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Harsco 10-K 2008 Documents found in this filing:
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31,
2007
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ______ to ______
Commission
file number 1-3970
___________________
HARSCO
CORPORATION
(Exact
name of Registrant as specified in its Charter)
Registrant’s telephone
number, including area code 717-763-7064
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the
Act: NONE
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES x NO o
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x
NO o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES o NO
x
The
aggregate market value of the Company’s voting stock held by non-affiliates of
the Company as of June 30, 2007 was $4,377,365,564.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
DOCUMENTS
INCORPORATED BY REFERENCE
Selected
portions of the 2008 Proxy Statement are incorporated by reference into Part III
of this Report.
The
Exhibit Index (Item No. 15) located on pages 99 to 104 incorporates several
documents by reference as indicated therein.
HARSCO
CORPORATION AND SUBSIDIARY COMPANIES
PART
I
(a) General
Development of Business.
Harsco
Corporation (“the Company”) is a
diversified, multinational provider of market-leading industrial services and
engineered products. The Company’s operations fall into two
reportable segments: Access Services and Mill Services, plus an “all other”
category labeled Minerals & Rail Services and Products. The
Company has locations in 50 countries, including the United
States. The Company was incorporated in 1956.
The
Company’s executive offices are located at 350 Poplar Church Road, Camp Hill,
Pennsylvania 17011. The Company’s main telephone number is (717)
763-7064. The Company’s Internet website address is
www.harsco.com. Through this Internet website (found in the “Investor
Relations” link) the Company makes available, free of charge, its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and
all amendments to those reports, as soon as reasonably practicable after these
reports are electronically filed or furnished to the Securities and Exchange
Commission. Information contained on the Company’s website is not
incorporated by reference into this Annual Report on Form 10-K, and should not
be considered as part of this Annual Report on Form 10-K.
The
Company’s principal lines of business and related principal business drivers are
as follows:
The
Company reports segment information using the “management approach” in
accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information” (“SFAS 131”). This approach is based on the way
management organizes and reports the segments within the enterprise for making
operating decisions and assessing performance. The Company’s
reportable segments are identified based upon differences in products, services
and markets served. These segments and the types of products and
services offered are more fully described in section (c) below.
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In 2007,
2006 and 2005, the United States contributed sales of $1.2 billion, $1.0 billion
and $0.8 billion, equal to 31%, 32% and 35% of total sales,
respectively. In 2007, 2006 and 2005, the United Kingdom contributed
sales of $0.7 billion, $0.7 billion and $0.5 billion, respectively, equal to
20%, 22% and 23% of total sales, respectively. One customer,
ArcelorMittal, represented 10% or more of the Company’s sales during 2007 and
2006. No customer represented 10% or more of the Company’s sales in
2005. There were no significant inter-segment sales.
(b) Financial
Information about Segments
Financial
information concerning industry segments is included in Note 14, Information by
Segment and Geographic Area, to the Consolidated Financial Statements under Part
II, Item 8, “Financial Statements and Supplementary Data.”
(c) Narrative
Description of Business
(1) A
narrative description of the businesses by reportable segment is as
follows:
Access
Services Segment – 39% of consolidated sales for 2007
Harsco’s
Access Services Segment includes the Company’s brand names of SGB Group,
Hünnebeck Group and Patent Construction Systems Divisions. The
Company’s Access Services Segment is a leader in the construction services
industry as one of the world’s most complete providers of rental scaffolding,
shoring, forming and other access solutions. The U.K.-based SGB Group
Division operates from a network of international branches throughout Europe,
the Middle East and Asia/Pacific; the Germany-based Hünnebeck Division serves
Europe, the Middle East and South America, while the U.S.-based Patent
Construction Systems Division serves North America including Mexico, Central
America and the Caribbean. Major services include the rental of
concrete shoring and forming systems, scaffolding and powered access equipment
for non-residential and infrastructure projects; as well as a variety of other
access services including project engineering and equipment erection and
dismantling and, to a lesser extent, access equipment sales.
The Company’s access services
are provided through branch locations in over 30 countries plus export sales
worldwide. In
2007, this Segment’s revenues
were generated in the following regions:
(a) Including Mexico.
For 2007,
2006 and 2005, the Access Services Segment’s percentage of the Company’s
consolidated sales was 39%, 36% and 33%, respectively.
Mill
Services Segment – 41% of consolidated sales for 2007
The Mill
Services Segment, which consists of the MultiServ Division, is the world’s
largest provider of on-site, outsourced mill services to the global steel and
metals industries. MultiServ provides its services on a long-term
contract basis, supporting each stage of the metal-making process from initial
raw material handling to post-production by-product processing and on-site
recycling. Working as a specialized, high-value-added services
provider, MultiServ rarely takes ownership of its customers’ raw materials or
finished products. Similar services are provided to the producers of
non-ferrous metals, such as aluminum, copper and nickel. The
Company’s multi-year Mill Services contracts had estimated future revenues of
$5.0 billion at December 31, 2007. This provides the Company with a
substantial base of long-term revenues. Approximately 61% of these
revenues are expected to be recognized by December 31, 2010. The
remaining revenues are expected to be recognized principally between January 1,
2011 and December 31, 2016.
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MultiServ’s
geographic reach to over 30 countries, and its increasing range of services,
enhance the Company’s financial and operating balance. In 2007, this
Segment’s revenues were generated in the following regions:
(a) Including Mexico.
For 2007,
2006 and 2005, the Mill Services Segment’s percentage of the Company’s
consolidated sales was 41%, 45% and 44%, respectively.
All
Other Category - Minerals & Rail Services and Products – 20% of consolidated
sales for 2007
The All
Other Category includes the Excell Minerals, Reed Minerals, Harsco Track
Technologies, IKG Industries, Patterson-Kelley and Air-X-Changers
Divisions. Approximately 84% of this category’s revenues originate in
the United States.
Export
sales for this Category totaled $57.1 million, $96.6 million and $116.6 million
in 2007, 2006 and 2005, respectively. In 2007, 2006 and 2005, export
sales for the Harsco Track Technologies Division were $21.8 million, $51.5
million and $80.0 million, respectively, which included sales to Canada, Mexico,
Europe, Asia, the Middle East and Africa. A significant backlog
exists at December 31, 2007 in the Harsco Track Technologies Division as a
result of orders received in 2007 from the Chinese Ministry of
Railways.
