Harsco Corporation Reports Third Quarter 2014 Results

• Adjusted Operating Income and Adjusted Earnings Per Share above Guidance; Lower Corporate Spend and Favorable Product Mix and Timing in Rail Contributed to Positive Result
  
• Project Orion Progressing as Expected with Phase II Framework to be Completed in the Fourth Quarter
  
• Adjusted Operating Income Guidance for 2014 Lowered to Range of $152 million to $157 million; Free Cash Flow Outlook Unchanged at $35 million to $65 million

CAMP HILL, Pa., Nov. 6, 2014 (GLOBE NEWSWIRE) -- Harsco Corporation (NYSE:HSC) today reported third quarter 2014 results. Excluding special items, adjusted diluted earnings per share from continuing operations in the third quarter of 2014 were $0.32. This compares with $0.20 in the third quarter of 2013, which included results from the Company's Infrastructure segment that was divested during the fourth quarter of 2013. Adjusted operating income for the third quarter of 2014 excluding special items was $49 million, above the prior guidance range of $43 million to $48 million provided by the Company, while adjusted earnings per share excluding special items of $0.32 exceeded the guidance range of $0.26 to $0.31 per share.

On a U.S. GAAP ("GAAP") basis, third quarter 2014 diluted earnings per share from continuing operations were $0.30, which included Project Orion severance costs, asset impairments and Brazil labor claim reserves. This compares with GAAP diluted loss per share of $2.89 in the third quarter of 2013, which included an impairment as well as costs related to the then-pending Infrastructure segment sale. The Company's third quarter 2014 earnings also included income of $5 million ($0.04 per share after tax) from the Brand Energy joint venture.

"The third quarter was a bit stronger than expected due to a favorable mix of spare parts and contract services in our Rail business," said President and CEO Nick Grasberger. "This performance builds on the solid financial results we reported earlier in the year. We remain pleased with the progress being made across our businesses. The Metals & Minerals division continues to execute successfully against its key initiatives outlined in Project Orion last spring. Industrial backlogs have surpassed prior record levels, and a growing international presence is boosting the Rail business.

"We expect adjusted operating income for the second half of 2014 to increase at a double-digit rate compared to the second half of last year even though we have reduced our Outlook for the fourth quarter due to delays in asset sales, the timing of a few large Rail orders, foreign exchange effects and the impacts of the ongoing repositioning of our Metals & Minerals business. As we look forward to 2015, we expect a moderate double-digit increase in adjusted operating income and adjusted earnings per share, together with notable improvements in free cash flow and ROIC."

Harsco Corporation—Selected Third Quarter Results

Consolidated Third Quarter Operating Results

Total revenues were $526 million, as revenues increased in each of the Company's segments compared with the prior-year quarter. The prior-year quarter also included results from the divested Infrastructure business. Foreign currency translation negatively affected revenues by approximately $1 million in this year's quarter.

GAAP operating income from continuing operations was $46 million, compared with an operating loss of $208 million in the prior-year quarter, which included results from the divested Infrastructure business. Excluding special items, adjusted operating income from continuing operations increased 16 percent from the same quarter last year, or 19 percent when excluding the impact of the Infrastructure transaction. During the quarter, adjusted operating results improved in the Rail and Industrial segments in comparison with the prior-year quarter, while earnings were stable in Metals & Minerals. Adjusted operating margin increased 350 basis points versus the prior-year period including Infrastructure and 100 basis points when excluding Infrastructure.

Third Quarter Business Review

Metals & Minerals

Revenues increased four percent to $348 million, primarily as a result of volume-related increases from existing and new contracts and higher by-product sales.  These positive factors were partially offset by the non-renewal or exiting of certain contracts. Adjusted operating income was consistent with the prior-year quarter as the positive effects from Project Orion benefits, volumes and by-product contributions were offset by the effects of site exits and higher maintenance and administrative costs. As a result, the segment adjusted operating margin was relatively stable at 7.8 percent versus 8.0 percent in last year's third quarter.  

Industrial

Revenues increased 11 percent to $106 million, primarily due to the Hammco acquisition completed in the first quarter of 2014 and volume increases in the Segment's commercial boiler and legacy heat exchanger businesses. These factors also supported the increase in adjusted operating income compared with the prior-year quarter. Adjusted operating margin declined modestly to 15.1 percent versus 16.2 percent in last year's third quarter as a result of performance within the Segment's industrial grating business. 

