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Harsco Corporation Reports First Quarter 2016 Results

  • Q1 Adjusted Operating Income Above Guidance
  • Maintaining 2016 Adjusted Operating Income and Free Cash Flow Guidance Between $80 Million and $100 Million and $50 Million and $70 Million, Respectively
  • Net Debt Reduced To $818 Million and Liquidity Remained Approximately $220 Million at Quarter-End

Harsco Corporation HSC, -2.98% today reported first quarter 2016 results. Excluding special items, adjusted diluted earnings per share from continuing operations in the first quarter of 2016 were $0.03. This result compares with diluted earnings per share of $0.20 in the first quarter of 2015. On a U.S. GAAP ("GAAP") basis, first quarter 2016 diluted loss per share from continuing operations was $0.13, which included Metals & Minerals Separation costs; a charge associated with an underperforming site that was idled and is in process of being exited; and a noncash charge related to the Company's Brand Energy investment. Adjusted operating income for the first quarter of 2016 was $18 million, which was above the guidance range of $6 million to $11 million provided by the Company. Operating income from continuing operations for the first quarter of 2016 was $9 million.

"Each of our businesses performed well this quarter against a challenging macro-environment, and I was again pleased that our quarterly results exceeded prior guidance," said President and CEO Nick Grasberger. "Our Metals & Minerals performance was particularly noteworthy as illustrated by the improvement in segment earnings and margins compared with the prior year. In M&M, Applied Products had a strong quarter and we benefited from better operating results within certain regions, mainly North America and Europe. Meanwhile, Rail was aided by favorable mix and shipment timing in the quarter and Corporate costs were lower than anticipated.

"2016 is certainly off to a solid start and some market indicators point to an underlying improvement in many of our markets. At this point, however, we are maintaining our outlook for the year to reflect timing impacts in the first quarter and the market uncertainties present in our businesses. In this context, we remain keenly focused on process and operating improvements that will enable us to increase free cash flow and achieve meaningful debt reduction during the year. We remain committed to our long-term strategy which includes rebalancing our business portfolio and realizing the value embedded within our businesses."

Harsco Corporation--Selected First Quarter Results

($ in millions, except per share amounts) Q1 2016 Q1 2015
Revenues $ 353 $ 452
Operating income from continuing operations - GAAP $ 9 $ 39
Operating margin from continuing operations - GAAP 2.7 % 8.6 %
Diluted EPS from continuing operations $ (0.13 ) $ 0.20
Special items per diluted share $ 0.16 $ --
Adjusted operating income - excluding special items $ 18 $ 39
Adjusted operating margin - excluding special items 5.0 % 8.6 %
Adjusted diluted EPS from continuing operations - excluding special items $ 0.03 $ 0.20
Return on invested capital (TTM) - excluding special items 5.3 % 7.2 %

Consolidated First Quarter Operating Results

Total revenues were $353 million, with the decrease mainly attributable to the Company's Metals & Minerals and Industrial segments, as expected. Foreign currency translation negatively affected first quarter 2016 revenues by approximately $19 million.

Adjusted operating income from continuing operations was $18 million, compared with operating income of $39 million, including an $11 million FX gain in the Rail segment in the prior-year quarter. Adjusted operating earnings in Metals & Minerals improved in comparison with the same quarter last year, while earnings declined in the Industrial and Rail segments. As a result, adjusted operating margin declined by 360 basis points versus the prior-year period. Foreign currency translation positively impacted adjusted operating income by approximately $1 million in this year's quarter (excluding the Rail gain realized in 2015).

During the first quarter and as permitted under its agreement, Harsco elected to not make its first quarter cash payments to its joint venture partner in Brand Energy and determined not to make such payments for the remainder of 2016 to preserve the financial flexibility of the Company. Instead, Harsco will make an in-kind transfer of approximately 3 percent of its ownership interest in the joint venture. This resulted in a pre-tax $10 million non-cash charge to net income. Also, the Company's first quarter 2016 earnings included equity income of approximately $3.2 million ($0.02 per share after tax) from the Brand Energy joint venture, which was negatively impacted by intercompany foreign currency losses and restructuring costs in the period.