Excell
Minerals is a multinational company that extracts high-value metallic content
for production re-use on behalf of leading steelmakers and also specializes in
the development of minerals technologies for commercial applications, including
agriculture fertilizers and performance-enhancing additives for cement
products.
Reed
Minerals’ industrial abrasives and roofing granules are produced from
power-plant utility coal slag at a number of locations throughout the United
States. The Company’s BLACK BEAUTY® abrasives are used for industrial
surface preparation, such as rust removal and cleaning of bridges, ship hulls
and various structures. Roofing granules are sold to residential
roofing shingle manufacturers, primarily for the replacement roofing
market. This Division is the United States’ largest producer of slag
abrasives and third largest producer of residential roofing
granules.
Harsco
Track Technologies is a global provider of equipment and services to maintain,
repair and construct railway track. The Company’s railway track
maintenance services support railroad customers worldwide. The
railway track maintenance equipment product class includes specialized track
maintenance equipment used by private and government-owned railroads and urban
transit systems worldwide.
IKG
Industries manufactures a varied line of industrial grating products at several
plants in North America. These products include a full range of bar
grating configurations, which are used mainly in industrial flooring, and safety
and security applications in the power, paper, chemical, refining and processing
industries.
Patterson-Kelley
is a leading manufacturer of heat transfer products such as boilers and water
heaters for commercial and institutional applications, and also powder
processing equipment such as blenders, dryers and mixers for the chemical,
pharmaceutical and food processing industries.
Air-X-Changers
is a leading supplier of custom-designed and manufactured air-cooled heat
exchangers for the natural gas industry. The Company’s heat
exchangers are the primary apparatus used to condition natural gas during
recovery, compression and transportation from underground reserves through the
major pipeline distribution channels.
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For 2007,
2006 and 2005, the All Other Category’s percentage of the Company’s consolidated
sales was 20%, 19% and 23%, respectively.
Historical
Revenue from Continuing Operations Patterns
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Historical
Cash Provided by Operations
(a) Does not
total due to rounding.
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(d) Financial
Information about Geographic Areas
Financial
information concerning foreign and domestic operations is included in Note 14,
Information by Segment and Geographic Area, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary
Data.” Export sales totaled $61.7 million, $99.6 million and $118.8
million in 2007, 2006 and 2005, respectively.
(e) Available
Information
Information
is provided in Part I, Item 1 (a), “General Development of
Business.”
Item
1A. Risk
Factors
Market
risk.
In the
normal course of business, the Company is routinely subjected to a variety of
risks. In addition to the market risk associated with interest rate
and currency movements on outstanding debt and non-U.S. dollar-denominated
assets and liabilities, other examples of risk include collectibility of
receivables, volatility of the financial markets and their effect on pension
plans, and global economic and political conditions.
Cyclical
industry and economic conditions may adversely affect the Company’s
businesses.
The
Company’s businesses are subject to general economic slowdowns and cyclical
conditions in the industries served. In particular,
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The
Company’s defined benefit pension expense is directly affected by the equity and
bond markets and a downward trend in those markets could adversely impact the
Company’s future earnings.
In
addition to the economic issues that directly affect the Company’s businesses,
changes in the performance of equity and bond markets, particularly in the
United Kingdom and the United States, impact actuarial assumptions used in
determining annual pension expense, pension liabilities and the valuation of the
assets in the Company’s defined benefit pension plans. If the
financial markets deteriorate, it would most likely have a negative impact on
the Company’s pension expense and the accounting for pension assets and
liabilities. This could result in a decrease to Stockholders’ Equity
and an increase in the Company’s statutory funding requirements.
In
response to the adverse market conditions, during 2002 and 2003 the Company
conducted a comprehensive global review of its pension plans in order to
formulate a plan to make its long-term pension costs more predictable and
affordable. The Company implemented design changes for most of these
plans during 2003. The principal change involved converting future
pension benefits for many of the Company’s non-union employees in both the
United Kingdom and United States from defined benefit plans to defined
contribution plans as of January 1, 2004. This conversion has made
the Company’s pension expense more predictable and less sensitive to changes in
the financial markets.
The
Company’s pension committee continues to evaluate alternative strategies to
further reduce overall pension expense including: conversion of certain
remaining defined benefit plans to defined contribution plans; the on-going
evaluation of investment fund managers’ performance; the balancing of plan
assets and liabilities; the risk assessment of all multi-employer pension plans;
the possible merger of certain plans; the consideration of incremental cash
contributions to certain plans; and other changes that are likely to reduce
future pension expense volatility and minimize risk.
In
addition to the Company’s defined benefit pension plans, the Company also
participates in numerous multi-employer pension plans throughout the world.
Within the United States, the Pension Protection Act of 2006 may require
additional funding for multiemployer plans that could cause the Company to be
subject to higher cash contributions in the future. The Company
continues to assess any full and partial withdrawal liability implications
associated with these plans.
The
Company’s global presence subjects it to a variety of risks arising from doing
business internationally.
The Company operates in
50 countries, including the
United
States. The Company’s
global footprint exposes it to a variety of risks that may adversely
affect results of operations, cash flows or financial position. These
include the following:
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If the
Company is unable to successfully manage the risks associated with its global
business, the Company’s financial condition, cash flows and results of
operations may be negatively impacted.
The
Company has operations in several countries in the Middle East, including
Bahrain, Egypt, Saudi Arabia, United Arab Emirates and Qatar, which are
geographically close to Iraq, Iran, Israel, Lebanon and other countries with a
continued high risk of armed hostilities. During 2007, 2006 and 2005,
the Company’s Middle East operations contributed approximately $44.6 million,
$34.8 million and $32.7 million, respectively, to the Company’s operating
income. Additionally, the Company has operations in and sales to
countries that have encountered outbreaks of communicable diseases (e.g.,
Acquired Immune Deficiency Syndrome (AIDS), avian influenza and
others). Should such outbreaks worsen or spread to other countries,
the Company may be negatively impacted through reduced sales to and within those
countries and other countries impacted by such diseases.
Exchange
rate fluctuations may adversely impact the Company’s business.
