Opportunities for GROWTH
I N D U S T R I A L S E R V I C E S O N A G L O B A L S C A L E
2006 Annual Report
Corporate Profile
Harsco Corporation is one of the world's leading diversified industrial services companies, serving
major customers in the steel and metals, non-residential construction, energy and railway
industries. Over 60% of Harsco's revenues and 70% of operating income are generated outside
the United States. We operate at more than 400 locations in 46 countries and employ more than
21,500 people. Harsco common stock is listed on the New York Stock Exchange under the
symbol HSC, and is a component of the S&P MidCap 400 Index and the Russell 1000 Index.
Mill Services
MultiServ
Sales
Operating Income
$1,367 million
$147.8 million
Countries of Operation 32
Employees
11,400
Services / Products
The world’s largest provider of on-site, outsourced services to the
steel and metals industries, operating under renewable, long-term
contracts as an integral partner to customer operations at more
than 160 mills worldwide.
Access Services
Sales
Operating Income
$1,081 million
$120.4 million
Countries of Operation 30
Employees
6,200
Hünnebeck
Services / Products
The world’s leading full-service organization for rental scaffolding,
concrete forming and shoring equipment and related access
services. Markets served include major non-residential construction
and industrial plant maintenance projects throughout the world.
Engineered Products and Services
Sales
Operating Income
$578 million
$77.5 million
Countries of Operation 5
Employees
2,200
Services / Products
Diversified niche businesses all having strong market positions and
cash flows. Services and products range from railway track
maintenance equipment and services to industrial grating products,
air-cooled heat exchangers, abrasives and roofing granules, and
high-efficiency boilers, water heaters, and blenders.
Gas Technologies*
Sales
Operating Income
$398 million
$14.2 million
Countries of Operation 6
Employees
1,700
Sherwood
Services / Products
American Welding
& Tank
The world's leading technology, service and manufacturing
network for gas applications involving pressure vessels and
precision valves.
*The Company has announced its intent to divest this business in 2007.
Table of Contents
2006 Financial Highlights
1
The Year in Review
2
3 Report to Stockholders
6 Creating Value for Our Stockholders
8 Corporate Responsibility and Governance
10 Growth Profile
11 Form 10-K Annual Report
Forward-Looking Statements
This document contains certain "forward-looking
statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These
statements are based on management's current
expectations and are subject to changes and
uncertainties that could cause future results to
differ materially. Please refer to the section
herein entitled "Forward-Looking Statements" for
further information.
2006 Financial Highlights
Total Revenues
Up 24%
Operating Income
Up 33%
Diluted Earnings Per Share
Up 25%
Operating
Income
Sales
Mill Services
40%
41%
Access Services
31%
34%
Engineered Products & Services 17%
21%
Operating Margin
Up 80 bps
Declared Dividends Per Share
Up 9%
Year-End Market Price of Stock
Up 13%
Europe
North America
Latin America
Sales
47%
40%
5%
Gas Technologies
12%
4%
Middle East and Africa 4%
Asia/Pacific
4%
Dollars in thousands, except per share amounts
2006
2005
2004
2003
2002
Operating Information
Total revenues from continuing operations
Operating income from continuing operations
Net income
$ 3,423,293
358,469
196,398
$ 2,766,210
268,948
156,657
$ 2,502,059
209,849
121,211
$ 2,118,516
173,892
92,217
$ 1,976,732
175,971
90,106
Ratios (1)
Current ratio
Return on average capital
Return on average equity
Return on average assets
Debt to total capitalization
Per Share
Diluted earnings
Diluted earnings from continuing operations
Book value
Cash dividends declared
Other Information
Diluted average shares outstanding (in thousands)
Number of employees
(1) Ratios are based on continuing operations.
1.4:1
11.3%
18.1%
11.6%
48.1%
$ 4.65
4.65
27.28
1.330
42,215
21,500
1.5:1
11.4%
16.7%
10.8%
50.4%
$ 3.72
3.73
23.79
1.225
1.6:1
9.8%
13.8%
9.4%
40.6%
$ 2.91
2.73
22.07
1.125
42,080
21,000
41,598
18,500
1.5:1
8.5%
12.2%
8.5%
44.1%
$ 2.25
2.12
19.01
1.0625
40,973
17,500
1.5:1
8.3%
12.6%
8.7%
49.8%
$ 2.21
2.17
15.90
1.0125
40,680
17,500
Harsco Corporation 2006 Annual Report 1
The Year In Review
(cid:132) Mill Services
(cid:132) 29% revenue growth to $1.4 billion, a new record. Operating income up 35%.
(cid:132) Successfully integrated the 2005 acquisitions of Brambles Industrial Services'
Northern Hemisphere steel mill services operations (12/05) and Evulca (6/05),
a European conveyor belt management and maintenance services specialist.
Both acquisitions have been accretive to Harsco's earnings.
(cid:132) Received new multi-year contracts and service add-ons representing more than
$175 million in future revenues. At December 31, 2006, Harsco's mill service
contracts totaled more than $4.4 billion in projected future revenue value, the
highest level in company history.
(cid:132) Acquired Technic Gum Services (11/06), Belgium's leading provider of conveyor
belt services for the steel and cement-producing industries.
(cid:132) Access Services
(cid:132) Segment revenues surpassed $1 billion for the first time, up 37% over 2005.
Operating income up 61%.
(cid:132) Strong performance from all three divisions _ SGB, Patent and Hünnebeck
(acquired 11/05).
(cid:132) Announced substantial new contracts in Europe, the U.S., and the Middle East in
support of major non-residential construction and plant maintenance projects.
(cid:132) Acquired Cleton (7/06), a leading industrial insulation and scaffolding services
provider serving major facilities in Holland, Belgium and Germany.
(cid:132) Acquired MyATH (11/06), one of Chile's top three suppliers of rental formwork and
scaffolding services.
(cid:132) Engineered Products and Services
(cid:132) Achieved solid revenue and income growth led by strong product demand in the
energy and infrastructure sectors. Revenues were up 6% to $578 million, while
operating income was up 11%.
(cid:132) Continued to successfully transition the railway track maintenance business toward
Harsco's higher-value services model. Approximately 40% of Harsco's track
maintenance revenues are now generated by contract services vs. equipment sales.
(cid:132) Added three new rail grinders to our U.S. railway contract services, and announced
major new contracts in the U.K. for track maintenance operation and support
services.
(cid:132) Gas Technologies
(cid:132) Revenues increased 7% to just under $400 million. Operating income was down
21% as results were negatively impacted by higher commodity costs for brass and
steel, as well as a one-time restructuring charge.
(cid:132) In January 2007, Harsco announced its plans to pursue the divestiture of this group,
consistent with the Company's increasing strategic focus on industrial services.
2 Harsco Corporation 2006 Annual Report
Report to Stockholders
C
onsiderable progress was made in 2006 on the journey that we began
several years ago to reshape Harsco into a broadly-balanced, worldwide
industrial services organization.
Revenues in 2006 climbed 24 percent to $3.4 billion, the highest in the Company's history.
Nearly 75 percent of our 2006 sales were generated by our industrial services businesses,
while over 60 percent of sales and 70 percent of our operating income were generated
internationally. Particularly pleasing are the contributions made by our two principal growth
segments, Mill Services and Access Services. Both posted new records for sales and
income. Also contributing to our growth
was another year of solid results from our
Engineered Products and Services group,
led by strong demand within the energy
and infrastructure sectors. Improving
fundamentals were also seen in our Gas
Technologies segment.
"It remains both our objective and
stockholders for their continuing
satisfaction to reward Harsco
confidence in our progress."
Income from continuing operations in 2006
increased 25 percent over the prior year.
Earnings per diluted share increased to $4.65, compared with $3.73 in 2005. Net cash
provided by operating activities increased 30 percent over the prior year to a record
$409 million, thus enabling us to meet the needs of our ongoing activities and the execution
of our growth initiatives. We achieved our highest level yet of Economic Value Added (EVA®)
improvement. We are now five years into being an EVA-focused organization, and our
continuing progress confirms the wisdom and strength of our conservative financial policies
as well as the prudent discipline we apply to our use of capital to secure long-term value on
behalf of Harsco stockholders.
We increased our dividend rate in 2006 for the 13th consecutive year and also announced a
2-for-1 split of our common stock, effective in early 2007. These actions are a reflection not
only of the confidence held by our Board of Directors and management team in Harsco's
growth, but also our dedication to serving the interests of our stockholders. It remains both
our objective and satisfaction to reward Harsco stockholders for their continuing confidence in
our progress.
We accomplished much in terms of our strategic initiatives in 2006. The integration of our
two larger acquisitions from the end of the prior year, Hünnebeck Group and the Northern
Hemisphere steel mill services operations of Brambles Industrial Services, was successfully
Harsco Corporation 2006 Annual Report 3
completed. This has added measurably to our performance as well as
our global market reach. We also completed several smaller bolt-on
acquisitions which further expand our growth opportunities and range of
service offerings:
(cid:132) Cleton, a European firm specializing in providing insulation and
scaffolding services for the maintenance of large-scale industrial
plants. The addition of Cleton expands our services to some
of central Europe's largest oil refinery, petrochemical and
processing sites.
(cid:132) MyATH, one of Chile's main suppliers of rental formwork and
scaffolding for the non-residential construction industry. We look
for this acquisition to give us a base for further Harsco Access
Services expansion in the growing Latin American non-residential
construction sector.
(cid:132)
Technic Gum Services, Belgium's leading provider of management
and maintenance services for industrial conveyor belts. Technic Gum
adds to our growing capabilities for conveyor services following our
2005 acquisition of the similarly-focused Evulca business in France.
A typical integrated steelworks can have as many as 40 to 50 miles
of conveyor belts on its premises.
The expanding Harsco global footprint, now some 46 countries, reflects
an appropriate blend of established major markets as well as emerging
sectors such as Eastern Europe and Latin America. We have enhanced
our position by acquiring Excell Materials during the first quarter of this
year. Excell is an international company which extracts and recycles
specialty metals for its customers and also has growing interests in the
minerals technologies sector. Excell has developed a number of
minerals-based products for the commercial turf, agriculture, and cement
industries which may hold some promise for the future.
While targeted acquisitions will continue to be important contributors to
our growth, we will execute on our organic growth opportunities. We
invested a record $340 million in 2006 to maintain ongoing operations,
and grow, principally, our two primary interests, Mill Services and Access
Services. We see substantial opportunities in both sectors to maintain
our momentum in the coming years, and our plans include further growth
1. This MultiServ elevating carrier is
ready to receive a scrap basket for
delivery to the meltshop.
2. Hünnebeck formwork is prepared on
the construction site of the world’s
tallest building, the Burj Dubai.
3. Three new rail grinders have been
added to Harsco's expanded contract
service program for railway track
maintenance.
4. Improving demand for large standard
and special bulk tanks helped
support increased Gas Technologies
revenues in 2006.
4 Harsco Corporation 2006 Annual Report
investments in several key projects to achieve these objectives. History has shown that
consolidation within the steel industry has generally been favorable for Harsco, as larger
and resolve."
with ample opportunity, energy,
"We are well-positioned for 2007
to continue our growth momentum
and more geographically diverse steel
industry partners turn increasingly to our
MultiServ resources and operations to provide
competitively-priced services with mutual
economy of scale benefits. We are taking a
similar approach to our Access Services
businesses, SGB, Patent and Hünnebeck,
where we are cross-sharing equipment lines
and expertise to enhance our global Harsco
Access Services depth and range. Our market-leading Engineered Products and Services
units will continue to play their part in future growth through positive contributions to
performance and strong cash flows. Given the outlook for our markets and the additional
growth initiatives identified, both organically and through acquisitions such as Excell, we
expect to fully replace the earnings contribution of our Gas Technologies business following
its recently announced planned sale, and when we are successful in finding the right new
home for this business.
"Management's goal is to endow your
business characteristics as are possible in
Company with as many of the virtuous
We believe that we are only just
beginning to capture the full value
of Harsco's global potential, and
are well-positioned for 2007 to
continue our growth momentum
with ample opportunity, energy, and
resolve. Management's goal is to
endow your Company with as
many of the virtuous business
characteristics as are possible in order to make Harsco stock an attractive, long-term
investment opportunity. We extend our gratitude to all of our constituents for their support
and confidence.
order to make Harsco stock an attractive,
long-term investment opportunity."
Derek C. Hathaway
Chairman and Chief Executive Officer
March 6, 2007
Harsco Corporation 2006 Annual Report 5
Creating Value for Our Stockholders
Harsco's continuing growth initiatives are
motivated by and executed via the Harsco
Value-Based Management System.
Growth
Value
Strategy
Industrial Services
and
Geographic Footprint
Development and Balance
Value-Based
Management System
Each component of this credo exempli-
fies a "best-practices" methodology
that we have appropriately tailored to
the specific characteristics of our
diversified, multinational opera-
tions. Implementation is led at
the senior executive level by
the Chairman and CEO,
Derek C. Hathaway, and the
President, CFO and
Treasurer, Salvatore D.
Fazzolari, and is overseen
by the Board of Directors.
The system includes our
Economic Value Added, or EVA®,financial manage-
ment discipline; our strong corporate governance
framework; our "A Team" management develop-
ment; our continuous process improvement philos-
ophy; and our infusion of enabling technologies to
enhance our business processes.
Creating Value For Stockholders
Economic Value Added
EVA at Harsco
Our adoption of EVA has been good for Harsco
and for Harsco stockholders. EVA has instilled an
enhanced global financial discipline within our
operations that gives us a single, common
framework for
evaluating
investments and
making critical
business decisions,
particularly regarding
our allocation of
capital. EVA
challenges us to
answer the question,
"Will this project or
investment create positive value for our
stockholders?" Investments that do not show long-
term value to the Company and our stockholders
are not pursued.
EVA
Adopted
1/02
12/03
12/00
12/01
12/02
The EVA improvement in 2006 established a new
high-water mark, surpassing the previous year's
record and marking our fourth consecutive year of
improved EVA since its inception just over five
years ago. EVA provides a measure of true
economic profit, taking into account not only
traditional accounting-based profit measures but
6 Harsco Corporation 2006 Annual Report
also a charge for the use of the total capital (both
debt and equity) used to create those profits. We
have ensured that our management performance
is linked directly to value creation by making
EVA the basis of our company-wide management
incentive compensation plan. Despite our
success, however, we are also mindful that EVA
is not a panacea. No tool can replace sound
judgment, experience, and solid execution.
Corporate Governance
Harsco has long held to a strong, integrated
system of corporate governance principles
and practices. The details are discussed
in the following section of this report, and
on our corporate website at
www.harsco.com. We view our
adherence to the highest ethical standards as an
essential part of our public responsibilities as a
well-managed, world-class enterprise.
"A Team" Management
Our "A Team" concept refers to senior
management's continuing priorities for placing and
developing the best possible management team in
each of the company's businesses. Highly capable
people are essential to helping us fully achieve our
goal of becoming the world's premier provider of
industrial services. Harsco's expanding global
growth in an increasingly complex
regulatory environment requires
strong competencies in every
business discipline. It is imperative
that we field the best team possible.
We have made excellent progress in
improving our intellectual capital
over the past few years, but we have
more to do as we move forward and
continue to grow.
Four Successive Years
of EVA Improvement,
2003 - 2006
12/04
12/05
12/06
Continuous Improvement
Six Sigma-based continuous process improvement
is a natural complement to our EVA discipline, as
operating more efficiently at lower cost contributes
directly to the creation of value.
Our continuous improvement philosophy involves
commitments from all levels of the organization to
improving efficiency and reducing costs. This
aligns well with our strategic objectives for creating
long-term sustainable value.
Enabling Technologies
Information Technology can either directly or
indirectly enable businesses to create value. Core
to our continuing growth is the significant
investment we are making in world-class
Information Technology resources and
infrastructure. Our objective is not simply to apply
Information Technology to our processes but
literally to infuse it, so
that enabling
technologies become
embedded in virtually
every important
aspect of our
business.
We now have the
ability for global
project teams from
any location to work
together in a virtual
online environment
that allows for
seamless
collaboration and
information flow. We have also embarked on a
global consolidation of our enterprise resource
planning systems, or ERPs. Our ERP initiative will
enhance our real-time access to the latest
information regarding key business functions, and
help us operate more efficiently as a global
organization. We expect to reduce our core
transaction systems in operations and finance from
over 60 to fewer than 12 in a period of four years.
We are also launching a broad-based initiative to
automate many of our traditional, manually-
intensive processes to further speed workflow and
reduce costs.
As we continue to grow Harsco's global footprint,
we are standardizing our underlying IT architecture
around a strict set of system and software
specifications that make it easier to
integrate new acquisitions and make other
"plug and play" changes, consistent with
our continuing growth and expansion
strategies.
Creating Long-Term Stockholder Value
Evidence continues to confirm that
companies who have adopted a value-
based framework regularly outperform
their peers in the creation of stockholder
value. During the past five years,
Harsco's cumulative total returns have
significantly exceeded two of the leading
indices for comparably sized and
structured companies, the Dow Jones U.S.
Diversified Industrials Index and the S&P Midcap
400 Index. The increasing valuation we have
earned in share price performance as well as our
nearly 70-year commitment to stockholder
dividends reaffirm Harsco's strong value-based
approach to growth.
To the right, President, CFO and Treasurer Sal Fazzolari
receives an update on Harsco's new High Availability Data Center
from Scott Gerson, VP and Chief Information Officer (center)
and Terry Stahler, Director of Global IT Infrastructure (left).
Comparison of Five Year Cumulative Total Returns
Quarterly Share Price and Dividend Information
The following performance graph compares the yearly
percentage change in the cumulative total stockholder
return (assuming the reinvestment of dividends) on
Harsco common stock against the cumulative total
return of the Standard & Poor's MidCap 400 Index
and Dow Jones U.S. Diversified Industrials Index.
The graph assumes an initial investment of $100 on
December 31, 2001.
Cumulative Total Returns
$100
$250.86
$167.69
$111.68
01
02
03
04
05
06
Harsco
(cid:83) S&P Midcap
400 Index
(cid:139) Dow Jones U.S. Diversified
Industrials Index
Note: In December 2001, Dow Jones restructured its industry
classification system. The net result of this change is that all U.S.
indices will show differences when compared to the prior index series.
2006
Q1
Q2
Q3
Q4
2005
Q1
Q2
Q3
Q4
High
Low
Dividends Declared
$84.55
89.70
82.42
82.97
$61.35
61.10
66.20
70.57
$67.52
71.25
67.77
76.00
$49.87
52.37
53.56
59.70
$0.3250
0.3250
0.3250
0.3550
$0.3000
0.3000
0.3000
0.3250
High and low per share data are as quoted on the New York
Stock Exchange. Harsco common stock is listed on the
New York Stock Exchange under ticker symbol HSC and is
a component of the S&P MidCap 400 Index and the Russell
1000 Index.
Harsco Corporation 2006 Annual Report 7
Corporate Responsibility and Governance
Code of Conduct
The Harsco Code of Conduct is issued in booklet
form to all Harsco directors, officers and
employees worldwide, while an online training
program facilitates new employee orientations and
individual refresher training. The Code is also
made available to our major suppliers,
representatives and consultants.
In 2006, a comprehensive update was developed
and distributed throughout Harsco's operations.
Our printing included nearly 20 languages, a
reflection of Harsco's broad international coverage
and global employee base. The full text of
Harsco's Code of Conduct is available on our
website at www.harsco.com, located within the
Corporate Governance section under Investor
Relations. You can also obtain a printed copy by
contacting the Corporate Communications
department at the Harsco corporate office.
Internal Control Framework
Harsco's internal control system and its underlying
principles are summarized in the Harsco Internal
Control Framework booklet, which is distributed
in multiple languages to all employees throughout
Harsco having management or administrative
responsibilities. The full text is available on
our website at www.harsco.com, located within
the Corporate Governance section under
Investor Relations.
Our internal control principles are reinforced by
our ongoing Sarbanes-Oxley Section 404
optimization initiative. This Company-wide
program is overseen by the Audit Committee of
the Board of Directors and is strategically focused
on achieving continuous improvement in the
effectiveness and efficiency of our controls, and
on ensuring our continuing compliance with
Sarbanes-Oxley provisions.
Confidential Submissions
Harsco has several methods available to report
complaints or concerns relating to our accounting,
internal accounting controls, or other related
matters:
(cid:132) Writing to the Harsco corporate office, P.O. Box
8888, Camp Hill, Pennsylvania 17001-8888,
marked to the attention of Audit Committee
Confidential Submission
(cid:132) E-mail to auditcommitteehotline@harsco.com
(cid:132) Calling this designated number, 800.942.7726
8 Harsco Corporation 2006 Annual Report
Contact can also be made with any member of the
Company's Audit Committee. All reports are
treated confidentially to the fullest extent possible,
and may be made anonymously. Harsco will not
tolerate any retaliation or harassment against any
individual who in good faith raises a concern or
reports misconduct.
Safety and the Environment
Although Harsco’s global safety performance
continues to significantly exceed industry
averages, we are redoubling our safety efforts in
2007 to ensure that all operations continue to
strive for an injury-free workplace. We are never
satisfied when
injuries occur.
In the
environmental
area, Harsco
continues to be
one of the world's
leading providers
of environmental
solutions and
technologies to
the global steel
and metals industries. On average each year, we
recover more than 12 million tons of metallics from
steelmaking slag; handle and process more than
30 million tons of scrap material; and facilitate the
external sale and commercial use of nearly ten
million tons of slag aggregate on behalf of our
steel and metals industry customers. Through our
specialized briquetting and pelletizing processes,
we also recycle over 1.6 million tons of
steelmaking dusts and other byproducts. As steel
and other metals producers face an increasingly
stringent regulatory climate _ and also recognize
the value-adding cost efficiencies of recycling _
Harsco is responding with an increasing array of
technology-based
solutions.
Harsco is also the
pioneer in recycling
electric utility coal
slag into aesthetically
pleasing,
competitively priced
roofing granules as
well as low free silica
abrasives. Our Reed
Minerals division
converts more than
one million tons of
coal slag material each year into useful,
environmentally-responsible products that would
otherwise go to landfill.
Community Support
Through our separately-administered Harsco
Corporation Fund giving arm, Harsco provides
targeted financial and other support to charitable,
educational, and cultural activities having wide
application and support in the communities in
which we operate. In 2006, the Fund granted just
under $1 million to a number of selected initiatives.
In the field of education, Harsco participates in the
U.S. National Merit Scholarship Program as well
as a similar international scholarship program to
award college-level tuition assistance to the top-
performing children of our employees. We marked
our 32nd consecutive year of scholarship
assistance in 2006, over which time the Company
has awarded more than $3 million to more than
350 talented students. We view the Harsco
scholarship program as our opportunity to invest in
some of the world's future leaders and help them
realize their full potential, both as scholars and
citizens. Our 2006 winners represented ten
different countries, including Australia, Brazil,
Canada, Italy, Malaysia, Mexico, Serbia, Slovakia,
the United Kingdom and the United States.
Corporate Governance
Harsco Corporation is led by a strong and
committed Board of Directors who reflect broad
executive leadership experience in services,
manufacturing, international operations, finance,
marketing and management, as appropriate to our
diversified activities and global scope.
Size of Board
Harsco's Board currently comprises 11 members,
including eight independent directors. The number
of directors is established with a view toward
balancing the need for diversity of experience and
talent against the risk of diluting responsibility and
participation of members.
Meeting Attendance and Committees
The Board of Directors held nine meetings during
the fiscal year ended December 31, 2006. All
directors attended at least 75% of the total Board
and committee meetings on which they served and
the average attendance by directors at all Board
and committee meetings was 99%.
Currently there are four standing committees of the
Harsco Board: Executive; Audit; Management
Development and Compensation; and Nominating
and Corporate Governance. The Board may
establish other committees from time to time as
circumstances dictate.
Each standing committee has a written charter
which is approved by the full Board and states
the purpose of the committee. The full text of
each committee charter is available on the Harsco
website at www.harsco.com, located within the
Corporate Governance section under Investor
Relations. Printed copies are also available to
any stockholder who requests them.
Independence
The members of Harsco's Audit, Management
Development and Compensation, and Nominating
and Corporate Governance committees are
composed entirely of members who qualify as
"independent" directors and at all times meet any
other requirements of applicable law and listing
standards.
Under Harsco's Corporate Governance principles,
at least two-thirds of Harsco's Board are required
to be "independent" directors as defined by the
New York Stock Exchange and other applicable
regulatory requirements. The independent
directors held three meetings during 2006.
Further Information
Please visit our website at www.harsco.com for
further information about our Board of Directors
and Corporate Governance principles and policies.
Management's Certifications
The certifications of our Chief Executive Officer
and Chief Financial Officer required by Section
302 of the Sarbanes-Oxley Act of 2002 have been
filed with the Securities and Exchange
Commission as exhibits to our Annual Report on
Form 10-K.
In addition, in May 2006, our Chief Executive
Officer provided to the New York Stock Exchange
the annual Section 303A CEO certification
regarding our compliance with the New York
Stock Exchange's corporate governance
listing standards.
Harsco Corporation 2006 Annual Report 9
Growth Profile
Revenue Growth
Dollars in Millions
Operating Income Growth
Dollars in Millions
$3,500
$2,800
$2,100
$1,400
$700
02
03
04
05
06
02
03
04
05
06
International U.S.
International U.S.
Earnings Per Share Growth
In Dollars
Cash Flow Growth
Dollars in Millions
$5.00
$4.20
$3.40
$2.60
$1.80
$1.00
02
03
04
05
06
02
03
04
05
06
Diluted Earnings Per Share from
Continuing Operations
Cash Flow from Operations
Capital Expenditures Growth
Dollars in Millions
Dividend Growth
In Dollars
03
04
05
06
Growth Capital Expenditures
Contract Renewals, Maintenance, Other
Stock Price Growth
In Dollars
$350
$290
$230
$170
$110
$80
$68
$56
$44
$32
02
03
04
05
06
Annual Dividends Per Share
Enterprise Value Growth
Dollars in Millions
$400
$320
$240
$160
$80
$450
$400
$350
$300
$250
$1.35
$1.25
$1.15
$1.05
$0.95
$4,500
$3,500
$2,500
$1,500
$500
02
03
04
05
06
02
03
04
05
06
Year-end Market Price of Stock
Total Debt Market Capitalization
10 Harsco Corporation 2006 Annual Report
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, 2006
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)
Delaware
(State or other jurisdiction of
incorporation or organization)
23-1483991
(I.R.S. employer identification number)
350 Poplar Church Road, Camp Hill, Pennsylvania
(Address of principal executive offices)
17011
(Zip Code)
Registrant's telephone number, including area code 717-763-7064
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, par value $1.25 per share
Preferred stock purchase rights
Name of each
exchange on which registered
New York Stock Exchange
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
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
NO
NO
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
NO
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES
NO
The aggregate market value of the Company's voting stock held by non-affiliates of the Company as of June 30, 2006 was
$3,274,276,264.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
Common stock, par value $1.25 per share
Classes
Outstanding at January 31, 2007
42,017,140
Selected portions of the 2007 Proxy Statement are incorporated by reference into Part III of this Report.
DOCUMENTS INCORPORATED BY REFERENCE
The Exhibit Index (Item No. 15) located on pages 108 to 113 incorporates several documents by reference as indicated therein.
Harsco Corporation 2006 Annual Report 11
HARSCO CORPORATION AND SUBSIDIARY COMPANIES
PART I
Item 1. Business
(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 three reportable segments: Mill Services, Access Services
and Gas Technologies, plus an “all other” category labeled Engineered Products and Services. The Company has
locations in 46 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, and should not be considered as part of this Annual Report.
The Company’s principal lines of business and related principal business drivers are as follows:
Principal Lines of Business
Principal Business Drivers
• Outsourced, on-site services to steel mills and
other metals producers
• Steel mill production and capacity utilization
• Outsourcing of services
• Scaffolding, forming, shoring and other
access-related services, rentals and sales
• Non-residential and commercial construction
•
Industrial and building maintenance requirements
• Railway track maintenance services and
• Domestic and international railway track maintenance-of-
equipment
way capital spending
•
Industrial grating products
• Outsourcing of track maintenance and new track
construction by railroads
•
Industrial plant and warehouse construction and
expansion
• Air-cooled heat exchangers
• Natural gas compression and transmission
•
Industrial abrasives and roofing granules
•
Industrial and infrastructure surface preparation and
restoration
• Residential roof replacement
• Heat transfer products and powder processing
• Commercial and institutional boiler and water heater
equipment
requirements
• Pharmaceutical, food and chemical production
• Gas control and containment products
-Cryogenic containers and industrial gas
cylinders
-Valves
• General industrial production and industrial gas production
• Use of industrial and refrigerant gases
• Respiratory care market
-Propane Tanks
• Use of propane as a primary and/or backup fuel
-Filament-wound composite cylinders
• Self-contained breathing apparatus (“SCBA”) demand
• Natural gas vehicle (“NGV”) demand
12 Harsco Corporation 2006 Annual Report
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 below.
In 2006, 2005 and 2004, the United States contributed sales of $1.3 billion, $1.2 billion and $1.0 billion, equal to 38%,
42% and 42% of total sales, respectively. In 2006, 2005 and 2004, the United Kingdom contributed sales of $0.7
billion, $0.5 billion and $0.5 billion, respectively, equal to 20%, 20% and 21% of total sales, respectively. One
customer represented 10% of the Company's sales during 2006. No customer represented 10% or more of the
Company’s sales in 2005 and 2004. 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:
Mill Services Segment – 40% of consolidated sales for 2006
The Mill Services Segment, which consists of the MultiServ Division, is the Company’s largest operating segment
in terms of revenues and operating income. MultiServ 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 $4.4 billion at December 31, 2006. This provides the Company with a
substantial base of long-term revenues. Approximately 60% of these revenues are expected to be recognized by
December 31, 2009. The remaining revenues are expected to be recognized principally between January 1, 2010
and December 31, 2015.
MultiServ’s geographic reach to over 30 countries, and its increasing range of services, enhance the Company’s
financial and operating balance. In 2006, this Segment’s revenues were generated in the following regions:
Mill Services Segment
Region
Europe
North America
Latin America (a)
Asia/Pacific
Middle East and Africa
(a) Including Mexico.
2006 Percentage
of Revenues
56%
21%
10%
7%
6%
For 2006, 2005 and 2004, the Mill Services Segment’s percentage of the Company’s consolidated sales was 40%,
38% and 40%, respectively.
Access Services Segment – 31% of consolidated sales for 2006
The Access Services Segment includes the Company’s SGB Group, Hünnebeck Group and Patent Construction
Systems Divisions. The Company’s Access Services Segment leads the access industry as one of the world’s
most complete providers of rental scaffolding, shoring, forming and other access solutions. The U.K.-based SGB
Harsco Corporation 2006 Annual Report 13
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. Major services include the rental of
concrete shoring and forming systems, scaffolding and powered access equipment for non-residential construction
and international multi-dwelling residential construction 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 approximately 30 countries plus export
sales worldwide. In 2006, this Segment’s revenues were generated in the following regions:
Access Services Segment
Region
Europe
North America
Middle East and Africa
Asia/Pacific
Latin America
2006 Percentage
of Revenues
70%
21%
7%
1%
1%
For 2006, 2005 and 2004, the Access Services Segment’s percentage of the Company’s consolidated sales was
31%, 29% and 28%, respectively.
Engineered Products and Services (“all other”) Category – 17% of consolidated sales for 2006
The Engineered Products and Services (“all other”) Category includes the Harsco Track Technologies, Reed
Minerals, IKG Industries, Air-X-Changers, and Patterson-Kelley Divisions. Approximately 88% of this category’s
revenues originate in the United States.
Export sales for this Category totaled $96.6 million, $116.6 million and $101.2 million in 2006, 2005 and 2004,
respectively. In 2006, 2005 and 2004, export sales for the Harsco Track Technologies Division were $51.5 million,
$80.0 million and $76.3 million, respectively, which included sales to Europe, Asia, the Middle East and Africa.
The increased export sales for the Division in 2005 and 2004 were due to large shipments to China.
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 provide high-technology comprehensive track
maintenance and new track construction support to 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.
Reed Minerals’ roofing granules and industrial abrasives 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.
IKG Industries manufactures a varied line of industrial grating products at several plants in North America. These
products include a full range of bar grating configurations, which are used mainly in industrial flooring, and safety
and security applications in the power, paper, chemical, refining and processing industries.
Air-X-Changers is a leading supplier of custom-designed and manufactured air-cooled heat exchangers for the
natural gas industry. The Company’s heat exchangers are the primary apparatus used to condition natural gas
during recovery, compression and transportation from underground reserves through the major pipeline distribution
channels.
Patterson-Kelley is a leading manufacturer of heat transfer products such as boilers and water heaters for
commercial and institutional applications, and also powder processing equipment such as blenders, dryers and
mixers for the chemical, pharmaceutical and food processing industries.
14 Harsco Corporation 2006 Annual Report
For 2006, 2005 and 2004, the Engineered Products and Services (“all other”) Category’s percentage of the
Company’s consolidated sales was 17%, 20% and 18%, respectively.
Gas Technologies Segment – 12% of consolidated sales for 2006
The Gas Technologies Segment includes the Company’s Harsco GasServ Division. The Segment’s
manufacturing and service facilities in the United States, Europe, Australia, Malaysia and China comprise an
integrated manufacturing network for gas containment and control products. This global operating presence and
product breadth provide economies of scale and multiple code production capability, enabling Harsco GasServ to
serve as a primary source to the world’s leading industrial gas producers and distributors, as well as regional and
local customers. In 2006, approximately 85% of this Segment’s revenues were generated in the United States.
The Company’s gas containment products include cryogenic gas storage tanks; high pressure and acetylene gas
cylinders; propane tanks; and composite vessels for industrial and commercial gases, natural gas vehicles (NGV)
and other products. The Company’s gas control products include valves and regulators serving a variety of
markets, including the industrial gas, commercial refrigeration, life support and outdoor recreation industries.
For 2006, 2005 and 2004, the Gas Technologies Segment’s percentage of the Company’s consolidated sales was
12%, 13% and 14%, respectively.
In January 2007, the Company’s Board of Directors approved the divestiture of this Segment. The Company
expects this divestiture to occur in the second half of 2007.
(1) (i) The products and services of the Company include a number of product groups. These product groups
are more fully discussed in Note 14, Information by Segment and Geographic Area, to the Consolidated
Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data.” The product
groups that contributed 10% or more as a percentage of consolidated sales in any of the last three fiscal
years are set forth in the following table:
Product Group
Mill Services
Access Services
Industrial Gas Products
Percentage of Consolidated Sales
2005
2006
2004
40%
31%
12%
38%
29%
13%
40%
28%
14%
(1) (ii) New products and services are added from time to time; however, in 2006 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 are usually readily available. The profitability of the Company’s
manufactured products are affected by changing purchase prices of steel and other materials and
commodities. Beginning in 2004, the price paid for steel and certain other commodities increased
significantly compared with prior years. Although these costs moderated in 2005, such costs increased
during 2006. If steel or other material costs associated with the Company’s manufactured products
continue to increase and the costs cannot be passed on to the Company’s customers, operating income
would be adversely impacted. Additionally, decreased availability of steel or other materials, such as
carbon fiber used to manufacture filament-wound composite cylinders, 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 impacted.
