul C. Coppock Senior Vice President, Chief Administrative Officer, General Counsel and Secretary -2- EX-12 3 COMPUTATION OF RATIOS OF EARNINGS 1 HARSCO CORPORATION Exhibit 12 Computation of Ratios of Earnings to Fixed Charges (In Thousands of Dollars)
YEARS ENDED DECEMBER 31 ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Pre-tax income from continuing operations (net of minority interest in net income) $ 142,312 $ 174,874 $ 165,613 $ 145,984 $ 107,073 Add fixed charges computed below 37,418 28,417 24,263 26,181 33,121 Net adjustments for equity companies 365 139 (694) (181) (466) Net adjustments for capitalized interest (535) (10) - - - -------- -------- -------- -------- -------- Consolidated Earnings Available for Fixed Charges $ 179,560 $ 203,420 $ 189,182 $ 171,984 $ 139,728 ======== ======== ======== ======== ======== Consolidated Fixed Charges: Interest expense per financial statements (1) $ 26,968 $ 20,504 $ 16,741 $ 21,483 $ 28,921 Interest expense capitalized 893 128 128 131 134 Portion of rentals (1/3) representing an interest factor 9,557 7,785 7,394 4,567 4,066 Interest expense for equity companies whose debt is guaranteed (2) - - - - - -------- -------- -------- -------- -------- Consolidated Fixed Charges $ 37,418 $ 28,417 $ 24,263 $ 26,181 $ 33,121 ======== ======== ======== ======== ======== Consolidated Ratio of Earnings to Fixed Charges 4.80 7.16 7.80 6.57 4.22 ======== ======== ======== ======== ========
(1) Includes amortization of debt discount and expense. (2) No fixed charges were associated with debt of less than fifty percent owned companies guaranteed by the Company during the five year period 1995 through 1999. EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 HARSCO CORPORATION EXHIBIT 21 Subsidiaries of the Registrant
Country of Ownership Name Incorporation Percentage - ---- ------------- ---------- Heckett MultiServ SAIC Argentina 100% MetServ Holdings Pty. Limited Australia 55% MetServ Australasia Pty. Ltd. Australia 70% MetServ Victoria Pty. Ltd. Australia 70% MetServ Pty. Ltd. Australia 55% Harsco (Australia) Pty. Limited Australia 100% Fairmont Tamper (Australia) Pty. Limited Australia 100% Taylor-Wharton (Australia) Pty. Limited Australia 100% Heckett MultiServ (Australia) Pty. Ltd. Australia 100% AluServ Middle East W.L.L. Bahrain 65% Heckett MultiServ S.A. Belgium 100% Heckett MultiServ Russia S.A. Belgium 100% Loyquip Holdings S.A. Belgium 100% Societe D'Etudes et D'Administration des Enterprises S.A. Belgium 100% Fortuna Insurance Limited Bermuda 100% Harsco (Bermuda) Limited Bermuda 100% Sobremetal - Recuperacao de Metais Ltda Brazil 100% Comercio de Rejeitos Industriais Ltda Brazil 100% Harsco Canada Limited Canada 100% Heckett MultiServ S.A. Chile 100% EnviroServ Co., Ltd. China 55% MultiServ Wuhan Co. Ltd. China 100% MultiServ Jiangxi Co. Ltd. China 100% Taylor-Wharton (Beijing) Cryogenic Equipment Co. Ltd. China 51% MultiServ Spol s.r.o. Czech Republic 100% Czech Slag - Nova Hut s.r.o. Czech Republic 65% Czech Slag Consulting s.r.o. Czech Republic 100% Czech Slag s.r.o. Czech Republic 100% Slag Reduction Vitkovice s.r.o. Czech Republic 65% Heckett MultiServ Bahna S.A.E. Egypt 65% Heckett Bahna Co. for Industrial Operations S.A.E. Egypt 65% Heckett MultiServ France S.A. France 100% Floyequip S.A. France 100% PyroServ France 100% Heckett MultiServ SAS France 100% Heckett MultiServ Sud S.A. France 100% Heckett MultiServ Industries France 100% Heckett MultiServ Logistique Et Services Specialises France 100% Carbofer International GmbH Germany 100% MultiServ GmbH Germany 100% Harsco GmbH Germany 100% IMS Servizi SpA Italy 100% MultiServ SrL Italy 100%
-1- 2
Country of Ownership Name Incorporation Percentage - ---- ------------- ---------- ILSERV SrL Italy 65% Luxequip Holding S.A. Luxembourg 100% Heckett MultiServ S.A. Luxembourg 100% Societe Luxembourgeoise D'Interim S.A. Luxembourg 100% Heckett MultiServ Kemaman SDN. BHD. Malaysia 100% Taylor-Wharon Gas Equipment SDN. BHD. Malaysia 100% Tayor-Wharton Asia (M) SDN. BHD. Malaysia 100% Irving, S.A. de C.V. Mexico 100% Heckett Mexicana, S.A. de C.V. Mexico 100% Andamios Patentados, S.A. de C.V. Mexico 100% Servicios Industriales Siderurgicos, S.A. de C.V. Mexico 100% Electroforjados Nacionales, S.A. de C.V. Mexico 100% Heckett MultiServ International N.V. Netherlands 100% Heckett MultiServ Finance B.V. Netherlands 100% Heckett MultiServ China B.V. Netherlands 100% Heckett MultiServ Far East B.V. Netherlands 100% Harsco Europe B.V. Netherlands 100% Heckett MultiServ (Holland) B.V. Netherlands 100% Slag Reductie (Pacific) B.V. Netherlands 100% Slag Reductie Nederland B.V. Netherlands 100% Heckett MultiServ AS Norway 100% Slag Reduction Polska SP Z.O.O Poland 