Fluctuations
in foreign exchange rates between the U.S. dollar and the over 40 other
currencies in which the Company conducts business may adversely impact the
Company’s operating income and income from continuing operations in any given
fiscal period. Approximately 69% and 68% of the Company’s sales and
approximately 68% and 71% of the Company’s operating income from continuing
operations for the years ended December 31, 2007 and 2006, respectively, were
derived from operations outside the United States. More specifically,
approximately 20% and 22% of the Company’s revenues were derived from operations
in the United Kingdom during 2007 and 2006,
respectively. Additionally, approximately 26% and 25% of the
Company’s revenues were derived from operations with the euro as their
functional currency during 2007 and 2006, respectively. Given the
structure of the Company’s revenues and expenses, an increase in the value of
the U.S. dollar relative to the foreign currencies in which the Company earns
its revenues generally has a negative impact on operating income, whereas a
decrease in the value of the U.S. dollar tends to have the opposite
effect. The Company’s principal foreign currency exposures are to the
British pound sterling and the euro.
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Compared
with the corresponding period in 2006, the average values of major currencies
changed as follows in relation to the U.S. dollar during 2007, impacting the
Company’s sales and income:
Compared
with exchange rates at December 31, 2006, the values of major currencies changed
as follows as of December 31, 2007:
The
Company’s foreign currency exposures increase the risk of income statement,
balance sheet and cash flow volatility. If the above currencies
change materially in relation to the U.S. dollar, the Company’s financial
position, results of operations, or cash flows may be materially
affected.
To
illustrate the effect of foreign currency exchange rate changes in certain key
markets of the Company, in 2007, revenues would have been approximately 5% or
$166.9 million less and operating income would have been approximately 4% or
$16.5 million less if the average exchange rates for 2006 were
utilized. A similar comparison for 2006 would have decreased revenues
approximately 1% or $34.1 million, while operating income would have been
approximately 1% or $3.9 million less if the average exchange rates for 2006
would have remained the same as 2005. If the U.S. dollar weakens in
relation to the euro and British pound sterling, the Company would expect to see
a positive impact on future sales and income from continuing operations as a
result of foreign currency translation. Currency changes also result
in assets and liabilities denominated in local currencies being translated into
U.S. dollars at different amounts than at the prior period end. If
the U.S. dollar weakens in relation to currencies in countries in which the
Company does business, the translated values of the related assets and
liabilities, and therefore stockholders’ equity, would
increase. Conversely, if the U.S. dollar strengthens in relation to
currencies in countries in which the Company does business, the translated
values of the related assets, liabilities, and therefore stockholders’ equity,
would decrease.
Although
the Company engages in foreign currency forward exchange contracts and other
hedging strategies to mitigate foreign exchange risk, hedging strategies may not
be successful or may fail to offset the risk.
In
addition, competitive conditions in the Company’s manufacturing businesses may
limit the Company’s ability to increase product prices in the face of adverse
currency movements. Sales of products manufactured in the United
States for the domestic and export markets may be affected by the value of the
U.S. dollar relative to other currencies. Any long-term strengthening
of the U.S. dollar could depress demand for these products and reduce sales and
may cause translation gains or losses due to the revaluation of accounts
payable, accounts receivable and other asset and liability
accounts. Conversely, any long-term weakening of the U.S. dollar
could improve demand for these products and increase sales and may cause
translation gains or losses due to the revaluation of accounts payable, accounts
receivable and other asset and liability accounts.
Negative economic
conditions may adversely impact the ability of the Company’s customers to meet
their obligations to the Companyon a timely basis
and impact the valuation of the Company’s assets.>
If a
downturn in the economy occurs, it may adversely impact the ability of the
Company’s customers to meet their obligations to the Company on a timely basis
and could result in bankruptcy filings by them. If customers are
unable to meet their obligations on a timely basis, it could adversely impact
the realizability of receivables, the valuation of inventories and the valuation
of long-lived assets across the Company’s businesses, as well as negatively
affect the forecasts used in performing the Company’s goodwill impairment
testing under SFAS No. 142, “Goodwill and Other Intangible
Assets.” If management determines that goodwill or other assets are
impaired or that inventories or
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receivables
cannot be realized at recorded amounts, the Company will be required to record a
write-down in the period of determination, which will reduce net income for that
period. Additionally, the risk remains that certain Mill Services
customers may file for bankruptcy protection, be acquired or consolidate in the
future, which could have an adverse impact on the Company’s income and cash
flows.
A negative
outcome on personal injury claims against the Company may adversely
impact results of operations and financial condition.>
The
Company has been named as one of many defendants (approximately 90 or more in
most cases) in legal actions alleging personal injury from exposure to airborne
asbestos. In their suits, the plaintiffs have named as defendants
many manufacturers, distributors and repairers of numerous types of equipment or
products that may involve asbestos. Most of these complaints contain
a standard claim for damages of $20 million or $25 million against the named
defendants. If the Company was found to be liable in any of these
actions and the liability was to exceed the Company’s insurance coverage,
results of operations, cash flows and financial condition could be adversely
affected. For more information concerning this litigation, see Note
10, Commitments and Contingencies, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary
Data.”
The
Company may lose customers or be required to reduce prices as a result of
competition.
The
industries in which the Company operates are highly competitive.
The
Company’s strategy to overcome this competition includes enterprise business
optimization programs, international customer focus and the diversification,
streamlining and consolidation of operations.
Increased
customer concentration and credit risk in the Mill Services Segment may
adversely impact the Company’s future earnings and cash flows.
The
Company’s Mill Services Segment (and, to a lesser extent, the All Other
Category) has several large customers throughout the world with significant
accounts receivable balances. In December 2005, the Company acquired the
Northern Hemisphere steel mill services operations of Brambles Industrial
Services, a unit of the Sydney, Australia-based Brambles Industrial
Limited. This acquisition has increased the Company’s corresponding
concentration of credit risk to customers in the steel industry.
Additionally, further consolidation in the global steel industry occurred
in 2006 and 2007 and additional consolidation is possible. Should
additional transactions occur involving some of the steel industry’s larger
companies, which are customers of the Company, it would result in an increase in
concentration of credit risk for the Company. If a large customer were to
experience financial difficulty, or file for bankruptcy protection, it could
adversely impact the Company’s income, cash flows and asset
valuations. As part of its credit risk management practices, the
Company developed strategies to mitigate this increased concentration of credit
risk. In the Access Services Segment, concentrations of credit risk
with respect to accounts receivable are generally limited due to the Company’s
large number of customers and their dispersion across different
geographies.
