Harsco Reports Third Quarter Results
11/07/2013 - Diversified global industrial company Harsco Corp. said it is executing initiatives to drive greater returns on capital and operating effectiveness across its Metals & Minerals business.
Harsco reported third quarter 2013 results. Including special items related to the company's previously announced Infrastructure joint venture transaction of US$3.09 per share, third quarter 2013 U.S. GAAP diluted loss per share from continuing operations was US$2.89. This compares with GAAP diluted earnings per share of US$0.32 in the third quarter of 2012. Excluding special items, adjusted diluted earnings per share from continuing operations were US$0.20 in the third quarter of 2013 and US$0.39 in the third quarter of 2012.
CEO Comment
"Our third quarter results were in line with our guidance, and cash flow generation was quite strong," said Harsco president and CEO Patrick Decker. "During the quarter we announced the first major step to transform Harsco through the sale of our Infrastructure business into a joint venture with Clayton, Dubilier & Rice. We are on track to close the transaction in the fourth quarter. The transaction will immediately strengthen our financial profile and increase our financial flexibility to pursue higher return, higher growth opportunities. Moreover, we believe our minority equity stake in the new, stronger infrastructure joint venture will create significant additional value for our shareholders.
"We are committed to strengthening Harsco's financial return profile and are confident that we are taking the necessary actions to achieve this goal," continued Mr. Decker. "In Metals & Minerals, we are executing initiatives to drive greater returns on capital and operating effectiveness across the business. In Rail, we are actively rebuilding our project backlog and are pleased to have recently announced our strategic entry into the influential European market with a significant contract win valued at US$100 million."
Consolidated Third Quarter Operating Results
Total revenues declined two% to US$740 million, primarily due to lower volume of equipment deliveries in Rail compared with the very strong prior-year quarter, as well as the non-renewal of certain contracts in Metals & Minerals. These declines were partially offset by volume growth in Infrastructure and Industrial. Foreign currency translation negatively impacted revenues by US$5 million in the quarter.
GAAP operating loss from continuing operations was US$208 million, compared with income of US$50 million in the prior-year quarter. Excluding special items, adjusted operating income from continuing operations declined 23%, primarily due to lower Rail and Metals & Minerals results, as well as certain strategic advisory costs. Adjusted operating margin declined 150 basis points.
Third Quarter Business Review
Metals & Minerals
Revenues declined three% to US$336 million, principally due to the non-renewal of certain contracts and the effect of lower scrap and nickel prices, as well as a production outage at a large customer location in North America. These factors were partially offset by the benefit of new contracts coming on line and volume growth in existing contracts. Foreign currency translation negatively impacted revenues by US$4 million in the quarter.
Operating income declined 15% to US$23 million from adjusted operating income of US$27 million in the prior-year quarter. Operating margin decreased to 6.9% from last year's adjusted 7.9%. This performance primarily reflected the aforementioned factors and costs related to the Simplification initiative.
Rail
Revenues declined 27% to US$66 million, primarily due to lower volume of equipment deliveries and contract services. These declines were partially offset by strong aftermarket parts sales. The prior-year quarter included a significant level of high-margin equipment deliveries to the China Railway Corporation (formerly the China Ministry of Railways).
Operating income decreased 42% and operating margin declined 310 basis points, reflecting the difficult year-over year comparison. While Rail's results were lower than the prior-year quarter, the business delivered better-than-expected operating income and margin due to strong aftermarket parts sales.
Industrial
Revenues increased five% to US$95 million, primarily due to strong customer demand for grating products and improved volume for boilers, partially offset by a modest decline in air-cooled heat exchanger volume. Operating income declined five% to US$16 million and operating margin declined 160 basis points due to business mix in the quarter.
Infrastructure
Revenues grew six% to US$243 million. Infrastructure's GAAP operating loss was US$242 million, compared with a loss of US$6 million in the prior-year-quarter. Excluding special items in both periods, Infrastructure's operating loss was US$4 million, versus US$3 million in the comparable quarter. This performance reflected lower industrial services activity in the UK and Benelux, partially offset by improved equipment rental and industrial services activity in North America.
