Building an Enduring Enterprise
2008 Annual Report
For more than a century,
our brand has stood for industrial
services delivered with unrivaled
competence, reliability and integrity.
now, we’re taking harsco to the next
level. as we expand our solutions
and extend our global base, we’ll do
so as one company, under one name.
Contents
Forward-Looking Statements
2 Letter to Shareholders
This document contains certain “forward-looking statements” within
4 Financial Highlights
7 Strategy for Growth
8 Harsco Infrastructure
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
10 Harsco Metals
results to differ materially. Please refer to the section herein entitled
12 Harsco Minerals & Rail
“Forward-Looking Statements” for further information.
14 Harsco At a Glance
16 Financial Section
80 Board of Directors and Officers
81 Stockholder Information
Harsco Corporation 2008 Annual Report
the new harsco identity projects
the scale, depth and focus of a world
leader. It captures the spirit of a
dynamic company on the rise—one
whose vital solutions power
economic growth in markets around
the world. and it unifies our people,
inspiring us to work together—and
with our customers—to engineer
greater value in everything we do.
Harsco Corporation 2008 Annual Report
Harsco Corporation 2008 Annual Report
Fellow Shareholders:
It’s one thing to achieve record results when times are good. It’s
another to still perform well under adverse conditions. Historians
will view the current financial and economic crisis as arguably the
most challenging and turbulent period of our generation. During
the unprecedented turmoil of 2008 we contended with declining
global steel production, an extremely volatile U.S. dollar, dramatic
fluctuations in fuel costs, freezing of credit markets and delayed
and cancelled customer orders. By the fourth quarter, the world
deepened into a recessionary decline that continues to test
ships, cars and railways. The co-products we recover from
the fortitude of companies and investors alike. We responded
metals production and coal combustion contribute to
by drawing on our strengths—our diverse industrial services
environmentally friendly manufacturing processes and
capabilities, our strong balance sheet, our expanding global
provide building blocks for specialized industrial products.
footprint and our operating discipline. We proactively
And the railway expansion and maintenance projects we
implemented countermeasures that will significantly lower
support fuel economic growth by enabling the efficient
our cost structure and deliver immediate benefit in 2009.
movement of goods and people.
I am proud to report that, excluding a relatively modest
This work continues all the time, in developed and
restructuring charge in the fourth quarter, we achieved
emerging global markets. And because we can deploy and
another full year of record performance.
scale our mobile assets wherever they’re needed, we can
We also invested in our future by embracing Harsco’s core
engineer sustainable growth during most economic cycles.
ideology throughout the organization. I believe the best way
to scale our Company’s culture across the globe is to adopt a
execution Focus
singular purpose supported by uniform values. This shared
Our fifth consecutive year of record revenues has better
commitment will help us build an enduring enterprise that
positioned Harsco for even greater success when economic
will create sustainable shareholder value for years to come.
conditions improve.
essential Services
• Revenues grew 8 percent to approximately $4 billion.
•
Income from continuing operations, before a fourth
Harsco is a different kind of industrial services company.
quarter restructuring charge, increased more than
We support customers that are doing the important work
5.3 percent.
that underpins economic growth and development around
•
Cash flow from operations reached a record
the world. As one analyst recently remarked, Harsco’s
$574 million, an increase of 22 percent.
services are “critical to the global way of life.” Our human
•
We invested $248 million in growth capital and
capital and worldwide equipment help leading
repurchased nearly 4.5 million shares of the Company’s
infrastructure construction companies build the new power
common stock.
plants, airports, highways and municipal and industrial
• We retained our investment-grade A rating.
facilities that create jobs, expand commerce and improve
quality of life. We work onsite to support metals and steel
This performance confirms the value of our diverse
producers as they forge the raw materials used in
portfolio of global businesses. We generated continued
everything from skyscrapers, stadiums and bridges to
growth in our Harsco Infrastructure group by repositioning
Harsco Corporation 2008 Annual Report
Salvatore D. Fazzolari Chairman and Chief Executive Officer
our highly engineered rental assets and building a strong
activity throughout its global mill services footprint,
growth presence in the Middle East Gulf Cooperation
because steel and other metals are essential materials in
Council (GCC) states and other key emerging markets.
these types of projects.
Revenues from Harsco Metals were essentially flat as
economic factors forced customers to slow metals
commitment to Value
production and accelerate scheduled maintenance
Harsco wins by understanding how customers define value
shutdowns. We held the line by renegotiating or exiting
and by building robust service and product portfolios that
unfavorable long-term contracts. Our Harsco Minerals
align our expertise, resources and global network to
businesses confronted the difficult climate with refocused
provide Insight onsite.™ We are equally committed to
energy and direction for their reclamation and recycling
creating wealth and value for shareholders, and one way
services. Our Harsco Rail business continued to grow as we
we do so is through our unwavering commitment to
started deliveries on our record China contract and expanded
Economic Value Added (EVA®). This enterprise-wide metric
our presence in Brazil. And Harsco Industrial’s market-leading
provides a consistent and transparent way to translate
portfolio enabled this business to operate at high capacity.
strategy into investment decisions and compensate all key
With the proactive fourth quarter 2008 countermeasures
managers in the Company based on performance. We have
that we implemented, coupled with our strong balance
also sharpened our focus by welcoming three new
sheet, Harsco enters 2009 on a solid foundation. We are
directors to our Board who bring tremendous global
prepared to confront the deepening global economic
business experience as well as strong perspectives on EVA
uncertainty that we expect throughout the year. No one
and continuous improvement. EVA discipline also drove
can predict how severe these challenges will be or when
our restructuring initiatives in the fourth quarter of 2008. As
the recovery will begin. As a global business, we also
the economic climate deteriorated, we took necessary
expect the soaring U.S. dollar to create particularly strong
countermeasures that included rationalizing facilities,
adverse headwinds throughout the year—as it did in the
renegotiating contracts, amending benefit plans and
fourth quarter of 2008. Nevertheless, we have a solid track
trimming our global workforce. These initiatives should
record of managing through turbulent times. And looking
save more than $50 million per year, with a majority of
forward, many Harsco businesses stand to benefit either
these cost savings being realized beginning in 2009.
directly or indirectly from the global economic stimulus
Going forward, EVA will reflect the results from the
packages that will fund new infrastructure projects. Harsco
LeanSigma® continuous improvement projects that are
Infrastructure and Harsco Minerals & Rail should benefit
now beginning to flourish across the Company. We
directly. Harsco Metals is also likely to see increased
completed 40 Kaizen events in 2008 that span
Harsco Corporation 2008 Annual Report
Financial highlights
Dollars in thousands, except per share amounts
2008
2007
2006
2005
2004
Operating Information
Total revenues from continuing operations
$3,967,822
$3,688,160
$3,025,613
$2,396,009
$2,162,973
Operating income from continuing
operations
Income from continuing operations
411,988
245,623
457,805
255,115
344,309
186,402
251,036
144,488
195,456
104,040
Ratios
Current ratio
Return on average capital
Return on average equity
Return on average assets
Debt to total capitalization
Per Share
1.4:1
10.9 %
15.2 %
10.4 %
41.7 %
1.5:1
12.2 %
19.2 %
13.0 %
40.8 %
1.4:1
10.8 %
17.2 %
12.1 %
48.1 %
1.5:1
10.7 %
15.3 %
11.2 %
50.4 %
1.6:1
9.2 %
12.7 %
9.9 %
40.6 %
Diluted earnings from continuing operations
$ 2.92
$ 3.01
$ 2.21
$ 1.72
$ 1.25
Book value
Cash dividends declared
17.63
0.78
18.54
0.7275
13.64
0.665
11.89
0.6125
11.03
0.5625
Other Information
Diluted average shares outstanding
(in thousands)
Number of employees
84,029
21,500
84,724
21,500
84,430
21,500
84,161
21,000
83,196
18,500
All amounts from Continuing Operations
Revenues
Dollars in millions
Operating Income
Dollars in millions
Diluted Earnings
per Share
In dollars
Cash Dividends
Declared per Share
In dollars
8
6
9
,
3
8
8
6
,
3
6
2
0
,
3
6
9
3
,
2
3
6
1
,
2
8
5
4
2
1
4
4
4
3
1
0
.
3
2
9
.
2
8
7
.
3
7
.
7
6
.
1
2
.
2
1
6
.
6
5
.
1
5
2
5
9
1
2
7
.
1
5
2
.
1
04
05
06
07
08
04
05
06
07
08
04
05
06
07
08
04
05
06
07
08
100
International
United States
International
United States
65.26 - 34.74 = 2163
Harsco Corporation 2008 Annual Report
64.92 - 35.08 = 2396
68.3 - 31.7 = 3026
68.8 - 31.2 = 3688
68.2 - 31.8 = 3968
71.19 - 28.81 = 195
69.79 - 30.21 = 251
70.8 - 29.2 = 344
69.9 - 30.1 = 458
60.8 - 39.2 = 412
harsco’s core Values
Uncompromising Integrity and
Ethical Business Practices
People – The “A Team”
Code of Conduct, Safety Policies and Practices,
Internal Control and Management Framework, and
General Policies and Procedures
Human Capital Framework: Global Talent
Management System for Recruiting, Developing,
Retaining and Assessing Human Capital
Continuous Improvement
LeanSigma® Business Transformation Discipline
Value Creation Discipline
Economic Value Added (EVA®)
manufacturing, service and office operations, and we
improve, and instead redeploy the cash to reduce debt,
expect this number to increase to over 200 in 2009 and
pursue selective acquisitions and repurchase our stock.
reach approximately 400 by 2010. I am convinced that
Harsco enters 2009 with the capital structure and financial
LeanSigma, coupled with our rigorous and disciplined
strength that many companies would envy, especially in
implementation, will be transformational for Harsco.
today’s environment. We executed a 10-year bond issue of
$450 million in May 2008 at a very favorable interest rate,
a Strong and Flexible Balance Sheet
leaving us with much less exposure to floating debt while
Backed by the discipline of EVA, our well-balanced,
extending our average debt maturities. We also renewed
diversified portfolio once again generated the strong
$220 million and $30 million credit facilities that bring our
cash flows we use to finance our business and expand
total short-term borrowing capacity to $700 million. At
our geographic footprint. In 2008 our discretionary cash
December 31, 2008 we have a strong liquidity position and
flow—that is, cash from operations less maintenance
a very manageable debt-to-capital ratio of 41.7 percent.
capital expenditures—increased to a record $365 million.
That gave us the resources to invest 54 percent of this
Building an enduring enterprise
year’s record capital expenditures, or approximately $248
Beginning in 2009, Harsco moves forward as one company,
million, in critical growth initiatives such as our robust
with a single unified Harsco brand identity. That means
emerging markets strategy. Investments in 2008 should
every Harsco business will benefit from the integrated
help us reach our goal of generating 30 percent of our
financial resources, best practices and market position of a
revenues from these fast-growing markets by 2010–2011.
strong global organization. Our focus on our core ideology
Our target is 40 percent by 2018. Our Infrastructure
will create meaningful opportunities for our employees as
footprint includes such strategically important emerging
we continue to assess our global talent base and support
markets as the GCC states and the Asia/Pacific region. Our
the professional growth and development of our human
Metals business is also pursuing market expansion with
capital. I appreciate and respect the hard work of our
new opportunities there as well. And we are responding
people as we continue to build our global leadership team
to inquiries from around the world about our innovative
and strengthen our intellectual infrastructure. I am also
railway track maintenance and co-product recycling
grateful for the genuine commitment that our team has
technologies. Abundant cash flows also provide a critical
demonstrated by embracing and embedding the
advantage during turbulent times. With three years of
LeanSigma core value in our culture. LeanSigma will
significant growth investment behind us, we can scale back
transform our business and make us a smarter and more
additional growth investments in 2009 until conditions
productive organization. Harsco’s core purpose is to build
Harsco Corporation 2008 Annual Report
Left to right:
Mark E. Kimmel
Senior Vice President,
Chief Administrative Officer,
General Counsel and Corporate Secretary
Geoffrey D. H. Butler
Harsco President and Group CEO,
Harsco Infrastructure and Harsco Metals
Stephen J. Schnoor
Senior Vice President and
Chief Financial Officer
Richard C. Neuffer
Harsco Senior Vice President and Group CEO,
Harsco Minerals & Rail
Scott H. Gerson
Vice President and
Chief Information Officer
teams that win with integrity anywhere in the world. We
These qualities give us the strength, resolve and character
will continue to embrace the values and ethical business
to face the continued financial and economic turmoil we
practices that earn the trust and respect of customers—and
expect in 2009. I am confident that Harsco has the people,
of one another.
the strategy, the fortitude, the discipline and the market
Misperceptions often take root during troubled times,
opportunities to weather the storm. We have the unwavering
even for globally balanced and diversified companies.
faith that we will emerge from this financial and economic
Winston Churchill once said that “Facts are better than
crisis an even stronger company. We appreciate your
dreams.” I am proud to remind our shareholders of our
support as we build an enduring enterprise.
unique business profile and the powerful attributes we
possess. Harsco is:
•
A global leader of industrial services and products,
with a balanced and globally scalable portfolio of
business platforms;
Salvatore D. Fazzolari
•
A company with a clear path to growth through
Chairman and Chief Executive Officer
targeted organic growth opportunities, joint ventures
and prudent acquisitions;
March 10, 2009
•
A culture of professionals who share a strong core
purpose and core values that empower us to win
through integrity, teamwork and discipline;
• A strong and financially sound company.
Harsco Corporation 2008 Annual Report
Strategy for Growth
Build and operate scalable platforms
1
that give customers the vital support
they need— everywhere they do
business. make the most of our
2
global assets by managing them with
agility and by making efficiency and
continuous improvement a way of
life. use disciplined financial metrics
3
to ensure that every operational and
investment decision we make
strengthens our competitive position.
4
unleash the passion, creativity and
integrity of our people to expand our
opportunities.
Harsco Corporation 2008 Annual Report
InFraStructure
Harsco Infrastructure grows with its global customers by turning
broad market insight into focused solutions. Customers value
our dependable, consistent quality and award-winning safety
performance. They look to us for expert engineering support; fast,
flexible delivery of equipment and highly skilled installation; and
in-depth understanding of local requirements. Together, these
strengths give large construction contractors and industrial plant
operators the onsite expertise and local equipment resources
they need to operate more efficiently and safely, and with optimal
cost of ownership.
Our global market presence served us well during a year when
tightening economic and credit conditions forced some cus-
tomers to temporarily delay or scale back new projects. Despite
the economic downturn, revenues from Europe, North America
and the Middle East remained solid for most of the year. We
supported a large number of energy, transportation, commercial
and public sector projects in such areas as bridges, hospitals and
high-rise office construction. We also began the expansion of our
highly portable rental equipment assets into new markets such
as Panama, Romania and India.
Going forward, we expect new government stimulus programs
to begin funding a variety of infrastructure projects to revitalize
global economic growth. We are well-positioned in our markets
to support these initiatives. We see good opportunities for con-
tinued growth later in 2009 as economic stability returns. We are
also expanding our infrastructure services business to create
more value as an onsite partner to major industrial plants for their
recurring routine maintenance and plant upgrade programs.
Across Harsco, our investment in LeanSigma continuous im-
provement is poised to begin delivering sustainable improve-
ments in operating performance. During 2008, our first year
of pilot project implementation, our Harsco Infrastructure
group helped confirm our optimism by identifying new process
improvements that will streamline local branch logistics. We will
drive improvements like these to other branches throughout our
global network and anticipate similar successes across the organ-
ization as we ramp up to full Company-wide implementation.
Harsco Corporation 2008 Annual Report
Denotes a location where Harsco Infrastructure has equipment and service operations
Pernis, The Netherlands
Harsco Infrastructure is responding to the growing
market demand for onsite support of industrial plant
maintenance, a traditionally noncyclical sector where
we can combine scaffolding with additional onsite
services. At the giant Shell Netherlands petrochemi-
cal plant, our 24/7 team is serving one of Europe’s
largest industrial facilities as a full-time, onsite part-
ner to their facility-wide maintenance requirements.
With our Cleton acquisition in 2006, we expanded
our support to include the installation of thermal
insulation and other maintenance services. We see
great potential to grow our plant maintenance sup-
port services as a complementary market extension
of our core expertise and global branch network.
Harsco Corporation 2008 Annual Report
metalS
Harsco Metals creates value for the world’s leading metals pro-
ducers by helping optimize their total cost of operation. Working
onsite and under long-term recurring contracts, we bring indus-
try-leading technology and global experience to every stage
of mill operations—from handling incoming raw materials to
packaging outgoing products. Our custom-engineered service
solutions deliver cost and productivity advantages, enhance
safety and quality, and respond to the growing environmental
demands being placed on modern metal-making operations.
Customers also value our worldwide engineering and process
expertise; our careful approach to managing our cost base; and
the integrity that underlies our culture. Moreover, our strong bal-
ance sheet and access to public debt markets allow us to grow
with our customers.
some 50 percent of the world’s steel production is used for con-
struction. To pave the way for future growth, we’re opening more
channels for our environmental solutions while placing more of
our higher technology service offerings into more locations. We
are also looking to increase our service presence in other metal
sectors and related cross-over markets like mining and quarry-
ing. At the same time, however, we are resolved to sharpen the
performance of our day-to-day operations with tighter controls
on costs and new LeanSigma efficiencies. We expect these ini-
tiatives and others to help us deliver more traditional levels
of earnings contribution. In the coming periods, we also ex-
pect our worldwide customers will return to upgrading facilities
and increasing production capacity—two good barometers of a
healthier market outlook.
We drew on these competitive strengths to see our way through
a difficult year, as worldwide demand for steel declined dra-
matically in the final quarter of 2008. Our broad global footprint
enables us to generate recurring revenues in virtually all major
market regions where steel and other metals are produced. As
global stimulus programs are implemented, we look for a gradual
return to more traditional levels of activity, recognizing that
We will continue to diversify our customer base and broaden our
geographic balance by expanding our presence in the world’s
developing economies. China, India and the Gulf Cooperation
Council states are all substantial metal-producing regions where
we have been largely underrepresented. We look to align our-
selves with each region’s strongest and most secure industry
partners to create a durable foundation for growth.
0 Harsco Corporation 2008 Annual Report
Denotes a location where Harsco Metals services are being used
Rotherham, United Kingdom
Harsco Metals is strategically focused on increas-
ing the value of by-products recovered on customer
sites. As one example, we take residual slag from
steel production, process it and use it as a base
material to manufacture “Steelphalt,” an asphalt-
line product used by the road construction industry.
Harsco has made a $10 million capital investment
to expand and update the plant that produces this
product. This energy-efficient facility uses up-to-date
“clean plant” technology to produce 300,000 tons
of road material per year. It also operates as a global
center of excellence where we explore new products
and applications produced from processed slag.
Harsco Corporation 2008 Annual Report
mIneralS & raIl
portunity. Our goal is to continue developing our Harsco Minerals
businesses as a provider of total environmental processing solu-
tions for customers worldwide.
In our Industrial group, Harsco manufactures specialized, high-
performance products known for quality, durability and value.
In 2008 we worked with our distribution partners and major gas
platform and other customers in the Gulf of Mexico to make our
metal grating immediately available to support reconstruction
in the wake of Hurricanes Gustav and Ike. We are also achieving
greater sales penetration with key customers for our air-cooled
heat exchangers, where our production levels set new records in
2008. As these customers continue to expand internationally, we
intend to grow with them. Harsco’s heat exchangers help natural
gas producers extend their equipment life for gas compression
and pipeline distribution. And our new boiler lines continue to
build sales momentum as their outstanding energy efficiency
underpins growing market demand.
Harsco Minerals & Rail continues to perform as our highest EVA
growth platform. In each division, our outsourced services and
engineered products create value by helping customers grow
and improve their businesses.
Global railway systems rely on Harsco’s highly engineered rail
grinders, track renewal and new track construction trains, and
ballast machines to increase train speed and tonnage, boost rev-
enues and improve total cost of ownership. As we begin deliveries
into China of our largest-ever railway equipment order, we’re
encouraged by the heightened public and private investment
plans around the world to expand and modernize railway infra-
structures. We believe the best way to work with our customers
in an adverse economic climate is to focus on value. As we save
our customers money and create real economic value for them,
they will continue to rely on us when conditions improve.
Our Harsco Minerals businesses generate value through their
specialty expertise for capturing and processing industrial
co-products to serve specific commercial applications, includ-
ing low-silica abrasives and fertilizers. We see our pioneering
co-product recovery services as a globally scalable growth op-
Harsco Corporation 2008 Annual Report
Carajás, Brazil
Companhia Vale do Rio Doce (Vale) relies on a
550-mile single-track railroad to transport iron ore
from its Carajás mines in northern Brazil to the port
city of São Luis. Vale purchased a new 96-stone
production rail grinder from Harsco to make this
high-volume, heavy-tonnage system more depend-
able and productive. The grinder, which can recon-
tour up to 50 kilometers of track per day, features
Harsco’s patented Jupiter computer system for
precise operating control and onboard diagnostics.
We expect important equipment and service relation-
ships like this to open additional opportunities, as
Brazil and other emerging market countries invest
in much-needed railway infrastructure to support
economic growth.
Denotes a location where Harsco Minerals & Rail has equipment and service operations
Harsco Corporation 2008 Annual Report
harsco at a Glance
Global Revenue Sources
2008 Revenues
2008 Operating Income
Western Europe 45%
North America 35%
Latin America 6%
Middle East and Africa 6%
Eastern Europe 5%
Asia/Pacific 3%
Infrastructure 39%
Metals 40%
Minerals & Rail 21%
Infrastructure 45%
Metals 21%
Minerals & Rail 37%
Corporate
-3%
We operate at more than 400 locations in 50 countries
and employ approximately 21,500 people.
operating companies
description
major services & products
• Full-service leader for total scaffolding, access
• World’s leading provider of scaffolding
and formwork solutions that help developed and
and cast-in-place concrete formwork for
emerging economies engineer growth
nonresidential construction
• Strong presence in virtually every major market,
• Broadest portfolio of equipment solutions
operating from more than 200 locations in
and expert engineering support
36 countries
• 100% service-based business, offering either
rental or sale of Company-designed and
purchased equipment
• Increasing role serving recurring plant mainte-
nance programs of major industrial facilities
• Portable, go-anywhere rental equipment
resources – enables rapid response to growth
opportunities and changing market conditions
• Professional outsourced service partner to
• Onsite logistics for raw materials, semifinished
the global metals industry
and finished products
• World’s largest and most experienced onsite
• Proprietary technologies for minimizing the
services company
environmental impacts of metals production
• Comprehensive support to each stage of
• Specialists in commercial applications of
the metal-making process
residual slag by-products
• Operates globally with a full range of Company-
purchased, owned, operated and maintained
equipment
• Diversified portfolio of market-leading niche
businesses that provide vital services and
products to customers in a broad range of
industries
• Global railway track maintenance services
and equipment
• Environmentally beneficial metal recovery
processes and mineral-based products for
• Pioneering product development and industry
commercial and industrial markets
innovation
• Air-cooled heat exchangers, industrial grating
• Strong cash and EVA® generator to Harsco’s
and energy-efficient boilers
growth
– SGB Group
– Patent Construction Systems
– Hünnebeck Group
– MultiServ
– Harsco Rail
– Excell Minerals
– Reed Minerals
– IKG Industries
– Air-X-Changers
– Patterson-Kelley
Harsco Corporation 2008 Annual Report
Total Revenues
Comparison of Five-Year Cumulative Total Returns
$4.0 billion
8%
Operating Income
$412 million
10%
Operating Margin
10.4 %
200 bps
Diluted Earnings per Share
$2.92
3%
Declared Dividends per Share
$0.78
7%
$.0
$.
$.
03
04
05
06
07
08
Harsco
S&P MidCap 400 Index
Dow Jones U.S. Diversified Industrials Index
Harsco Corporation
S&P MidCap 400
Dow Jones U.S. Diversified Industrials
12/03
12/04
12/05
12/06
12/07
12/08
$ 100.00
$ 130.31
$ 161.26
$ 184.88
$ 315.88
$ 139.04
100.00
100.00
116.48
119.18
131.11
144.64
156.18
116.07
127.13
135.70
99.59
69.14
This graph compares the yearly percentage change in the cumulative total stockholder return on Harsco common
stock against the cumulative total return of the Standard & Poor’s MidCap 400 index and the Dow Jones U.S.
Diversified Industrials index. The graph assumes an initial investment of $100 on December 31, 2003 and the
reinvestment of dividends.
markets
2008 highlights
• New construction, expansion and maintenance
of public works, infrastructure and commercial
• Strong contract activity in Europe and
North America throughout most of 2008
properties, and other major facilities
• Strengthened market position in Middle East
• Clients range from large, global contractors to
infrastructure construction sector
regional and local players
• #1, 2 or 3 market presence
• Entered India market with new scaffolding
services for major steelworks customer
• Future growth focused on additional geographic
expansion into emerging markets
• Serves the complete range of metals producers,
• Growing role in developing and executing
from multinational giants to regional and
environmental solutions for waste minimization
specialty producers, including both integrated
mills and mini-mills
• Worldwide presence at approximately
170 locations in 35 countries
• Continuing global growth opportunities for
expanding services with existing customers,
adding new locations and end-market crossover
into complementary fields
• New service contracts, particularly in emerging
markets, will benefit 2009 and beyond
• Executing countermeasures and global best
practices for improved operating performance
• Estimated value of contracts totals approximately
$4.1 billion in future revenues
• Major domestic and international railways,
• Began production deliveries on record
short lines and rapid transit systems
$350 million rail grinding equipment order
• Global metals producers and other commercial
from China’s Ministry of Railways
and industrial customers for mineral-based
• Supported strong natural gas market with
products
record deliveries and backlog
• Natural gas processors, industrial plant
• Mobilized grating production to support
fabricators, and boiler installations for schools,
reconstruction of industrial infrastructure
hospitals, offices and other facilities
damaged by Hurricanes Gustav and Ike
Harsco Corporation 2008 Annual Report
Financial contents
17 Five-Year Statistical Summary
18 Management’s Discussion and Analysis of Financial Condition and Results of Operations
40 Management’s Report on Internal Control Over Financial Reporting
41 Report of Independent Registered Public Accounting Firm
42 Consolidated Balance Sheets
43 Consolidated Statements of Income
44 Consolidated Statements of Cash Flows
45 Consolidated Statements of Stockholders’ Equity
46 Consolidated Statements of Comprehensive Income
Notes to Consolidated Financial Statements
47 Note 1 Summary of Significant Accounting Policies
51 Note 2 Acquisitions and Dispositions
52 Note 3 Accounts Receivable and Inventories
53 Note 4 Property, Plant and Equipment
53 Note 5 Goodwill and Other Intangible Assets
54 Note 6 Debt and Credit Agreements
55 Note 7 Leases
56 Note 8 Employee Benefit Plans
61 Note 9
Income Taxes
63 Note 10 Commitments and Contingencies
66 Note 11 Capital Stock
67 Note 12 Stock-Based Compensation
69 Note 13 Financial Instruments
73 Note 14 Information by Segment and Geographic Area
75 Note 15 Other (Income) and Expenses
76 Note 16 Components of Accumulated Other Comprehensive Income (Loss)
76 Note 17 2008 Restructuring Program
77 Market Risks
Harsco Corporation 2008 Annual Report
Five-year Statistical Summary
(In thousands, except per share, employee information and percentages)
00
2007 (a)
2006
2005 (b)
2004
Income Statement Information (c)
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 (including discontinued operations)
Capital expenditures
Cash provided by operating activities
Cash used by investing activities
Cash provided (used) by financing activities
Ratios
Return on sales (d)
Return on average equity (e)
Current ratio
Total debt to total capital (f)
Per Share Information (g)
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 (g)
Number of employees
Backlog from continuing operations (i)
$3,967,822
245,623
(4,678)
240,945
$÷«317,062
3,562,970
891,817
1,012,883
337,949
457,617
574,276
(443,418)
(155,539)
6.2%
15.2%
1.4:1
41.7%
$÷÷÷÷«2.94
(0.06)
$÷÷÷÷«2.88
$÷÷÷÷«2.92
(0.06)
$÷÷÷÷«2.87 (h)
$÷÷÷«17.63
0.78
84,029
21,500
$÷«639,693
$3,688,160
255,115
44,377
299,492
$÷«471,367
3,905,430
1,012,087
1,080,794
306,413
443,583
471,740
(386,125)
(77,687)
6.9%
19.2%
1.5:1
40.8%
$÷÷÷÷«3.03
0.53
$÷÷÷÷«3.56
$÷÷÷÷«3.01
0.52
$÷÷÷÷«3.53
$÷÷÷«18.54
0.7275
84,724
21,500
$÷«448,054
$3,025,613
186,402
9,996
196,398
$÷«320,847
3,326,423
864,817
1,063,021
252,982
340,173
409,239
(359,455)
(84,196)
6.2%
17.2%
1.4:1
48.1%
$÷÷÷÷«2.22
0.12
$÷÷÷÷«2.34
$÷÷÷÷«2.21
0.12
$÷÷÷÷«2.33
$÷÷÷«13.64
0.665
84,430
21,500
$÷«236,460
$2,396,009
144,488
12,169
156,657
$÷«352,620
2,975,804
905,859
1,009,888
198,065
290,239
315,279
(645,185)
369,325
6.0%
15.3%
1.5:1
50.4%
$÷÷÷÷«1.73
0.15
$÷÷÷÷«1.88
$÷÷÷÷«1.72
0.14
$÷÷÷÷«1.86
$÷÷÷«11.89
0.6125
84,161
21,000
$÷«230,584
$2,162,973
104,040
17,171
121,211
$÷«346,768
2,389,756
594,747
625,809
184,371
204,235
270,465
(209,602)
(56,512)
4.8%
12.7%
1.6:1
40.6%
$÷÷÷÷«1.26
0.21
$÷÷÷÷«1.47
$÷÷÷÷«1.25
0.21
$÷÷÷÷«1.46
$÷÷÷«11.03
0.5625
83,196
18,500
$÷«194,336
(a)
(b)
Includes Excell Minerals acquired February 1, 2007 (All Other Category – Harsco Minerals & Rail).
Includes the Northern Hemisphere mill services operations of Brambles Industrial Services (BISNH) acquired December 29, 2005 (Harsco Metals) and Hünnebeck Group GmbH acquired
November 21, 2005 (Harsco Infrastructure).
(c) 2006, 2005 and 2004 income statement information reclassified to reflect the Gas Technologies Segment as Discontinued Operations.
(d) “Return on sales” is calculated by dividing income from continuing operations by revenues from continuing operations.
(e) “Return on average equity” is calculated by dividing income from continuing operations by quarterly weighted-average equity.
(f) “Total debt to total capital” is calculated by dividing the sum of debt (short-term borrowings and long-term debt including current maturities) by the sum of equity and debt.
(g) 2006, 2005 and 2004 per share information restated to reflect the 2-for-1 stock split effective in the first quarter of 2007.
(h) Does not total due to rounding.
(i) Excludes the estimated amount of long-term mill service contracts, which had estimated future revenues of $4.1 billion at December 31, 2008 and $5.0 billion at December 31, 2007. Also excludes
backlog of the Harsco Infrastructure Segment and the roofing granules and industrial abrasives business. These amounts are generally not quantifiable due to the nature and timing of the
products and services provided.
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
The following discussion should be read in conjunction with the con-
leveraged and those with inadequate liquidity) to maintain their credit
solidated financial statements provided in this Annual Report. Certain
availability; and (12) other risk factors listed from time to time in the
statements contained herein may constitute forward-looking state-
Company’s SEC reports. A further discussion of these, along with other
ments within the meaning of the Private Securities Litigation Reform
potential factors, can be found in the Company’s 2008 Form 10-K as filed
Act of 1995. These statements involve a number of risks, uncertainties
with the Securities and Exchange Commission. The Company cautions
and other factors that could cause actual results to differ materially, as
that these factors may not be exhaustive and that many of these factors
discussed more fully herein.
are beyond the Company’s ability to control or predict. Accordingly,
forward-looking statements should not be relied upon as a prediction
Forward-looking Statements
of actual results. The Company undertakes no duty to update forward-
The nature of the Company’s business and the many countries in which
looking statements except as may be required by law.
it operates subject it to changing economic, competitive, regulatory
and technological conditions, risks and uncertainties. In accordance
executive overview
with the “safe harbor” provisions of the Private Securities Litigation
Despite the challenging macroeconomic operating environment
Reform Act of 1995, the Company provides the following cautionary
encountered in the fourth quarter of 2008, the Company’s 2008 rev-
remarks regarding important factors which, among others, could cause
enues were a record $4.0 billion. This is an increase of $280 million or
future results to differ materially from the forward-looking statements,
8% over 2007. Organic growth contributed 5% to the growth in sales,
expectations and assumptions expressed or implied herein. Forward-
while acquisitions contributed 2% and favorable foreign currency
looking statements contained herein could include among other things,
translation effects contributed 1%. This resulted from the Company’s
statements about our management confidence and strategies for
continued strategy of constructing a well-balanced industrial services-
performance; expectations for new and existing products, technolo-
based portfolio of businesses based on scalable operating platforms;
gies, and opportunities; and expectations regarding growth, sales, cash
focused organic growth; growth through prudent acquisitions; and
flows, earnings and Economic Value Added (EVA®). These statements
increased geographical diversity. Income from continuing operations
can be identified by the use of such terms as “may,” “could,” “expect,”
was $245.6 million for 2008 (which included $36.1 million of restructur-
“anticipate,” “intend,” “believe,” or other comparable terms.
ing charges in the fourth quarter) compared with $255.1 million in 2007,
Factors which could cause results to differ include, but are not lim-
a decrease of 4%. The Harsco Infrastructure Segment and All Other
ited to: (1) changes in the worldwide business environment in which the
Category (Harsco Minerals & Rail) led the Company’s performance.
