Harsco (HSC)

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Charles Colon

Harsco Corporation (NYSE:HSC) is a metals industry services company. Its main clients are in the steel, energy, manufacturing, and mining industries,^[1] for whom it produces industrial goods like mining equipment and consults on large-scale infrastructure projects. Harsco is an international corporation, and one of its biggest clients is the Chinese government, which is spending big bucks on transportation infrastructure. In 2007 Harsco landed a contract to produce more than 40 new rail-grinding machines (used to build railways) in China, a deal that is expected to generate $350 million in revenues over the next four years.^[2]

The company's operations have traditionally been divided into four major segments: Mill Services, Access Services, Gas Technologies, and Minerals and Rail Services and Products.^[3] However, in December 2007, Harsco sold its Gas Technologies group to Wind Point Partners, a private equity firm, for $340 million.^[4] The sale of this division, which manufactured propane tanks and valves, is an example of Harsco’s ongoing shift in focus away from its roots in manufacturing and towards industrial services - offering maintenance, engineering, and product support for manufacturers and builders.

The company has shed many of its commodity manufacturing businesses, while making more than 15 acquisitions of various industrial services businesses since 1993.^[5] As of 2007, it had operations in 48 countries worldwide. Harsco reported record revenues of roughly $3.4 billion in 2006, with 70% of this income coming from locations outside the United States.^[6]

Business Financials

Harsco focuses primarily on providing support services for the steel, metals and non-residential construction industries, although the company also manufactures engineered products.^[7] The services that the company supplies are divided into three categories: Mill Services, Access Services and Minerals & Rail Technologies.

• The Mill Services segment is the largest worldwide provider of on-site, outsourced mill services to the steel and metals industries.^[8] These services include processes for slag handling and metal recovery, product management, integrated materials handling, transportation, and asphalt and aggregate marketing.^[9]
• The Access Services segment's operations include the rental of concrete shoring and forming systems, scaffolding, powered access equipment and a variety of other access services mainly serving the non-residential and commercial construction industries.^[10]
• The Minerals and Rail Services and Products segment provides maintenance services and equipment for railways, manufactures industrial grating products, produces air-cooled heat exchangers for the natural gas industry, manufactures industrial abrasives and roofing granules, and provides other engineering services and projects.^[11]
• The Gas Technologies segment manufactures products for gas containment and control, but this division is now controlled by the private equity firm Wind Point Partners and will operate under the name Taylor-Wharton International.^[12]

Each of the company's operating segments except for Gas Technologies showed improved results during 2006 compared to 2005. The success of the company's different divisions led to revenues of $3.4 billion in 2006, reflecting 24% growth compared to 2005.^[13] Along with revenue, operating income has been steadily rising as well, totaling $365.2 million in 2006.^[14] These increases reinforce positive trends over the period since 2002, presented in the graph below.

^[15]

Revenue Generation by Operating Segment and Geographic Region

Of the four segments of Harsco's operations, the company's Mill Services segment was responsible for the largest share of sales, composing 40% of total 2006 sales or $1.4 billion.^[16][17] Access Services was the second most productive sector for the company, producing 31% of 2006 sales or almost $1.1 billion^[18][19] A breakdown of the percentage of sales generated by each operating segment from 2004 to 2006 can be seen below.

Source:HSC 2006 10k^[20]

Harsco earns 60% of its revenues in overseas markets, with Europe as the company's largest customer in 2006 generating almost $1.6 billion.^[21] Indeed, Europe was responsible for the vast majority of revenues in the company's Mill Services and Access Services segments in 2006, claiming 56% and 70% respectively.^[22][23] However, North America was also a significant customer, generating 40% of total revenues in 2006.^[24] Also impressive is the growth in sales to all markets from 2005 to 2006, particularly the 41.2% rise in the volume of sales to Europe over that period.^[25] A breakdown of the geographical distribution of sales during 2006 by percentage can be seen below.

^[26]

Key Trends & Forces

China currently produces 30% of steel worldwide

The decline of the U.S. Dollar

• Continued success of the steel industry will drive Harsco's profits: Steel prices have been at elevated levels recently due to growing international demand, especially from China. Increased activity in the steel industry leads to higher demand for the mill services that Harsco offers. Considering that the mill services segment of the company generated 40% of 2006 revenues, continued and elevated activity in the steel industry is essential to the company's success. On the other hand, Harsco uses steel in certain manufacturing operations, and thus they themselves must also pay these higher steel prices.

