Harsco Reports 30% Increase in Third Quarter Diluted EPS and 20% Increase in Sales; Increases Full-Year 2007 Outlook
Third quarter diluted EPS from continuing operations up 30 percent to a record $0.83; sales up 20 percent to a record $927 million
*Improvements led by Company’s Access Services and Minerals & Rail Technologies Groups with 36 and 68 percent increases, respectively, in operating income
*Company raises full-year 2007 EPS guidance from continuing operations from a range of $2.90 to $2.95 to a new range of $2.93 to $2.97
Worldwide industrial services company Harsco Corporation (NYSE: HSC) today reported record third quarter 2007 results from continuing operations.
Third quarter 2007 diluted EPS from continuing operations was a record $0.83, up 30 percent from $0.64 in the third quarter of 2006. Income from continuing operations was a record $70.3 million, compared with $54.2 million last year, also up 30 percent. Overall operating margins improved by 70 basis points to 13.4 percent from 12.7 percent in last year’s comparable period. Third quarter sales totaled a record $927 million, up 20 percent from sales of $773 million in the same period last year. Foreign currency translation increased third quarter sales by $41 million and pre-tax income from continuing operations by $4.4 million. All per share and share amounts in this release reflect the Company’s 2-for-1 stock split effective March 27, 2007.
For the first nine months of 2007, sales, income from continuing operations, and diluted earnings per share were all records. Income from continuing operations was $193 million, or $2.28 per diluted share, compared with income from continuing operations of $140 million, or $1.66 per diluted share in the first nine months of 2006, an increase in income of 38 percent and in diluted EPS of 37 percent. Sales for the first nine months of 2007 were $2.71 billion, an increase of 22 percent from $2.22 billion in the same period a year ago. Foreign currency translation increased sales in the first nine months by $113 million, and contributed $10.4 million to pre-tax income from continuing operations.
Commenting on the Company’s results, Harsco Chairman and Chief Executive Officer Derek C. Hathaway said, “Once again the solid execution of our strategies to focus on market-leading industrial services on a global basis is evident in this quarter’s results. Our Access Services and Minerals & Rail Technologies operating groups continue to achieve strong year-over-year performance. Our Mill Services Segment, for specific and identifiable reasons, posted slightly lower results for the quarter. We are confident the medium-term outlook for this business remains positive.
“With a significant proportion of Harsco’s revenues, earnings and cash flows generated outside of North America, we believe our growth will continue into 2008 and beyond. We see further growth opportunities for our wide range of industrial services not only in developed economies, but those of emerging economies as well. These opportunities include organic growth and opportunities from further bolt-on acquisitions.”
Commenting on the Company’s outlook, Harsco President and Chief Financial Officer (and CEO designee effective January 1, 2008) Salvatore D. Fazzolari said, “As we enter the fourth quarter, we are raising slightly our full year 2007 guidance for EPS from continuing operations to a range of $2.93 to $2.97, from the previous range of $2.90 to $2.95. Using the mid-point of the updated guidance, this reflects an increase of approximately 33 percent over 2006’s diluted EPS from continuing operations of $2.21.
“Moreover, as we look forward to 2008 we expect another year of growth. Both our Access Services and Minerals & Rail Technologies groups should continue to perform well in the coming year. In addition, the expected improvements in global market conditions in our Mill Services Segment, combined with anticipated new contract signings and the benefits of certain cost optimization initiatives we are currently implementing should serve to return Mill Services to its recent historical level of operating results next year. Further details in this regard and initial guidance for 2008 will be provided at our Annual Analysts Conference scheduled for December 7, 2007 in New York City.”
Third Quarter Business Review
Third quarter 2007 sales increased 26 percent to $351 million from $279 million last year. Organic sales growth contributed $53 million, or approximately 19 percent; acquisitions contributed $2 million, or 1 percent; and positive foreign currency translation contributed $17 million, or approximately 6 percent. Operating income increased by 36 percent to $48.1 million in the third quarter, up from $35.4 million in the comparable period last year. Positive foreign currency translation increased operating income by approximately $2.3 million in this year’s third quarter. Operating margins increased by 100 basis points to 13.7 percent from 12.7 percent in the third quarter of last year.
Improved performance in the quarter continues to be broad-based. The Access Services Segment continues to see strong results across a number of geographic regions, particularly in Eastern Europe, the U.S., Northern Europe, the U.K. and the Middle East. Rental demand for the Company’s highly engineered scaffolding and concrete forming and shoring systems remains strong, serving both the nonresidential construction and infrastructure markets, as well as the industrial maintenance sector.
The market outlook for the Access Services Segment is expected to remain positive into 2008, underpinned by a solid market for nonresidential construction and infrastructure-related rental products, as well as opportunities for further geographic growth.
Sales in the third quarter of 2007 increased by approximately 9 percent to $376 million from $346 million in last year’s comparable quarter. Organic sales were down slightly by $3 million, or approximately 1 percent, while acquisitions contributed a positive $10 million, or approximately 3 percent, and positive foreign currency translation contributed $23 million, or approximately 7 percent. Third quarter operating income decreased by $2.9 million, or by approximately 8 percent. Foreign currency translation contributed $2.6 million to operating income in the quarter. Operating margins decreased by approximately 160 basis points to 9.2 percent from 10.8 percent in the third quarter of 2006.
Third quarter performance in Mill Services continued to be negatively impacted by a slowdown in the growth of global steel production, particularly in North America, as well as product mix and higher maintenance and other costs. These items were partially offset by the start-up of new contracts in the quarter, as well as the favorable effect of cost reduction initiatives.