Company operates, including general economic conditions; (2) changes
Diluted earnings per share from continuing operations were $2.92
in currency exchange rates, interest rates and capital costs;
for 2008 (which included $0.28 of restructuring charges in the fourth
(3) changes in the performance of stock and bond markets that could
quarter), which was a 3% decrease from 2007 diluted earnings per
affect, among other things, the valuation of the assets in the Company’s
share from continuing operations of $3.01.
pension plans and the accounting for pension assets, liabilities and
During 2008, all major business platforms of the Company achieved
expenses; (4) changes in governmental laws and regulations, including
increased sales over 2007, highlighting the diversity and balance of the
environmental, tax and import tariff standards; (5) market and competi-
Company. The Company continued to make progress on its geographic
tive changes, including pricing pressures, market demand and accep-
expansion strategy as sales in 2008 reflect an increasing geographic
tance for new products, services and technologies; (6) unforeseen
balance, especially in emerging markets. Revenues outside Western
business disruptions in one or more of the many countries in which the
Europe and North America were approximately 21% of total revenues in
Company operates due to political instability, civil disobedience, armed
2008 compared with 18% in 2007. The Company’s continued geographic
hostilities or other calamities; (7) the seasonal nature of the business;
expansion strategy is expected to result in a significant increase to the
(8) the integration of the Company’s strategic acquisitions; (9) the
Company’s presence in emerging markets to approximately 30% of total
amount and timing of repurchases of the Company’s common stock,
Company revenues over the next three years, and closer to 40% in the
if any; (10) the current global financial and credit crisis, which could
longer term.
result in our customers curtailing development projects, construction,
Overall, the global markets in which the Company participates dete-
production and capital expenditures, which, in turn, could reduce the
riorated in the fourth quarter of 2008 due to the financial and economic
demand for our products and services and, accordingly, our sales,
crisis. To counteract this, the Company initiated restructuring actions
margins and profitability; (11) the financial condition of our customers,
designed to improve organizational efficiency and enhance profitability
including the ability of customers (especially those that may be highly
and stockholder value by generating sustainable operating expense
Harsco Corporation 2008 Annual Report
savings. Under this program, the Company principally exited certain
such as petrochemical and power plants, remained strong particu-
underperforming contracts with customers, closed certain facilities and
larly in North America and Northern Europe. Harsco Infrastructure
reduced global workforce during the fourth quarter of 2008. The Com-
accounted for 39% of the Company’s revenues and 45% of the operating
pany anticipates that these actions will generate annualized savings of
income for 2008.
$50 million in 2009 and beyond. The cost associated with these actions
The Harsco Metals Segment’s revenues in 2008 were $1.6 billion
in the fourth quarter of 2008 was $36.1 million.
compared with $1.5 billion in 2007, a 4% increase. Operating income
Furthermore, the Company continues to minimize its cost structure,
decreased by 37% to $85.3 million, from $134.5 million in 2007. Operat-
with such actions as the redeployment of its mobile asset base in the
ing margins for this Segment decreased by 340 basis points to 5.4%
Harsco Infrastructure and Harsco Metals Segments to focus on market
from 8.8% in 2007. The decrease in operating income and margins
segments that remain strong and provide growth opportunities, the
was due to pre-tax restructuring costs of $27.7 million, higher fuel
LeanSigma® continuous improvement initiative and prudent reductions
costs and unprecedented production cuts by steel mills across the
in capital spending.
globe, particularly in the fourth quarter 2008. Restructuring charges
The Company believes its strong balance sheet and liquidity position
primarily related to severance, contract exit costs, assets disposals
as well as a lower cost structure put the Company in a strong posi-
and charges related to defined benefit pension plan changes. This
tion to execute its long-term strategic initiatives and take advantage
Segment accounted for 40% of the Company’s revenues and 21% of
of near-term growth opportunities. The Company continues to have
the operating income for 2008.
available liquidity and remains well-positioned from a financial flexibility
The All Other Category’s revenues in 2008 were $849.6 million
perspective. The Company successfully executed a $450 million, 10-
compared with $750.0 million in 2007, a 13% increase. Operating income
year notes issue in the second quarter of 2008, providing more financial
increased by 6% to $150.9 million, from $142.2 million in 2007. Operating
flexibility and less exposure to variable interest rates. The debt-to-capi-
margins decreased by 120 basis points to 17.8% in 2008 from 19.0% in
tal ratio at December 31, 2008 was 41.7%.
2007 primarily due to higher steel costs and lower volume and pricing
During 2008, the Company had record cash provided by operat-
in the minerals and recycling technologies business. All six businesses
ing activities of $574.3 million, a 22% increase over the $471.7 million
contributed higher revenues due to strong demand. Four of the six busi-
achieved in 2007. The Company expects continued strong cash flows
nesses contributed higher operating income compared to 2007. This
from operating activities in 2009; however, 2009 is not expected to be
Category accounted for 21% of the Company’s revenue and 37% of the
as strong as 2008. Additionally, in 2008, the Company invested a record
operating income for 2008.
$457.6 million in capital expenditures (over 54% of which was for rev-
Despite the significant strengthening of the U.S. dollar during
enue-growth projects). More importantly, 43% of the revenue-growth
the fourth quarter of 2008, the effect of foreign currency translation
capital expenditures were invested in emerging economies. The Com-
increased full year 2008 consolidated revenues by $30.8 million and pre-
pany also repurchased approximately 4.5 million shares during 2008
tax income by $3.8 million when compared with 2007. If the U.S. dollar
at a total cost of $129 million. The Company’s cash flows are further
remains at current strong levels or strengthens further, 2009 results will
discussed in the Liquidity and Capital Resources section.
be significantly negatively impacted.
Segment Overview
Outlook Overview
The Harsco Infrastructure Segment’s revenues in 2008 were $1.5 billion
The Company’s operations span several industries, products and end
compared with $1.4 billion in 2007, a 9% increase. Operating income
markets. On a macro basis, the Company is affected by non-residential
increased by 1% to $185.4 million, from $183.8 million in 2007. Operat-
and infrastructure construction and infrastructure maintenance and
ing margins for the Segment declined by 100 basis points to 12.0%
capital improvement activities; worldwide steel mill production and
from 13.0% in 2007. Operating margins declined partially due to 2008
capacity utilization; industrial production volume and maintenance
pre-tax restructuring costs of $5.0 million related to severance, contract
activity; and the general business trend towards the outsourcing of
exit costs and asset disposals. Organic growth of 6% was gener-
services. The overall outlook for 2009 is guarded as a result of the deep-
ated primarily in the Middle East and Asia/Pacific as these emerging
ening global financial and economic crisis that has created tremendous
economies continued to make significant investment in infrastructure
uncertainty and volatility throughout the world.
modernization and expansion. Infrastructure maintenance activities,
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
Additionally, the Company’s pension plans’ assets declined in value
new technology applications, consolidated procurement and logistics;
consistent with the weakening economy and will result in significant
and LeanSigma continuous improvement initiatives.
increased pension expense during 2009. The significant strengthening
The long-term outlook for the Harsco Metals Segment remains stable
of the U.S. dollar in the fourth quarter of 2008, and its continued appre-
as the global steel market is expected to grow at reasonable rates over
ciation in the first quarter of 2009, is expected to have a significant
the next several years. The key factor behind this anticipated growth
adverse impact on the 2009 Company’s performance.
is the demand from emerging economies for significant infrastructure
In response to these events, the Company undertook a restructuring
development needs. The near-term outlook, however, is challenging
action during the fourth quarter of 2008 that is expected to generate
due to the deepening global economic and financial crisis which has
annual savings of approximately $50 million in 2009 and beyond. The
caused reductions in demand for steel and associated steel production.
costs associated with these actions were $36.1 million. The Com-
Steel mill production declines reached unprecedented levels at the end
pany does not currently expect to incur any significant restructuring
of 2008. Reduced production volumes are expected to continue into the
charges during 2009, although the Company continues to proactively
first half of 2009. It is expected that some of this impact will be mitigated
and aggressively implement a number of additional countermeasures
by substantially lower fuel costs, improved contract performance, new
designed to improve future financial performance. These additional
contract signings, and other cost optimization initiatives the Company is
actions include: targeted reductions in capital spending; execut-
currently implementing. Additionally, to ensure the segment will oper-
ing LeanSigma continuous improvement initiatives; and redeploying
ate at optimal efficiency in 2009 and beyond, significant restructuring
equipment from slowing markets into strategically important, growing
actions were executed during the fourth quarter of 2008. The recent
markets. Additionally, the All Other Category (Harsco Minerals & Rail) is
decline in oil prices, if sustained, should have a measurable effect on
expected to benefit from declining steel prices in 2009. The current eco-
operating results in the Segment in 2009. The Company continues to
nomic conditions provide the Company with expansion opportunities
engage in enterprise business optimization initiatives including introduc-
to pursue its prudent acquisition strategy of seeking further accretive
ing the LeanSigma continuous improvement program, which over time
bolt-on acquisitions.
is expected to result in broad-scale improvement in business practices
The long-term outlook across the global footprint of the Harsco
and consequently operating margin. In addition, new contract signings
Infrastructure business remains positive. The near-term outlook, how-
and start-ups, as well as the Company’s geographic expansion strategy,
ever, is challenging due to the current economic and financial crisis.
particularly in emerging markets, are expected to gradually have a posi-
This Segment will leverage its global breadth and mobile asset base to
tive effect on results in the longer term.
relocate equipment to focus on emerging markets as well as market
For the All Other Category (Harsco Minerals & Rail), the long-term
segments that remain stable such as infrastructure maintenance
outlook remains positive. Most end-market demand remains strong
services, and institutional services such as hospitals and education,
and backlogs continue near record levels for the Category. The near-
and global infrastructure work. Operating performance for this Segment
term outlook, however, for the Minerals business, which recovers and
in the long term is expected to continue to benefit from the execution of
recycles high value metals, has been negatively affected by the recent
numerous global government stimulus packages which are expected
steep decline in metal prices. The Company continues to experience
to fund much needed infrastructure projects throughout the world;
strong bidding activity in its railway track maintenance services and
selective strategic investments and acquisitions in existing and new
equipment business, new contract opportunities for its minerals and
markets; and enterprise business optimization opportunities including
recycling technologies business, and potential geographic expansion
opportunities within its industrial products businesses.
Total Revenues Twelve Months Ended December 31
Percentage Growth From 2007 to 2008
00
Percent
2007
Percent
Volume
Currency
$1,770.8
1,370.0
257.5
253.7
189.0
126.8
$3,967.8
45%
35
6
6
5
3
100%
$1,758.5
1,244.9
196.4
213.5
139.6
135.3
$3,688.2
48%
34
5
6
4
3
100%
0.0%
10.0
35.0
15.5
22.9
(7.3)
6.8%
0.7%
0.0
(3.9)
3.3
12.5
1.0
0.8%
Total
0.7%
10.0
31.1
18.8
35.4
(6.3)
7.6%
Revenues by Region
(Dollars in millions)
Western Europe
North America
Middle East and Africa
Latin America (a)
Eastern Europe
Asia/Pacific
Total
(a)
Includes Mexico.
0 Harsco Corporation 2008 Annual Report
2008 highlights
The following significant items affected the Company overall during
2008 in comparison with 2007:
Company Wide
Harsco Metals Segment
(Dollars in millions)
Revenues
Operating income
Operating margin percent
00
2007
$1,577.7
85.3
5.4%
$1,522.3
134.5
8.8%
• Overall stronger demand benefited the Company in the first three
quarters of 2008, in particular, increased infrastructure maintenance
Harsco Metals Segment – Significant Effects on Revenues
services and highly engineered equipment rentals, especially in the
(In millions)
Middle East and Eastern Europe; as well as railway track equipment
sales and increased demand for air-cooled heat exchangers.
• Operating income and margins for the Harsco Metals Segment
were negatively impacted by unprecedented declines in global steel
production during the fourth quarter of 2008; costs of restructuring
actions implemented in the fourth quarter of 2008; increased operat-
ing expenses, mainly higher fuel costs; as well as certain contracts
with lower-than-acceptable margins.
Harsco Infrastructure Segment
(Dollars in millions)
Revenues
Operating income
Operating margin percent
00
2007
$1,540.3
185.4
12.0%
$1,415.9
183.8
13.0%
Revenues – 2007
Acquisitions
Net increased volume and new business
Impact of foreign currency translation
Revenues – 2008
$1,522.3
30.0
18.6
6.8
$1,577.7
Harsco Metals Segment – Significant Impacts on Operating Income
• Despite overall increased volume, operating income and margins
for the Harsco Metals Segment were negatively impacted by
unprecedented declines in global steel production particularly
during the fourth quarter of 2008; increased operating expenses,
mainly higher fuel costs; as well as certain contracts with lower-
than-acceptable margins.
• Operating income for 2008 included higher severance and other
restructuring charges of $27.7 million related to the fourth quarter
Harsco Infrastructure Segment – Significant Impacts on Revenues
2008 restructuring actions.
(In millions)
Revenues – 2007
Net increased volume and new business
Impact of foreign currency translation
Acquisitions
Revenues – 2008
• The 2007 acquisition of Alexander Mill Services International
(“AMSI”) was accretive to earnings in 2008.
• The impact of foreign currency translation in 2008 increased operat-
ing income for this segment by $4.1 million compared with 2007.
All Other Category – Harsco Minerals & Rail
$1,415.9
80.3
28.5
15.6
$1,540.3
Harsco Infrastructure Segment – Significant Impacts on
Operating Income:
•
In 2008, the Segment’s operating results continued to improve due to
increased non-residential, and infrastructure construction through-
(Dollars in millions)
Revenues
Operating income
Operating margin percent
00
2007
$849.6
150.9
17.8%
$750.0
142.2
19.0%
out the world, and in particular the Middle East, Asia/Pacific and
All Other Category – Harsco Minerals & Rail – Significant
certain parts of Europe. The Company continues to benefit from its
Impacts on Revenues
highly engineered rental equipment capital investments made in
(In millions)
both developed and emerging markets. Additionally, infrastructure
maintenance activity remained strong in both North America and
certain parts of Western Europe.
• This Segment benefited from $8.3 million of increased pre-tax net
gain on the sale of properties during 2008 compared with 2007.
• The impact of foreign currency translation in 2008 increased operat-
ing income for this Segment by $5.1 million, compared with 2007.
Revenues – 2007
Railway track maintenance services and equipment
Air-cooled heat exchangers
Industrial grating products
Acquisitions
Roofing granules and abrasives
Boiler and process equipment
Impact of foreign currency translation
Reclamation and recycling services
•
In 2008, the segment’s operating results included $5.0 million of
Revenues – 2008
costs related to the fourth quarter 2008 restructuring actions and
increased costs associated with new business optimization initia-
tives and further process and technology standardization.
$750.0
46.8
22.0
18.7
12.9
5.9
4.3
(4.5)
(6.5)
$849.6
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
All Other Category – Harsco Minerals & Rail – Significant
particularly in the first half. The major challenges facing the Company
Effects on Operating Income
include the following:
• The railway track maintenance services and equipment business
• Overall instability of the global financial markets and economies
delivered increased income in 2008 compared with 2007 due to
• Continuing strengthening of the U.S. dollar
increased rail equipment sales and repair parts, partially offset by
• Tightening of credit markets that limit the ability of the Company’s
reduced contract services sales and higher selling, general and
customers to obtain financing
administrative expenses.
• Substantial and unprecedented reductions in global steel production
• Strong demand in the natural gas market resulted in increased
• Depressed commodity prices, particularly high-value metals
volume and operating income for the air-cooled heat exchangers
business in 2008. These increases were partially offset by increased
costs principally due to overall higher steel costs in 2008.
• The industrial grating products business experienced higher
sales as a result of increased pricing; however, operating income
increases were partially offset by higher costs principally due to
overall higher steel costs in 2008.
• Despite lower volume for the roofing granules and abrasives business
in 2008, sales and operating income increased due to price increases,
which were partially offset by higher selling, general and adminis-
trative expenses.
• Operating income for the boiler and process equipment business was
higher in 2008 due to increased demand, partially offset by increased
production costs and selling, general and administrative expenses.
• Operating income for the reclamation and recycling services was
lower in 2008 due principally to unprecedented fourth quarter steel
mills production declines and a significantly lower metal prices and
product mix.
• The impact of foreign currency translation in 2008 decreased oper-
ating income by $2.1 million for this Category compared to 2007.
outlook, trends and Strategies
Company Wide
In response to this global financial and economic crisis, the Com-
pany has and will continue to proactively and aggressively implement a
number of countermeasures to reinforce 2009 performance, including:
• During the fourth quarter of 2008, the Company implemented a
restructuring program designed to improve organizational efficiency
and enhance profitability and stockholder value. Under the restruc-
turing program, the Company is principally exiting certain under-
performing contracts with customers, closing certain facilities,
and reducing its global workforce. The extent of the restructuring
program increased from previously announced estimates to include
additional actions taken as the global financial and economic crisis
continued to deepen. The Company recorded a pre-tax charge of
$36.1 million related to the restructuring program, or approximately
$0.28 per diluted share. The annualized benefits associated with this
charge are estimated to be $50 million, or approximately $0.45 per
diluted share, and are expected to be realized in 2009 and beyond.
• Cutting costs across the enterprise, including reducing or eliminat-
ing discretionary spending to match market conditions.
• Prudently reducing growth capital expenditures in 2009 while
redeploying equipment from slowing markets to new projects in
strategically important areas such as the Middle East and Africa,
Asia-Pacific, and several other key countries.
• Accelerating growth initiatives, including projects in emerging markets.
Adverse economic conditions precipitated by developments in the
• Selective, prudent strategic acquisitions.
financial markets in the United States have created tremendous uncer-
tainty and anxiety throughout the world. The erosion in confidence in
the financial markets, the global recession and the soaring U.S. dollar
have caused the Company’s near-term prospects to become more
difficult. During the fourth quarter of 2008 there was an unprecedented
reduction in global steel production as well as the postponement of
some construction projects and sales due to the tightening of credit. In
addition, the value of the U.S. dollar strengthened significantly against
many other currencies, including the major currencies in key markets of
the Company. The year 2009 is expected to be a very challenging year,
While the global economic conditions remain uncertain and turbu-
lent, the Company believes it is well-positioned to capitalize on oppor-
tunities and execute strategic initiatives based upon its strong balance
sheet, available liquidity and its ability to generate strong operating cash
flows. The Company is confident that the previously mentioned actions
along with its new LeanSigma continuous improvement program will
significantly reduce the Company’s cost structure, further enhancing its
financial strength. Additionally, the Company’s global footprint; diversity
of services and products; long-term mill services contracts; portability
of infrastructure services equipment; and large infrastructure services
customer base help mitigate its overall exposure to changes in any one
single economy. However, further deterioration of the global economies
could still have an adverse impact on the Company’s operating results.
Harsco Corporation 2008 Annual Report
Looking to 2009 and beyond, the following significant items, trends
in reduced operating income for certain products and services, to
and strategies are expected to affect the Company:
the extent that such costs cannot be passed on to customers. Cost
• The Company will continue its disciplined focus on expanding
decreases could result in increased operating income to the extent
its industrial services businesses, with a particular emphasis on
that such cost savings do not need to be passed to customers. How-
prudently growing the Harsco Infrastructure Segment, especially
ever, increased volatility in energy and commodity costs may provide
in emerging economies and other targeted markets. Growth is
additional service opportunities for the Harsco Metals Segment and
expected to be achieved through the provision of additional services
several businesses in the All Other Category (Harsco Minerals & Rail)
to existing customers, new contracts in both developed and emerg-
as customers may tend to outsource more services to reduce overall
ing markets, and selective strategic bolt-on acquisitions. Addition-
costs. Such volatility may also provide opportunities for additional pet-
ally, new higher-margin service and sales opportunities in the miner-
rochemical plant maintenance and capital improvement projects. As
als and rail businesses will be pursued globally.
part of the enterprise-wide optimization initiatives discussed above,
• The Company will continue to invest in selective strategic acquisitions
the Company is implementing programs to help mitigate these costs.
and growth capital investments; however, management will continue
• Foreign currency translation had an overall minor favorable effect
to be very selective and disciplined in allocating capital, choosing
on the Company’s sales and operating income during 2008 in
projects with the highest Economic Value Added (“EVA”) potential.
comparison with 2007. However, due to the strengthening of the
• The Company anticipates global government stimulus packages to
U.S. dollar near the end of the third quarter and through the fourth
fund much-needed infrastructure projects throughout the world. The
quarter 2008, foreign currency translation had an overall unfavor-
Harsco Infrastructure Segment is well-positioned with its engineer-
able impact on the Company’s stockholders’ equity and is expected
ing and logistics expertise and the capital investment base to take
to have a significant negative impact on 2009 sales and earnings in
advantage of these expected opportunities.
relationship to 2008. If the U.S. dollar continues to strengthen (which
• The implementation of the Company’s enterprise-wide LeanSigma
it has through mid-February 2009), particularly in relationship to the
continuous improvement program in 2008 should provide long-term
euro, British pound sterling or the Eastern European currencies,
benefits and improve the overall performance of the Company
the impact on the Company would generally be negative in terms
through a reduced cost structure and increased efficiency.
of reduced revenue, operating income and stockholders’ equity.
•
In addition to LeanSigma, the Company will continue to implement
Additionally, even if the U.S. dollar remains at its current value,
enterprise-wide business optimization initiatives to further enhance
the Company’s revenue and operating income will be negatively
margins for most businesses. These initiatives include improved
impacted in comparison to 2008. Should the U.S. dollar weaken in
supply-chain and logistics management; capital employed optimiza-
relationship to these currencies, the effect on the Company would
tion; and added emphasis on global procurement.
generally be positive in terms of higher revenue, operating income
• The Company will place a strong focus on corporate-wide expan-
and stockholders’ equity.
sion into emerging economies in the coming years to better balance
• Despite the tightening of credit during the second half of the year
its geographic footprint. More specifically, within the next three to
(and slightly higher borrowing rates during that time) overall variable
five years, the Company’s global growth strategies include steady,
borrowing rates for 2008 have been lower than 2007. A one percent-
targeted expansion in the Middle East and Africa, Asia/Pacific
age point change in variable interest rates would change interest
and Latin America to further complement the Company’s already-
expense by approximately $1.2 million per year. This is substantially
strong presence throughout Western Europe and North America.
lower than prior projected impacts as variable rate debt has been
This strategy is expected to result in a significant increase to the
reduced to approximately 12% of the Company’s borrowings as of
Company’s presence in these markets to approximately 30% of total
December 31, 2008, compared to approximately 49% at Decem-
Company revenues over the next three years and closer to 40% in
ber 31, 2007. This decrease is due to the repayment of commercial
the longer term. Revenues in these markets were almost 21% for
paper borrowings during the second quarter of 2008 with the
2008 compared with 18% for 2007. In the long term, the improved
proceeds from the May 2008 U.S. senior notes offering coupled with
geographic footprint will also benefit the Company as it further
strong operating cash flows in 2008. The Company manages the mix
diversifies its customer base.
of fixed-rate and floating-rate debt to preserve adequate funding
• Volatility in energy and commodity costs (e.g., crude oil, natural gas,
flexibility, as well as control the effect of interest-rate changes on
steel, etc.) and worldwide demand for these commodities could have
consolidated interest expense. Strategies to further reduce related
an adverse impact on the Company’s operating costs and ability
risks are under consideration.
to obtain the necessary raw materials. Cost increases could result
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
• Total defined benefit pension expense for 2009 will be substantially
leverage its value-added services and highly engineered forming,
higher than the 2008 level due to the decline in pension asset values
shoring and scaffolding systems to grow the business.
during the second half of 2008. This decline was due to the financial
• The Company will continue to diversify this business, focusing on
crisis and the deterioration of global economic conditions. In an
growth in institutional and global infrastructure projects and infra-
effort to mitigate a portion of this overall increased cost for 2009, the
structure maintenance projects.
Company implemented additional plan design changes for a certain
• The Company will continue to implement its LeanSigma continuous
international defined benefit pension plan so that accrued service
improvement program and other key initiatives including: global pro-
is no longer granted for periods after December 31, 2008. This
curement and logistics; the sharing of engineering knowledge and
action was part of the Company’s overall strategy to reduce pension
resources; optimizing the business under one standardized adminis-
expense and volatility.
trative and operating model at all locations worldwide; and on-going
• As the Company continues the strategic expansion of its global foot-
analysis for other potential synergies across the operations.
print and implements tax planning opportunities, the 2008 effective
• Operating performance for this Segment in the long term is
income tax rate has been lower than 2007. The effective income tax
expected to benefit from the execution of global government
rate for continuing operations was 26.7% for 2008, compared with
stimulus packages which should fund much-needed infrastructure
30.7% for 2007. The decrease in the effective income tax rate for the
projects throughout the world.
year 2008 was primarily due to increased earnings in jurisdictions
with lower tax rates; increased designation of certain interna-
tional earnings as permanently reinvested; and the recognition of
previously unrecognized tax benefits in certain state and foreign
jurisdictions. Looking forward into 2009 the effective income tax rate
is expected to be in the range of 28%.
• The Company expects continued strong cash flows from operat-
ing activities in 2009; however, 2009 is not expected to be as strong
as the record 2008 cash flows. The Company plans to significantly
reduce the amount of cash invested for organic growth capital
expenditures during 2009. The Company’s growth capital expendi-
tures were approximately $248 million in 2008. The Company expects
growth capital expenditures to approximate $100 million during 2009.
The Company believes that the mobile nature of its capital invest-
ment pool will facilitate strategic growth initiatives in the near term,
despite the reduction in growth capital expenditures for 2009.
Harsco Metals Segment
• The strong U.S. dollar will continue to adversely affect the sales
and operating income of Harsco Metals, as over 80% of this
business operates outside the U.S. Adverse economic uncertain-
ties developing through the third and fourth quarters of 2008 have
resulted in reduced demand for steel, causing steel companies
globally to significantly scale back production. Mills have also been
accelerating planned maintenance outages in an effort to better bal-
ance production and end-market demand. These customer actions
had a significant negative impact on the Harsco Metals Segment’s
results in the fourth quarter of 2008. Entering 2009, the Company
continues to see this Segment’s operations running at even lower
capacity than December 2008. While global demand for steel
remains weak, steel production cuts of this depth and breadth are
not expected to be sustainable for long periods of time. The Com-
pany does not foresee any measurable pick-up in this Segment’s
Harsco Infrastructure Segment
operations until the second half of 2009.
• The strong U.S. dollar will continue to adversely affect sales and
• Benefits from the restructuring program implemented in the fourth
operating income of Harsco Infrastructure, as approximately 80%
quarter of 2008 should improve the operational efficiency and
of this business operates outside the U.S. The near-term outlook
enhance profitability of the Harsco Metals Segment in 2009 and
for the Harsco Infrastructure Segment will be negatively impacted
beyond. Initiatives included the exit of underperforming contracts
by continued uncertainty in the global credit markets, which has
with customers and underperforming operations; defined benefit
deferred equipment sales and some construction projects. The cur-
pension plan design changes; overall reduction in global workforce;
rent weakness in the commercial construction market, particularly
and substantially reducing discretionary spending.
in Western Europe and the United States, is being partially offset by
• The Company will continue to place significant emphasis on improv-
a steady level of activity from the Company’s infrastructure mainte-
ing operating margins of this Segment. Margin improvements are
nance services, institutional and global infrastructure projects, and
most likely to be achieved as a result of the recent decline in fuel
continued overall growth in the Middle East.
costs; cost reduction initiatives, renegotiating or exiting contracts
• The Company will continue to emphasize prudent expansion of its
with lower-than-acceptable returns, principally in North America;
geographic presence in this Segment through entering new markets
internal enterprise business optimization efforts; divesting low-margin
and further expansion in emerging economies, and will continue to
product lines; continuing to execute a geographic expansion strategy
Harsco Corporation 2008 Annual Report
in the Middle East and Africa, Latin America and Asia/Pacific;
All Other Category – Harsco Minerals & Rail
and implementing continuous improvement initiatives including
• The Company will emphasize prudent global expansion of its recla-
LeanSigma projects, global procurement initiatives, site efficiency
mation and recycling value-added services for extracting high-value
programs, technology enhancements, maintenance best practices
metallic content from slag and responsibly handling and recycling
programs and reorganization actions. Although the costs associated
residual materials.
with these efforts have reduced operating margins during 2008 when
• Low metal prices and historical low production levels will continue
compared with 2007 due to incremental costs, the overall margin
to have a negative effect on certain reclamation and recycling ser-
enhancements are expected to be recognized in the second half of
vices in 2009, which may adversely affect the revenues, operating
2009 and beyond.
income, cash flows and asset valuations of this business.
• The Company will continue to diversify its customer base by
• Certain businesses in this Category are dependent on a small
reallocating assets to new customers in emerging markets.
group of key customers. The loss of one of these customers due to
• Further consolidation in the global steel industry is possible. Should
competition or due to financial difficulty, or the filing for bankruptcy
additional consolidations occur involving some of the steel indus-
protection could adversely impact the Company’s income, cash
try’s larger companies that are customers of the Company, it would
flows and asset valuations. As part of its credit risk management
result in an increase in concentration of revenues and credit risk
practices, the Company closely monitors the credit standing and
for the Company. If a large customer were to experience financial
accounts receivable position of its customer base.
difficulty, or file for bankruptcy protection, it could adversely impact
•
International demand for the railway track maintenance services
the Company’s income, cash flows and asset valuations. As part of
and equipment business’s products and services is expected to
its credit risk management practices, the Company closely monitors
be strong in both the near term and the long term. A large multi-
the credit standing and accounts receivable position of its customer
year equipment order signed in 2007 with China is an example of
base. Further consolidation may also increase pricing pressure on
the underlying strength of the international markets. Due to long
the Company and the competitive risk of services contracts which
lead-times, this order is expected to generate most of its revenues
are due for renewal. Conversely, such consolidation may provide
during 2009 through 2011. In addition, increased volume of contract
additional service opportunities for the Company as the Company
services and LeanSigma continuous improvement initiatives are
believes it is well-positioned competitively.
expected to improve margins on a long-term basis.
• ArcelorMittal recently notified the Company that it would unilaterally
• Worldwide supply and demand for steel and other commodities could
revise the fixed-fee provisions of certain contracts between the parties
have an adverse impact on raw material costs and the ability to obtain
with the intended effect resulting in a significant price reduction to the
the necessary raw materials for several businesses in this Category. The
Company. The Company has notified ArcelorMittal that their actions
Company has implemented certain strategies to help ensure continued
are a breach of these contracts and that the Company will take all
product supply to its customers and mitigate the potential impact that
necessary and appropriate actions to protect its legal rights. Discus-
changes in steel and other commodity prices could have on operating
sions between the parties continue, but it is possible that the parties
income. If steel or other commodity costs associated with the Company’s
may need to resort to third-party resolution of this issue. ArcelorMit-
manufactured products increase and the costs cannot be passed on
tal represented approximately 10% of the Company’s sales in 2008,
to the Company’s customers, operating income would be adversely
2007 and 2006. The Company expects ArcelorMittal sales in 2009 to
affected. Conversely, reduced steel and other commodity costs would
be less than 10% of the Company’s sales due primarily to reduced
improve operating income to the extent such savings do not have to be
steel production levels; the Company’s exiting of certain underper-
passed to customers. Additionally, if the Company cannot obtain the
forming contracts with ArcelorMittal; and a stronger U.S. dollar. It is
necessary raw materials for its manufactured products, then revenues,
possible that the eventual outcome of this unprecedented breach of
operating income and cash flows could be adversely affected.
contract could negatively impact the Company’s long-term relation-
• Operating margins of the abrasives business could be impacted by
ship with this customer and, as a result, the Company’s financial
volatile energy prices that affect both production and transportation
position, results of operations and cash flows could be negatively
costs. This business continues to pursue cost and site optimization
impacted. Of all of the Company’s major customers in the Harsco
initiatives and the use of more energy-efficient equipment to help
Metals Segment, the EVA on contracts with ArcelorMittal are the
mitigate future energy-related increases.
lowest in the portfolio. Contracts with ArcelorMittal are long-term
• Due to a stable natural gas market and additional North American
contracts, such that any impact on the Company’s future results of
opportunities, demand for air-cooled heat exchangers is expected
operations would occur over a number of years.
to remain at least consistent with 2008 levels.
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
results of operations for 2008, 2007 and 2006 (a)
(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
00
$3,967.8
2,926.4
602.2
22.0
412.0
73.2
91.8
245.6
(4.7)
240.9
2.92
2.87
26.7%
27.7%
2007
$3,688.2
2,685.5
538.2
3.4
457.8
81.4
117.6
255.1
44.4
299.5
3.01
3.53
30.7%
31.4%
2006
$3,025.6
2,203.2
472.8
2.5
344.3
60.5
93.4
186.4
10.0
196.4
2.21
2.33
32.5%
32.3%
(a) All historical amounts in the Results of Operations section have been reclassified for comparative purposes to reflect discontinued operations.
Comparative Analysis of Consolidated Results
Revenues
2008 vs. 2007
Revenues for 2008 increased $279.7 million or 8% from 2007, to a record level. This increase was attributable to the following significant items:
In millions
Change in Revenues 00 vs. 00
Net increased revenues in the Harsco Infrastructure Segment due principally to non-residential and infrastructure construction in international,
particularly in the Middle East and Europe, and North American markets.
Effect of business acquisitions. Increased revenues of $30.0 million, $15.6 million and $12.9 million in the Harsco Metals Segment, Harsco Infrastructure
Segment and the All Other Category (Harsco Minerals & Rail), respectively.
Increased revenues in the railway track maintenance services and equipment business due to a higher level of rail equipment shipments in 2008 and
increased repair parts sales, partially offset by decreased contract services.
Effect of foreign currency translation.
Increased revenues of the air-cooled heat exchangers business due to a continued strong natural gas market.
Increased revenues of the industrial grating products business due to increased prices.
Net increased volume, new business and sales price changes in the Harsco Metals Segment (excluding acquisitions).
Increased revenues in the roofing granules and abrasives business resulting from price increases and product mix.
Other (minor changes across the various units not already mentioned).
Net decreased revenues in the reclamation and recycling services business due to lower metal prices and reduced volume.
Total Change in Revenues 2008 vs. 2007
$÷80.3
÷÷58.5
÷÷46.8
÷÷30.8
÷÷22.0
÷÷18.7
÷÷18.6
÷÷÷5.9
÷÷÷4.6
÷÷«(6.5)
$279.7
2007 vs. 2006
Revenues for 2007 increased $662.5 million or 22% from 2006. This increase was attributable to the following significant items:
In millions
Change in Revenues 00 vs. 00
$211.6
÷209.6
÷166.9
÷÷30.8
÷÷27.7
÷÷23.8
÷÷«(4.9)
÷÷«(3.0)
$662.5
Business acquisitions. Increased revenues of $123.7 million, $53.2 million and $34.7 million in the All Other Category (Harsco Minerals & Rail), Harsco
Infrastructure Segment and Harsco Metals Segment, respectively.
