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Harsco's Metals & Minerals Business Performed Below Expectations in Second Quarter

08/08/2013 - As it reported its second quarter results, diversified global industrial company Harsco Corporation said its Metals & Minerals segment will continue to be affected by the challenging conditions in the global steel industry in the third quarter.

The company reported second quarter 2013 diluted earnings per share from continuing operations of US$0.30, compared with US$0.16 in the second quarter of 2012. Excluding special items, adjusted diluted earnings per share from continuing operations were US$0.43 in the second quarter of 2012.
CEO Comment
"Second quarter earnings per share were within our guidance range and driven by the performance of the Infrastructure, Rail and Industrial businesses," said Harsco president and CEO Patrick Decker. "The Metals & Minerals business, however, continues to face macro industry challenges and as a result, this business performed below our expectations.
"We are confident that we are taking the steps necessary to better position Harsco for financial and operational success," continued Mr. Decker. "At the same time, we are also aware of the need to achieve our goals more quickly and deliver more value to all of our stakeholders. To that end, we are executing a comprehensive simplification program that is focused on improving our operating model to increase our speed and ability to execute. We are also continuing to explore ways to optimize our portfolio of businesses to drive future growth. We believe that these initiatives are highly complementary and demonstrate our commitment to improving Harsco's financial profile and shareholder returns."
Consolidated Second Quarter Operating Results
Total revenues declined 1% to US$760 million, primarily due to lower Metals & Minerals volume in the face of continued end-market weakness. This was partially offset by volume growth in Infrastructure and Industrial.
Operating income from continuing operations increased 47% to US$51 million. Excluding special items, adjusted operating income from continuing operations declined 12%, primarily due to lower Metals & Minerals results. These factors were partially offset by strong profit growth in Rail. Adjusted operating margin declined 80 basis points.  
Second Quarter Business Review
Metals & Minerals
Revenues declined 8% to US$336 million, principally due to lower by-product sales, reduced steel production volumes, the exit of certain underperforming contracts and an extended production outage at a large customer location in North America. These factors were partially offset by the benefit of new contracts coming on line.
Operating income declined 25% to US$24 million from adjusted operating income of US$32 million in the prior-year quarter. Operating margin decreased 150 basis points to 7.2% from last year's adjusted 8.7%. This performance primarily reflected lower by-product sales, which have higher margins. This was partially offset by lower selling, general and administrative expenses.
Infrastructure
Revenues grew 7% to US$251 million, reflecting improved volume for industrial services and rental equipment in certain geographies. Foreign currency translation positively impacted revenues by US$3 million.
Infrastructure's operating loss was US$2 million, slightly better than the prior-year quarter's adjusted operating loss. This performance reflected a higher mix of lower-margin revenues and continued softness in certain European countries.
Rail
Revenues declined 1% to US$79 million, primarily due to lower contract services volume, which was partially offset by strong parts sales.
Operating income increased 34% and operating margin improved 540 basis points, reflecting the aforementioned higher part sales and a favorable mix of equipment deliveries.
Industrial
Revenues increased 3% to US$94 million, primarily due to improved demand for grating products, which was partially offset by lower volume for industrial boilers.
Operating income declined 5% to US$16 million and operating margin declined 130 basis points, reflecting lower pricing for grating products, which was partially offset by a favorable mix for air-cooled heat exchangers.
Third Quarter 2013 Outlook
Metals & Minerals' revenues for the third quarter are expected to decline 10 to 12% versus the prior-year quarter and operating margin is anticipated to be slightly lower year over year. This outlook reflects challenging conditions in the global steel industry, particularly reduced by-product sales and an extended outage at a major customer location, as well as lower steel production volumes. The company anticipates these factors to be partially offset by growth from higher-return contracts coming on line.
Infrastructure's revenues are expected to grow in the high-single digits versus the prior-year quarter and operating margin is expected to improve slightly year over year. This outlook reflects improvement in the United States and continued challenges in certain European countries.
Rail's revenues are expected to decline in the high teens versus the prior-year quarter and operating margin is anticipated to be in the mid-single digits. This outlook reflects an unfavorable mix of equipment deliveries and lower contract services volume compared with the prior-year quarter. These factors are expected to be partially offset by higher parts volume. The timing and mix of equipment deliveries can cause variability in Rail's results from quarter to quarter. The company believes Rail's operating margin will approximate the low-to-mid teens for the full year 2013.
Industrial's revenues are expected to increase in the low-single digits and operating margin is expected to be in the mid-to-high teens. This business continues to see solid demand for its products.
The company expects its effective income tax rate will approximate 31% in the third quarter. This modest increase from historical levels is due to losses from operations in certain jurisdictions where tax benefits will not be able to be recognized, as well as the geographic mix of income. Going forward, there may be some variability in the reported GAAP tax rate from quarter to quarter depending on the actual geographic mix of earnings.
Based on the aforementioned factors, the company expects diluted earnings per share from continuing operations in the third quarter to range from US$0.17 to US$0.22. The company reported diluted earnings per share from continuing operations of US$0.39, excluding special items, in the third quarter of 2012.
Harsco Corporation serves key industries that play a fundamental role in worldwide economic development, including steel and metals production, construction, railways and energy.