Increases
in energy prices could increase the Company’s operating costs and reduce its
profitability.
Worldwide
political and economic conditions, an imbalance in the supply and demand for
oil, extreme weather conditions, armed hostilities in oil-producing regions,
among other factors, may result in an increase in the volatility of energy
costs, both on a macro basis and for the Company specifically. In
2007, 2006 and 2005, energy costs have
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approximated
3.7%, 3.9% and 3.5% of the Company’s revenue, respectively. To the
extent that such costs cannot be passed to customers in the future, operating
income and results of operations may be adversely affected.
Increases
or decreases in purchase prices (or selling prices) or availability of steel or
other materials and commodities may affect the Company’s
profitability.
The
profitability of the Company’s manufactured products is affected by changing
purchase prices of steel and other materials and commodities. If raw
material costs associated with the Company’s manufactured products increase and
the costs cannot be passed on to the Company’s customers, operating income would
be adversely affected. Additionally, decreased availability of steel
or other materials could affect the Company’s ability to produce manufactured
products in a timely manner. If the Company cannot obtain the necessary
raw materials for its manufactured products, then revenues, operating income and
cash flows will be adversely affected. Certain services performed by
the Excell Minerals Division result in the recovery, processing and sale of
specialty steel and other high-value metal by-products to its
customers. The selling price of the by-products material is
market-based and varies based upon the current fair value of its
components. Therefore, the revenue amounts recorded from the sale of
such by-products material vary based upon the fair value of the commodity
components being sold. The Company has executed hedging instruments
designed to reduce the volatility of the revenue from the sale of the
by-products material at varying market prices. However, there can be
no guarantee that such hedging strategies will be fully effective in reducing
the variability of revenues from period to period.
The Company is
subject to various environmental laws and the success of existing or future
environmental claims against it could adversely impact the Company’s
results of
operations and cash flows.>
The
Company’s operations are subject to various federal, state, local and
international laws, regulations and ordinances relating to the protection of
health, safety and the environment, including those governing discharges to air
and water, handling and disposal practices for solid and hazardous wastes, the
remediation of contaminated sites and the maintenance of a safe work
place. These laws impose penalties, fines and other sanctions for
non-compliance and liability for response costs, property damages and personal
injury resulting from past and current spills, disposals or other releases of,
or exposure to, hazardous materials. The Company could incur
substantial costs as a result of non-compliance with or liability for
remediation or other costs or damages under these laws. The Company
may be subject to more stringent environmental laws in the future, and
compliance with more stringent environmental requirements may require the
Company to make material expenditures or subject it to liabilities that the
Company currently does not anticipate.
The
Company is currently involved in a number of environmental remediation
investigations and clean-ups and, along with other companies, has been
identified as a “potentially
responsible party” for certain waste disposal sites under the federal “Superfund”
law. At several sites, the Company is currently conducting
environmental remediation, and it is probable that the Company will agree to
make payments toward funding certain other of these remediation
activities. It also is possible that some of these matters will be
decided unfavorably to the Company and that other sites requiring remediation
will be identified. Each of these matters is subject to various
uncertainties and financial exposure is dependent upon such factors as the
continuing evolution of environmental laws and regulatory requirements, the
availability and application of technology, the allocation of cost among
potentially responsible parties, the years of remedial activity required and the
remediation methods selected. The Company has evaluated its potential
liability and the Consolidated Balance Sheets at December 31, 2007 and 2006
include an accrual of $3.9 million and $3.8 million, respectively, for
environmental matters. The amounts charged against pre-tax earnings
related to environmental matters totaled $2.8 million, $2.1 million and $1.4
million for the years ended December 31, 2007, 2006 and 2005,
respectively. The liability for future remediation costs is evaluated
on a quarterly basis. Actual costs to be incurred at identified sites
in future periods may be greater than the estimates, given inherent
uncertainties in evaluating environmental exposures.
Restrictions
imposed by the Company’s credit facilities and outstanding notes may limit the
Company’s ability to obtain additional financing or to pursue business
opportunities.
The
Company’s credit facilities and certain notes payable agreements contain a
covenant requiring a maximum debt to capital ratio of 60%. In
addition, certain notes payable agreements also contain a covenant requiring a
minimum net worth of $475 million. These covenants limit the amount
of debt the Company may incur, which could limit its ability to obtain
additional financing or pursue business opportunities. In addition,
the Company’s ability to comply with these ratios may be affected by events
beyond its control. A breach of any of these covenants or the
inability to comply with the required financial ratios could result in a default
under these credit facilities. In the event of any default under
these credit facilities, the lenders under those facilities could elect to
declare all borrowings outstanding, together with
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accrued
and unpaid interest and other fees, to be due and payable, which would cause an
event of default under the notes. This could, in turn, trigger an
event of default under the cross-default provisions of the Company’s other
outstanding indebtedness. At December 31, 2007, the Company was in
compliance with these covenants with a debt to capital ratio of 40.8%, and a net
worth of $1.6 billion. The Company had $395.2 million in outstanding
indebtedness containing these covenants at December 31, 2007.
Higher
than expected claims under insurance policies, under which the Company retains a
portion of the risk, could adversely impact results of operations and cash
flows.
The
Company retains a significant portion of the risk for property, workers’
compensation, U.K. employers’ liability, automobile, general and product
liability losses. Reserves have been recorded which reflect the
undiscounted estimated liabilities for ultimate losses including claims incurred
but not reported. Inherent in these estimates are assumptions that
are based on the Company’s history of claims and losses, a detailed analysis of
existing claims with respect to potential value, and current legal and
legislative trends. At December 31, 2007 and 2006, the Company had
recorded liabilities of $112.0 million and $103.4 million, respectively, related
to both asserted and unasserted insurance claims. Included in the
balance at December 31, 2007 and 2006 were $25.9 million and $18.9 million,
respectively, of recognized liabilities covered by insurance
carriers. If actual claims are higher than those projected by
management, an increase to the Company’s insurance reserves may be required and
would be recorded as a charge to income in the period the need for the change
was determined. Conversely, if actual claims are lower than those
projected by management, a decrease to the Company’s insurance reserves may be
required and would be recorded as a reduction to expense in the period the need
for the change was determined.