First Quarter Business Review

Metals & Minerals

($ in millions) Q1 2016 Q1 2015 %Change
Revenues $ 230 $ 291 (21 )%
Adjusted operating income $ 12 $ 11 14 %
Adjusted operating margin 5.2 % 3.6 %
Customer liquid steel tons (millions) 33.3 40.6 (18 )%

Revenues decreased 21 percent to $230 million, primarily as a result of exiting certain contracts, reduced customer steel production, foreign exchange translation and lower nickel-related sales. Meanwhile, adjusted operating income increased in comparison with the prior-year as the workforce reductions and other benefits realized under Project Orion, as well as lower operating and administrative costs, were partially offset by site exits, lower customer output and nickel-related sales. As a result, the segment adjusted operating margin improved to 5.2 percent versus 3.6 percent in last year's first quarter.

Industrial

Revenues $ 62 $ 99 (37 )%
Operating income $ 6 $ 17 (62 )%
Operating margin 10.5 % 17.2 %

Revenues declined 37 percent to $62 million, primarily due to volume changes in the segment's heat exchanger business resulting from lower capital spending among U.S. energy customers. Operating income declined as reduced demand for heat exchangers and asset sales were partially offset by lower selling and administrative costs. As a result, the segment's operating margin decreased to 10.5 percent compared with 17.2 percent in the comparable quarter last year.

Rail

Revenues $ 62 $ 62 -- %
Operating income $ 5 $ 22 (77 )%
Operating margin 7.9 % 35.1 %

Revenues totaled $62 million, essentially unchanged as compared with the prior-year period, as higher equipment volume offset lower after-market parts sales. Operating income decreased as a foreign exchange gain on cash advances of $11 million in the prior-year quarter was not repeated, in addition to lower contributions from after-market parts and a less favorable mix of equipment sales. As a result, segment operating margin was 7.9 percent, compared with 35.1 percent in the prior-year period.

Cash Flow

Free cash flow was $(17) million in the first quarter of 2016, compared with $(14) million in the prior-year period. This cash flow performance reflects lower net cash provided by operating activities, partly offset by reduced capital expenditures compared with last year's quarter.

Financial Position

At the end of the first quarter, Harsco maintained net debt of approximately $818 million, a slight decrease from the sequential quarter after the Company monetized a cross-currency interest rate swap for approximately $17 million. Meanwhile, the Company's net debt to EBITDA ratio was 3.0x, as compared with a maximum leverage covenant of 4.0x under the Company's current Credit Agreement, and its borrowing capacity and available cash remained at approximately $220 million at the end of the quarter. Also, subject to the uncertainty and volatility in end markets, the Company is targeting a net leverage ratio of 3.0x to 3.2x at year-end.

2016 Outlook

The Company's expectations for key financial metrics are unchanged for 2016 as noted below. This outlook reflects continued uncertainty within the global steel market. Adjusted operating income in Metals & Minerals is expected to remain stable or decline slightly compared with 2015, as lower steel production, site exits and weaker commodities demand will offset the benefits of cost reductions, operational improvements and site start-ups. In Industrial, business fundamentals remain challenging, and as a result, adjusted operating results are projected to be meaningfully lower as compared with 2015 due to reduced demand from U.S. energy customers. Lastly, Rail earnings after adjusting for the $11 million FX gain in 2015 are expected to be unchanged or decrease slightly as a result of weaker U.S. market demand, sales mix and administrative costs to facilitate international expansion. The Outlook also includes anticipated equity income from the Brand Energy joint venture, where impacts from various financial uncertainties such as foreign exchange and income taxes are assumed to be limited in the forecast period.

Full Year 2016

  • Adjusted operating income for the full year is expected to range from $80 million to $100 million; compared with $135 million in 2015.
  • Free cash flow in the range of $50 million to $70 million; compared with $24 million in 2015.
  • Net interest expense is forecasted to range from $50 million to $52 million.
  • Equity income from the Brand Energy joint venture is expected to be $3 million to $6 million.
  • Adjusted earnings per share for the full year in the range of $0.13 to $0.33; compared with $0.56 per share in 2015.
  • Adjusted return on invested capital is expected to range from 4.0 percent to 4.5 percent; compared with 6.3 percent in 2015.

Q2 2016

  • Adjusted operating income of $22 million to $27 million; compared with $36 million in the prior-year quarter.
  • Adjusted earnings per share of $0.02 to $0.07; compared with earnings per share of $0.08 in the prior-year quarter.

Conference Call

As previously announced, the Company will hold a conference call today at 9:00 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 90218106. 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 May 18, 2016 by dialing (800) 585-8367, (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 Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, 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; 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," "anticipate," "intend," "believe," "likely," "estimate," "target," "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...


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