Net increased revenues in the Harsco Infrastructure Segment due principally to the continued strength of the non-residential and infrastructure construction
markets in both North America and internationally, particularly in Europe and the Middle East (excluding acquisitions).
Effect of foreign currency translation.
Net increased volume, new business and sales price changes in the Harsco Metals Segment (excluding acquisitions).
Increased revenues of the air-cooled heat exchangers business due to a continued strong natural gas market.
Increased revenues of the industrial grating products business due to continued strong demand.
Net decreased revenues in the roofing granules and abrasives business resulting from lower demand.
Other (minor changes across the various units not already mentioned).
Total Change in Revenues 2007 vs. 2006
Harsco Corporation 2008 Annual Report
Cost of Services and Products Sold
2008 vs. 2007
Cost of services and products sold for 2008 increased $240.9 million or 9% from 2007, slightly higher than the 8% increase in revenues. This increase
was attributable to the following significant items:
In millions
Change in Cost of Services and Products Sold 00 vs. 00
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).
Business acquisitions.
Other (product/service mix and increased equipment maintenance costs, partially offset by enterprise business optimization initiatives and volume-related
efficiencies).
Effect of foreign currency translation.
Total Change in Cost of Services and Products Sold 2008 vs. 2007
$129.5
÷÷45.7
÷÷40.8
÷÷24.9
$240.9
2007 vs. 2006
Cost of services and products sold for 2007 increased $482.3 million or 22% from 2006, consistent with the 22% increase in revenues. This increase
was attributable to the following significant items:
In millions
Change in Cost of Services and Products Sold 00 vs. 00
$174.1
÷144.4
÷124.5
÷÷39.3
$482.3
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).
Business acquisitions.
Effect of foreign currency translation.
Other (increased equipment maintenance costs and product/service mix, partially offset by enterprise business optimization initiatives and volume-related
efficiencies).
Total Change in Cost of Services and Products Sold 2007 vs. 2006
Selling, General and Administrative Expenses
2008 vs. 2007
Selling, general and administrative (“SG&A”) expenses for 2008 increased $63.9 million or 12% from 2007. This increase was attributable to the
following significant items:
In millions
Change in Selling, General and Administrative Expenses 00 vs. 00
Increased compensation expense due to salary increases resulting from overall business growth, partially offset by lower employee incentive plan costs.
Increased professional fees due to global optimization projects and global business expansion.
Business acquisitions.
Bad debt expense.
Increased travel expenses to support business expansion and optimization projects.
Increased commissions, largely related to increased revenues in the railway track equipment business.
Higher depreciation expense principally related to the implementation of enterprise-wide information technology systems and related hardware.
Effect of foreign currency translation.
Other expenses.
Total Change in Selling, General and Administrative Expenses 2008 vs. 2007
$23.5
÷÷9.5
÷÷6.8
÷÷4.7
÷÷3.6
÷÷3.2
÷÷3.2
÷÷2.6
÷÷6.8
$63.9
2007 vs. 2006
Selling, general and administrative (“SG&A”) expenses for 2007 increased $65.4 million or 14% from 2006. This increase was attributable to the
following significant items:
In millions
Change in Selling, General and Administrative Expenses 00 vs. 00
$22.8
÷20.3
÷19.2
÷÷7.9
÷«(4.8)
$65.4
Effect of foreign currency translation.
Increased compensation expense due to salary increases and employee incentive plan costs due to overall business growth and improved performance.
Business acquisitions.
Increased professional fees due to global optimization projects.
Other expenses.
Total Change in Selling, General and Administrative Expenses 2007 vs. 2006
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
Other Expenses
for 2008 was 26.7% versus 30.7% for 2007. The decrease in the effec-
This income statement classification includes impaired asset write-
tive income tax rate for the year 2008 was primarily due to increased
downs, employee termination benefit costs and costs to exit activities,
earnings in jurisdictions with lower tax rates; increased designation
offset by net gains on the disposal of non-core assets.
of certain international earnings as permanently reinvested; and the
2008 vs. 2007
Net Other Expenses of $22.0 million for 2008 increased $18.5 million from
recognition of previously unrecognized tax benefits in certain state
and foreign jurisdictions.
the $3.4 million during 2007. This increase in other expenses primarily
2007 vs. 2006
relates to restructuring charges that the Company incurred during the
The increase in 2007 of $24.2 million or 26% in the provision for income
fourth quarter of 2008.
2007 vs. 2006
Net Other Expenses of $3.4 million in 2007 compared to $2.5 million in
2006, an increase of $0.9 million, due principally to employee termina-
tion benefit costs.
For additional information, see Note 15, Other (Income) and
Expenses, to the Consolidated Financial Statements.
Interest Expense
2008 vs. 2007
Interest expense in 2008 was $8.2 million or 10% lower than in 2007. This
was principally due to lower overall debt levels in 2008 and, to a lesser
extent, lower interest rates on variable interest rate borrowings. The
impact of foreign currency translation also decreased interest expense
by approximately $0.5 million.
2007 vs. 2006
Interest expense in 2007 was $20.9 million or 35% higher than in 2006.
This was principally due to increased borrowings to finance business
acquisitions made in 2007 and, to a lesser extent, higher interest rates on
variable interest rate borrowings. The impact of foreign currency trans-
taxes from continuing operations was due to increased earnings from
continuing operations for the reasons mentioned above, partially offset
by a lower effective income tax rate. The effective income tax rate
relating to continuing operations for 2007 was 30.7% versus 32.5% for
2006. The decrease related principally from the Company increasing its
designation of certain international earnings as permanently reinvested.
For additional information, see Note 9, Income Taxes, to the Consoli-
dated Financial Statements.
Income from Continuing Operations
2008 vs. 2007
Income from continuing operations in 2008 of $245.6 million was
$9.5 million or 4% lower than 2007. This decrease resulted from the
overall economic downturn during the fourth quarter and the restruc-
turing charges taken by the Company as a result of the downturn.
2007 vs. 2006
Income from continuing operations in 2007 of $255.1 million was
$68.7 million or 37% higher than 2006. This increase resulted from
strong demand for most of the Company’s services and products,
and business acquisitions.
lation also increased interest expense by approximately $2.6 million.
Income (Loss) from Discontinued Operations
Income Tax Expense from Continuing Operations
2008 vs. 2007
The decrease in 2008 of $25.8 million or 22% in the provision for income
taxes from continuing operations was primarily due to a lower effec-
tive income tax rate from continuing operations and lower pre-tax
income. The effective income tax rate relating to continuing operations
2008 vs. 2007
A loss from discontinued operations of $4.7 million was generated in
2008 due to working capital adjustments and other costs associated
with the disposition of the Gas Technologies Segment, coupled with
the tax effect from the final purchase price allocation. This compares
with income of $44.4 million in 2007 due principally to the sale of the
Company’s Gas Technologies Segment in December 2007.
Harsco Corporation 2008 Annual Report
2007 vs. 2006
to lower trade receivables, lower inventory levels and higher cash
Income from discontinued operations for 2007 increased by $34.4 million
advances from customers. These increases were partially offset by
or 344% compared with 2006. The increase was primarily attributable
lower income tax accruals, which included the effect of a $20 million
to the $26.4 million after-tax gain on the sale of the Gas Technologies
income tax payment (as a result of the December 2007 gain on the sale
Segment, as well as improved operating results for the business prior
of the discontinued Gas Technologies Segment), and reduced accounts
to the divestiture.
payable levels.
Net Income and Earnings Per Share
2008 vs. 2007
Net income of $240.9 million and diluted earnings per share of $2.87
in 2008 were lower than 2007 by $58.5 million or 20% and $0.66 or 19%,
respectively, due to decreased income from both continuing and
discontinued operations for the reasons described above.
2007 vs. 2006
In 2008, the Company invested $457.6 million in capital expendi-
tures (over 54% of which were for revenue-growth projects) returned
$128.6 million to stockholders through the repurchase of Company
stock; and paid $65.6 million in stockholder dividends.
The Company’s net cash borrowings increased $44.5 million in
2008. The incremental borrowings and operating cash flows funded
capital expenditures, share repurchases, and stockholder dividends.
Balance sheet debt, which is affected by foreign currency transla-
Net income of $299.5 million and diluted earnings per share of $3.53 in
tion, decreased $67.9 million from December 31, 2007. Debt to total
2007 exceeded 2006 by $103.1 million or 52% and $1.20 or 52%, respec-
capital ratio increased to 41.7% as of December 31, 2008, due princi-
tively, due to increased income from both continuing and discontinued
pally to a $152.4 million decline in Stockholders’ Equity. The decline in
operations for the reasons described above.
Stockholders’ Equity was primarily due to foreign currency translation
liquidity and capital resources
decreased value of plan assets; and repurchases of treasury stock, off-
adjustments; actuarial losses on pension obligations as a result of a
Overview
Global financial markets have been under stress due to poor lending
and investment practices and sharp declines in real estate values. As a
result, broad-based tightening of credit conditions has occurred which
has restrained economic growth. In response to these changes in the
global economic conditions, the Company has undertaken several
initiatives to conserve capital and enhance liquidity including prudently
reducing capital spending to only critical projects where the highest
returns can be achieved while redeploying existing capital investments;
optimizing worldwide cash positions; reducing or eliminating discretion-
ary spending; and additional scrutiny and tightening of credit terms with
customers. Despite the tightening of credit markets around the world,
the Company continues to have available liquidity and has been able
to issue commercial paper as needed. The Company currently expects
operational and business needs to be covered by cash from operations
in 2009.
Building on its consistent historical performance of strong operating
cash flows, the Company achieved a record $574.3 million in operat-
ing cash flow in 2008. This represents a 22% improvement over 2007’s
operating cash flow of $471.7 million. This increase was primarily due
set by higher retained earnings at the end of 2008. Debt to total capital
was 40.8% at December 31, 2007.
Despite global economic conditions, the Company’s strategic
objectives for 2009 include generating strong operating cash flows. The
Company plans to sustain its balanced portfolio through its strategy of
redeploying discretionary cash for disciplined growth and international
diversification in the Harsco Infrastructure Segment; in long-term,
high-return and high-renewal-rate services contracts for the Harsco
Metals Segment, principally in emerging economies or for customer
diversification; for growth and international diversification in the All
Other Category (Harsco Minerals & Rail); and for selective bolt-on
acquisitions in the industrial services businesses. The Company also
foresees continuing its long and consistent history of paying dividends
to stockholders.
The Company is also focused on improved working capital man-
agement. Specifically, short-term and long-term enterprise business
optimization programs are being used to continue to further improve
the effective and efficient use of working capital, particularly accounts
receivable and inventories in the Harsco Infrastructure and Harsco
Metals Segments.
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
Cash Requirements
The following summarizes the Company’s expected future payments related to contractual obligations and commercial commitments at
December 31, 2008.
Contractual Obligations as of December , 00 (a)
(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 Postretirement Obligations (c)
Operating Leases
Purchase Obligations
Foreign Currency Forward Exchange Contracts (d)
Uncertain Tax Benefits (e)
Total Contractual Obligations
Less than
1 year
$117.9
3.2
57.0
48.9
55.6
120.6
293.9
0.9
$698.0
Payments Due by Period
1-3 years
4-5 years
After 5 years
$÷÷÷«–
295.1
85.3
99.1
61.2
1.5
–
–
$542.2
$÷÷÷«–
150.0
65.0
104.9
32.9
0.6
–
–
$353.4
$÷÷÷«–
446.7
112.1
275.5
37.8
0.3
–
–
$872.4
Total
$÷«117.9
895.0
319.4
528.4
187.5
123.0
293.9
0.9
$2,466.0
(a) See Note 6, Debt and Credit Agreements; Note 7, Leases; Note 8, Employee Benefit Plans; Note 9, Income Taxes; and Note 13, Financial Instruments, to the Consolidated Financial Statements for
additional disclosures on short-term and long-term debt; operating leases; pensions and other postretirement benefits; income taxes; and foreign currency forward exchange contracts, respectively.
(b) The total projected interest payments on Long-term Debt are based upon borrowings, interest rates and foreign currency exchange rates as of December 31, 2008. The interest rates on
variable-rate debt and the foreign currency exchange rates are subject to changes beyond the Company’s control and may result in actual interest expense and payments differing from the
amounts projected above.
(c) Amounts represent expected benefit payments by the defined benefit plans for the next 10 years.
(d) This amount represents the notional value of the foreign currency exchange contracts outstanding at December 31, 2008. Due to the nature of these transactions, there will be offsetting cash
flows to these contracts, with the difference recognized as a gain or loss in the consolidated income statement.
(e) On January 1, 2007, the Company adopted the provisions of FIN 48. As of December 31, 2008, in addition to the $0.9 million classified as short-term, the Company had approximately $31.1 million
of long-term tax liabilities, including interest and penalties, related to uncertain tax positions. Because of the high degree of uncertainty regarding the timing of future cash outflows associated
with these liabilities, the Company is unable to estimate the years in which settlement will occur with the respective taxing authorities.
Off-Balance Sheet Arrangements – The following table summarizes the Company’s contingent commercial commitments at December 31, 2008.
These amounts are not included in the Company’s Consolidated Balance Sheets since there are no current circumstances known to management
indicating that the Company will be required to make payments on these contingent obligations.
Commercial Commitments as of December , 00
(In millions)
Standby Letters of Credit
Guarantees
Performance Bonds
Other Commercial Commitments
Total Commercial Commitments
Total Amounts
Committed
Less than
1 Year
1-3 Years
4-5 Years
Over 5 Years
Amount of Commitment Expiration Per Period
$197.9
30.5
20.5
11.1
$260.0
$61.7
11.3
8.4
–
$81.4
$136.2
1.4
–
–
$137.6
$÷«–
0.8
–
–
$0.8
$÷«–
5.1
–
–
$5.1
Indefinite
Expiration
$÷÷«–
11.9
12.1
11.1
$35.1
Certain guarantees and performance bonds are of a continuous nature and do not have a definite expiration date.
0 Harsco Corporation 2008 Annual Report
Sources and Uses of Cash
The following table illustrates the amounts outstanding under credit
The Company’s principal sources of liquidity are cash from opera-
facilities and commercial paper programs and available credit as of
tions and borrowings under its various credit agreements, augmented
December 31, 2008:
periodically by cash proceeds from asset sales. The primary drivers
of the Company’s cash flow from operations are the Company’s sales
and income, particularly in the services businesses. The Company’s
long-term Harsco Metals contracts provide predictable cash flows for
several years into the future. (See “Certainty of Cash Flows” section
for additional information on estimated future revenues of Harsco
Metals contracts and order backlogs for the Company’s manufacturing
businesses and railway track maintenance services and equipment
business). Cash returns on capital investments made in prior years, for
which no cash is currently required, are a significant source of operat-
ing cash. Depreciation expense related to these investments is a non-
cash charge. The Company also continues to maintain working capital
at a manageable level based upon the requirements and seasonality of
the business.
Major uses of operating cash flows and borrowed funds include
capital investments, principally in the industrial services business;
payroll costs and related benefits; pension funding payments; inven-
tory purchases for the manufacturing businesses; income tax pay-
ments; debt principal and interest payments; insurance premiums and
payments of self-insured casualty losses; and machinery, equipment,
automobile and facility rental payments. Cash is also used for share
repurchases and selective or bolt-on acquisitions as the appropriate
opportunities arise.
Resources Available for Cash Requirements – The Company meets its
on-going cash requirements for operations and growth initiatives by
accessing the public debt markets and by borrowing from banks. Public
markets in the United States and Europe are accessed through its
commercial paper programs and through discrete term note issuance
to investors. Various bank credit facilities are available throughout the
world. The Company expects to utilize both the public debt markets and
bank facilities to meet its cash requirements in the future.
In May 2008, the Company completed an offering in the United
Summary of Credit Facilities and Commercial Paper Programs
(In millions)
U.S. commercial paper program
Euro commercial paper program
Multi-year revolving credit facility (a)
364-day revolving credit facility (a)
Bilateral credit facility (b)
Totals at December , 00
As of December 31, 2008
Facility
Limit
Outstanding
Balance
$÷«550.0
279.4
450.0
220.0
30.0
$1,529.4
$35.9
9.0
–
50.0
–
$94.9
Available
Credit
$÷«514.1
270.4
450.0
170.0
30.0
$1,434.5 (c)
(a) U.S.-based program.
(b)
(c) Although the Company has significant available credit, for practical purposes, the
International-based program.
Company limits aggregate commercial paper and credit facility borrowings at any one time
to a maximum of $700 million (the aggregate amount of the back-up facilities).
The Company’s bilateral credit facility was renewed in December
2008. The facility, in the amount of $30 million, serves as back-up to the
Company’s commercial paper programs and also provides available
financing for the Company’s European operations. Borrowings under
this facility, which expires in December 2009, are available in most
major currencies with active markets at interest rates based upon
LIBOR plus a margin. Borrowings outstanding at expiration may be
repaid over the succeeding 12 months. As of December 31, 2008 and
2007, there were no borrowings outstanding on this facility.
See Note 6, Debt and Credit Agreements, to the Consolidated Finan-
cial Statements 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, 2008:
Standard & Poor’s (“S&P”)
Moody’s
Fitch
Long-term
Notes
U.S.-Based
Commercial
Paper
A-
A3
A-
A-2
P-2
F2
Outlook
Stable
Stable(a)
Stable
(a)
In January 2009, Moody’s reaffirmed the Company’s long-term notes and U.S. based
commercial paper ratings, but changed its outlook from stable to negative.
States of 5.75%, 10-year senior notes totaling $450.0 million. After
The Company’s euro-based commercial paper program has
pricing and underwriting discounts, the Company received a total
not been rated since the euro market does not require it. Fitch and
of $446.6 million in cash proceeds from the offering. The proceeds
Standard & Poor’s ratings were reaffirmed as shown above in August
were used to reduce the Company’s U.S. and euro commercial paper
and October 2008, respectively. In January 2009, Moody’s reaffirmed
programs by $286.4 million and $160.2 million, respectively.
the Company’s long-term notes and U.S. based commercial paper
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
ratings, but changed its outlook from stable to negative. Any contin-
• Accounts payable decreased $45.0 million primarily due to reduced
ued tightening of the credit markets, which began during 2007 and
activity levels in 2008 and foreign currency translation.
significantly accelerated in 2008, may adversely impact the Company’s
• Accrued compensation decreased $23.7 million due principally to
access to capital and the associated costs of borrowing; however
reduced 2008 incentive compensation accrual based on 2008 results
this is somewhat mitigated by the Company’s strong financial posi-
and the payments of incentive compensation earned during 2007,
tion. A downgrade to the Company’s credit ratings would probably
partially offset by normal incentive compensation accruals within
increase borrowing costs to the Company, while an improvement in the
the All Other Category.
Company’s credit ratings would probably decrease borrowing costs to
• Other current liabilities increased $58.6 million due principally
the Company. Additionally, a downgrade in the Company’s credit ratings
to advances on contracts within the railway track maintenance
could result in reduced access to credit markets.
services and equipment business; partially offset by payments on
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
Trade accounts receivable, net
Other receivables, 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
Working Capital
Current Ratio
December
00
December 31
2007
Increase
(Decrease)
$÷÷«91.3
648.9
46.0
309.5
104.5
5.3
1,205.5
121.1
262.8
85.2
13.4
405.9
888.4
$÷«121.8
779.6
44.5
310.9
88.0
0.5
1,345.3
68.7
307.8
108.9
41.3
347.3
874.0
$÷(30.5)
(130.7)
1.5
(1.4)
16.5
4.8
(139.8)
52.4
(45.0)
(23.7)
(27.9)
58.6
14.4
$÷«317.1
$÷«471.3
$(154.2)
1.4:1
1.5:1
Working capital decreased 33% in 2008 due principally to the
following factors:
• Cash decreased $30.5 million principally due to foreign currency
translation and the Company’s objective to efficiently use cash
by reducing global cash balances.
• Net trade accounts receivable decreased $130.7 million primarily
due to foreign currency translation, the timing of collections and
reduced sales in the fourth quarter of 2008, partially offset by growth
within the All Other Category due to higher sales levels in these
businesses.
• Other current assets increased $16.5 million primarily due to higher
prepayments made by the Company, mark-to-market commodity
hedging and tax prepayments.
• Notes payable and current maturities increased $52.4 million due to
the anticipated payments of commercial paper borrowings during
2009, reduction of other short-term borrowings and foreign currency
translation.
existing accruals; decrease in insurance liabilities; foreign currency
translation and accrued interest.
Certainty of Cash Flows – The certainty of the Company’s future cash
flows is underpinned by the long-term nature of the Company’s metals
services contracts and the strong discretionary cash flows (operating
cash flows in excess of the amounts necessary for capital expendi-
tures to maintain current revenue levels) generated by the Company.
Traditionally the Company has utilized these discretionary cash flows
for growth-related capital expenditures. At December 31, 2008, the
Company’s metals services contracts had estimated future revenues
of $4.1 billion, compared with $5.0 billion as of December 31, 2007. The
decline is primarily attributable to foreign currency translation effects.
In addition, as of December 31, 2008, the Company had an order backlog
of $639.7 million in its All Other Category (Harsco Minerals & Rail). This
compares with $448.1 million as of December 31, 2007. The increase
from December 31, 2007 is due principally to increased demand for
certain products within the railway track maintenance services and
equipment business, as a result of new international orders, as well as
increased demand for heat exchangers. The railway track maintenance
services and equipment business backlog includes a significant portion
that will not be realized until 2009 and later due to the long lead-time
necessary to build certain equipment, and the long-term nature of certain
service contracts. Order backlog for scaffolding, shoring and forming
services; for roofing granules and slag abrasives; and the reclamation
and recycling services of high-value content from steelmaking slag is
excluded from the above amounts. These amounts are generally not
quantifiable due to the short order lead times for certain services, the
nature and timing of the products and services provided and equipment
rentals with the ultimate length of the rental period unknown.
The types of products and services that the Company provides are
not subject to rapid technological change, which increases the stability
of related cash flows. Additionally, each of the Company’s businesses,
in its balanced portfolio, is among the top three companies (relative to
sales) in the industries and markets the Company serves. Due to these
factors, the Company is confident in its future ability to generate posi-
tive cash flows from operations.
Harsco Corporation 2008 Annual Report
Cash Flow Summary
Cash Used in Financing Activities – The following table summarizes the
The Company’s cash flows from operating, investing and financing
Company’s debt and capital positions as of December 31, 2008 and 2007.
activities, as reflected in the Consolidated Statements of Cash Flows,
are summarized in the following table:
Summarized Cash Flow Information
(In millions)
00
2007
2006
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
$«574.3
(443.4)
(155.6)
(5.8)
$÷(30.5)
$«471.7
(386.1)
(77.7)
12.7
$÷«20.6
$409.2
(359.4)
(84.2)
14.7
$«(19.7)
Cash From Operating Activities – Net cash provided by operating
(Dollars are in millions)
Notes Payable and Current Maturities
Long-term Debt
Total Debt
Total Equity
Total Capital
Total Debt to Total Capital
December ,
00
December 31,
2007
$÷«121.1
891.8
1,012.9
1,413.7
$÷÷«68.7
1,012.1
1,080.8
1,566.1
$2,426.6
$2,646.9
41.7%
40.8%
The Company’s debt as a percentage of total capital increased
in 2008. Total equity decreased due principally to foreign currency
translation, treasury stock purchases and pension liability adjustments
activities in 2008 was a record $574.3 million, an increase of $102.5 mil-
partially offset by current net income.
lion from 2007. The increase was primarily due to the following:
•
Improved trade receivable collections coupled with lower sales
Debt Covenants
volume during the fourth quarter of 2008.
• Reducing inventory growth throughout the Company.
• Higher levels of cash advances from customers received within
the railway track maintenance services and equipment business.
These benefits were partially offset by the following:
• Lower income tax accruals (including a $20 million income tax pay-
ment due to gain on the 2007 sale of discontinued Gas Technologies
Segment).
• Lower net income in 2008 as compared with 2007.
• Decrease in accounts payable due to reduced activity levels in
2008 and foreign currency translation.
Cash Used in Investing Activities – Net cash used in investing activities
in 2008 increased compared with 2007 due principally to the proceeds
from the sale of the Company’s Gas Technologies Segment in December
2007, partially offset by the purchase of Excell Minerals in 2007. In 2008,
cash used in investing activities was $443.4 million consisting primar-
ily of capital investments of $457.6 million. Capital investments were
$14.0 million higher compared to 2007 and over 54% of the investments
were for projects intended to grow future revenues. Investments were
made predominantly in the industrial services businesses, with 50% in
the Harsco Infrastructure Segment and 45% in the Harsco Metals Seg-
ment. Throughout 2009, the Company plans to continue to manage its
balanced portfolio and consider opportunities to invest in value creation
projects including prudent, strategic, bolt-on acquisitions, principally in
the Harsco Infrastructure business. Additionally, the Company will shift
more growth investments into the All Other Category (Harsco Minerals
& Rail) in 2009 and beyond, as this group continues to expand globally
and operate at near maximum capacity.
The Company’s credit facilities and certain notes payable agreements
contain covenants requiring a minimum net worth of $475 million and a
maximum debt to capital ratio of 60%. At December 31, 2008, the Com-
pany was in compliance with these covenants with a debt to capital
ratio of 41.7% and total net worth of $1.4 billion. Based on balances at
December 31, 2008, the Company could increase borrowings by approx-
imately $1,108.2 million and still be within its debt covenants. Alterna-
tively, keeping all other factors constant, the Company’s equity could
decrease by approximately $739.1 million and the Company would still
be within its covenants. Additionally, the Company’s 7.25% British pound
sterling-denominated notes, due October 27, 2010, and its 5.75% notes,
due May 2018, also include covenants that permit the note holders to
redeem their notes, at par and 101% of par, respectively, in the event of a
change of control of the Company or disposition of a significant portion
of the Company’s assets in combination with the Company’s credit rating
downgraded to non-investment grade. The Company expects to be
compliant with these debt covenants one year from now.
Cash and Value-Based Management
The Company plans to continue with its strategy of selective, prudent
investing for strategic purposes for the foreseeable future, although
2009 capital investments are expected to significantly decline from
2008 as existing investments are used more efficiently. The goal of this
strategy is to improve the Company’s EVA under the program adopted in
2002. Under this program the Company evaluates strategic investments
based upon the investment’s economic profit. EVA equals after-tax
operating profits less a charge for the use of the capital employed to
create those profits (only the service cost portion of pension expense is
included for EVA purposes). Therefore, value is created when a project
or initiative produces a return above the cost of capital.
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
The Company currently expects to continue paying dividends to
disclosure relating to these estimates in this Management’s Discussion
stockholders. The Company has increased the dividend rate for fifteen
and Analysis of Financial Condition and Results of Operations. These
consecutive years, and in February 2009, the Company paid its 235th
items should be read in conjunction with Note 1, Summary of Signifi-
consecutive quarterly cash dividend.
cant Accounting Policies, to the Consolidated Financial Statements.
The Company repurchased 4.5 million shares of the Company’s
common stock under its stock repurchase authorization. Repurchases
were made in open market transactions at times and amounts as
management deemed appropriate, depending on market conditions.
The Company has authorization to repurchase up to 1.5 million of its
shares through January 31, 2010. Future repurchase may commence or
be discontinued at any time. The Company will be extremely prudent in
any decision to resume repurchases.
The Company’s financial position and debt capacity should enable
it to meet current and future requirements. As additional resources
are needed, the Company should be able to obtain funds readily and
at competitive costs. The Company is well-positioned and intends to
continue investing prudently and strategically in high-return projects,
generally in emerging markets; and strategic acquisitions; to reduce
debt; and pay cash dividends as a means to enhance stockholder value.
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 state-
ments, 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 circum-
stances, 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 account-
ing estimates described below with the Audit Committee of the Board
of Directors and the Audit Committee has reviewed the Company’s
Pension Benefits
The Company has defined benefit pension plans in several countries.
The largest of these plans are in the United Kingdom and the United
States. The Company’s funding policy for these plans is to contribute
amounts sufficient to meet the minimum funding pursuant to U.K. and
U.S. statutory requirements, plus any additional amounts that the
Company may determine to be appropriate. The Company made cash
contributions to its defined benefit pension plans of $30.5 million and
$42.0 million (including $10.1 million of voluntary payments) during 2008
and 2007, respectively. Additionally, the Company expects to make a
minimum of $37.9 million in cash contributions to its defined benefit
pension plans during 2009.
As of December 31, 2006, the Company accounted for its defined
benefit pension plans in accordance with SFAS 158, which requires the
Company to recognize in its balance sheet, the overfunded or under-
funded 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 Accumu-
lated other comprehensive income (loss), net of tax. This reduced the
Company’s equity on an after-tax basis by approximately $88.2 million
compared with measurement under prior standards. The results of
operations were not affected. The adoption of SFAS 158 did not have a
negative impact on compliance with the Company’s debt covenants.
During 2008, the Company eliminated early measurement dates
for its defined benefit pension plans. In accordance with SFAS 158, all
defined benefit pension plans are now measured at the end-of-year
balance sheet date. The incremental effect of this transition resulted
in an increase of $0.9 million to beginning Stockholders’ Equity as of
January 1, 2008.
As of December 31, 2008, the Company recorded an after-tax charge
of $74.3 million to Accumulated other comprehensive loss. This is pri-
marily due to actuarial losses as a result of actual pension asset returns
being lower than assumed pension asset returns. Actual pension asset
returns were impacted by the 2008 financial crisis and the deterioration
of global economic conditions.
As a result, total defined benefit pension expense for 2009 will be
substantially higher than the 2008 level due to the decline in pension
asset values during the second half of 2008. In an effort to mitigate
a portion of this overall increased cost for 2009, the Company imple-
mented additional plan design changes for a certain international
Harsco Corporation 2008 Annual Report
defined benefit pension plans so that accrued service is no longer
Changes in defined benefit pension expense may occur in the future
granted for periods after December 31, 2008. This action was a con-
due to changes in actuarial assumptions and due to changes in returns
tinuation of the Company’s overall strategy to reduce overall pension
on plan assets resulting from financial market conditions. Holding all
expense and volatility.
other assumptions constant, using December 31, 2008 plan data, a one-
The Company’s pension task force continues to evaluate alterna-
half percent increase or decrease in the discount rate and the expected
tive strategies to further reduce overall pension expense including
long-term rate-of-return on plan assets would increase or decrease
the consideration of converting the remaining defined benefit plans to
annual 2009 pre-tax defined benefit pension expense as follows:
defined contribution plans; the on-going evaluation of investment fund
managers’ performance; the balancing of plan assets and liabilities; the
risk assessment of all multi-employer pension plans; the possible merger
of certain plans; the consideration of incremental cash contributions
to certain plans; and other changes that could reduce future pension
expense volatility and minimize risk.
Discount rate
One-half percent increase
One-half percent decrease
Critical Estimate – Defined Benefit Pension Benefits
Accounting for defined benefit pensions and other postretirement
benefits requires the use of actuarial assumptions. The principal
Expected long-term rate-of-return
on plan assets
One-half percent increase
assumptions used include the discount rate and the expected long-term
One-half percent decrease
rate-of-return on plan assets. Each assumption is reviewed annually and
Approximate Changes in
Pre-tax Defined Benefit Pension Expense
U.S. Plans
U.K. Plan
Decrease of
$1.5 million
Increase of
$1.8 million
Decrease of
$2.6 million
Increase of
$1.9 million
Decrease of
$0.9 million
Increase of
$0.9 million
Decrease of
$2.4 million
Increase of
$2.4 million
represents management’s best estimate at that time. The assumptions
Should circumstances change that affect these estimates, changes
are selected to represent the average expected experience over time
(either increases or decreases) to the net pension obligations may be
and may differ in any one year from actual experience due to changes in
required and would be recorded in accordance with the provisions of
capital markets and the overall economy. These differences will impact
SFAS 87 and SFAS 158. Additionally, certain events could result in the
the amount of unfunded benefit obligation and the expense recognized.
pension obligation changing at a time other than the annual measure-
The discount rates as of the December 31, 2008 measurement date
ment date. This would occur when the benefit plan is amended or when
for the U.K. and U.S. defined benefit pension plans were 6.0% and
plan curtailments occur under the provisions of SFAS No. 88, “Employ-
6.1%, respectively. These rates were used in calculating the Company’s
ers’ Accounting for Settlements and Curtailments of Defined Benefit
projected benefit obligations as of December 31, 2008. The discount
Pension Plans and for Termination Benefits” (“SFAS 88”).
rates selected represent the average yield on high-quality corporate
See Note 8, Employee Benefit Plans, to the Consolidated Financial
bonds as of the measurement dates. The global weighted-average of
Statements for additional disclosures related to these items.
these assumed discount rates for the years ending December 31, 2008,
2007 and 2006 were 6.1%, 5.9% and 5.3%, respectively. Annual pension
expense is determined using the discount rates as of the measurement
date, which for 2008 was the 5.9% global weighted-average discount
rate. Pension expense and the projected benefit obligation generally
increase as the selected discount rate decreases.
The expected long-term rate-of-return on plan assets is determined
by evaluating the portfolios’ asset class return expectations with the
Company’s advisors as well as actual, long-term, historical results of
asset returns for the pension plans. The pension expense increases as
the expected long-term rate-of-return on assets decreases. For 2008,
the global weighted-average expected long-term rate-of-return on
asset assumption was 7.6%. For 2009, the expected global long-term
rate-of-return on assets is 7.4%. This rate was determined based on a
model of expected asset returns for an actively managed portfolio.
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 unwill-
ingness 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 at times still experience
collection problems and potential bad debts due to economic condi-
tions within certain industries (e.g., construction and steel industries)
and countries and regions in which the Company operates. As of
December 31, 2008 and 2007, trade accounts receivable of $648.9 million
and $779.6 million, respectively, were net of reserves of $27.9 million
and $25.6 million, respectively.