The
seasonality of the Company’s business may cause its quarterly results to
fluctuate.
The
Company has historically generated the majority of its cash flows in the second
half of the year. This is a direct result of normally higher sales
and income during the second half of the year, as the Company’s business tends
to follow seasonal patterns. If the Company is unable to successfully
manage the cash flow and other effects of seasonality on the business, its
results of operations may suffer. The Company’s historical revenue
patterns and net cash provided by operating activities are included in Part I,
Item 1, “Business.”
The
Company’s cash flows and earnings are subject to changes in interest
rates.
The
Company’s total debt as of December 31, 2007 was $1.1 billion. Of
this amount, approximately 49.2% had variable rates of interest and 50.8% had
fixed rates of interest. The weighted average interest rate of total
debt was approximately 6.0%. At current debt levels, a one-percentage
increase/decrease in variable interest rates would increase/decrease interest
expense by approximately $5.3 million per year.
The
future financial impact on the Company associated with the above risks cannot be
estimated.
Item
1B. Unresolved Staff
Comments
None.
Information
as to the principal plants owned and operated by the Company is summarized in
the following table:
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The
Company also operates the following plants which are leased:
The above
listing includes the principal properties owned or leased by the
Company. The Company also operates from a number of other smaller
plants, branches, depots, warehouses and offices in addition to the
above. The Company considers all of its properties at which
operations are currently performed to be in satisfactory condition and suitable
for operations. Additionally, the Company has administrative offices
in Camp Hill, Pennsylvania and Leatherhead, United Kingdom.
Information
regarding legal proceedings is included in Note 10, Commitments and
Contingencies, to the Consolidated Financial Statements under Part II, Item 8,
“Financial
Statements and Supplementary Data.”
There
were no matters that were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
covered by this Report.
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Supplementary
Item. Executive Officers of the Registrant (Pursuant to Instruction 3
to Item 401(b) of Regulation S-K)
Set forth
below, as of February 29, 2008, are the executive officers (this excludes six
corporate officers who are not deemed “executive
officers”
within the meaning of applicable Securities and Exchange Commission regulations)
of the Company and certain information with respect to each of
them. S. D. Fazzolari was elected to his new position effective
January 1, 2008. G. D. H. Butler, M. E. Kimmel, S. J. Schnoor and R.
C. Neuffer were elected to their respective offices effective on January 1,
2008. R. M. Wagner was elected to his new position effective January
1, 2008. All terms expire on April 22, 2008. There are no
family relationships between any of the executive officers.
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PART
II
Harsco
Corporation common stock is listed on the New York Stock Exchange. At
the end of 2007, there were 84,459,866 shares outstanding. In 2007,
the Company’s common stock traded in a range of $36.90 to $66.51 (on a
post-split basis) and closed at $64.07 at year-end. At December 31,
2007 there were approximately 22,000 stockholders. There are no
significant limitations on the payment of dividends included in the Company’s
loan agreements. For additional information regarding Harsco common
stock market price and dividends declared, see Dividend Action under Part II,
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” and the Common Stock Price and Dividend Information under Part
II, Item 8, “Financial
Statements and Supplementary Data.” For additional information on the
Company’s equity compensation plans see Part III, Item 11, “Executive
Compensation.”
(c) Issuer
Purchases of Equity Securities
The
Company’s share repurchase program was extended by the Board of Directors in
November 2007. The program authorizes the repurchase of up to
2,000,000 shares of the Company’s common stock and expires January 31,
2009. As announced in February 2008, the Company plans to begin the
repurchase of an undetermined number of shares of the Company’s common stock
under the above mentioned stock repurchase authorization. Repurchases
will be made in open market transactions at times and amounts as management
deems appropriate, depending on market conditions. Any repurchase may
commence or be discontinued at any time.
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Five-Year
Statistical Summary
- 18
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The
following discussion should be read in conjunction with the consolidated
financial statements provided under Part II, Item 8 of this Annual Report on
Form 10-K. Certain statements contained herein may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of
risks, uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein.
Forward-Looking
Statements
The
nature of the Company’s business and the many countries in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In accordance with the “safe
harbor” provisions of the Private Securities Litigation Reform Act of 1995, the
Company provides the following cautionary remarks regarding important factors
which, among others, could cause future results to differ materially from the
forward-looking statements, expectations and assumptions expressed or implied
herein. Forward-looking statements contained herein could include
among other things, statements about our management confidence and strategies
for performance; expectations for new and existing products, technologies, and
opportunities; and expectations regarding growth, sales, cash flows, earnings
and Economic Value Added (EVA®). These statements can be identified
by the use of such terms as “may,” “could,” “expect,” “anticipate,” “intend,”
“believe,” or other comparable terms.
Factors
which could cause results to differ include, but are not limited
to: (1) changes in the worldwide business environment in which the
Company operates, including general economic conditions; (2) changes in currency
exchange rates, interest rates and capital costs; (3) changes in the performance
of stock and bond markets that could affect, among other things, the valuation
of the assets in the Company’s pension plans and the accounting for pension
assets, liabilities and expenses; (4) changes in governmental laws and
regulations, including environmental, tax and import tariff standards; (5)
market and competitive changes, including pricing pressures, market demand and
acceptance for new products, services and technologies; (6) unforeseen business
disruptions in one or more of the many countries in which the Company operates
due to political instability, civil disobedience, armed hostilities or other
calamities; (7) the seasonal nature of the business; (8) the successful
integration of the Company’s strategic acquisitions; (9) the amount and timing
of repurchases of the Company’s common stock, if any; and (10) other risk
factors listed from time to time in the Company’s SEC reports. A
further discussion of these, along with other potential factors, can be found in
Part I, Item 1A, “Risk Factors,” of this Form 10-K. The Company
cautions that these factors may not be exhaustive and that many of these factors
are beyond the Company’s ability to control or predict. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results. The Company undertakes no duty to update forward-looking
statements except as may be required by law.
Executive
Overview
The
Company’s record performance in 2007 reflected the continued execution of the
Company’s strategy of growth through increased international diversity and a
balanced, industrial services-based portfolio, augmented by selective strategic
acquisitions. The 2007 results were led by the Access Services
Segment and All Other Category (Minerals & Rail Services and
Products).