(1) (iv) While the Company has a number of trademarks, patents and patent applications, it does not consider
that any material part of its business is dependent upon them.
(1) (v) The Company furnishes products and materials and certain industrial services within the Access Services
and Gas Technologies Segments and the Engineered Products and Services (“all other”) Category that
are seasonal in nature. As a result, the Company’s sales and net income for the first quarter ending
Harsco Corporation 2006 Annual Report 15
March 31 are normally lower than the second, third and fourth quarters. Additionally, the Company has
historically generated the majority of its cash flows in the third and fourth quarters (periods ending
September 30 and December 31). This is a direct result of normally higher sales and income during the
latter part of the year. The Company’s historical revenue patterns and cash provided by operating
activities were as follows:
Historical Revenue Patterns
(In millions)
2006
2005
2004
2003
2002
First Quarter Ended March 31
$ 769.6
$ 640.1
$ 556.3
$ 487.9
$ 458.6
Second Quarter Ended June 30
865.5
Third Quarter Ended September 30
875.9
Fourth Quarter Ended December 31
912.3
696.1
697.5
732.5
617.6
617.3
710.9
536.4
530.2
564.0
510.3
510.5
497.3
Totals
$ 3,423.3
$ 2,766.2
$ 2,502.1
$ 2,118.5
$ 1,976.7
Historical Cash Provided by Operations
(In millions)
2006
2005
2004
2003
2002
First Quarter Ended March 31
$ 69.8
$ 48.1
$ 32.4
$ 31.2
$
9.0
Second Quarter Ended June 30
114.5
Third Quarter Ended September 30
94.6
86.3
98.1
64.6
68.9
59.2
64.1
Fourth Quarter Ended December 31
130.3
82.7
104.6
108.4
71.4
83.3
90.1
Totals
$ 409.2
$ 315.3 (a)
$ 270.5
$ 262.8 (a)
$ 253.8
(a) Does not total due to rounding.
(1) (vi) The practices of the Company relating to working capital are similar to those practices of other industrial
service providers or manufacturers servicing both domestic and international industrial services and
commercial markets. These practices include the following:
• Standard accounts receivable payment terms of 30 days to 60 days, with progress payments
required for certain long-lead-time or large orders. Payment terms are longer in certain international
markets.
• Standard accounts payable payment terms of 30 days to 90 days.
•
Inventories are maintained in sufficient quantities to meet forecasted demand. Due to the time
required to manufacture certain railway maintenance equipment to customer specifications, inventory
levels of this business tend to increase for an extended time during the production phase and then
decline when the equipment is sold.
(1) (vii) No single customer represented 10% or more of the Company’s sales in 2005 and 2004. However, in
2006 one customer represented 10% of its sales. In addition, the Mill Services Segment is dependent
largely on the global steel industry and in 2006, 2005 and 2004, there were two customers that each
provided in excess of 10% of this Segment’s revenues under multiple long-term contracts at several mill
sites. The loss of any one of the contracts would not have a material adverse effect upon the Company’s
financial position or cash flows; however, it could have a material effect on quarterly or annual results of
operations. Additionally, these customers have significant accounts receivable balances. Further
consolidation in the global steel industry is probable. Should transactions occur involving some of the
Company’s larger steel industry customers, it would result in an increase in concentration of credit risk for
the Company. If a large customer were to experience financial difficulty, or file for bankruptcy protection,
it could adversely impact the Company’s income, cash flows, and asset valuations. As part of its credit
risk management practices, the Company closely monitors the credit standing and accounts receivable
position of its customer base.
16 Harsco Corporation 2006 Annual Report
(1) (viii) Backlog of orders was $301.0 million and $275.8 million as of December 31, 2006 and 2005,
respectively. It is expected that approximately 20% of the total backlog at December 31, 2006 will not be
filled during 2007. The Company’s backlog is seasonal in nature and tends to follow in the same pattern
as sales and net income which is discussed in section (1) (v) above. Order backlog for scaffolding,
shoring and forming services of the Access Services Segment is excluded from the above amounts.
These amounts are generally not quantifiable due to short order lead times for certain services, the
nature and timing of the products and services provided and equipment rentals with the ultimate length of
the rental period often unknown. Backlog for roofing granules and slag abrasives is not included in the
total backlog because it is generally not quantifiable, due to the short order lead times of the products
provided. Contracts for the Mill Services Segment are also excluded from the total backlog. These
contracts have estimated future revenues of $4.4 billion at December 31, 2006. For additional
information regarding backlog, see the Backlog section included in Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
(1) (ix) At December 31, 2006, the Company had no material contracts that were subject to renegotiation of
profits or termination at the election of the U.S. Government.
(1) (x) The Company encounters active competition in all of its activities from both larger and smaller companies
who produce the same or similar products or services, or who produce different products appropriate for
the same uses.
(1) (xi) The expense for product development activities was $3.0 million, $2.7 million and $2.6 million in 2006,
2005 and 2004, respectively. For additional information regarding product development activities, see the
Research and Development section included in Part II, Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.”
(1) (xii) The Company has become subject, as have others, to stringent air and water quality control legislation.
In general, the Company has not experienced substantial difficulty complying with these environmental
regulations in the past, and does not anticipate making any material capital expenditures for
environmental control facilities. While the Company expects that environmental regulations may expand,
and that its expenditures for air and water quality control will continue, it cannot predict the effect on its
business of such expanded regulations. For additional information regarding environmental matters see
Note 10, Commitments and Contingencies, to the Consolidated Financial Statements included in Part II,
Item 8, "Financial Statements and Supplementary Data."
(1) (xiii) As of December 31, 2006, the Company had approximately 21,500 employees.
(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 $162.6 million, $171.0 million and $139.3 million in 2006, 2005 and 2004,
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.
Harsco Corporation 2006 Annual Report 17
Cyclical industry and economic conditions may adversely affect the Company’s businesses.
The Company’s businesses are subject to general economic slowdowns and cyclical conditions in the industries
served. In particular,
• The Company’s Mill Services business may be adversely impacted by slowdowns in steel mill production, excess
capacity, consolidation or bankruptcy of steel producers or a reversal or slowing of current outsourcing trends in
the steel industry;
• The Company’s Access Services business may be adversely impacted by slowdowns in non-residential or
commercial construction and the volatility of annual industrial and building maintenance cycles;
• The railway track maintenance business may be adversely impacted by developments in the railroad industry that
lead to lower capital spending or reduced maintenance spending;
• The industrial abrasives and roofing granules business may be adversely impacted by reduced home resales or
economic conditions that slow the rate of residential roof replacement, or by slowdowns in the industrial and
infrastructure refurbishment industries;
• The industrial grating business may be adversely impacted by slowdowns in non-residential construction and
industrial production;
• The air-cooled heat exchangers business is affected by cyclical conditions present in the natural gas industry. A
high demand for natural gas is currently creating increased demand for the Company’s air-cooled heat
exchangers. However, a slowdown in natural gas production could adversely affect this business; and
• The Company’s Gas Technologies business may be adversely impacted by reduced industrial production and
lower demand for industrial gases, slowdowns in demand for medical cylinders and valves, or lower demand for
natural gas vehicles.
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. An upward
trend in the equity and bond markets could positively affect 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. The downturn in financial markets during 2000, 2001 and 2002 negatively impacted the
Company’s pension expense and the accounting for pension assets and liabilities. This resulted in an increase in pre-
tax defined benefit pension expense from continuing operations of approximately $20.8 million for calendar year 2002
compared with 2001 and $17.7 million for calendar year 2003 compared with 2002. The upturn in certain financial
markets beginning in 2003 and certain plan design changes (discussed below) contributed to a decrease in pre-tax
defined benefit pension expense from continuing operations of approximately $1.6 million for 2006 compared with
2005, approximately $3.8 million for 2005 compared with 2004, and approximately $5.4 million for 2004 compared with
2003. An upward trend in capital markets would likely result in a decrease in future unfunded obligations and pension
expense. This could also result in an increase to Stockholders’ Equity and a decrease in the Company’s statutory
funding requirements. 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 U.K. and U.S.
from defined benefit plans to defined contribution plans as of January 1, 2004. This conversion is expected to make
the Company’s pension expense more predictable and affordable 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 the on-going evaluation of investment fund managers’ performance; the balancing of plan assets
18 Harsco Corporation 2006 Annual Report
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.
The Company’s global presence subjects it to a variety of risks arising from doing business
internationally.
The Company operates in 46 countries, including the United States. The Company’s global footprint exposes it to a
variety of risks that may adversely affect results of operations, cash flows or financial position. These include the
following:
• periodic economic downturns in the countries in which the Company does business;
•
•
•
•
fluctuations in currency exchange rates;
customs matters and changes in trade policy or tariff regulations;
imposition of or increases in currency exchange controls and hard currency shortages;
changes in regulatory requirements in the countries in which the Company does business;
• higher tax rates and potentially adverse tax consequences including restrictions on repatriating earnings,
adverse tax withholding requirements and "double taxation'';
•
•
longer payment cycles and difficulty in collecting accounts receivable;
complications in complying with a variety of international laws and regulations;
• political, economic and social instability, civil unrest and armed hostilities in the countries in which the
Company does business;
•
•
inflation rates in the countries in which the Company does business;
laws in various international jurisdictions that limit the right and ability of subsidiaries to pay dividends and
remit earnings to affiliated companies unless specified conditions are met; and‚
• uncertainties arising from local business practices, cultural considerations and international political and trade
tensions.
If the Company is unable to successfully manage the risks associated with its global business, the Company’s financial
condition, cash flows and results of operations may be negatively impacted.
The Company has operations in several countries in the Middle East, including Bahrain, Egypt, Saudi Arabia, United
Arab Emirates and Qatar, which are geographically close to Iraq, Iran, Israel, Lebanon and other countries with a
continued high risk of armed hostilities. During 2006, 2005 and 2004, the Company’s Middle East operations
contributed approximately $34.8 million, $32.7 million and $25.5 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 approximately 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 62% and 58% of the Company’s sales and approximately 71%
and 67% of the Company’s operating income from continuing operations for the years ended December 31, 2006 and
2005, respectively, were derived from operations outside the United States. More specifically, during both 2006 and
2005, approximately 20% of the Company’s revenues were derived from operations in the U.K. Additionally,
approximately 23% and 18% of the Company’s revenues were derived from operations with the euro as their functional
Harsco Corporation 2006 Annual Report 19
currency during 2006 and 2005, 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. The Company’s exposure to these currencies, as well as other foreign currencies, has increased in 2006 due to
the acquisitions of Hünnebeck and the Northern Hemisphere mill services operations of Brambles Industrial Services
(“BISNH”) in the fourth quarter of 2005 and the acquisition of Cleton in the third quarter of 2006.
Compared with the corresponding period in 2005, the average values of major currencies changed as follows in
relation to the U.S. dollar during 2006, impacting the Company’s sales and income:
euro
• British pound sterling
•
• South African rand
• Brazilian real
• Canadian dollar
• Australian dollar
Strengthened by 2%
Strengthened by 2%
Weakened by 6%
Strengthened by 11%
Strengthened by 7%
Neutral
Compared with exchange rates at December 31, 2005, the values of major currencies changed as follows as of
December 31, 2006:
euro
• British pound sterling
•
• South African rand
• Brazilian real
• Canadian dollar
• Australian dollar
Strengthened by 14%
Strengthened by 12%
Weakened by 10%
Strengthened by 9%
Neutral
Strengthened by 8%
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 2006,
revenues would have been approximately 1% or $35.3 million less and operating income would have been
approximately 1% or $3.0 million less if the average exchange rates for 2005 were utilized. A similar comparison for
2005 would have decreased revenues approximately 1% or $14.8 million, while operating income would have been
approximately 1% or $2.8 million less if the average exchange rates for 2005 would have remained the same as 2004.
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.
The Company seeks to reduce exposures to foreign currency transaction fluctuations through the use of forward
exchange contracts. At December 31, 2006, the notional amount of these contracts was $170.9 million, and over 99%
of these contracts will mature within the first quarter of 2007. 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.
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.
20 Harsco Corporation 2006 Annual Report
Negative economic conditions may adversely impact the ability of the Company’s customers to meet their
obligations to the Company on a timely basis and impact the valuation of the Company’s assets.
If a downturn in the economy occurs, it may adversely impact the ability of the Company’s customers to meet their
obligations to the Company on a timely basis and could result in bankruptcy filings by them. If customers are unable to
meet their obligations on a timely basis, it could adversely impact the realizability of receivables, the valuation of
inventories and the valuation of long-lived assets across the Company’s businesses, as well as negatively affect the
forecasts used in performing the Company’s goodwill impairment testing under SFAS No. 142, "Goodwill and Other
Intangible Assets” (“SFAS 142”). If management determines that goodwill or other assets are impaired or that
inventories or receivables cannot be realized at recorded amounts, the Company will be required to record a write-
down in the period of determination, which will reduce net income for that period. 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. The potential financial impact of this risk has
increased with the Company’s acquisition of BISNH in December 2005 and consolidation of certain large steel mill
customers in 2006. Conversely, such consolidation may provide additional service opportunities for the Company.
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 Mill Services business is sustained mainly through contract renewals. Historically, the Company’s
contract renewal rate has averaged approximately 95%. If the Company is unable to renew its contracts at the
historical rates or renewals are at reduced prices, revenue may decline.
• The Company’s Access Services business rents and sells equipment and provides erection and dismantling
services to principally the non-residential and commercial construction and industrial plant maintenance markets.
Contracts are awarded based upon the Company’s engineering capabilities, product availability, safety record, and
the ability to competitively price its rentals and services. If the Company is unable to consistently provide high-
quality products and services at competitive prices, it may lose customers or operating margins may decline due to
reduced selling prices.
• The Company’s manufacturing businesses compete with companies that manufacture similar products both
internationally and domestically. Certain international competitors export their products into the United States and
sell them at lower prices due to lower labor costs and government subsidies for exports. Such practices may limit
the prices the Company can charge for its products and services. Additionally, unfavorable foreign exchange rates
can adversely impact the Company’s ability to match the prices charged by international competitors. If the
Company is unable to match the prices charged by international competitors, it may lose customers.
The Company’s strategy to overcome this competition includes continuous process improvement and cost reduction
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.
Concentrations of credit risk with respect to accounts receivable are generally limited due to the Company’s large
number of customers and their dispersion across different industries and geographies. However, the Company’s Mill
Services Segment has several large customers throughout the world with significant accounts receivable balances. In
December 2005, the Company acquired BISNH. 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 additional consolidation is probable. 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
Harsco Corporation 2006 Annual Report 21
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 is developing strategies to mitigate this increased concentration of
credit risk.
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, or 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 2006, 2005 and 2004, energy costs have
approximated 4.0%, 3.6% 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 are affected by changing purchase prices of steel and other
materials and commodities. Beginning in 2004, the price paid for steel and certain other commodities increased
significantly compared with prior years. Although these costs moderated in 2005, such costs increased again during
2006 on a comparative basis with 2005. 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
impacted. Additionally, decreased availability of steel or other materials, such as carbon fiber used to manufacture
filament-wound composite cylinders, 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. The Company acquired Excell Materials (“Excell”) in
February 2007. Certain services performed by Excell result in the recovery, processing and sale of stainless steel
scrap to its customers. The selling price of the scrap material is market-based and varies based upon the current fair
value of its components (predominantly nickel). Therefore, the revenue amounts recorded from the sale of such scrap
material vary based upon the fair value of the commodity components being sold. The Company intends to execute
hedging instruments to help reduce the volatility of the revenue from the sale of the scrap 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, 2006 and 2005 include an accrual of $3.8 million and $2.8 million,
respectively, for environmental matters. The amounts charged against pre-tax earnings related to environmental
matters totaled $2.2 million, $1.5 million and $2.1 million for the years ended December 31, 2006, 2005 and 2004,
respectively. The liability for future remediation costs is evaluated on a quarterly basis. Actual costs to be incurred at
22 Harsco Corporation 2006 Annual Report
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
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, 2006, the Company was in compliance with these covenants with a debt
to capital ratio of 48.1%, and a net worth of $1.15 billion. The Company had $395.3 million in outstanding
indebtedness containing these covenants at December 31, 2006.
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, 2006 and 2005, the Company had
recorded liabilities of $103.4 million and $102.3 million, respectively, related to both asserted and unasserted
insurance claims. Included in the balance at December 31, 2006 and 2005 were $18.9 million and $25.2 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 third and fourth quarters (periods ending
September 30 and December 31). 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, 2006 was $1.06 billion. Of this amount, approximately 47.7% had
variable rates of interest and 52.3% had fixed rates of interest. The weighted average interest rate of total debt was
approximately 5.7%. At current debt levels, a one-percentage increase/decrease in variable interest rates would
increase/decrease interest expense by approximately $5.1 million per year.
The future financial impact on the Company associated with the above risks cannot be estimated.
Item 1B. Unresolved Staff Comments
None.
Harsco Corporation 2006 Annual Report 23
Item 2. Properties
Information as to the principal plants owned and operated by the Company is summarized in the following table:
Location
Principal Products
Access Services Segment
Marion, Ohio
Dosthill, United Kingdom
Access Equipment Maintenance
Access Equipment Maintenance
Engineered Products and Services (“all other”) Category
Drakesboro, Kentucky
Gary, Indiana
Moundsville, West Virginia
Tampa, Florida
Brendale, Australia
Fairmont, Minnesota
Ludington, Michigan
West Columbia, South Carolina
Channelview, Texas
Leeds, Alabama
Queretaro, Mexico
East Stroudsburg, Pennsylvania
Catoosa, Oklahoma
Gas Technologies Segment
Niagara Falls, New York
Washington, Pennsylvania
Bloomfield, Iowa
Fremont, Ohio
Jesup, Georgia
West Jordan, Utah
Harrisburg, Pennsylvania
Huntsville, Alabama
Beijing, China
Jesup, Georgia
Kosice, Slovakia
Shah Alam, Malaysia
Theodore, Alabama
Roofing Granules/Abrasives
Roofing Granules/Abrasives
Roofing Granules/Abrasives
Roofing Granules/Abrasives
Rail Maintenance Equipment
Rail Maintenance Equipment
Rail Maintenance Equipment
Rail Maintenance Equipment
Industrial Grating Products
Industrial Grating Products
Industrial Grating Products
Process Equipment
Heat Exchangers
Valves
Valves
Propane Tanks
Propane Tanks
Propane Tanks
Propane Tanks
High Pressure Cylinders
High Pressure Cylinders
Cryogenic Storage Vessels
Cryogenic Storage Vessels
Cryogenic Storage Vessels
Cryogenic Storage Vessels
Cryogenic Storage Vessels
The Company also operates the following plants which are leased:
Location
Access Services Segment
DeLimiet, Netherlands
Ratingen, Germany
Principal Products
Access Equipment Maintenance
Access Equipment Maintenance
24 Harsco Corporation 2006 Annual Report
Location
Principal Products
Engineered Products and Services (“all other”) Category
Memphis, Tennessee
Eastwood, United Kingdom
Tulsa, Oklahoma
Garrett, Indiana
Catoosa, Oklahoma
Sapulpa, Oklahoma
Gas Technologies Segment
Cleveland, Ohio
Pomona, California
Roofing Granules/Abrasives
Rail Maintenance Equipment
Industrial Grating Products
Industrial Grating Products
Heat Exchangers
Heat Exchangers
Brass Castings
Composite Cylinders
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.
Item 3. Legal Proceedings
Information regarding legal proceedings is included in Note 10, Commitments and Contingencies, to the Consolidated
Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data.”
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters that were submitted to a vote of security holders, through the solicitation of proxies or
otherwise, during the fourth quarter of the year covered by this Report.
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 27, 2007, are the executive officers (this excludes four 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. D. C. Hathaway, S. D. Fazzolari, G. D. H. Butler,
M. E. Kimmel, S. J. Schnoor and R. C. Neuffer were elected to their respective offices effective April 25, 2006. All
terms expire on April 25, 2007. There are no family relationships between any of the executive officers.
Name
Age
Principal Occupation or Employment
Executive Officers:
D. C. Hathaway
62
Chairman and Chief Executive Officer of the Corporation since January 24, 2006
and from January 1, 1998 to July 31, 2000. Served as Chairman, President and
Chief Executive Officer from April 1, 1994 to December 31, 1997 and from July
31, 2000 to January 23, 2006 and as 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.
Harsco Corporation 2006 Annual Report 25
Name
Age
Principal Occupation or Employment
S. D. Fazzolari
54
G. D. H. Butler
60
M. E. Kimmel
47
S. J. Schnoor
53
R. C. Neuffer
64
President, Chief Financial Officer and Treasurer of the Corporation effective
January 24, 2006 and Director since January 2002. Served as Senior Vice
President, Chief Financial Officer and Treasurer from August 24, 1999 to January
23, 2006 and as Senior Vice President and Chief Financial Officer from January
1998 to August 1999. Served as Vice President and Controller from January
1994 to December 1997 and as Controller from January 1993 to January 1994.
Previously served as Director of Auditing from 1985 to 1993 and served in various
auditing positions from 1980 to 1985.
Senior Vice President-Operations of the Corporation effective September 26,
2000 and Director since January 2002. Concurrently serves as President of the
MultiServ and SGB Group Divisions. From September 2000 through December
2003, he was President of the Heckett MultiServ International and SGB Group
Divisions. Was President of the Heckett MultiServ-East Division from July 1,
1994 to September 26, 2000. Served as Managing Director - Eastern Region of
the Heckett MultiServ Division from January 1, 1994 to June 30, 1994. Served in
various officer positions within MultiServ International, N. V. prior to 1994 and
prior to the Company’s acquisition of that corporation in August 1993.
General Counsel and Corporate Secretary effective January 1, 2004. Served as
Corporate Secretary and Assistant General Counsel from May 1, 2003 to
December 31, 2003. Held various legal positions within the Corporation since he
joined the Company in August 2001. Prior to joining Harsco, he was Vice
President, Administration and General Counsel, New World Pasta Company from
January 1, 1999 to July 2001. Before joining New World Pasta, Mr. Kimmel spent
approximately 12 years in various legal positions with Hershey Foods
Corporation.
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. Prior to joining
Harsco, he served in various auditing positions for Coopers & Lybrand from
September 1985 to April 1988. Mr. Schnoor is a Certified Public Accountant.
President of the Engineered Products and Services business group since his
appointment on January 24, 2006. Previously, he led the Patterson-Kelley, IKG
Industries and Air-X-Changers units as Vice President and General Manager
since 2004. In 2003, he was Vice President and General Manager of IKG
Industries and Patterson-Kelley. Between 1997 and 2002, he was Vice President
and General Manager of Patterson-Kelley. Mr. Neuffer joined Harsco in 1991.
26 Harsco Corporation 2006 Annual Report
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Harsco Corporation common stock is listed on the New York Exchange, and also trades on the Boston and
Philadelphia Exchanges under the symbol HSC. At the end of 2006, there were 42,018,680 shares outstanding. In
2006, the Company’s common stock traded in a range of $67.52 to $89.70 and closed at $76.10 at year-end. At
December 31, 2006 there were approximately 20,000 stockholders. There are no significant limitations on the
payment of dividends included in the Company’s loan agreements. For additional information regarding Harsco
common stock market price and dividends declared, see Dividend Action under Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and the Common Stock Price and Dividend
Information under Part II, Item 8, "Financial Statements and Supplementary Data.” For additional information on the
Company’s equity compensation plans see Part III, Item 11, “Executive Compensation.”
(c). Issuer Purchases of Equity Securities
Period
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
October 1, 2006 – October 31, 2006
November 1, 2006 – November 30, 2006
December 1, 2006 – December 31, 2006
Total
-
-
-
-
-
-
-
-
-
-
-
-
1,000,000
1,000,000
1,000,000
The Company’s share repurchase program was extended by the Board of Directors in November 2006. The program
authorizes the repurchase of up to 1,000,000 shares of the Company’s common stock and expires January 31, 2008.
After the close of business on March 26, 2007, this authorization will be 2,000,000 shares as a result of the stock split
approved by the Board of Directors in January 2007.
Harsco Corporation 2006 Annual Report 27
Item 6. Selected Financial Data
Five-Year Statistical Summary
(In thousands, except per share, employee information
and percentages)
Income Statement Information
Revenues from continuing operations
Income from continuing operations
Income (loss) from discontinued operations
Net income
Financial Position and Cash Flow Information
Working capital
Total assets
Long-term debt
Total debt
Depreciation and amortization
Capital expenditures
Cash provided by operating activities
Cash used by investing activities
Cash provided (used) by financing activities
Ratios
Return on sales(b)
Return on average equity(c)
Current ratio
Total debt to total capital(d)
Per Share Information
Basic - Income from continuing operations
- Income from discontinued operations
- Net income
Diluted - Income from continuing operations
- Income from discontinued operations
- Net income
Book value
Cash dividends declared
Other Information
Diluted average number of shares outstanding
Number of employees
Backlog from continuing operations (f)
2006
2005 (a)
2004
2003
2002
$ 3,423,293
196,509
(111)
196,398
$ 2,766,210
156,750
(93)
156,657
$ 2,502,059
113,540
7,671
121,211
$ 2,118,516
86,999
5,218
92,217
$ 1,976,732
88,410
1,696
90,106
$
320,847
3,326,423
864,817
1,063,021
252,982
340,173
409,239
(359,455)
(84,196)
$
352,620
2,975,804
905,859
1,009,888
198,065
290,239
315,279
(645,185)
369,325
$
346,768
2,389,756
594,747
625,809
184,371
204,235
270,465
(209,602)
(56,512)
$
269,276
2,138,035
584,425
613,531
168,935
143,824
262,788
(144,791)
(125,501)
$
228,552
1,999,297
605,613
639,670
155,661
114,340
253,753
(53,929)
(205,480)
5.7%
18.1%
1.4:1
48.1%
4.68
-
4.68
4.65
-
4.65
27.28
1.330
42,215
21,500
300,998
$
$
$
$
$
$
5.7%
16.7%
1.5:1
50.4%
3.76
-
3.76
3.73
-
$
$
$
3.72 (e) $
4.5%
13.8%
1.6:1
40.6%
2.76
0.19
2.95
2.73
0.18
2.91
23.79
$
22.07
1.225
1.125
42,080
21,000
275,790
41,598
18,500
243,006
$
$
$
$
$
$
$
4.1%
12.2%
1.5:1
44.1%
4.5%
12.6%
1.5:1
49.8%
$
$
$
$
$
$
2.14
0.13
2.27
2.12
0.13
2.25
19.01
1.0625
$
$
$
$
$
2.19
0.04
2.23
2.17
0.04
2.21
15.90
1.0125
40,973
17,500
186,222
40,680
17,500
157,777
$
(a) Includes the Northern Hemisphere mill services operations of Brambles Industrial Services (BISNH) acquired December 29, 2005 (Mill Services)
and Hünnebeck Group GmbH acquired November 21, 2005 (Access Services).
(b) "Return on sales" is calculated by dividing income from continuing operations by revenues from continuing operations.
(c) "Return on average equity" is calculated by dividing income from continuing operations by quarterly weighted-average equity.
(d) "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.
(e) Does not total due to rounding.
(f) Excludes the estimated amount of long-term mill service contracts, which had estimated future revenues of $4.4 billion at December 31, 2006.
Also excludes backlog of the Access Services Segment and the roofing granules and slag abrasives business. These amounts are generally not
quantifiable due to the nature and timing of the products and services provided.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated financial statements provided under Part
II, Item 8 of this Annual Report on Form 10-K. Certain statements contained herein may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a
28 Harsco Corporation 2006 Annual Report
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 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; and (9) 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 2006 reflected the execution of the Company’s portfolio-based management
strategy of growth through selective strategic acquisitions and increased international diversity that is industrial
services focused. All of the Company’s core operating groups showed improved full-year results over the prior year.
The 2006 results were led by the Access Services and Mill Services Segments. Only the Gas Technologies Segment’s
results were below prior year. In the first quarter of 2007, the Board of Directors approved the divestiture of this
business, which is expected to occur in the second half of 2007.
The Company’s 2006 revenues were a record $3.4 billion. This was an increase of $657.1 million or 24% over 2005.
Income from continuing operations was a record $196.5 million for 2006 compared with $156.8 million in 2005, an
increase of 25%. Diluted earnings per share from continuing operations were a record $4.65 for 2006, a 25% increase
from 2005.
In addition to strong market conditions for most of the Company’s services and products, the 2006 performance
benefited from the Company’s November 21, 2005 acquisition of Hünnebeck Group GmbH (“Hünnebeck”) and the
December 29, 2005 acquisition of the Northern Hemisphere steel mill services of Brambles Industrial Services
(“BISNH”). Both of these acquisitions performed well in 2006. Revenues in 2006 were reduced by the sale of the
Company’s U.K.-based Youngman manufacturing operation on October 1, 2005. The net effect of business
acquisitions and divestitures increased revenues by $405.2 million in 2006.
During 2006, the Company had record net cash provided by operating activities of $409.2 million, a 30% increase over
the $315.3 million achieved in 2005. The Company expects strong cash flows from operating activities in 2007,
exceeding the record achieved in 2006. 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 2006 demonstrate the
balance and geographic diversity of the Company’s operations. The Company’s Mill Services and Access Services
Segments, as well as the Engineered Products and Services (“all other”) Category delivered improved results. This
operating balance and geographic diversity, as well as growth opportunities in the Company’s core services platforms,
such as the February 2007 acquisition of Excell Materials, provide a broad foundation for future growth and a hedge
against normal changes in economic and industrial cycles.
Harsco Corporation 2006 Annual Report 29
Segment Overview
Mill Services Segment revenues in 2006 were $1.4 billion compared with $1.1 billion in 2005, a 29% increase.
Operating income increased by 35% to $147.8 million, from $109.6 million in 2005. Operating margins for this
Segment increased by 50 basis points to 10.8% from 10.3% in 2005. The increase in operating margins was due to
improved operating performance at several locations, principally due to the Company’s ongoing cost reduction
program. The overall effect of acquisitions increased revenues for the Segment by $219.0 million in 2006, and BISNH
was accretive in 2006. This Segment accounted for 40% of the Company’s revenues and 41% of the operating
income for 2006.
The Access Services Segment’s revenues in 2006 were $1,080.9 million compared with $788.8 million in 2005, a 37%
increase. Operating income increased by 61% to $120.4 million, from $74.7 million in 2005. Operating margins for the
Segment improved by 160 basis points to 11.1% from 9.5% in 2005. These improvements were broad-based, and
were led by the North American and European operations, including Hünnebeck. The net effect of business
acquisitions and divestitures increased revenues for this Segment by $186.2 million in 2006, mostly due to Hünnebeck.
This Segment accounted for 31% of the Company’s revenues and 34% of the operating income for 2006.
The Engineered Products and Services (“all other”) Category’s revenues in 2006 were $578.2 million compared with
$546.9 million in 2005, a 6% increase. Operating income increased by 11% to $77.5 million, from $69.7 million in
2005. Four of the five businesses in this Category contributed higher revenues in 2006 compared with 2005, and three
of the businesses contributed higher operating income. The air-cooled heat exchangers business continued to benefit
from strong energy market demand due to increased natural gas drilling and transmission. The industrial grating
business again posted improved results due to strong end-markets in energy and non-residential construction. The
roofing granules and abrasives business and the boiler and process equipment business contributed solid
performances in 2006, consistent with 2005. The railway track maintenance services and equipment business
continued the shift towards contract services, but operating income was negatively impacted by increased operating
expenses, mostly from the effects of a rail grinder accident, increased raw material costs and higher sub-contractor
equipment and labor costs. However, the overall strong performance by the businesses in this group helped to
moderate the rising commodity costs experienced throughout this Category in 2006. This Category accounted for 17%
of the Company’s revenue and 21% of the operating income for 2006.
The Gas Technologies Segment’s revenues in 2006 were $397.7 million compared with $370.2 million in 2005, a 7%
increase. Operating income decreased by 21% to $14.2 million, from $17.9 million in 2005. Operating income was
negatively impacted by restructuring costs associated with strategic initiatives including exiting an underperforming
product line, as well as higher commodity costs for brass and steel. These increased costs reduced operating margins
for this Segment by 120 basis points from 4.8% in 2005 to 3.6% in 2006. This Segment accounted for 12% of the
Company’s revenues and 4% of the operating income for 2006.
The positive effect of foreign currency translation increased 2006 consolidated revenues by $35.3 million and pre-tax
income by $2.4 million when compared with 2005.
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 worldwide steel mill production and capacity utilization; non-residential
and commercial construction and industrial maintenance activities; industrial production volume; and the general
business trend towards the outsourcing of services. The overall outlook for 2007 continues to be positive for these
business drivers.
The Company’s Mill Services Segment expects to continue to benefit from consistent levels of global steel production
at mills served by the Company, new contract signings and continued accretion from the December 2005 acquisition of
BISNH. However, the Company may also experience increased operating costs that could have a negative impact on
operating margins, to the extent these costs cannot be passed to customers.
Both the domestic and international Access Services activity remains strong. Although the sale of the Youngman light-
access manufacturing business in late 2005 modestly affected 2006 revenues, operating income in 2006 for the
Segment was a record and is expected to continue to benefit from the strong performance of Hünnebeck; increased
non-residential construction spending and industrial maintenance activity in the Company’s major markets; continued
development of new markets; further market penetration from new products; product cross-selling opportunities among
the markets served by the three Access Services businesses; and cost reduction opportunities through consolidated
procurement and continuous process improvement initiatives.
30 Harsco Corporation 2006 Annual Report
The outlook for the Engineered Products and Services (“all other”) Category remains positive for 2007. Income and
margins in the Company’s railway track maintenance services and equipment business are expected to improve in the
long term from the shift towards contract services. The air-cooled heat exchangers business is expected to continue to
benefit from strong end-market demand due to increased natural gas drilling and transmission. The boiler and process
equipment business and the industrial grating products business are expected to post another year of solid, stable
results in 2007. The roofing granules and abrasives business is expected to continue to perform consistently well
long-term, although increased operating costs could reduce operating margins.
In January 2007, the Company announced its intention to divest the Gas Technologies business. This decision is
consistent with the Company’s overall strategic focus on global industrial services businesses. The divestiture is
expected to be completed in the second half of 2007.
The stable or improved market conditions for most of the Company’s services and products, the significant
investments made recently for acquisitions, such as the February 2007 acquisition of Excell Materials, and other
growth-related capital expenditures provide the base for achieving the Company’s stated objective for growth in diluted
earnings per share from continuing operations and net cash provided by operating activities for 2007. The record
performance and cash flow achieved in 2006 and the executed strategic actions provide a solid foundation towards
achieving these goals.