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
Critical Estimate – Notes and Accounts Receivable
Critical Estimate – Goodwill
A considerable amount of judgment is required to assess the realiz-
A discounted cash flow model is used to estimate the fair value of
ability of receivables, including the current creditworthiness of each
a reporting unit. This model requires the use of long-term planning
customer, related aging of the past due balances and the facts and
estimates and assumptions regarding industry-specific economic
circumstances surrounding any non-payment. The Company’s provisions
conditions that are outside the control of the Company. The annual test
for bad debts during 2008, 2007 and 2006 were $12.5 million, $7.8 million
for impairment includes the selection of an appropriate discount rate
and $9.2 million, respectively. The increase from 2007 to 2008 is due to
to value cash flow information. The basis of this discount rate calcula-
higher bad debt expense in the Harsco Infrastructure Segment due
tion is derived from several internal and external factors. These factors
principally to deteriorating economic conditions in certain markets. The
include, but are not limited to, the average market price of the Compa-
decrease from 2006 to 2007 is due to lower bad debt expense in the
ny’s stock, the number of shares of stock outstanding, the book value of
Harsco Infrastructure and Harsco Metals Segments.
the Company’s debt, a long-term risk-free interest rate, and both market
On a monthly basis, customer accounts are analyzed for collect-
and size-specific risk premiums. Additionally, assessments of future
ibility. Reserves are established based upon a specific-identification
cash flows would consider, but not be limited to the following: infra-
method as well as historical collection experience, as appropriate. The
structure plant maintenance requirements; global metals production
Company also evaluates specific accounts when it becomes aware of
and capacity utilization; global railway track maintenance-of-way capi-
a situation in which a customer may not be able to meet its financial
tal spending; and other drivers of the Company’s businesses. Changes
obligations due to a deterioration in its financial condition, credit ratings
in the overall interest rate environment may also impact the fair market
or bankruptcy. The reserve requirements are based on the facts avail-
value of the Company’s reporting units as this would directly influence
able to the Company and are re-evaluated and adjusted as additional
the discount rate utilized for discounting operating cash flows, and ulti-
information is received. Reserves are also determined by using per-
mately determining a reporting unit’s fair value. The Company’s overall
centages (based upon experience) applied to certain aged receivable
market capitalization is also a factor in evaluating the fair market values
categories. Specific issues are discussed with Corporate Management
of the Company’s reporting units. While the Company’s stock price
and any significant changes in reserve amounts or the write-off of bal-
has declined approximately 57% during 2008, the Company’s market
ances must be approved by a specifically designated Corporate Officer.
capitalization continues to exceed its book value as of December 31,
All approved items are monitored to ensure they are recorded in the
2008. As a result of this and other factors, the Company concluded that
proper period. Additionally, any significant changes in reserve balances
an interim impairment test was not required subsequent to its annual
are reviewed to ensure the proper Corporate approval has occurred.
test performed as of October 1, 2008. Further significant declines in the
If the financial condition of the Company’s customers were to
overall market capitalization of the Company could lead to the determi-
deteriorate, resulting in an impairment of their ability to make payments,
nation that the book value of one or more of the Company’s reporting
additional allowances may be required. Conversely, an improvement
units exceeds their fair value. The Company’s annual goodwill impair-
in a customer’s ability to make payments could result in a decrease of
ment testing, performed as of October 1, 2008 and 2007, indicated that
the allowance for doubtful accounts. Changes in the allowance related
the fair value of all reporting units tested exceeded their respective
to both of these situations would be recorded through income in the
book values and therefore no additional goodwill impairment testing
period the change was determined.
was required.
The Company has not materially changed its methodology for calcu-
The Company’s customers may be impacted adversely by the
lating allowances for doubtful accounts for the years presented.
current tightening of credit in financial markets, which may result in
See Note 3, Accounts Receivable and Inventories, to the Consolidated
postponed spending and cancellation or delay of existing and future
Financial Statements for additional disclosures related to these items.
orders with the Company. Continued economic decline could further
Goodwill
The Company’s net goodwill balances were $631.5 million and $720.1 mil-
lion, as of December 31, 2008 and 2007, respectively. The decline in
goodwill is due to foreign currency translation effects. Goodwill is not
amortized but tested for impairment at the reporting unit level on an
annual basis, and between annual tests whenever events or circum-
stances indicate that the carrying value of a reporting unit’s goodwill
may exceed its fair value.
impact the ability of the Company’s customers to meet their obligations
to the Company and possibly result in bankruptcy filings by them. This,
in turn, could negatively impact the forecasts used in performing the
Company’s goodwill impairment testing. If management determines that
goodwill is impaired, the Company will be required to record a write-
down in the period of determination, which will reduce net income for
that period. Therefore, there can be no assurance that future goodwill
impairment tests will not result in a charge to earnings.
Harsco Corporation 2008 Annual Report
The Company has not materially changed its methodology for good-
levels. If actual market conditions are determined to be less favorable
will impairment testing for the years presented.
than those projected by management, additional inventory write-
See Note 5, Goodwill and Other Intangible Assets, to the Consoli-
downs may be required and would be recorded through income in the
dated Financial Statements for additional information on goodwill and
period the determination is made. Additionally, the Company records
other intangible assets.
Asset Impairment
Long-lived assets are reviewed for impairment when events and circum-
stances indicate that the book value of an asset may be impaired. The
amounts charged against pre-tax continuing operations income related
to impaired long-lived assets were $12.6 million, $0.9 million and $0.2 mil-
lion in 2008, 2007 and 2006, respectively.
reserves to adjust a substantial portion of its U.S. inventory balances to
the last-in, first-out (“LIFO”) method of inventory valuation. In adjust-
ing these reserves throughout the year, the Company estimates its
year-end inventory costs and quantities. At December 31 of each year,
the reserves are adjusted to reflect actual year-end inventory costs
and quantities. During periods of inflation, the LIFO expense usually
increases and during periods of deflation it decreases. These year-
end adjustments resulted in pre-tax income (expense) of $1.1 million,
Critical Estimate – Asset Impairment
$1.4 million and $(2.3) million in 2008, 2007 and 2006, respectively.
The determination of a long-lived asset impairment loss involves
The Company has not materially changed its methodology for calcu-
significant judgments based upon short-term and long-term projections
lating inventory reserves for the years presented.
of future asset performance. If the undiscounted cash flows associated
See Note 3, Accounts Receivable and Inventories, to the Consolidated
with an asset do not exceed the book value, impairment loss estimates
Financial Statements for additional disclosures related to these items.
would be based upon the difference between the book value and
the fair value of the asset. The fair value is generally based upon the
Company’s estimate of the amount that the assets could be bought or
sold for in a current transaction between willing parties. If quoted
market prices for the asset or similar assets are unavailable, the fair
value estimate is generally calculated using a discounted cash flow
model. Should circumstances change that affect these estimates,
additional impairment charges may be required and would be recorded
through income in the period the change was determined.
The Company has not materially changed its methodology for calcu-
Insurance Reserves
The Company retains a significant portion of the risk for property, work-
ers’ compensation, U.K. employers’ liability, automobile, general and
product liability losses. At December 31, 2008 and 2007, the Company
has recorded liabilities of $97.2 million and $112.0 million, respectively,
related to both asserted as well as unasserted insurance claims. At
December 31, 2008 and 2007, $17.8 million and $25.9 million, respectively,
is included in insurance liabilities related to claims covered by insurance
carriers for which a corresponding receivable has been recorded.
lating asset impairments for the years presented. SFAS 157 will affect
Critical Estimate – Insurance Reserves
the methodology of assessments after its January 1, 2009 effective date,
Reserves have been recorded based upon actuarial calculations
by requiring consideration of all valuation techniques for which market
which reflect the undiscounted estimated liabilities for ultimate losses
participant inputs can be obtained without undue cost and effort. The
including claims incurred but not reported. Inherent in these estimates
use of discounted cash flows may be appropriate; however, methodolo-
are assumptions which are based on the Company’s history of claims
gies other than quoted market prices must also be considered.
and losses, a detailed analysis of existing claims with respect to
Inventories
Inventories are stated at the lower of cost or market. Inventory balances
are adjusted for estimated obsolete or unmarketable inventory equal to
the difference between the cost of inventory and its estimated market
value. At December 31, 2008 and 2007, inventories of $309.5 million and
$310.9 million, respectively, are net of lower of cost or market reserves
and obsolescence reserves of $15.7 million and $13.9 million, respectively.
Critical Estimate – Inventories
potential value, and current legal and legislative trends. If actual claims
differ from those projected by management, changes (either increases
or decreases) to insurance reserves may be required and would be
recorded through income in the period the change was determined.
During 2008, 2007 and 2006, the Company recorded a retrospective
insurance reserve adjustment that decreased pre-tax insurance
expense from continuing operations for self-insured programs by
$1.8 million, $1.2 million and $1.3 million, respectively. The Company has
programs in place to improve claims experience, such as aggressive
In assessing the ultimate realization of inventory balance amounts, the
claim and insured litigation management and a focused approach to
Company is required to make judgments as to future demand require-
workplace safety.
ments and compare these with the current or committed inventory
Harsco Corporation 2008 Annual Report
management’s Discussion and analysis
of Financial condition and results of operations
The Company has not materially changed its methodology for calcu-
See Note 10, Commitments and Contingencies, to the Consolidated
lating insurance reserves for the years presented. There are currently
Financial Statements for additional disclosure on this uncertainty and
no known trends, demands, commitments, events or uncertainties that
other contingencies.
are reasonably likely to occur that would materially affect the method-
ology or assumptions described above.
Legal 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
Reserves for contingent liabilities are recorded when it is probable that
of each quarterly period, the Company makes its best estimate of the
an asset has been impaired or a liability has been incurred and the loss
annual effective income tax rate and applies that rate to year-to-date
can be reasonably estimated. Adjustments to estimated amounts are
income before income taxes and minority interest to arrive at the year-
recorded as necessary based on new information or the occurrence of
to-date income tax provision. As of December 31, 2008, 2007 and 2006,
new events or the resolution of an uncertainty. Such adjustments are
the Company’s net effective income tax rate on income from continuing
recorded in the period that the required change is identified.
operations was 26.7%, 30.7% and 32.5%, respectively.
Critical Estimate – Legal and Other Contingencies
Critical Estimate – Income Taxes
On a quarterly basis, recorded contingent liabilities are analyzed to
The annual effective income tax rates are developed giving recogni-
determine if any adjustments are required. Additionally, functional
tion to tax rates, tax holidays, tax credits and capital losses, as well
department heads within each business unit are consulted monthly to
as certain exempt income and non-deductible expenses in all of the
ensure all issues with a potential financial accounting impact, includ-
jurisdictions where the Company does business. The income tax provi-
ing possible reserves for contingent liabilities have been properly
sion for the quarterly period is the change in the year-to-date provision
identified, addressed or disposed of. Specific issues are discussed
from the previous quarterly period. The Company has not materially
with Corporate Management and any significant changes in reserve
changed its methodology for calculating income tax expense for the
amounts or the adjustment or write-off of previously recorded balances
years presented.
must be approved by a specifically designated Corporate Officer. If
The Company records deferred tax assets to the extent the
necessary, outside legal counsel, other third parties or internal experts
Company believes these assets will more-likely-than-not be realized.
are consulted to assess the likelihood and range of outcomes for a
In making such determinations, the Company considers all available
particular issue. All approved changes in reserve amounts are moni-
positive and negative evidence, including future reversals of existing
tored to ensure they are recorded in the proper period. Additionally,
temporary differences, projected future taxable income, tax planning
any significant changes in reported business unit reserve balances are
strategies and recent financial operating results. In the event the
reviewed to ensure the proper Corporate approval has occurred. On a
Company were to determine that it would be able to realize deferred
quarterly basis, the Company’s business units submit a reserve listing to
income tax assets in the future in excess of their net recorded amount,
the Corporate headquarters which is reviewed in detail. All significant
an adjustment to the valuation allowance would be made which
reserve balances are discussed with a designated Corporate Officer to
would reduce the provision for income taxes. The valuation allowance
assess their validity, accuracy and completeness. Anticipated changes
was $21.5 million and $15.3 million as of December 31, 2008 and 2007,
in reserves are identified for follow-up prior to the end of a reporting
respectively. The valuation allowance is principally for state and inter-
period. Any new issues that may require a reserve are also identified
national tax net operating loss carryforwards.
and discussed to ensure proper disposition. Additionally, on a quarterly
FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in
basis, all significant environmental reserve balances or issues are
Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”)
evaluated to assess their validity, accuracy and completeness.
provides that a tax benefit from an uncertain position may be recog-
The Company has not materially changed its methodology for cal-
nized when it is more-likely-than-not that the position will be sustained
culating legal and other contingencies for the years presented. There
upon examination, including resolutions of any related appeals or
are currently no known trends, demands, commitments, events or
litigation processes, based on technical merits. Income tax positions
uncertainties that are reasonably likely to occur that would materially
must meet a more-likely-than-not recognition threshold at the effective
affect the methodology or assumptions described above.
date to be recognized upon the adoption of FIN 48 and in subsequent
Harsco Corporation 2008 Annual Report
periods. This interpretation also provides guidance on measurement,
decreased order backlog for railway track maintenance services and
derecognition, classification, interest and penalties, accounting for
industrial grating products.
interim periods, disclosure and transition. The Company adopted FIN 48
Long-term metals industry services contracts have an estimated
effective January 1, 2007. The unrecognized tax benefits that would
future value of $4.1 billion at December 31, 2008 compared with $5.0 bil-
impact the effective income tax rate at December 31, 2008 are approxi-
lion at December 31, 2007. The decline is primarily attributable to foreign
mately $31 million including interest and penalties.
currency translation effects. Approximately 65% of these revenues are
See Note 9, Income Taxes, to the Consolidated Financial Statements
expected to be recognized by December 31, 2011. The majority of the
for additional disclosures related to these items.
remaining revenues are expected to be recognized between January 1,
research and Development
Order backlog for infrastructure-related services, such as highly
The Company invested $5.3 million, $3.2 million and $2.8 million in internal
engineered scaffolding, shoring and forming services of the Harsco
research and development programs in 2008, 2007 and 2006, respec-
Infrastructure Segment, is excluded from the above, as these amounts
tively. Internal funding for research and development was as follows:
are generally not quantifiable due to short order lead times for certain
2012 and December 31, 2017.
(In millions)
Harsco Infrastructure Segment
Harsco Metals Segment
Segment Totals
All Other Category – Harsco Minerals & Rail
Consolidated Totals
Research and Development Expense
00
$2.0
1.6
3.6
1.7
$5.3
2007
$0.7
1.3
2.0
1.2
$3.2
2006
$0.7
1.1
1.8
1.0
$2.8
new Financial accounting
Standards Issued
services, the nature and timing of the products and services provided,
and equipment rentals with the ultimate length of the rental period often
unknown. Order backlog for roofing granules and industrial abrasives
products, and for minerals and recycling technologies services, is also
not included in the total backlog amount above because it is gener-
ally not quantifiable due to short order lead times of the products and
services provided. The minerals and recycling technology business
does enter into contracts for some of its services. These contracts have
estimated future revenues of $91.6 million as of December 31, 2008 of
which 85% is expected to be filled by December 31, 2011.
See Note 1, Summary of Significant Accounting Policies, to the Consoli-
dated Financial Statements for disclosures on new financial accounting
Dividend action
standards issued and their effect on the Company.
Backlog
The Company has paid dividends each year since 1939. Four quarterly
cash dividends of $0.195 were paid in 2008, for an annual rate of $0.78,
or an increase of 9.9% from 2007. In 2008, 27.2% of net earnings were
As of December 31, 2008, the Company’s order backlog, exclusive of
paid out in dividends. There are no significant restrictions on the pay-
long-term metals industry services contracts, infrastructure-related
ment of dividends.
services, roofing granules and industrial abrasives products, and
The Company is philosophically committed to maintaining or increas-
minerals and metal recovery technologies services, was $639.7 million
ing the dividend at a sustainable level. The Board normally reviews the
compared with $448.1 million as of December 31, 2007, a 43% increase.
dividend rate periodically during the year and annually at its November
Of the order backlog at December 31, 2008, approximately $298.4 million
meeting. At its November 2008 meeting, the Board of Directors declared
or 47% is not expected to be filled in 2009. This backlog is expected to
the Company’s 235th consecutive quarterly dividend, payable in February
be filled in 2010.
2009, at $0.195 per share.
The increase in order backlog is principally due to increased
In December 2008, the Board increased the dividend rate to $0.20 per
order backlog for railway track maintenance equipment as a result of
share to become effective with the next scheduled quarterly dividend
orders from the Chinese Ministry of Railways, along with increased
declaration in early 2009. The December 2008 action increased the
order backlog of air-cooled heat exchangers due to stable demand in
dividend rate by 2.6% to $0.80 per share on an annualized basis, and
the natural gas compression market. These were partially offset by
represented the Company’s 15th consecutive year of dividend increases.
Harsco Corporation 2008 Annual Report
management’s report on Internal control over
Financial reporting
Management of Harsco Corporation, together with its consolidated
Management has assessed the effectiveness of its internal control
subsidiaries (the Company), is responsible for establishing and
over financial reporting as of December 31, 2008 based on the frame-
maintaining adequate internal control over financial reporting. The
work established in Internal Control – Integrated Framework issued by
Company’s internal control over financial reporting is a process
the Committee of Sponsoring Organizations of the Treadway Commis-
designed under the supervision of the Company’s principal execu-
sion (COSO). Based on this assessment, management has determined
tive and principal financial officers to provide reasonable assurance
that the Company’s internal control over financial reporting is effective
regarding the reliability of financial reporting and the preparation of
as of December 31, 2008.
the Company’s financial statements for external reporting purposes in
The effectiveness of the Company’s internal control over financial
accordance with U.S. generally accepted accounting principles.
reporting as of December 31, 2008 has been audited by Pricewater-
The Company’s internal control over financial reporting includes
houseCoopers LLP, an independent registered public accounting firm,
policies and procedures that:
as stated in their report appearing in the Company’s Annual Report on
• Pertain to the maintenance of records that, in reasonable detail,
Form 10-K, which expresses an unqualified opinion on the effective-
accurately and fairly reflect transactions and dispositions of assets
ness of the Company’s internal control over financial reporting as of
of the Company;
December 31, 2008.
• Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accor-
dance 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
Salvatore D. Fazzolari
Chairman and Chief Executive Officer
February 24, 2009
the risk that controls may become inadequate because of changes
Stephen J. Schnoor
in conditions, or that the degree of compliance with the policies and
Senior Vice President and Chief Financial Officer
procedures may deteriorate.
February 24, 2009
0 Harsco Corporation 2008 Annual Report
report of Independent registered Public accounting Firm
To the Stockholders of Harsco Corporation:
internal control based on the assessed risk. Our audits also included
In our opinion, the accompanying consolidated balance sheets and
performing such other procedures as we considered necessary in the
the related consolidated statements of income, cash flows, stockhold-
circumstances. We believe that our audits provide a reasonable basis
ers’ equity and comprehensive income present fairly, in all material
for our opinions.
respects, the financial position of Harsco Corporation and its subsid-
A company’s internal control over financial reporting is a process
iaries at December 31, 2008 and 2007, and the results of their opera-
designed to provide reasonable assurance regarding the reliability of
tions and their cash flows for each of the three years in the period
financial reporting and the preparation of financial statements for exter-
ended December 31, 2008 in conformity with accounting principles
nal purposes in accordance with generally accepted accounting prin-
generally accepted in the United States of America. Also in our opin-
ciples. A company’s internal control over financial reporting includes
ion, the Company maintained, in all material respects, effective internal
those policies and procedures that (i) pertain to the maintenance of
control over financial reporting as of December 31, 2008, based on
records that, in reasonable detail, accurately and fairly reflect the
criteria established in Internal Control – Integrated Framework issued
transactions and dispositions of the assets of the company; (ii) provide
by the Committee of Sponsoring Organizations of the Treadway
reasonable assurance that transactions are recorded as necessary to
Commission (COSO). The Company’s management is responsible for
permit preparation of financial statements in accordance with generally
these financial statements, for maintaining effective internal control
accepted accounting principles, and that receipts and expenditures of
over financial reporting and for its assessment of the effectiveness of
the company are being made only in accordance with authorizations of
internal control over financial reporting, included in the accompany-
management and directors of the company; and (iii) provide reasonable
ing Management’s Report on Internal Control Over Financial Reporting.
assurance regarding prevention or timely detection of unauthorized
Our responsibility is to express opinions on these financial statements
acquisition, use, or disposition of the company’s assets that could have
and on the Company’s internal control over financial reporting based on
a material effect on the financial statements.
our integrated audits. We conducted our audits in accordance with the
Because of its inherent limitations, internal control over financial
standards of the Public Company Accounting Oversight Board (United
reporting may not prevent or detect misstatements. Also, projections of
States). Those standards require that we plan and perform the audits
any evaluation of effectiveness to future periods are subject to the risk
to obtain reasonable assurance about whether the financial state-
that controls may become inadequate because of changes in condi-
ments are free of material misstatement and whether effective internal
tions, or that the degree of compliance with the policies or procedures
control over financial reporting was maintained in all material respects.
may deteriorate.
Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over
PricewaterhouseCoopers LLP
financial reporting, assessing the risk that a material weakness exists,
Philadelphia, Pennsylvania
and testing and evaluating the design and operating effectiveness of
February 24, 2009
Harsco Corporation 2008 Annual Report
consolidated Balance Sheets
(In thousands, except share and per share amounts)
December , 00
December 31, 2007
$÷÷«91,336
648,880
46,032
309,530
104,430
5,280
1,205,488
1,482,833
631,490
141,493
101,666
$÷«121,833
779,619
44,475
310,931
88,016
463
1,345,337
1,535,214
720,069
188,864
115,946
$3,562,970
$3,905,430
$÷«117,854
3,212
262,783
85,237
13,395
15,637
36,553
144,237
209,518
888,426
891,817
35,442
60,663
190,153
82,793
2,149,294
–
138,925
137,083
(208,299)
2,079,170
(733,203)
1,413,676
$÷÷«60,323
8,384
307,814
108,871
41,300
16,444
44,823
52,763
233,248
873,970
1,012,087
174,423
67,182
120,536
91,113
2,339,311
–
138,665
128,622
(2,501)
1,904,502
(603,169)
1,566,119
$3,562,970
$3,905,430
ASSETS
Current assets:
Cash and cash equivalents
Trade accounts receivable, net
Other receivables, 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
Advances on contracts
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 111,139,988 and 110,932,619 shares as of December 31, 2008 and 2007, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Treasury stock, at cost (30,965,452 and 26,472,753, respectively)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
Harsco Corporation 2008 Annual Report
consolidated Statements of Income
(In thousands, except per share amounts)
Years ended December 31
Revenues from continuing operations:
Service revenues
Product revenues
Total revenues
Costs and expenses from continuing operations:
Costs 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:
Income from operations of discontinued business
Gain (loss) on disposal of discontinued business
Income tax expense related to discontinued business
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
Income statement information reclassified to reflect the Gas Technologies Segment as Discontinued Operations.
(a)
(b) Does not total due to rounding.
00
2007
2006 (a)
$3,340,456
627,366
3,967,822
2,484,975
441,445
602,169
5,295
21,950
3,555,834
411,988
901
3,608
(73,160)
343,337
(91,820)
251,517
(5,894)
245,623
–
(1,747)
(2,931)
(4,678)
$÷«240,945
83,599
$÷÷÷÷«2.94
(0.06)
$÷÷÷÷«2.88
84,029
$÷÷÷÷«2.92
(0.06)
$÷÷÷÷«2.87 (b)
$3,166,561
521,599
3,688,160
2,316,904
368,600
538,233
3,175
3,443
3,230,355
457,805
1,049
4,968
(81,383)
382,439
(117,598)
264,841
(9,726)
255,115
26,897
41,414
(23,934)
44,377
$÷«299,492
84,169
$÷÷÷÷«3.03
0.53
$÷÷÷÷«3.56
84,724
$÷÷÷÷«3.01
0.52
$÷÷÷÷«3.53
$2,538,068
487,545
3,025,613
1,851,230
351,962
472,790
2,846
2,476
2,681,304
344,309
192
3,582
(60,479)
287,604
(93,354)
194,250
(7,848)
186,402
14,070
28
(4,102)
9,996
$÷«196,398
83,905
$÷÷÷÷«2.22
0.12
$÷÷÷÷«2.34
84,430
$÷÷÷÷«2.21
0.12
$÷÷÷÷«2.33
See accompanying notes to consolidated financial statements.
Harsco Corporation 2008 Annual Report
00
2007
2006
$«240,945
$«299,492
$«196,398
307,847
30,102
(901)
484
1,747
67,138
34,198
(24,238)
(22,144)
3,841
(15,843)
(76,346)
92,580
(65,134)
574,276
(457,617)
(15,539)
24,516
5,222
(443,418)
65,239
975,393
(996,173)
(65,632)
1,831
(128,577)
(7,620)
(155,539)
(5,816)
(30,497)
121,833
277,397
29,016
(1,049)
181
(41,414)
(662)
(60,721)
(106,495)
18,268
(1,291)
8,516
2,971
46,159
1,372
471,740
(443,583)
(254,639)
317,189
(5,092)
(386,125)
(137,645)
1,023,282
(908,295)
(59,725)
11,765
–
(7,069)
(77,687)
12,645
20,573
101,260
245,397
7,585
(188)
–
(28)
8,036
(27,261)
(20,347)
13,017
497
11,846
15,722
(1,160)
(40,275)
409,239
(340,173)
(34,333)
17,650
(2,599)
(359,455)
73,050
315,010
(423,769)
(54,516)
11,574
–
(5,545)
(84,196)
14,743
(19,669)
120,929
$÷«91,336
$«121,833
$«101,260
$÷÷÷«(263)
(11,961)
(3,315)
$÷(15,539)
$÷(17,574)
(45,398)
(191,667)
$(254,639)
$÷÷(2,547)
(15,106)
(16,680)
$÷(34,333)
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 affiliates
(Gain) loss on disposal of discontinued business
Other, net
Changes in assets and liabilities, net of acquisitions and dispositions of businesses:
Accounts receivable
Inventories
Accounts payable
Accrued interest payable
Accrued compensation
Income taxes
Advances on contracts
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
Common stock acquired for treasury
Other financing activities
Net cash 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
Cash and cash equivalents at end of period
*Purchase of businesses, net of cash acquired
Working capital, other than cash
Property, plant and equipment
Other noncurrent assets and liabilities, net
Net cash used to acquire businesses
See accompanying notes to consolidated financial statements.
Harsco Corporation 2008 Annual Report
consolidated Statements of Stockholders’ equity
(In thousands, except share and per share amounts)
Common Stock
Issued
Treasury
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Unearned
Stock-Based
Compensation
Total
Balances, January , 00
$÷85,322
$(603,225)
$154,017
$1,526,216
$(167,318)
$(1,118)
$÷«993,894
Net income
Adoption of SFAS 123(R)
Cash dividends declared, $1.33 per share
Translation adjustments, net of deferred income taxes of $(5,643)
Cash flow hedging instrument adjustments, net of deferred income
taxes of $(72)
Pension liability adjustments, net of deferred income taxes of $1,307
Adoption of SFAS 158, net of deferred income taxes of $40,313
Marketable securities unrealized gains, net of deferred income
taxes of $1
(1,118)
196,398
(55,853)
1,118
91,578
134
(5,523)
(88,207)
2
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
292
19
35
11,659
(3)
1,939
196,398
–
(55,853)
91,578
134
(5,523)
(88,207)
2
11,970
32
1,939
Balances, December , 00
Cumulative effect from adoption of FIN 48
Beginning Balances, January , 00
$÷85,614
$(603,171)
$166,494
$1,666,761
$(169,334)
$÷÷÷÷–
$1,146,364
(499)
(499)
$÷85,614
$(603,171)
$166,494
$1,666,262
$(169,334)
$÷÷÷÷–
$1,145,865
Net income
2-for-1 stock split, 42,029,232 shares
Cash dividends declared, $0.71 per share
Translation adjustments, net of deferred income taxes of $(4,380)
Cash flow hedging instrument adjustments, net of deferred income
taxes of $(64)
Pension liability adjustments, net of deferred income taxes of $(24,520)
Marketable securities unrealized gains, net of deferred income
taxes of $(3)
52,536
(52,536)
299,492
(61,252)
Stock options exercised, 411,864 shares
Other, 90 shares, and 82,700 restricted stock units (net of forfeitures)
Amortization of unearned compensation on restricted stock units
515
2
11,224
26
3,414
110,451
119
56,257
6
299,492
–
(61,252)
110,451
119
56,257
6
11,739
28
3,414
Balances, December , 00
$138,665
$(603,169)
$128,622
$1,904,502
$÷÷(2,501)
$÷÷÷÷–
$1,566,119
Cumulative effect from adoption of SFAS 158 measurement date
provision, net of deferred income taxes of $(413)
(1,453)
2,372
919
Beginning Balances, January , 00
$138,665
$(603,169)
$128,622
$1,903,049
$÷÷÷«(129)
$÷÷÷÷–
$1,567,038
Net income
Cash dividends declared, $0.78 per share
Translation adjustments, net of deferred income taxes of $85,526
Cash flow hedging instrument adjustments, net of deferred
income taxes of $(7,655)
Pension liability adjustments, net of deferred income taxes of $29,057
Marketable securities unrealized gains, net of deferred income
taxes of $38
Stock options exercised, 121,176 shares
Net issuance of stock – vesting of restricted stock units, 56,847 shares
Treasury shares repurchased, 4,463,353 shares
Amortization of unearned compensation on restricted stock units,
152
108
(1,457)
(128,577)
net of forfeitures
Balances, December , 00
240,945
(64,824)
(154,572)
20,812
(74,340)
(70)
3,336
(108)
5,233
240,945
(64,824)
(154,572)
20,812
(74,340)
(70)
3,488
(1,457)
(128,577)
5,233
$138,925
$(733,203)
$137,083
$2,079,170
$(208,299)
$÷÷÷÷–
$1,413,676
See accompanying notes to consolidated financial statements.
Harsco Corporation 2008 Annual Report
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 $(7,681),
$2 and $(40) in 2008, 2007 and 2006, respectively
Reclassification adjustment for (gain) loss on cash flow hedging instruments, net of deferred
income taxes of $26, $(66) and $(32) in 2008, 2007 and 2006, respectively
Pension liability adjustments, net of deferred income taxes of $29,057, $(24,520) and $1,307 in 2008,
2007 and 2006, respectively
Unrealized gain (loss) on marketable securities, net of deferred income taxes of $38, $(3) and $(1)
in 2008, 2007 and 2006, respectively
Other comprehensive income (loss)
Total comprehensive income
00
$«240,945
2007
$299,492
2006
$196,398
(154,572)
110,451
91,578
20,859
(47)
(74,340)
(70)
(208,170)
$÷«32,775
(3)
122
56,257
6
166,833
$466,325
75
59
(5,523)
2
86,191
$282,589
See accompanying notes to consolidated financial statements.
Harsco Corporation 2008 Annual Report
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 four entities in which it has
an equity interest of 49% to 50% and exercises management con-
trol. These four entities had combined revenues of approximately
$172.3 million, $117.0 million and $85.6 million, or 4.3%, 3.2% and 2.8%
of the Company’s total revenues for the years ended 2008, 2007 and
2006, respectively. Investments in unconsolidated entities (all of which
are 40-50% owned) are accounted for under the equity method. The
Leases
The Company leases certain property and equipment under noncan-
celable 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.
Company does not have any off-balance sheet arrangements with
Goodwill and Other Intangible Assets
unconsolidated special-purpose entities.
Goodwill is not amortized but tested for impairment at the report-
Reclassifications
Certain reclassifications have been made to prior years’ amounts to
conform with current year classifications. These reclassifications
relate principally to the Gas Technologies Segment that is currently
classified as Discontinued Operations in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“SFAS 144”) as discussed in Note 2, “Acquisitions and Dispositions.”
Additionally, all historical share and per share data have been restated
to reflect the two-for-one stock split that was effective at the close
of business on March 26, 2007. As a result of these reclassifications,
certain prior amounts presented for comparative purposes will not
individually agree with previously filed Forms 10-K or 10-Q.
Cash and Cash Equivalents
ing 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 avail-
able and segment management regularly reviews the operating results
of that component. Accordingly, the Company performs the goodwill
impairment test at the operating segment level for the Harsco Metals
Segment and the All Other Category (Harsco Minerals & Rail) and at the
component level for the Harsco Infrastructure Segment. The goodwill
impairment tests are performed on an annual basis as of October 1
and between annual tests whenever events or circumstances indicate
that the carrying value of a reporting unit’s goodwill may exceed its fair
value. A discounted cash flow model is used to estimate the fair value
Cash and cash equivalents include cash on hand, demand deposits
of a reporting unit. This model requires the use of long-term planning
and short-term investments which are highly liquid in nature and have
forecasts and assumptions regarding industry-specific economic
an original maturity of three months or less.
conditions that are outside the control of the Company. See Note 5,
Inventories
Inventories are stated at the lower of cost or market. Inventories in the
United States are principally accounted for using principally the last-in,
“Goodwill and Other Intangible Assets,” for additional information on
intangible assets and goodwill impairment testing. Finite-lived intan-
gible assets are amortized over their estimated useful lives.
first-out (“LIFO”) method. Other inventories are accounted for using the
Impairment of Long-Lived Assets (Other than Goodwill)
first-in, first-out (“FIFO”) or average cost methods.
Long-lived assets are reviewed for impairment when events and
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 accu-
mulated 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.
circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company’s policy is to record an impairment loss
when it is determined that the carrying amount of the asset exceeds
the sum of the expected undiscounted future cash flows resulting from
use of the asset and its eventual disposition. Impairment losses are
measured as the amount by which the carrying amount of the asset
exceeds its fair value. Long-lived assets to be disposed of are reported
at the lower of the carrying amount or fair value less cost to sell.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
Revenue Recognition
may be recognized subsequent to the transfer of title and risk of loss
Product revenues and service revenues are recognized when they
for certain product sales of Harsco Rail if the specific sales contract
are realized or realizable and when earned. Revenue is realized
includes a customer acceptance clause which provides for different
or realizable and earned when all of the following criteria are met:
timing. In those situations revenue is recognized after transfer of title and
persuasive evidence of an arrangement exists, delivery has occurred
risk of loss and after customer acceptance. Harsco Rail also provides
or services have been rendered, the Company’s price to the buyer is
services predominantly on a long-term, time-and-materials contract
fixed or determinable and collectibility is reasonably assured. Service
basis. Revenue is recognized when earned as services are performed.
revenues include the Harsco Metals and Harsco Infrastructure Seg-
The Excell Minerals Division also provides services predominantly on a
ments as well as service revenues of the All Other Category (Harsco
long-term, volume-of-production contract basis. Contracts may include
Minerals & Rail). Product revenues include the manufacturing busi-
both fixed monthly fees as well as variable fees based upon specific
nesses of the All Other Category (Harsco Minerals & Rail).
services provided to the customer. The fixed-fee portion is recognized
Harsco Infrastructure Segment – This Segment rents equipment under
month-to-month rental contracts, provides services under both fixed-
fee and time-and-materials short-term contracts and, to a lesser extent,
periodically as earned (normally monthly) over the contractual period.