The
Company’s 2007 revenues were a record $3.7 billion. This was an
increase of $662.5 million or 22% over 2006. Income from continuing
operations was a record $255.1 million for 2007 compared with $186.4 million in
2006, an increase of 37%. Diluted earnings per share from continuing
operations were a record $3.01 for 2007, a 36% increase from 2006.
Results
for 2007 benefited from continued improved performance in the Access Services
Segment and the February 1, 2007 acquisition of Excell Minerals. The
improved performance in the Access Services Segment was due to continued
strength in the Company’s global non-residential and infrastructure construction
and industrial services markets, and positive returns from the Company’s
increased investment in highly engineered formwork rental systems.
Overall,
the global markets in which the Company participates, remain strong and the
Company has expansion opportunities to pursue its prudent acquisition strategy
of seeking further accretive bolt-on acquisitions, as well as organic
investments in its industrial services platforms. The Company also expects
continued strength in its operations in 2008, particularly from the Access
Services Segment, as well as the All Other Category (Minerals & Rail
Services and Products). In addition, the Company expects gradual
improvement in 2008 from the Mill Services Segment, as global steel production
levels begin to increase from 2007 levels; the implementation of business
optimization
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initiatives
continues; underperforming contracts are exited or renegotiated; certain low
margin businesses are divested; the effects of restructuring actions are
realized; and new contracts are signed and work begins as our geographic
expansion strategy in high-return regions continues.
During
2007, the Company had record net cash provided by operating activities of $471.7
million, a 15% increase over the $409.2 million achieved in 2006. The
Company expects continued strong cash flows from operating activities in
2008. The Company’s cash flows are further discussed in the Liquidity
and Capital Resources section.
The
record revenue, income from continuing operations and diluted earnings per share
for 2007 reflect the balance and geographic diversity of the Company’s
operations. This operating balance and geographic diversity, as well
as growth opportunities in the Company’s core services platforms, such as the
February 1, 2007 acquisition of Excell Minerals, provide a broad foundation for
future growth and a hedge against normal changes in economic and industrial
cycles. In addition, the Company’s value-based management system
continued to deliver significant improvement in Economic Value Added (“EVA®”)
during 2007.
On
December 7, 2007, the Company completed the sale of its Gas Technologies
business group to Wind Point Partners. The terms of the sale include
a total purchase price of $340 million, including $300 million paid in cash at
closing and $40 million in the form of an earnout, contingent on the Gas
Technologies business achieving certain performance targets in 2008 or
2009.
Effective
in the first quarter of 2007, there was a two-for-one split of the Company’s
common stock for which one additional share of common stock was issued to
stockholders as of March 26, 2007.
Segment
Overview
The
Access Services Segment’s revenues in 2007 were $1.4 billion compared with $1.1
billion in 2006, a 31% increase. Operating income increased by 53% to
$183.8 million, from $120.4 million in 2006. Operating margins for
the Segment improved by 190 basis points to 13.0% from 11.1% in
2006. These improvements were due principally to continued strength
in the Company’s global non-residential and infrastructure construction and
industrial services markets, particularly in Europe and North
America. This Segment accounted for 39% of the Company’s revenues and
40% of the operating income for 2007.
Mill
Services Segment revenues in 2007 were $1.5 billion compared with $1.4 billion
in 2006, an 11% increase. Operating income decreased by 9% to $134.5
million, from $147.8 million in 2006. Operating margins for this
Segment decreased by 200 basis points to 8.8% from 10.8% in 2006. The
decrease in operating income and margins was due to higher operating and
maintenance costs, as well as lower steel production in certain regions,
particularly North America. The 2007 results include pre-tax
restructuring charges of $4.7 million, primarily related to severance costs
associated with initiatives to improve operating results. This
Segment accounted for 41% of the Company’s revenues and 29% of the operating
income for 2007.
The All
Other Category’s revenues in 2007 were $750.0 million compared with $578.2
million in 2006, a 30% increase. Operating income increased by 84% to
$142.2 million, from $77.5 million in 2006. Operating margins
increased by 560 basis points to 19.0% in 2007 from 13.4% in
2006. The February 1, 2007 acquisition of Excell Minerals contributed
to this Category’s improved performance. Four of the five other
businesses contributed higher revenues, and all five businesses contributed
higher operating income in 2007 compared with 2006. This Category
accounted for 20% of the Company’s revenue and 31% of the operating income for
2007.
The
positive effect of foreign currency translation increased 2007 consolidated
revenues by $166.9 million and pre-tax income by $13.9 million when compared
with 2006.
Outlook
Overview
The
Company’s operations span several industries and products as more fully
discussed in Part I, Item 1, “Business.” On a macro basis, the
Company is affected by non-residential and infrastructure construction and
industrial maintenance and capital improvement activities; worldwide steel mill
production and capacity utilization; industrial production volume; and the
general business trend towards the outsourcing of services. The
overall outlook for 2008 continues to be positive for most of these business
drivers.
Both
international and domestic Access Services activity remains
strong. Operating performance in 2007 for this Segment has benefited,
and is expected to continue to benefit in 2008, from increased non-residential
and infrastructure construction spending and industrial services activity in the
Company’s major markets; selective strategic investments and acquisitions in
existing and new markets and expansion of current product lines; further market
penetration from new services; service cross-selling opportunities among the
markets served; and enterprise business
- 20
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optimization
opportunities including new technology applications, consolidated procurement,
logistics and continuous process improvement initiatives. Further
prudent global expansion and market share gains are also expected from this
Segment.
Overall,
the outlook for the Mill Services Segment for 2008 remains
positive. However, margin improvement in this Segment in 2008 is
expected to be gradual as the effects of the margin-improvement plans previously
outlined are realized. During 2007, in order to maintain pricing
levels, a more disciplined and consolidated steel industry has been adjusting
production levels to bring inventories in-line with current
demand. The Company expects global steel production and consumption
to increase at a sustainable pace in 2008, which would generally have a
favorable effect on this Segment’s revenues. In addition, new
contract signings and start-ups, as well as the Company’s geographic expansion
strategy, particularly Eastern Europe and the Middle East, are expected to
gradually have a positive effect on results in the longer term. The
Company continues to engage in enterprise business optimization initiatives
designed to improve operating results and margins. However, the
Company may experience higher operating costs, such as maintenance and energy;
that could have a negative impact on operating margins, to the extent these
costs cannot be passed to customers.