The outlook for the Mill Services Segment is positive, especially for 2008. A major industry source has recently reported an estimated 6.8 percent rise in global steel consumption in 2008, as inventories which were worked down in 2007 are rebuilt in various regions of the globe. The Company also expects further new contract signings in the fourth quarter which will have a favorable effect on results for much of next year. Lastly, the Company is undertaking a number of key initiatives in the Mill Services Segment to address maintenance and other business costs with a view to improve operations and enhance margins in 2008.
Minerals & Rail Technologies, Services and Products (“All Other”)
Sales of $200 million in the third quarter of 2007 were 35 percent higher than the $149 million in the same period last year. Organic sales growth contributed $21 million, or approximately 14 percent; the previously announced February 1, 2007 acquisition of Excell Minerals contributed $29 million, or approximately 20 percent; and positive foreign currency translation contributed $1 million, or approximately 1 percent. Operating income increased by 68 percent to $42.3 million, from $25.2 million in the third quarter of last year. Positive foreign currency translation had a minimal effect on operating income in the quarter. Operating margins were 21.1 percent, more than 410 basis points higher than last year’s third quarter margin of 17.0 percent.
The strong third quarter performance within this group was broad-based. Excell Minerals continues to be accretive since its acquisition and a significant contributor to the growth of the Minerals & Rail Technologies group. Harsco Track Technologies also had a strong quarter, as did each of the other four businesses within this group. All units in this group posted higher year-over-year operating income and margins in the third quarter of 2007.
The outlook for the Minerals & Rail Technologies group remains positive. New contract signings are expected for Excell Minerals which will contribute to full year 2008 results. Likewise, Harsco Track Technologies is beginning the engineering and production of its record-setting equipment order from the Chinese Ministry of Railways received earlier this year, as well as other equipment orders recently announced from international railroads. Air-X-Changers continues to have a healthy order book going into 2008, and the outlook also remains positive for Reed Minerals, IKG, and Patterson-Kelley.
As previously reported, progress continues in the Company’s efforts to divest its Gas Technologies business group. Results for Gas Technologies have been reclassified as discontinued operations.
Income from discontinued operations for the third quarter was $7.1 million after-tax, or $0.08 per diluted share, compared with $1.6 million after-tax or $0.02 per diluted share in 2006.
For the first nine months of 2007, income from discontinued operations was $15.3 million after-tax, or $0.18 per diluted share, compared with $4.0 million after-tax, or $0.05 per diluted share in 2006. Nine month 2007 results include a pre-tax pension curtailment expense of $1.5 million.
Liquidity, Capital Resources and Other Matters
Net cash provided by operating activities for the third quarter of 2007 was a record $176 million, an 86 percent increase over the $95 million for the comparable period of last year. Net cash used by investing activities was $145 million, a 53 percent increase over the $95 million last year. The increased use of cash was due primarily to higher capital expenditures for organic growth, capital initiatives to improve operational efficiencies, and expenditures for businesses acquired in the third quarter of 2007. Net cash provided by operating activities for the first nine months of 2007 was a record $372 million, compared with $279 million in 2006, an increase of 33 percent.
During the first nine months of 2007, the Company’s total debt increased by $267 million to $1.3 billion as of September 30, 2007. The increase in debt was principally due to the acquisition of Excell Minerals on February 1, 2007, other smaller acquisitions, and higher growth-related capital expenditures. The debt-to-capital ratio decreased 200 basis points to 48.4 percent at the end of the third quarter of 2007, down from 50.4 percent at the end of the second quarter. The debt-to-capital ratio was 48.1 percent at December 31, 2006.
Consistent with the quarterly results, meaningful improvement in Economic Value Added (EVA®) continued to be achieved in the third quarter and first nine months of 2007.
Forward Looking Statements
The nature of the Company’s business and the many countries in which it operates subject it to changing economic, competitive, regulatory, and technological conditions, risks, and uncertainties. In accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. Forward-looking statements contained herein could include information about management’s confidence and strategies for performance; expectations for new and existing products, technologies, and opportunities; and expectations regarding growth, sales, cash flows, earnings, and EVA. These statements are identified by the use of such terms as “may,” “could,” “expect,” “anticipate,” “intend,” “believe,” or other comparable terms.
Factors which could cause results to differ include, but are not limited to: (1) changes in the worldwide business environment in which the Company operates, including general economic conditions; (2) changes in currency exchange rates, certain commodity prices and costs, interest rates and capital costs; (3) changes in the performance of stock and bond markets that could affect, among other things, the valuation of the assets of the Company’s pension plans and the accounting for pension assets, liabilities and expenses; (4) changes in governmental laws and regulations, including environmental, taxes and import tariff standards; (5) market and competitive changes, including pricing pressures, market demand and acceptance for new products, services, and technologies; (6) unforeseen business disruptions in one or more of the many countries in which the Company operates due to political instability, civil disobedience, armed hostilities or other calamities; (7) the seasonal nature of the Company’s business; (8) the successful integration of the Company’s strategic acquisitions; and (9) other risk factors listed from time to time in the Company’s SEC reports. The Company cautions that these factors may not be exhaustive and that many of these factors are beyond the Company’s ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty to update forward-looking statements.
As previously announced, the Company will hold a conference call today at 2:00 p.m. Eastern Time (ET) to discuss its results and respond to questions from the investment community. The conference call will be broadcast live through the Harsco Corporation website at www.harsco.com. The call can also be accessed by telephone by dialing (800) 611-4920, or (706) 634-5923 from outside the United States and Canada. Enter Conference ID number 17955084. Listeners are advised to dial in at least five minutes prior to the call. Replays will be available via the Harsco website, or by telephone beginning approximately 5:00 pm ET today. The telephone replay dial-in number is (800) 642-1687, or (706) 645-9291 from outside the United States and Canada. Enter Conference ID number 17955084.
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