The variable-fee portion is recognized as services are performed and dif-
fers from period-to-period based upon the actual provision of services.
sells products to customers. Equipment rentals are recognized as
Income Taxes
earned over the contractual rental period. Services provided on a fixed-
The Company accounts for income taxes under the asset and liability
fee basis are recognized over the contractual period based upon the
method, which requires the recognition of deferred tax assets and
completion of specific units of accounting (i.e., erection and dismantling
liabilities for the expected future tax consequences of the events that
of equipment). Services provided on a time-and-materials basis are
have been included in the consolidated financial statements. Under
recognized when earned as services are performed. Product sales
this method, deferred tax assets and liabilities are determined based
revenue is recognized when title and risk of loss transfer, and when all
on the differences between the financial statements and tax bases of
of the revenue recognition criteria have been met.
assets and liabilities using enacted tax rates in effect for the year in
Harsco Metals Segment – This Segment provides services predomi-
nantly 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 por-
tion 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.
which the differences are expected to reverse. The effect of a change
in tax rates on deferred tax assets and liabilities is recognized in
income in the period that includes the enactment date.
The Company records deferred tax assets to the extent the
Company believes these assets will more-likely-than-not be realized.
In making such determinations, the Company considers all available
positive and negative evidence, including future reversals of existing
temporary differences, projected future taxable income, tax planning
strategies and recent financial operations. In the event the Company
All Other Category (Harsco Minerals & Rail) – This category includes
were to determine that it would be able to realize deferred income tax
the Harsco Rail, Excell Minerals, Reed Minerals, IKG Industries, Patter-
assets in the future in excess of their net recorded amount, an adjust-
son-Kelley, and Air-X-Changers operating segments. These operating
ment to the valuation allowance would be made which would reduce
segments principally sell products. Harsco Rail Division and the Excell
the provision for income taxes.
Minerals Division sell products and provide services. Product sales
FASB Interpretation (“FIN”) 48, “Accounting for Uncertainty in
revenue for each of these operating segments is recognized generally
Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”)
when title and risk of loss transfer, and when all of the revenue recogni-
provides that a tax benefit from an uncertain position may be recog-
tion criteria have been met. Title and risk of loss for domestic shipments
nized when it is more-likely-than-not that the position will be sustained
generally transfers to the customer at the point of shipment. For export
upon examination, including resolutions of any related appeals or
sales, title and risk of loss transfer in accordance with the international
litigation processes, based on technical merits. Income tax positions
commercial terms included in the specific customer contract. Revenue
must meet a more-likely-than-not recognition threshold at the effective
date to be recognized upon the adoption of FIN 48 and in subsequent
Harsco Corporation 2008 Annual Report
periods. This interpretation also provides guidance on measurement,
Contingencies.” The following table summarizes the warranty activity
derecognition, classification, interest and penalties, accounting for
for the years ended December 31, 2008, 2007 and 2006:
interim periods, disclosure and transition. The Company adopted FIN 48
effective January 1, 2007.
The Company recognizes interest and penalties related to unrec-
ognized tax benefits within Income tax expense in the accompanying
Consolidated Statements of Income. Accrued interest and penalties are
included in Other liabilities in the Consolidated Balance Sheets.
In general, it is the practice and intention of the Company to
reinvest the undistributed earnings of its non-U.S. subsidiaries. Should
the Company repatriate undistributed earnings, such amounts become
subject to U.S. taxation giving recognition to current tax expense and
foreign tax credits upon remittance of dividends and under certain
other circumstances.
Accrued Insurance and Loss Reserves
The Company retains a significant portion of the risk for workers’
Warranty Activity
(In thousands)
Balance at the beginning of the period
Accruals for warranties issued during
the period
Reductions related to pre-existing
warranties
Divestiture
Warranties paid
Other (principally foreign currency
translation)
00
2007
2006
$«2,907
$«4,805
$«4,962
3,683
(1,524)
–
(2,157)
3,112
3,371
(1,112)
(980)
(2,810)
(868)
–
(2,731)
(46)
(108)
71
Balance at end of the period
$«2,863
$«2,907
$«4,805
Foreign Currency Translation
The financial statements of the Company’s subsidiaries outside the
United States, except for those subsidiaries located in highly infla-
tionary economies and those entities for which the U.S. dollar is the
compensation, U.K. employers’ liability, automobile, general and product
currency of the primary economic environment in which the entity
liability losses. During 2008, 2007 and 2006, the Company recorded insur-
operates, are measured using the local currency as the functional
ance expense from continuing operations related to these lines of cover-
currency. Assets and liabilities of these subsidiaries are translated at
age of approximately $43 million, $37 million and $34 million, respectively.
the exchange rates as of the balance sheet date. Resulting translation
Reserves have been recorded which reflect the undiscounted estimated
adjustments are recorded in the cumulative translation adjustment
liabilities including claims incurred but not reported. When a recognized
account, a separate component of Other comprehensive income (loss).
liability is covered by third-party insurance, the Company records an
Income and expense items are translated at average monthly exchange
insurance claim receivable to reflect the covered liability. Changes in
rates. Gains and losses from foreign currency transactions are included
the estimates of the reserves are included in net income in the period
in net income. For subsidiaries operating in highly inflationary econo-
determined. During 2008, 2007 and 2006, the Company recorded retro-
mies, and those entities for which the U.S. dollar is the currency of the
spective insurance reserve adjustments that decreased pre-tax insur-
primary economic environment in which the entity operates, gains and
ance expense from continuing operations for self-insured programs by
losses on foreign currency transactions and balance sheet translation
$1.8 million, $1.2 million and $1.3 million, respectively. At December 31,
adjustments are included in net income.
2008 and 2007, the Company has recorded liabilities of $97.2 million and
$112.0 million, respectively, related to both asserted as well as unasserted
insurance claims. Included in the balance at December 31, 2008 and 2007
were $17.8 million and $25.9 million, respectively, of recognized liabilities
covered by insurance carriers. Amounts estimated to be paid within
one year have been classified as current Insurance liabilities, with the
remainder included in non-current Insurance liabilities in the Consoli-
dated Balance Sheets.
Warranties
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 busi-
ness. The Company seeks to reduce exposure to foreign currency fluc-
tuations 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 specula-
tive purposes. The Company has a Foreign Currency Risk Management
Committee that meets periodically to monitor foreign currency risks.
The Company has recorded product warranty reserves of $2.9 million,
The Company executes foreign currency forward exchange con-
$2.9 million and $4.8 million as of December 31, 2008, 2007 and 2006,
tracts to hedge transactions for firm purchase commitments, to hedge
respectively. The Company provides for warranties of certain prod-
variable cash flows of forecasted transactions and for export sales
ucts as they are sold in accordance with SFAS No. 5, “Accounting for
denominated in foreign currencies. These contracts are generally for
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
90 days or less; however, where appropriate longer-term contracts
as well as other accounting pronouncements that address fair value
may be utilized. For those contracts that are designated as qualified
measurements on lease classification or measurement under SFAS 13,
cash flow hedges under SFAS No. 133, “Accounting for Derivative
from the scope of SFAS 157. FSP FAS 157-2 delays the effective date of
Instruments and Hedging Activities” (“SFAS 133”), gains or losses are
SFAS 157 for all nonrecurring fair value measurements of nonfinancial
recorded in Other comprehensive income (loss).
assets and nonfinancial liabilities until fiscal years beginning after
Amounts recorded in Other comprehensive income (loss) are
November 15, 2008 (January 1, 2009 for the Company).
reclassified into income in the same period or periods during which the
SFAS 157, as amended by FSP SFAS 157-2, was adopted by the
hedged forecasted transaction affects income. The cash flows from
Company as of January 1, 2008. The adoption of SFAS 157, as it relates
these contracts are classified consistent with the cash flows from the
to financial assets and financial liabilities, had no impact on the
transaction being hedged (e.g., the cash flows related to contracts to
Company’s financial position, results of operations or cash flows. The
hedge the purchase of fixed assets are included in cash flows from
Company is still in the process of evaluating the impact that SFAS 157
investing activities, etc.). The Company also enters into certain forward
will have on nonfinancial assets and liabilities not valued on a recurring
exchange contracts not designated as hedges under SFAS 133. Gains
basis (at least annually). The disclosure requirements of SFAS 157 are
and losses on these contracts are recognized in income based on fair
presented in Note 13, “Financial Instruments.”
market value. For fair value hedges of a firm commitment, the gain or
loss on the derivative and the offsetting gain or loss on the hedged firm
commitment are recognized currently in income.
Earnings Per Share
SFAS No. 0, “Noncontrolling Interests in Consolidated Financial
Statements” (“SFAS 0”).
In December 2007, the FASB issued SFAS 160, which amends ARB
No. 51, “Consolidated Financial Statements.” SFAS 160 requires, among
Basic earnings per share are calculated using the average shares of
other items, that a noncontrolling interest be included in the consoli-
common stock outstanding, while diluted earnings per share reflect
dated statement of financial position within equity separate from
the dilutive effects of restricted stock units and the potential dilution
the parent’s equity; consolidated net income be reported at amounts
that could occur if stock options were exercised. See Note 11, “Capital
inclusive of both the parent’s and noncontrolling interest’s shares and,
Stock,” for additional information on earnings per share.
separately, the amounts of consolidated net income attributable to the
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States (“GAAP”) requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses. Actual results could
differ from those estimates.
New Financial Accounting Standards Issued
SFAS No. , “Fair Value Measurements” (“SFAS ”)
In September 2006, the Financial Accounting Standards Board (“FASB”)
issued SFAS 157 which formally defines fair value, creates a standardized
framework for measuring fair value under GAAP, and expands fair value
measurement disclosures. SFAS 157 was amended by FASB Staff Posi-
tion (“FSP”) No.157-1, “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or Mea-
surement under Statement 13” (“FSP SFAS 157-1”) and FSP No. 157-2,
“Effective Date of FASB Statement No. 157” (“FSP SFAS 157-2”). FSP
SFAS 157-1 excludes SFAS No. 13, “Accounting for Leases,” (“SFAS 13”)
parent and noncontrolling interest all on the Consolidated Statements
of Income; if a subsidiary is deconsolidated, any retained noncontrolling
equity investment in the former subsidiary be measured at fair value
and a gain or loss be recognized in net income based on such fair value;
and changes in a parent’s ownership interest while the parent retains its
controlling interest are accounted for as equity transactions. SFAS 160
became effective for the Company on January 1, 2009. Adoption of this
statement had no material impact on the Company’s consolidated finan-
cial position or results of operations when it became effective.
SFAS No. (R), “Business Combinations” (“SFAS (R)”)
In December 2007, the FASB issued SFAS 141(R) which significantly
modifies the accounting for business combinations. SFAS 141(R)
requires the acquiring entity in a business combination to recognize
and measure the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, at their
fair values as of that date, with limited exceptions. Liabilities related
to contingent consideration are required to be recognized at acquisi-
tion and remeasured at fair value in each subsequent reporting period.
Restructuring charges, and all pre-acquisition related costs (e.g.,
deal fees for attorneys, accountants and investment bankers), must
be expensed in the period they are incurred. In addition, changes to
0 Harsco Corporation 2008 Annual Report
acquisition-related deferred tax assets and unrecognized tax benefits
2 acquisitions and Dispositions
recorded under FIN 48 made subsequent to the measurement period
will generally impact income tax expense in that period as opposed
to being recorded to goodwill. SFAS 141(R) became effective for the
Company’s acquisitions that are completed on or after January 1, 2009.
The impact of adopting SFAS 141(R) will depend on the nature, terms
and size of business combinations that occur after the effective date.
The Company expensed acquisition-related costs for any business
combinations not concluded prior to the January 1, 2009 effective date
in accordance with the transition guidance of SFAS 141(R).
Acquisitions
In April 2008, the Company acquired Sovereign Access Services
Limited (“Sovereign”), a United Kingdom-based provider of mastclimber
work platform rental equipment. Sovereign recorded revenues of
approximately $7 million in 2007 and has been included in the Harsco
Infrastructure Segment.
In March 2008, the Company acquired Romania-based Baviera
S.R.L. (“Baviera”), a distributor of formwork and scaffolding products
in Romania. Baviera recorded revenues of approximately $3 million in
SFAS No. , “Disclosures About Derivative Instruments and Hedging
2007 and has been included in the Harsco Infrastructure Segment.
Activities – an amendment of FASB Statement No. ” (“SFAS ”).
In February 2008, the Company acquired Northern Ireland-based
In March 2008, the FASB issued SFAS 161 which requires enhanced
Buckley Scaffolding (“Buckley”), a provider of scaffolding and erection
disclosures about the use of derivative instruments, the accounting for
and dismantling services to customers in the construction, industrial and
derivatives, and how derivatives impact financial statements to enable
events businesses. Buckley recorded revenues of approximately $3 mil-
investors to better understand their effects on a company’s financial
lion in 2007 and has been included in the Harsco Infrastructure Segment.
position, financial performance and cash flows. These requirements
In August 2007, the Company acquired Alexander Mill Services
include the disclosure of the fair values of derivative instruments and
International (“AMSI”), a privately held company that provides services
their gains and losses in a tabular format. SFAS 161 became effective for
to some of the leading steel producers in Poland and Romania. AMSI
the Company on January 1, 2009. As SFAS 161 only requires enhanced
also provides mill services on a smaller scale in Portugal. AMSI
disclosures, this standard will only impact notes to the consolidated
recorded 2006 revenues of approximately $21 million and has been
financial statements.
included in the Harsco Metals Segment.
FSP No. FAS - “Determination of the Useful Life of Intangible
Assets” (“FSP FAS -”)
In April 2008, the FASB issued FSP FAS 142-3, which amends the factors
that should be considered in developing renewal or extension assump-
tions used to determine the useful life of a recognized intangible asset
under SFAS 142, in order to improve the consistency between the useful
life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under
SFAS 141(R) and other GAAP. FSP FAS 142-3 is effective prospectively
for intangible assets acquired or renewed after January 1, 2009. The
effect of adopting FSP FAS 142-3 will depend on the nature of intangible
assets acquired after the effective date.
In August 2007, the Company acquired ZETA-TECH Associates, Inc.
(“ZETA-TECH”), a Cherry Hill, NJ-based niche technical services and
applied technology company serving the railway industry with special-
ized expertise in railway engineering services and track maintenance
software. ZETA-TECH produces a range of proprietary software tools
that are used by railways to regularly monitor and evaluate the perfor-
mance of their rail and track assets. ZETA-TECH recorded 2006 revenues
of approximately $4 million and has been included in the Company’s
Harsco Rail Group of the All Other Category (Harsco Minerals & Rail).
In April 2007, the Company acquired Performix Technologies, Ltd.
(“Performix”), an Ohio-based company that is one of the United States’
leading producers of specialty additives used by steelmakers in the
ladle refining of molten steel. Performix operates from two plants in the
FSP No. EITF 0--, “Determining Whether Instruments Granted in
United States and serves most of the major steelmakers in the upper
Share-Based Payment Transactions Are Participating Securities,”
Midwest and Canada. Performix recorded 2006 sales of approximately
(“FSP EITF 0--”)
$29 million and has been included in the Harsco Metals Segment.
In June 2008, the FASB issued FSP EITF 03-6-1 which states that
In February 2007, the Company acquired Excell Materials, Inc.
unvested share-based payment awards that contain nonforfeitable
(“Excell”), a Pittsburgh-based multinational company, for approximately
rights to dividends or dividend equivalents (whether paid or unpaid)
$210 million, which excluded direct acquisition costs. Excell specializes
are participating securities and shall be included in the computation of
in the reclamation and recycling of high-value content from principally
earnings per share pursuant to the two-class method. FSP EITF 03-6-1
steelmaking slag. Excell is also involved in the development of mineral-
became effective for the Company on January 1, 2009. The adoption of
based products for commercial applications. Excell recorded 2006 sales
FSP EITF 03-6-1 had no impact on the consolidated financial statements.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
in excess of $100 million and maintains operations at nine locations in
Assets Held for Sale
the United States, Canada, Brazil, South Africa and Germany. Goodwill
Throughout the past several years, management approved the sale of
recognized in this transaction (based on foreign exchange rates at the
certain long-lived assets throughout the Company’s operations. The
transaction date) was $101.9 million, none of which is expected to be
net property, plant and equipment reflected as assets held-for-sale in
deductible for U.S. income tax purposes. Excell has been included in
the December 31, 2008 and 2007 Consolidated Balance Sheets were
the All Other Category (Harsco Minerals & Rail) and has been renamed
$5.3 million and $0.5 million, respectively.
Excell Minerals to emphasize its long-term growth strategy.
Dispositions
3 accounts receivable and Inventories
Consistent with the Company’s strategic focus to grow and allocate
At December 31, 2008 and 2007, Trade accounts receivable of
financial resources to its industrial services businesses, on December 7,
$648.9 million and $779.6 million, respectively, were net of allowances
2007, the Company sold the Gas Technologies Segment to Wind Point
for doubtful accounts of $27.9 million and $25.6 million, respectively.
Partners, a private equity investment firm with offices in Chicago, Illi-
The decrease in accounts receivable from December 31, 2007 related
nois. The terms of the sale include a total purchase price of $340 million,
principally to foreign currency translation and lower sales levels in the
including $300 million paid in cash at closing and $40 million payable
fourth quarter. The provision for doubtful accounts was $12.5 million,
in the form of an earnout, contingent on the Gas Technologies group
$7.8 million and $9.2 million for 2008, 2007 and 2006, respectively. Other
achieving certain performance targets in 2008 or 2009. The Company
receivables include insurance claim receivables, employee receiv-
recorded a $26.4 million after-tax gain on the sale in the fourth quarter of
ables, tax claim receivables and other miscellaneous receivables not
2007. In 2008, the Company recorded a loss from discontinued operations
included in Trade accounts receivable, net.
of $4.7 million. This comprised $1.7 million of working capital adjustments
Inventories consist of the following:
and other costs associated with this disposition, coupled with the tax
effect from the final purchase price allocation. The purchase price is
Inventories
(In thousands)
not final at December 31, 2008 due to final working capital adjustments
as provided in the purchase agreement, and the potential earnout. This
business recorded revenues and operating income of $384.9 million and
$26.9 million and $397.7 million and $14.2 million, respectively, for the
years ended 2007 and 2006. The Consolidated Statements of Income
for the years ended 2008, 2007 and 2006 reflect the Gas Technologies
Segment’s results in discontinued operations.
The major classes of assets and liabilities sold as part of this
Finished goods
Work-in-process
Raw materials and purchased parts
Stores and supplies
Total inventories
Valued at lower of cost or market:
Last-in, first out (“LIFO”) basis
First-in, first out (“FIFO”) basis
Average cost basis
Total inventories
00
2007
$156,490
21,918
83,372
47,750
$161,013
23,776
76,735
49,407
$309,530
$310,931
$105,959
15,140
188,431
$÷99,433
16,742
194,756
$309,530
$310,931
December 7, 2007
Inventories valued on the LIFO basis at December 31, 2008 and 2007
were approximately $32.8 million and $23.4 million, respectively, less
than the amounts of such inventories valued at current costs.
As a result of reducing certain inventory quantities valued on the
LIFO basis, net income increased from that which would have been
recorded under the FIFO basis of valuation by $0.3 million in 2008, less
than $0.1 million in 2007 and $0.3 million in 2006.
$÷61,444
103,592
2,608
72,814
36,930
2,617
$280,005
$÷28,210
2,354
449
11,528
959
$÷43,500
transaction were as follows:
(In thousands)
Assets
Accounts receivable, net
Inventories
Other current assets
Property, plant and equipment, net
Goodwill, net
Other assets
Total assets sold
Liabilities
Accounts payable
Accrued compensation
Income taxes payable
Other current liabilities
Retirement plan liabilities
Total liabilities sold
Harsco Corporation 2008 Annual Report
4 Property, Plant and equipment
is a comparison of each reporting unit’s fair value to its book value. If
Property, plant and equipment consists of the following:
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
00
2007
to assets and liabilities as if the reporting unit had just been purchased
(In thousands)
Land and improvements
Buildings and improvements
Machinery and equipment
Uncompleted construction
Gross property, plant and equipment
Less accumulated depreciation
$÷÷÷41,913
167,606
2,905,398
75,210
3,190,127
(1,707,294)
$÷÷÷47,250
175,744
2,997,425
75,167
3,295,586
(1,760,372)
Net property, plant and equipment
$«1,482,833
$«1,535,214
The estimated useful lives of different types of assets are generally:
Land improvements
Buildings and improvements
Machinery and equipment
Leasehold improvements
5 to 20 years
5 to 40 years
3 to 20 years
Estimated useful life of the improvement
or, if shorter, the life of the lease
5 Goodwill and other Intangible assets
resulting in the implied fair value of goodwill. If the carrying value of
the goodwill exceeds the implied fair value, a write down to the implied
fair value would be required.
The Company uses a discounted cash flow model to estimate the
fair value of a reporting unit in performing step one of the testing. This
model requires the use of long-term planning estimates and assumptions
regarding industry-specific economic conditions that are outside the
control of the Company. Assessments of future cash flows would con-
sider, but not be limited to the following: infrastructure plant maintenance
requirements; global metals production and capacity utilization; global
railway track maintenance-of-way capital spending; and other drivers of
the Company’s businesses. Changes in the overall interest rate environ-
ment may also impact the fair market value of the Company’s report-
ing units as this would directly influence the discount rate utilized for
discounting operating cash flows, and ultimately determining a reporting
In connection with the provisions of SFAS No. 142, “Goodwill and Other
unit’s fair value. The Company’s overall market capitalization is also a fac-
Intangible Assets,” (“SFAS 142”) goodwill and intangible assets with
tor in evaluating the fair market values of the Company’s reporting units.
indefinite useful lives are no longer amortized. Goodwill is tested for
Significant declines in the overall market capitalization of the Company
impairment at the reporting unit level on an annual basis, and between
could lead to the determination that the book value of one or more of the
annual tests, whenever events or circumstances indicate that the
Company’s reporting units exceeds their fair value. The Company per-
carrying value of a reporting unit’s goodwill may exceed its fair value.
formed required annual testing for goodwill impairment as of October 1,
The Company has determined that the reporting units for goodwill
2008 and 2007 and all reporting units of the Company passed the step one
impairment testing purposes are the Company’s operating segments
testing thereby indicating that no goodwill impairment exists. Additionally,
for the Harsco Metals Segment and the All Other Category and the
the Company determined that as of December 31, 2008 no interim impair-
component level for the Harsco Infrastructure Segment. This impair-
ment testing was necessary. However, there can be no assurance that
ment testing is a two-step process as outlined in SFAS 142. Step one
future goodwill impairment tests will not result in a charge to earnings.
The following table reflects the changes in carrying amounts of goodwill by segment for the years ended December 31, 2007 and 2008:
Goodwill by Segment
(In thousands)
Balance as of December 31, 2006, net of accumulated amortization
Goodwill acquired during year (a)
Changes to Goodwill (b)
Goodwill disposed during year (c)
Foreign currency translation
Balance as of December 31, 2007, net of accumulated amortization
Goodwill acquired during year (d)
Changes to Goodwill (b)
Foreign currency translation
Harsco
Infrastructure
Segment
Harsco
Metals
Segment
All Other
Category – Harsco
Minerals & Rail
Gas
Technologies
Segment
Consolidated
Totals
$241,937
–
1,686
–
11,233
$254,856
12,045
1,262
(47,616)
$325,492
13,621
(1,301)
–
10,499
$348,311
–
(4,892)
(43,806)
$÷÷8,137
103,935
–
–
4,830
$116,902
–
266
(5,838)
$«36,914
–
–
(36,930)
16
$÷÷÷÷÷–
–
–
–
$612,480
117,556
385
(36,930)
26,578
$720,069
12,045
(3,364)
(97,260)
Balance as of December 31, 2008, net of accumulated amortization
$220,547
$299,613
$111,330
$÷÷÷÷÷–
$631,490
(a) Relates principally to the Excell Minerals acquisition in the All Other Category – Harsco Minerals & Rail.
(b) Relates principally to opening balance sheet adjustments.
(c) Relates to the sale of the Company’s Gas Technologies Segment.
(d) Relates to acquisitions of Baviera S.R.L., Buckley Scaffolding and Sovereign Access Services Limited.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
Goodwill is net of accumulated amortization of $95.9 million and
6 Debt and credit agreements
$103.7 million at December 31, 2008 and 2007, respectively. The reduc-
tion in accumulated amortization from December 31, 2007 is due to
foreign currency translation.
Intangible assets totaled $141.5 million, net of accumulated amor-
tization of $65.4 million at December 31, 2008 and $189.0 million, net of
accumulated amortization of $45.2 million at December 31, 2007. The
following table reflects these intangible assets by major category:
Intangible Assets
(In thousands)
Customer relationships
Non-compete agreements
Patents
Other
Total
December , 00
December 31, 2007
Gross
Carrying
Amount
$138,752
1,414
6,316
60,495
$206,977
Accumulated
Amortization
$40,821
1,196
4,116
19,309
$65,442
Gross
Carrying
Amount
$157,717
3,382
6,805
66,266
$234,170
Accumulated
Amortization
$25,137
2,952
4,241
12,821
$45,151
The decrease in intangible assets for 2008 was due principally to for-
The Company has various credit facilities and commercial paper
programs available for use throughout the world. The following table
illustrates the amounts outstanding on credit facilities and commercial
paper programs and available credit at December 31, 2008. These credit
facilities and programs are described in more detail below the table.
(In thousands)
U.S. commercial paper program
Euro commercial paper program
Multi-year revolving credit facility (a)
364-day revolving credit facility (a)
Bilateral credit facility (b)
As of December , 00
Facility Limit
Outstanding
Balance
Available
Credit
$÷«550,000
279,380
450,000
220,000
30,000
$35,943
9,012
–
50,000
–
$÷«514,057
270,368
450,000
170,000
30,000
Totals at December 31, 2008
$1,529,380
$94,955
$1,434,425(c)
(a) U.S.-based program.
(b)
(c) Although the Company has significant available credit, in practice, the Company limits
International-based program.
aggregate commercial paper and credit facility borrowings at any one time to a maximum
of $700.0 million (the aggregate amount of the back-up facilities).
eign currency translation, partially offset by intangible assets acquired
The Company has a U.S. commercial paper borrowing program
in the acquisitions discussed in Note 2, “Acquisitions and Dispositions.”
under which it can issue up to $550 million of short-term notes in
As part of these transactions, the Company acquired the following intan-
the U.S. commercial paper market. In addition, the Company has a
gible assets (by major class) which are subject to amortization:
200 million euro commercial paper program, equivalent to approxi-
Acquired Intangible Assets
(In thousands)
Customer relationships
Non-compete agreements
Other
Total
Weighted-
average
amortization
period
6 years
2 years
2 years
Residual
Value
None
None
None
Gross
Carrying
Amount
$2,087
78
478
$2,643
mately $279.4 million at December 31, 2008, which is used to fund the
Company’s international operations. At December 31, 2008 and 2007,
the Company had $35.9 million and $333.4 million of U.S. commercial
paper outstanding, respectively; and $9.0 million and $132.8 million
outstanding, respectively, under its European-based commercial paper
program. Additionally, the Company had $50.0 million outstanding under
its 364-day revolving credit facility at December 31, 2008. These borrow-
ings are classified as long-term debt when the Company has the ability
There were no research and development assets acquired and
and intent to refinance it on a long-term basis through existing long-term
written off in 2008, 2007 or 2006.
credit facilities. At December 31, 2008 and 2007, the Company classified
Amortization expense for intangible assets was $28.1 million,
$94.9 million and $8.0 million, respectively, of commercial paper and
$27.4 million and $6.7 million for the years ended December 31, 2008,
advances as short-term debt. There was no remaining commercial
2007 and 2006, respectively. The following table shows the estimated
paper or advances to be reclassified as long-term debt at December 31,
amortization expense for the next five fiscal years based on current
2008, while $458.2 million was reclassified at December 31, 2007.
intangible assets.
(In thousands)
2009
2010
2011
2012
2013
Estimated amortization expense (a)
$24,742
$24,308
$23,077
$10,908
$9,472
(a) These estimated amortization expense amounts do not reflect the potential effect of future
foreign currency exchange rate fluctuations.
The Company has a multi-year revolving credit facility in the amount
of $450 million, through a syndicate of 16 banks, which matures in
November 2010. This facility serves as back-up to the Company’s com-
mercial paper programs. Interest rates on the facility are based upon
either the announced JPMorgan Chase Bank Prime Rate, the Federal
Funds Effective Rate plus a margin or LIBOR plus a margin. The Com-
pany pays a facility fee (.08% per annum as of December 31, 2008) that
varies based upon its credit ratings. At December 31, 2008 and 2007,
there were no borrowings outstanding on this credit facility.
Harsco Corporation 2008 Annual Report
In November 2008, the Company, Citibank N.A., as administrative
As reflected in the above table, in May 2008, the Company com-
agent, and a syndicate of nine other banks entered into a 364-day credit
pleted an offering in the United States of 5.75%, ten-year senior notes
agreement that enables the Company to borrow up to $220 million. The
totaling $450.0 million. Net proceeds of $446.6 million were used to
facility matures in November 2009. Any borrowings outstanding at the
reduce the Company’s U.S. and euro commercial paper borrowings
termination of the facility may, at the Company’s option, be repaid over
by $286.4 million and $160.2 million, respectively. The notes include a
the following 12 months. The Company has the option to increase the
covenant that permits the note holders to redeem their notes at 101%
size of the facility at a later date to up to $300 million with the consent of
of par in the event of a change in control of the Company, or disposition
the lenders. Interest rates on the facility are based upon the announced
of a significant portion of the Company’s assets in combination with a
Citibank Prime Rate plus a margin, the Federal Funds Effective rate plus
downgrade of the Company’s credit rating to non-investment grade.
a margin, or LIBOR plus a margin. The Company pays a commitment fee
The Company’s credit facilities and certain notes payable agreements
(0.125% per annum as of entry into the facility) that varies based upon
contain covenants requiring a minimum net worth of $475 million and a
its credit ratings. At December 31, 2008, the Company had $50 million
maximum debt to capital ratio of 60%. Additionally, the Company’s 7.25%
outstanding under this facility.
British pound sterling-denominated notes, due October 27, 2010, and its
The Company’s bilateral credit facility was amended in December 2008
5.75% notes, due May 2018, also include covenants that permit the note
to extend the maturity date to December 2009 and to reduce the amount
holders to redeem their notes, at par and 101% of par, respectively, in the
of the credit facility to $30 million from $50 million. The reduction in amount
event of a change of control of the Company or disposition of a significant
accommodates the Company’s current anticipated liquidity needs and
portion of the Company’s assets in combination with the Company’s credit
reduces borrowing costs. The facility serves as back-up to the Company’s
rating being downgraded to non-investment grade. At December 31, 2008,
commercial paper programs and also provides available financing for the
the Company was in compliance with these covenants.
Company’s European operations. Borrowings under this facility are avail-
The maturities of long-term debt for the four years following
able in most major currencies with active markets at interest rates based
December 31, 2009 are as follows:
upon LIBOR plus a margin. Borrowings outstanding at expiration may be
(In thousands)
repaid over the succeeding 12 months. As of December 31, 2008 and 2007,
there were no borrowings outstanding on this facility.
Short-term borrowings amounted to $117.9 million and $60.3 million
at December 31, 2008 and 2007, respectively. This included commer-
cial paper and short-term advances of $94.9 million and $8.0 million at
December 31, 2008 and 2007, respectively. Other than the commercial
2010
2011
2012
2013
$293,192
1,911
699
149,253
Cash payments for interest on all debt from continuing operations
were $71.6 million, $80.3 million and $59.7 million in 2008, 2007 and 2006,
paper borrowings and advances, short-term debt was principally bank
respectively.
overdrafts. The weighted-average interest rate for short-term borrow-
ings at December 31, 2008 and 2007 was 3.8% and 6.0%, respectively.
Long-term debt consists of the following:
7 leases
Long-term Debt
(In thousands)
5.75% notes due May 1, 2018
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 5.2% as of December 31, 2007
Faber Prest loan notes due October 31, 2008 with
interest based on sterling LIBOR minus .75% (5.1% at
December 31, 2007)
Other financing payable in varying amounts due
through 2013 with a weighted average interest rate
of 7.5% and 7.0% as of December 31, 2008 and 2007,
respectively
Less: current maturities
00
2007
$446,762
$÷÷÷÷÷÷÷–
290,777
149,247
–
–
395,197
149,110
458,180
3,120
8,243
895,029
(3,212)
14,864
1,020,471
(8,384)
The Company leases certain property and equipment under noncancel-
able operating leases. Rental expense (for continuing operations) under
such operating leases was $65.0 million, $70.4 million and $69.6 million
in 2008, 2007 and 2006, respectively.
Future minimum payments under operating leases with noncancel-
able terms are as follows:
(In thousands)
2009
2010
2011
2012
2013
After 2013
$55,592
36,200
25,029
18,133
14,742
37,811
$891,817
$1,012,087
Total minimum rentals to be received in the future under non-
cancelable subleases as of December 31, 2008 are $8.9 million.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
8 employee Benefit Plans
In September 2006, the FASB issued SFAS No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans” (“SFAS 158”). The Company adopted the recognition provisions
of SFAS 158 effective December 31, 2006.
SFAS 158 also requires the consistent measurement of plan assets and
benefit obligations as of the date of the Company’s fiscal year-end state-
ment of financial position effective for the year ending December 31, 2008.