Rail

Revenues increased 10 percent to $73 million, primarily due to higher after-market parts sales and contract services compared with the prior-year period. Adjusted operating income and adjusted operating margin increased also as a result of these above items.

Cash Flow

Free cash flow was $65 million in the third quarter of 2014, compared with $52 million in the prior-year period excluding the Infrastructure business. This cash flow performance reflects a modest improvement in net cash provided by operating activities as well as lower net capital expenditures as compared with last year's quarter.

Project Orion (Metals & Minerals Improvement Plan)

The Metals & Minerals team continues to advance the key initiatives of Project Orion. The new organizational structure has been embraced throughout the business with operating standards being implemented and improvements being realized across the asset portfolio. The workforce changes "above the site" and "at the site" under Phase I of Project Orion are largely complete and the remaining changes are anticipated in the coming months. The Bid & Contract Management function has begun reviewing renewal and growth opportunities, and the analytical thoroughness and consistency being utilized within this team is expected to drive improved contract outcomes in the future. Meanwhile, triage efforts at underperforming sites are underway. The processes implemented across these work streams have driven improved operational and commercial performance at a number of locations during the year, and the Company expects to commit additional resources to a larger number of underperforming locations during the fourth quarter. In total, Phase I estimated benefits are unchanged at approximately $25 million, with $5 million to $7 million expected to be realized in 2014. The Company also expects to finalize the framework and scope of Project Orion Phase II during the balance of this year. Previously, Phase II benefits were estimated at $10 million to $20 million. These savings will be confirmed while costs to implement, related charges and timing of benefits will be communicated at a later point. The Company's key financial targets for this segment by the end of 2017 remain unchanged.

2014 Outlook

The 2014 Outlook for operating income has been updated for the year to reflect a slower ramp-up at certain sites, the decision to exit certain underperforming contracts and higher maintenance and consulting support costs in Metals & Minerals. Also, this Outlook is adjusted for delays in certain Rail shipments, current foreign exchange rates and fewer asset sales during the year. Key highlights in the Outlook are included below. Similar to prior 2014 quarters, Metals & Minerals contract exits, severance and impairment costs may be incurred during the balance of the year through Project Orion. These costs are consistent with the Company's focus on improving cash flow and capital returns and are not considered in the Outlook. The Outlook continues to include earnings per share, which is partially dependent on anticipated equity income from the Brand Energy joint venture. The Company continues to expect that the performance of the Brand Energy joint venture will be consistent with its plan and that the impacts from various financial uncertainties such as restructuring, foreign exchange and income taxes will be limited in the forecast period.

• Adjusted operating income for the full year is expected to range from $152 million to $157 million; versus $152 million in 2013 and a previous estimated range of $170 million to $180 million.
• Adjusted operating income of $28 million to $33 million in Q4 2014; compared with $30 million in the prior-year quarter.
• Free cash flow in the range of $35 million to $65 million; unchanged.
• Net interest expense is forecasted to range from $44 million to $46 million; compared to previous range of $43 million to $47 million.
• Effective tax rate is expected to range from 34 percent to 36 percent before Brand Energy JV equity income; previously was 31 percent to 33 percent.
• Adjusted earnings per share for the full year in the range of $0.76 to $0.80; compared with $0.87 per share in 2013 and prior estimated range of $0.92 to $1.04.
• Adjusted earnings per share of $0.11 to $0.15 in Q4 2014; versus $0.20 in the prior-year period.
• Adjusted return on invested capital is expected to range from 6.8 percent to 7.2 percent; previous range was 7.5 percent to 8.0 percent.

Conference Call

As previously announced, the Company will hold a conference call today at 10:00 a.m. Eastern Time 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 Company will refer to a slide presentation that accompanies its formal remarks. The slide presentation will be available on the Company's website.

The call can also be accessed by telephone by dialing (800) 611-4920, or (973) 200-3957 for international callers. Enter Conference ID number 17063740. Listeners are advised to dial in at least five minutes prior to the call.

Replays will be available via the Harsco website and also by telephone through December 6, 2014 by dialing toll-free to (855) 859-2056 or (404) 537-3406.