Revenues by Region
Total Revenues
Twelve Months Ended
December 31
(Dollars in millions)
Europe
North America
Latin America
Middle East and Africa
Asia/Pacific
Total
2006
$ 1,593.1
1,364.0
165.4
159.5
141.2
$ 3,423.2
2005
$ 1,109.1
1,219.8
149.2
153.7
134.4
$ 2,766.2
Percentage Growth From
2005 to 2006
Currency
2.4%
0.3
5.6
(2.2)
(0.3)
1.3%
Volume
41.2%
11.5
5.3
6.0
5.4
22.5%
Total
43.6%
11.8
10.9
3.8
5.1
23.8%
2006 Highlights
The following significant items affected the Company overall during 2006 in comparison with 2005:
Company Wide:
• Strong worldwide economic activity, as well as the accretive performance of the Hünnebeck and BISNH
acquisitions, benefited the Company in 2006. This included increased access equipment services, especially in
North America and Europe; net increased volume and new business in the Mill Services Segment; and increased
demand for air-cooled heat exchangers and industrial grating products.
• As expected, during 2006, the Company experienced higher fuel and energy-related costs, as well as higher
commodity costs for certain manufacturing businesses. To the extent that such costs cannot be passed to
customers in the future, operating income may be adversely affected.
• Total pension expense for 2006 increased $5.8 million compared with 2005. Defined contribution and multi-
employer plan expenses for 2006 increased approximately $7.4 million from 2005 due to increased volume in the
Mill Services and Access Services Segments. This was partially offset by decreased defined benefit pension
expense of approximately $1.6 million due principally to improved returns on plan assets in 2005 as well as the
Company’s cash contributions to the plans’ assets. The Company is currently taking additional actions designed
to further mitigate pension expense volatility. This is more fully discussed in the Outlook, Trends and Strategies
section.
• During 2006, international sales and operating income were 62% and 71%, respectively, of total sales and
operating income. This compares with 2005 levels of 58% of sales and 67% of operating income. The
international percentages have increased from 2005 to 2006 principally as a result of the Hünnebeck and BISNH
acquisitions.
Harsco Corporation 2006 Annual Report 31
Mill Services Segment:
(Dollars in millions)
Revenues
Operating income
Operating margin percent
2006
2005
$ 1,366.5
$ 1,060.4
147.8
10.8%
109.6
10.3%
Mill Services Segment – Significant Effects on Revenues:
Revenues – 2005
Acquisitions – (principally BISNH)
Increased volume and new business
Impact of foreign currency translation
Revenues – 2006
(In millions)
$ 1,060.4
219.0
68.7
18.4
$ 1,366.5
Mill Services Segment – Significant Effects on Operating Income:
• Operating income for 2006 increased by $35.3 million (excluding the effect of foreign currency translation), as
a result of the BISNH acquisition and increased volumes and net new business, particularly in the United
States, Europe and Latin America, partially offset by increased operating costs (as noted below).
• Compared with 2005, the Segment’s operating income and margins in 2006 were negatively impacted by
increased fuel and energy-related costs (excluding increased costs due to acquisitions) of approximately
$10 million. A portion of this increase was growth-related. Despite the increased energy costs, margins
improved in 2006 due to continuous process improvement activities and stringent cost controls.
• Foreign currency translation in 2006 increased operating income for this Segment by $2.8 million, compared
with 2005.
Access Services Segment:
(Dollars in millions)
Revenues
Operating income
Operating margin percent
2006
2005
$ 1,080.9
$ 788.8
120.4
74.7
11.1%
9.5%
Access Services Segment – Significant Effects on Revenues:
Revenues – 2005
Net effect of acquisitions and divestitures ((Hünnebeck and Cleton) offset by the
Youngman light-access manufacturing unit divestiture)
Increased volume and new business
Impact of foreign currency translation
Other
Revenues – 2006
(In millions)
$ 788.8
186.2
91.2
14.8
(0.1)
$1,080.9
Access Services Segment – Significant Effects on Operating Income:
• The net effect of acquisitions and divestitures had a positive effect on 2006 operating income of $25.8 million,
•
with the Hünnebeck business performing well.
In 2006, there was a continued strengthening in the North American non-residential construction markets that
started in the latter half of 2004. This had a positive effect on volume (particularly equipment rentals) which
caused overall margins and operating income in North America to improve. Equipment rentals, particularly in
the construction sector, provide the highest margins for this Segment.
32 Harsco Corporation 2006 Annual Report
• The international access services business continued to improve due to increased non-residential construction
spending and industrial maintenance activity in the Company’s major markets.
• Operating income and margins were negatively impacted in 2006 due to lower gains on the sale of significant
assets in 2006 of $2.5 million, compared with asset gains of $5.1 million in 2005.
• Foreign currency translation in 2006 increased operating income for this Segment by $1.5 million compared
with 2005.
Engineered Products and Services (“all other”) Category:
(Dollars in millions)
Revenues
Operating income
Operating margin percent
2006
2005
$ 578.2
$ 546.9
77.5
13.4%
69.7
12.7%
Engineered Products and Services (“all other”) Category –
Significant Effects on Revenues:
Revenues – 2005
Air-cooled heat exchangers
Industrial grating products
Boiler and process equipment
Roofing granules and abrasives
Railway track maintenance services and equipment
Impact of foreign currency translation
Other
Revenues – 2006
(In millions)
$ 546.9
32.5
8.4
5.4
0.9
(17.0)
0.9
0.2
$ 578.2
Engineered Products and Services (“all other”) Category – Significant Effects on Operating Income:
• Operating income for the air-cooled heat exchangers business improved in 2006 due to increased volume
resulting from an improved natural gas market.
• The boiler and process equipment business delivered improved results in 2006 due to increased revenues
from the new-generation MACH boilers, Thermific boilers and process equipment.
• The increase in 2006 operating income for the industrial grating products business was due principally to
higher pricing and an improved product mix, partially offset by higher raw material costs.
• Higher pricing resulting from the pass-through of higher energy costs for roofing granules and abrasives again
sustained profitable results for that business in 2006, approximating 2005’s operating income.
• Operating income for the railway track maintenance services and equipment business was lower in 2006
compared with 2005 due to increased operating expenses, mostly from the effects of a rail grinder accident,
increased raw material costs and higher sub-contractor equipment and labor costs, partially offset by favorable
equipment sales mix and increased repair parts volume.
• The impact of foreign currency translation in 2006 did not have a material impact on operating income for this
Category when compared with the 2005.
Gas Technologies Segment:
(Dollars in millions)
Revenues
Operating income
Operating margin percent
2006
2005
$ 397.7
$ 370.2
14.2
3.6%
17.9
4.8%
Harsco Corporation 2006 Annual Report 33
Gas Technologies Segment – Significant Effects on Revenues:
Revenues – 2005
Increased demand for cryogenics equipment and industrial cylinders
Increased demand for composite-wrapped cylinders and certain valves
Decreased sales of propane tanks
Impact of foreign currency translation
Other
Revenues – 2006
(In millions)
$ 370.2
23.5
11.9
(8.8)
1.2
(0.3)
$ 397.7
Gas Technologies Segment – Significant Impacts on Operating Income:
• Operational improvements and the effect of increased sales were offset by increased brass costs, higher
insurance and restructuring costs (principally in the third quarter) associated with strategic initiatives in the
valves business in 2006 compared with 2005. A strategic action plan has been implemented to improve the
results of the valves business. Cost savings as a result of this plan helped decrease the impact of significantly
increased brass costs in 2006. In addition, certain product lines have been rationalized which resulted in
significant restructuring costs incurred in 2006.
• The international businesses, principally in Europe, contributed to the improved performance of the cryogenics
business during 2006 compared with 2005.
• Despite higher demand for industrial cylinders, operating income decreased from 2005 due mainly to the effect
of equipment repairs and maintenance, product mix and higher commodity and energy-related costs.
• Operating income decreased for propane tanks in 2006, due to decreased demand, as well as increased
commodity costs. The negative effect of these items was partially offset by a favorable product mix and
process improvement initiatives.
• Operating income increased during 2006 for composite-wrapped cylinders due to increased sales and a
favorable product mix, partially offset by higher raw material costs.
• Foreign currency translation in 2006 decreased operating income for this Segment by $0.9 million.
Outlook, Trends and Strategies
Looking to 2007 and beyond, the following significant items, trends and strategies are expected to affect the Company:
Company Wide:
• The Company will continue its focus on expanding the industrial services businesses, with a particular emphasis
on growing the Mill Services Segment, the Access Services Segment and other specialized services. Growth is
expected to be achieved through the provision of additional services to existing customers, new contracts in both
developed and emerging markets and strategic acquisitions, such as the February 2007 acquisition of Excell
Materials, Inc. Additionally, new higher-margin service opportunities in railway services will be pursued globally.
In January 2007, the Company announced its intention to divest the Gas Technologies business. This decision is
consistent with the Company’s overall strategic focus on industrial services businesses.
•
• The Company will continue to invest in strategic acquisitions and growth capital investments; however,
management will be very selective in its capital investments, choosing those with the highest Economic Value
Added (EVA®).
• A greater focus on corporate-wide expansion into emerging economies is expected in the coming years. More
specifically, within the next three to five years, a focused strategy of the Company is to approximately double its
presence in the Latin American, Asia Pacific, Middle East and Africa, and Eastern European markets to
approximately 30% of total revenues.
• The continued growth of the Chinese steel industry, as well as other Asian emerging economies, could impact the
Company in several ways. Increased steel mill production in China, and in other Asian countries, may provide
additional service opportunities for the Mill Services Segment. However, increased Asian steel exports could
result in lower steel production in other parts of the world, affecting the Company’s customer base. Additionally,
continued increased Chinese economic activity may result in increased commodity costs in the future, which may
adversely affect the Company’s manufacturing businesses. The potential impact of these risks is currently
unknown.
Increases in energy and commodity costs (e.g., fuel, natural gas, steel, brass, aluminum, etc.) and worldwide
demand for these commodities could have an adverse effect on the Company’s raw material costs and ability to
obtain the necessary raw materials. Fuel and energy costs increased approximately $15 million in 2006 compared
•
34 Harsco Corporation 2006 Annual Report
with 2005 (excluding increased costs due to acquisitions). A portion of this increase was growth-related. Should
cost increases continue, it could result in reduced operating income for certain products to the extent that such
costs cannot be passed on to customers. The effect of any Middle East armed hostilities on the cost of fuel and
commodities is currently unknown, but it could have a significant effect.
• The armed hostilities in the Middle East could also have a significant effect on the Company’s operations in the
region. The potential impact of this risk is currently unknown. This exposure is further discussed in Part I, Item
1A, “Risk Factors.”
• Foreign currency translation had an overall favorable effect on the Company’s sales, operating income and
Stockholders’ equity as a result of translation adjustments during 2006. If the U.S. dollar strengthens, particularly
in relationship to the euro or British pound sterling, the impact on the Company would generally be negative in
terms of reduced sales, income and Stockholders’ equity.
• The Company expects strong cash flow from operating activities in 2007 exceeding the record of $409 million
achieved in 2006. This will help support the Company’s growth initiatives.
• Controllable cost reductions and continuous process improvement initiatives across the Company are targeted to
further enhance margins for most businesses. These initiatives include improved supply-chain management;
additional outsourcing in the manufacturing businesses; and an added emphasis on corporate-wide procurement
initiatives. The Company will use its increased size and leverage due to recent acquisitions to reduce vendor
costs and focus on additional opportunities for cost reductions via procurement in low-cost countries such as China
and India.
• Total pension expense (defined benefit, defined contribution and multi-employer) for 2007 is expected to
approximate or be slightly higher than the 2006 level. Defined benefit pension expense is expected to decline in
2007 due to the significant level of cash contributions, including voluntary cash contributions (approximately $10.6
million during 2006 and $16.9 million during 2005, mostly to the U.K. plan, which will have a positive effect on
future years’ pension expense), to the defined benefit pension plans as well as the higher than expected returns in
2006 on the plans’ assets. The Company’s pension task force continues to evaluate alternative strategies to
further mitigate overall pension expense, including 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 should mitigate future volatility and expense. On a comparative basis, total pension expense during
2006 was $5.8 million higher than 2005, due principally to increased defined contribution and multi-employer
pension expense resulting from increased volume in the Access Services and Mill Services Segments.
• Changes in worldwide interest rates, particularly in the U.S. and Europe, could have a significant effect on the
Company’s overall interest expense, as approximately 48% of the Company’s borrowings are at variable interest
rates as of December 31, 2006 (in comparison to approximately 50% at December 31, 2005). The Company
manages the mix of fixed rate and floating rate debt to preserve adequate funding flexibility as well as control the
effect of interest rate changes on consolidated interest expense.
Mill Services Segment:
• To maintain pricing levels, a more disciplined steel industry has been adjusting production levels to bring
inventories in-line with current demand. Based on current market conditions and industry reports, the Company
expects global steel production to remain stable in 2007, which would generally have a favorable effect on this
Segment’s revenues.
• Further consolidation in the global steel industry is probable. Should additional transactions occur involving some
of the steel industry’s larger companies that are customers of the Company, it would result in an increase in
concentration of revenues and credit risk for the Company. If a large customer were to experience financial
difficulty, or file for bankruptcy protection, it could adversely impact the Company’s income, cash flows and asset
valuations. As part of its credit risk management practices, the Company closely monitors the credit standing and
accounts receivable position of its customer base. Further consolidation may also increase pricing pressure on the
Company and the competitive risk of services contracts which are up for renewal. Conversely, such consolidation
may provide additional service opportunities for the Company as the Company believes it is well-positioned
competitively.
• Energy-related costs increased approximately $10 million during 2006 compared with 2005 (excluding increased
costs due to acquisitions). Some of these costs were passed on to customers in the form of selling price
increases. Given the volatility of such costs, the future effect on the Company cannot be quantified.
• The Company has been placing significant emphasis on improving operating margins of this Segment. Margin
improvements are most likely to be achieved through internal efforts such as global procurement initiatives;
process improvement programs; maintenance best practices programs; and continued execution of the Company’s
reorganization plan.
Harsco Corporation 2006 Annual Report 35
Access Services Segment:
• Both the international and domestic Access Services businesses experienced buoyant markets during 2006 and
that is expected to continue in 2007. Specifically, international and especially North American non-residential
construction activity continues at historically high volume levels. Additionally, new product line additions continue
to benefit growth in North America.
Engineered Products and Services (“all other”) Category:
•
International demand for the railway track maintenance services and equipment business’s products and services
is expected to be strong in the long term. In addition, increased volume of higher-margin contract services and
manufacturing process improvements and efficiencies are expected to improve margins on a long-term basis.
Additionally, higher-margin international equipment sales will continue to be pursued by this business.
• Worldwide supply and demand for steel could have an adverse impact on raw material costs and the ability to
obtain the necessary raw materials for most businesses in this Category. The Company has implemented certain
strategies and plans to help ensure continued product supply to our customers and mitigate the potentially
negative impact that rising steel prices could have on operating income.
• The roofing granules and abrasives business is expected to continue to perform well long-term, although increased
energy costs could reduce operating margins. This business is pursuing the use of more energy-efficient
equipment to help mitigate the increased energy-related costs.
• Due to a strong natural gas market and additional North American opportunities, demand for air-cooled heat
exchangers is expected to remain strong for 2007.
Gas Technologies Segment:
•
In January 2007, the Company announced its intention to divest the Gas Technologies business. This decision is
consistent with the Company’s overall strategic focus on industrial services businesses.
Results of Operations for 2006, 2005 and 2004
(Dollars are in millions, except per share information and percentages)
Revenues from continuing operations
Cost of services and products sold
Selling, general and administrative expenses
Other expenses
Operating income from continuing operations
Interest expense
Income tax expense from continuing operations
Income from continuing operations
Income/(loss) from discontinued operations
Net income
Diluted earnings per common share from continuing operations
Diluted earnings per common share
Effective income tax rate for continuing operations
Consolidated effective income tax rate
Comparative Analysis of Consolidated Results
Revenues
2006
2005
2004
$ 3,423.3
$ 2,766.2
$ 2,502.1
2,547.6
2,099.4
1,916.4
507.4
6.9
358.5
60.5
97.5
196.5
(0.1)
196.4
4.65
4.65
32.3%
32.3%
393.2
2.0
268.9
41.9
64.8
156.8
(0.1)
156.7
3.73
3.72
28.1%
28.1%
368.4
4.9
209.8
41.1
49.0
113.5
7.7
121.2
2.73
2.91
28.6%
29.1%
2006 vs. 2005
Revenues for 2006 increased $657.1 million or 24% from 2005, to a record level. This increase was attributable to the
following significant items:
36 Harsco Corporation 2006 Annual Report
In millions
$ 405.2
Net effect of business acquisitions and divestitures. Increased revenues of $219.0 million and
$186.2 million in the Mill Services and Access Services Segments, respectively.
Change in Revenues 2006 vs. 2005
91.2
Net increased revenues in the Access Services Segment due principally to strong non-residential
construction markets in North America and the continued strength of the international
business, particularly in Europe (excluding the net effect of acquisitions and divestitures).
68.7
Net increased volume, new contracts and sales price changes in the Mill Services Segment,
particularly in Europe and the U.S. (excluding acquisitions).
35.3
Effect of foreign currency translation.
32.5
Increased revenues of the air-cooled heat exchangers business due to a strong natural gas market
and increased prices.
26.3
Net increased revenues in the Gas Technologies Segment due principally to demand for
cryogenics equipment, certain valves and industrial cylinders, partially offset by decreased
demand for propane tanks.
8.4
Increased revenues of the industrial grating products business due to increased demand and, to a
lesser extent, increased prices and a more favorable product mix.
(17.0)
Net decreased revenues in the railway track maintenance services and equipment business due to
decreased equipment sales, partially offset by increased contract services as well as repair
part sales in the U.K. Equipment sales declined due to a large order shipped to China in 2005
which did not recur in 2006.
6.5
Other (minor changes across the various units not already mentioned).
$ 657.1
Total Change in Revenues 2006 vs. 2005
2005 vs. 2004
Revenues for 2005 increased $264.1 million or 11% from 2004. This increase was attributable to the following
significant items:
In millions
$ 72.5
Change in Revenues 2005 vs. 2004
Net increased revenues in the Access Services Segment due principally to improved markets in
the North America and the strength of the international business, particularly in the Middle East
and Europe (excluding the net effect of acquisitions and divestitures).
41.9
Net increased volume, new contracts and price changes in the Mill Services Segment (excluding
acquisitions).
38.0
Net increased revenues in the railway track maintenance services and equipment business due to
increased contract services (principally in the U.K.), rail equipment sales (primarily to
international customers) and repair part sales.
32.2
Increased revenues of the air-cooled heat exchangers business due to an improved natural gas
market.
31.0
Net increased revenues in the Gas Technologies Segment due principally to improved market
conditions for industrial cylinders, cryogenics equipment and composite-wrapped cylinders,
partially offset by slightly decreased demand for propane tanks. The decrease in propane tank
sales was due to customers accelerating purchases in 2004 to avoid anticipated price
increases due to commodity cost inflation.
16.5
Net effect of business acquisitions and divestitures. Increased revenues of $4.0 million and $12.5
million in the Mill Services and Access Services Segments, respectively.
14.8
Effect of foreign currency translation.
12.4
Increased revenues of the industrial grating products business due to increased demand (partially
due to the effects of Hurricanes Katrina and Rita) and, to a lesser extent, increased prices and
a more favorable product mix.
4.8
Other (minor changes across the various units not already mentioned).
$ 264.1
Total Change in Revenues 2005 vs. 2004
Harsco Corporation 2006 Annual Report 37
Cost of Services and Products Sold
2006 vs. 2005
Cost of services and products sold for 2006 increased $448.2 million or 21% from 2005, slightly lower than the 24%
increase in revenues. This increase was attributable to the following significant items:
In millions
$ 281.8
Change in Cost of Services and Products Sold 2006 vs. 2005
Net effect of business acquisitions and divestitures.
159.6
Increased costs due to increased revenues (exclusive of the effect of foreign currency translation
and business acquisitions, and including the impact of increased commodity and energy costs
included in selling prices).
25.9
Effect of foreign currency translation.
(19.1) Other (due to product mix; stringent cost controls; process improvements; volume-related
efficiencies and minor changes across the various units not already mentioned; partially offset
by increased fuel and energy-related costs not recovered through selling prices).
$ 448.2
Total Change in Cost of Services and Products Sold 2006 vs. 2005
2005 vs. 2004
Cost of services and products sold for 2005 increased $183.0 million or 10% from 2004, slightly lower than the 11%
increase in revenues. This increase was attributable to the following significant items:
In millions
$ 177.8
Change in Cost of Services and Products Sold 2005 vs. 2004
Increased costs due to increased revenues (exclusive of the effect of foreign currency translation
and business acquisitions and including the impact of increased costs included in selling
prices).
12.7
Effect of foreign currency translation.
4.1
Net effect of business acquisitions and divestitures.
(11.6) Other (due to product mix; stringent cost controls; process improvements; and minor changes
across the various units not already mentioned; partially offset by increased fuel and energy-
related costs).
$ 183.0
Total Change in Cost of Services and Products Sold 2005 vs. 2004
Selling, General and Administrative Expenses
2006 vs. 2005
Selling, general and administrative (“SG&A”) expenses for 2006 increased $114.2 million or 29% from 2005, a higher
rate than the 24% increase in revenues. The higher relative percentage increase in SG&A expense as compared with
revenues was due principally to the effect of certain acquisitions which, by their nature, have a higher percentage of
SG&A-related costs. This increase was attributable to the following significant items:
In millions
$ 71.3
22.4
5.5
3.7
3.2
2.9
5.2
Change in Selling, General and Administrative Expenses 2006 vs. 2005
Net effect of business acquisitions and dispositions.
Increased compensation expense due to salary increases, increased headcount, higher
commissions and employee incentive plan costs due to improved performance.
Effect of foreign currency translation.
Increased space and equipment rentals, supplies, utilities and fuel costs.
Increased travel expenses.
Increased professional fees due to special projects.
Other.
$ 114.2
Total Change in Selling, General and Administrative Expenses 2006 vs. 2005
38 Harsco Corporation 2006 Annual Report
2005 vs. 2004
Selling, general and administrative expenses for 2005 increased $24.8 million or 7% from 2004, less than the 11%
increase in revenues. This increase was attributable to the following significant items:
In millions
$ 6.5
Change in Selling, General and Administrative Expenses 2005 vs. 2004
Increased employee compensation expense due to salary increases, increased payroll taxes and
employee incentive plan increases due to improved performance, partially offset by decreased
defined benefit pension expense.
5.6
3.5
1.9
1.4
1.0
0.4
4.5
Net effect of business acquisitions and dispositions.
Increased sales commission expense due to increased revenues.
Increased costs on a comparative basis due to income generated by the termination of
postretirement benefit plans in 2004 that were not repeated in 2005.
Increased travel expenses.
Increased professional fees due to special projects.
Effect of foreign currency translation.
Other (including energy-related costs and the cost of new technology projects).
$ 24.8
Total Change in Selling, General and Administrative Expenses 2005 vs. 2004
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 of $6.9 million in
2006 compared with $2.0 million in 2005 and $4.9 million in 2004.
2006 vs. 2005
Net Other Expenses for 2006 increased $4.9 million or 243% from 2005. This increase was attributable to the
following significant items:
In millions
$ 4.2
Change in Other Expenses 2006 vs. 2005
Decrease in net gains on disposals of non-core assets. This decrease was attributable principally
to $5.5 million in net gains that were realized in 2006 from the sale of non-core assets
compared with $9.7 million in 2005. The net gains for both years were principally within the
Access Services and Mill Services Segments.
3.9
Increase in impaired asset write-downs due principally to exiting an underperforming product line
of the Gas Technologies Segment.
2.3
Increase in other expenses, including costs to exit activities.
(5.5)
Decrease in employee termination benefit costs. This decrease related principally to decreased
costs in the Mill Services and Access Services Segments.
$ 4.9
Total Change in Other Expenses 2006 vs. 2005
Harsco Corporation 2006 Annual Report 39
2005 vs. 2004
Net Other Expenses for 2005 decreased $2.9 million or 59% from 2004. This decrease was attributable to the
following significant items:
In millions
(8.2)
$
Change in Other Expenses 2005 vs. 2004
Increase in net gains on disposals of non-core assets. This increase was attributable principally to
$9.7 million in net gains that were realized in 2005 from the sale of non-core assets principally
within the Access Services and Mill Services Segments, compared with $1.5 million in 2004.
5.2
Increase in employee termination benefit costs. This increase related principally to increased
costs in the Mill Services and Access Services Segments as well as the Engineered Products
and Services (“all other”) Category and the Corporate headquarters compared with 2004.
0.1
Increase in other expenses.
$
(2.9)
Total Change in Other Expenses 2005 vs. 2004
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.”
Interest Expense
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 business acquisitions made in the fourth quarter of 2005 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 $0.6 million.
2005 vs. 2004
Interest expense in 2005 was $0.9 million or 2% higher than in 2004. This was principally due to higher interest rates
on variable interest rate borrowings in the United States and, to a lesser extent, increased borrowings in November
and December 2005 to finance acquisitions. This was partially offset by approximately $0.3 million of decreased
interest expense due to the effect of foreign currency translation.
Income Tax Expense from Continuing Operations
2006 vs. 2005
The increase in 2006 of $32.8 million or 51% in the provision for income taxes from continuing operations was
primarily due to increased earnings from continuing operations for the reasons mentioned above and an increased
effective income tax rate. The effective income tax rate relating to continuing operations for 2006 was 32.3% versus
28.1% for 2005. The increase related principally to increased effective income tax rates on international earnings and
remittances. The year 2005 included a one-time benefit recorded in the fourth quarter 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.
2005 vs. 2004
The increase in 2005 of $15.7 million or 32% in the provision for income taxes from continuing operations was
primarily due to increased earnings from continuing operations for the reasons mentioned above, partially offset by a
decreased effective income tax rate. The effective income tax rate relating to continuing operations for 2005 was
28.1% versus 28.6% for 2004. The decrease related principally to reduced effective income tax rates on international
earnings and remittances, partially offset by reduced favorable settlements of tax contingencies in comparison with
2004. The differences on international earnings and remittances from 2004 to 2005 included 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.
40 Harsco Corporation 2006 Annual Report
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
2006 vs. 2005
Income from continuing operations in 2006 of $196.5 million was $39.8 million or 25% 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.
2005 vs. 2004
Income from continuing operations in 2005 of $156.8 million was $43.2 million or 38% higher than 2004. This increase
resulted from strong demand for most of the Company’s services and products (principally from the Access Services
Segment and industrial grating products) that resulted in increased revenues, as well as from stringent cost controls
and process improvements that contained selling, general and administrative expenses growth to a level below
revenue growth.
Income from Discontinued Operations
2006 vs. 2005
Income from discontinued operations for 2006 approximated the 2005 amount and was immaterial.
2005 vs. 2004
Income from discontinued operations for 2005 decreased $7.8 million or 101% from 2004. This decrease was
attributable principally to after-tax income from the one-time settlement of the Company’s Federal Excise Tax (FET)
litigation in 2004. For additional information on the FET litigation see Note 10, Commitments and Contingencies, to the
Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data,” in the
Company’s 2004 Form 10-K.
Net Income and Earnings Per Share
2006 vs. 2005
Net income of $196.4 million and diluted earnings per share of $4.65 in 2006 exceeded 2005 by $39.7 million or 25%
and $0.93 or 25%, respectively, due to increased income from continuing operations for the reasons described above.
2005 vs. 2004
Net income of $156.7 million and diluted earnings per share of $3.72 in 2005 exceeded 2004 by $35.4 million or 29%
and $0.81 or 28%, 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 history of strong operating cash flows, the Company achieved a record $409.2 million in operating cash
flow in 2006. This represents a 30% improvement over 2005’s operating cash flow of $315.3 million. In 2006, this
significant source of cash has enabled the Company to invest $340.2 million in capital expenditures (45% of which
were for revenue-growth projects); pay $54.5 million in stockholder dividends; and invest $34.3 million in business
acquisitions. These significant 2006 investments follow $290 million of capital expenditures (over 50% of which were
for revenues–growth projects); $49.9 million in stockholder dividends; and $394.5 million in business acquisitions
invested in 2005. The Company believes these investments provide a solid foundation for future revenue and
Economic Value Added (EVA®) growth.
Despite significant investment amounts in 2006, the Company’s net cash borrowings decreased by $35.7 million.
Balance sheet debt, which is affected by foreign currency translation, increased $53.1 million from December 31,
2005. However, for the same period, the debt to capital ratio declined from 50.4% to 48.1% as a result of increased
Stockholder’s Equity.
Harsco Corporation 2006 Annual Report 41
The Company’s strategic objectives for 2007 include generating record net cash provided by operating activities in
excess of the $409.2 million generated in 2006. The Company’s strategy to redeploy excess or discretionary cash in
long-term, high-renewal-rate services contracts for the Mill Services business; for growth and international
diversification in the Access Services Segment; for growth and international expansion of the recently acquired Excell
Materials; expansion of the railway track maintenance services and equipment business; and for sensible bolt-on
acquisitions in the industrial services businesses. The Company also foresees continuing its long and consistent
history of paying dividends to stockholders and to pay down debt to the extent possible.
To further enhance its portfolio of industrial services businesses and provide cash flow for strategic investments, in
January 2007, the Company’s Board of Directors approved a plan to divest the Gas Technologies Segment. The
Company estimates that the business will be sold during the second half of 2007. Proceeds from the sale of this
manufacturing business will provide financial flexibility to further invest in the Company’s services businesses and for
debt reduction.
The Company also intends to focus on improved working capital management. Specifically, accounts receivable in the
Access Services Segment and inventory levels in the manufacturing businesses will continue to be scrutinized and
challenged to improve the Company’s use of funds.
Cash Requirements
The following summarizes the Company’s expected future payments related to contractual obligations and commercial
commitments at December 31, 2006.
Contractual Obligations as of December 31, 2006 (a)
Payments Due by Period
Total
$ 185.1
Less than
1 year
$ 185.1
1-3
years
-
$
4-5
years
-
$
After 5
years
-
$
877.9
13.1
10.0
705.8
149.0
227.3
59.4
102.2
52.6
13.1
(In millions)
Short-term Debt
Long-term Debt
(including current maturities and
capital leases)
Projected interest payments on
Long-term Debt (b)
Pension and Other Post-
retirement Obligations (c)
Operating Leases
611.4
184.5
51.2
50.4
108.3
118.1
333.8
72.9
1.9
30.4
0.5
Purchase Obligations
161.4
158.5
Foreign Currency Forward
Exchange Contracts (d)
170.9
170.9
-
-
30.8
0.5
-
Total Contractual Obligations
$ 2,418.5
$ 688.6
$ 295.3
$ 907.4
$ 527.2
(a) See Note 6, Debt and Credit Agreements; Note 7, Leases; Note 8, Employee Benefit Plans; and Note 13, Financial Instruments, to the
Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data,” for additional disclosures on
short-term and long-term debt; operating leases; pensions and other postretirement benefits; and foreign currency forward exchange
contracts, respectively.
(b) The total projected interest payments on Long-term Debt are based upon borrowings, interest rates and foreign currency exchange rates
as of December 31, 2006. The interest rates on variable-rate debt and the foreign currency exchange rates are subject to changes
beyond the Company’s control and may result in actual interest expense and payments differing from the amounts projected above.
(c) Amounts represent expected benefit payments for the next 10 years.
(d) This amount represents the notional value of the foreign currency exchange contracts outstanding at December 31, 2006. Due to the
nature of these transactions, there will be offsetting cash flows to these contracts, with the difference recognized as a gain or loss in the
consolidated income statement. See Note 13, Financial Instruments, to the Consolidated Financial Statements under Part II, Item 8,
“Financial Statements and Supplementary Data.”
Off-Balance Sheet Arrangements – The following table summarizes the Company’s contingent commercial
commitments at December 31, 2006. These amounts are not included in the Company’s Consolidated Balance Sheet
42 Harsco Corporation 2006 Annual Report
since there are no current circumstances known to management indicating that the Company will be required to make
payments on these contingent obligations.
Commercial Commitments as of December 31, 2006
(In millions)
Amount of Commitment Expiration Per Period
Total
Amounts
Committed
Less
Than
1 Year
1-3
Years
4-5
Years
Over 5
Years
Indefinite
Expiration
Standby Letters of Credit
$ 95.7
$ 77.8
$ 17.9
$ -
$
-
$
-
Guarantees
Performance Bonds
Other Commercial Commitments
29.1
14.4
11.1
12.9
1.1
1.4
0.8
8.8
-
0.1
-
-
-
-
-
12.9
5.5
11.1
Total Commercial Commitments
$ 150.3
$ 99.5
$ 19.1
$ 1.4
$ 0.8
$ 29.5
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 payroll costs and related benefits; pension funding
payments; raw material purchases for the manufacturing businesses; income tax payments; interest payments;
insurance premiums and payments of self-insured casualty losses; and machinery, equipment, automobile and facility
rental payments. Other primary uses of cash include capital investments, principally in the industrial services
businesses; debt principal payments; and dividend payments. Cash will also be used for strategic or bolt-on
acquisitions as the appropriate opportunities arise.
Resources available for cash requirements – The Company has various credit facilities and commercial paper
programs available for use throughout the world. The following chart illustrates the amounts outstanding under credit
facilities and commercial paper programs and available credit as of December 31, 2006.
Harsco Corporation 2006 Annual Report 43
Summary of Credit Facilities and
Commercial Paper Programs
(In millions)
As of December 31, 2006
Outstanding
Balance
Available
Credit
Facility Limit
U.S. commercial paper program
$ 550.0 (a)
$ 263.4
$ 286.6
Euro commercial paper program
264.0
207.2
56.8
Revolving credit facility (b)
Supplement credit facility (b) (c)
Bilateral credit facility (d)
450.0
100.0
50.0
-
-
-
450.0
100.0
50.0
Totals at December 31, 2006
$1,414.0
$ 470.6
$ 943.4(e)
In June 2006, the Company increased the maximum amount of its U.S. commercial paper program from $400 million to $550 million.
(a)
(b) U.S. – based program.
(c) This facility was increased to $250 million effective February 1, 2007.
(d)
(e) Although the Company has significant available credit, as of December 31, 2006, it was the Company’s policy to limit aggregate
International-based Program.
commercial paper and credit facility borrowings at any one time to a maximum of $600 million. Effective February 1, 2007, this maximum
was increased to $750 million.
See Note 6, Debt and Credit Agreements, to the Consolidated Financial Statements under Part II, Item 8, “Financial
Statements and Supplementary Data,” for more information on the Company’s credit facilities.
Credit Ratings and Outlook – The following table summarizes the Company's debt ratings as of
December 31, 2006:
Long-term Notes
U.S.–Based
Commercial Paper
Standard & Poor’s (S&P)
Moody’s
Fitch
A-
A3
A-
A-2
P-2
F2
Outlook
Stable
Stable
Stable
The Company’s euro-based commercial paper program has not been rated since the euro market does not require it.