• Harsco’s relationship with China has the potential for long term growth: Steel demand across the world has led to increases in production both domestically and internationally, especially in China. Harsco's exposure to the Asian Steel Industry has been historically slim, as revenues generated from Asia only generated 4% of total revenues in 2006.^[27] However, recent efforts by the company have led to further penetration into the Chinese market. During 2007, Harsco signed numerous notable contracts for its services in China, including a $350 million contract with the Chinese Ministry of Railways and a $50 million contract with Ningbo Iron & Steel. As the world's biggest producer and consumer of steel a continuing partnership between China and Harsco could be extremely beneficial to the company.

• Non-Residential and Commercial Construction: Harsco's Access Services division generates much of its revenues by providing services for the non-residential and commercial construction industries. The residential construction industry continues to be affected by the ongoing subprime crisis and its effects on new home construction. Non-residential construction was resilient in 2007, with construction for new stores and offices growing 10% after inflation last year.^[28] However, the industry is not expected to enjoy the same level of success in 2008 because of economic uncertainty. Harsco's Access Services division relies on commercial construction for much of its business, and a decline in activity will more than likely lead to a decrease in revenues.

• Value of The U.S. Dollar: The dollar has been declining in value for most of 2007, reaching historic lows against the Euro. The consequences of a falling dollar are many and complicated, though they are not all negative. One benefit of a falling dollar is that the goods and services of U.S. companies become relatively cheaper to those of international competitors. This works to both decrease foreign penetration of the domestic market and also to increase foreign demand for U.S. goods and services.

Harsco derived 62% of 2006 sales and 71% of 2006 operating income from markets outside of the United States.^[29] Indeed, European activity dominated the company's two most important segments in 2006, with 56% of Mill Services revenues and 70% of Access Services revenues being generated in the European market.^[30][31] A falling dollar may help the company achieve further growth in the international market as Harsco's services and products become relatively cheaper for international customers.

Competition

Harsco provides its industrial services worldwide and thus faces competition both domestically and internationally. After the sale of the company's Gas Technologies segment was completed in December 2007, Harsco should be able to focus more on global industrial services.^[32] Harsco operates in specialized industries, so competitors do not necessarily encompass all of the company's operations.

Source: Company Reports, Yahoo Finance

References

1. ↑ HSC 2006 10k pg 2
2. ↑ Reuters, May 2007
3. ↑ HSC 2006 10k pg 2
4. ↑ Harsco Press Release, December 7, 2007
5. ↑ Investor’s Business Daily, December 18 2007
6. ↑ HSC 2006 10k pg 18
7. ↑ HSC 2006 10k pg 2
8. ↑ HSC 2006 10k pg 3
9. ↑ Harsco Website
10. ↑ HSC 2006 10k pg 3
11. ↑ HSC 2006 10k pg 4
12. ↑ HSC 2006 10k pg 5
13. ↑ HSC 2006 10k pg 19
14. ↑ HSC 2007 10k pg 18
15. ↑ HSC 2006 10k pg 18
16. ↑ HSC 2006 10k pg 3
17. ↑ HSC 2006 10k pg 20
18. ↑ HSC 2006 10k pg 5
19. ↑ HSC 2006 10k pg 22
20. ↑ HSC 2006 10k pg 5
21. ↑ HSC 2006 10k pg 21
22. ↑ HSC 2006 10k pg 3
23. ↑ HSC 2006 10k pg 4
24. ↑ HSC 2006 10k pg 21
25. ↑ HSC 2006 10k pg 21
26. ↑ HSC 2006 10k pg 21
27. ↑ HSC 2006 10k pg 21
28. ↑ Speech by Jeffrey M. Lacker, President of The Federal Reserve Bank of Richmond, February 5, 2008
29. ↑ HSC 2006 10k pg 9
30. ↑ HSC 2006 10k pg 3
31. ↑ HSC 2006 10k pg 4
32. ↑ Harsco Press Release, December 7, 2007