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 that, among others, could cause future results to differ materially from the results contemplated by forward-looking statements, including the expectations and assumptions expressed or implied herein. Forward-looking statements contained herein could include, among other things, statements about management's confidence in and strategies for performance; expectations for new and existing products, technologies and opportunities; statements made regarding Project Orion and the Outlook; and expectations regarding growth, sales, cash flows, and earnings. Forward-looking statements can be identified by the use of such terms as "may," "could," "expect," "will," "anticipate," "intend," "believe," "likely," "estimate," "plan" or other comparable terms.

Factors that could cause actual results to differ, perhaps materially, from those implied by forward-looking statements include, but are not limited to: (1) changes in the worldwide business environment in which the Company operates, including general economic conditions; (2) changes in currency exchange rates, interest rates, commodity and fuel costs and capital costs; (3) changes in the performance of equity and bond markets that could affect, among other things, the valuation of the assets in the Company's pension plans and the accounting for pension assets, liabilities and expenses; (4) changes in governmental laws and regulations, including environmental, occupational health and safety, tax and import tariff standards; (5) market and competitive changes, including pricing pressures, market demand and acceptance for new products, services and technologies; (6) the Company's inability or failure to protect its intellectual property rights from infringement in one or more of the many countries in which the Company operates; (7) failure to effectively prevent, detect or recover from breaches in the Company's cybersecurity infrastructure; (8) unforeseen business disruptions in one or more of the many countries in which the Company operates due to political instability, civil disobedience, armed hostilities, public health issues or other calamities; (9) disruptions associated with labor disputes and increased operating costs associated with union organization; (10) the seasonal nature of the Company's business; (11) the Company's ability to successfully enter into new contracts and complete new acquisitions or strategic ventures in the time-frame contemplated, or at all; (12) the integration of the Company's strategic acquisitions; (13) the amount and timing of repurchases of the Company's common stock, if any; (14) the prolonged recovery in global financial and credit markets and economic conditions generally, which could result in the Company's customers curtailing development projects, construction, production and capital expenditures, which, in turn, could reduce the demand for the Company's products and services and, accordingly, the Company's revenues, margins and profitability; (15) the outcome of any disputes with customers, contractors and subcontractors; (16) the financial condition of the Company's customers, including the ability of customers (especially those that may be highly leveraged and those with inadequate liquidity) to maintain their credit availability; (17) the Company's ability to successfully implement and receive the expected benefits of cost-reduction and restructuring initiatives, including the achievement of expected cost savings in the expected time frame; (18) the ability to successfully implement the Company's strategic initiatives and portfolio optimization and the impact of such initiatives, such as the Harsco Metals & Minerals Segment's Improvement Plan ("Project Orion"); (19) the ability of the strategic venture between the Company and Clayton, Dubilier & Rice ("CD&R") to effectively integrate the Company's Infrastructure business and the Brand Energy & Infrastructure Services business and realize the synergies contemplated by the transaction; (20) the Company's ability to realize cost savings from the divestiture of the Infrastructure business, as well as the transaction being accretive to earnings and improving operating margins and return on capital; (21) the amount ultimately realized from the Company's exit from the strategic venture between the Company and CD&R and the timing of such exit; (22) risk and uncertainty associated with intangible assets; and (23) other risk factors listed from time to time in the Company's SEC reports. A further discussion of these, along with other potential risk factors, can be found in Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The Company cautions that these factors may not be exhaustive and that many of these factors are beyond the Company's ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty to update forward-looking statements except as may be required by law.

About Harsco

Harsco Corporation serves key industries that are fundamental to worldwide economic development, including steel and metals production, railways and energy. Harsco's common stock is a component of the S&P MidCap 400 Index and the Russell 2000 Index. Additional information can be found at www.harsco.com.

The Company has reclassified segment operating results for the three months and nine months ended September 30, 2013 to conform to the revised manner in which the Company now allocates corporate expenses to operating segments as a result of changes in organizational structure resulting from the Infrastructure Transaction, which was consummated in the fourth quarter of 2013. The changes do not impact the Company's previously reported consolidated revenues from continuing operations, operating income from continuing operations or income from continuing operations before income taxes and equity income.