In August 2006, S&P reaffirmed it’s A- and A-2 ratings for the Company’s long-term notes and U.S. commercial paper,
respectively, and its stable outlook. In January 2007, Fitch reaffirmed it’s ratings for the Company’s long-term notes
and U.S. commercial paper, respectively, and its stable outlook. Also in January 2007, Moody’s reaffirmed its ratings
for the Company. A downgrade to the Company’s credit ratings would probably increase borrowing costs to the
Company, while an improvement in the Company’s credit ratings would probably decrease borrowing costs to the
Company.
44 Harsco Corporation 2006 Annual Report
Working Capital Position – Changes in the Company’s working capital are reflected in the following table:
(Dollars are in millions)
Current Assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Assets held-for-sale
Total current assets
Current Liabilities
Notes payable and current maturities
Accounts payable
Accrued compensation
Income taxes payable
Other current liabilities
Total current liabilities
December 31
2006
December 31
2005
Increase
(Decrease)
$ 101.2
753.2
285.2
88.4
3.6
1,231.6
198.2
287.0
95.0
62.0
268.6
910.8
$ 120.9
666.3
251.1
60.4
2.3
1,101.0
104.0
247.2
75.7
42.3
279.2
748.4
$ (19.7)
86.9
34.1
28.0
1.3
130.6
94.2
39.8
19.3
19.7
(10.6)
162.4
Working Capital
Current Ratio
$ 320.8
$ 352.6
$ (31.8)
1.4:1
1.5:1
Working capital decreased 9% in 2006 due principally to the following factors:
• Cash decreased by $19.7 million due principally to payments made to reduce the Company’s net cash
borrowings.
• Net receivables increased by $86.9 million due principally to increases in the Mill Services and Access
Services Segments which were largely due to foreign currency translation as a result of the strengthening of
the British pound sterling and the euro in relation to the U.S. dollar, higher sales and the Cleton acquisition.
Partially offsetting these increases was the timing of cash collections in the railway track maintenance services
and equipment business.
• The increase in inventory balances related principally to increased demand in the Access Services Segment,
increased demand and the timing of purchases and shipments in the Gas Technologies Segment and foreign
currency translation.
• Notes payable and current maturities increased $94.2 million principally due to increased bank overdrafts and
the anticipated payment of a portion of commercial paper borrowings within one year.
• Accounts payable increased $39.8 million due principally to increases in the Mill Services and Access Services
Segments which were largely due to foreign currency translation, the Cleton acquisition and the timing of
payments.
Certainty of Cash Flows – The certainty of the Company’s future cash flows is underpinned by the long-term nature
of the Company’s mill services contracts. At December 31, 2006, the Company’s mill services contracts had estimated
future revenues of $4.4 billion, compared with $4.3 billion as of December 31, 2005. In addition, as of December 31,
2006, the Company had an order backlog of $301.0 million for its manufacturing businesses and railway track
maintenance services and equipment business. This compares with $275.8 million as of December 31, 2005. This
increase is due principally to new orders for air-cooled heat exchangers, industrial grating and increased demand for
certain products within the Gas Technologies Segment, partially offset by decreased orders for railway track
maintenance services in the Engineered Products and Services (“all other”) Category. The railway track maintenance
services and equipment business backlog includes a significant portion that is long-term, which will not be realized until
2007 and later due to the long lead times necessary to build certain equipment, and the long-term nature of certain
service contracts. Order backlog for scaffolding, shoring and forming services of the Access Services Segment and for
roofing granules and slag abrasives is excluded from the above amounts. These amounts are generally not
Harsco Corporation 2006 Annual Report 45
quantifiable due to short order lead times for certain services, the nature and timing of the products and services
provided and equipment rentals with the ultimate length of the rental period often unknown.
The types of products and services that the Company provides are not subject to rapid technological change, which
increases the stability of related cash flows. Additionally, each of the Company’s businesses is among the top three
companies (relative to sales) in the industries and markets the Company serves. Due to these factors, the Company is
confident in its future ability to generate positive cash flows from operations.
Cash Flow Summary
The Company’s cash flows from operating, investing and financing activities, as reflected in the Consolidated
Statements of Cash Flows, are summarized in the following table:
Summarized Cash Flow Information
(In millions)
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
2006
2005
2004
$ 409.2
(359.4)
(84.2)
14.7
$ 315.3
(645.2)
369.3
(12.6)
$ 270.5
(209.6)
(56.5)
9.5
Net change in cash and cash equivalents
$ (19.7)
$ 26.8
$ 13.9
Cash From Operating Activities – Net cash provided by operating activities in 2006 was a record $409.2 million,
an increase of $93.9 million from 2005. The increased cash from operations in 2006 resulted from the following
factors:
•
Increased net income in 2006 compared with 2005.
• The timing of accounts receivable collections at the railway track maintenance services and equipment
business, mill services business and the air-cooled heat exchangers business.
• Partially offsetting the above improvements was the use of cash for other assets and liabilities in 2006
compared with a source of cash for other assets and liabilities for 2005. This was principally due to an
increase in insurance liabilities during 2005 not repeated in 2006, partially offset by an increase in income tax
payments due to increased net income in 2006. The increased insurance liabilities during 2005 were directly
offset by increased third-party insurance claim receivables.
Cash Used in Investing Activities – Capital investments in 2006 were $340.2 million, an increase of $50.0 million
from 2005. Approximately 45% of the investments were for projects intended to grow future revenues. Investments
were made predominantly for the industrial services businesses with 48% in the Mill Services Segment and 41% in the
Access Services Segment. The Company also invested $34.3 million principally for acquisitions in the Mill Services
and Access Services Segments. See Note 2, Acquisitions and Dispositions, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data,” for additional disclosures related to these
acquisitions.
Cash Used in Financing Activities – The following table summarizes the Company’s debt and capital positions
as of December 31, 2006 and 2005.
(Dollars are in millions)
Notes Payable and Current Maturities
Long-term Debt
Total Debt
Total Equity
Total Capital
December 31
2006
$ 198.2
864.8
1,063.0
1,146.4
$ 2,209.4
December 31
2005
$ 104.0
905.9
1,009.9
993.9
$ 2,003.9 (a)
Total Debt to Total Capital
48.1%
50.4%
(a) Does not total due to rounding.
46 Harsco Corporation 2006 Annual Report
The Company’s debt as a percentage of total capital decreased in 2006. Overall debt increased due to increases in
foreign currency-denominated debt due to foreign currency translation resulting from the weakening of the U.S. dollar
in comparison with the euro and the British pound sterling. Additionally, total equity increased due principally to
increased net income in 2006 and foreign currency translation, partially offset by SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87,
88, 106 and 132(R)” (“SFAS 158”) pension adjustments and dividends.
Debt Covenants
The Company’s credit facilities and certain notes payable agreements contain covenants requiring a minimum net
worth of $475 million and a maximum debt to capital ratio of 60%. Based on balances at December 31, 2006, the
Company could increase borrowings by approximately $655.2 million and still be within its debt covenants.
Alternatively, keeping all other factors constant, the Company’s equity could decrease by approximately $438.0 million
and the Company would still be within its covenants. Additionally, the Company’s 7.25% British pound sterling-
denominated notes due October 27, 2010 include a covenant that permits the note holders to redeem their notes, at
par, in the event of a change of control of the Company. The Company expects to be compliant with these debt
covenants one year from now.
Cash and Value-Based Management
The Company plans to continue with its strategy of selective investing for strategic purposes for the foreseeable future.
An example of the execution of this strategy is the February 2007 acquisition of Excell Materials. The goal of this
strategy is to improve the Company’s Economic Value Added (EVA®) under the program that commenced January 1,
2002. Under this program the Company evaluates strategic investments based upon the investment’s economic profit.
EVA equals after-tax operating profits less a charge for the use of the capital employed to create those profits (only the
service cost portion of pension expense is included for EVA purposes). Therefore, value is created when a project or
initiative produces a return above the cost of capital. Consistent with the 2006 results, meaningful improvement in
EVA was achieved compared with 2005.
The Company is committed to continue paying dividends to stockholders. The Company has increased the dividend
rate for 13 consecutive years, and in November 2006, the Company paid its 226th consecutive quarterly cash dividend.
In November 2006, the Company declared its 227th consecutive quarterly dividend and increased its dividend rate by
more than nine percent. The Company also plans to continue paying down debt to the extent possible. Additionally,
the Company has authorization to repurchase up to one million of its shares through January 31, 2008.
The Company's financial position and debt capacity should enable it to meet current and future requirements. As
additional resources are needed, the Company should be able to obtain funds readily and at competitive costs. The
Company is well-positioned and intends to continue investing strategically in high-return projects and acquisitions,
reducing debt, to the extent possible, and paying cash dividends as a means to enhance stockholder value.
Application of Critical Accounting Policies
The Company’s discussion and analysis of its financial condition and results of operations are based upon the
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent liabilities. On an on-going basis the Company evaluates its estimates, including those related to pensions
and other postretirement benefits, bad debts, goodwill valuation, long-lived asset valuations, inventory valuations,
insurance reserves, contingencies and income taxes. The impact of changes in these estimates, as necessary, is
reflected in the respective segment’s operating income in the period of the change. The Company bases its estimates
on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different outcomes, assumptions or conditions.
The Company believes the following critical accounting policies are affected by its more significant judgments and
estimates used in the preparation of its consolidated financial statements. Management has discussed the
development and selection of the critical accounting estimates described below with the Audit Committee of the Board
of Directors and the Audit Committee has reviewed the Company’s disclosure relating to these estimates in this
Management’s Discussion and Analysis of Financial Condition and Results of Operations. These items should be read
in conjunction with Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements
under Part II, Item 8, “Financial Statements and Supplementary Data.”
Harsco Corporation 2006 Annual Report 47
Pension Benefits
The Company has defined benefit pension plans in several countries. The largest of these plans are in the United
Kingdom and the United States. The Company’s funding policy for these plans is to contribute amounts sufficient to
meet the minimum funding pursuant to U.K. and U.S. statutory requirements, plus any additional amounts that the
Company may determine to be appropriate. The Company made cash contributions to its defined benefit pension
plans of $37.2 million (including $10.6 million of discretionary payments) and $48.8 million (including $16.9 million
discretionary payments) during 2006 and 2005, respectively. Additionally, the Company expects to make a minimum
of $25.6 million in cash contributions to its defined benefit pension plans during 2007.
For the year 2005, the Company accounted for its defined benefit pension plans in accordance with SFAS No. 87,
“Employer’s Accounting for Pensions” (“SFAS 87”), which requires that amounts recognized in financial statements be
determined on an actuarial basis. At December 31, 2005, the adjustment to recognize the additional minimum liability
required under SFAS 87 impacted accumulated other comprehensive loss in the Stockholders’ Equity section of the
Consolidated Balance Sheets by $14.7 million, net of deferred income taxes.
As of December 31, 2006, the Company accounted for its defined benefit pension plans in accordance with SFAS 158,
which requires the Company to recognize in its balance sheet, the overfunded or underfunded status of its defined
benefit postretirement plans measured as the difference between the fair value of the plan assets and the benefit
obligation (projected benefit obligation for a pension plan) as an asset or liability. The charge or credit is recorded as
adjustment to accumulated other comprehensive income/loss, net of tax. This reduced the Company’s equity on an
after-tax basis by approximately $88.2 million compared with measurement under prior standards. The results of
operations were not affected. The adoption of SFAS 158 did not have a negative impact on compliance with the
Company’s debt covenants.
Management implemented a three-part strategy in 2002 and 2003 to deal with the adverse market forces that have
increased the unfunded benefit obligations of the Company. These strategies included pension plan design changes,
a review of funding policy alternatives and a review of the asset allocation policy and investment manager structure.
With regards to plan design, the Company amended a majority of the U.S. defined benefit pension plans and certain
international defined benefit pension plans so that accrued service is no longer granted for periods after December 31,
2003, although compensation increases will continue to be recognized on actual service to-date (for the U.S. plans this
is limited to 10 years – through December 2013). In place of these plans, the Company established, effective January
1, 2004, defined contribution pension plans providing for the Company to contribute a specified matching amount for
participating employees’ contributions to the plan. Domestically, this match is made on employee contributions up to
four percent of their eligible compensation. Additionally, the Company may provide a discretionary contribution of up
to two percent of compensation for eligible employees. Internationally, this match is up to six percent of eligible
compensation with an additional two percent going towards insurance and administrative costs. The Company
believes these new retirement benefit plans will provide a more predictable and less volatile pension expense than
existed under the defined benefit plans.
The Company’s pension task force continues to evaluate alternative strategies to further reduce overall pension
expense including the on-going evaluation of investment fund managers’ performance; the balancing of plan assets
and liabilities; the risk assessment of all multi-employer pension plans; the possible merger of certain plans; the
consideration of incremental cash contributions to certain plans; and other changes that could reduce future pension
expense volatility and minimize risk.
Critical Estimate – Defined Benefit Pension Benefits
Accounting for defined benefit pensions and other postretirement benefits requires the use of actuarial assumptions.
The principal assumptions used include the discount rate and the expected long-term rate-of-return on plan assets.
Each assumption is reviewed annually and represents management’s best estimate at that time. The assumptions are
selected to represent the average expected experience over time and may differ in any one year from actual
experience due to changes in capital markets and the overall economy. These differences will impact the amount of
unfunded benefit obligation and the expense recognized.
The discount rates as of the September 30, 2006 measurement date for the U.K. defined benefit pension plan and the
October 31, 2006 measurement date for the U.S. defined benefit pension plans were 5.13% and 5.87%, respectively.
These rates were used in calculating the Company's projected benefit obligations as of December 31, 2006. The
discount rates selected represent the average yield on high-quality corporate bonds as of the measurement dates.
The global weighted-average of these assumed discount rates for the years ending December 31, 2006, 2005 and
2004 were 5.3%, 5.3% and 5.7%, respectively. Annual pension expense is determined using the discount rate as of
48 Harsco Corporation 2006 Annual Report
the beginning of the year, which for 2007 is the 5.3% global weighted-average discount rate. Pension expense and
the projected benefit obligation generally increase as the selected discount rate decreases.
The expected long-term rate-of-return on plan assets is determined by evaluating the portfolios’ asset class return
expectations with the Company’s advisors as well as actual, long-term, historical results of asset returns for the
pension plans. The pension expense increases as the expected long-term rate-of-return on assets decreases. For
2006, the global weighted-average expected long-term rate-of-return on asset assumption was 7.6%. For 2007, the
expected global long-term rate-of-return on assets will remain the same at 7.6%. This rate was determined based on a
model of expected asset returns for an actively managed portfolio.
Based on the updated actuarial assumptions and the structural changes in the pension plans mentioned previously,
the Company’s 2007 pension expense is expected to stabilize. Total pension expense increased from 2005 to 2006
by $5.8 million due principally to increased multi-employer and defined contribution pension plan costs resulting from
increased volume in the Access Services and Mill Services Segments. From 2004 to 2005, pension expense
decreased by $1.7 million due principally to lower defined benefit pension expense in the United Kingdom. This
resulted from plan design changes in 2004 when certain defined benefit plans were replaced by defined contribution
plans.
Changes in pension benefit expense may occur in the future due to changes in actuarial assumptions and due to
changes in returns on plan assets resulting from financial market conditions. Holding all other assumptions constant, a
one-half percent increase or decrease in the discount rate and the expected long-term rate-of-return on plan assets
would increase or decrease annual 2007 pre-tax defined benefit pension expense as follows:
Approximate Changes in Pre-tax Defined Benefit
Pension Expense
U.S. Plans
U.K. Plan
Discount rate
One-half percent increase
One-half percent decrease
Decrease of $0.7 million Decrease of $4.3 million
Increase of $4.1 million
Increase of $2.0 million
Expected long-term rate-of-return on plan assets
One-half percent increase
One-half percent decrease
Decrease of $1.3 million Decrease of $3.7 million
Increase of $3.7 million
Increase of $1.3 million
Should circumstances change that affect these estimates, changes (either increases or decreases) to the net pension
obligations may be required and would be recorded in accordance with the provisions of SFAS 87 and SFAS 158.
Additionally, certain events could result in the pension obligation changing at a time other than the annual
measurement date. This would occur when the benefit plan is amended or when plan curtailments occur under the
provisions of SFAS No. 88, “Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits” (“SFAS 88”).
See Note 8, Employee Benefit Plans, to the Consolidated Financial Statements under Part II, Item 8, “Financial
Statements and Supplementary Data,” for additional disclosures related to these items.
Notes and Accounts Receivable
Notes and accounts receivable are stated at their net realizable value through the use of an allowance for doubtful
accounts. The allowance is maintained for estimated losses resulting from the inability or unwillingness of customers
to make required payments. The Company has policies and procedures in place requiring customers to be evaluated
for creditworthiness prior to the execution of new service contracts or shipments of products. These reviews are
structured to minimize the Company’s risk related to realizability of its receivables. Despite these policies and
procedures, the Company may still experience collection problems and potential bad debts due to economic conditions
within certain industries (e.g., construction and steel industries) and countries and regions in which the Company
operates. As of December 31, 2006 and 2005, receivables of $753.2 million and $666.3 million, respectively, were net
of reserves of $25.4 million and $24.4 million, respectively.
Critical Estimate – Notes and Accounts Receivable
A considerable amount of judgment is required to assess the realizability of receivables, including the current
creditworthiness of each customer, related aging of the past due balances and the facts and circumstances
Harsco Corporation 2006 Annual Report 49
surrounding any non-payment. The Company’s provisions for bad debts during 2006, 2005 and 2004 were $9.2
million, $6.5 million and $5.0 million, respectively. The increase from 2005 to 2006 related principally to the acquisition
of businesses in the fourth quarter of 2005 and overall increased revenues.
On a monthly basis, customer accounts are analyzed for collectibility. Reserves are established based upon a
specific-identification method as well as historical collection experience, as appropriate. The Company also evaluates
specific accounts when it becomes aware of a situation in which a customer may not be able to meet its financial
obligations due to a deterioration in its financial condition, credit ratings or bankruptcy. The reserve requirements are
based on the facts available to the Company and are re-evaluated and adjusted as additional information is received.
Reserves are also determined by using percentages (based upon experience) applied to certain aged receivable
categories. Specific issues are discussed with Corporate Management and any significant changes in reserve
amounts or the write-off of balances must be approved by a specifically designated Corporate Officer. All approved
items are monitored to ensure they are recorded in the proper period. Additionally, any significant changes in reserve
balances are reviewed to ensure the proper Corporate approval has occurred.
If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. Conversely, an improvement in a customer’s ability to make
payments could result in a decrease of the allowance for doubtful accounts. Changes in the allowance related to both
of these situations would be recorded through income in the period the change was determined.
The Company has not materially changed its methodology for calculating allowances for doubtful accounts for the
years presented.
See Note 3, Accounts Receivable and Inventories, to the Consolidated Financial Statements under Part II, Item 8,
“Financial Statements and Supplementary Data,” for additional disclosures related to these items.
Goodwill
The Company’s net goodwill balances were $612.5 million and $559.6 million, as of December 31, 2006 and 2005,
respectively. Goodwill is not amortized but tested for impairment at the reporting unit level on an annual basis, and
between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit’s goodwill
may exceed its fair value.
Critical Estimate – Goodwill
A discounted cash flow model is used to estimate the fair value of a reporting unit. This model requires the use of
long-term planning estimates and assumptions regarding industry-specific economic conditions that are outside the
control of the Company. The annual test for impairment includes the selection of an appropriate discount rate to value
cash flow information. The basis of this discount rate calculation is derived from several internal and external factors.
These factors include, but are not limited to, the average market price of the Company’s stock, the number of shares of
stock outstanding, the book value of the Company’s debt, a long-term risk-free interest rate, and both market and size-
specific risk premiums. The Company’s annual goodwill impairment testing, performed as of October 1, 2006 and
2005, indicated that the fair value of all reporting units tested exceeded their respective book values and therefore no
additional goodwill impairment testing was required. Due to uncertain market conditions, it is possible that estimates
used for goodwill impairment testing may change in the future. Therefore, there can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
The Company has not materially changed its methodology for goodwill impairment testing for the years presented.
There are currently no known trends, demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described above.
See Note 5, Goodwill and Other Intangible Assets, to the Consolidated Financial Statements under Part II, Item 8,
“Financial Statements and Supplementary Data,” for additional information on goodwill and other intangible assets.
Asset Impairment
Long-lived assets are reviewed for impairment when events and circumstances indicate that the book value of an
asset may be impaired. The amounts charged against pre-tax income related to impaired long-lived assets were $4.4
million, $0.6 million and $0.4 million in 2006, 2005 and 2004, respectively. The increased 2006 amount relates to
exiting an underperforming product line of the Gas Technologies Segment.
50 Harsco Corporation 2006 Annual Report
Critical Estimate – Asset Impairment
The determination of a long-lived asset impairment loss involves significant judgments based upon short and long-term
projections of future asset performance. Impairment loss estimates are based upon the difference between the book
value and the fair value of the asset. The fair value is generally based upon the Company’s estimate of the amount
that the assets could be bought or sold for in a current transaction between willing parties. If quoted market prices for
the asset or similar assets are unavailable, the fair value estimate is generally calculated using a discounted cash flow
model. Should circumstances change that affect these estimates, additional impairment charges may be required and
would be recorded through income in the period the change was determined.
The Company has not materially changed its methodology for calculating asset impairments for the years presented.
There are currently no known trends, demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described above.
Inventories
Inventories are stated at the lower of cost or market. Inventory balances are adjusted for estimated obsolete or
unmarketable inventory equal to the difference between the cost of inventory and its estimated market value. At
December 31, 2006 and 2005, inventories of $285.2 million and $251.1 million, respectively, are net of lower of cost or
market reserves and obsolescence reserves of $14.3 million and $16.1 million, respectively.
Critical Estimate – Inventories
In assessing the ultimate realization of inventory balance amounts, the Company is required to make judgments as to
future demand requirements and compare these with the current or committed inventory levels. If actual market
conditions are determined to be less favorable than those projected by management, additional inventory write-downs
may be required and would be recorded through income in the period the determination is made. Additionally, the
Company records reserves to adjust a substantial portion of its U.S. inventory balances to the last-in, first-out (LIFO)
method of inventory valuation. In adjusting these reserves throughout the year, the Company estimates its year-end
inventory costs and quantities. At December 31 of each year, the reserves are adjusted to reflect actual year-end
inventory costs and quantities. During periods of inflation, the LIFO expense usually increases and during periods of
deflation it decreases. These year-end adjustments resulted in pre-tax income/(expense) of $(2.1) million, $1.7 million
and $(4.3) million in 2006, 2005 and 2004, respectively.
The Company has not materially changed its methodology for calculating inventory reserves for the years presented.
There are currently no known trends, demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described above.
See Note 3, Accounts Receivable and Inventories, to the Consolidated Financial Statements under Part II, Item 8,
“Financial Statements and Supplementary Data,” for additional disclosures related to these items.
Insurance Reserves
The Company retains a significant portion of the risk for property, workers' compensation, U.K. employers’ liability,
automobile, general and product liability losses. At December 31, 2006 and 2005 the Company has recorded liabilities
of $103.4 million and $102.3 million, respectively, related to both asserted as well as unasserted insurance claims. At
December 31, 2006 and 2005, $18.9 million and $25.2 million, respectively, is included in insurance liabilities related to
claims covered by insurance carriers for which a corresponding receivable has been recorded.
Critical Estimate – Insurance Reserves
Reserves have been recorded based upon actuarial calculations which reflect the undiscounted estimated liabilities for
ultimate losses including claims incurred but not reported. Inherent in these estimates are assumptions which are
based on the Company’s history of claims and losses, a detailed analysis of existing claims with respect to potential
value, and current legal and legislative trends. If actual claims differ from those projected by management, changes
(either increases or decreases) to insurance reserves may be required and would be recorded through income in the
period the change was determined. During 2006, the Company recorded a retrospective insurance reserve
adjustment that increased pre-tax insurance expense by $1.2 million. In 2005 and 2004, the retrospective insurance
reserve adjustments decreased pre-tax insurance expense for self-insured programs by $4.1 million and $2.7 million,
respectively. The Company has programs in place to improve claims experience, such as aggressive claim and
insured litigation management and an improved focus on workplace safety.
Harsco Corporation 2006 Annual Report 51
The Company has not materially changed its methodology for calculating insurance reserves for the years presented.
There are currently no known trends, demands, commitments, events or uncertainties that are reasonably likely to
occur that would materially affect the methodology or assumptions described above.
Legal and Other Contingencies
Reserves for contingent liabilities are recorded when it is probable that an asset has been impaired or a liability has
been incurred and the loss can be reasonably estimated. Adjustments to estimated amounts are recorded as
necessary based on new information or the occurrence of new events or the resolution of an uncertainty. Such
adjustments are recorded in the period that the required change is identified.
Critical Estimate – Legal and Other Contingencies
On a quarterly basis, recorded contingent liabilities are analyzed to determine if any adjustments are required.
Additionally, functional department heads within each business unit are consulted monthly to ensure all issues with a
potential financial accounting impact, including possible reserves for contingent liabilities have been properly identified,
addressed or disposed of. Specific issues are discussed with Corporate Management and any significant changes in
reserve amounts or the adjustment or write-off of previously recorded balances must be approved by a specifically
designated Corporate Officer. If necessary, outside legal counsel, other third parties or internal experts are consulted
to assess the likelihood and range of outcomes for a particular issue. All approved changes in reserve amounts are
monitored to ensure they are recorded in the proper period. Additionally, any significant changes in reported business
unit reserve balances are reviewed to ensure the proper Corporate approval has occurred. On a quarterly basis, the
Company’s business units submit a reserve listing to the Corporate headquarters which is reviewed in detail. All
significant reserve balances are discussed with a designated Corporate Officer to assess their validity, accuracy and
completeness. Anticipated changes in reserves are identified for follow-up prior to the end of a reporting period. Any
new issues that may require a reserve are also identified and discussed to ensure proper disposition. Additionally, on
a quarterly basis, all significant environmental reserve balances or issues are evaluated to assess their validity,
accuracy and completeness.
The Company has not materially changed its methodology for calculating legal and other contingencies for the years
presented. There are currently no known trends, demands, commitments, events or uncertainties that are reasonably
likely to occur that would materially affect the methodology or assumptions described above.
See Note 10, Commitments and Contingencies, to the Consolidated Financial Statements under Part II, Item 8,
“Financial Statements and Supplementary Data,” for additional disclosure on this uncertainty and other contingencies.
Income Taxes
The Company is subject to various federal, state and local income taxes in the taxing jurisdictions where the Company
operates. At the end of each quarterly period, the Company makes its best estimate of the annual effective income tax
rate and applies that rate to year-to-date pre-tax income to arrive at the year-to-date income tax provision. Income tax
loss contingencies are recorded in the period when it is determined that it is probable that a liability has been incurred
and the loss can be reasonably estimated. Adjustments to estimated amounts are recorded as necessary based upon
new information, the occurrence of new events or the resolution of an uncertainty. As of December 31, 2006, 2005
and 2004, the Company’s net effective income tax rate was 32.3%, 28.1% and 29.1%, respectively.
A valuation allowance to reduce deferred tax assets is evaluated on a quarterly basis. The valuation allowance is
principally for tax-loss carryforwards which are uncertain as to realizability. The valuation allowance was $13.9 million
and $21.7 million as of December 31, 2006 and 2005, respectively.
Critical Estimate – Income Taxes
The annual effective income tax rates are developed giving recognition to tax rates, tax holidays, tax credits and
capital losses, as well as certain exempt income and non-deductible expenses in all of the jurisdictions where the
Company does business. The income tax provision for the quarterly period is the change in the year-to-date provision
from the previous quarterly period.
The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing
the need for the valuation allowance. In the event the Company were to determine that it would more likely than not be
able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was made. Likewise, should the Company
52 Harsco Corporation 2006 Annual Report
determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the
deferred tax assets would decrease income in the period in which such determination was made.
The Company has not materially changed its methodology for calculating income tax expense for the years presented.
In July 2006, the FASB issued FASB Interpretation, (“FIN”) 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It
prescribes a recognition threshold and measurement attribute for financial statement recognition and disclosure of tax
positions taken or expected to be taken on a tax return. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company will adopt this interpretation in the first quarter of 2007.
The Company is currently evaluating the requirements of FIN 48 and has not yet determined the impact on the
consolidated financial statements. There are currently no other known trends, demands, commitments, events or
uncertainties that are reasonably likely to occur that would materially affect the methodology or assumptions described
above.
See Note 9, Income Taxes, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and
Supplementary Data,” for additional disclosures related to these items.
New Financial Accounting Standards Issued
See Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item
8, “Financial Statements and Supplementary Data,” for disclosures on new financial accounting standards issued and
their effect on the Company.
Research and Development
The Company invested $3.0 million, $2.7 million and $2.6 million in internal research and development programs in
2006, 2005 and 2004, respectively. Internal funding for research and development was as follows:
(In millions)
Mill Services Segment
Access Services Segment
Gas Technologies Segment
Segment Totals
Engineered Products and Services (“all other”) Category
Consolidated Totals
Research and Development Expense
2004
2005
2006
$ 1.3
$ 1.4
$ 1.1
0.4
0.5
0.7
0.3
0.2
0.2
2.0
2.1
2.0
0.6
0.6
1.0
$ 3.0
$ 2.7
$ 2.6
Backlog
As of December 31, 2006, the Company’s order backlog, exclusive of long-term mill services contracts, access
services and roofing granules and slag abrasives, was $301.0 million compared with $275.8 million as of December
31, 2005, a 9% increase. Of the $301.0 million of order backlog at December 31, 2006, approximately $58.7 million or
20% is not expected to be filled in 2007.
(In millions)
Engineered Products and Services (“all other”) Category
Gas Technologies Segment
Consolidated Backlog
2006
$ 236.5
64.5
$ 301.0
2005
$ 230.6
45.2
$ 275.8
Order Backlog
Order backlog for the Engineered Products and Services (“all other”) Category at December 31, 2006 was 3% above
the December 31, 2005 order backlog. The change is principally due to increased order backlog of air-cooled heat
exchangers and industrial grating products, partially offset by decreased order backlog for railway track maintenance
services. Order backlog for roofing granules and slag abrasives is excluded from the above amounts. Order backlog
amounts for that product group are generally not quantifiable due to the short order lead times of the products
provided.
Harsco Corporation 2006 Annual Report 53
The Gas Technologies Segment order backlog at December 31, 2006 was 43% above the December 31, 2005 order
backlog. The change primarily reflects increased order backlog for cryogenics equipment and industrial gas cylinders,
partially offset by decreased order backlog for composite pressure vessels.
Mill services contracts have an estimated future value of $4.4 billion at December 31, 2006 compared with $4.3 billion
at December 31, 2005. Approximately 60% of these revenues are expected to be recognized by December 31, 2009.
The remaining revenues are expected to be recognized between January 1, 2010 and December 31, 2015.
Order backlog for scaffolding, shoring and forming services of the Access Services Segment is excluded from the
above amounts. These amounts are generally not quantifiable due to short order lead times for certain services, the
nature and timing of the products and services provided and equipment rentals with the ultimate length of the rental
period often unknown.
Dividend Action
The Company paid four quarterly cash dividends of $0.325 per share in 2006, for an annual rate of $1.30. This is an
increase of 8.3% from 2005. At the November 2006 meeting, the Board of Directors increased the dividend by 9.2% to
an annual rate of $1.42 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 February 2007 payment marked the 227th consecutive quarterly dividend paid at the same or at an increased rate.
In 2006, 28% of net earnings were paid out in dividends. The Company is philosophically committed to maintaining or
increasing the dividend at a sustainable level. The Company has paid dividends each year since 1939.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
See Part I, Item 1A, “Risk Factors,” for quantitative and qualitative disclosures about market risk.
54 Harsco Corporation 2006 Annual Report
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data
Consolidated Financial Statements of Harsco Corporation:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
December 31, 2006 and 2005
Consolidated Statements of Income
for the years 2006, 2005 and 2004
Consolidated Statements of Cash Flows
for the years 2006, 2005 and 2004
Consolidated Statements of Stockholders' Equity
for the years 2006, 2005 and 2004
Consolidated Statements of Comprehensive Income
for the years 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Supplementary Data (Unaudited):
Two-Year Summary of Quarterly Results
Common Stock Price and Dividend Information
Page
56
57
59
60
61
62
63
64
102
102
Harsco Corporation 2006 Annual Report 55
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Management of Harsco Corporation, together with its consolidated subsidiaries (the Company), is responsible for
establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over
financial reporting is a process designed under the supervision of the Company’s principal executive and principal
financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted
accounting principles.
The Company’s internal control over financial reporting includes policies and procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and
dispositions of assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures
of the Company are being made only in accordance with authorizations of management and the directors of the
Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may
deteriorate.
Management has assessed the effectiveness of its internal control over financial reporting as of December 31, 2006
based on the framework established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has
determined that the Company’s internal control over financial reporting is effective as of December 31, 2006.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report appearing below, which expresses unqualified opinions on management’s assessment
and on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006.
Derek C. Hathaway
Chairman and Chief Executive Officer
February 27, 2007
Salvatore D. Fazzolari
President, Chief Financial Officer and Treasurer
February 27, 2007
56 Harsco Corporation 2006 Annual Report
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Stockholders of Harsco Corporation:
We have completed integrated audits of Harsco Corporation’s consolidated financial statements and of its internal
control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material
respects, the financial position of Harsco Corporation and its subsidiaries at December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item 15(a)2 presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial
statements 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 our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying “Management’s Report on Internal
Control Over Financial Reporting,” that the Company maintained effective internal control over financial reporting as
of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material
respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal
Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
Harsco Corporation 2006 Annual Report 57
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 27, 2007
58 Harsco Corporation 2006 Annual Report
HARSCO CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
Other current assets
Assets held-for-sale
Total current assets
Property, plant and equipment, net
Goodwill, net
Intangible assets, net
Other assets
Total assets
LIABILITIES
Current liabilities:
Short-term borrowings
Current maturities of long-term debt
Accounts payable
Accrued compensation
Income taxes payable
Dividends payable
Insurance liabilities
Other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Insurance liabilities
Retirement plan liabilities
Other liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, Series A junior participating cumulative preferred stock
Common stock, par value $1.25, issued 68,491,523 and 68,257,785 shares as of
December 31, 2006 and 2005, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Treasury stock, at cost (26,472,843 and 26,474,609 shares, respectively)
Unearned stock-based compensation
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
December 31
2006
December 31
2005
$
101,260
753,168
285,229
88,398
3,567
1,231,622
1,322,467
612,480
88,164
71,690
$ 3,326,423
$
185,074
13,130
287,006
95,028
61,967
15,983
40,810
211,777
910,775
864,817
103,592
62,542
189,457
48,876
2,180,059
$
120,929
666,252
251,080
60,436
2,326
1,101,023
1,139,808
559,629
78,839
96,505
$ 2,975,804
$
97,963
6,066
247,179
75,742
42,284
13,580
47,244
218,345
748,403
905,859
123,334
55,049
98,946
50,319
1,981,910
-
-
85,614
166,494
(169,334)
1,666,761
(603,171)
-
1,146,364
$ 3,326,423
85,322
154,017
(167,318)
1,526,216
(603,225)
(1,118)
993,894
$ 2,975,804
Harsco Corporation 2006 Annual Report 59
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years ended December 31
Revenues from continuing operations:
Service revenue
Product revenue
Total revenues
Costs and expenses from continuing operations:
Cost of services sold
Cost of products sold
Selling, general and administrative expenses
Research and development expenses
Other expenses
Total costs and expenses
Operating income from continuing operations
Equity in income of unconsolidated entities, net
Interest income
Interest expense
Income from continuing operations before income taxes and
minority interest
Income tax expense
Income from continuing operations before minority interest
Minority interest in net income
Income from continuing operations
Discontinued operations:
Loss from operations of discontinued business
Gain/(loss) on disposal of discontinued business
Income/(loss) related to discontinued defense business
Income tax benefit (expense)
Income/(loss) from discontinued operations
Net Income
Average shares of common stock outstanding
Basic earnings per common share:
Continuing operations
Discontinued operations
Basic earnings per common share
Diluted average shares of common stock outstanding
Diluted earnings per common share:
Continuing operations
Discontinued operations
Diluted earnings per common share
(a) Does not total due to rounding.