Cash Flow
Free cash flow was US$49 million in the third quarter of 2013, compared with US$22 million in the prior-year period. This cash flow performance primarily reflected strong improvement in working capital.
Fourth Quarter 2013 Outlook
The company expects its fourth quarter will include a number of non-recurring items related to the Infrastructure transaction. These include restructuring charges to address stranded Infrastructure costs and to reduce overall corporate overhead costs; an adjustment to the impairment charge recorded in the third quarter of 2013; and transaction-related costs. In addition, the precise timing of the Infrastructure transaction close and subsequent impact on the company's equity income from the joint venture, as well as its impact on the company's non-cash tax rate are not known at this time. Therefore, the company is providing fourth quarter guidance for operating income for its continuing businesses, excluding these items.
Metals & Minerals' revenues for the fourth quarter are expected to grow in the low-single digits and operating income is anticipated to increase in the high-single digits versus the prior year quarter. This outlook reflects growth from higher-return contracts coming on line and modest growth in liquid steel tonnage.
Rail's revenues are expected to decline approximately 30% from a very strong prior-year quarter. This outlook reflects the effects of quarter-to-quarter timing of equipment deliveries, specifically the very strong fourth quarter of 2012 that was driven by deliveries to the China Railway Corporation. Despite the anticipated revenue decline, operating margin is anticipated to be in the low-double digits, reflecting strong aftermarket parts sales focus and a continued focus on driving operational efficiencies.
Industrial's revenues are expected to be essentially flat with the prior-year quarter. Operating margin is expected to be in the mid-to-high teens. This business continues to see similar business dynamics as the third quarter, led by stronger grating and boiler sales.
The company expects operating income from the Metals & Minerals, Rail and Industrial segments to range from US$37 to US$42 million in the fourth quarter, excluding special items. This outlook reflects the aforementioned segment-specific factors, as well as US$2 to US$3 million of expenses for ongoing strategic consulting services. The company reported operating income for these three segments of US$51 million, excluding special items, in the fourth quarter of 2012.
Harsco Corporation serves key industries that play a fundamental role in worldwide growth and development, including steel and metals production, construction, railways and energy.
CEO Comment
"Our third quarter results were in line with our guidance, and cash flow generation was quite strong," said Harsco president and CEO Patrick Decker. "During the quarter we announced the first major step to transform Harsco through the sale of our Infrastructure business into a joint venture with Clayton, Dubilier & Rice. We are on track to close the transaction in the fourth quarter. The transaction will immediately strengthen our financial profile and increase our financial flexibility to pursue higher return, higher growth opportunities. Moreover, we believe our minority equity stake in the new, stronger infrastructure joint venture will create significant additional value for our shareholders.
"We are committed to strengthening Harsco's financial return profile and are confident that we are taking the necessary actions to achieve this goal," continued Mr. Decker. "In Metals & Minerals, we are executing initiatives to drive greater returns on capital and operating effectiveness across the business. In Rail, we are actively rebuilding our project backlog and are pleased to have recently announced our strategic entry into the influential European market with a significant contract win valued at US$100 million."
Consolidated Third Quarter Operating Results
Total revenues declined two% to US$740 million, primarily due to lower volume of equipment deliveries in Rail compared with the very strong prior-year quarter, as well as the non-renewal of certain contracts in Metals & Minerals. These declines were partially offset by volume growth in Infrastructure and Industrial. Foreign currency translation negatively impacted revenues by US$5 million in the quarter.
GAAP operating loss from continuing operations was US$208 million, compared with income of US$50 million in the prior-year quarter. Excluding special items, adjusted operating income from continuing operations declined 23%, primarily due to lower Rail and Metals & Minerals results, as well as certain strategic advisory costs. Adjusted operating margin declined 150 basis points.