Since the Company previously used an October 31 measurement date
for its United States defined benefit pension plans and a September 30
measurement date for most of its international defined benefit pension
plans, the standard required the Company to change those measurement
dates in 2008 to December 31. In order to record the effects of the change
to a December 31 measurement date, the Company chose to use the
measurements determined as of October 31, 2007 and September 30, 2007
and estimate the net periodic benefit cost for the 14-month and 15-month
periods, respectively, ending December 31, 2008, exclusive of any curtail-
ment or settlement gains or losses. Amounts allocated proportionately to
the 2-month and 3-month periods ended December 31, 2007 (the “short
periods”) were recorded as an adjustment to retained earnings, effective
January 1, 2008. The remaining costs were recognized as net periodic
pension expense during the year ended December 31, 2008. The following
table sets forth the adjustments to retained earnings and Accumulated
other comprehensive income (“AOCI”) resulting from the measurement
date change, net of tax for the short periods:
Impact of SFAS Measurement Date Change
(In thousands)
Service cost, interest cost and expected return on plan assets
Amortization of prior service cost and actuarial gain (loss)
Net adjustment recognized
Pension Benefits
U. S. Defined
Benefit Pension Plans
International Defined
Benefit Pension Plans
Other Post-Retirement
Benefit Plans
Retained
Earnings
$«576
(169)
$«407
AOCI
$÷÷–
169
$169
Retained
Earnings
$÷÷364
(2,207)
$(1,843)
AOCI
$÷÷÷«–
2,207
$2,207
Retained
Earnings
$(21)
4
$(17)
AOCI
$«–
(4)
$(4)
Segment, so that accrued service is no longer granted for periods after
The Company has pension and profit sharing retirement plans covering
December 31, 2008. As a result, for most of the U.S. defined benefit pen-
a substantial number of its employees. The defined benefits for salaried
sion plans and a majority of international defined benefit pension plans,
employees generally are based on years of service and the employee’s
accrued service is no longer granted. In place of these plans, the Com-
level of compensation during specified periods of employment. Defined
pany has established defined contribution pension plans providing for
benefit plans covering hourly employees generally provide benefits of
the Company to contribute a specified matching amount for participating
stated amounts for each year of service. The multi-employer plans in
employees’ contributions to the plan. Domestically, this match is made
which the Company participates provide benefits to certain unionized
on employee contributions up to four percent of their eligible compensa-
employees. The Company’s funding policy for qualified plans is consistent
tion. Additionally, the Company may provide a discretionary contribution
with statutory regulations and customarily equals the amount deducted
of up to two percent of compensation for eligible employees. The two
for income tax purposes. The Company also makes periodic voluntary
percent discretionary contribution was recorded for 2007 and 2006, and
contributions as recommended by its pension committee. The Company’s
paid in February of the subsequent year. Internationally, this match is up
policy is to amortize prior service costs of defined benefit pension plans
to six percent of eligible compensation with an additional two percent
over the average future service period of active plan participants.
going towards insurance and administrative costs.
In an effort to mitigate a portion of the increased pension expense for
The Company believes the defined contribution plans will provide a
2009, the Company implemented plan design changes for certain inter-
more predictable and less volatile pension expense than exists under
national defined benefit pension plans, principally in the Harsco Metals
the defined benefit plans.
Harsco Corporation 2008 Annual Report
(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 (income) expense
Less Discontinued Operations included in above
Defined benefit plans pension (income) expense – continuing operations
Multi-employer plans (a)
Defined contribution plans (a)
U.S. Plans
International Plans
00
2007
2006
00
2007
2006
$÷«1,740
15,197
(23,812)
333
1,167
–
(620)
(5,995)
(694)
(5,301)
15,231
6,969
$÷«3,033
15,511
(22,943)
686
1,314
–
2,091
(308)
2,748
(3,056)
13,552
8,999
$÷«3,685
14,919
(19,942)
742
2,949
(361)
78
2,070
1,848
222
10,560
7,544
$÷«8,729
50,146
(58,166)
897
10,317
29
1,536
13,488
–
13,488
10,143
7,894
$÷«9,031
50,118
(61,574)
938
15,254
36
–
13,803
477
13,326
10,361
7,589
$÷«9,168
43,506
(52,081)
1,446
12,882
36
(51)
14,906
447
14,459
8,662
6,518
Pension expense – continuing operations
$«16,899
$«19,495
$«18,326
$«31,525
$«31,276
$«29,639
(a) Excludes discontinued operations.
In 2008, the Company recognized a settlement gain of $0.9 million
The change in the financial status of the pension plans and amounts
related to the Gas Technologies Segment that was sold in December
recognized in the Consolidated Balance Sheets at December 31, 2008
2007. The settlement gain was recognized upon final transfer of pension
and 2007 are as follows:
assets and liabilities to an authorized trust established by the purchaser
Defined Benefit Pension Benefits
of the Segment and is included above in U.S. Plans discontinued opera-
tions. Also in 2008, the Company implemented plan design changes for
(In thousands)
certain domestic and international defined benefit pension plans so that
accrued service is no longer granted for periods after December 31,
2008. These actions resulted in a net curtailment loss of $1.5 million. See
Note 17, “2008 Restructuring Program” for additional information.
In 2007, the Company recognized a $2.1 million curtailment loss in
connection with the remeasurement of plan obligations related to the
divestiture of the Gas Technologies Segment.
Change in benefit obligation:
Benefit obligation at
beginning of year
Service cost
Interest cost
Plan participants’ contributions
Amendments
Adoption of SFAS 158
measurement date change
Actuarial loss (gain)
Settlements/curtailments
Benefits paid
Divestiture of Gas
Technologies Segment
Effect of foreign currency
U. S. Plans
International Plans
00
2007
00
2007
$268,710
1,740
15,197
–
890
598
(10,145)
–
(15,721)
(22,922)
–
$266,441
3,033
15,511
–
349
–
(1,857)
(1,315)
(13,452)
$987,894
8,729
50,146
2,311
(111)
5,154
(58,507)
(10,388)
(35,695)
–
–
(678)
(250,019)
$981,618
9,031
50,118
2,354
–
–
(39,523)
–
(40,156)
–
24,452
Benefit obligation at end of year
$238,347
$268,710
$698,836
$987,894
Change in plan assets:
Fair value of plan assets at
beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Settlements/curtailments
Benefits paid
Adoption of SFAS 158
measurement date change
Divestiture of Gas
Technologies Segment
Effect of foreign currency
Fair value of plan
assets at end of year
$311,193
(83,794)
1,600
–
–
(15,721)
(2,495)
(21,097)
–
$271,899
49,731
3,015
–
–
(13,452)
$«905,849
(99,645)
28,865
2,310
(237)
(34,182)
$829,927
58,477
39,016
2,354
–
(38,987)
–
–
–
(5,946)
–
–
(238,257)
–
15,062
$189,686
$311,193
$«558,757
$905,849
Funded status at end of year
$«(48,661)
$÷42,483
$(140,079)
$«(82,045)
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
The actual return on the Company’s U.S. and international plans’
Net Periodic Pension Expense Assumptions
assets reflects the decline in pension asset values during the second
The weighted-average actuarial assumptions used to determine the
half of 2008. This decline was due to the financial crisis and the deterio-
net periodic pension expense for the years ended December 31 were
ration of global economic conditions.
Defined Benefit Pension Benefits
as follows:
Global Weighted Average
U. S. Plans
International Plans
December 31
00
2007
2006
(In thousands)
00
2007
00
2007
Amounts recognized in the
Consolidated Balance Sheets
consist of the following:
Noncurrent assets
Current liabilities
Noncurrent liabilities
Accumulated other
$÷÷÷«232
(2,111)
(46,782)
$«70,154
(1,172)
(26,499)
$÷÷«5,072
(1,897)
(143,254)
$÷÷9,604
(1,446)
(90,203)
comprehensive loss before tax
109,523
9,947
260,765
246,526
Amounts recognized in Accumulated other comprehensive loss
consist of the following:
Discount rates
Expected long-term rates of return on
plan assets
Rates of compensation increase
5.9%
7.6%
3.6%
5.3%
7.6%
3.3%
5.3%
7.6%
3.4%
December 31
00
2007
2006
00
2007
2006
U.S. Plans
International Plans
Discount rates
Expected long-term rates of
return on plan assets
Rates of compensation increase
6.2%
8.3%
4.8%
5.9%
8.3%
4.5%
5.9%
8.3%
4.4%
5.8%
7.3%
3.5%
5.1%
7.3%
3.2%
5.2%
7.4%
3.2%
(In thousands)
Net actuarial loss
Prior service cost
Transition obligation
Total
U. S. Plans
International Plans
The expected long-term rates of return on plan assets for the 2009
00
2007
00
2007
pension expense are 8.00% for the U.S. plans and 7.1% for the interna-
$107,672
1,851
–
$109,523
$8,346
1,601
–
$9,947
$257,393
3,184
188
$240,193
6,026
307
tional plans.
Defined Benefit Pension Obligation Assumptions
$260,765
$246,526
The weighted-average actuarial assumptions used to determine
the defined benefit pension plan obligations at December 31 were
The estimated amounts that will be amortized from Accumulated
as follows:
other comprehensive loss into defined benefit pension expense in 2009
are as follows:
(In thousands)
Net actuarial loss
Prior service cost
Transition obligation
Total
U. S. Plans
International Plans
$10,098
351
–
$10,449
$15,206
357
26
$15,589
The Company’s estimate of expected contributions to be paid in
year 2009 for the U.S. defined benefit plans is $4.4 million and for the
international defined benefit plans is $33.5 million.
Contributions to multi-employer pension plans were $26.1 million,
$24.2 million and $18.3 million in years 2008, 2007 and 2006, respectively.
For defined contribution plans, payments were $18.8 million, $16.6 mil-
lion and $13.7 million for years 2008, 2007 and 2006, respectively.
Future Benefit Payments
The expected benefit payments for defined benefit plans over the next
ten years are as follows:
(In millions)
2009
2010
2011
2012
2013
2014–2018
U.S.Plans
International Plans
$15.8
15.0
16.1
16.0
17.8
90.0
$32.8
32.8
34.6
35.4
35.1
184.0
Harsco Corporation 2008 Annual Report
Global Weighted Average
December 31
Discount rates
Rates of compensation increase
00
6.1%
3.4%
2007
5.9%
3.6%
2006
5.3%
3.3%
December 31
00
2007
2006
00
2007
2006
U.S. Plans
International Plans
Discount rates
Rates of compensation increase
6.1%
4.0%
6.2%
4.8%
5.9%
4.5%
6.0%
3.4%
5.8%
3.5%
5.1%
3.2%
The U.S. discount rate was determined using a yield curve that was
produced from a universe containing over 300 U.S.-issued, AA-graded
corporate bonds, all of which were noncallable (or callable with make-
whole provisions), and excluding the 10% of the bonds with the highest
yields and the 10% with the lowest yields. The discount rate was then
developed as the level-equivalent rate that would produce the same
present value as that using spot rates to discount the projected benefit
payments. For international plans, the discount rate is aligned to corpo-
rate bond yields in the local markets, normally AA-rated corporations.
The process and selection seeks to approximate the cash outflows
with the timing and amounts of the expected benefit payments. As of
the measurement dates, these international rates have increased by
20 basis points from the prior year.
Accumulated Benefit Obligations
the expected return-on-asset assumption for 2008 which was 8.25%.
The accumulated benefit obligation for all defined benefit pension
The decrease reflects the impact of the financial crisis that began in
plans at December 31 was as follows:
the second half of 2008 and the long-term effect on recovery.
(In millions)
2008
2007
U.S.Plans
International Plans
$237.8
$257.0
$687.7
$899.4
Plans with Accumulated Benefit Obligation in Excess of Plan Assets
The projected benefit obligation, accumulated benefit obligation and
The U.S. defined benefit pension plans assets include 434,088
shares of the Company’s stock valued at $12.0 million at December 31,
2008 and 765,280 shares of the Company’s common stock valued at
$46.4 million at October 31, 2007. These shares represented 6.4% and
14.4%, respectively, of total plan assets. Dividends paid to the pen-
sion plans on the Company stock amounted to $0.3 million in 2008 and
fair value of plan assets for pension plans with accumulated benefit
$0.5 million in 2007.
obligations in excess of plan assets at December 31 were as follows:
The asset allocations attributable to the Company’s international
U. S. Plans
International Plans
defined benefit pension plans at December 31, 2008 and September 30,
(In millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
00
$228.7
228.5
179.8
2007
$38.1
34.8
10.5
00
$659.5
656.1
517.3
2007
2007 and the target allocation of plan assets for 2009, by asset category,
$88.5
83.1
51.7
are as follows:
International Plans Asset Category
The asset allocations attributable to the Company’s U.S. defined
benefit pension plans at December 31, 2008, and October 31, 2007 and
the target allocation of plan assets for 2009, by asset category, are as
follows:
U.S. Plans Asset Category
Target Long-
Term Allocation
Percentage of Plan Assets at
December , 00
October 31, 2007
Domestic Equity Securities
Fixed Income Securities
International Equity Securities
Cash & Cash Equivalents
Other
45%–55%
27%–37%
4.5%–14.5%
0%–5%
4%–12%
42.5%
39.6%
8.8%
1.4%
7.7%
54.1%
25.5%
13.0%
0.9%
6.5%
Target Long-
Term Allocation
Percentage of Plan Assets at
December , 00
September 30, 2007
Equity Securities
Fixed Income Securities
Cash & Cash Equivalents
Other
50.0%
40.0%
5.0%
5.0%
42.0%
47.4%
0.2%
10.4%
54.3%
40.3%
0.7%
4.7%
Plan assets as of December 31, 2008, in the U.K. defined benefit
pension plan amounted to 85.6% of the international pension assets.
These assets are allocated among various categories of equities, fixed
income, cash and cash equivalents with professional investment man-
agers whose performance is actively monitored. The primary invest-
ment objective is long-term growth of assets in order to meet present
and future benefit obligations. The Company periodically conducts
Plan assets are allocated among various categories of equities,
asset/liability modeling studies and accordingly adjusts investment
fixed income, cash and cash equivalents with professional investment
amounts within asset categories to ensure the long-term investment
managers whose performance is actively monitored. The primary
strategy is aligned with the profile of benefit obligations.
investment objective is long-term growth of assets in order to meet
For the international long-term rate-of-return assumption, the
present and future benefit obligations. The Company periodically
Company considered the current level of expected returns in risk-free
conducts an asset/liability modeling study and accordingly adjusts
investments (primarily government bonds), the historical level of the
investments among and within asset categories to ensure the long-term
risk premium associated with other asset classes in which the portfolio
investment strategy is aligned with the profile of benefit obligations.
is invested and the expectations for future returns of each asset class
The Company reviews the long-term expected return-on-asset
and plan expenses. The expected return for each asset class was then
assumption on a periodic basis taking into account a variety of factors
weighted based on the target asset allocation to develop the expected
including the historical investment returns achieved over a long-term
long-term rate-of-return on assets. The Company’s expected rate-of-
period, the targeted allocation of plan assets and future expectations
return assumption for the U.K. plan was 7.23% and 7.5% for 2009 and
based on a model of asset returns for an actively managed portfolio,
2008, respectively. The remaining international pension plans with
inflation and administrative/other expenses. The model simulates 500
assets representing 14.4% of the international pension assets are
different capital market results over 15 years. For 2009, the expected
under the guidance of professional investment managers and have
return-on-asset assumption for U.S. plans is 8.00%, as compared with
similar investment objectives.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
The impact of adopting the recognition provisions of SFAS 158 effec-
The changes in the postretirement benefit liability recorded in the
tive December 31, 2006 has been reflected in the consolidated financial
Consolidated Balance Sheets are as follows:
statements as of December 31, 2008, 2007 and 2006 and the incremental
Postretirement Benefits
effect of applying SFAS 158 to pension benefits is disclosed below.
(In thousands)
00
2007
Incremental Effect on Consolidated Balance Sheet of Adopting the Recognition
Provisions of SFAS for Pension Plans – December , 00
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
$210,061
186,014
113,425
$÷«1,716
3,443
(9,833)
$«211,777
189,457
103,592
Change in benefit obligation:
Benefit obligation at beginning of year
Effect of eliminating early measurement date
Service cost
Interest cost
Actuarial loss
Benefits paid
Acquisitions
Curtailment
Settlement
Benefit obligation at end of year
(In thousands)
Assets:
Other assets
Liabilities:
Other current liabilities
Retirement plan liabilities
Deferred income tax liabilities
Stockholders’ Equity:
Accumulated other
comprehensive loss
$«(81,127)
$(88,207)
$(169,334)
position consist of the following:
Amounts recognized in the statement of financial
(a) Balances represent major captions as presented on the Consolidated Balance Sheet.
Postretirement Benefits
Current liability
Noncurrent liability
Net amount recognized
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.
Amounts recognized in Accumulated other
comprehensive income consist of the following:
Net actuarial loss (gain)
Prior service cost
The costs of health care and life insurance benefits are accrued for
Net amount recognized (before tax adjustment)
current and future retirees and are recognized as determined under the
$«3,202
33
4
187
223
(260)
–
–
–
$«3,389
$«÷(333)
(3,056)
$(3,389)
$198
9
$207
$«3,193
–
5
182
52
(240)
85
(39)
(36)
$«3,202
$÷«(300)
(2,902)
$(3,202)
$(62)
18
$(44)
projected unit credit actuarial method. Under this method, the Company’s
The estimated amounts that will be amortized from Accumulated
obligation for postretirement benefits is to be fully accrued by the date
other comprehensive income into net periodic benefit cost are as follows:
employees attain full eligibility for such benefits. The Company’s post-
retirement health care and life insurance plans are unfunded. Effective
December 31, 2008, the Company uses a December 31 measurement
Actuarial loss
Prior service cost
date for its postretirement benefit plans in accordance with the provi-
Total
sions of SFAS 158.
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:
On total service and interest cost
components
On postretirement benefit obligation
Effect of one percent decrease in health care
cost trend rate:
On total service and interest cost
components
On postretirement benefit obligation
00
6.10%
8.50%
5.00%
$÷«10
202
$÷÷(9)
(182)
2007
6.17%
9.00%
5.00%
$÷«8
164
$÷÷(8)
(148)
2009
$3
2
$5
2006
5.87%
9.00%
5.00%
$÷«10
144
$÷÷(9)
(130)
(In thousands)
00
2007
2006
Postretirement Benefits Expense (Income)
Service cost
Interest cost
Recognized prior service costs
Recognized gains
Curtailment gains
Postretirement benefit expense (income)
$÷÷4
187
3
(26)
–
$168
$÷÷«5
182
3
(126)
(82)
$÷(18)
$÷÷5
186
3
(38)
(20)
$136
0 Harsco Corporation 2008 Annual Report
It is anticipated that the health care cost trend rate will decrease
Employee directed investments in the Savings Plan and HRSIP
from 8.5% in 2009 to 5.0% in the year 2016.
include the following amounts of Company stock:
The assumed discount rates to determine the postretirement benefit
Company Shares in Plans
expense for the years 2008, 2007 and 2006 were 6.17%, 5.87% and 5.87%,
respectively.
The Company’s expected benefit payments over the next ten years
(Dollars in millions)
December , 00
December 31, 2007
December 31, 2006
Number
of Shares
Fair
Market
Value
Number
of Shares
Fair
Market
Value
Number
of Shares (a)
Fair
Market
Value
are as follows:
(In thousands)
2009
2010
2011
2012
2013
2014–2018
Benefits Payments
$÷«333
335
334
331
326
1,482
During 2008, the Company decided to no longer file for Medicare
Part D federal subsidies that would provide retiree drug coverage, as
the administrative cost associated with pursuing the reimbursement
is expected to exceed the benefits received. Therefore, the Company
does not expect any future subsidy payments under the Medicare
Modernization Act.
Savings Plan
Savings Plan
HRSIP
1,129,708
1,751,098
$31.3
48.5
1,435,289
1,783,462
$÷92.0
114.3
1,714,298
1,818,474
$65.2
69.2
(a) Adjusted to reflect the March 2007 stock split.
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 for continuing operations
was $9.4 million, $12.1 million and $7.0 million in 2008, 2007 and 2006,
respectively. The expenses include performance-based restricted stock
units (“RSUs”) that were granted to certain officers and key employees
of the Company. See Note 12, “Stock-Based Compensation,” for addi-
Prior to January 1, 2004, the Company had a 401(k) Savings Plan (“the
tional information on the equity component of executive compensation.
Savings Plan”) which covered substantially all U.S. employees with
the exception of employees represented by a collective bargaining
9 Income taxes
agreement, unless the agreement expressly provides otherwise. Effec-
tive 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.
Income from continuing operations before income taxes and minor-
ity interest in the Consolidated Statements of Income consists of the
following:
The transferred employees were those whose credited years of service
(In thousands)
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 continu-
ing operations expense for contributions to the Savings Plan by the
Total income taxes currently payable
Company was $0.8 million, $0.6 million and $0.6 million for 2008, 2007 and
2006, respectively.
Total income before income taxes and
minority interest
$343,337
$382,439
$287,604
United States
International
Income tax expense (benefit):
Currently payable:
Federal
State
International
Deferred federal and state
Deferred international
00
2007
2006
$÷98,842
244,495
$110,926
271,513
$÷69,620
217,984
$÷33,873
1,988
54,817
90,678
1,478
(336)
$÷37,917
8,670
68,688
115,275
(3,695)
6,018
$÷33,525
2,338
56,156
92,019
(1,328)
2,663
Total income tax expense
$÷91,820
$117,598
$÷93,354
Cash payments for income taxes, including Discontinued Operations,
were $120.6 million, $125.4 million and $98.9 million for 2008, 2007 and
2006, respectively.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
The following is a reconciliation of the normal expected statutory
The deferred tax asset and liability balances are included in the
U.S. federal income tax rate to the effective rate as a percentage of
following Consolidated Balance Sheets line items:
Income from continuing operations before income taxes and minority
interest as reported in the Consolidated Statements of Income:
Deferred Income Tax Assets (Liabilities)
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
FIN 48 tax contingencies and settlements
Cumulative effect in change in
statutory tax rates
Other, net
Effective income tax rate
00
35.0%
0.8
(0.2)
(0.2)
(7.7)
(0.5)
(0.4)
(0.1)
26.7%
2007
35.0%
1.0
(0.3)
(0.2)
(3.7)
0.1
(0.7)
(0.5)
30.7%
2006
35.0%
0.7
(0.3)
(0.3)
(2.5)
(0.3)
–
0.2
32.5%
The difference in effective tax rates on international earnings and
remittances from 2006 to 2008 was primarily due to increased earnings
in jurisdictions with lower tax rates and the Company increasing its
designation of certain international earnings as permanently rein-
vested.
The difference in effective tax rates for FASB Interpretation (“FIN”)
No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation
of FASB Statement No. 109” (“FIN 48”) tax contingencies and settlements
from 2007 to 2008 resulted from the recognition of previously unrecog-
nized tax benefits in various state and foreign jurisdictions.
The tax effects of the primary temporary differences giving rise to
the Company’s deferred tax assets and liabilities for the years ended
December 31, 2008 and 2007 are as follows:
Deferred Income Taxes
(In thousands)
Other current assets
Other assets
Other current liabilities
Deferred income taxes
December 31
00
2007
$«35,065
27,013
(4,194)
(35,442)
$÷«37,834
15,535
(5,701)
(174,423)
At December 31, 2008, the tax effected amount of net operating loss
carryforwards (“NOLs”) totaled $21.2 million. Tax effected NOLs from
international operations are $13.5 million. Of that amount, $12.7 mil-
lion can be carried forward indefinitely, and $0.8 million will expire at
various times between 2012 and 2023. Tax effected U.S. federal NOLs
are $0.4 million, expire in 2018, and relate to preacquisition NOLs. Tax
effected U.S. state NOLs are $7.3 million. Of that amount, $0.1 million
expire at various times between 2009 and 2015, $4.8 million expire at
various times between 2016 and 2023, and $2.4 million expire at various
times between 2024 and 2028.
The valuation allowance of $21.5 million and $15.3 million at Decem-
ber 31, 2008 and 2007, respectively, related principally to NOLs and
foreign investment tax credits which are uncertain as to realizability.
The change in the valuation allowances for 2008 and 2007 results
primarily from the increase in valuation allowances in certain jurisdic-
tions based on the Company’s evaluation of the realizability of future
benefits partially offset by the utilization of NOLs and the release of
valuation allowances in certain jurisdictions based on the Company’s
revaluation of the realizability of future benefits.
The Company has not provided U.S. income taxes on certain of its
non-U.S. subsidiaries’ undistributed earnings as such amounts are per-
00
2007
manently reinvested outside the United States. At December 31, 2008
(In thousands)
Asset
Liability
Asset
Liability
Depreciation
Expense accruals
Inventories
Provision for receivables
Postretirement benefits
Deferred revenue
Operating loss carryforwards
Deferred foreign tax credits
Pensions
Currency adjustments and outside
basis differences on foreign
investments
Other
Subtotal
Valuation allowance
$÷÷÷÷÷«–
30,371
4,866
2,587
1,223
–
21,211
3,601
58,226
71,030
11,240
204,355
(21,459)
$152,750
–
–
–
–
7,704
–
–
–
$÷÷÷÷÷–
32,074
4,020
2,093
1,157
–
14,954
–
24,631
–
–
–
–
160,454
–
78,929
(15,317)
$142,102
–
–
–
–
3,430
–
–
18,754
13,120
12,961
190,367
–
Total deferred income taxes
$182,896
$160,454
$«63,612
$190,367
and 2007, such earnings were approximately $741 million and $697 mil-
lion, respectively. If these earnings were repatriated at December 31,
2008, the one time tax cost associated with the repatriation would be
approximately $99.6 million. The Company has various tax holidays
in the Middle East and Asia that expire between 2009 and 2012. The
Company no longer has tax holidays in Europe as they have all expired.
During 2008, 2007 and 2006, these tax holidays resulted in approximately
$0.2 million, $2.8 million and $2.3 million, respectively, in reduced income
tax expense.
The Company adopted the provisions of FIN 48, effective January 1,
2007. As a result of the adoption, the Company recognized a cumula-
tive effect reduction to the January 1, 2007 retained earnings bal-
ance of $0.5 million. As of the adoption date, the Company had gross
Harsco Corporation 2008 Annual Report
unrecognized income tax benefits of $46.0 million, of which $17.8 million,
During the third quarter of 2008, the U.S. Internal Revenue Service
if recognized, would affect the Company’s effective income tax rate.
completed its audit of the Company’s U.S. income tax returns for 2004
Of this amount, $0.8 million was classified as current and $45.2 million
and 2005. The resolution of the audit resulted in a payment of $2.8 million.
was classified as non-current on the Company’s balance sheet. While
In July 2008, the Company and the Ontario Ministry of Finance
the Company believes it has adequately provided for all tax positions,
settled its royalty dispute matter consistent with the results obtained
amounts asserted by taxing authorities could be different than the
by the Company with the Canada Revenue Agency (“CRA”). This matter
accrued position.
is more fully discussed in Note 10, “Commitments and Contingencies,”
The Company recognizes accrued interest and penalty expense
to the consolidated financial statements.
related to unrecognized income tax benefits (“UTB”) in income tax
The Company filed voluntary disclosure agreements with various
expense. In conjunction with the adoption of FIN 48, the total amount
U.S. state jurisdictions which resulted in a 2008 payment of $2.3 million
of accrued interest and penalties resulting from such unrecognized tax
and a realization of UTBs of approximately $1.0 million.
benefits was $4.4 million. During the year ended December 31, 2008, the
The Company files its income tax returns as prescribed by the tax
Company recognized a benefit of $3.2 million for interest and penalties.
laws of the jurisdictions in which it operates. With few exceptions, the
During the year ended December 31, 2007, the Company recognized
Company is no longer subject to the U.S. and foreign examinations by
expense of $6.5 million for interest and penalties. The Company had
tax authorities for the years through 2002.
$7.7 million and $10.9 million for the payment of interest and penalties
Upon the adoption of SFAS 141(R) on January 1, 2009, the resolution
accrued at December 31, 2008 and 2007, respectively.
of all UTBs accounted for under FIN 48 from business combinations and
A reconciliation of the change in the UTB balance from January 1,
changes in valuation allowances for acquired deferred tax assets will
2007 to December 31, 2008 is as follows:
be recognized in income tax expense rather than as an additional cost
Balance at December 31, 2007
$÷30,176
$÷«(2,332)
$27,844
(In thousands)
Balance at January 1, 2007
Additions for tax positions related to
the current year (includes currency
translation adjustment)
Additions for tax positions related to prior
years (includes currency translation
adjustment)
Reductions for tax positions related to
acquired entities in prior years, offset
to goodwill
Other reductions for tax positions related
to prior years
Settlements
Additions for tax positions related to
the current year (includes currency
translation adjustment)
Additions for tax positions related to prior
years (includes currency translation
adjustment)
Reductions for tax positions related to
acquired entities in prior years, offset
to goodwill
Other reductions for tax positions related
to prior years
Settlements
Total unrecognized income tax benefits
that, if recognized, would impact
the effective income tax rate as of
December , 00
Unrecognized
Income Tax
Benefits
Deferred
Income Tax
Benefits
Unrecognized
Income Tax
Benefits, Net
of Deferred
Income Tax
Benefits
$«45,965
$(15,016)
$30,949
of the acquisition or goodwill. Such adjustments will impact the effec-
tive income tax rate. The amount of UTBs accounted for under FIN 48
from business combinations that may impact the effective income tax
rate as of December 31, 2008 is $4.6 million.
3,849
(172)
3,677
Royalty Expense Dispute
10 commitments and contingencies
6,516
(3,568)
(22,086)
(500)
–
–
12,681
175
6,516
(3,568)
(9,405)
(325)
2,723
–
2,723
The Company was involved in a royalty expense dispute with the Canada
Revenue Agency (“CRA”). The CRA disallowed certain expense deduc-
tions claimed by the Company’s Canadian subsidiary on its 1994–1998 tax
returns. The Company completed settlement discussions with the CRA
which resulted in a resolution and closure of the matter in the fourth
quarter of 2007. The settlement resulted in a refund to the Company in
the amount of approximately $5.9 million Canadian dollars, representing
a refund of the payment made to the CRA in the fourth quarter of 2005,
with the interest accrued on the 2005 settlement being utilized to satisfy
2,753
(629)
2,124
the final assessment of $0.6 million Canadian dollars.
(92)
(6,080)
(5,181)
–
1,077
705
(92)
(5,003)
(4,476)
The Ontario Ministry of Finance (“Ontario”) also proposed to disallow
certain expense deductions for the period 1994–1998. In July 2008, the
Company and Ontario settled this matter in a manner consistent with
the results obtained by the Company with the CRA. The settlement
resulted in a total refund to the Company of approximately $4.9 million
Canadian dollars, representing a refund of payments made to Ontario,
$«24,299
$÷(1,179)
$23,120
plus accrued interest. A portion of these amounts was utilized to satisfy
the final assessment of $0.4 million Canadian dollars.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
Environmental
the clean-up and salvage efforts were completed during 2007, and the
The Company is involved in a number of environmental remediation
site is in a closure monitoring phase. Estimated environmental remedia-
investigations and clean-ups and, along with other companies, has
tion expenses to complete the clean-up have been recognized in the
been identified as a “potentially responsible party” for certain waste
financial statements as of December 31, 2008. Following the incident,
disposal sites. While each of these matters is subject to various
the Company’s remaining rail grinders were inspected by the Federal
uncertainties, it is probable that the Company will agree to make pay-
Railroad Administration (“FRA”) and each grinder was found to be
ments toward funding certain of these activities and it is possible that
in compliance with legal requirements. The Company also regularly
some of these matters will be decided unfavorably to the Company.
inspects its grinders to ensure they are in proper working condition and
The Company has evaluated its potential liability, and its financial
in compliance with contractual commitments. The Company believes
exposure is dependent upon such factors as the continuing evolution
that the insurance proceeds already received from the loss of the rail
of environmental laws and regulatory requirements, the availability
grinder have offset the majority of incurred expenses, which have been
and application of technology, the allocation of cost among potentially
recognized in the financial statements as of December 31, 2008, and
responsible parties, the years of remedial activity required and the
insurance proceeds should be available to cover any future liabilities.
remediation methods selected. The Consolidated Balance Sheets
Therefore, the Company does not believe that the derailment will have
at December 31, 2008 and December 31, 2007 include accruals of
a material adverse effect on its financial position, results of operations,
$3.2 million and $3.9 million, respectively, for environmental matters.
or cash flows.
The amounts charged against pre-tax income related to environmental
matters totaled $1.5 million, $2.8 million and $2.0 million in 2008, 2007
and 2006, respectively.
The Company and an unrelated third party received a notice of
violation in November 2007 from the United States Environmental
Protection Agency (“the EPA”), in connection with an alleged violation
by the Company and such third party of certain applicable federally
enforceable air pollution control requirements in connection with
the operation of a slag processing area located on the third party’s
Pennsylvania facility. The Company and such third party have promptly
taken steps to remedy the situation. The Company and the third party
have reached an agreement in principle with the EPA to resolve this
matter and are in the process of finalizing this agreement. The Company
anticipates that its portion of any penalty would exceed $0.1 million.
However, the Company does not expect that any sum it may have to pay
in connection with this matter would have a material adverse effect on
its financial position, results of operations or cash flows.
The Company evaluates its liability for future environmental reme-
diation costs on a quarterly basis. Actual costs to be incurred at identi-
fied 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
Customer Contract Breach
ArcelorMittal recently notified the Company that it would unilaterally
revise the fixed fee provisions of certain contracts between the parties
with the intended effect resulting in a significant price reduction to the
Company. The Company has notified ArcelorMittal that their actions are
a breach of these contracts and that the Company will take all neces-
sary and appropriate actions to protect its legal rights. Discussions
between the parties continue but it is possible that the parties may
need to resort to third party resolution of this issue. ArcelorMittal rep-
resented approximately 10% of the Company’s sales in 2008, 2007 and
2006. The Company expects ArcelorMittal sales in 2009 to be less than
10% of the Company’s sales due primarily to reduced steel production
levels; the Company’s exiting of certain underperforming contracts with
ArcelorMittal; and a stronger U.S. dollar. It is possible that the eventual
outcome of this unprecedented breach of contract could negatively
impact the Company’s long-term relationship with this customer and,
as a result, the Company’s financial position, results of operations and
cash flows could be negatively impacted. Of all of the Company’s major
customers in the Harsco Metals Segment, the EVA on contracts with
ArcelorMittal are the lowest in the portfolio. Contracts with ArcelorMit-
tal are long-term contracts, such that any impact on the Company’s
future results of operations would occur over a number of years.
above would have a material adverse effect on its financial position,
Other
results of operations or cash flows.