100% Companhia de Tratemento de Sucatas, Lda. Portugal 100% Heckett MultiServ Saudi Arabia Limited Saudi Arabia 55% MultiServ Slovensko spol. s.r.o. Slovakia Republic 100% Heckett MultiServ (FS) (Pty.) Limited South Africa 100% SteelServ (Pty.) Ltd. South Africa 51% Faber Prest (South Africa) (Proprietary) Ltd. South Africa 100% S.R.V. Mill Services (Pty.) Ltd. South Africa 100% Heckett MultiServ (SR) (Pty.) Ltd. South Africa 100% SRH Pty. Ltd. South Africa 100% MultiServ Lycrete S.A. Spain 100% Serviequipo S.A. Spain 100% MultiServ Intermetal S.A. Spain 100% MultiServ Iberica S.A. Spain 100% Heckett MultiServ Reclamet S.A. Spain 100% Gestion Materias Ferricas, S.A. Spain 100% Heckett MultiServ Nordiska AB Sweden 100% Heckett MultiServ Thailand Limited Thailand 70% EFIC Ltd. U.K. 100% Heckett MultiServ Investment Limited U.K. 100% Heckett MultiServ plc U.K. 100% Heckett MultiServ (U.K.) Ltd. U.K. 100% MultiServ Overseas Ltd. U.K. 100% Quipco Ltd. U.K. 100% Harsco (U.K.) Ltd. U.K. 100%
-2- 3
Country of Ownership Name Incorporation Percentage - ---- ------------- ---------- The Permanent Way Equipment Company Limited U.K. 100% Heckett International Services Limited U.K. 100% Heckett Limited U.K. 100% B.P. Dempsey Ltd. U.K. 100% Faber Prest (Australia) Limited U.K. 100% Faber Prest (Overseas) Limited U.K. 100% Faber Prest (Pacific) Limited U.K. 100% Faber Prest Distribution Limited U.K. 100% Faber Prest Limited U.K. 100% Flixborough Wharf Limited U.K. 75% Gunness Wharf Limited U.K. 100% Heckett MultiServ (ASR) Ltd. U.K. 100% Heckett MultiServ (Sheffield) Ltd. U.K. 100% Heckett MultiServ (SR) Ltd. U.K. 100% Otis Transport Services Limited U.K. 100% Slag Reduction Overseas Limited U.K. 100% Faber Prest (US) Ltd. U.K. 100% Harsco Foreign Sales Corporation U.S. Virgin Islands 100% Bio-Oxidation Services Inc. U.S.A. 100% Bio-Oxidation, Inc. U.S.A. 100% Heckett MultiServ U.S. Corporation U.S.A. 100% Heckett MultiServ Inc. U.S.A. 100% Heckett MultiServ Operations Ltd. U.S.A. 100% Heckett MultiServ General Corp. U.S.A. 100% Heckett MultiServ Intermetal Inc. U.S.A. 100% Heckett Technology Services Inc. U.S.A. 100% Harsco Defense Holding, Inc. U.S.A. 100% Harsco Minnesota Corporation U.S.A. 100% Harsco UDLP Corporation U.S.A. 100% Heckett MultiServ Investment Corporation U.S.A. 100% T.J. Egan and Company Inc. U.S.A. 100% Chemi-Trol Chemical Co. U.S.A. 100% Faber Prest (U.S.), Inc. U.S.A. 100% Harsco Technologies Corporation U.S.A. 100% Heckett MultiServ International Holdings U.S.A. 100% SRA Mill Services, Inc. U.S.A. 100% Heckett MultiServ MV & MS, C.A. Venezuela 100%
-3- 4 Companies in which Harsco Corporation does not have majority ownership are not consolidated. These companies are listed below as unconsolidated entities
Country of Incorporation/ Ownership Name Organization Percentage - ---- ------------ ---------- Steelstone Holdings Pty. Ltd. Australia 50% Steelstone Pty. Limited Australia 50% Phooltas Tamper Private Limited India 40% Ferro Scrap Nigam Ltd. India 40% P.T. Purna Baja Heckett Indonesia 40% IKG-Salcon SDN. BHD. Malaysia 50% The Slag Reduction Company (New Zealand) Limited New Zealand 50% Auxihec Spain 50% S. R. Gabisa, S.A. Spain 50%
-4- EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following Registration Statements of Harsco Corporation and Subsidiary Companies (the "Company") of our reports, dated January 27, 2000, on our audits, of the consolidated financial statements and consolidated financial statement schedule of the Company as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, which reports are included in this Annual Report on Form 10-K, respectively: - - Post Effective Amendment No. 6 to Form S-8 Registration Statement (Registration No. 2-57876), effective May 21, 1982. - - Post Effective Amendment No. 2 to Form S-8 Registration Statement (Registration No. 33-5300), dated March 26, 1987. - - Form S-8 Registration Statement (Registration No. 33-14064), dated May 6, 1987. - - Amendment No. 2 to Form S-8 Registration Statement (Registration No. 33-24854), dated October 31, 1988. - - Form S-3 Registration Statement (Registration No. 33-56885), dated December 15, 1994. - - Form S-8 Registration Statement (Registration No. 333-13175), dated October 1, 1996. - - Form S-8 Registration Statement (Registration No. 333-13173), dated October 1, 1996. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 20, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 DEC-31-1999 51,266 0 331,123 (13,339) 172,198 612,955 1,499,823 828,277 1,659,823 430,516 418,504 0 0 82,777 567,344 1,659,823 1,716,688 1,720,811 1,329,532 1,551,075 0 4,844 26,968 147,430 51,599 90,713 0 0 0 90,713 2.22 2.21
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