The
outlook for the All Other Category (Minerals & Rail Services and Products)
remains positive. Excell Minerals is expected to continue to be
accretive to earnings in 2008, as full integration into the Company continues to
occur. Likewise, the railway track maintenance services and equipment
business should continue to see improved year-over-year operating performance in
2008. Contract opportunities for the business remain high (such as
the signing of significant orders from China in 2007), which also provides
confidence to the longer-term outlook. The remaining businesses
within this group are also expected to continue to operate at their current high
levels of operating effectiveness.
The
stable or improved market conditions for most of the Company’s services and
products and the significant investments made recently for acquisitions and
growth-related capital expenditures provide the base for achieving the Company’s
stated growth objectives. The record performance for revenue and
operating income achieved in 2007 provides momentum for continued improvement in
2008.
2007
Highlights
The
following significant items affected the Company overall during 2007 in
comparison with 2006:
Company
Wide:
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Access Services
Segment:
Access
Services Segment – Significant Impacts on Operating Income:
Mill Services
Segment:
Mill
Services Segment – Significant Impacts on Operating Income:
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All Other
Category - Minerals
& Rail Services and Products:>
All Other Category - Minerals & Rail Services and
Products – Significant Effects on Operating Income:>
Outlook,
Trends and Strategies
Looking
to 2008 and beyond, the following significant items, trends and strategies are
expected to affect the Company:
Company
Wide:
- 23
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- 24
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Access Services
Segment:
Mill Services
Segment:
All Other Category - Minerals
& Rail Services and Products:>
- 25
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Results
of Operations for 2007, 2006 and 2005 (a)
(a) All
historical amounts in the Results of Operations section have been restated for
comparative purposes to reflect discontinued operations.
- 26
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Comparative
Analysis of Consolidated Results
Revenues
2007 vs.
2006
Revenues
for 2007 increased $662.5 million or 22% from 2006, to a record
level. This increase was attributable to the following significant
items:
2006 vs.
2005
Revenues
for 2006 increased $629.6 million or 26% from 2005. This increase was
attributable to the following significant items:
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Cost
of Services and Products Sold
2007 vs.
2006
Cost of
services and products sold for 2007 increased $482.3 million or 22% from 2006,
consistent with the 22% increase in revenues. This increase was
attributable to the following significant items:
2006 vs.
2005
Cost of
services and products sold for 2006 increased $424.0 million or 24% from 2005,
slightly lower than the 26% increase in revenues. This increase was
attributable to the following significant items:
Selling,
General and Administrative Expenses
2007 vs.
2006
Selling,
general and administrative (“SG&A”) expenses for 2007 increased $65.4
million or 14% from 2006, a lower rate than the 22% increase in
revenues. The lower relative percentage increase in SG&A expense
as compared with revenue was due principally to economic business optimization
programs geared towards reducing costs. This increase was
attributable to the following significant items:
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2006 vs.
2005
Selling,
general and administrative expenses for 2006 increased $111.3 million or 31%
from 2005, more than the 26% increase in revenues. The higher
relative percentage increase in SG&A expense as compared with revenue was
due principally to the effect of certain acquisitions which, by their nature,
have a higher percentage of SG&A-related costs. This increase was
attributable to the following significant items:
Other
Expenses
This
income statement classification includes impaired asset write-downs, employee
termination benefit costs and costs to exit activities, offset by net gains on
the disposal of non-core assets. Net Other Expenses was $3.4 million
in 2007 compared with $2.5 million in 2006 and $1.9 million in
2005.
2007 vs.
2006
Net Other
Expenses for 2007 increased $1.0 million or 39% from 2006. This
increase was attributable to the following significant items:
2006 vs.
2005
Net Other
Expenses for 2006 increased $0.6 million or 31% from 2005. This
increase was attributable to the following significant items:
For
additional information, see Note 15, Other (Income) and Expenses, to the
Consolidated Financial Statements under Part II, Item 8, “Financial Statements
and Supplementary Data.”
- 29
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Interest
Expense
2007 vs.
2006
Interest
expense in 2007 was $20.9 million or 35% higher than in 2006. This
was principally due to increased borrowings to finance business acquisitions
made in 2007 and, to a lesser extent, higher interest rates on variable interest
rate borrowings. The impact of foreign currency translation also
increased interest expense by approximately $2.6 million.
2006 vs.
2005
Interest
expense in 2006 was $18.6 million or 44% higher than in 2005. This
was principally due to increased borrowings to finance acquisitions in the
fourth quarter of 2005 and, to a lesser extent, higher interest rates on
variable interest rate borrowings. This impact of foreign currency
translation also increased interest expense by approximately $0.6
million.
Income
Tax Expense from Continuing Operations
2007 vs.
2006
The
increase in 2007 of $24.2 million or 26% in the provision for income taxes from
continuing operations was due to increased earnings from continuing operations
for the reasons mentioned above, partially offset by a lower effective income
tax rate. The effective income tax rate relating to continuing
operations for 2007 was 30.7% versus 32.5% for 2006. The decrease
related principally from the Company increasing its designation of certain
international earnings as permanently reinvested.
2006 vs.
2005
The
increase in 2006 of $34.2 million or 58% in the provision for income taxes from
continuing operations was primarily due to increased earnings from continuing
operations and an increased effective income tax rate. The effective
income tax rate relating to continuing operations for 2006 was 32.5% versus
27.9% for 2005. The increase related principally to increased
effective income tax rates on international earnings and remittances due in part
to a one-time benefit recorded in the fourth quarter of 2005 of $2.7 million
associated with funds repatriated under the American Jobs Creation Act of 2004
(AJCA). Additionally, during the fourth quarter of 2005, consistent
with the Company’s strategic plan of investing for growth at certain
international locations, the Company received a one-time income tax benefit of
$3.6 million.
For
additional information, see Note 9, Income Taxes, to the Consolidated Financial
Statements under Part II, Item 8, “Financial Statements and Supplementary
Data.”
Income
from Continuing Operations
2007 vs.
2006
Income
from continuing operations in 2007 of $255.1 million was $68.7 million or 37%
higher than 2006. This increase resulted from strong demand for most
of the Company’s services and products, and business acquisitions.
2006 vs.