See accompanying notes to consolidated financial statements.
2006
2005
2004
$ 2,538,068
885,225
3,423,293
$ 1,928,539
837,671
2,766,210
$ 1,764,159
737,900
2,502,059
1,851,230
696,350
507,367
3,026
6,851
3,064,824
1,425,222
674,177
393,187
2,676
2,000
2,497,262
1,313,075
603,309
368,385
2,579
4,862
2,292,210
358,469
192
3,709
(60,478)
301,892
(97,523)
204,369
(7,860)
196,509
(181)
28
(25)
67
(111)
196,398
41,953
4.68
-
4.68
42,215
4.65
-
4.65
$
$
$
$
$
268,948
74
3,165
(41,918)
230,269
(64,771)
165,498
(8,748)
156,750
(430)
261
20
56
(93)
156,657
41,642
3.76
-
3.76
209,849
128
2,319
(41,057)
171,239
(49,034)
122,205
(8,665)
113,540
(801)
(102)
12,849
(4,275)
7,671
121,211
41,129
2.76
0.19
2.95
$
$
$
42,080
41,598
3.73
-
3.72 (a)
$
$
2.73
0.18
2.91
$
$
$
$
$
60 Harsco Corporation 2006 Annual Report
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended December 31
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation
Amortization
Equity in income of unconsolidated entities, net
Dividends or distributions from unconsolidated entities
Other, net
Changes in assets and liabilities, net of acquisitions
and dispositions of businesses:
Accounts receivable
Inventories
Accounts payable
Net receipts (disbursements) related to discontinued defense
business
Other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Purchase of businesses, net of cash acquired*
Proceeds from sales of assets
Other investing activities
Net cash used by investing activities
Cash flows from financing activities:
Short-term borrowings, net
Current maturities and long-term debt:
Additions
Reductions
Cash dividends paid on common stock
Common stock issued-options
Other financing activities
Net cash provided (used) by financing activities
Effect of exchange rate changes on cash
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
2006
2005
2004
$ 196,398
$ 156,657
$ 121,211
245,397
7,585
(188)
-
8,008
(27,261)
(20,347)
13,017
(3)
(13,367)
409,239
(340,173)
(34,333)
17,650
(2,599)
(359,455)
195,139
2,926
(74)
170
8,134
(64,580)
(25,908)
10,787
(141)
32,169
315,279
(290,239)
(394,493)
39,543
4
(645,185)
181,914
2,457
(128)
589
(2,781)
(81,403)
(22,278)
22,310
12,280
36,294
270,465
(204,235)
(12,264)
6,897
-
(209,602)
73,050
73,530
(5,863)
315,010
(423,769)
(54,516)
11,574
(5,545)
(84,196)
14,743
(19,669)
120,929
571,928
(230,010)
(49,928)
9,097
(5,292)
369,325
(12,583)
26,836
94,093
198,032
(214,551)
(45,170)
16,656
(5,616)
(56,512)
9,532
13,883
80,210
Cash and cash equivalents at end of period
$ 101,260
$ 120,929
$
94,093
*Purchase of businesses, net of cash acquired
Working capital, other than cash
Property, plant and equipment
Other noncurrent assets and liabilities, net
$
(2,547)
(15,106)
(16,680)
$
(26,831)
(169,172)
(198,490)
$
(60)
(3,024)
(9,180)
Net cash used to acquire businesses
$
(34,333)
$
(394,493)
$
(12,264)
See accompanying notes to consolidated financial statements.
Harsco Corporation 2006 Annual Report 61
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Balances, December 31, 2004
$
84,889
(In thousands, except share and per
share amounts)
Balances, January 1, 2004
Net income
Cash dividends declared, $1.125
per share
Translation adjustments
Cash flow hedging instrument
adjustments, net of $(86) deferred
income taxes
Pension liability adjustments, net of
$2,062 deferred income taxes
Stock options exercised, 564,529 shares
Other, 250 shares, and 3,500 restricted
stock units
Net income
Cash dividends declared, $1.225
per share
Translation adjustments, net of $2,846
deferred income taxes
Cash flow hedging instrument
adjustments, net of $82 deferred
income taxes
Pension liability adjustments, net of
$(6,407) deferred income taxes
Stock options exercised, 350,840 shares
Other, 1,087 shares, and 36,250
restricted stock units (net of
forfeitures)
Amortization of unearned compensation
on restricted stock units
Balances, December 31, 2005
Net income
Adoption of SFAS 123(R)
Cash dividends declared, $1.33
per share
Translation adjustments, net of $(5,643)
deferred income taxes
Cash flow hedging instrument
adjustments, net of $(72) deferred
income taxes
Pension liability adjustments, net of
$1,307 deferred income taxes
Adoption of SFAS 158, net of $40,313
deferred income taxes
Marketable securities unrealized gains,
net of $1 deferred income taxes
Stock options exercised, 234,419 shares
Other, 1,085 shares, and 50,700
restricted stock units (net of
forfeitures)
Amortization of unearned compensation
on restricted stock units
Balances, December 31, 2006
Common Stock
Issued
$
84,197
Treasury
$ (603,639)
Additional
Paid-in
Capital
$ 120,070
Retained
Earnings
$ 1,345,787
Accumulated Other
Comprehensive
Income (Loss)
(169,427)
$
Unearned
Stock-Based
Compensation
$
-
121,211
(46,361)
46,230
159
(4,453)
692
253
19,308
9
$ (603,377)
154
$ 139,532
$ 1,420,637
$
(127,491)
$
-
$
156,657
(51,078)
(54,399)
(152)
14,724
433
116
12,596
36
1,889
$
85,322
$ (603,225)
$ 154,017
$ 1,526,216
$
(167,318)
$
(1,118)
196,398
(55,853)
(1,847)
729
(1,118)
1,118
$
91,578
134
(5,523)
(88,207)
2
292
19
35
11,659
(3)
Total
776,988
$
121,211
(46,361)
46,230
159
(4,453)
20,253
163
914,190
156,657
(51,078)
(54,399)
(152)
14,724
13,145
78
729
993,894
196,398
-
(55,853)
91,578
134
(5,523)
(88,207)
2
11,970
32
$
85,614
$ (603,171)
1,939
$ 166,494
$ 1,666,761
$
(169,334)
$
-
1,939
$ 1,146,364
See accompanying notes to consolidated financial statements.
62 Harsco Corporation 2006 Annual Report
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Years ended December 31
Net Income
Other comprehensive income (loss):
Foreign currency translation adjustments
Net gains (losses) on cash flow hedging instruments, net of deferred
income taxes of $(40), $79 and $(30) in 2006, 2005 and 2004,
respectively
Reclassification adjustment for (gain)/loss on cash flow hedging
instruments, net of deferred income taxes of $(32), $3, and $(56) in
2006, 2005 and 2004, respectively
Pension liability adjustments, net of deferred income taxes of $1,307,
$(6,407) and $2,062 in 2006, 2005 and 2004, respectively
Unrealized gain on marketable securities, net of deferred income taxes of
$(1) in 2006
Other comprehensive income (loss)
2006
2005
2004
$ 196,398
$ 156,657
$
121,211
91,578
(54,399)
46,230
75
59
(147)
(5)
55
104
(5,523)
14,724
(4,453)
2
86,191
-
(39,827)
-
41,936
Total comprehensive income
$ 282,589
$ 116,830
$
163,147
See accompanying notes to consolidated financial statements.
Harsco Corporation 2006 Annual Report 63
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
(the "Company"). Additionally, the Company consolidates three entities in which it has an equity interest of 49% to
50% and exercises management control. These three entities had combined revenues of approximately $87.3 million
or 2.5% of the Company’s total revenues in 2006. Investments in unconsolidated entities (all of which are 40-50%
owned) are accounted for under the equity method. The Company does not have any off-balance sheet arrangements
with unconsolidated special-purpose entities.
Reclassifications
Certain reclassifications have been made to prior years’ amounts to conform with current year classifications. These
reclassifications relate principally to components of the Consolidated Balance Sheets.
As a result of these reclassifications, certain prior year amounts presented for comparative purposes will not
individually agree with previously filed Forms 10-K or 10-Q.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term investments which are highly liquid
in nature and have an original maturity of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Inventories in the United States are accounted for using
principally the last-in, first-out (LIFO) method. Other inventories are accounted for using the first-in, first-out (FIFO) or
average cost methods.
Depreciation
Property, plant and equipment is recorded at cost and depreciated over the estimated useful lives of the assets using
principally the straight-line method. When property is retired from service, the cost of the retirement is charged to the
allowance for depreciation to the extent of the accumulated depreciation and the balance is charged to income. Long-
lived assets to be disposed of by sale are not depreciated while they are held for sale.
Leases
The Company leases certain property and equipment under noncancelable lease agreements. All lease agreements
are evaluated and classified as either an operating lease or capital lease. A lease is classified as a capital lease if any
of the following criteria are met: transfer of ownership to the Company by the end of the lease term; the lease contains
a bargain purchase option; the lease term is equal to or greater than 75% of the asset’s economic life; or the present
value of future minimum lease payments is equal to or greater than 90% of the asset’s fair market value. Operating
lease expense is recognized ratably over the entire lease term, including rent abatement periods and rent holidays.
Goodwill and Other Intangible Assets
Goodwill is not amortized but tested for impairment at the reporting unit level. SFAS No. 142, “Goodwill and Other
Intangible Assets,” (SFAS 142) defines a reporting unit as an operating segment or one level below an operating
segment (referred to as a component). A component of an operating segment is a reporting unit if the component
constitutes a business for which discrete financial information is available and segment management regularly reviews
the operating results of that component. Accordingly, the Company performs the goodwill impairment test at the
operating segment level for the Mill Services Segment, the Access Services Segment and the Engineered Products
and Services category and at the component level for the Gas Technologies Segment. The goodwill impairment tests
are performed on an annual basis as of October 1 and between annual tests whenever events or circumstances
indicate that the carrying value of a reporting unit’s goodwill may exceed its fair value. A discounted cash flow model
is used to estimate the fair value of a reporting unit. This model requires the use of long-term planning forecasts and
assumptions regarding industry-specific economic conditions that are outside the control of the Company. See Note 5,
“Goodwill and Other Intangible Assets,” for additional information on intangible assets and goodwill impairment testing.
Finite-lived intangible assets are amortized over their estimated useful lives.
Impairment of Long-Lived Assets (Other than Goodwill)
Long-lived assets are reviewed for impairment when events and circumstances indicate that the carrying amount of an
asset may not be recoverable. The Company's policy is to record an impairment loss when it is determined that the
carrying amount of the asset exceeds the sum of the expected undiscounted future cash flows resulting from use of
64 Harsco Corporation 2006 Annual Report
the asset and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount
of the asset exceeds its fair value. Long-lived assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell.
Revenue Recognition
Product sales and service sales are recognized when they are realized or realizable and when earned. Revenue is
realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the Company’s price to the buyer is fixed or
determinable and collectibility is reasonably assured. Service sales include sales of the Mill Services and Access
Services Segments as well as railway track maintenance services. Product sales include sales of the Gas
Technologies Segment as well as the manufacturing businesses of the Engineered Products and Services (“all other”)
Category.
Mill Services Segment – This Segment provides services predominantly on a long-term, volume-of-production
contract basis. Contracts may include both fixed monthly fees as well as variable fees based upon specific services
provided to the customer. The fixed-fee portion is recognized periodically as earned (normally monthly) over the
contractual period. The variable-fee portion is recognized as services are performed and differs from period-to-period
based upon the actual provision of services.
Access Services Segment – This Segment rents equipment under month-to-month rental contracts, provides
services under both fixed-fee and time-and-materials short-term contracts and, to a lesser extent, sells products to
customers. Equipment rentals are recognized as earned over the contractual rental period. Services provided on a
fixed-fee basis are recognized over the contractual period based upon the completion of specific units of accounting
(i.e., erection and dismantling of equipment). Services provided on a time-and-materials basis are recognized when
earned as services are performed. Product sales revenue is recognized when title and risk of loss transfer, and when
all of the revenue recognition criteria have been met.
Gas Technologies Segment – This Segment sells products under customer-specific sales contracts. Product sales
revenue is recognized when title and risk of loss transfer, and when all of the revenue recognition criteria have been
met. Title and risk of loss for domestic shipments generally transfers to the customer at the point of shipment. For
international sales, title and risk of loss transfer in accordance with the international commercial terms included in the
specific customer contract.
Engineered Products and Services (“all other”) Category – This category includes the Harsco Track Technologies,
Reed Minerals, IKG Industries, Patterson-Kelley and Air-X-Changers operating segments. These operating segments
principally sell products. The Harsco Track Technologies Division sells products and provides services. Product sales
revenue for each of these operating segments is recognized generally when title and risk of loss transfer, and when all
of the revenue recognition criteria have been met. Title and risk of loss for domestic shipments generally transfers to
the customer at the point of shipment. For export sales, title and risk of loss transfer in accordance with the
international commercial terms included in the specific customer contract. Revenue may be recognized subsequent to
the transfer of title and risk of loss for certain product sales of the Harsco Track Technologies Division if the specific
sales contract includes a customer acceptance clause which provides for different timing. In those situations revenue
is recognized after transfer of title and risk of loss and after customer acceptance. The Harsco Track Technologies
Division also provides services predominantly on a long-term, time-and-materials contract basis. Revenue is
recognized when earned as services are performed.
Income Taxes
United States federal and state income taxes and non-U.S. income taxes are provided currently on the undistributed
earnings of international subsidiaries and unconsolidated affiliated entities, giving recognition to current tax rates and
applicable foreign tax credits, except when management has specific plans for reinvestment of undistributed earnings
which will result in the indefinite postponement of their remittance. Deferred taxes are provided using the asset and
liability method for temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. A valuation allowance to reduce deferred tax assets is evaluated on a
quarterly basis. The valuation allowance is principally for tax loss carryforwards which are uncertain as to realizability.
Income tax loss contingencies are recorded in the period when it is determined that it is probable that a liability has
been incurred and the loss can be reasonably estimated. Adjustments to estimated amounts are recorded as
necessary based upon new information, the occurrence of new events or the resolution of an uncertainty. Beginning in
2007, income tax contingencies will be measured under FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”).
Harsco Corporation 2006 Annual Report 65
Accrued Insurance and Loss Reserves
The Company retains a significant portion of the risk for workers’ compensation, U.K. employers’ liability, automobile,
general and product liability losses. During 2006, 2005 and 2004, the Company recorded insurance expense related
to these lines of coverage of approximately $44 million, $37 million and $37 million, respectively. Reserves have been
recorded which reflect the undiscounted estimated liabilities including claims incurred but not reported. When a
recognized liability is covered by third-party insurance, the Company records an insurance claim receivable to reflect
the covered liability. Changes in the estimates of the reserves are included in net income in the period determined.
During 2006, the Company recorded a retrospective insurance reserve adjustment that increased pre-tax insurance
expense for self insured programs by $1.2 million. In 2005 and 2004, the retrospective insurance reserve adjustments
decreased pre-tax insurance expense by $4.1 million and $2.7 million, respectively. At December 31, 2006 and 2005,
the Company has recorded liabilities of $103.4 million and $102.3 million, respectively, related to both asserted as well
as unasserted insurance claims. Included in the balance at December 31, 2006 and 2005 were $18.9 million and
$25.2 million, respectively, of recognized liabilities covered by insurance carriers. Amounts estimated to be paid within
one year have been classified as current Insurance liabilities, with the remainder included in non-current Insurance
liabilities in the Consolidated Balance Sheets.
Warranties
The Company has recorded product warranty reserves of $4.8 million, $5.0 million and $4.2 million as of December
31, 2006, 2005 and 2004, respectively. The Company provides for warranties of certain products as they are sold in
accordance with SFAS No. 5, “Accounting for Contingencies.” The following table summarizes the warranty activity for
the years ended December 31, 2006, 2005 and 2004:
Warranty Activity
(In thousands)
2006
2005
2004
Balance at the beginning of the period
$ 4,962
$ 4,161
$ 2,788
Accruals for warranties issued during the period
3,371
3,851
4,135
Increase/(reductions) related to pre-existing warranties
(868)
60
(414)
Warranties paid
(2,731)
(3,083)
(2,361)
Other (principally foreign currency translation)
71
(27)
13
Balance at end of the period
$ 4,805
$ 4,962
$ 4,161
Foreign Currency Translation
The financial statements of the Company's subsidiaries outside the United States, except for those subsidiaries
located in highly inflationary economies and those entities for which the U.S. dollar is the currency of the primary
economic environment in which the entity operates, are measured using the local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rates as of the balance sheet date. Resulting
translation adjustments are recorded in the cumulative translation adjustment account, a separate component of Other
comprehensive income (loss). Income and expense items are translated at average monthly exchange rates. Gains
and losses from foreign currency transactions are included in net income. For subsidiaries operating in highly
inflationary economies, and those entities for which the U.S. dollar is the currency of the primary economic
environment in which the entity operates, gains and losses on foreign currency transactions and balance sheet
translation adjustments are included in net income.
Financial Instruments and Hedging
The Company has operations throughout the world that are exposed to fluctuations in related foreign currencies in the
normal course of business. The Company seeks to reduce exposure to foreign currency fluctuations through the use
of forward exchange contracts. The Company does not hold or issue financial instruments for trading purposes, and it
is the Company's policy to prohibit the use of derivatives for speculative purposes. The Company has a Foreign
Currency Risk Management Committee that meets periodically to monitor foreign currency risks.
The Company executes foreign currency forward exchange contracts to hedge transactions for firm purchase
commitments, to hedge variable cash flows of forecasted transactions and for export sales denominated in foreign
currencies. These contracts are generally for 90 days or less. For those contracts that are designated as qualified
66 Harsco Corporation 2006 Annual Report
cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”),
gains or losses are recorded in Other comprehensive income (loss).
Amounts recorded in Other comprehensive income (loss) are reclassified into income in the same period or periods
during which the hedged forecasted transaction affects income. The cash flows from these contracts are classified
consistent with the cash flows from the transaction being hedged (e.g., the cash flows related to contracts to hedge the
purchase of fixed assets are included in cash flows from investing activities, etc.). The Company also enters into
certain forward exchange contracts not designated as hedges under SFAS 133. Gains and losses on these contracts
are recognized in income based on fair market value. For fair value hedges of a firm commitment, the gain or loss on
the derivative and the offsetting gain or loss on the hedged firm commitment are recognized currently in income.
Options for Common Stock
In prior years, when stock options were issued to employees, the Company used the intrinsic value method to account
for the options. No compensation expense was recognized on the grant date, since at that date, the option price
equaled the market price of the underlying common stock. Effective in 2002 and 2003, the Company ceased granting
stock options to employees and non-employee directors, respectively.
The Company's net income and earnings per common share would have been reduced to the pro forma amounts
indicated below if compensation cost for the Company's stock option plan had been determined based on the fair value
at the grant date for awards in accordance with the provisions of SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”).
Pro forma Impact of SFAS 123(R) on Earnings
(In thousands, except per share)
Net income:
2005
2004
As reported
Compensation expense (a)
Pro forma
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
As reported
Pro forma
$ 156,657
-
$ 156,657
$ 3.76
3.76
3.72
3.72
$ 121,211
(96)
$ 121,115
$ 2.95
2.94
2.91
2.91
(a)
Total stock-based employee compensation expense related to stock options determined under fair value-based method for all
awards, net of related income tax effects.
In 2004, the Board of Directors approved the granting of performance-based restricted stock units as the long-term
equity component of officer compensation. See Note 12, “Stock-Based Compensation,” for additional information on
the Company’s equity compensation plans.
Earnings Per Share
Basic earnings per share are calculated using the average shares of common stock outstanding, while diluted earnings
per share reflect the dilutive effects of restricted stock units and the potential dilution that could occur if stock options
were exercised. See Note 11, “Capital Stock,” for additional information on earnings per share.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
New Financial Accounting Standards Issued
SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an Amendment of FASB Statements No. 133 and
140” (“SFAS 155”)
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS 155, which amends SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 addresses several issues relating to the
Harsco Corporation 2006 Annual Report 67
accounting for financial instruments, including permitting fair value measurement for any hybrid financial instrument
that contains an embedded derivative, and eliminating the prohibition on a qualifying special-purpose entity from
holding certain derivative instruments. SFAS 155 also provides clarification that concentrations of credit risk in the
form of subordination are not embedded derivatives. SFAS 155 is effective for all financial instruments issued or
acquired after the fiscal year that begins after September 15, 2006 (January 1, 2007 for the Company), with early
adoption permitted. The Company implemented SFAS 155 effective January 1, 2007, and it did not have a material
impact on the Company’s financial position, results of operations or cash flows.
SFAS No. 156, “Accounting for Servicing of Financial Assets, an Amendment of FASB Statement 140” (“SFAS 156”)
In March 2006, the FASB issued SFAS 156, which amends SFAS No. 140, “Accounting of Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.” SFAS 156 requires, in certain specified situations, an entity to
recognize a servicing asset or servicing liability when it undertakes an obligation to service a financial asset by
entering into a servicing contract. SFAS 156 also requires all separately recognized servicing assets and servicing
liabilities to be initially recognized at fair value, if practical, and allows entities to choose either the amortization method
or the fair value measurement method for subsequent measurement. SFAS 156 is effective for all servicing
transactions occurring on or after the beginning of the first fiscal year that begins after September 15, 2006 (January 1,
2007 for the Company), with early adoption permitted. The Company implemented SFAS 156 effective January 1,
2007, and it did not have a material impact on the Company’s financial position, results of operations or cash flows.
FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No.
109” (“FIN 48”)
In July 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” It prescribes a
recognition threshold and measurement attribute for financial statement recognition and disclosure of tax positions
taken or expected to be taken on a tax return. The provisions of this interpretation are required to be adopted for fiscal
periods beginning after December 15, 2006. The Company will be required to apply the provisions of FIN 48 to all tax
positions upon initial adoption with any cumulative effect adjustment to be recognized as an adjustment to retained
earnings. The Company is currently evaluating the requirements of FIN 48 and has not yet determined the impact on
the consolidated financial statements.
SFAS No. 157, “Fair Value Measurements” (“SFAS 157”)
In September 2006, the FASB issued SFAS 157 to provide a single definition of fair value, establish a framework for
measuring fair value in U.S. generally accepted accounting principles (“GAAP”), and expand the disclosure
requirements regarding fair value measurements. SFAS 157 is applicable in the application of other accounting
pronouncements that require or permit fair value measurements, but does not require new fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company), with
limited retrospective application required. The Company is currently evaluating the requirements of SFAS 157 and has
not yet determined the impact on the consolidated financial statements.
Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”)
In September 2006, the SEC issued SAB 108 to provide guidance for quantifying and evaluating the materiality of a
misstatement. SAB 108 indicates that an entity should use both a balance sheet (iron curtain) approach and an
income statement (rollover) approach when quantifying and evaluating the materiality of a misstatement, and provides
guidance for using the dual approach. SAB 108 also provides transition guidance for correcting errors existing in prior
years. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15,
2006 (December 31, 2006 for the Company). The Company implemented SAB 108 effective December 31, 2006, and
it did not have an impact on the Company’s financial position, results of operations or cash flows as there were no
misstatements that required evaluation under the standard.
SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of
FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”)
The FASB is currently reconsidering the accounting for pensions and other postretirement benefits in a two-phase
project. Phase I of this project primarily addresses the balance sheet recognition of a plan’s overfunded or
underfunded status. Phase II will be a comprehensive reconsideration of all elements of pension accounting, and is
expected to take several years to complete once Phase I is complete. As part of Phase I, the FASB issued SFAS 158
68 Harsco Corporation 2006 Annual Report
in September 2006. Included in SFAS 158 is a requirement for an entity to recognize in its balance sheet, the
overfunded or underfunded status of its defined benefit postretirement plans measured as the difference between the
fair value of the plan assets and the benefit obligation. For a pension plan, this would be the projected benefit
obligation; for any other postretirement plan, the benefit obligation would be the accumulated postretirement benefit
obligation. SFAS 158 also eliminates the early measurement dates by requiring the pension plan obligation to be
measured as of the date of the entity’s balance sheet. The requirement to recognize the funded status of the pension
plans is effective for publicly-held companies for fiscal years ending after December 15, 2006 (December 31, 2006 for
the Company). The requirement to measure the pension obligation as of the entity’s balance sheet date is effective for
fiscal years ending after December 15, 2008 (December 31, 2008 for the Company). The Company implemented
Phase I of SFAS 158 effective December 31, 2006. This reduced the Company’s equity on an after-tax basis by
approximately $88.2 million compared with measurement under prior standards. The results of operations were not
affected. The adoption of SFAS 158 did not have a negative impact on compliance with the Company’s debt
covenants.
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).
In February 2007, the FASB issued SFAS 159, which permits all entities to choose to measure eligible items at fair
value at specified election dates. Unrealized gains and losses on items for which the fair value option has been
elected will be reported in earnings at each subsequent reporting date. The fair value option may be applied financial
instrument by financial instrument (with limited exceptions), is generally irrevocable, and must be applied to the entire
financial instrument. SFAS 159 is effective for fiscal years that begin after November 15, 2007 (January 1, 2008 for
the Company). The Company is currently evaluating the requirements of SFAS 159, and has not yet determined the
impact on the consolidated financial statements.
2.
Acquisitions and Dispositions
Acquisitions
In February 2007, the Company acquired Excell Materials, Inc. (“Excell”), a Pittsburgh-based multinational company,
for approximately $200 million, subject to various adjustments. Excell specializes in the reclamation and recycling of
high-value content from steelmaking slag. Excell is also involved in the development of minerals technologies for
commercial applications. Excell recorded 2006 sales in excess of $100 million and maintains operations at nine
locations in the United States, Canada, Brazil, and South Africa.
In November 2006, the Company acquired the Santiago, Chile-based company Moldajes y Andamios TH S.A.
(“MyATH”), a supplier of rental formwork, scaffolding and related services to the construction, infrastructure and
building maintenance sectors. MyATH employs approximately 100 people and its annual revenues are approximately
$8 million. MyATH has been included in the Hünnebeck Division of the Access Services Segment.
In November 2006, the Company acquired the conveyor services and trading arm of Technic Gum, a Belgium-based
provider of conveyor belt maintenance services for the steel and cement-producing industries. Technic Gum recorded
revenues of approximately $8 million in 2005 and employs approximately 50 people. Technic Gum has been included
in the Mill Services Segment.
In July 2006, the Company acquired the assets of UK-based Cape PLC’s Cleton industrial maintenance services
(“Cleton”) subsidiaries in Holland, Belgium and Germany for €8 million (approximately $10 million). Cleton posted
2005 revenues in excess of $50 million and employs close to 400 people. Cleton specializes in providing scaffolding
and related insulation services for the maintenance of large-scale industrial plants, and serves some of the largest oil
refinery, petrochemical, and process plant sites in the Benelux countries. Cleton has been included in the SGB
Division of the Access Services Segment.
In December 2005, the Company acquired the Northern Hemisphere steel mill services operations of Brambles
Industrial Services (“BISNH”), a unit of the Sydney, Australia-based Brambles Industrial Limited, for ₤136 million
(approximately $235 million), excluding acquisition costs. BISNH has been included in the Company’s Mill Services
Segment. The Company did not assume debt as part of this acquisition. BISNH is a provider of on-site, outsourced
mill services to the steel and metals industries, operating at 19 locations in the U.K., France, Holland and the United
States. Goodwill recognized in this transaction (based on foreign exchange rates at the transaction date) was $96.3
million, of which $91.8 million is expected to be deductible for U.S. income tax purposes.
In November 2005, the Company acquired the Germany-based Hünnebeck Group GmbH (Hünnebeck) for €140
million (approximately $164 million), which included the assumption of debt but excluded acquisition costs.
Harsco Corporation 2006 Annual Report 69
Hünnebeck has been included in the Company’s Access Services Segment. Hünnebeck is a provider of highly
engineered formwork and scaffolding equipment with more than 60 branches and depots in 12 countries and export
sales worldwide. Goodwill recognized in this transaction (based on foreign exchange rates at the transaction date)
was $67.8 million, none of which is expected to be deductible for U. S. income tax purposes.
Dispositions – Assets Held for Sale and Discontinued Operations
In January 2007, the Company’s Board of Directors approved the divestiture of its Gas Technologies Segment. This
Segment recorded revenues and operating income of $397.7 million and $14.2 million, respectively, for 2006. The
Company expects the divestiture to occur in the second half of 2007. Results of the Segment will be included in
Discontinued Operations of the income statement effective with the first quarter 2007 report. The Segment’s assets
and liabilities will be classified as held-for-sale in the Company’s first quarter 2007 balance sheet.
Throughout the past several years, management approved the sale of certain long-lived assets (primarily land and
buildings) throughout the Company’s operations. The major classes of assets held-for-sale included in the
Consolidated Balance Sheets are as follows:
(In thousands)
As of December 31
ASSETS
Property, plant and equipment, net
Total assets held-for-sale
2006
2005
$ 3,567
$ 3,567
2,326
$ 2,326
3.
Accounts Receivable and Inventories
At December 31, 2006 and 2005, accounts receivable of $753.2 million and $666.3 million, respectively, were net of
allowances for doubtful accounts of $25.4 million and $24.4 million, respectively. Gross accounts receivable included
trade accounts receivable of $737.1 million and $638.5 million at December 31, 2006 and 2005, respectively. Other
receivables included insurance claim receivables of $18.9 million and $25.2 million at December 31, 2006 and 2005,
respectively. The increase in accounts receivable and the allowance for doubtful accounts from December 31, 2005
related principally to increased sales, foreign currency translation and the net effect of acquisitions and divestitures
discussed in Note 2, “Acquisitions and Dispositions.” The provision for doubtful accounts was $9.2 million, $6.5 million
and $5.0 million for 2006, 2005 and 2004, respectively.
Inventories consist of the following:
Inventories
(In thousands)
Finished goods
Work-in-process
Raw materials and purchased parts
Stores and supplies
2006
$ 117,072
31,489
96,750
39,918
2005
$ 85,325
43,830
87,251
34,674
Total inventories
$ 285,229
$ 251,080
Valued at lower of cost or market:
Last-in, first out (LIFO) basis
First-in, first out (FIFO) basis
Average cost basis
Total inventories
$ 138,643
28,165
118,421
$ 137,101
26,003
87,976
$ 285,229
$ 251,080
The increase in inventory balances related principally to increased demand in the Access Services Segment,
increased demand and the timing of purchases and shipments in the Gas Technologies Segment, and foreign
currency translation.
Inventories valued on the LIFO basis at December 31, 2006 and 2005 were approximately $46.1 million and $34.1
million, respectively, less than the amounts of such inventories valued at current costs.
70 Harsco Corporation 2006 Annual Report
As a result of reducing certain inventory quantities valued on the LIFO basis, net income increased from that which
would have been recorded under the FIFO basis of valuation by $0.11 million, $1.6 million and $0.02 million in 2006,
2005 and 2004, respectively.
4.
Property, Plant and Equipment
Property, plant and equipment consists of the following:
(In thousands)
Land and improvements
Buildings and improvements
Machinery and equipment
Uncompleted construction
Gross property, plant and equipment
Less accumulated depreciation
Net property, plant and equipment
2006
$
41,255
192,575
2,699,131
52,640
2,985,601
(1,663,134)
$ 1,322,467
2005
$
39,306
168,727
2,291,294
91,186
2,590,513
(1,450,705)
$ 1,139,808
The increase in net property, plant and equipment from 2005 to 2006 related principally to investments in the Mill
Services and Access Services Segments.
The estimated useful lives of different types of assets are generally:
Land improvements
Buildings and improvements
Machinery and equipment
Leasehold improvements
5 to 20 years
5 to 40 years
3 to 20 years
Estimated useful life of the improvement
or, if shorter, the life of the lease
5.
Goodwill and Other Intangible Assets
In connection with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142) goodwill and
intangible assets with indefinite useful lives are no longer amortized. Goodwill is tested for impairment at the reporting
unit level on an annual basis, and between annual tests, whenever events or circumstances indicate that the carrying
value of a reporting unit’s goodwill may exceed its fair value. This impairment testing is a two-step process as outlined
in SFAS 142. Step one is a comparison of each reporting unit’s fair value to its book value. If the fair value of the
reporting unit exceeds the book value, step two of the test is not required. Step two requires the allocation of fair
values to assets and liabilities as if the reporting unit had just been purchased resulting in the implied fair value of
goodwill. If the carrying value of the goodwill exceeds the implied fair value, a write down to the implied fair value
would be required.
The Company uses a discounted cash flow model to estimate the fair value of a reporting unit in performing step one
of the testing. This model requires the use of long-term planning estimates and assumptions regarding industry-
specific economic conditions that are outside the control of the Company. The Company performed required annual
testing for goodwill impairment as of October 1, 2006 and 2005 and all reporting units of the Company passed the step
one testing thereby indicating that no goodwill impairment exists. However, there can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
Harsco Corporation 2006 Annual Report 71
The following table reflects the changes in carrying amounts of goodwill by segment for the years ended December 31,
2005 and 2006:
Goodwill by Segment
(In thousands)
Balance as of December 31, 2004, net
of accumulated amortization
Mill
Services
Segment
Access
Services
Segment
Gas
Technologies
Segment
Engineered
Products
and
Services
(“all other”)
Category
Consolidated
Totals
$ 220,493
$ 167,802
$ 36,693
$
8,137
$ 433,125
Goodwill acquired during year
93,268
71,068
-
(5,370)
(16,542)
(15,920)
-
-
-
-
164,336
-
-
(5,370)
(32,462)
Goodwill written off related to sale of
business unit
Other (principally foreign currency
translation)
Balance as of December 31, 2005, net
of accumulated amortization
$ 297,219
$ 217,580
$ 36,693
$
8,137
$ 559,629
Goodwill acquired during year
341
4,704
222
Changes to Goodwill (a)
3,709
(3,251)
Other (b)
-
(3,286)
Foreign currency translation
24,223
26,190
-
-
(1)
-
-
-
-
5,267
458
(3,286)
50,412
Balance as of December 31, 2006, net
of accumulated amortization
$ 325,492
$ 241,937
$ 36,914
$
8,137
$ 612,480
(a) Relate principally to opening balance sheet adjustments for the BISNH, Hünnebeck and Cleton acquisitions.