Third Quarter Business Review
Metals & Minerals
Revenues declined three% to US$336 million, principally due to the non-renewal of certain contracts and the effect of lower scrap and nickel prices, as well as a production outage at a large customer location in North America. These factors were partially offset by the benefit of new contracts coming on line and volume growth in existing contracts. Foreign currency translation negatively impacted revenues by US$4 million in the quarter.
Operating income declined 15% to US$23 million from adjusted operating income of US$27 million in the prior-year quarter. Operating margin decreased to 6.9% from last year's adjusted 7.9%. This performance primarily reflected the aforementioned factors and costs related to the Simplification initiative.
Rail
Revenues declined 27% to US$66 million, primarily due to lower volume of equipment deliveries and contract services. These declines were partially offset by strong aftermarket parts sales. The prior-year quarter included a significant level of high-margin equipment deliveries to the China Railway Corporation (formerly the China Ministry of Railways).
Operating income decreased 42% and operating margin declined 310 basis points, reflecting the difficult year-over year comparison. While Rail's results were lower than the prior-year quarter, the business delivered better-than-expected operating income and margin due to strong aftermarket parts sales.
Industrial
Revenues increased five% to US$95 million, primarily due to strong customer demand for grating products and improved volume for boilers, partially offset by a modest decline in air-cooled heat exchanger volume. Operating income declined five% to US$16 million and operating margin declined 160 basis points due to business mix in the quarter.
Infrastructure
Revenues grew six% to US$243 million. Infrastructure's GAAP operating loss was US$242 million, compared with a loss of US$6 million in the prior-year-quarter. Excluding special items in both periods, Infrastructure's operating loss was US$4 million, versus US$3 million in the comparable quarter. This performance reflected lower industrial services activity in the UK and Benelux, partially offset by improved equipment rental and industrial services activity in North America.
Cash Flow
Free cash flow was US$49 million in the third quarter of 2013, compared with US$22 million in the prior-year period. This cash flow performance primarily reflected strong improvement in working capital.
Fourth Quarter 2013 Outlook
The company expects its fourth quarter will include a number of non-recurring items related to the Infrastructure transaction. These include restructuring charges to address stranded Infrastructure costs and to reduce overall corporate overhead costs; an adjustment to the impairment charge recorded in the third quarter of 2013; and transaction-related costs. In addition, the precise timing of the Infrastructure transaction close and subsequent impact on the company's equity income from the joint venture, as well as its impact on the company's non-cash tax rate are not known at this time. Therefore, the company is providing fourth quarter guidance for operating income for its continuing businesses, excluding these items.
Metals & Minerals' revenues for the fourth quarter are expected to grow in the low-single digits and operating income is anticipated to increase in the high-single digits versus the prior year quarter. This outlook reflects growth from higher-return contracts coming on line and modest growth in liquid steel tonnage.
Rail's revenues are expected to decline approximately 30% from a very strong prior-year quarter. This outlook reflects the effects of quarter-to-quarter timing of equipment deliveries, specifically the very strong fourth quarter of 2012 that was driven by deliveries to the China Railway Corporation. Despite the anticipated revenue decline, operating margin is anticipated to be in the low-double digits, reflecting strong aftermarket parts sales focus and a continued focus on driving operational efficiencies.
Industrial's revenues are expected to be essentially flat with the prior-year quarter. Operating margin is expected to be in the mid-to-high teens. This business continues to see similar business dynamics as the third quarter, led by stronger grating and boiler sales.
The company expects operating income from the Metals & Minerals, Rail and Industrial segments to range from US$37 to US$42 million in the fourth quarter, excluding special items. This outlook reflects the aforementioned segment-specific factors, as well as US$2 to US$3 million of expenses for ongoing strategic consulting services. The company reported operating income for these three segments of US$51 million, excluding special items, in the fourth quarter of 2012.
Harsco Corporation serves key industries that play a fundamental role in worldwide growth and development, including steel and metals production, construction, railways and energy.
