Harsco Corporation Reports Second Quarter 2019 Results

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Jay Cooney
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  • Completed Two Milestone Transactions to Accelerate Portfolio Transformation to Leading Global Environmental Solutions Provider; Acquisition of Clean Earth (June 28) and Divestiture of Air-X-Changers (July 1)
     
  • Completed Successful $500 Million, 8-Year Senior Unsecured Notes Offering, While Increasing and Extending the Company's Revolving Credit Facility; Company's Proforma Leverage Ratio Totaled 2.2x at Quarter-End After Adjusting for Air-X-Changers Sale
     
  • Q2 GAAP Operating Income Totaled $18 Million and GAAP Diluted Loss per Share From Continuing Operations of $0.04 Including Unusual Items and After Reclassification of Harsco Industrial as Discontinued Operations
     
  • Operating Income and Diluted Earnings per Share Excluding Unusual Items and Including Harsco Industrial Totaled $53 Million and $0.37; Compared with Prior Guidance of $53 Million to $58 Million and $0.35 to $0.40, Respectively
     
  • 2019 Adjusted Operating Income Now Expected to be Between $215 Million to $225 Million; Excluding Remaining Industrial Business Earnings in H2 2019 and Acquisition-Related Amortization Expense
     

CAMP HILL, PA (July 31, 2019) - Harsco Corporation (NYSE: HSC) today reported second quarter 2019 results. On a U.S. GAAP ("GAAP") basis, second quarter of 2019 diluted loss per share from continuing operations was $0.04, including transaction costs and other unusual items and after the reclassification of Harsco Industrial as Discontinued Operations. The unusual items included expenses to execute two strategic transactions and capital market financings, a bad debt provision related to a Harsco Environmental customer in the U.K. that entered into administration, costs to implement Harsco Rail's productivity improvement initiative and a non-cash accounting adjustment to a contingent consideration liability. This figure compares with second quarter of 2018 GAAP diluted earnings per share from continuing operations of $0.37. Excluding unusual items, diluted earnings per share from continuing operations were $0.21 in second quarter of 2019 and $0.25 in the second quarter of 2018.

GAAP operating income from continuing operations for the second quarter of 2019 was $18 million. Excluding unusual items and including Harsco Industrial results for the quarter, operating income was $53 million, compared to the Company's previously provided guidance range of $53 million to $58 million. Clean Earth will be incorporated in Harsco results beginning in the third quarter.

 “In recent months we took a number of significant strategic actions to position Harsco for growth and value creation, while also delivering second quarter results within our guidance range,” said Chairman and CEO Nick Grasberger. “We announced and closed two strategic transactions, completed a successful financing and launched the rebranded Environmental segment, consistent with our strategy to position Harsco as a global environmental solutions industry leader.”

Mr. Grasberger continued, “Harsco Rail delivered strong performance in the quarter. While a challenging operating environment impacted Environmental’s performance, we expect the segment’s business performance to improve in the second half, with results supported by our ongoing growth investments and focus on improvement initiatives. We will also benefit in the second half from a robust outlook for Clean Earth. With Harsco now focused on less cyclical and higher-growth businesses, we are well positioned to continue our strategic investments while continuing to create value for our customers and shareholders.”

Harsco Corporation—Selected Second Quarter Results
 

($ in millions, except per share amounts) Q2 2019 Q2 2018
Revenues $ 351 $ 340
Operating income from continuing operations - GAAP $ 18 $ 38
Operating margin from continuing operations - GAAP 5.1 % 11.2 %
Diluted EPS from continuing operations - GAAP $ (0.04) $ 0.37
Return on invested capital (TTM) - excluding unusual items and including discontinued operations 14.9 % 13.8 %

Note: Income statement details above and commentary below reflect that Harsco Industrial has been reclassified as Discontinued Operations starting in Q2 2019.

Consolidated Second Quarter Operating Results

Total revenues from continuing operations were $351 million, an increase of 3 percent compared with the prior-year quarter as a result of higher revenues in the Company's Rail segment. Revenues within the Company's Environmental segment, net of foreign currency impacts, were comparable to the prior-year quarter.  Foreign currency translation negatively impacted second quarter 2019 revenues by approximately $10 million compared with the prior-year period.
GAAP operating income from continuing operations was $18 million, or $33 million when excluding unusual items, for the second quarter of 2019. These figures compare with GAAP operating income from continuing operations of $38 million and adjusted operating income of $36 million in the same quarter of last year. At the segment level, adjusted operating income in Rail improved relative to the prior-year quarter, while adjusted operating income declined in Environmental.
The Company's GAAP and adjusted operating margins in the second quarter of 2019 were 5.1 percent and 9.4 percent, respectively.
 