(b) Reduction of valuation allowance related to realization of a tax loss carryback.
Goodwill is net of accumulated amortization of $109.3 million and $103.0 million at December 31, 2006 and 2005,
respectively.
Intangible assets totaled $88.2 million, net of accumulated amortization of $19.4 million at December 31, 2006 and
$78.8 million, net of accumulated amortization of $11.8 million at December 31, 2005. The following table reflects
these intangible assets by major category:
Intangible Assets
(In thousands)
December 31, 2006
December 31, 2005
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
Customer relationships
$87,426
$ 7,084
$73,224
$ 1,262
Non-compete agreements
5,648
4,708
5,036
4,402
Patents
Other
Total
4,700
3,940
4,426
3,587
9,800
3,678
7,962
2,558
$107,574
$19,410
$90,648
$11,809
72 Harsco Corporation 2006 Annual Report
The increase in intangible assets for 2006 was due principally to the acquisitions discussed in Note 2, “Acquisitions
and Dispositions,” and foreign currency translation. As part of these transactions, the Company acquired the following
intangible assets (by major class) which are subject to amortization:
Acquired Intangible Assets
(In thousands)
Gross Carrying
Amount
Residual Value
Weighted-average
amortization period
Customer relationships
$ 5,863
Non-compete agreements
593
Other
Total
1,239
$ 7,695
None
None
None
10 years
4 years
5 years
There were no research and development assets acquired and written off in 2006, 2005 or 2004.
Amortization expense for intangible assets was $6.9 million, $2.1 million and $1.8 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The following table shows the estimated amortization expense for
the next five fiscal years based on current intangible assets.
(In thousands)
2007
2008
2009
2010
2011
Estimated amortization expense $7,645 $7,356 $7,129 $6,820 $5,496
6.
Debt and Credit Agreements
The Company has various credit facilities and commercial paper programs available for use throughout the world. The
following table illustrates the amounts outstanding on credit facilities and commercial paper programs and available
credit at December 31, 2006. As of December 31, 2006, the Company limited the aggregate commercial paper,
syndicated credit facility and bilateral credit facility borrowings at any one time to a maximum of $600 million. Effective
February 1, 2007, with the increase in the supplemental credit facility to $250 million as indicated below, this maximum
was increased to $750 million to provide additional financial flexibility for growth-related investments. These credit
facilities and programs are described in more detail below the table.
Summary of Credit Facilities and
Commercial Paper Programs
(In thousands)
Facility Limit
As of December 31, 2006
Outstanding
Balance
Available
Credit
U.S. commercial paper program
$ 550,000 (a)
$ 263,371
$ 286,629
Euro commercial paper program
Revolving credit facility (b)
Supplemental credit facility (b) (c)
Bilateral credit facility (d)
264,020
450,000
100,000
50,000
207,207
-
-
-
56,813
450,000
100,000
50,000
Totals at December 31, 2006
$ 1,414,020
$ 470,578
$ 943,442 (e)
In June 2006, the Company increased the maximum amount of its U.S. commercial paper program from $400 million to $550 million.
(a)
(b) U.S.-based program
(c) This facility was increased to $250 million effective February 1, 2007.
(d)
(e) Although the Company has significant available credit, as of December 31, 2006, it was the Company’s policy to limit aggregate
International-based program
commercial paper and credit facility borrowings at any one time to a maximum of $600 million. Effective February 1, 2007, this maximum
was increased to $750 million.
Harsco Corporation 2006 Annual Report 73
The Company has a U.S. commercial paper borrowing program under which it can issue up to $550 million of short-
term notes in the U.S. commercial paper market. In addition, the Company has a 200 million euro commercial paper
program, equivalent to approximately $264 million at December 31, 2006, which is used to fund the Company's
international operations. Commercial paper interest rates, which are based on market conditions, have been lower
than comparable rates available under the credit facilities. At December 31, 2006 and 2005, the Company had $263.4
million and $351.3 million of U.S. commercial paper outstanding, respectively, and $207.2 million and $127.4 million
outstanding, respectively, under its European-based commercial paper program. Commercial paper is classified as
long-term debt when the Company has the ability and intent to refinance it on a long-term basis through existing long-
term credit facilities. At December 31, 2006 and 2005, the Company classified $161.5 million and $88.7 million of
commercial paper as short-term debt, respectively. The remaining $309.1 million and $390.1 million in commercial
paper at December 31, 2006 and 2005, respectively, was classified as long-term debt.
The Company has a revolving credit facility in the amount of $450 million, through a syndicate of 16 banks, which
matures in November 2010. This facility serves as back-up to the Company's commercial paper programs. Interest
rates on the facility are based upon the London Interbank Offered Rate (LIBOR) plus a margin. The Company pays a
facility fee (.08% per annum as of December 31, 2006) that varies based upon its credit ratings. At December 31,
2006 and 2005, there were no borrowings outstanding on this credit facility.
On December 22, 2006, the Company renewed its supplemental 364-day credit facility in the amount of $100 million,
through two banks, which now matures in December 2007. On February 1, 2007, the Company increased its
supplemental 364-day credit facility to $250 million. This facility also serves as back-up to the Company’s commercial
paper programs. Interest rates on the facility are based upon either the announced Citicorp lending rate, the Federal
Funds Effective Rate plus a margin or LIBOR plus a margin. The Company pays a facility fee (.08% per annum as of
December 31, 2006) that varies based upon its credit ratings. As of December 31, 2006 and 2005, there were no
borrowings outstanding on this credit facility.
The bilateral credit facility was renewed in December 2006 for an additional one year. The facility serves as back-up
to the Company’s commercial paper programs and also provides available financing for the Company’s European
operations. Borrowings under this facility, which expires in December 2007, are available in most major currencies
with active markets at interest rates based upon LIBOR plus a margin. Borrowings outstanding at expiration may be
repaid over the succeeding 12 months. As of December 31, 2006 and 2005, there were no borrowings outstanding on
this facility.
Short-term debt amounted to $185.1 million and $98.0 million (of which $161.5 million and $88.7 million was
commercial paper) at December 31, 2006 and 2005, respectively. Other than the commercial paper borrowings, short-
term debt was principally bank overdrafts. The weighted-average interest rate for short-term borrowings at December
31, 2006 and 2005 was 4.8% and 4.0%, respectively.
74 Harsco Corporation 2006 Annual Report
Long-term debt consists of the following:
(In thousands)
7.25% British pound sterling-denominated notes due October 27, 2010
5.125% notes due September 15, 2013
Commercial paper borrowings, with a weighted average interest rate of
4.7% and 3.9% as of December 31, 2006 and 2005, respectively
Faber Prest loan notes due October 31, 2008 with interest based on
sterling LIBOR minus .75% (4.5% and 3.9% at December 31, 2006
and 2005, respectively)
Industrial development bonds, payable in varying amounts from 2010 to
2011 with a weighted average interest rate of 4.1% and 3.7% as of
December 31, 2006 and 2005, respectively
Other financing payable in varying amounts to 2011 with a weighted
average interest rate of 5.9% and 5.5% as of December 31, 2006 and
2005, respectively
Less: current maturities
Long-term Debt
2006
$ 388,763
148,978
2005
$ 341,063
148,856
309,109
390,074
5,494
6,731
6,500
6,500
19,103
877,947
(13,130)
$ 864,817
18,701
911,925
(6,066)
$ 905,859
The Company’s credit facilities and certain notes payable agreements contain covenants requiring a minimum net
worth of $475 million and a maximum debt to capital ratio of 60%. Additionally, the Company’s 7.25% British pound
sterling-denominated notes due October 27, 2010 include a covenant that permits the note holders to redeem their
notes, at par, in the event of a change of control of the Company. At December 31, 2006, the Company was in
compliance with these covenants.
The maturities of long-term debt for the four years following December 31, 2007 are as follows:
(In thousands)
2008
2009
2010
2011
$
8,702
1,333
700,831
4,974
Cash payments for interest on all debt from continuing operations were $59.7 million, $42.2 million and $40.2 million in
2006, 2005 and 2004, respectively.
7.
Leases
The Company leases certain property and equipment under noncancelable operating leases. Rental expense (for both
continuing and discontinued operations) under such operating leases was $72.2 million, $52.1 million and $49.4 million
in 2006, 2005 and 2004, respectively.
Future minimum payments under operating leases with noncancelable terms are as follows:
(In thousands)
2007
2008
2009
2010
2011
After 2011
$ 50,409
37,402
35,509
17,702
12,729
30,793
Total minimum rentals to be received in the future under non-cancelable subleases as of December 31, 2006 are
$18.9 million.
Harsco Corporation 2006 Annual Report 75
8.
Employee Benefit Plans
Pension Benefits
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (“SFAS 158”). The Company adopted the recognition provisions of SFAS 158 effective
December 31, 2006. The impact of adopting SFAS 158 has been reflected in the consolidated financial statements as
of December 31, 2006 and the incremental effect of applying SFAS 158 is disclosed below.
The Company has pension and profit sharing retirement plans covering a substantial number of its employees. The
defined benefits for salaried employees generally are based on years of service and the employee's level of
compensation during specified periods of employment. Plans covering hourly employees generally provide benefits of
stated amounts for each year of service. The multi-employer plans in which the Company participates provide benefits
to certain unionized employees. The Company's funding policy for qualified plans is consistent with statutory
regulations and customarily equals the amount deducted for income tax purposes. The Company also makes periodic
voluntary contributions as recommended by its pension committee. The Company's policy is to amortize prior service
costs of defined benefit pension plans over the average future service period of active plan participants. The Company
uses an October 31 measurement date for its United States defined benefit pension plans and recently acquired
international plans. A September 30 measurement date is used for other international defined benefit pension plans.
For a majority of the U.S. defined benefit pension plans and certain international defined benefit pension plans,
accrued service is no longer granted for periods after December 31, 2003. In place of these plans, the Company has
established, effective January 1, 2004, defined contribution pension plans providing for the Company to contribute a
specified matching amount for participating employees’ contributions to the plan. Domestically, this match is made on
employee contributions up to four percent of their eligible compensation. Additionally, the Company may provide a
discretionary contribution of up to two percent of compensation for eligible employees. The two percent discretionary
contribution was recorded for the last three years, 2006, 2005 and 2004, and paid in February of the subsequent year.
Internationally, this match is up to six percent of eligible compensation with an additional two percent going towards
insurance and administrative costs. The Company believes the defined contribution plans will provide a more
predictable and less volatile pension expense than exists under the defined benefit plans.
(In thousands)
Pension Expense (Income)
Defined benefit plans:
Service cost
Interest cost
Expected return on plan assets
Recognized prior service costs
Recognized losses
Amortization of transition
(asset) liability
Settlement/Curtailment loss
(gain)
Defined benefit plans pension
expense
Multi-employer plans
Defined contribution plans
2006
U.S. Plans
2005
2004
International Plans
2005
2004
2006
$ 3,685
14,919
(19,942)
742
2,949
$ 3,380
13,914
(19,112)
767
3,617
$ 2,610
13,592
(17,960)
754
2,982
$ 9,168
43,506
(52,081)
1,446
12,882
$ 8,195
40,475
(44,796)
1,208
12,247
$ 9,561
37,876
(39,765)
1,245
13,431
(361)
(1,455)
(1,466)
78
(3)
131
36
(51)
117
50
(567)
-
2,070
10,560
8,846
1,108
8,156
7,522
643
7,674
6,197
14,906
8,662
6,531
17,496
5,579
5,901
21,781
5,395
5,722
Pension expense
$ 21,476
$ 16,786
$ 14,514
$ 30,099
$ 28,976
$ 32,898
76 Harsco Corporation 2006 Annual Report
The change in the financial status of the pension plans and amounts recognized in the Consolidated Balance Sheets
at December 31, 2006 and 2005 are as follows:
Defined Benefit Pension Benefits
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Amendments
Actuarial loss
Settlements/curtailments
Benefits paid
Obligations of added plans
Effect of foreign currency
U. S. Plans
2006
2005
International Plans
2005
2006
$ 255,629
3,686
14,919
-
1,159
3,717
-
(12,669)
-
-
$ 243,568
3,380
13,914
-
711
5,300
-
(11,244)
-
-
$ 798,334
9,102
43,424
2,393
(2,932)
57,593
(994)
(37,639)
4,204
108,133
$ 746,573
8,195
40,475
1,866
-
86,447
(541)
(28,602)
20,695
(76,774)
Benefit obligation at end of year
$ 266,441
$ 255,629
$ 981,618
$ 798,334
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Plan assets of added plans
Effect of foreign currency
$ 246,680
35,685
2,203
-
(12,669)
-
-
$ 223,108
26,377
8,439
-
(11,244)
-
-
$ 670,149
72,112
34,992
2,393
(36,725)
3,012
83,994
$ 617,097
104,295
40,367
1,868
(28,225)
10,292
(75,545)
Fair value of plan assets at end of year
$ 271,899
$ 246,680
$ 829,927
$ 670,149
Funded status:
Funded status at end of year
Unrecognized net loss
Unrecognized transition (asset) obligation
Unrecognized prior service cost
$ 5,458
-
-
-
$ (8,949)
54,593
(361)
3,802
$(151,691)
-
-
-
$(128,185)
229,454
332
9,643
Net amount recognized
$ 5,458
$ 49,085
$(151,691)
$ 111,244
Defined Benefit Pension Benefits
(In thousands)
U. S. Plans
2006
2005
International Plans
2005
2006
Amounts recognized in the Consolidated
Balance Sheets consist of the following:
Noncurrent assets
Current liabilities
Noncurrent liabilities
Accumulated other comprehensive loss before tax
$ 36,966
(1,135)
(30,373)
43,650
$ 64,580
(958)
(30,458)
15,921
$ 5,840
(1,090)
(156,441)
295,102
$ 9,537
(19,207)
(66,418)
187,332
Harsco Corporation 2006 Annual Report 77
Amounts recognized in accumulated other comprehensive loss consist of the following:
(In thousands)
Net actuarial loss
Prior service cost
Transition obligation
Total
U. S. Plans
2006
$
39,620
4,030
-
International Plans
2006
$ 288,216
6,512
374
$
43,650
$ 295,102
The estimated amounts that will be amortized from accumulated other comprehensive loss into defined
benefit pension expense in 2007 are as follows:
(In thousands)
Net actuarial loss
Prior service cost
Transition obligation
Total
U. S. Plans
1,531
$
827
-
$
2,358
International Plans
$
15,057
907
29
$
15,993
Incremental Effect on Consolidated Balance Sheet of Adopting SFAS 158 for Pension Plans
December 31, 2006
(In thousands)
Assets:
Other assets
Liabilities:
Balance Sheet
Before
Adopting
SFAS 158 (a)
Adjustments
to Adopt
SFAS 158
Balance Sheet
After
Adopting
SFAS 158 (a)
$ 164,571
$
(92,881)
$ 71,690
Other current liabilities
Retirement plan liabilities
Deferred income tax liabilities
$ 210,061
186,014
113,425
$
1,716
3,443
(9,833)
$ 211,777
189,457
103,592
Stockholders’ Equity:
Accumulated other comprehensive loss
$
(81,127)
$
(88,207)
$ (169,334)
(a) Balances represent major captions as presented on the Consolidated Balance Sheet.
The Company’s best estimate of expected contributions to be paid in year 2007 for the U.S. defined benefit plans is
$2.4 million and for the international defined benefit plans is $23.2 million.
On August 17, 2006, the Pension Protection Act of 2006 (the “Act”) was signed into law. Key provisions of the Act
include a requirement to fully fund U.S. defined benefit pension plans within seven years and an increase in the annual
income tax deduction limit applicable to pension plans. The Company is currently evaluating the impact of the Act on
its cash flows; however, it is not expected to materially impact the Company’s cash flows for any given period.
Contributions to multi-employer pension plans were $18.3 million, $13.6 million and $15.2 million in years 2006, 2005
and 2004, respectively. For defined contribution plans, payments were $13.7 million, $12.9 million and $9.7 million for
years 2006, 2005 and 2004, respectively.
78 Harsco Corporation 2006 Annual Report
Future Benefit Payments
The expected benefit payments for defined benefit plans over the next ten years are as follows:
(In millions)
2007
2008
2009
2010
2011
2012 - 2016
U.S. Plans
$ 12.3
12.4
13.9
14.7
15.8
92.5
International
Plans
$ 38.6
39.5
41.9
42.4
44.6
239.8
Net Periodic Pension Expense Assumptions
The weighted-average actuarial assumptions used to determine the net periodic pension expense for the years ended
December 31 were as follows:
Discount rates
Expected long-term rates of return on plan
assets
Rates of compensation increase
Discount rates
Expected long-term rates of return on
plan assets
Rates of compensation increase
Global Weighted Average
December 31
2005
5.7%
2006
5.3%
2004
5.9%
7.6%
3.4%
7.8%
3.4%
7.9%
3.5%
U. S. Plans
December 31
2005
5.75%
2006
5.87%
2004
6.25%
International Plans
December 31
2005
5.7%
2006
5.2%
2004
5.7%
8.25%
4.36%
8.75%
4.0%
8.75%
4.0%
7.4%
3.2%
7.5%
3.3%
7.5%
3.4%
The expected long-term rates of return on plan assets for the 2007 pension expense are 8.25% for the U.S. plans and
7.3% for the international plans.
Defined Benefit Pension Obligation Assumptions
The weighted-average actuarial assumptions used to determine the defined benefit pension plan obligations at
December 31 were as follows:
Discount rates
Rates of compensation increase
Global Weighted Average
December 31
2005
5.3%
3.4%
2006
5.3%
3.3%
2004
5.7%
3.5%
Discount rates
Rates of compensation increase
U. S. Plans
December 31
2005
5.87%
4.36%
2006
5.87%
4.5%
2004
5.75%
4.0%
International Plans
December 31
2005
5.2%
3.2%
2006
5.1%
3.2%
2004
5.7%
3.3%
Harsco Corporation 2006 Annual Report 79
The U.S. discount rate was determined using a yield curve that was produced from a universe containing over 500
U.S.-issued, AA-graded corporate bonds, all of which were noncallable (or callable with make-whole provisions), and
excluding the 10% of the bonds with the highest yields and the 10% with the lowest yields. The discount rate was then
developed as the level-equivalent rate that would produce the same present value as that using spot rates to discount
the projected benefit payments. For international plans, the discount rate is aligned to Corporate bond yields in the
local markets, normally AA-rated Corporations. The process and selection seeks to approximate the cash outflows
with the timing and amounts of the expected benefit payments. As of the September 30, 2006 measurement date,
these rates have declined by 10 basis points from the prior year.
Accumulated Benefit Obligations
The accumulated benefit obligation for all defined benefit pension plans at December 31 was as follows:
(In millions)
2006
2005
U.S. Plans
$252.1
244.4
International
Plans
$880.2
744.7
Plans with Accumulated Benefit Obligation in Excess of Plan Assets
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with
accumulated benefit obligations in excess of plan assets at December 31 were as follows:
(In millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
U. S. Plans
International Plans
2006
$70.3
66.1
39.0
2005
$76.8
74.2
44.9
2006
$945.6
850.3
787.3
2005
$778.2
730.1
644.8
The asset allocations attributable to the Company’s U.S. defined benefit pension plans at October 31, 2006 and 2005
and the target allocation of plan assets for 2007, by asset category, are as follows:
U.S. Plans
Asset Category
Domestic Equity Securities
Fixed Income Securities
International Equity Securities
Cash & Cash Equivalents
Other
Target 2007
Allocation
45% - 55%
27% - 37%
4.5% - 14.5%
0% - 5%
2.5% - 12.5%
Percentage of Plan Assets at October 31
2006
54.2%
27.5%
12.3%
1.6%
4.4%
2005
51.9%
29.0%
10.7%
4.1%
4.3%
Plan assets are allocated among various categories of equities, fixed income, cash and cash equivalents with
professional investment managers whose performance is actively monitored. The primary investment objective is
long-term growth of assets in order to meet present and future benefit obligations. The Company periodically conducts
an asset/liability modeling study to ensure the investment strategy is aligned with the profile of benefit obligations.
The Company reviews the long-term expected return-on-asset assumption on a periodic basis taking into account a
variety of factors including the historical investment returns achieved over a long-term period, the targeted allocation of
plan assets and future expectations based on a model of asset returns for an actively managed portfolio, inflation and
administrative/other expenses. The model simulates 500 different capital market results over 15 years. For 2007, the
expected return-on-asset assumption for U.S. plans is 8.25%, consistent with the expected return-on-asset assumption
for 2006.
The U.S. defined benefit pension plans assets include 382,640 shares of the Company’s stock valued at $31.3 million
and $24.4 million on October 31, 2006 and 2005, respectively, representing 11.5% and 9.9%, respectively, of total plan
assets. As part of a rebalancing of the pension fund to further diversify the plan assets, approximately one-half of the
pension fund’s holdings in the Company’s stock were sold in the second quarter of 2004. As of December 31, 2006,
the Company’s stock represented 10.3% of total plan assets. The Company is considering a further rebalancing of the
Company’s stock in the pension fund during 2007. Dividends paid to the pension plans on the Company stock
amounted to $0.5 million in 2006 and $0.4 million in 2005.
80 Harsco Corporation 2006 Annual Report
The asset allocations attributable to the Company’s international defined benefit pension plans at September 30, 2006
and 2005 and the target allocation of plan assets for 2007, by asset category, are as follows:
International Plans
Asset Category
Equity Securities
Fixed Income Securities
Cash & Cash Equivalents
Other
Target 2007
Allocation
50.0 %
40.0 %
5.0%
5.0%
Percentage of Plan Assets at September 30
2006
54.1%
39.9%
2.6%
3.4%
2005
57.1%
40.8%
1.0%
1.1%
Plan assets as of September 30, 2006, in the United Kingdom (U.K.) defined benefit pension plan amounted to 90% of
the international pension assets. These assets were divided into portfolios representing various categories of equities,
fixed income, cash and cash equivalents managed by a number of professional investment managers.
The primary investment objective is long-term growth of assets in order to meet present and future benefit obligations.
The Company periodically conducts asset/liability modeling studies to ensure the investment strategies are aligned
with the profile of benefit obligations. For the international long-term rate-of-return assumption, the Company
considered the current level of expected returns in risk-free investments (primarily government bonds), the historical
level of the risk premium associated with other asset classes in which the portfolio is invested and the expectations for
future returns of each asset class and plan expenses. The expected return for each asset class was then weighted
based on the target asset allocation to develop the expected long-term rate-of-return on assets. The Company’s
expected rate-of-return assumption for the U.K. plan was 7.50% for both 2007 and 2006. The remaining international
pension plans with assets representing 10% of the international pension assets are under the guidance of professional
investment managers and have similar investment objectives.
Postretirement Benefits
The Company has postretirement health care benefits for a limited number of employees mainly under plans related to
acquired companies and postretirement life insurance benefits for certain hourly employees. The costs of health care
and life insurance benefits are accrued for current and future retirees and are recognized as determined under the
projected unit credit actuarial method. Under this method, the Company's obligation for postretirement benefits is to be
fully accrued by the date employees attain full eligibility for such benefits. The Company's postretirement health care
and life insurance plans are unfunded. The Company uses an October 31 measurement date for its postretirement
benefit plans.
(In thousands)
Postretirement Benefits Expense (Income)
Service cost
Interest cost
Recognized prior service costs
Recognized (gains) or losses
Curtailment gains
Postretirement benefit expense/(income)
2006
2005
2004
$
5
186
3
(38)
(20)
$ 136
$
$
7
200
7
(37)
(318)
(141)
$
11
342
32
39
(2,236)
$ (1,812)
The curtailment gains of $0.3 million for 2005 and $2.2 million for 2004 were due to the termination of certain retiree
health care plans.
Effective October 31, 2004, the Company adopted the provisions of Financial Accounting Standards Board Staff
Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003” (“FSP FAS 106-2”). Adoption of FSP FAS 106-2 reduced the
Company’s accumulated postretirement benefit obligation by $0.3 million as of December 31, 2004. This amount was
treated as an unrecognized actuarial gain. The Company deferred re-measurement of its postretirement health care
benefit obligation until its measurement date, so there was no effect on 2004 reported expense. The expense for 2006
and 2005 decreased by $29 thousand and $36 thousand, respectively, after reflecting the value of the federal subsidy.
Harsco Corporation 2006 Annual Report 81
The changes in the postretirement benefit liability recorded in the Consolidated Balance Sheets are as follows:
Postretirement Benefits
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial gain
Plan participants’ contributions
Benefits paid
Curtailment
Benefit obligation at end of year
Amounts recognized in the statement of financial
position consist of the following:
Current liability
Noncurrent liability
Net amount recognized
Postretirement Benefits
(In thousands)
Amounts recognized in accumulated other
comprehensive income consist of the following:
Net actuarial gain
Prior service cost
Net amount recognized (before tax adjustment)
The estimated amounts that will be amortized from
accumulated other comprehensive income into net
periodic benefit cost in 2007 are as follows:
Actuarial gain
Prior service cost
Total
2006
2005
$ 4,187
7
200
(117)
25
(311)
(670)
$ 3,321
$
-
(3,560)
$ (3,560)
$ 3,321
5
186
(23)
13
(289)
(20)
$ 3,193
$
(332)
(2,861)
$ (3,193)
2006
$
$
(241)
14
(227)
$
$
(127)
3
(124)
The actuarial assumptions used to determine the postretirement benefit obligation are as follows:
(Dollars in thousands)
Assumed discount rate
Health care cost trend rate
Decreasing to ultimate rate
Effect of one percent increase in
health care cost trend rate:
2006
5.87%
9.00%
5.00%
2005
5.87%
10.00%
5.00%
2004
5.75%
10.00%
5.00%
On total service and interest cost components
On postretirement benefit obligation
10
$
$ 144
10
$
$ 166
15
$
$ 239
Effect of one percent decrease in
health care cost trend rate:
On total service and interest cost components
On postretirement benefit obligation
$
(9)
$ (130)
$
(9)
$ (149)
$ (13)
$ (212)
It is anticipated that the health care cost trend rate will decrease from 9% in 2007 to 5.0% in the year 2011.
82 Harsco Corporation 2006 Annual Report
The assumed discount rates to determine the postretirement benefit expense for the years 2006, 2005 and 2004 were
5.87%, 5.75% and 6.25%, respectively.
The Company’s expected benefit payments over the next ten years are as follows:
(In thousands)
2007
2008
2009
2010
2011
2012 - 2016
Benefits
Payments
Before Subsidy
$ 332
331
332
330
324
1,476
Expected Subsidy
Under Medicare
Modernization Act
$ 28
29
29
30
29
132
Savings Plan
Prior to January 1, 2004, the Company had a 401(k) Savings Plan (“the Savings Plan”) which covered substantially all
U.S. employees with the exception of employees represented by a collective bargaining agreement, unless the
agreement expressly provides otherwise. Effective January 1, 2004, certain U.S. employees previously covered by the
Savings Plan were transferred into the Harsco Retirement Savings and Investment Plan (“HRSIP”) which is a defined
contribution pension plan. The transferred employees were those whose credited years of service under the qualified
Defined Benefit Pension Plan were frozen as of December 31, 2003. Employees whose credited service was not
frozen as of December 31, 2003 remained in the Savings Plan. The expenses related to the HRSIP are included in
the defined contribution pension plans disclosure in the Pension Benefits section of this footnote.
Employee contributions to the Savings Plan are generally determined as a percentage of covered employees'
compensation. The expense for contributions to the Savings Plan by the Company was $0.9 million, $0.9 million and
$0.4 million for 2006, 2005 and 2004, respectively.
Employee directed investments in the Savings Plan and HRSIP include the following amounts of Company stock:
Company Shares in Plans
December 31, 2006
December 31, 2005
December 31, 2004
Number
of Shares
Fair
Market
Value
Number
of Shares
Fair
Market
Value
Number
of Shares
Fair
Market
Value
(Dollars in millions)
Savings Plan
857,149
$ 65.2
929,537
$ 62.8
1,017,241
$ 56.7
HRSIP
909,237
69.2
921,258
62.2
954,442
53.2
Executive Incentive Compensation Plan
The amended 1995 Executive Incentive Compensation Plan provides the basis for determination of annual incentive
compensation awards under a performance-based Economic Value Added (EVA®) plan. Actual cash awards are
usually paid in January or February of the following year. The Company accrues amounts reflecting the estimated
value of incentive compensation anticipated to be earned for the year. Total executive incentive compensation
expense was $7.7 million, $6.1 million and $4.5 million in 2006, 2005 and 2004, respectively. The 2006 and 2005
expenses included performance-based restricted stock units (“RSUs”) that were granted to certain officers and key
employees of the Company. There were no RSUs granted to officers or employees in 2004. See Note 12, “Stock-
Based Compensation,” for additional information on the equity component of executive compensation.
Harsco Corporation 2006 Annual Report 83
9.
Income Taxes
Income before income taxes and minority interest for both continuing and discontinued operations in the Consolidated
Statements of Income consists of the following:
(In thousands)
United States
International
Total income before income taxes and
minority interest
Income tax expense/(benefit):
Currently payable:
Federal
State
International
Total income taxes currently payable
Deferred federal and state
Deferred international
Total income tax expense
Continuing Operations
Discontinued Operations
Total income tax expense
2006
2005
2004
$ 76,468
225,246
$ 74,013
156,107
$ 57,566
125,619
$ 301,714
$ 230,120
$ 183,185
$ 39,329
2,468
54,325
96,122
(1,328)
2,662
$ 97,456
$ 97,523
(67)
$ 97,456
$ 24,260
637
34,381
59,278
4,550
887
$ 64,715
$ 64,771
(56)
$ 64,715
$
(2,788)
(281)
31,471
28,402
17,110
7,797
$ 53,309
$ 49,034
4,275
$ 53,309
Cash payments for income taxes were $98.9 million, $52.2 million and $26.2 million, for 2006, 2005 and 2004,
respectively.
The following is a reconciliation of the normal expected statutory U.S. federal income tax rate to the effective rate as a
percentage of Income before income taxes and minority interest for both continuing and discontinued operations as
reported in the Consolidated Statements of Income:
U.S. federal income tax rate
State income taxes, net of federal income tax benefit
Export sales corporation benefit/domestic manufacturing
deduction
Deductible 401(k) dividends
Difference in effective tax rates on international earnings and
remittances
Settlement of tax contingencies
Other, net
Effective income tax rate
2006
35.0%
0.7
(0.4)
(0.3)
(2.8)
(0.3)
0.4
2005
35.0%
0.7
(0.6)
(0.4)
(5.4)
(0.9)
(0.3)
2004
35.0%
1.0
(0.6)
(0.4)
(1.7)
(3.3)
(0.9)
32.3%
28.1%
29.1%
The difference in effective tax rates on international earnings and remittances from 2005 to 2006 includes a one-time
benefit recorded in the fourth quarter of 2005 of $2.7 million associated with funds repatriated under the American
Jobs Creation Act of 2004 (“AJCA”). Additionally, during the fourth quarter of 2005, consistent with the Company’s
strategic plan of investing for growth, the Company designated certain international earnings as permanently
reinvested which resulted in a one-time income tax benefit of $3.6 million.
84 Harsco Corporation 2006 Annual Report
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, 2006 and 2005 are as follows:
(In thousands)
Deferred income taxes
Depreciation
Expense accruals
Inventories
Provision for receivables
Postretirement benefits
Deferred revenue
Operating loss carryforwards
Deferred foreign tax credits
Pensions
Currency translation adjustment
Other
Subtotal
Valuation allowance
Total deferred income taxes
Asset
$
-
29,853
5,646
3,060
-
-
18,421
7,681
49,608
-
-
114,269
(13,892)
$ 100,377
2006
Liability
$ 146,301
-
-
-
79
1,736
-
-
3,512
3,258
8,741
163,627
-
$ 163,627
Asset
$
-
23,951
3,510
1,578
1,340
-
22,340
8,708
26,764
2,846
4,615
95,652
(21,682)
$ 73,970
2005
Liability
$ 143,802
-
-
-
-
4,941
-
-
17,129
-
428
166,300
-
$ 166,300
The deferred tax asset and liability balances are included in the following Consolidated Balance Sheets line items:
Deferred income taxes
(In thousands)
Other current assets
Other assets
Other current liabilities
Deferred income taxes
December 31
2006
2005
$ 33,226
11,710
4,594
103,592
$ 29,756
5,203
3,955
123,334
At December 31, 2006, the tax effected amount of net operating loss carryforwards (“NOLs”) totaled $18.4 million. Of
that amount, $8.6 million is attributable to international operations and can be carried forward indefinitely. Tax effected
U.S. federal NOLs are $1.2 million and expire in 2018. Tax effected U.S. state NOLs are $8.6 million. Of that amount,
$0.9 million expire in 2007-2013, $0.7 million expire in 2014-2021, and $7.0 million expire in 2026. Included in the
above-mentioned total are $1.2 million of preacquisition NOLs.
The valuation allowance of $13.9 million and $21.7 million at December 31, 2006 and 2005, respectively, related
principally to NOLs which are uncertain as to realizability. To the extent that the preacquisition NOLs are utilized in the
future and the associated valuation allowance reduced, the tax benefit will be allocated to reduce goodwill.
The change in the valuation allowances for 2006 and 2005 results primarily from the utilization of NOLs, the release of
valuation allowances in certain jurisdictions based on the Company's revaluation of the realizability of future benefits
and the increase in valuation allowances in certain jurisdictions based on the Company’s revaluation of the realizability
of future benefits.
The Company has not provided U.S. income taxes on certain of its non-U.S. subsidiaries’ undistributed earnings as
such amounts are permanently reinvested outside the U.S. At December 31, 2006 and 2005, such earnings were
approximately $425 million and $295 million, respectively. If these earnings were repatriated at December 31, 2006,
the one time tax cost associated with the repatriation would be approximately $48 million. The Company has various
tax holidays in Europe, the Middle East and Asia that expire between 2005 and 2010. During 2006, 2005 and 2004,
these tax holidays resulted in approximately $3.6 million, $2.4 million and $4.2 million, respectively, in reduced income
tax expense.