The Company has been named as one of many defendants (approxi-
Derailment
One of the Company’s production rail grinders derailed near Baxter,
California on November 9, 2006, resulting in two crew member fatali-
ties and the near total loss of the rail grinder. Government and private
investigations into the cause of the derailment are on-going. Most of
mately 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.
Harsco Corporation 2008 Annual Report
The Company believes that the claims against it are without merit.
Docket for plaintiffs who are able to show such medical condition. As a
The Company has never been a producer, manufacturer or processor of
result of this order, the majority of the asbestos cases filed against the
asbestos fibers. Any component within a Company product which may
Company in New York County have been moved to the Inactive Docket
have contained asbestos would have been purchased from a supplier.
until such time as the plaintiff can show that they have incurred a physi-
Based on scientific and medical evidence, the Company believes that
cal impairment. As of December 31, 2008, the Company has been listed
any asbestos exposure arising from normal use of any Company product
as a defendant in 443 Active or In Extremis asbestos cases in New York
never presented any harmful levels of airborne asbestos exposure, and
County. The Court’s Order has been challenged by plaintiffs.
moreover, the type of asbestos contained in any component that was
The Company’s insurance carrier has paid all legal and settlement
used in those products was protectively encapsulated in other materials
costs and expenses to date. The Company has liability insurance
and is not associated with the types of injuries alleged in the pending
coverage under various primary and excess policies that the Company
suits. Finally, in most of the depositions taken of plaintiffs to date in the
believes will be available, if necessary, to substantially cover any liabil-
litigation against the Company, plaintiffs have failed to specifically iden-
ity that might ultimately be incurred on these claims.
tify any Company products as the source of their asbestos exposure.
The Company intends to continue its practice of vigorously defending
The majority of the asbestos complaints pending against the Com-
these cases as they are listed for trial. It is not possible to predict the
pany have been filed in New York. Almost all of the New York complaints
ultimate outcome of asbestos-related lawsuits, claims and proceedings
contain a standard claim for damages of $20 million or $25 million against
due to the unpredictable nature of personal injury litigation. Despite
the approximately 90 defendants, regardless of the individual plaintiff’s
this uncertainty, and although results of operations and cash flows for a
alleged medical condition, and without specifically identifying any
given period could be adversely affected by asbestos-related lawsuits,
Company product as the source of plaintiff’s asbestos exposure.
claims and proceedings, management believes that the ultimate outcome
As of December 31, 2008, there are 26,235 pending asbestos per-
of these cases will not have a material adverse effect on the Company’s
sonal injury claims filed against the Company. Of these cases, 25,728
financial condition, results of operations or cash flows.
were pending in the New York Supreme Court for New York County in
The Company is subject to various other claims and legal proceed-
New York State. The other claims, totaling 507, are filed in various coun-
ings covering a wide range of matters that arose in the ordinary course of
ties in a number of state courts, and in certain Federal District Courts
business. In the opinion of management, all such matters are adequately
(including New York), and those complaints generally assert lesser
covered by insurance or by accruals, and if not so covered, are without
amounts of damages than the New York State court cases or do not
merit or are of such kind, or involve such amounts, as would not have a
state any amount claimed.
material adverse effect on the financial position, results of operations or
As of December 31, 2008, the Company has obtained dismissal by
cash flows of the Company.
stipulation, or summary judgment prior to trial, in 17,892 cases.
Insurance liabilities are recorded in accordance with SFAS 5,
In view of the persistence of asbestos litigation nationwide, which
“Accounting for Contingencies.” Insurance reserves have been
has not yet been sufficiently addressed either politically or legally, the
estimated based primarily upon actuarial calculations and reflect the
Company expects to continue to receive additional claims. However,
undiscounted estimated liabilities for ultimate losses including claims
there have been developments during the past several years, both
incurred but not reported. Inherent in these estimates are assump-
by certain state legislatures and by certain state courts, which could
tions which are based on the Company’s history of claims and losses, a
favorably affect the Company’s ability to defend these asbestos claims
detailed analysis of existing claims with respect to potential value, and
in those jurisdictions. These developments include procedural changes,
current legal and legislative trends. If actual claims differ from those
docketing changes, proof of damage requirements and other changes
projected by management, changes (either increases or decreases) to
that require plaintiffs to follow specific procedures in bringing their
insurance reserves may be required and would be recorded through
claims and to show proof of damages before they can proceed with
income in the period the change was determined. When a recognized
their claim. An example is the action taken by the New York Supreme
liability is covered by third-party insurance, the Company records an
Court (a trial court), which is responsible for managing all asbestos
insurance claim receivable to reflect the covered liability. Insurance
cases pending within New York County in the State of New York. This
claim receivables are included in Other receivables in the Company’s
Court issued an order in December 2002 that created a Deferred or
Consolidated Balance Sheets. See Note 1, “Summary of Significant
Inactive Docket for all pending and future asbestos claims filed by
Accounting Policies,” for additional information on Accrued Insurance
plaintiffs who cannot demonstrate that they have a malignant condi-
and Loss Reserves.
tion or discernable physical impairment, and an Active or In Extremis
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
As has been indicated in previous disclosure filings, the working
Agreement also includes an exchange feature. At December 31, 2008,
capital adjustments associated with the Gas Technologies divestiture
801,745 shares of $1.25 par value preferred stock were reserved for
have not yet been finalized. The Company has reflected a portion of the
issuance upon exercise of the rights.
claimed amount of the adjustment in the Company’s financial statements
On January 23, 2007, the Company’s Board of Directors approved a
as of December 31, 2008. Any additional final adjustment amounts are
two-for-one stock split of the Company’s common stock. One additional
not expected to be material to the Company’s financial position, results
share of common stock was issued on March 26, 2007, for each share
of operations or cash flows. As part of its effort to resolve the working
that was issued and outstanding at the close of business on February 28,
capital adjustment claims, the Company recently submitted this matter
2007. The Company’s treasury stock was not included in the stock split.
to arbitration. In response to this filing, Taylor-Wharton International,
The Board of Directors has authorized the repurchase of shares of
the purchaser of the business, submitted certain counter-claims seek-
common stock as follows:
ing damages in excess of $30 million, relating primarily to the alleged
breach of certain representations and warranties made by the Company
under the Purchase Agreement. The Company intends to vigorously
defend against the counter-claims. The Company believes that it will be
successful in its defense of these claims and does not believe that any
amount it will have to pay in connection with these claims would have a
material adverse effect on its financial position, results of operations or
cash flows.
11 capital Stock
No. of Shares
Authorized to
be Purchased
January 1 (a)
Additional
Shares
Authorized for
Purchase
No. of Shares
Purchased (a)
Remaining No. of
Shares Authorized
for Purchase
December 31 (a)
2006
2007
00
2,000,000
2,000,000
2,000,000
–
–
4,000,000
–
–
4,463,353
2,000,000
2,000,000
1,536,647
(a) Authorization and number of shares purchased adjusted to reflect the two-for-one stock
split effective at the end of business on March 26, 2007.
The Company’s share repurchase program was extended by
the Board of Directors in September 2008. The Board authorized an
increase of 4,000,000 shares to the 946,367 remaining from the Board’s
The authorized capital stock of the Company consists of 150,000,000
previous stock repurchase authorization. The repurchase program
shares of common stock and 4,000,000 shares of preferred stock, both
expires January 31, 2010.
having a par value of $1.25 per share. The preferred stock is issuable in
In addition to the above purchases, 29,346 shares were repurchased
series with terms as fixed by the Board of Directors (the “Board”). None
in 2008 in connection with the issuance of shares as a result of vested
of the preferred stock has been issued. On September 25, 2007, the
restricted stock units. In 2007 and 2006, 90 treasury shares and 1,766
Board approved a revised Preferred Stock Purchase Rights Agreement
treasury shares, respectively, were issued in connection with SGB
(the “Agreement”). Under the Agreement, the Board authorized and
stock option exercises, employee service awards, and shares related to
declared a dividend distribution to stockholders of record on October 9,
vested restricted stock units.
2007, of one right for each share of common stock outstanding on the
The following table summarizes the Company’s common stock:
record date. The rights may only be exercised if, among other things
Common Stock (a)
and with certain exceptions, a person or group has acquired 15% or
more of the Company’s common stock without the prior approval of
the Board. Each right entitles the holder to purchase 1/100th share of
Harsco Series A Junior Participating Cumulative Preferred Stock at an
exercise price of $230. Once the rights become exercisable, the holder
of a right will be entitled, upon payment of the exercise price, to pur-
chase a number of shares of common stock calculated to have a value
of two times the exercise price of the right. The rights, which expire
on October 9, 2017, do not have voting power, and may be redeemed
by the Company at a price of $0.001 per right at any time until the 10th
Outstanding, January 1, 2006
Stock Options Exercised
Other
Outstanding, December 31, 2006
Stock Options Exercised
Other
Outstanding, December , 00
Stock Options Exercised
Vested Restricted Stock Units
Purchases
Shares
Issued
Treasury
Shares
Outstanding
Shares
110,040,961
468,157
1,085
110,510,203
422,416
–
110,932,619
121,176
86,193
–
26,474,609
(681)
(1,085)
26,472,843
–
(90)
26,472,753
–
29,346
4,463,353
83,566,352
468,838
2,170
84,037,360
422,416
90
84,459,866
121,176
56,847
(4,463,353)
business day following public announcement that a person or group
Outstanding, December , 00
111,139,988
30,965,452
80,174,536
has accumulated 15% or more of the Company’s common stock. The
(a) All share data has been restated for comparison purposes to reflect the effect of the
March 2007 stock split.
Harsco Corporation 2008 Annual Report
The following is a reconciliation of the average shares of common
directors, respectively. Primarily because of this, the effect of adopting
stock used to compute basic earnings per common share to the shares
SFAS 123(R) was not material to the Company’s income from continuing
used to compute diluted earnings per common share as shown on the
operations, income before income taxes, net income, basic or diluted
Consolidated Statements of Income:
(Amounts in thousands, except per share data)
00
2007
2006 (a)
Income from continuing operations
$245,623
$255,115
$186,402 (b)
earnings per share or cash flows from operating and financing activi-
ties 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 transi-
tion method for calculating the historical pool of windfall tax benefits.
In 2004, the Board of Directors approved the granting of perfor-
83,599
84,169
83,905
430
555
525
mance-based restricted stock units as the long-term equity com-
ponent of director, officer and certain key employee compensation.
84,029
84,724
84,430
The restricted stock units require no payment from the recipient and
$÷÷2.94
$÷÷3.03
$÷÷2.22
grant date and is generally recorded over the vesting period. The vest-
compensation cost is measured based on the market price on the
Average shares of common stock
outstanding used to compute basic
earnings per common share
Dilutive effect of stock options and
restricted stock units
Average shares of common stock
outstanding used to compute dilutive
earnings per common share
Basic earnings per common share from
continuing operations
Diluted earnings per common share from
continuing operations
$÷÷2.92
$÷÷3.01
$÷÷2.21
(a) Shares have been adjusted for comparison purposes to reflect the effect of the March 2007
(b)
stock split.
Income from continuing operations has been adjusted to reflect reclassification of
Discontinued Operations for comparative purposes.
All outstanding stock options were included in the computation of
average shares of common stock outstanding used to compute diluted
earnings per share at December 31, 2008, 2007 and 2006.
12 Stock-Based compensation
ing 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.
Effective January 1, 2006, the Company adopted SFAS No. 123 (revised
This compares with the prior three-year cliff vesting and retirement age
2004), “Share-Based Payments” (“SFAS 123(R)”), which replaced SFAS
of 65 for awards prior to September 2006. Restricted stock units do not
No. 123, “Accounting for Stock-Based Compensation,” and superseded
have an option for cash payment.
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for
The following table summarizes restricted stock units issued and
Stock Issued to Employees” (“APB 25”). SFAS 123(R) requires the cost
the compensation expense (including both continuing and discontinued
of employee services received in exchange for an award of equity
operations) recorded for the years ended December 31, 2008, 2007
instruments to be based upon the grant-date fair value of the award
and 2006:
(with limited exceptions). Additionally, this cost is to be recognized
Stock-Based Compensation Expense
(Dollars in thousands,
except per unit)
Restricted
Stock Units
Fair Value
per Unit
Expense
00
2007
2006
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.
Directors:
May 1, 2005 (a)
May 1, 2006 (a)
May 1, 2007
May 1, 2008
Employees:
January 24, 2005 (a)
January 24, 2006 (a)
January 22, 2007
January 22, 2008
$26.88
41.30
50.62
58.36
25.21
33.85
38.25
45.95
12,000
16,000
16,000
16,000
65,400
93,100
101,700
130,950
451,150
$÷÷÷«–
–
270
623
21
632
1,035
2,652
$÷÷÷«–
220
539
–
328
839
1,488
–
$÷«108
440
–
–
477
914
–
–
$5,233
$3,414
$1,939
The Company adopted the provisions of SFAS 123(R) using the modi-
Total
fied-prospective transition method. Under this method, results from
(a) Restricted stock units and fair values have been restated to reflect the March 2007 two-for-
prior periods have not been restated. During 2002 and 2003, the Com-
one stock split.
pany ceased granting stock options to employees and non-employee
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
Restricted stock unit activity for the years ended December 31, 2008,
the Executive Incentive Compensation and Non-Employee Directors’
2007 and 2006 was as follows:
Stock Plans are stated on a post-split basis. Generally, new shares are
Nonvested at January 1, 2006
Granted
Vested
Forfeited
Nonvested at December 31, 2006
Granted
Vested
Forfeited
Nonvested at December , 00
Granted
Vested
Forfeited
Nonvested at December , 00
Weighted
Average
Grant-Date
Fair Value (a)
Restricted
Stock Units (a)
63,500
109,100
(15,666)
(11,700)
145,234
117,700
(16,000)
(35,000)
211,934
146,950
(95,570)
(5,584)
257,730
$25.31
34.94
36.59
30.90
$30.88
39.93
47.51
34.06
$34.12
47.30
34.43
39.78
$41.40
(a) Restricted stock units and fair values have been restated to reflect the March 2007
two-for-one stock split.
As of December 31, 2008, the total unrecognized compensation
cost related to nonvested restricted stock units was $4.1 million, which
is expected to be recognized over a weighted-average period of
approximately 1.7 years.
As of December 31, 2008, 2007 and 2006, excess tax benefits,
resulting principally from stock options, were $1.7 million, $5.1 million
and $3.6 million, respectively.
No stock options have been granted to officers and employees
since February 2002. No stock options have been granted to non-
employee directors since May 2003. Prior to these dates, the Company
had granted stock options for the purchase of its common stock to
issued for exercised stock options and vested restricted stock units.
Options issued under the 1995 Executive Incentive Compensation
Plan generally vested and became exercisable one year following
the date of grant except options issued in 2002 generally vested and
became exercisable two years following the date of grant. Options
issued under the 1995 Non-Employee Director’s Stock Plan generally
became exercisable one year following the date of grant but vested
immediately. The options under both Plans expire ten years from the
date of grant.
Stock option activity for the years ended December 31, 2008, 2007
and 2006 was as follows:
Stock Options
Outstanding, January 1, 2006
Exercised
Terminated and Expired
Outstanding, December 31, 2006
Exercised
Outstanding, December , 00
Exercised
Outstanding, December , 00
Shares
Under
Option (a)
1,498,050 (c)
(468,838)
(1,800)
1,027,412
(422,416)
604,996
(121,176)
483,820
Weighted
Average
Exercise
Price (a)
Aggregate
Intrinsic Value
(in millions) (b)
$15.97
17.03
14.38
$15.49
15.74
$15.30
14.96
$15.39
$26.9
–
–
$23.4
–
$29.9
–
$÷5.7
(a) Stock options and weighted average exercise prices have been restated to reflect the
(b)
(c)
March 2007 two-for-one stock split.
Intrinsic value is defined as the difference between the current market value and the
exercise price.
Included in options outstanding at January 1, 2006 were 681 options granted to SGB key
employees as part of the Company’s acquisition of SGB in 2000. These options were not a part
of the 1995 Executive Compensation Plan, or the 1995 Non-Employee Directors’ Stock Plan.
officers, certain key employees and non-employee directors under two
The total intrinsic value of options exercised during the twelve
stockholder-approved plans. The exercise price of the stock options
months ended December 31, 2008, 2007 and 2006 was $4.5 million,
was the fair value on the grant date, which was the date the Board of
$17.1 million and $10.8 million, respectively.
Directors approved the respective grants. The 1995 Executive Incentive
Options to purchase 483,820 shares were exercisable at December 31,
Compensation Plan authorizes the issuance of up to 8,000,000 shares
2008. The following table summarizes information concerning outstand-
of the Company’s common stock for use in paying incentive compensa-
ing and exercisable options at December 31, 2008.
tion awards in the form of stock options or other equity awards such
as restricted stock, restricted stock units or stock appreciation rights.
The 1995 Non-Employee Directors’ Stock Plan authorizes the issuance
of up to 600,000 shares of the Company’s common stock for equity
awards. At December 31, 2008, there were 2,292,396 and 265,000 shares
available for granting equity awards under the 1995 Executive Incentive
Compensation Plan and the 1995 Non-Employee Directors’ Stock Plan,
Stock Options Outstanding and Exercisable (a)
Range of Exercisable
Prices
Number
Outstanding and
Exercisable
Remaining
Contractual
Life In Years
Weighted
Average
Exercise Price
$12.81–14.50
÷14.65–16.33
÷16.40–23.08
219,715
197,905
66,200
483,820
1.43
3.02
3.47
$13.64
16.29
18.51
respectively. The above referenced authorized and available shares for
(a) All share and price values reflect the effect of the March 2007 two-for-one stock split.
Harsco Corporation 2008 Annual Report
13 Financial Instruments
Off-Balance Sheet Risk
related to these properties. There is no recognition of this potential future
payment in the accompanying financial statements as the Company
believes the potential for making this payment is remote.
As collateral for the Company’s performance and to insurers, the
The Company provided an environmental indemnification for prop-
Company is contingently liable under standby letters of credit, bonds
erty that was sold to a third party in 2006. The term of this guarantee is
and bank guarantees in the amounts of $234.1 million and $159.2 million
three years and the Company would only be required to perform under
at December 31, 2008 and 2007, respectively. These standby letters of
the guarantee if an environmental matter were discovered on the prop-
credit, bonds and bank guarantees are generally in force for up to four
erty. The Company is not aware of any environmental issues related
years. Certain issues have no scheduled expiration date. The Company
to the property. The maximum potential amount of future payments
pays fees to various banks and insurance companies that range from
(undiscounted) related to this guarantee is $0.2 million at December 31,
0.25 percent to 1.60 percent per annum of the instruments’ face value.
2008 and 2007. There is no recognition of this potential future payment
If the Company were required to obtain replacement standby letters of
in the accompanying financial statements as the Company believes the
credit, bonds and bank guarantees as of December 31, 2008 for those
potential for making this payment is remote.
currently outstanding, it is the Company’s opinion that based on current
The Company provided an environmental indemnification for prop-
economic conditions the replacement costs would be higher than the
erty that was sold to a third party in 2006. The term of this guarantee is
present fee structure.
indefinite, and the Company would only be required to perform under
The Company has currency exposures in approximately 50 coun-
the guarantee if an environmental matter were discovered on the prop-
tries. The Company’s primary foreign currency exposures during 2008
erty relating to the time the Company owned the property. The Company
were in the United Kingdom, members of the European Economic and
is not aware of any environmental issues related to this property. The
Monetary Union, Brazil, Poland and South Africa.
maximum potential amount of future payments (undiscounted) related
Off-Balance Sheet Risk – Third Party Guarantees
In connection with the licensing of one of the Company’s trade names
and providing certain management services (the furnishing of selected
employees), the Company guarantees the debt of certain third parties
related to its international operations. These guarantees are provided
to enable the third parties to obtain financing of their operations. The
Company receives fees from these operations, which are included
as Services revenues in the Company’s Consolidated Statements of
Income. The revenue the Company recorded from these entities was
$6.3 million, $3.0 million and $2.2 million for the twelve months ended
December 31, 2008, 2007 and 2006, respectively. The guarantees are
renewed on an annual basis and the Company would only be required
to perform under the guarantees if the third parties default on their
debt. The maximum potential amount of future payments (undiscounted)
related to these guarantees was $2.9 million at December 31, 2008
and 2007. There is no recognition of this potential future payment in
the accompanying financial statements as the Company believes the
potential for making these payments is remote. These guarantees were
renewed in June 2008, September 2008 and November 2008.
The Company provided an environmental indemnification for prop-
erties that were sold to a third party in 2007. The maximum term of this
guarantee is twenty years, and the Company would only be required
to perform under the guarantee if an environmental matter is discovered
on the properties. The Company is not aware of environmental issues
to this guarantee is estimated to be $3.0 million at December 31, 2008
and 2007. There is no recognition of this potential future payment in
the accompanying financial statements as the Company believes the
potential for making this payment is remote.
The Company provides guarantees related to arrangements with
certain customers that include joint and several liability for actions
for which the Company may be partially at fault. The terms of these
guarantees generally do not exceed four years and the maximum
amount of future payments (undiscounted) related to these guarantees
is $3.0 million per occurrence. This amount represents the Company’s
self-insured maximum limitation. There is no specific recognition of
potential future payments in the accompanying financial statements as
the Company is not aware of any claims.
The Company provided a guarantee related to the payment of taxes
for a product line that was sold to a third party in 2005. The term of
this guarantee is five years, and the Company would only be required
to perform under the guarantee if taxes were not properly paid to the
government while the Company owned the product line in accordance
with applicable statutes. The Company is not aware of any instances
of noncompliance related to these statutes. The maximum potential
amount of future payments (undiscounted) related to this guarantee
is estimated to be $1.3 million at December 31, 2008 and 2007. There is
no recognition of any potential future payment in the accompanying
financial statements as the Company believes the potential for making
this payment is remote.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
The Company provided an environmental indemnification for prop-
All derivative instruments are recorded on the balance sheet at fair
erty that was sold to a third party in 2004. The term of this guarantee
value. Derivatives used to hedge foreign-currency-denominated bal-
is seven years and the Company would only be required to perform
ance sheet items are reported directly in earnings along with offsetting
under the guarantee if an environmental matter were discovered on
transaction gains and losses on the items being hedged. Derivatives
the property relating to the time the Company owned the property
used to hedge forecasted cash flows associated with foreign currency
that was not known by the buyer at the date of sale. The Company is
commitments or forecasted commodity purchases may be accounted
not aware of any environmental issues related to this property. The
for as cash flow hedges, as deemed appropriate and if the criteria of
maximum potential amount of future payments (undiscounted) related
SFAS 133 are met. Gains and losses on derivatives designated as cash
to this guarantee is $0.8 million at December 31, 2008 and 2007. There
flow hedges are deferred as a separate component of stockholders’
is no recognition of this potential future payment in the accompanying
equity and reclassified to earnings in a manner that matches the timing
financial statements as the Company believes the potential for making
of the earnings impact of the hedged transactions. The ineffective
this payment is remote.
portion of all hedges, if any, is recognized currently in earnings.
Liabilities for the fair value of each of the guarantee instruments
noted above were recognized in accordance with FASB Interpreta-
tion No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others”
(“FIN 45”). These liabilities are included in Other current liabilities or
Other liabilities (as appropriate) on the Consolidated Balance Sheets.
The recognition of these liabilities did not have a material impact on the
Company’s financial condition or results of operations for the twelve
months ended December 31, 2008 or 2007.
In the normal course of business, the Company provides legal
indemnifications related primarily to the performance of its products
and services and patent and trademark infringement of its goods and
services sold. These indemnifications generally relate to the per-
formance (regarding function, not price) of the respective goods or
services and therefore no liability is recognized related to the fair
value of such guarantees.
Commodity Derivatives
The Company may periodically use derivative instruments to hedge cash
flows associated with selling price exposure to certain commodities. The
Company’s commodity derivative activities are subject to the manage-
ment, direction and control of the Company’s Risk Management Commit-
tee, which approves the use of all commodity derivative instruments.
The following tables summarize the open positions of contracts
qualifying as cash flow hedges at December 31, 2008 and 2007 under
the requirements of SFAS 133. All contracts are with major financial
institutions. The Company may be exposed to credit loss in the event of
non-performance by the other parties to the contracts. The Company
evaluates the creditworthiness of the counterparties and does not
expect default by them.
Commodity Cash Flow Hedges as of December , 00
(In thousands)
Amount Recognized in
Notional
Value (a)
Operating Income
from Continuing
Operations in 2008
Other
Comprehensive
Income(b)
Derivative Instruments and Hedging Activities
The Company conducts business in many different currencies and,
Hedge Type
accordingly, is subject to the inherent risks associated with foreign
exchange rate movements. The financial position and results of opera-
tions of substantially all of the Company’s foreign subsidiaries are
measured using the local currency as the functional currency. Foreign
currency denominated assets and liabilities are translated into U.S.
dollars at the exchange rates existing at the respective balance sheet
dates, and income and expense items are translated at the average
Swap contracts; unsecured,
maturing monthly through
December 2009
Swap contracts and cashless collars
closed in 2008
$10,923
$÷«102
$4,377(c)
–
6,277
–
(a) Notional value is equal to the hedged volume multiplied by the strike price of the derivative.
(b) Amounts are shown pre-tax.
(c) All amounts will be reclassified to earnings over the next twelve months.
Commodity Cash Flow Hedges as of December , 00
exchange rates during the respective periods. The aggregate effects of
(In thousands)
translating the balance sheets of these subsidiaries are deferred as a
separate component of stockholders’ equity.
The Company has used derivative instruments, including swaps
Hedge Type
Amount Recognized in
Notional
Value (a)
Operating Income
from Continuing
Operations in 2007
Other
Comprehensive
Income (b)
and forward contracts, to manage certain foreign currency, commodity
price and interest rate exposures. Derivative instruments are viewed
as risk management tools by the Company and are not used for trading
or speculative purposes.
Cashless Collars; unsecured,
maturing monthly through
November 2008
$6,048
$527
$–
(a) Notional value is equal to the hedged volume multiplied by the strike price of the derivative.
(b) Amounts are shown pre-tax.
0 Harsco Corporation 2008 Annual Report
Although earnings volatility may occur between fiscal quarters due
flow hedges in the amount of $2.1 million at December 31, 2008. These
to hedge ineffectiveness or if the derivatives do not qualify as cash
forward contracts had a net unrealized gain of $6 thousand that was
flow hedges under SFAS 133, the economic substance of the deriva-
included in Other comprehensive income (loss), net of deferred taxes,
tives provides more predictable cash flows by reducing the Company’s
at December 31, 2008. The Company did not elect to treat the remaining
exposure to the commodity price fluctuations.
contracts as hedges under SFAS 133, and mark-to-market gains and
Foreign Currency Forward Exchange Contracts
losses were recognized in net income.
The Company may use derivative instruments to hedge cash flows
Forward Exchange Contracts
related to foreign currency fluctuations. At December 31, 2008 and 2007,
the Company had $293.9 million and $392.2 million contracted amounts,
(In thousands)
respectively, of foreign currency forward exchange contracts out-
standing. These contracts are part of a worldwide program to minimize
foreign currency exchange operating income and balance sheet
exposure. The unsecured contracts outstanding at December 31, 2008
mature within nine months and are with major financial institutions.
The Company may be exposed to credit loss in the event of non-perfor-
mance by the other parties to the contracts. The Company evaluates
the creditworthiness of the counterparties and does not expect default
Australian dollar
Canadian dollar
Canadian dollar
Euros
Euros
British pounds sterling
British pounds sterling
Mexican pesos
South African rand
by them. Foreign currency forward exchange contracts are used to
Total
Type
Sell
Buy
Sell
Buy
Sell
Buy
Sell
Sell
Sell
As of December 31, 2007
U.S. Dollar
Equivalent
Maturity
Recognized
Gain (Loss)
$÷÷1,447
7,149
4,008
197,597
9,005
48,801
115,489
1,318
7,354
$392,168
January 2008
January 2008
January 2008
January 2008
January 2008
January through
March 2008
January 2008
January 2008
January through
May 2008
$÷÷(36)
150
(83)
1,859
66
(222)
3,296
10
(166)
$4,874
hedge commitments, such as foreign currency debt, firm purchase
commitments and foreign currency cash flows for certain export
sales transactions.
The following tables summarize by major currency the contractual
amounts of the Company’s forward exchange contracts in U.S. dollars
as of December 31, 2008 and 2007. The “Buy” amounts represent the
U.S. dollar equivalent of commitments to purchase foreign currencies,
and the “Sell” amounts represent the U.S. dollar equivalent of commit-
ments to sell foreign currencies.
Forward Exchange Contracts
As of December 31, 2008
Maturity
Recognized
Gain (Loss)
At December 31, 2007, the Company held forward exchange
contracts which were used to offset certain future payments between
the Company and its various subsidiaries, vendors or customers. The
Company did not have any outstanding forward contracts designated
as SFAS 133 cash flow hedges at December 31, 2007, and mark-to-
market gains and losses were recognized in net income.
In addition to foreign currency forward exchange contracts, the
Company designates certain loans as hedges of net investments in
foreign subsidiaries. The Company recorded charges of $7.6 million
and $12.8 million during 2008 and 2007, respectively, as Accumulated
other comprehensive expense, which is a separate component of
stockholders’ equity, related to hedges of net investments.
(In thousands)
Canadian dollar
Euros
Euros
British pounds sterling
British pounds sterling
South African rand
Other currencies
Other currencies
Total
Type
Sell
Sell
Buy
Sell
Buy
Sell
Sell
Buy
U.S. Dollar
Equivalent
$÷÷1,342
19,749
113,084
56,671
98,878
2,175
292
1,692
$293,883
January through
September 2009
January through
March 2009
January through
August 2009
January 2009
January through
February 2009
January 2009
January 2009
January through
May 2009
$÷÷(14)
(248)
Cross-Currency Interest Rate Swap
In May 2008, the Company entered into a ten-year, $250.0 million cross-
5,625
currency interest rate swap in conjunction with the May 2008 note
1,450
(3,335)
(41)
3
(62)
$3,378
issuance (see Note 6, “Debt and Credit Agreements”) in order to lock
in a fixed euro interest rate for $250.0 million of the borrowing. Under
the swap, the Company receives interest based on a fixed U.S. dollar
rate and pays interest on a fixed euro rate on the outstanding notional
principal amounts in dollars and euros, respectively. The cross-currency
interest rate swap is recorded in the consolidated balance sheet at
fair value, with changes in value attributed to the effect of the swaps’
At December 31, 2008, the Company held forward exchange con-
interest spread recorded in Accumulated other comprehensive income
tracts which were used to offset certain future payments between the
which is a separate component of stockholders’ equity. At December 31,
Company and its various subsidiaries, vendors or customers. The Com-
2008, the fair value asset of the swap was $49.4 million.
pany had outstanding forward contracts designated as SFAS 133 cash
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
Concentrations of Credit Risk
between (1) market participant assumptions developed based on mar-
Financial instruments, which potentially subject the Company to concen-
ket data obtained from independent sources (observable inputs) and
trations of credit risk, consist principally of cash and cash equivalents and
(2) an entity’s own assumptions about market participant assumptions
accounts receivable. The Company places its cash and cash equivalents
developed based on the best information available in the circumstances
with high-quality financial institutions and, by policy, limits the amount of
(unobservable inputs). The fair value hierarchy consists of three broad
credit exposure to any one institution.
levels, which gives the highest priority to unadjusted quoted prices in
Concentrations of credit risk with respect to accounts receivable
active markets for identical assets or liabilities (Level 1) and the lowest
are generally limited in the Harsco Infrastructure Segment and the “All
priority to unobservable inputs (Level 3). The three levels of the fair
Other” Category due to the Company’s large number of customers and
value hierarchy under SFAS 157 are described below:
their dispersion across different industries and geographies. However,
• Level 1 – Unadjusted quoted prices in active markets that are
the Company’s Harsco Metals Segment has several large customers
accessible at the measurement date for identical, unrestricted
throughout the world with significant accounts receivable balances.
assets or liabilities.
Additionally, consolidation in the global steel industry has increased the
• Level 2 – Inputs other than quoted prices included within Level 1 that
Company’s exposure to specific customers. Additional consolidation is
are observable for the asset or liability, either directly or indirectly,
possible. Should transactions occur involving some of the steel indus-
including quoted prices for similar assets or liabilities in active
try’s larger companies, which are customers of the Company, it would
markets; quoted prices for identical or similar assets or liabilities in
result in an increase in concentration of credit risk for the Company.
markets that are not active; inputs other than quoted prices that are
The Company generally does not require collateral or other security
observable for the asset or liability (e.g., interest rates); and inputs
to support customer receivables. If a receivable from one or more of
that are derived principally from or corroborated by observable
the Company’s larger customers becomes uncollectible, it could have a
market data by correlation or other means.
material effect on the Company’s results of operations or cash flows.
• Level 3 – Inputs that are both significant to the fair value measure-
Fair Value of Financial Instruments
ment and unobservable.
The carrying amounts of cash and cash equivalents, accounts receiv-
In instances in which multiple levels of inputs are used to measure
able, accounts payable, accrued liabilities, and short-term borrowings
fair value, hierarchy classification is based on the lowest level input
approximate fair value due to the short-term maturities of these assets
that is significant to the fair value measurement in its entirety. The
and liabilities. At December 31, 2008 and 2007, total fair value of long-
Company’s assessment of the significance of a particular input to the
term debt, including current maturities, was $900 million and $1,049 mil-
fair value measurement in its entirety requires judgment, and considers
lion, respectively, compared to carrying value of $895 million and
factors specific to the asset or liability.
$1,020 million, respectively. Fair values for debt are based on quoted
The following table presents information about the Company’s
market prices for the same or similar issues or on the current rates
assets and liabilities measured at fair value on a recurring basis at
offered to the Company for debt of the same remaining maturities.
December 31, 2008, and indicates the fair value hierarchy of the valua-
Effective January 1, 2008, the Company adopted SFAS 157, as
tion techniques utilized by the Company to determine such fair value.
amended by FSP SFAS 157-2, which provides a framework for measur-
Fair Value Measurements as of December , 00
ing fair value under GAAP. As defined in SFAS 157, fair value is the price
(In thousands)
Level 1
Level 2
Level 3
Total
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date (exit price). The Company utilizes market data or assumptions that
Assets
Commodity derivatives
Foreign currency forward exchange
contracts
the Company believes market participants would use in pricing the
Cross-currency interest rate swap
asset or liability, including assumptions about risk and the risks inherent
in the inputs to the valuation technique.