The Company's management believes diluted earnings per share from continuing operations excluding special items and the Harsco Infrastructure Segment, which are non-U.S. GAAP financial measures, are useful to investors because they provide an overall understanding of the Company's historical and future prospects. Exclusion of special items permits evaluation and comparison of results for the Company's core business operations, and it is on this basis that management internally assesses the Company's performance. Exclusion of the Harsco Infrastructure Segment from 2013 provides a basis for comparison of ongoing operations and prospects since the segment was divested in the fourth quarter of 2013. These measures should be considered in addition to, rather than as a substitute for, other information provided in accordance with U.S. GAAP.

The Company's management believes adjusted operating margin excluding special items and the Harsco Infrastructure Segment, which are non-U.S. GAAP financial measures, are useful to investors because they provide an overall understanding of the Company's historical and future prospects. Exclusion of special items permits evaluation and comparison of results for the Company's core business operations, and it is on this basis that management internally assesses the Company's performance. Exclusion of the Harsco Infrastructure Segment from 2013 provides a basis for comparison of ongoing operations and prospects since the segment was divested in the fourth quarter of 2013. These measures should be considered in addition to, rather than as a substitute for, other information provided in accordance with U.S. GAAP.

The Company's management believes adjusted operating income excluding special items and the Harsco Infrastructure Segment, which are non-U.S. GAAP financial measures, are useful to investors because they provide an overall understanding of the Company's historical and future prospects. Exclusion of special items permits evaluation and comparison of results for the Company's core business operations, and it is on this basis that management internally assesses the Company's performance. Exclusion of the Harsco Infrastructure Segment from 2013 provides a basis for comparison of ongoing operations and prospects since the segment was divested in the fourth quarter of 2013. These measures should be considered in addition to, rather than as a substitute for, other information provided in accordance with U.S. GAAP.

The Company's management believes adjusted operating income excluding special items and the Harsco Infrastructure Segment, which are non-U.S. GAAP financial measures, are useful to investors because they provide an overall understanding of the Company's historical and future prospects. Exclusion of special items permits evaluation and comparison of results for the Company's core business operations, and it is on this basis that management internally assesses the Company's performance. Exclusion of the Harsco Infrastructure Segment from 2013 provides a basis for comparison of ongoing operations and prospects since the segment was divested in the fourth quarter of 2013. These measures should be considered in addition to, rather than as a substitute for, other information provided in accordance with U.S. GAAP.

The Company's management believes that free cash flow, which is a non-U.S. GAAP financial measure, is meaningful to investors because management reviews cash flows generated from operations less capital expenditures net of asset sales proceeds. It is important to note that free cash flow does not represent the total residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements, are not deducted from the measure. Exclusion of the Harsco Infrastructure Segment from 2013 provides a basis for comparison of ongoing operations and prospects since the segment was divested in the fourth quarter of 2013. This measure should be considered in addition to, rather than as a substitute for, other information provided in accordance with U.S. GAAP.

The Company's management believes that free cash flow, a non-U.S. GAAP financial measure, is meaningful to investors because management reviews cash flows generated from operations less capital expenditures net of asset sales proceeds. It is important to note that free cash flow does not represent the total residual cash flow available for discretionary expenditures since other non-discretionary expenditures, such as mandatory debt service requirements, are not deducted from the measure. This measure should be considered in addition to, rather than as a substitute for, other information provided in accordance with U.S. GAAP.

The Company's management believes return on invested capital excluding special items and the Harsco Infrastructure Segment, which are non-U.S. GAAP financial measures, are meaningful in evaluating the efficiency and effectiveness of the capital invested in the Company's business. Exclusion of special items permits evaluation and comparison of results for the Company's core business operations, and it is on this basis that management internally assesses the Company's performance. Exclusion of the Harsco Infrastructure Segment provides a basis for comparison of ongoing operations and prospects since the segment was divested in the fourth quarter of 2013. These measures should be considered in addition to, rather than as a substitute for, net income or other information provided in accordance with U.S. GAAP. 

The Company's management believes diluted earnings (loss) per share from continuing operations excluding special items and the Harsco Infrastructure Segment, non-U.S. GAAP financial measures, are useful to investors because they provide an overall understanding of the Company's historical and future prospects. Exclusion of special items permits evaluation and comparison of results for the Company's core business operations, and it is on this basis that management internally assesses the Company's performance. Exclusion of the Harsco Infrastructure Segment provides a basis for comparison of ongoing operations and prospects since the segment was divested in the fourth quarter of 2013. These measures should be considered in addition to, rather than as a substitute for, other information provided in accordance with U.S. GAAP.