On October 22, 2004, the AJCA was signed into law. The AJCA included a deduction of 85% for certain international
earnings that are repatriated, as defined in the AJCA, to the U.S. The Company completed its evaluation of the
repatriation provisions of the AJCA and repatriated qualified earnings of approximately $24 million in the fourth quarter
Harsco Corporation 2006 Annual Report 85
of 2005. This resulted in the Company receiving a one-time income tax benefit of approximately $2.7 million during the
fourth quarter of 2005.
10. Commitments and 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 Sheets at December 31, 2006 and 2005 include accruals of
$3.8 million and $2.8 million, respectively, for environmental matters. The amounts charged against pre-tax income
related to environmental matters totaled $2.2 million, $1.5 million and $2.1 million in 2006, 2005 and 2004,
respectively.
The liability for future remediation costs is evaluated on a quarterly basis. Actual costs to be incurred at identified sites
in future periods may vary from the estimates, given inherent uncertainties in evaluating environmental exposures.
The Company does not expect that any sum it may have to pay in connection with environmental matters in excess of
the amounts recorded or disclosed above would have a material adverse effect on its financial position, results of
operations or cash flows.
Royalty Expense Dispute
The Company is involved in a royalty expense dispute with the Canada Revenue Agency (“CRA”). The CRA is
proposing to disallow certain royalty expense deductions claimed by the Company’s Canadian subsidiary on its 1994-
1998 tax returns. As of December 31, 2006, the maximum assessment from the CRA for the period 1994-1998 is
approximately $10.4 million including tax and interest. The Ontario Ministry of Finance (“Ontario”) is also proposing to
disallow these same deductions for the period 1994-1998. As of December 31, 2006, the maximum assessment from
Ontario is approximately $3.3 million, including tax and interest. The Company has filed administrative appeals and
will vigorously contest these disallowances.
The Company currently anticipates that, ultimately, it may have liability for some portion of the assessment in this
royalty expense dispute. However, the Company intends to utilize competent authority proceedings in the U.S. to
recover a portion of any required tax payment amount. The Company believes that any amount not recovered through
these proceedings has been fully reserved as of December 31, 2006 and, therefore will not have a material adverse
effect on the Company’s future results of operations or financial condition. In accordance with Canadian tax law, the
Company made a payment to the CRA in the fourth quarter of 2005 of $5.0 million. Additionally, the Company made a
payment to the Ontario Ministry of Finance in the first quarter of 2006 for the entire disputed amount. These payments
were made for tax compliance purposes and to reduce potential interest expense on the disputed amount. These
payments in no way reflect the Company’s acknowledgement as to the validity of the assessed amounts.
Derailment
One of the Company’s production rail grinders derailed near Baxter, California on November 9, 2006, resulting in two
crew member fatalities and the near total loss of the rail grinder. Government and private investigations into the cause
of the derailment are on-going. Most of the clean-up and salvage efforts are completed, although work on
environmental remediation is on-going. Estimated environmental remediation expenses have been recognized as of
December 31, 2006. All remaining Company rail grinders have been inspected by the Federal Railroad Administration
(“FRA”) and each grinder is fully operational and in compliance with legal requirements. The Company has also
conducted its own inspections to ensure that its grinders are safe and in compliance with contractual commitments.
The Company believes that the insurance proceeds from the loss of the rail grinder will offset the majority of incurred
expenses, which have been recognized as of December 31, 2006. Therefore, the Company does not believe that the
derailment will have a material adverse effect on its financial position, results of operations or cash flows.
Other
The Company has been named as one of many defendants (approximately 90 or more in most cases) in legal actions
alleging personal injury from exposure to airborne asbestos over the past several decades. In their suits, the plaintiffs
have named as defendants, among others, many manufacturers, distributors and installers of numerous types of
equipment or products that allegedly contained asbestos.
86 Harsco Corporation 2006 Annual Report
The Company believes that the claims against it are without merit. The Company has never been a producer,
manufacturer or processor of asbestos fibers. Any component within a Company product which may have contained
asbestos would have been purchased from a supplier. Based on scientific and medical evidence, the Company
believes that any asbestos exposure arising from normal use of any Company product never presented any harmful
levels of airborne asbestos exposure, and moreover, the type of asbestos contained in any component that was used
in those products was protectively encapsulated in other materials and is not associated with the types of injuries
alleged in the pending suits. Finally, in most of the depositions taken of plaintiffs to date in the litigation against the
Company, plaintiffs have failed to specifically identify any Company products as the source of their asbestos exposure.
The majority of the asbestos complaints pending against the Company have been filed in New York. Almost all of the
New York complaints contain a standard claim for damages of $20 million or $25 million against the approximately 90
defendants, regardless of the individual plaintiff’s alleged medical condition, and without specifically identifying any
Company product as the source of plaintiff’s asbestos exposure.
As of December 31, 2006, there are 26,440 pending asbestos personal injury claims filed against the Company. Of
these cases, 26,111 were pending in the New York Supreme Court for New York County in New York State. The other
claims, totaling 329, are filed in various counties in a number of state courts, and in certain Federal District Courts
(including New York), and those complaints generally assert lesser amounts of damages than the New York State
court cases or do not state any amount claimed.
As of December 31, 2006, the Company has obtained dismissal by stipulation, or summary judgment prior to trial, in
16,953 cases.
In view of the persistence of asbestos litigation nationwide, which has not yet been sufficiently addressed either
politically or legally, the Company expects to continue to receive additional claims. However, there have been
developments during the past several years, both by certain state legislatures and by certain state courts, which could
favorably affect the Company’s ability to defend these asbestos claims in those jurisdictions. These developments
include procedural changes, docketing changes, proof of damage requirements and other changes that require
plaintiffs to follow specific procedures in bringing their claims and to show proof of damages before they can proceed
with their claim. An example is the action taken by the New York Supreme Court (a trial court), which is responsible
for managing all asbestos cases pending within New York County in the State of New York. This Court issued an
order in December 2002 that created a Deferred or Inactive Docket for all pending and future asbestos claims filed by
plaintiffs who cannot demonstrate that they have a malignant condition or discernable physical impairment, and an
Active or In Extremis Docket for plaintiffs who are able to show such medical condition. As a result of this order, the
majority of the asbestos cases filed against the Company in New York County have been moved to the Inactive Docket
until such time as the plaintiff can show that they have incurred a physical impairment. As of December 31, 2006, the
Company has been listed as a defendant in 248 Active or In Extremis asbestos cases in New York County. The
Court’s Order has been challenged by plaintiffs.
The Company’s insurance carrier has paid all legal and settlement costs and expenses to date. The Company has
liability insurance coverage under various primary and excess policies that the Company believes will be available, if
necessary, to substantially cover any liability that might ultimately be incurred on these claims.
The Company intends to continue its practice of vigorously defending these cases as they are listed for trial. It is not
possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable
nature of personal injury litigation. Despite this uncertainty, and although results of operations and cash flows for a
given period could be adversely affected by asbestos-related lawsuits, claims and proceedings, management believes
that the ultimate outcome of these cases will not have a material adverse effect on the Company’s financial condition,
results of operations or cash flows.
The Company is subject to various other claims and legal proceedings covering a wide range of matters that arose in
the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance
or by accruals, and if not so covered, are without merit or are of such kind, or involve such amounts, as would not have
a material adverse effect on the financial position, results of operations or cash flows of the Company.
Insurance liabilities are recorded in accordance with SFAS 5, “Accounting for Contingencies.” Insurance reserves
have been estimated based primarily upon actuarial calculations and reflect the undiscounted estimated liabilities for
ultimate losses including claims incurred but not reported. Inherent in these estimates are assumptions which are
based on the Company’s history of claims and losses, a detailed analysis of existing claims with respect to potential
value, and current legal and legislative trends. If actual claims differ from those projected by management, changes
Harsco Corporation 2006 Annual Report 87
(either increases or decreases) to insurance reserves may be required and would be recorded through income in the
period the change was determined. When a recognized liability is covered by third-party insurance, the Company
records an insurance claim receivable to reflect the covered liability. See Note 1, “Summary of Significant Accounting
Policies,” for additional information on Accrued Insurance and Loss Reserves.
11. Capital Stock
The authorized capital stock of the Company consists of 150,000,000 shares of common stock and 4,000,000 shares
of preferred stock, both having a par value of $1.25 per share. The preferred stock is issuable in series with terms as
fixed by the Board of Directors. None of the preferred stock has been issued. On June 24, 1997, the Company
adopted a revised Shareholder Rights Plan. Under that Plan, the Board declared a dividend to stockholders 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, 2006, 750,000 shares of $1.25 par value preferred stock were reserved
for issuance upon exercise of the rights.
The Board of Directors has authorized the repurchase of shares of common stock as follows:
No. of Shares
Authorized to be
Purchased
January 1
1,000,000
1,000,000
1,000,000
No. of Shares
Purchased
-
(133) (a)
-
Additional Shares
Authorized for
Purchase
-
-
-
Remaining No. of
Shares Authorized
for Purchase
December 31
1,000,000
1,000,000
1,000,000
2004
2005
2006
(a) The 133 shares purchased were not part of the share repurchase program. They were shares which a retired employee sold to the
Company in order to pay personal federal and state income taxes on shares issued to the employee upon retirement.
In November 2006, the Board of Directors extended the share purchase authorization through January 31, 2008 for the
1,000,000 shares still remaining from the prior authorization.
In 2006, 2005 and 2004, additional issuances of treasury shares of 1,766 shares, 5,306 shares and 11,195 shares,
respectively, were made for SGB stock option exercises, employee service awards and shares related to vested
restricted stock units.
88 Harsco Corporation 2006 Annual Report
The following table summarizes the Company’s common stock:
Outstanding, January 1, 2004
Stock Options Exercised
Other
Outstanding, December 31, 2004
Stock Options Exercised
Other
Purchases
Outstanding, December 31, 2005
Stock Options Exercised
Other
Shares
Issued
67,357,447
553,584
-
67,911,031
346,754
-
-
68,257,785
233,738
-
Common Stock
Treasury
Shares
Outstanding
Shares
26,490,977
(10,945)
(250)
26,479,782
(4,086)
(1,220)
133
26,474,609
(681)
(1,085)
40,866,470
564,529
250
41,431,249
350,840
1,220
(133)
41,783,176
234,419
1,085
Outstanding, December 31, 2006
68,491,523
26,472,843
42,018,680
The following is a reconciliation of the average shares of common stock used to compute basic earnings per common
share to the shares used to compute diluted earnings per common share as shown on the Consolidated Statements of
Income:
(Amounts in thousands, except per share data)
Income from continuing operations
2006
2005
$196,509
$156,750
2004
$113,540
Average shares of common stock outstanding used to
compute basic earnings per common share
Dilutive effect of stock options and restricted stock units
Shares used to compute dilutive effect of stock options
Basic earnings per common share from continuing
41,953
262
42,215
41,642
438
42,080
41,129
469
41,598
operations
$
4.68
$
3.76
$
2.76
Diluted earnings per common share from continuing
operations
$
4.65
$
3.73
$
2.73
All outstanding stock options were included in the computation of diluted earnings per share at December 31, 2006,
2005 and 2004.
On January 23, 2007, the Company’s Board of Directors approved a two-for-one stock split. One additional share of
common stock will be issued on March 26, 2007, to stockholders of record at the close of business on February 28,
2007.
The total number of authorized common stock shares and par value were unchanged by this action. The stock split
will require retroactive restatement of all historical share and per share data in the first quarter ending on March 31,
2007. Stockholder’s equity will also be restated to give retroactive recognition of the stock split. For all periods
presented, the par value of the additional shares resulting from the split will be reclassified from Additional paid-in
capital to Common stock.
All references to the number of shares and per share amounts in the Consolidated Financial Statements for the years
2006, 2005 and 2004 are presented on a pre-split basis.
Harsco Corporation 2006 Annual Report 89
The company’s historical earnings per common share on a pro forma basis (unaudited), assuming the stock split
had occurred on January 1, 2004, would be as follows:
Year Ended December 31
Basic earnings per common share:
Continuing operations
Discontinued operations
Basic earnings per common share
Diluted earnings per common share:
Continuing operations
Discontinued operations
Diluted earnings per common share
(a) Does not total due to rounding.
Pro Forma Earnings Per Common Share
2005
2004
2006
$ 2.34
-
$ 2.34
$ 2.33
-
$ 2.33
$ 1.88
-
$ 1.88
$ 1.86
-
$ 1.86
$ 1.38
0.09
$ 1.47
$ 1.36
0.09
$ 1.46 (a)
12. Stock-Based Compensation
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payments” (“SFAS
123(R)”), which replaced SFAS No. 123, “Accounting for Stock-Based Compensation,” and superseded Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123(R)
requires the cost of employee services received in exchange for an award of equity instruments to be based upon the
grant-date fair value of the award (with limited exceptions). Additionally, this cost is to be recognized as expense over
the period during which an employee is required to provide services in exchange for the award (usually the vesting
period). However, this recognition period would be shorter if the recipient becomes retirement-eligible prior to the
vesting date. SFAS 123(R) also requires that the additional tax benefits the Company receives from stock-based
compensation be recorded as cash inflows from financing activities in the statement of cash flows. Prior to January 1,
2006, the Company applied the provisions of APB 25 in accounting for awards made under the Company’s stock-
based compensation plans.
The Company adopted the provisions of SFAS 123(R) using the modified-prospective transition method. Under this
method, results from prior periods have not been restated. During 2002 and 2003, the Company ceased granting
stock options to employees and non-employee directors, respectively. Primarily because of this, the effect of adopting
SFAS 123(R) was not material to the Company’s income from continuing operations, income before income taxes, net
income, basic or diluted earnings per share or cash flows from operating and financing activities for the year ended
December 31, 2006, and the cumulative effect of adoption using the modified-prospective transition method was not
material. In addition, the Company elected to use the short-cut transition method for calculating the historical pool of
windfall tax benefits.
In 2004, the Board of Directors approved the granting of performance-based restricted stock units as the long-term
equity component of director, officer and certain key employee compensation. The restricted stock units require no
payment from the recipient and compensation cost is measured based on the market price on the grant date and is
generally recorded over the vesting period. The vesting period for restricted stock units granted to non-employee
directors is one year and each restricted stock unit will be exchanged for a like number of shares of Company stock
following the termination of the participant’s service as a director. The vesting period for restricted stock units granted
to officers and certain key employees is three years, and, upon vesting, each restricted stock unit will be exchanged for
a like number of shares of the Company’s stock. In September 2006, the Board of Directors approved changes to the
employee restricted stock units program where future awards will vest on a pro rata basis over a three-year period and
the specified retirement age will be 62. This compares with the prior three-year cliff vesting and retirement age of 65.
Restricted stock units do not have an option for cash payment.
90 Harsco Corporation 2006 Annual Report
The following table summarizes restricted stock units issued and the compensation expense recorded for the years
ended December 31, 2006 and 2005:
Stock-based Compensation Expense
(Dollars in thousands, except per unit)
Restricted
Stock Units
Fair Value
per Unit
2006
Expense
2005
2004
Directors:
May 1, 2004
May 1, 2005
May 1, 2006
Employees:
January 24, 2005
January 24, 2006
Total
3,500
6,000
8,000
$ 43.42
53.75
82.59
$
32,700
46,550
96,750
50.41
67.70
-
108
440
477
914
$
51
215
-
502
-
$ 101
-
-
-
-
$ 1,939
$ 768
$ 101
Restricted stock unit activity for the year ended December 31, 2006 was as follows:
Nonvested at January 1, 2006
Granted
Vested
Forfeited
Restricted
Stock Units
31,750
54,550
(7,833)
(5,850)
Weighted Average
Grant-Date
Fair Value
$ 50.62
69.88
73.17
61.79
Nonvested at December 31, 2006
72,617
$ 61.76
As of December 31, 2006, the total unrecognized compensation costs related to nonvested restricted stock units was
$2.7 million which is expected to be recognized over a weighted-average period of approximately 1.8 years.
As of December 31, 2006, 2005 and 2004, excess tax benefits, resulting principally from stock options were $3.6
million, $3.9 million and $3.3 million, respectively.
No stock options have been granted to officers and employees since February 2002. No stock options have been
granted to non-employee directors since May 2003. Prior to these dates, the Company had granted stock options for
the purchase of its common stock to officers, certain key employees and non-employee directors under two
stockholder-approved plans. The exercise price of the stock options was the fair value on the grant date, which was
the date the Board of Directors approved the respective grants. The 1995 Executive Incentive Compensation Plan
authorizes the issuance of up to 4,000,000 shares of the Company's common stock for use in paying incentive
compensation awards in the form of stock options or other equity awards such as restricted stock, restricted stock units
or stock appreciation rights. The 1995 Non-Employee Directors' Stock Plan authorizes the issuance of up to 300,000
shares of the Company's common stock for equity awards. At December 31, 2006, there were 1,242,231 and 148,500
shares available for granting equity awards under the 1995 Executive Incentive Compensation Plan and the 1995
Non-Employee Directors' Stock Plan, respectively. Generally, new shares are issued for exercised stock options and
treasury shares are issued for vested restricted stock units.
Options issued under the 1995 Executive Incentive Compensation Plan generally vested and became exercisable one
year following the date of grant except options issued in 2002 generally vested and became exercisable two years
following the date of grant. Options issued under the 1995 Non-Employee Director’s Stock Plan generally became
exercisable one year following the date of grant but vested immediately. The options under both Plans expire ten
years from the date of grant.
Harsco Corporation 2006 Annual Report 91
Stock option activity for the years ended December 31, 2006, 2005 and 2004 was as follows:
Stock Options
Shares
Under Option
Weighted Average
Exercise Price
Aggregate Intrinsic
Value (in millions) (c)
Outstanding, January 1, 2004
Exercised
Terminated and Expired
1,695,080
(564,529)
(9,450)
Outstanding, December 31, 2004
Exercised
Terminated and Expired
1,121,101 (a)
(370,836)
(1,240)
Outstanding, December 31, 2005
Exercised
Terminated and Expired
749,025 (b)
(234,419)
(900)
Outstanding, December 31, 2006
513,706
$30.72
30.02
40.25
$31.01
29.10
33.41
$31.93
34.06
28.75
$30.97
$22.5
-
-
$27.9
-
-
$26.9
-
$23.4
(a)
(b)
(c)
Included in options outstanding at December 31, 2004 were 5,107 options granted to SGB key employees as part of the Company’s
acquisition of SGB in 2000. These options were not a part of the 1995 Executive Compensation Plan, or the 1995 Non-Employee
Directors’ Stock Plan.
Included in options outstanding at December 31, 2005 were 681 options granted to SGB key employees as part of the Company's
acquisition of SGB in 2000. These options were not a part of the 1995 Executive Compensation Plan, or the 1995 Non-Employee Directors'
Stock Plan.
Intrinsic value is defined as the difference between the current market value and the exercise price.
The total intrinsic value of options exercised during the twelve months ended December 31, 2006, 2005 and 2004
were $10.8 million, $11.1 million and $9.5 million, respectively.
Options to purchase 513,706 shares were exercisable at December 31, 2006. The following table summarizes
information concerning outstanding and exercisable options at December 31, 2006.
Range of
Exercisable Prices
$25.63 – $29.00
29.31 – 32.65
32.81 – 46.16
Stock Options Outstanding and Exercisable
Number
Outstanding
and
Exercisable
211,208
244,894
57,604
513,706
Remaining
Contractual Life
In Years
3.28
4.99
3.97
Weighted
Average
Exercise Price
$27.47
32.54
37.09
13. Financial Instruments
Off-Balance Sheet Risk
As collateral for the Company’s performance and to insurers, the Company is contingently liable under standby letters
of credit, bonds and bank guarantees in the amounts of $128.4 million and $154.0 million at December 31, 2006 and
2005, respectively. These standby letters of credit, bonds and bank guarantees are generally in force for up to four
years. Certain issues have no scheduled expiration date. The Company pays fees to various banks and insurance
companies that range from 0.25 percent to 1.90 percent per annum of the instruments’ face value. If the Company
were required to obtain replacement standby letters of credit, bonds and bank guarantees as of December 31, 2006 for
those currently outstanding, it is the Company's opinion that the replacement costs would not vary significantly from
the present fee structure.
92 Harsco Corporation 2006 Annual Report
The Company has currency exposures in approximately 45 countries. The Company's primary foreign currency
exposures during 2006 were in the United Kingdom, members of the European Economic and Monetary Union, Brazil,
Canada and South Africa.
Off-Balance Sheet Risk – Third Party Guarantees
In connection with the licensing of one of the Company’s trade names and providing certain management services (the
furnishing of selected employees), the Company guarantees the debt of certain third parties related to its international
operations. These guarantees are provided to enable the third parties to obtain financing of their operations. The
Company receives fees from these operations, which are included as Services sales in the Company’s Consolidated
Statements of Income. The revenue the Company recorded from these entities was $2.2 million, $1.9 million and $1.0
million for the twelve months ended December 31, 2006, 2005 and 2004, respectively. The guarantees are renewed
on an annual basis and the Company would only be required to perform under the guarantees if the third parties
default on their debt. The maximum potential amount of future payments (undiscounted) related to these guarantees
was $2.9 million at December 31, 2006 and 2005. There is no recognition of this potential future payment in the
accompanying financial statements as the Company believes the potential for making these payments is remote.
These guarantees were renewed in June 2006, September 2006 and November 2006.
The Company provided an environmental indemnification for property that was sold to a third party in 2006. The term
of this guarantee is three years and the Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property. The Company is not aware of any environmental issues related to
the property. The maximum potential amount of future payments (undiscounted) related to this guarantee is $0.2
million at December 31, 2006. There is no recognition of this potential future payment in the accompanying financial
statements as the Company believes the potential for making this payment is remote.
The Company provided an environmental indemnification for property that was sold to a third party in 2006. The term
of this guarantee is indefinite, and the Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property relating to the time the Company owned the property. The
Company is not aware of any environmental issues related to this property. The maximum potential amount of future
payments (undiscounted) related to this guarantee is estimated to be $3.0 million at December 31, 2006. There is no
recognition of this potential future payment in the accompanying financial statements as the Company believes the
potential for making this payment is remote.
The Company provides guarantees related to arrangements with certain customers that include joint and several
liability for actions for which the Company may be partially at fault. The terms of these guarantees do not exceed four
years and the maximum amount of future payments (undiscounted) related to these guarantees is $3.0 million per
occurrence. This amount represents the Company’s self-insured maximum limitation. There is no specific recognition
of potential future payments in the accompanying financial statements as the Company is not aware of any claims.
The Company provided a guarantee related to the payment of taxes for a product line that was sold to a third party in
2005. The term of this guarantee is five years, and the Company would only be required to perform under the
guarantee if taxes were not properly paid to the government while the Company owned the product line in accordance
with applicable statutes. The Company is not aware of any instances of noncompliance related to these statutes. The
maximum potential amount of future payments (undiscounted) related to this guarantee is estimated to be $1.3 million
at December 31, 2006. There is no recognition of any potential future payment in the accompanying financial
statements as the Company believes the potential for making this payment is remote.
The Company provided an environmental indemnification for property that was sold to a third party in 2004. The term
of this guarantee is seven years and the Company would only be required to perform under the guarantee if an
environmental matter is discovered on the property relating to the time the Company owned the property that was not
known by the buyer at the date of sale. The Company is not aware of any environmental issues related to this
property. The maximum potential amount of future payments (undiscounted) related to this guarantee is $0.8 million at
December 31, 2006 and 2005. There is no recognition of this potential future payment in the accompanying financial
statements as the Company believes the potential for making this payment is remote.
Every three years, the Company requires a third party to review procedures and record keeping related to the
production of certain products. Commencing in 2004, the Company provided an indemnification for any costs incurred
by the third party resulting from an injury while these services are being provided to the Company. In addition, the
Company provided an indemnification for certain costs resulting from an outside claim against the third party. The
indemnification is provided for as long as the Company is producing products which meet the third party’s
specifications. At December 31, 2006 and 2005, the maximum potential amount of future payments (undiscounted)
related to this guarantee is $3.0 million per occurrence. This amount represents the Company’s self-insured maximum
Harsco Corporation 2006 Annual Report 93
limitation. There is no specific recognition of this potential future payment in the accompanying financial statements as
the Company is not aware of any claims.
Prior to the Company’s acquisition of the business, Hünnebeck guaranteed certain third party debt to leasing
companies in connection with the sale of equipment. The guarantees expire on January 1, 2007 and December 1,
2008. At December 31, 2006, the maximum potential amount of future payments (undiscounted) related to these
guarantees was $0.1 million. The Company would only be required to perform under the guarantees if a customer
defaulted on the lease payments. There is no recognition of these potential future payments in the accompanying
financial statements as the Company believes the potential for making these payments is remote.
Liabilities for the fair value of each of the guarantee instruments noted above were recognized in accordance with
FASB Interpretation No. 45, “Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others” (“FIN 45”). These liabilities are included in Other current liabilities or Other
liabilities (as appropriate) on the Consolidated Balance Sheets. The recognition of these liabilities did not have a
material impact on the Company’s financial condition or results of operations for the twelve months ended December
31, 2006 or 2005.
In the normal course of business, the Company provides legal indemnifications related primarily to the performance of
its products and services and patent and trademark infringement of its goods and services sold. These
indemnifications generally relate to the performance (regarding function, not price) of the respective goods or services
and therefore no liability is recognized related to the fair value of such guarantees.
Derivative Instruments and Hedging Activities
The Company has several hedges of net investment recorded in accordance with SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”). The Company recorded a debit of $14.0 million and a
credit of $16.3 million during 2006 and 2005, respectively, in the foreign currency translation adjustments line of Other
comprehensive income (loss) related to hedges of net investments.
At December 31, 2006 and 2005, the Company had $170.9 million and $157.9 million contracted amounts,
respectively, of foreign currency forward exchange contracts outstanding. These contracts are part of a worldwide
program to minimize foreign currency exchange operating income and balance sheet exposure. The unsecured
contracts outstanding at December 31, 2006 mature within six months and are with major financial institutions. The
Company may be exposed to credit loss in the event of non-performance by the other parties to the contracts. The
Company evaluates the credit worthiness of the counterparties and does not expect default by them. Foreign currency
forward exchange contracts are used to hedge commitments, such as foreign currency debt, firm purchase
commitments and foreign currency cash flows for certain export sales transactions.
The following tables summarize by major currency the contractual amounts of the Company's forward exchange
contracts in U.S. dollars as of December 31, 2006 and 2005. 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.
Forward Exchange Contracts
(In thousands)
As of December 31, 2006
Australian Dollar
Australian Dollar
Canadian Dollar
Canadian Dollar
Euros
Euros
British Pounds Sterling
British Pounds Sterling
Mexican Pesos
Taiwan Dollar
Taiwan Dollar
South African Rand
Total
Type
Sell
Buy
Sell
Buy
Sell
Buy
Sell
Buy
Buy
Buy
Sell
Sell
U.S. Dollar
Equivalent
$ 2,373
1,050
3,050
7,850
10,828
52,699
19,503
70,551
509
895
895
691
$ 170,894
Maturity
January 2007
January 2007
January 2007
January 2007
January 2007
January 2007
January 2007
January through March 2007
January 2007
January 2007
January 2007
January through May 2007
94 Harsco Corporation 2006 Annual Report
$
Recognized
Gain (Loss)
(16)
-
26
(151)
12
288
34
(386)
3
(2)
3
(17)
(206)
$
At December 31, 2006, the Company held forward exchange contracts in British pounds sterling, euros, Canadian
dollars, Australian dollars, Mexican pesos, South African rands and Taiwan dollars which were used to offset certain
future payments between the Company and its various subsidiaries, vendors or customers. These contracts all mature
by May 2007. The Company had outstanding forward contracts designated as SFAS 133 cash flow hedges in the
amount of $1.1 million at December 31, 2006. These forward contracts had a net unrealized gain of $5 thousand that
was included in Other comprehensive income (loss), net of deferred taxes, at December 31, 2006. The Company did
not elect to treat the remaining contracts as hedges under SFAS 133 and so mark-to-market gains and losses were
recognized in net income.
Forward Exchange Contracts
(In thousands)
As of December 31, 2005
Euros
Euros
British pounds sterling
British pounds sterling
Canadian dollars
Canadian dollars
Taiwan dollars
Total
Type
Buy
Sell
Buy
Sell
Buy
Sell
Sell
U.S. Dollar
Equivalent
$ 14,343
1,987
75,743
56,929
942
1,886
6,088
$ 157,918
Maturity
January through June 2006
January 2006
January 2006
January 2006
January 2006
January 2006
August through November 2006
$
Recognized
Gain (Loss)
(211)
15
(1,334)
436
5
15
-
$ (1,074)
At December 31, 2005, the Company held forward exchange contracts in British pounds sterling, euros, Canadian
dollars and Taiwan dollars which were used to offset certain future payments between the Company and its various
subsidiaries, vendors or customers. These contracts all mature by November 2006. The Company had outstanding
forward contracts designated as SFAS 133 cash flow hedges in the amount of $6.1 million at December 31, 2005.
These forward contracts had a net unrealized loss of $112 thousand that was included in other comprehensive income
(loss), net of deferred taxes, at December 31, 2005. The Company did not elect to treat the remaining contracts as
hedges under SFAS 133 and so mark-to-market gains and losses were recognized in net income.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash
and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high-quality
financial institutions and, by policy, limits the amount of credit exposure to any one institution.
Concentrations of credit risk with respect to accounts receivable are generally limited due to the Company’s large
number of customers and their dispersion across different industries and geographies. However, the Company’s Mill
Services Segment has several large customers throughout the world with significant accounts receivable balances. In
December 2005, the Company acquired BISNH. This acquisition has increased the Company’s corresponding
concentration of credit risk to customers in the steel industry. Additionally, consolidation in the global steel industry
has increased the Company’s exposure to specific customers. Additional consolidation is possible. Should
transactions occur involving some of the steel industry’s larger companies, which are customers of the Company, it
would result in an increase in concentration of credit risk for the Company.
The Company generally does not require collateral or other security to support customer receivables. If a receivable
from one or more of the Company’s larger customers becomes uncollectible, it could have a material effect on the
Company’s results of operations and cash flows.
Fair Value of Financial Instruments
The major methods and assumptions used in estimating the fair values of financial instruments are as follows:
Cash and cash equivalents
The carrying amount approximates fair value due to the relatively short period to maturity of these instruments.
Foreign currency forward exchange contracts
The fair value of foreign currency forward exchange contracts is estimated by obtaining quotes from brokers.
Long-term debt
The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Harsco Corporation 2006 Annual Report 95
The carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 2006 and
2005 are as follows:
(In thousands)
Financial Instruments
2006
2005
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Assets:
Cash and cash equivalents
Liabilities:
Long-term debt including current maturities
Foreign currency forward exchange
contracts
$ 101,260
$ 101,260
$ 120,929
$ 120,929
877,947
893,373
911,925
947,406
206
206
1,074
1,074
14.
Information by Segment and Geographic Area
The Company reports information about its operating segments using the "management approach" in accordance with
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131). This approach is
based on the way management organizes and reports the segments within the enterprise for making operating
decisions and assessing performance. The Company's reportable segments are identified based upon differences in
products, services and markets served. There were no significant inter-segment sales.
The Company's Divisions are aggregated into three reportable segments and an “all other” category labeled
Engineered Products and Services. These segments and the types of products and services offered include the
following:
Mill Services Segment
This segment provides on-site, outsourced services to steel mills and other metal producers such as aluminum.
Services include slag processing; semi-finished inventory management; material handling; scrap management; in-plant
transportation; and a variety of other services.
Access Services Segment
Major services include the rental and sale of scaffolding, shoring and concrete forming systems for non-residential
construction, international multi-dwelling residential construction projects, industrial maintenance projects, as well as a
variety of other access services including project engineering and equipment installation.
Products and services are provided to commercial and industrial construction contractors; public utilities; industrial
plants; and the infrastructure repair and maintenance markets.
Gas Technologies Segment
Major products and services include tanks, cylinders and valves for the containment and control of compressed gases.
Major customers include various industrial markets and users of compressed gases; the hospital, life support, and
refrigerant gas industries; welding distributors; medical laboratories; beverage carbonation users; and the animal
husbandry industry.
Engineered Products and Services (“all other”) Category
Major products and services include railway track maintenance equipment and services; industrial grating; air-cooled
heat exchangers; granules for asphalt roofing shingles and abrasives for industrial surface preparation derived from
coal slag; and boilers, water heaters and process equipment, including industrial blenders, dryers and mixers.
Major customers include private and government-owned railroads and urban mass transit systems worldwide;
industrial plants and the non-residential, commercial and public construction and retrofit markets; the natural gas
exploration and processing industry; asphalt roofing manufacturers; and the chemical, food processing and
pharmaceutical industries.
96 Harsco Corporation 2006 Annual Report
Other Information
The measurement basis of segment profit or loss is operating income. Sales of the Company in the United States and
the United Kingdom exceeded 10% of consolidated sales with 38% and 20%, respectively, in 2006; 42% and 20%,
respectively, in 2005; and 42% and 21%, respectively, in 2004. There are no significant inter-segment sales.
No single customer represented 10% or more of the Company’s sales in 2005 and 2004. However, one customer in
the Mill Services Segment provided $351.0 million in sales for 2006, which was 10% of the Company’s revenues for
the year. In addition, the Mill Services Segment is dependent largely on the global steel industry and in 2006, 2005
and 2004, there were two customers that each provided in excess of 10% of this Segment’s revenues under multiple
long-term contracts at several mill sites. The loss of any one of these contracts would not have a material adverse
impact upon the Company’s financial position or cash flows; however, it could have a material effect on quarterly or
annual results of operations. Additionally, these customers have significant accounts receivable balances. Further
consolidation in the global steel industry is probable. Should transactions occur involving some of the Company’s
larger steel industry customers, it would result in an increase in concentration of credit risk for the Company.
Corporate assets include principally cash, insurance receivables, prepaid pension costs and United States deferred
income taxes. Net Property, Plant and Equipment in the United States represented 30%, 33% and 34% of total Net
Property, Plant and Equipment as of December 31, 2006, 2005 and 2004, respectively. Net Property, Plant and
Equipment in the United Kingdom represented 23% of total Net Property, Plant and Equipment as of December 31,
2006, 2005 and 2004.