This standard is now the single source in GAAP for the definition
Liabilities
Foreign currency forward exchange
contracts
–
–
–
–
$÷4,479
7,332
49,433
3,954
–
–
–
–
$÷4,479
7,332
49,433
3,954
of fair value, except for the fair value of leased property as defined in
The Company primarily applies the market approach for recurring
SFAS 13. SFAS 157 establishes a fair value hierarchy that distinguishes
fair value measurements and endeavors to utilize the best available
Harsco Corporation 2008 Annual Report
information. Accordingly, the Company utilizes valuation techniques
Harsco Metals Segment
that maximize the use of observable inputs, such as forward rates,
This segment provides on-site, outsourced services to steel mills and
interest rates, the Company’s credit risk and counterparties’ credit risks,
other metal producers such as aluminum and copper. Services include
and minimize the use of unobservable inputs. The Company is able to
slag processing; semi-finished inventory management; material
classify fair value balances based on the observability of those inputs.
handling; scrap management; in-plant transportation; and a variety of
Commodity derivatives, foreign currency forward exchange contracts,
other services.
and cross-currency interest rate swaps are classified as Level 2 fair
value based upon pricing models using market-based inputs. Model
inputs can be verified and valuation techniques do not involve signifi-
cant management judgment.
FSP SFAS 157-2, issued in February 2008, delayed until Janu-
ary 1, 2009 the effective date of SFAS 157 for nonfinancial assets and
nonfinancial liabilities that are measured on a nonrecurring basis. The
Company’s nonfinancial assets consist principally of property, plant
and equipment, goodwill, and other intangible assets associated with
acquired businesses. For these assets, measurement at fair value in
periods subsequent to their initial recognition will be applicable if one
or more of these assets are determined to be impaired. When and if
recognition of these assets at their fair value is necessary, such mea-
surements would be determined utilizing principally Level 3 inputs.
All Other Category – Harsco Minerals & Rail
Major products and services include railway track maintenance
equipment and services; minerals and recycling technologies; gran-
ules for asphalt roofing shingles and abrasives for industrial surface
preparation derived from coal slag; industrial grating; air-cooled heat
exchangers; and boilers, water heaters and process equipment,
including industrial blenders, dryers and mixers.
Major customers include private and government-owned railroads
and urban mass transit systems worldwide; steel mills; industrial plants
and the non-residential, commercial and public construction and
retrofit markets; the natural gas exploration and processing industry;
asphalt roofing manufacturers; and the chemical, food processing and
pharmaceutical industries.
Other Information
14 Information by Segment and
The measurement basis of segment profit or loss is operating income.
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 Informa-
tion” (“SFAS 131”). This approach is based on the way management
organizes and reports the segments within the enterprise for making
operating decisions and assessing performance. The Company’s
reportable segments are identified based upon differences in products,
services and markets served.
The Company has two reportable segments and an “All Other”
category labeled Harsco Minerals & Rail. These segments and the
types of products and services offered include the following:
Harsco Infrastructure Segment
Sales of the Company in the United States and the United Kingdom
exceeded 10% of consolidated sales with 32% and 17%, respectively,
in 2008; 31% and 20%, respectively, in 2007; and 32% and 22%, respec-
tively, in 2006. There are no significant inter-segment sales.
In 2008, 2007 and 2006, sales to one customer, ArcelorMittal, princi-
pally in the Harsco Metals Segment were $416.6 million, $396.2 million
and $351.0 million, respectively, which represented more than 10% of
the Company’s consolidated sales for those years. These sales were
provided under multiple long-term contracts at several mill sites. In
addition, the Harsco Metals Segment is dependent largely on the global
steel industry, and in 2008, 2007 and 2006 there were two customers,
including ArcelorMittal, that each provided in excess of 10% of this
Segment’s revenues under multiple long-term contracts at several mill
sites. The loss of any one of these contracts would not have a material
Major services include project engineering and equipment installation;
adverse impact upon the Company’s financial position or cash flows;
as well as the rental and sale of scaffolding, shoring and concrete
however, it could have a material effect on quarterly or annual results
forming systems for industrial maintenance and capital improvement
of operations. Additionally, these customers have significant accounts
projects, non-residential construction, and international multi-dwelling
receivable balances. Further consolidation in the global steel industry
residential construction projects.
is possible. Should transactions occur involving some of the Company’s
Services are provided to industrial and petrochemical plants; the
larger steel industry customers, it would result in an increase in con-
infrastructure construction, repair and maintenance markets; commer-
centration of credit risk for the Company.
cial and industrial construction contractors; and public utilities.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
Corporate assets include principally cash, insurance receivables, prepaid pension costs and U.S. deferred income taxes. Net Property, Plant and
Equipment in the United States represented 24%, 24% and 30% of total net Property, Plant and Equipment as of December 31, 2008, 2007 and 2006,
respectively. Net Property, Plant and Equipment in the United Kingdom represented 15%, 20% and 23% of total Net Property, Plant and Equipment as
of December 31, 2008, 2007 and 2006, respectively.
Segment Information
(In thousands)
Harsco Infrastructure Segment
Harsco Metals Segment
Segment Totals
All Other Category – Harsco Minerals & Rail
General Corporate
00
2007
2006
Twelve Months Ended December 31,
Sales
$1,540,258
1,577,720
3,117,978
849,604
240
Operating
Income
(Loss)
$185,382
85,344
270,726
150,922
(9,660)
Sales
$1,415,873
1,522,274
2,938,147
749,997
16
Operating
Income
(Loss)
$183,752
134,504
318,256
142,191
(2,642)
Sales
$1,080,924
1,366,530
2,447,454
578,159
–
Operating
Income
(Loss)
$120,382
147,798
268,180
77,466
(1,337)
Total
$3,967,822
$411,988
$3,688,160
$457,805
$3,025,613
$344,309
Reconciliation of Segment Operating Income to Consolidated Income from Continuing Operations Before Income Taxes and Minority Interest
(In thousands)
Segment operating income
All Other Category – Harsco Minerals & Rail
General corporate expense
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
00
$270,726
150,922
(9,660)
411,988
901
3,608
(73,160)
$343,337
Twelve Months Ended December 31,
2007
$318,256
142,191
(2,642)
457,805
1,049
4,968
(81,383)
$382,439
2006
$268,180
77,466
(1,337)
344,309
192
3,582
(60,479)
$287,604
Segment Information
(In thousands)
Harsco Infrastructure Segment
Harsco Metals Segment
Gas Technologies Segment
Segment Totals
All Other Category – Harsco Minerals & Rail
Corporate
00
$1,607,171
1,338,633
–
2,945,804
565,348
51,818
Assets
2007
$1,563,630
1,585,921
–
3,149,551
587,182
168,697
2006
$1,239,892
1,401,603
271,367
2,912,862
287,482
126,079
Depreciation and Amortization (a)
00
2007
2006
$110,227
181,180
–
291,407
42,580
3,962
$÷90,477
167,179
–
257,656
44,498
3,019
$÷69,781
151,005
–
220,786
18,922
1,863
Total
$3,562,970
$3,905,430
$3,326,423
$337,949
$305,173
$241,571
(a) Excludes Depreciation and Amortization for the Gas Technologies Segment in the amounts of $1.2 million and $11.4 million for 2007 and 2006, respectively because this Segment was reclassified
to Discontinued Operations.
Capital Expenditures
(In thousands)
Harsco Infrastructure Segment
Harsco Metals Segment
Gas Technologies Segment
Segment Totals
All Other Category – Harsco Minerals & Rail
Corporate
Total
Harsco Corporation 2008 Annual Report
00
$226,559
205,766
–
432,325
23,025
2,267
$457,617
2007
$228,130
193,244
8,618
429,992
11,263
2,328
$443,583
2006
$138,459
161,651
9,330
309,440
27,635
3,098
$340,173
Information by Geographic Area (a)
(In thousands)
United States
United Kingdom
All Other
Revenues from Unaffiliated Customers (b)
Net Property, Plant and Equipment (c)
00
2007
2006
00
2007
2006
$1,260,967
677,598
2,029,257
$1,152,623
746,261
1,789,276
$÷«959,486
676,520
1,389,607
$÷«361,071
225,368
896,394
$÷«364,950
312,375
857,889
$÷«401,997
298,582
621,888
Totals including Corporate
$3,967,822
$3,688,160
$3,025,613
$1,482,833
$1,535,214
$1,322,467
(a) Revenues are attributed to individual countries based on the location of the facility generating the revenue.
(b) Excludes the sales of the Gas Technologies Segment.
(c)
Includes net Property, Plant and Equipment for the Gas Technologies Segment for 2006.
Information about Products and Services
(In thousands)
Product Group
Services and equipment for infrastructure construction and maintenance
On-site services to metal producers
Railway track maintenance services and equipment
Heat exchangers
Industrial grating products
Minerals and recycling technologies (b)
Industrial abrasives and roofing granules
Powder processing equipment and heat transfer products
General Corporate
Consolidated Revenues
(a) Excludes the sales of the Gas Technologies Segment.
(b) Acquired February 2007.
Revenues from Unaffiliated Customers (a)
00
2007
2006
$1,540,258
1,577,720
277,595
174,513
149,168
127,140
74,118
47,070
240
$3,967,822
$1,415,873
1,522,274
232,402
152,493
130,919
123,240
68,165
42,778
16
$3,688,160
$1,080,924
1,366,530
231,625
124,829
107,048
–
73,112
41,545
–
$3,025,613
15 other (Income) and expenses
Net Gains
(In thousands)
During 2008, 2007 and 2006, the Company recorded pre-tax Other
(income) and expenses from continuing operations of $22.0 million,
$3.4 million and $2.5 million, respectively. The major components of this
income statement category are as follows:
Harsco Infrastructure Segment
Harsco Metals Segment
All Other Category – Harsco Minerals & Rail
Total
00
2007
2006
$(10,399)
(4,538)
(986)
$(15,923)
$(2,342)
(3)
(3,246)
$(5,591)
$(2,510)
(2,823)
(117)
$(5,450)
Other (Income) and Expenses
(In thousands)
Net gains
Impaired asset write-downs
Employee termination benefit costs
Costs to exit activities
Other expense
Total
Net Gains
00
2007
2006
from the sale of assets in the investing activities section of the Consoli-
Cash proceeds associated with these gains are included in Proceeds
$(15,923)
12,588
19,027
5,269
989
$«21,950
$(5,591)
903
6,552
1,278
301
$«3,443
$(5,450)
221
3,495
1,290
2,920
$«2,476
dated Statements of Cash Flows.
Impaired Asset Write-downs
Impairment losses are measured as the amount by which the carrying
amount of assets exceeded their fair value. Fair value is estimated based
upon the expected future realizable cash flows including anticipated
selling prices. Non-cash impaired asset write-downs are included in
Net gains are recorded from the sales of redundant properties (primar-
Other, net in the Consolidated Statements of Cash Flows as adjustments
ily land, buildings and related equipment) and non-core assets. In 2008,
to reconcile net income to net cash provided by operating activities. In
gains related to assets sold principally in the United States, Australia
2008, impaired asset write-downs of $12.6 million were recorded prin-
and the United Kingdom. In 2007, gains related to assets sold principally
cipally in the Harsco Metals Segment due to contract terminations and
in the United States and in 2006, gains related to assets sold principally
costs associated with existing underperforming contracts. Impaired
in Europe, South America and the United States.
asset write-downs related to assets principally in Australia, the United
Kingdom and the United States.
Harsco Corporation 2008 Annual Report
notes to consolidated Financial Statements
Employee Termination Benefit Costs
In 2007 and 2006, exit costs incurred were $1.3 million in each year, and
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
principally related to relocation costs, lease run-out costs and lease
Activities,” (“SFAS 146”) addresses involuntary termination costs
termination costs.
associated with one-time benefit arrangements provided as part of
Costs Associated with Exit or Disposal Activities
an exit or disposal activity. These costs and the related liabilities are
(In thousands)
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-
Harsco Infrastructure Segment
Harsco Metals Segment
All Other Category – Harsco Minerals & Rail
Corporate
going benefit arrangements, or in certain countries where statutory
Total
requirements dictate a minimum required benefit, are recognized when
00
2007
2006
$1,724
1,092
5
2,448
$5,269
$÷«803
375
100
–
$1,278
$÷«146
189
955
–
$1,290
they are probable and estimable, in accordance with SFAS No. 112,
See Note 17, “2008 Restructuring Program,” for additional information
“Employers’ Accounting for Postemployment Benefits,” (“SFAS 112”).
on net gains, impaired asset write-downs, employee termination benefit
The total amount of employee termination benefit costs incurred for
costs and costs associated with exit and disposal activities.
the years 2008, 2007 and 2006 is detailed in the table below. None of the
actions are expected to incur any additional costs. The terminations in
16 components of accumulated other
2008 related primarily to the fourth quarter 2008 restructuring program
comprehensive Income (loss)
and occurred globally, but primarily in Western Europe and the United
States. The terminations in 2007 and 2006 occurred principally in
Europe and the United States.
Employee Termination Benefit Costs
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:
(In thousands)
00
2007
2006
Accumulated Other Comprehensive Income (Loss) – Net of Tax
Harsco Infrastructure Segment
Harsco Metals Segment
All Other Category – Harsco Minerals & Rail
Corporate
Total
$÷5,317
11,961
1,648
101
$19,027
$1,130
4,935
382
105
$6,552
$÷«799
1,820
821
55
$3,495
(In thousands)
Cumulative foreign exchange translation adjustments
Fair value of effective cash flow hedges
Pension liability adjustments
Unrealized gain (loss) on marketable securities
December 31
00
2007
$÷«21,295
21,001
(250,536)
(59)
$«175,867
189
(178,568)
11
Costs Associated with Exit or Disposal Activities
Costs associated with exit or disposal activities are recognized in
Total Accumulated other comprehensive income (loss)
$(208,299)
$÷÷(2,501)
accordance with SFAS 146, which addresses involuntary termination
17 2008 restructuring Program
costs (as discussed above) and other costs associated with exit or
disposal activities (exit costs). Costs to terminate a contract that is not
a capital lease are recognized when an entity terminates the contract
or when an entity ceases using the right conveyed by the contract.
This includes the costs to terminate the contract before the end of its
term or the costs that will continue to be incurred under the contract
for its remaining term without economic benefit to the entity (e.g., lease
run-out costs). Other costs associated with exit or disposal activities
(e.g., costs to consolidate or close facilities and relocate equipment
or employees) are recognized and measured at their fair value in the
period in which the liability is incurred. In 2008, $5.3 million of exit costs
were incurred, principally lease run-out costs and relocation costs for
Corporate, and the Harsco Infrastructure and Harsco Metals Segments.
As a result of the deepening financial and economic crisis, in the
fourth quarter of 2008 the Company initiated a restructuring program
designed to improve organizational efficiency and enhance profitability
and shareholder value by generating sustainable operating expense
savings. Under this program, the Company is principally exiting certain
underperforming contracts with customers, closing certain facilities
and reducing the global workforce. Restructuring costs were incurred
primarily at the Harsco Metals and Harsco Infrastructure Segments.
In the fourth quarter of 2008, the Company recorded net pre-tax
restructuring and other related charges totaling $36.1 million, including
$28.0 million in Other expenses, $5.8 million reduction in services reve-
nue, a net $1.5 million related to pension curtailments and $0.8 million of
other costs. These restructuring actions are expected to be completed
over the next twelve months, but principally in the first quarter of 2009.
Harsco Corporation 2008 Annual Report
At December 31, 2008, the Company completed workforce reduc-
cost to exit activities are targeted for completion during 2009, principally
tions of 407 employees of a total expected workforce reduction of 1,429
in the first quarter.
employees. The majority of the remaining workforce reductions and
The restructuring accrual attributable to each segment at Decem-
(In thousands)
Harsco Infrastructure Segment
Impaired asset write-downs
Employee termination benefit costs
Cost to exit activities and contracts
Pension curtailment gain
Total Harsco Infrastructure Segment
Harsco Metals Segment
Impaired asset write-downs
Employee termination benefit costs
Cost to exit activities and contracts and related impaired asset write-downs
Pension curtailment charge
Total Harsco Metals Segment
All Other Category – Harsco Minerals & Rail
Employee termination benefit costs
Pension curtailment charge
Total All Other Category – Harsco Minerals & Rail
Corporate
Employee termination benefit costs
Cost to exit activities
Total Corporate
Total
ber 31 is as follows:
Expense
Utilization of Reserves
Cash Expenditures
Remaining Accrual
December 31 2008
$÷1,147
2,286
2,508
(973)
4,968
1,268
11,811
12,396
2,178
27,653
654
246
900
113
2,448
2,561
$36,082
$÷(1,147)
–
–
973
(174)
(1,268)
–
(11,740)
(2,178)
(15,186)
–
(246)
(246)
–
–
–
$÷÷÷÷–
(480)
(545)
–
(1,025)
–
(1,923)
–
–
(1,923)
(123)
–
(123)
–
–
–
$(15,606)
$(3,071)
$÷÷÷÷«–
1,806
1,963
–
3,769
–
9,888
656
–
10,544
531
–
531
113
2,448
2,561
$17,405
The remaining cash expenditures related to the 2008 actions of
in the Consolidated Balance Sheets as a reduction in the value of the
$17.4 million are expected to be paid within the next twelve months. The
respective long-term assets. The cost to exit activities in the Harsco
pension curtailment (gains) charges were recorded primarily as a com-
Metals Segment represents impaired asset write-downs of $5.9 million
ponent of cost of services sold. See Note 8, “Employee Benefit Plans,”
and a customer concession of $5.8 million, which were both directly
for additional information. Impaired asset write-downs are reflected
related to the exiting of underperforming contracts. See Note 15, “Other
(Income) and Expenses,” for additional information.
market risks
Set forth below and elsewhere in this report and in other documents
non-U.S. dollar-denominated assets and liabilities, other examples
the Company files with the Securities and Exchange Commission are
of risk include customer concentration in Harsco Metals and certain
risks and uncertainties that could cause the Company’s actual results
businesses of the “All Other” Category, collectibility of receivables,
to materially differ from the results contemplated by the forward-look-
volatility of the financial markets and their effect on pension plans,
ing statements contained in this report and in other documents the
and global economic and political conditions.
Company files with the Securities and Exchange Commission.
The financial markets in the United States, Europe and Asia experi-
Market Risk
In the normal course of business, the Company is routinely sub-
jected to a variety of risks. In addition to the market risk associated
with interest rate and currency movements on outstanding debt and
enced extreme disruption in the last half of 2008 and into 2009, including,
among other things, severely diminished liquidity and credit availability
for many business entities, declines in consumer confidence, negative
economic growth, declines in real estate values, increases in unemploy-
ment rates, significant volatility in equities, rating agency downgrades,
Harsco Corporation 2008 Annual Report
and uncertainty about economic stability. This has led to a global reces-
an increase in the value of the U.S. dollar relative to the foreign curren-
sion. Governments across the globe have taken unprecedented actions,
cies in which the Company earns its revenues generally has a negative
including economic stimulus programs, intended to address these
impact on operating income, whereas a decrease in the value of the U.S.
difficult market conditions. These economic uncertainties affect all busi-
dollar tends to have the opposite effect. The Company’s principal foreign
nesses in a number of ways, making it difficult to accurately forecast
currency exposures are to the British pound sterling and the euro.
and plan future business activities.
Compared with the corresponding period in 2007, the average values
The continuing disruption in the credit markets has severely
of major currencies changed as follows in relation to the U.S. dollar during
restricted access to capital for many companies. If credit markets
2008, impacting the Company’s sales and income:
continue to deteriorate, the Company’s ability to incur additional indebt-
edness to fund operations or refinance maturing obligations as they
• British pound sterling
• euro
become due may be significantly constrained. The Company is unable
• South African rand
to predict the likely duration and severity of the current disruptions in
• Brazilian real
the credit and financial markets and adverse global economic condi-
• Canadian dollar
tions. While these conditions have not impaired the Company’s ability to
• Australian dollar
access credit markets and finance operations at this time, if the current
• Polish zloty
Weakened by 10%
Strengthened by 6%
Weakened by 17%
Strengthened by 5%
Relatively constant
Relatively constant
Strengthened by 13%
uncertain economic conditions continue or further deteriorate, the
Company’s business and results of operations could be materially and
adversely affected.
The Company has operations in several countries in the Middle
East, including Bahrain, Egypt, Saudi Arabia, United Arab Emirates and
Qatar, which are geographically close to Iraq, Iran, Israel, Lebanon and
other countries with a continued high risk of armed hostilities. During
2008, 2007 and 2006, the Company’s Middle East operations contributed
approximately $66.7 million, $44.6 million and $34.8 million, respectively,
to the Company’s operating income. Additionally, the Company has
Compared with exchange rates at December 31, 2007, the values of
major currencies changed as follows as of December 31, 2008:
• British pound sterling
• euro
• South African rand
• Brazilian real
• Canadian dollar
• Australian dollar
• Polish zloty
Weakened by 36%
Weakened by 5%
Weakened by 37%
Weakened by 30%
Weakened by 22%
Weakened by 23%
Weakened by 20%
operations in and sales to countries that have encountered outbreaks
The Company’s foreign currency exposures increase the risk of income
of communicable diseases (e.g., Acquired Immune Deficiency Syndrome
statement, balance sheet and cash flow volatility. If the above currencies
(“AIDS”) and others). In countries in which such outbreaks occur,
change materially in relation to the U.S. dollar, the Company’s financial
worsen or spread to other countries, the Company may be negatively
position, results of operations, or cash flows may be materially affected.
impacted through reduced sales to and within those countries and other
To illustrate the effect of foreign currency exchange rate changes
countries impacted by such diseases.
in certain key markets of the Company, in 2008, revenues would have
Exchange Rate Fluctuations May Adversely Impact the
Company’s Business
Fluctuations in foreign exchange rates between the U.S. dollar and the
over 40 other currencies in which the Company conducts business may
adversely impact the Company’s operating income and income from
continuing operations in any given fiscal period. Approximately 68%
and 69% of the Company’s sales and approximately 61% and 68% of the
Company’s operating income from continuing operations for the years
ended December 31, 2008 and 2007, respectively, were derived from
operations outside the United States. More specifically, approximately
17% and 20% of the Company’s revenues were derived from operations
in the United Kingdom during 2008 and 2007, respectively. Addition-
ally, approximately 26% of the Company’s revenues were derived from
operations with the euro as their functional currency during both 2008
and 2007. Given the structure of the Company’s revenues and expenses,
been approximately 1% or $30.8 million less and operating income
would have been approximately 1% or $3.3 million less if the average
exchange rates for 2007 were utilized. A similar comparison for 2007
would have decreased revenues approximately 5% or $166.9 mil-
lion, while operating income would have been approximately 4% or
$16.5 million less if the average exchange rates for 2007 would have
remained the same as 2006. If the U.S. dollar weakens in relation to
the euro and British pound sterling, the Company would expect to see
a positive impact on future sales and income from continuing opera-
tions as a result of foreign currency translation. Additionally, based
on current foreign currency exchange rates, earnings for 2009 will
be significantly negatively impacted in comparison to 2008. Currency
changes also result in assets and liabilities denominated in local cur-
rencies being translated into U.S. dollars at different amounts than at
the prior period end. If the U.S. dollar weakens in relation to currencies
Harsco Corporation 2008 Annual Report
in countries in which the Company does business, the translated values
cant assumptions used to estimate defined benefit pension income or
of the related assets and liabilities, and therefore stockholders’ equity,
expense for the upcoming year are the discount rate and the expected
would increase. Conversely, if the U.S. dollar strengthens in relation to
long-term rate of return on plan assets. Significant changes in key eco-
currencies in countries in which the Company does business, the trans-
nomic indicators may materially affect the Company’s financial position,
lated values of the related assets, liabilities, and therefore stockholders’
results of operations, or cash flows. These key economic factors would
equity, would decrease.
also likely affect the amount of cash the Company would contribute to
Although the Company engages in foreign currency forward exchange
the defined benefit pension plans. For a discussion regarding how the
contracts and other hedging strategies to mitigate foreign exchange risk,
Company’s financial statements can be affected by defined benefit pen-
hedging strategies may not be successful or may fail to offset the risk.
sion plan accounting policies, see the Pension Benefits section of the
The Company has a Foreign Currency Risk Management Committee that
Application of Critical Accounting Policies in “Management’s Discus-
develops and implements strategies to mitigate these risks.
sion and Analysis of Financial Condition and Results of Operations.”
In addition, competitive conditions in the Company’s manufacturing
In response to adverse market conditions during 2002 and 2003,
businesses may limit the Company’s ability to increase product prices in
the Company conducted a comprehensive global review of its defined
the face of adverse currency movements. Sales of products manufac-
benefit pension plans in order to formulate a plan to make its long-term
tured in the United States for the domestic and export markets may be
pension costs more predictable and affordable. In 2008, as a response
affected by the value of the U.S. dollar relative to other currencies. Any
to worsening economic conditions, the Company implemented design
long-term strengthening of the U.S. dollar could depress demand for
changes for additional defined benefit plans, of which the principal
these products and reduce sales and may cause translation gains or
change involved converting future pension benefits for many of the
losses due to the revaluation of accounts payable, accounts receiv-
Company’s non-union employees in the United Kingdom from a defined
able and other asset and liability accounts. Conversely, any long-term
benefit plan to a defined contribution plan. Defined benefit pension
weakening of the U.S. dollar could improve demand for these products
expense is expected to increase by approximately $28 million in 2009
and increase sales and may cause translation gains or losses due to
when compared with 2008.
the revaluation of accounts payable, accounts receivable and other
The Company’s pension committee continues to evaluate alternative
asset and liability accounts.
The Company’s cash flows and earnings are subject to changes in
interest rates.
The Company’s total debt as of December 31, 2008 was $1.0 billion. Of
this amount, approximately 12.0% had variable rates of interest and
88.0% had fixed rates of interest. The weighted average interest rate of
total debt was approximately 5.8%. At current debt levels, a one-per-
centage increase/decrease in variable interest rates would increase/
strategies to further reduce overall pension expense including: conver-
sion of certain remaining defined benefit plans to defined contribution
plans; the on-going evaluation of investment fund managers’ perfor-
mance; the balancing of plan assets and liabilities; the risk assessment
of all multi-employer pension plans; the possible merger of certain
plans; the consideration of incremental cash contributions to certain
plans; and other changes that are likely to reduce future pension
expense volatility and minimize risk.
decrease interest expense by approximately $1.2 million per year.
Energy prices impact the Company’s operating costs and profitability.
The Company’s defined benefit pension expense is directly affected by
the equity and bond markets.
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 actuar-
ial assumptions used in determining annual pension expense, pension
liabilities and the valuation of the assets in the Company’s defined
benefit pension plans.
The Company’s earnings may be positively or negatively impacted
by the amount of income or expense the Company records for defined
benefit pension plans. The Company calculates income or expense for
the plans using actuarial valuations that reflect assumptions relating
to financial market and other economic conditions. The most signifi-
Worldwide political and economic conditions, an imbalance in the
supply and demand for oil, extreme weather conditions and armed
hostilities in oil-producing regions, among other factors, may result in
an increase in the volatility of energy costs, both on a macro basis and
for the Company specifically. In the first half of 2008, unprecedented
increases in oil prices were incurred, while in the second half of 2008,
oil prices declined sharply to levels below 2007. In 2008, 2007 and 2006,
energy costs have approximated 4.5%, 3.7% and 3.9% of the Company’s
revenue, respectively. To the extent that increased energy costs cannot
be passed to customers in the future, the financial condition, results of
operations and cash flows of the Company may be adversely affected.
To the extent that reduced energy costs are not passed to customers in
the future, this may have a favorable impact on the financial condition,
results of operations and cash flows of the Company.
Harsco Corporation 2008 Annual Report
Board of Directors and officers
(As of March 10, 2009)
Carolyn F. Scanlan 2, 3
President and Chief Executive Officer
The Hospital & Healthsystem
Association of Pennsylvania
Director since 1998
James I. Scheiner 2, 3
Vice President
Century Engineering
Director since 1995
Andrew J. Sordoni, III 1, 3, 4C
Chairman
Sordoni Construction Services, Inc.
Director since 1988
Dr. Robert C. Wilburn 1, 4
President
The Gettysburg Foundation
Director since 1986
Serves as Lead Director
Board Committees
1 Executive Committee
2 Audit Committee
3 Management Development and
Compensation Committee
4 Nominating and Corporate Governance
Committee
C Indicates Committee Chair
Board of Directors
Salvatore D. Fazzolari 1C
Chairman and Chief Executive Officer
Harsco Corporation
Director since 2002
Geoffrey D. H. Butler
President
Harsco Corporation
Director since 2002
Kathy G. Eddy 1, 2C, 4
CPA and Founding Partner
McDonough, Eddy, Parsons & Baylous, AC
Director since 2004
Stuart E. Graham 2
Retired Chief Executive Officer
Skanska AB
Chairman
Skanska USA
Director since 2009
Terry D. Growcock 3, 4
Retired Chairman
The Manitowoc Company
Director since 2008
Jerry J. Jasinowski 4
Former President
The Manufacturing Institute
Director since 1999
Henry W. Knueppel 3
Chairman and Chief Executive Officer
Regal Beloit Corporation
Director since 2008
D. Howard Pierce 1, 2, 3C
Retired President and Chief Executive Officer
ABB Inc.
Director since 2001
0 Harsco Corporation 2008 Annual Report
0 Harsco Corporation 2008 Annual Report
corporate officers
Salvatore D. Fazzolari
Chairman and Chief Executive Officer
Geoffrey D. H. Butler
President
Richard C. Neuffer
Sr. Vice President
Mark E. Kimmel
Sr. Vice President, Chief Administrative Officer,
General Counsel and Corporate Secretary
Stephen J. Schnoor
Sr. Vice President and Chief Financial Officer
Scott H. Gerson
Vice President and Chief Information Officer
Michael A. Higgins
Vice President – Audit
Michael H. Kolinsky
Vice President – Taxes
Richard A. Sullivan
Vice President – Business Transformation
Eugene M. Truett
Vice President – Investor Relations and Credit
Gerald F. Vinci
Vice President – Human Resources Americas
Richard M. Wagner
Vice President and Controller
Sr. operations executives
Geoffrey D. H. Butler
Chief Executive Officer
Harsco Infrastructure and Harsco Metals
John W. Barrett
Chief Operating Officer
Harsco Infrastructure
Richard C. Neuffer
Chief Executive Officer
Harsco Minerals & Rail
Stockholder Information
company news
Company information, archived news releases and SEC
Quarterly Share Price and
Dividend Information
filings are available free of charge 24 hours a day, seven
Harsco Corporation common stock is listed on the New York
days a week via Harsco’s website at www.harsco.com.
Stock Exchange (NYSE) under ticker symbol HSC. At year-
Harsco’s quarterly earnings conference calls and other
end 2008, there were 80,174,536 shares outstanding and
significant investor events are posted when they occur.
approximately 22,000 stockholders.
Securities analysts, portfolio managers, other represen-
As shown below, during 2008, the Company’s common
tatives of institutional investors and other interested parties
stock traded in a range of $17.55 to $64.75 and closed at $27.68
seeking information about Harsco should contact:
at year-end. High and low per share data are as quoted on
Eugene M. Truett
Vice President – Investor Relations and Credit
Phone: 717.975.5677
Fax: 717.265.8152
Email: etruett@harsco.com
annual meeting
April 28, 2009, 10:00 am
the NYSE. Four quarterly cash dividends of $0.195 were
paid in 2008 for an annual rate of $0.78, an increase of 9.9%
from 2007. In 2008, 27.2% of net earnings were paid out in
dividends. There are no significant restrictions on the
payment of dividends. In December 2008, the Company’s
Board increased the dividend rate to $0.20 per share, effective
with the next scheduled quarterly dividend declaration in
Radisson Penn Harris Hotel and Convention Center
early 2009. This action increased the dividend rate by 2.6%
Camp Hill, PA 17011
to $0.80 per share on an annualized basis.
registrar, transfer and Dividend
Disbursing agent
BNY Mellon Shareowner Services
P.O. Box 358015
Pittsburgh, PA 15252-8015
Phone: 800.850.3508
www.bnymellon.com/shareowner/isd
BNY Mellon Shareowner Services maintains the records for
our registered stockholders and can help you with a variety
of stockholder-related services at no charge, including:
• Change of name or address
• Consolidation of accounts
• Duplicate mailings
• Dividend reinvestment enrollment
• Lost stock certificates
• Transfer of stock to another person
• 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.bnymellon.com/shareowner/isd.
Independent registered Public
accounting Firm
PricewaterhouseCoopers LLP
Philadelphia, PA 19103
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Dividends Declared
High
Low
Dividends Declared
High
Low
Dividends Declared
High
Low
Dividends Declared
2008
$ 64.50
46.10
0.1950
64.75
53.75
0.1950
56.32
33.50
0.1950
37.41
17.55
0.1950
(a)
2007
$ 45.325
36.90
0.1775
54.00
44.49
0.1775
59.99
47.85
0.1775
66.51
55.37
0.1950
(a)
Historical per share data restated to reflect the two-for-one stock split that was
effective at the close of business March 26, 2007.
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 2008 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 World Headquarters
350 Poplar Church Road
Camp Hill, PA 17011 USA
Tel: 717.763.7064
www.harsco.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.hunnebeck-group.com
Patent Construction Systems
650 From Road, Suite 525
Paramus, NJ 07652 USA
Tel: 201.261.5600
www.pcshd.com
MultiServ
Harsco House, Regent Park
299 Kingston Road
Leatherhead, Surrey KT22 7SG
United Kingdom
Tel: 44.1372.381400
www.multiserv.com
Harsco Rail
2401 Edmund Road
West Columbia, SC 29171 USA
Tel: 803.822.9160
www.harscotrack.com
Excell Minerals
5040 Louise Drive
Mechanicsburg, PA 17055 USA
Tel: 717.506.2071
www.excellminerals.com
Reed Minerals
5040 Louise Drive
Mechanicsburg, PA 17055 USA
Tel: 717.506.2071
www.reedminerals.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
Tek: 918.619.8000
www.airx.com
Patterson-Kelley
100 Burson Street
East Stroudsburg, PA 18301 USA
Tel: 570.421.7500
www.patkelco.com