2005
Income
from continuing operations in 2006 of $186.4 million was $41.9 million or 29%
higher than 2005. This increase resulted from strong demand for most
of the Company’s services and products, and the net effect of business
acquisitions and divestitures.
Income
from Discontinued Operations
2007 vs.
2006
Income
from discontinued operations for 2007 increased by $34.4 million or 344%
compared with 2006. The increase was primarily attributable to the
$26.4 million after-tax gain on the sale of the Gas Technologies business, as
well as improved operating results for the business prior to the
divestiture.
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2006 vs.
2005
Income
from discontinued operations for 2006 decreased $2.2 million or 18% from
2005. This decrease was attributable principally to the write-down of
impaired assets associated with the exit of an underperforming product line in
the Gas Technologies business.
Net
Income and Earnings Per Share
2007 vs.
2006
Net
income of $299.5 million and diluted earnings per share of $3.53 in 2007
exceeded 2006 by $103.1 million or 52% and $1.20 or 52%, respectively, due to
increased income from both continuing and discontinued operations for the
reasons described above.
2006 vs.
2005
Net
income of $196.4 million and diluted earnings per share of $2.33 in 2006
exceeded 2005 by $39.7 million or 25% and $0.47 or 25%, respectively, primarily
due to increased income from continuing operations, partially offset by the
decrease in income from discontinued operations for the reasons described
above.
Liquidity
and Capital Resources
Overview
Building
on its consistent historical performance of strong operating cash flows, the
Company achieved a record $471.7 million in operating cash flow in
2007. This represents a 15% improvement over 2006’s operating cash
flow of $409.2 million. In 2007, this significant source of cash
combined with $317.2 million in proceeds from the sale of assets enabled the
Company to invest $443.6 million in capital expenditures (56% of which were for
revenue-growth projects); invest $254.6 million in business acquisitions; and
pay $59.7 million in stockholder dividends. These significant 2007
investments follow $340.2 million of capital expenditures (45% of which were for
revenue–growth projects); $54.5 million in stockholder dividends; and $34.3
million in business acquisitions invested in 2006. The Company
believes these investments provide a solid foundation for future revenue and
Economic Value Added (“EVA®”) growth.
During
2007, the Company’s value-based management system continued to deliver results
by creating increased economic value. Significant EVA® improvement
was achieved and the Company’s return on invested capital improved 240 basis
points from the year 2006.
The
Company’s net cash borrowings decreased $22.7 million in 2007. This
decrease is primarily due to the strong operating cash flows achieved in
2007. Balance sheet debt, which is affected by foreign currency
translation, increased $17.8 million from December 31, 2006. Debt to
total capital ratio decreased to 40.8% as of December 31, 2007, due principally
to a $419.8 increase in Stockholders’ Equity. Debt to total capital
was 48.1% at December 31, 2006.
In
December 2007, the Company completed the sale of its Gas Technologies business
group. The terms of the sale included a total sale price of $340
million, including $300 million paid in cash at closing and $40 million payable
in the form of an earnout, contingent on the Gas Technologies group achieving
certain performance targets in 2008 or 2009. Proceeds from the sale
have provided the Company with capital to immediately reduce short-term debt and
ultimately fund continuing organic growth initiatives and other opportunities in
its core businesses within its balanced portfolio, as well as debt
reduction.
The
Company’s strategic objectives for 2008 include again generating record cash
provided by operating activities. The Company plans to sustain its
balanced portfolio through its strategy of redeploying discretionary cash for
prudent growth and international diversification in the Access Services Segment;
in long-term, high-return and high-renewal-rate services contracts for the Mill
Services Segment, principally in emerging economies; for growth and
international diversification in the All Other Category (Minerals & Rail
Services and Products); and for selective bolt-on acquisitions in the industrial
services businesses. The Company also foresees continuing its long
and consistent history of paying dividends to stockholders, paying down debt and
repurchasing Company stock under its previously approved stock repurchase
authorization.
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The
Company is also focused on improved working capital
management. Specifically, enterprise business optimization programs
are being used to improve the effective and efficient use of working capital,
particularly accounts receivable in the Access Services and Mill Services
Segments.
Cash
Requirements
The
following summarizes the Company’s expected future payments related to
contractual obligations and commercial commitments at December 31,
2007.
Off-Balance Sheet Arrangements –
>The following table summarizes the Company’s contingent commercial
commitments at December 31, 2007. These amounts are not included in
the Company’s Consolidated Balance Sheet since there are no current
circumstances known to management indicating that the Company will be required
to make payments on these contingent obligations.
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Certain
guarantees and performance bonds are of a continuous nature and do not have a
definite expiration date.
Sources
and Uses of Cash
The
Company’s principal sources of liquidity are cash from operations and borrowings
under its various credit agreements, augmented periodically by cash proceeds
from asset sales. The primary drivers of the Company’s cash flow from
operations are the Company’s sales and income, particularly in the services
businesses. The Company’s long-term Mill Services contracts provide
predictable cash flows for several years into the future. (See
“Certainty of Cash Flows” section for additional information on estimated future
revenues of Mill Services contracts and order backlogs for the Company’s
manufacturing businesses and railway track maintenance services and equipment
business). Cash returns on capital investments made in prior years,
for which no cash is currently required, are a significant source of operating
cash. Depreciation expense related to these investments is a non-cash
charge. The Company also continues to maintain working capital at a
manageable level based upon the requirements and seasonality of the
business.
Major
uses of operating cash flows and borrowed funds include capital investments,
principally in the industrial services business; payroll costs and related
benefits; pension funding payments; inventory purchases; raw material purchases
for the manufacturing businesses; income tax payments; debt principal and
interest payments; insurance premiums and payments of self-insured casualty
losses; and machinery, equipment, automobile and facility rental
payments. Cash is also used for selective or bolt-on acquisitions as
the appropriate opportunities arise as well as funding of share
repurchases.
Resources available for cash
requirements – >The Company meets its on-going cash requirements for
operations and growth initiatives by accessing the public debt markets and by
borrowing from banks. Public markets in the United States and Europe are
accessed through its commercial paper programs and through discrete term note
issuance to investors. Various bank credit facilities are available
throughout the world. The company expects to utilize both the public debt
markets and bank facilities to meet its cash requirements in the
future. The following chart illustrates the amounts outstanding under
credit facilities and commercial paper programs and available credit as of
December 31, 2007.
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