Segment Information
December 31, 2006
December 31, 2005
December 31, 2004
Twelve Months Ended
(In thousands)
Sales
Operating
Income
(Loss)
Operating
Income
(Loss)
Sales
Operating
Income
(Loss)
Sales
Mill Services Segment
$1,366,530
$ 147,798
$1,060,354 $ 109,591
$ 997,410 $105,490
Access Services Segment
1,080,924
120,382
788,750
74,742
706,490
44,464
Gas Technologies Segment
397,680
14,160
370,201
17,912
339,086
14,393
Segment Totals
2,845,134
282,340
2,219,305 202,245
2,042,986
164,347
Engineered Products and Services
(“all other”) Category
578,159
77,466
546,905
69,699
459,073
47,029
General Corporate
-
(1,337)
-
(2,996)
-
(1,527)
Consolidated Totals
$3,423,293
$ 358,469
$2,766,210 $ 268,948
$2,502,059 $209,849
Harsco Corporation 2006 Annual Report 97
Reconciliation of Segment Operating Income to Consolidated Income
Before Income Taxes and Minority Interest
(In thousands)
Twelve Months Ended
December 31
2006
December 31
2005
December 31
2004
Segment operating income
$ 282,340
$ 202,245
$ 164,347
Engineered Products and Services
(“all other”) Category
General Corporate Expense
77,466
(1,337)
69,699
47,029
(2,996)
(1,527)
Operating income from continuing operations
358,469
268,948
209,849
Equity in income of unconsolidated entities, net
Interest Income
Interest Expense
192
3,709
74
3,165
128
2,319
(60,478)
(41,918)
(41,057)
Income from continuing operations before income taxes
and minority interest
Segment Information
$ 301,892
$ 230,269
$ 171,239
Assets (a)
Depreciation and
Amortization
(In thousands)
2006
2005
2004
2006
2005
2004
Mill Services Segment
$ 1,401,603 $ 1,273,522 $ 985,538 $ 151,005 $ 114,952
$ 107,682
Access Services Segment
1,239,892
976,936
763,916
69,781
53,263
48,005
Gas Technologies Segment
271,367
253,276
257,233
11,411
12,610
12,735
Segment Totals
2,912,862
2,503,734
2,006,687
232,197
180,825
168,422
Engineered Products and Services
(“all other”) Category
Corporate
Total
287,482
315,241
274,627
18,922
15,735
14,675
126,079
156,829
108,442
1,863
1,505
1,274
$ 3,326,423 $ 2,975,804 $ 2,389,756 $ 252,982 $ 198,065
$ 184,371
(a) Assets from discontinued operations of $0.0 million, $0.4 million and $0.5 million in 2006, 2005 and 2004, respectively, are included in the Gas
Technologies Segment.
Capital Expenditures
(In thousands)
2006
2005
2004
Mill Services Segment
$ 161,651 $ 155,595 $ 120,890
Access Services Segment
138,459
86,668
50,439
Gas Technologies Segment
9,330
6,438
8,958
Segment Totals
309,440
248,701
180,287
Engineered Products and Services
(“all other”) Category
Corporate
Total
27,635
39,834
22,585
3,098
1,704
1,363
$ 340,173 $ 290,239 $ 204,235
98 Harsco Corporation 2006 Annual Report
Information by Geographic Area (a)
(In thousands)
United States
Sales to Unaffiliated Customers
2004
2005
2006
Net Property, Plant and Equipment
2004
2005
2006
$ 1,296,256 $ 1,157,034 $1,047,416
$ 401,997 $ 371,039 $ 313,391
United Kingdom
676,520
546,673 534,097
298,582
258,786 218,127
All Other
1,450,517
1,062,503 920,546
621,888
509,983 400,780
Totals excluding
Corporate
$ 3,423,293 $ 2,766,210 $2,502,059
$ 1,322,467 $ 1,139,808 $ 932,298
(a) Revenues are attributed to individual countries based on the location of the facility generating the revenue.
Information about Products and Services
(In thousands)
Product Group
Mill services
Access services
Industrial gas products
Railway track maintenance services and equipment
Industrial grating products
Industrial abrasives and roofing granules
Heat exchangers
Powder processing equipment and heat transfer products
Consolidated Sales
Sales to Unaffiliated Customers
2004
2005
2006
$1,366,530
1,080,924
397,680
231,625
107,048
73,112
124,829
41,545
$3,423,293
$1,060,354
788,750
370,201
247,452
98,845
72,216
92,339
36,053
$2,766,210
$ 997,410
706,490
339,086
209,765
85,609
70,863
60,103
32,733
$ 2,502,059
15. Other (Income) and Expenses
In the years 2006, 2005 and 2004, the Company recorded pre-tax Other (income) and expenses from continuing
operations of $6.9 million, $2.0 million and $4.9 million, respectively. The major components of this income statement
category are as follows:
(In thousands)
Net gains
Other (Income) and Expenses
2005
2006
2004
$ (5,450)
$ (9,674)
$ (1,524)
Impaired asset write-downs
4,441
579
484
Employee termination benefit costs
3,552
9,060
3,892
Costs to exit activities
1,389
1,028
975
Other expense
2,919
1,007
1,035
Total
$ 6,851
$ 2,000
$ 4,862
Net Gains
Net gains are recorded from the sales of redundant properties (primarily land, buildings and related equipment) and
non-core assets. In 2006, gains related to assets principally in Europe, South America and the United States. In
2005, gains related to assets principally in the United States and Europe.
Harsco Corporation 2006 Annual Report 99
(In thousands)
2006
Net Gains
2005
2004
Mill Services Segment
$ (2,823)
$ (4,202)
$
(354)
Access Services Segment
(2,510)
(5,413)
(1,124)
Gas Technologies Segment
Engineered Products and Services (“all
other”) Category
Corporate
Total
-
(117)
-
-
(59)
-
-
(46)
-
$ (5,450)
$ (9,674)
$ (1,524)
Cash proceeds associated with these gains are included in Proceeds from the sale of assets in the investing activities
section of the Consolidated Statements of Cash Flows.
Impaired Asset Write-downs
Impairment losses are measured as the amount by which the carrying amount of assets exceeded their fair value. Fair
value is estimated based upon the expected future realizable cash flows including anticipated selling prices. In 2006,
the Company recorded an asset impairment loss of $4.2 million for certain plant, property and equipment related to
exiting an underperforming product line in the Gas Technologies Segment.
Non-cash impaired asset write-downs are included in Other, net in the Consolidated Statements of Cash Flows as
adjustments to reconcile net income to net cash provided by operating activities.
Employee Termination Benefit Costs
The Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS 146”)
on January 1, 2003. This standard addresses involuntary termination costs associated with one-time benefit
arrangements provided as part of an exit or disposal activity. These costs and the related liabilities are recognized by
the Company when a formal plan for reorganization is approved at the appropriate level of management and
communicated to the affected employees. Additionally, costs associated with on-going benefit arrangements, or in
certain countries where statutory requirements dictate a minimum required benefit, are recognized when they are
probable and estimable, in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,”
(SFAS 112).
The total amount of employee termination benefit costs incurred for the years 2006, 2005 and 2004 was as follows.
None of the actions are expected to incur any additional costs.
(In thousands)
Employee Termination Benefit Costs
2005
2004
2006
Mill Services Segment
$ 1,820
$ 4,827
$ 1,338
Access Services Segment
Gas Technologies Segment
Engineered Products and Services (“all
other”) Category
Corporate
Total
799
57
821
55
1,647
107
1,256
1,223
1,504
229
685
136
$ 3,552
$ 9,060
$ 3,892
The terminations for the years 2004 to 2006 occurred principally in Europe, South America and the United States.
100 Harsco Corporation 2006 Annual Report
Employee termination benefit costs incurred but not paid as of December 31 2006 totaled $1.9 million. The payments
for employee termination benefit costs are reflected as uses of operating cash in the Consolidated Statements of Cash
Flows.
Costs Associated with Exit or Disposal Activities
Costs associated with exit or disposal activities are recognized in accordance with SFAS 146 and are included as a
component of Other expenses in the Company’s Consolidated Statements of Income. SFAS 146 addresses
involuntary termination costs (as discussed above) and other costs associated with exit or disposal activities (exit
costs). Costs to terminate a contract that is not a capital lease are recognized when an entity terminates the contract
or when an entity ceases using the right conveyed by the contract. This includes the costs to terminate the contract
before the end of its term or the costs that will continue to be incurred under the contract for its remaining term without
economic benefit to the entity (e.g., lease run-out costs). Other costs associated with exit or disposal activities (e.g.,
costs to consolidate or close facilities and relocate equipment or employees) are recognized and measured at their fair
value in the period in which the liability is incurred. In 2006, $1.4 million of exit costs were incurred. These were
principally relocation costs and lease run-out costs for the Engineered Products and Services Category and the Mill
Services and Access Services Segments.
In 2005 and 2004, exit costs incurred were $1.0 million and $1.0 million, respectively. These were principally lease
run-out costs, lease termination costs and relocation costs for the Mill Services and Access Services Segments and
the Engineered Products and Services Category.
16. Components of Accumulated Other Comprehensive Income (Loss)
Total Accumulated other comprehensive income (loss) is included in the Consolidated Statements of Stockholders’
Equity. The components of Accumulated other comprehensive income (loss) are as follows:
Accumulated Other Comprehensive Income (Loss)
(In thousands)
December 31
2006
2005
Cumulative foreign exchange translation adjustments
$
65,416
$
(26,162)
Fair value of effective cash flow hedges
Minimum pension liability
Pension and postretirement benefit adjustment
Marketable securities unrealized gains
70
-
(64)
(141,094)
(234,825)
5
-
2
Total Accumulated Other Comprehensive Income (Loss)
$ (169,334)
$ (167,318)
Harsco Corporation 2006 Annual Report 101
Two-Year Summary of Quarterly Results
(Unaudited)
(In millions, except per share amounts)
Quarterly
Sales
Gross profit (a)
Net income
Basic earnings per share
Diluted earnings per share
(In millions, except per share amounts)
Quarterly
Sales
Gross profit (a)
Net income
Basic earnings per share
Diluted earnings per share
2006
First
Second
Third
Fourth
$ 769.6
$ 865.5
$ 875.9
$ 912.3
190.5
224.0
230.0
231.3
34.3
0.82
0.81
53.9
1.28
1.28
55.8
1.33
1.32
52.5
1.25
1.24
2005
First
Second
Third
Fourth
$ 640.1
$ 696.1
$ 697.5
$ 732.5
146.4
169.8
164.8
185.7
23.1
0.56
0.55
41.7
1.00
0.99
40.0
0.96
0.95
51.9
1.24
1.23
(a) Gross profit is defined as Sales less costs and expenses associated directly with or allocated to products sold or services rendered.
Common Stock Price and Dividend Information
(Unaudited)
2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2005
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Market Price Per Share
High
Low
Dividends Declared
Per Share
$ 84.55
89.70
82.42
82.97
$ 61.35
61.10
66.20
70.57
$ 67.52
71.25
67.77
76.00
$ 49.87
52.37
53.56
59.70
$ 0.3250
0.3250
0.3250
0.3550
$ 0.3000
0.3000
0.3000
0.3250
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
Item 9A. Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has conducted an
evaluation of the effectiveness of disclosure controls and procedures as of December 31, 2006. Based on that
102 Harsco Corporation 2006 Annual Report
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective. There have been no changes in internal control over financial reporting that could materially
affect, or are likely to materially affect, internal control over financial reporting.
Management’s Report on Internal Controls Over Financial Reporting is included in Part II, Item 8, “Financial
Statements and Supplementary Data.” Management’s assessment of the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report appearing in Part II, Item 8, “Financial
Statements and Supplementary Data,” which expresses unqualified opinions on management’s assessment and on
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006.
Item 9B. Other Information
10b5-1 Plan
The Chief Executive Officer (“CEO”) of the Company plans to adopt, in the first quarter of 2007, a new personal trading
plan as part of a long-term strategy for asset diversification and liquidity, in accordance with the Securities and
Exchange Commission’s Rule 10b5-1. Under the proposed plan, the CEO will exercise 40,000 shares, under pre-
arranged terms, in open market transactions. The proposed trading plan will expire in April 2007.
Rule 10b5-1 allows officers and directors, at a time when they are not in possession of material non-public information,
to adopt written plans to sell shares on a regular basis under pre-arranged terms, regardless of any subsequent non-
public information they may receive. Exercises of stock options by the CEO pursuant to the terms of his plan will be
disclosed publicly through Form 144 and Form 4 filings with the Securities and Exchange Commission.
Harsco Corporation 2006 Annual Report 103
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information regarding executive officers required by this Item is set forth as a Supplementary Item at the end of Part I
hereof (pursuant to Instruction 3 to Item 401(b) of Regulation S-K). Other information required by this Item is
incorporated by reference to the sections entitled “Corporate Governance,” “Director Information,” “Report of the Audit
Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” of the 2007 Proxy Statement.
The Company’s Code of Ethics for the Chief Executive Officer and Senior Financial Officers (the “Code”) may be found
on the Company’s internet website, www.harsco.com. The Company intends to disclose on its website any
amendments to the Code or any waiver from a provision of the Code. The Code is available in print to any stockholder
who requests it.
Item 11. Executive Compensation
Information regarding compensation of executive officers and directors is incorporated by reference to the sections
entitled “Compensation Discussion and Analysis,” “Compensation Committee Report,” "Executive Compensation,"
"Non-Employee Director Compensation" and “Compensation Committee Interlocks and Insider Participation” of the
2007 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management is incorporated by reference to
the section entitled “Share Ownership of Directors, Management and Certain Beneficial Owners” of the 2007 Proxy
Statement.
Equity Compensation Plan Information
The Company maintains the 1995 Executive Incentive Compensation Plan and the 1995 Non-Employee Directors’
Stock Plan, which allow the Company to grant equity awards to eligible persons. Upon stockholder approval of these
two plans in 1995, the Company terminated the use of the 1986 Stock Option Plan for granting stock option awards.
The Company also assumed options under the SGB Group Plc Discretionary Share Option Plan 1997 (the “SGB
Plan”) upon the Company’s acquisition of SGB Group Plc (“SGB”) in 2000. The SGB Plan terminated in accordance
with its terms when the remaining Harsco Replacement Options were exercised on August 30, 2006.
104 Harsco Corporation 2006 Annual Report
The following table gives information about equity awards under these plans as of December 31, 2006. All securities
referred to are shares of Harsco common stock.
Equity Compensation Plan Information
Column (a)
Column (b)
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Column (c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in Column (a))
513,706
$30.97
1,390,731
-
513,706
-
$30.97
-
1,390,731
Plan category
Equity compensation
plans approved by
security holders (1)
Equity compensation
plans not approved by
security holders
Total
(1) Plans include the 1995 Executive Incentive Compensation Plan, as amended, and the 1995 Non-Employee Directors’ Stock Plan, as
amended.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding certain relationships and related transactions is incorporated by reference to the sections entitled
"Certain Relationships and Related Party Transactions" and “Corporate Governance” of the 2007 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information regarding principal accounting fees and services is incorporated by reference to the sections entitled
“Report of the Audit Committee” and “Fees Billed by the Accountants for Audit and Non-Audit Services” of the 2007
Proxy Statement.
Harsco Corporation 2006 Annual Report 105
Item 15. Exhibits, Financial Statement Schedules
PART IV
(a) 1. The Consolidated Financial Statements are listed in the index to Item 8, "Financial Statements and
Supplementary Data," on page 55.
(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”):
Report of Independent Registered Public
Accounting Firm
Page
57
Schedule II - Valuation and Qualifying
Accounts for the years 2006, 2005 and 2004
107
Schedules other than that listed above are omitted for the reason that they are either not applicable
or not required, or because the information required is contained in the financial statements or notes
thereto.
Condensed financial information of the registrant is omitted since "restricted net assets" of
consolidated subsidiaries does not exceed 25% of consolidated net assets.
Financial statements of 50% or less owned unconsolidated companies are not submitted inasmuch
as (1) the registrant's investment in and advances to such companies do not exceed 20% of the total
consolidated assets, (2) the registrant's proportionate share of the total assets of such companies
does not exceed 20% of the total consolidated assets, and (3) the registrant's equity in the income
from continuing operations before income taxes of such companies does not exceed 20% of the
total consolidated income from continuing operations before income taxes.
106 Harsco Corporation 2006 Annual Report
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Continuing Operations
(Dollars in thousands)
COLUMN A
COLUMN B
COLUMN C
Additions
Balance at
Beginning of
Period
Charged to
Cost and
Expenses
COLUMN D
(Deductions) Additions
Due to
Currency
Translation
Adjustments
Other (a)
COLUMN E
Balance at
End of Period
Description
For the year 2006:
Allowance for Doubtful
Accounts
Deferred Tax Assets –
$ 24,404
$ 9,230
$ 1,880
$ (10,163)
$ 25,351
Valuation Allowance
$ 21,682
$ (5,793)
$
(270)
$ (1,727)
$ 13,892
For the year 2005:
Allowance for Doubtful
Accounts
$ 19,095
$ 6,453
$
(832)
$ (312)
$ 24,404
Deferred Tax Assets –
Valuation Allowance
$ 17,492
$ 2,119
$
172
$ 1,899
$ 21,682
For the year 2004:
Allowance for Doubtful
Accounts
$ 24,612
$ 5,048
$
863
$ (11,428) (b)
$ 19,095
Deferred Tax Assets –
Valuation Allowance
$ 13,098
$ 4,228
$
166
$
-
$ 17,492
(a) Includes principally the use of previously reserved amounts and changes related to acquired companies.
(b) Includes $5,322 for the write-off of six accounts receivable in the Mill Services Segment as well as the write-off of other
accounts receivable for all segments.
Harsco Corporation 2006 Annual Report 107
(a) 3. Listing of Exhibits Filed with Form 10-K
Exhibit
Number
2(a)
Data Required
Location in Form 10-K
Share Purchase Agreement between Sun HB Holdings,
LLC, Boca Raton, Florida, United States of America
and Harsco Corporation, Camp Hill, Pennsylvania,
United States of America dated September 20, 2005
regarding the sale and purchase of the issued share
capital of Hünnebeck Group GmbH, Ratingen,
Germany.
Exhibit to Form 10-Q for the period ended
September 30, 2005
2(b)
Agreement, dated as of December 29, 2005, by and
Exhibit volume, 2005 10-K
among the Harsco Corporation (for itself and as agent
for each of MultiServ France SA, Harsco Europa BV
and Harsco Investment Limited), Brambles U.K.
Limited, a company incorporated under the laws of
England and Wales, Brambles France SAS, a
company incorporated under the laws of France,
Brambles USA, Inc., a Delaware corporation,
Brambles Holdings Europe B.V., a company
incorporated under the laws of the Netherlands, and
Brambles Industries Limited, a company incorporated
under the laws of Australia. In accordance with Item
601(b)(2) of Regulation S-K, the registrant hereby
agrees to furnish supplementally a copy of any
omitted schedule to the Commission upon request.
Portions of Exhibit 2(a) have been omitted pursuant to
a request for confidential treatment. The omitted
portions have been filed separately with the Securities
and Exchange Commission.
2(c)
Stock Purchase Agreement among Excell Materials,
Inc., the Stockholders of Excell Materials, Inc. and
Harsco Corporation dated as of January 4, 2007.
Exhibit volume, 2006 10-K
3(a)
Restated Certificate of Incorporation as amended
Exhibit volume, 1990 10-K
April 24, 1990
3(b)
Certificate of Amendment of Restated Certificate of
Exhibit volume, 1999 10-K
Incorporation filed June 3, 1997
3(c)
Certificate of Designation filed September 25, 1997
Exhibit volume, 1997 10-K
3(d)
By-laws as amended January 23, 2007
Exhibit to Form 8-K dated January 23, 2007
3(e)
Certificate of Amendment of Restated Certificate of
Proxy Statement dated March 22, 2005 on
Incorporation filed April 26, 2005
Appendix A pages A-1 through A-2
4(a)
Harsco Corporation Rights Agreement dated as of
Incorporated by reference to Form 8-A, filed
September 28, 1997, with Chase Mellon Shareholder
Services L.L.C.
September 26, 1997
108 Harsco Corporation 2006 Annual Report
Exhibit
Number
Data Required
Location in Form 10-K
4(b)
Registration of Preferred Stock Purchase Rights
Incorporated by reference to Form 8-A dated
October 2, 1987
4(c)
Current Report on dividend distribution of Preferred
Incorporated by reference to Form 8-K dated
Stock Purchase Rights
October 13, 1987
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
4(g)
Harsco Finance B. V. £200 million, 7.25% Guaranteed
Exhibit to Form 10-Q for the period ended
Notes due 2010
September 30, 2000
4(h) (i)
Indenture, dated as of May 1, 1985, by and between
Exhibit to Form 8-K dated September 8,
Harsco Corporation and The Chase Manhattan Bank
(National Association), as trustee (incorporated herein
by reference to Exhibit 4(d) to the Registration
Statement on Form S-3, filed by Harsco Corporation
on August 23, 1991 (Reg. No. 33-42389))
2003
4(h) (ii)
First Supplemental Indenture, dated as of April 12,
Exhibit to Form 8-K dated September 8,
1995, by and among Harsco Corporation, The Chase
Manhattan Bank (National Association), as resigning
trustee, and Chemical Bank, as successor trustee
2003
4(h) (iii)
Form of Second Supplemental Indenture, by and
Exhibit to Form 8-K dated September 8,
between Harsco Corporation and JPMorgan Chase
Bank, as Trustee
2003
4(h) (iv)
Second Supplemental Indenture, dated as of
Exhibit to 10-Q for the period ended
September 12, 2003, by and between Harsco
Corporation and J.P. Morgan Chase Bank, as Trustee
September 30, 2003
4(i) (i)
Form of 5.125% Global Senior Note due September 15,
Exhibit to Form 8-K dated September 8,
2013
2003
4(i) (ii)
5.125% 2003 Notes due September 15, 2013 described
in Prospectus Supplement dated September 8, 2003
to Form S-3 Registration under Rule 415 dated
December 15, 1994
Incorporated by reference to the Prospectus
Supplement dated September 8, 2003 to
Form S-3, Registration No. 33-56885
dated December 15, 1994
Harsco Corporation 2006 Annual Report 109
Exhibit
Number
Data Required
Location in Form 10-K
Material Contracts - Credit and Underwriting
Agreements
10(a) (i)
$50,000,000 Facility agreement dated December 15,
Exhibit volume, 2000 10-K
2000
10(a) (ii)
Agreement extending term of $50,000,000 Facility
Exhibit volume, 2001 10-K
agreement dated December 15, 2000
10(a) (iii)
Agreement amending term and amount of $50,000,000
Exhibit volume, 2002 10-K
Facility agreement dated December 15, 2000
10(a) (iv)
Agreement extending term of $50,000,000 Facility
Exhibit volume, 2003 10-K
agreement dated December 15, 2000
10(a) (v)
Agreement extending term of $50,000,000 Facility
Exhibit to Form 8-K dated January 25, 2005
agreement dated December 15, 2000
10(a) (vi)
Agreement extending term of $50,000,000 Facility
Exhibit volume, 2005 10-K
agreement dated December 15, 2000
10(a) (vii) Agreement extending term of $50,000,000 Facility
Exhibit to Form 8-K dated December 22,
agreement dated December 15, 2000
2006
10(b)
10(b)(i)
10(c)
10(e)
Commercial Paper Dealer Agreement dated September
24, 2003, between ING Belgium SA/NV and Harsco
Finance B.V.
Exhibit volume, 2003 10-K
Commercial Paper Dealer Agreement dated September
24, 2003, between ING Belgium SA/NV and Harsco
Finance B.V. – Supplement No. 1 to the Dealer
Agreement
Exhibit to Form 8-K dated November 8,
2005
Commercial Paper Payment Agency Agreement Dated
October 1, 2000, between Salomon Smith Barney Inc.
and Harsco Corporation
Exhibit volume, 2000 10-K
Issuing and Paying Agency Agreement, Dated October
12, 1994, between Morgan Guaranty Trust Company
of New York and Harsco Corporation
Exhibit volume, 1994 10-K
10(f)
364-Day Credit Agreement
Exhibit to Form 8-K dated December 23,
2005
110 Harsco Corporation 2006 Annual Report
Exhibit
Number
Data Required
Location in Form 10-K
10(f)(i)
Amendment No. 1 to the Credit Agreement, dated as of
Exhibit to Form 8-K dated December 22,
December 22, 2006, by and among Harsco
Corporation, The Royal Bank of Scotland, PLC, as
syndication agent, and Citicorp North America, Inc.,
as administrative agent.
2006
10(g)
Five Year Credit Agreement
Exhibit to Form 8-K dated November 23,
2005
10(i)
Commercial Paper Dealer Agreement dated June 7,
2001, between Citibank International plc, National
Westminster Bank plc, The Royal Bank of Scotland
plc and Harsco Finance B.V.
Exhibit to 10-Q for the period ended
June 30, 2001
10(j)
Commercial Paper Placement Agency Agreement
Exhibit volume, 1998 10-K
dated November 6, 1998, between Chase Securities,
Inc. and Harsco Corporation
Material Contracts - Management Contracts and Compensatory Plans
10(d)
Form of Change in Control Severance Agreement
(Chairman, President and CEO and Senior Vice
Presidents)
Exhibit to Form 8-K dated June 21, 2005
10(k)
Harsco Corporation Supplemental Retirement Benefit
Exhibit volume, 2002 10-K
Plan as amended October 4, 2002
10(l)
Trust Agreement between Harsco Corporation and
Exhibit volume, 1987 10-K
Dauphin Deposit Bank and Trust Company dated July
1, 1987 relating to the Supplemental Retirement
Benefit Plan
10(m)
Harsco Corporation Supplemental Executive
Exhibit volume, 1991 10-K
Retirement Plan as amended
10(n)
Trust Agreement between Harsco Corporation and
Dauphin Deposit Bank and Trust Company dated
November 22, 1988 relating to the Supplemental
Executive Retirement Plan
Exhibit volume, 1988 10-K
10(o)
Harsco Corporation 1995 Executive Incentive
Proxy Statement dated March 23, 2004 on
Compensation Plan As Amended and Restated
Exhibit B pages B-1 through B-15
10(p)
Authorization, Terms and Conditions of the Annual
Exhibit to Form 8-K dated March 23, 2006
Incentive Awards, as Amended and Restated April 27,
2004, under the 1995 Executive Incentive
Compensation Plan
Harsco Corporation 2006 Annual Report 111
Exhibit
Number
Data Required
Location in Form 10-K
10(r)
Special Supplemental Retirement Benefit Agreement
Exhibit Volume, 1988 10-K
for D. C. Hathaway
10(s)
Harsco Corporation Form of Restricted Stock Units
Exhibit to Form 8-K dated April 26, 2005
Agreement (Directors)
10(u)
Harsco Corporation Deferred Compensation Plan for
Non-Employee Directors, as amended and restated
January 1, 2005
Exhibit to Form 8-K dated April 26, 2005
10(v)
Harsco Corporation 1995 Non-Employee Directors'
Proxy Statement dated March 23, 2004 on
Stock Plan As Amended and Restated at January 27,
2004
Exhibit A pages A-1 through A-9
10(x)
Settlement and Consulting Agreement
Exhibit to 10-Q for the period ended
March 31, 2003
10(y)
Restricted Stock Units Agreement
Exhibit to Form 8-K dated January 23, 2007
10(z)
Form of Change in Control Severance Agreement
Exhibit to Form 8-K dated June 21, 2005
(Certain Harsco Vice Presidents)
112 Harsco Corporation 2006 Annual Report
Director Indemnity Agreements -
10(t)
A. J. Sordoni, III
Exhibit volume, 1989 10-K Uniform
agreement, same as shown for J. J. Burdge
"
"
"
"
"
"
"
12
21
23
31(a)
31(b)
32(a)
32(b)
R. C. Wilburn
J. I. Scheiner
C. F. Scanlan
J. J. Jasinowski
J. P. Viviano
D. H. Pierce
K. G. Eddy
" "
" "
" "
" "
" "
" "
Exhibit to Form 8-K dated August 27, 2004
Computation of Ratios of Earnings to Fixed Charges
Exhibit volume, 2006 10-K
Subsidiaries of the Registrant
Exhibit volume, 2006 10-K
Consent of Independent Accountants
Exhibit volume, 2006 10-K
Certification Pursuant to Rule 13a-14(a) and 15d-14(a)
as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Exhibit volume, 2006 10-K
Certification Pursuant to Rule 13a-14(a) and 15d-14(a)
as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Exhibit volume, 2006 10-K
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Exhibit volume, 2006 10-K
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Exhibit volume, 2006 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.
Harsco Corporation 2006 Annual Report 113
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.
SIGNATURES
Date 2-27-07
HARSCO CORPORATION
By /S/ Salvatore D. Fazzolari
Salvatore D. Fazzolari
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 capacity and on the dates indicated.
SIGNATURE
CAPACITY
DATE
/S/
/S/
/S/
/S/
/S/
/S/
/S/
/S/
/S/
/S/
/S/
/S/
Derek C. Hathaway
(Derek C. Hathaway)
Salvatore D. Fazzolari
(Salvatore D. Fazzolari)
Geoffrey D. H. Butler
(Geoffrey D. H. Butler)
Stephen J. Schnoor
(Stephen J. Schnoor)
Kathy G. Eddy
(Kathy G. Eddy)
Jerry J. Jasinowski
(Jerry J. Jasinowski)
D. Howard Pierce
(D. Howard Pierce)
Carolyn F. Scanlan
(Carolyn F. Scanlan)
James I. Scheiner
(James I. Scheiner)
Andrew J. Sordoni, III
(Andrew J. Sordoni, III)
Joseph P. Viviano
(Joseph P. Viviano)
Dr. Robert C. Wilburn
(Dr. Robert C. Wilburn)
Chairman and Chief Executive Officer
2-27-07
President, Chief Financial Officer,
Treasurer and Director
(Principal Financial Officer)
Senior Vice President - Operations
and Director
Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
2-27-07
2-27-07
2-27-07
2-27-07
2-27-07
2-27-07
2-27-07
2-27-07
2-27-07
2-27-07
2-27-07
114 Harsco Corporation 2006 Annual Report
Corporate Information
Directors
Derek C. Hathaway 1
Chairman and CEO
Harsco Corporation
Director since 1991
Salvatore D. Fazzolari
President, CFO and Treasurer
Harsco Corporation
Director since 2002
Geoffrey D. H. Butler
Senior Vice President - Operations
Harsco Corporation
Director since 2002
Independent Directors
Kathy G. Eddy 2
CPA and Founding Partner
McDonough, Eddy, Parsons &
Baylous, AC
Director since 2004
Jerry J. Jasinowski 3,4
Former President
The Manufacturing Institute
Director since 1999
D. Howard Pierce 2,4
Retired President and CEO
ABB Inc.
Director since 2001
Carolyn F. Scanlan 2,3
President and CEO
The Hospital and Healthsystem
Association of Pennsylvania
Director since 1998
James I. Scheiner 1,2,3
Chairman
Benatec Associates, Inc.
Director since 1995
Andrew J. Sordoni, III 1,3,4
Chairman
Sordoni Construction Services, Inc.
Director since 1988
Joseph P. Viviano 2,4
Retired Vice Chairman
The Hershey Company
Director since 1999
Dr. Robert C. Wilburn 1,3,4
President
The Gettysburg Foundation
Director since 1986
Currently serves as Lead Director
Corporate Officers
Derek C. Hathaway
Chairman and CEO
Salvatore D. Fazzolari
President, CFO and Treasurer
Geoffrey D. H. Butler
Senior Vice President -
Operations
Scott H. Gerson
Vice President and CIO
Mark E. Kimmel
General Counsel and Corporate
Secretary
Michael H. Kolinsky
Vice President - Taxes
Stephen J. Schnoor
Vice President and Controller
Eugene M. Truett
Vice President - Investor
Relations and Credit
Operations Executives
Mill Services
Geoffrey D. H. Butler
President and CEO
MultiServ
Access Services
Geoffrey D. H. Butler
President and CEO
SGB Group
John W. Barrett
Chief Operating Officer
SGB Group
Jürgen Schlenker
Managing Director and COO
Hünnebeck Group GmbH
Robert S. Safier
Executive Vice President and
General Manager
Patent Construction Systems
Engineered Products and Services
Richard C. Neuffer
President
Engineered Products and
Services Group
Gas Technologies
James E. Cline
President
Harsco GasServ
Company News
Company information, archived news releases
and SEC filings are available free of charge
24 hours a day, seven days a week via
Harsco's website at www.harsco.com.
Harsco's quarterly earnings conference calls
and other significant investor events are posted
when they occur.
Securities analysts, portfolio managers, other
representatives of institutional investors and
other interested parties seeking information
about Harsco should contact:
Eugene M. Truett
Vice President - Investor Relations and Credit
Phone: 717.975.5677
Fax: 717.763.6402
Email: etruett@harsco.com
Annual Meeting
April 24, 2007, 10:00 am
Radisson Penn Harris Hotel and
Convention Center
Camp Hill, PA 17011
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
Philadelphia, PA 19103
Registrar, Transfer and Dividend
Disbursing Agent
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606
Phone: 800.850.3508
www.melloninvestor.com
Mellon Investor Services maintains the records
for our registered stockholders and can help
you with a variety of stockholder-related
services at no charge, including:
(cid:132) Change of name or address
(cid:132) Consolidation of accounts
(cid:132) Duplicate mailings
(cid:132) Dividend reinvestment enrollment
(cid:132) Lost stock certificates
(cid:132) Transfer of stock to another person
(cid:132) Additional administrative services
You can also access your investor statements
online 24 hours a day, seven days a week with
MLinksm. For more information, go to
www.melloninvestor.com/isd.
Board Committees
1 Executive
2 Audit
3 Management Development and Compensation
4 Nominating and Corporate Governance
Bold-faced type indicates Committee Chair
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Harsco Corporation
350 Poplar Church Road
P.O. Box 8888
Camp Hill, PA 17001-8888 USA
Tel: 717.763.7064
www.harsco.com
Mill Services
Access Services
MultiServ
Harsco House, Regent Park
299 Kingston Road
Leatherhead, Surrey KT22 7SG
United Kingdom
Tel: 44.1372.381400
www.multiserv.com
SGB Group
Harsco House, Regent Park
299 Kingston Road
Leatherhead, Surrey KT22 7SG
United Kingdom
Tel: 44.1372.381300
www.sgb.co.uk
Hünnebeck Group GmbH
Rehhecke 80
D-40885 Ratingen
Germany
Tel: 49.2102.937-1
www.huennebeck-group.com
Patent Construction Systems
One Mack Centre Drive
Paramus, NJ 07652 USA
Tel: 201.261.5600
www.pcshd.com
Engineered Products
and Services
Gas Technologies
Harsco Track Technologies
2401 Edmund Road
West Columbia, SC 29171 USA
Tel: 803.822.9160
www.harscotrack.com
Harsco GasServ
4718 Old Gettysburg Road
Mechanicsburg, PA 17055 USA
Tel: 717.763.5060
www.harscogasserv.com
IKG Industries
1514 S. Sheldon Road
Channelview, TX 77530 USA
Tel: 281.452.6637
www.ikgindustries.com
Air-X-Changers
5215 Arkansas Road
Catoosa, OK 74015 USA
Tel: 918.619.8000
www.airx.com
Reed Minerals
5040 Louise Drive
Mechanicsburg, PA 17055 USA
Tel: 717.506.2071
www.reedminerals.com
Patterson-Kelley
100 Burson Street
East Stroudsburg, PA 18301 USA
Tel: 570.421.7500
www.patkelco.com