Second Quarter Business Review

Environmental

($ in millions) Q2 2019 Q2 2018 % Change
Revenues $ 269 $ 272 (1) %
Operating income - GAAP $ 28 $ 36 (23)%
Operating margin - GAAP 10.2 % 13.1 %  

Revenues totaled $269 million, a slight decrease from the prior-year quarter due to the impact of foreign currency translation. The segment's operating income in the second quarter of 2019 totaled $28 million, or $29 million when excluding unusual items in the period. These figures compare with GAAP operating income of $36 million and adjusted operating income of $33 million in the prior-year period. The change in adjusted operating earnings is attributable to the impact of foreign exchange translation and prior site exits as well as lower contributions from certain Applied Products businesses, partially due to lower commodity prices and steel output in North America. Lastly, the segment's operating margin was 10.2 percent and adjusted operating margin was 10.8 percent in the second quarter of 2019.
 

Rail

($ in millions) Q2 2019 Q2 2018 % Change
Revenues $ 81.6 $ 67.6 21 %
Operating income - GAAP $ 9.4 $ 8.6 10 %
Operating margin - GAAP 11.6 % 12.8 %  

Revenues increased 21 percent to $82 million, due to improved demand for original equipment from North American customers and higher after-market parts sales. The segment's operating income in the second quarter of 2019 totaled $9 million, or $11 million when excluding unusual items in the period. These figures compare with GAAP and adjusted operating income of $9 million in the prior-year quarter. The 23 percent improvement in adjusted operating income relative to the prior-year quarter is attributable to the above factors and a more favorable product-sales mix, partially offset by higher SG&A and engineering expenses. As a result, the segment's operating margin was 11.6 percent in the second quarter of 2019 (13.0 percent on adjusted basis), compared with 12.8 percent in the same quarter of 2018.

Cash Flow

Net cash used by operating activities totaled $9 million in the second quarter of 2019, compared with net cash provided by operating activities of $55 million in the prior-year period. Further, free cash flow was $(45) million (before transaction expenses) in the second quarter of 2019, compared with $28 million in the prior-year period. The change in free cash flow compared with the prior-year quarter is principally attributable to growth-related capital spending and working capital.
 

2019 Outlook

The Company’s full year outlook now incorporates Clean Earth for the second-half of the year and includes Harsco Industrial for only the first-half of 2019. As a result, the outlook ranges provided below should be considered in the context that the earnings of the remaining Industrial businesses (IKG and Patterson-Kelley) are not included for H2 2019. Also, certain guidance metrics presented below have changed from prior presentations. Adjusted operating income is now presented prior to acquisition-related amortization expenses, for example, and will be presented this way starting in Q3.

First, Clean Earth is expected to generate revenues of approximately $160 million in second-half of 2019. In addition, the segment's adjusted operating income for this period is anticipated to range from $32 million to $35 million, which largely offsets the impact of excluding the Industrial segment in H2. Also, this Clean Earth range contemplates meaningful year-on-year growth, which can be mainly attributed to positive underlying market trends, 2018 acquisitions, new waste-streams and facilities, and lower operating costs.

The Company’s outlook for Harsco Environmental is lowered modestly from prior guidance, to reflect lower service levels linked to global steel output and Applied Product contributions as well as slower start-up of certain projects. As a result, the segment’s 2019 adjusted operating income is expected to increase less than previously forecasted year-on-year.

Rail’s outlook remains strong and unchanged from prior guidance. For the year, Rail's adjusted operating income is anticipated to be significantly higher than 2018 due to increased global demand for equipment, after-market parts and Protran Technology products as well as productivity initiatives. These benefits are expected to be only partially offset by lower contracting contributions, a less favorable product mix as well as R&D and administrative investments (costs) to support the segment's multi-year growth strategy.

Lastly, Corporate spending is expected to range from $24 million to $25 million for 2019.

Key consolidated highlights in the Outlook for full-year 2019 and Q3 2019 are as follows:
 

2019 Full Year Outlook

  2019 Outlook 2019 Prior 2018 Actual (as previously reported)
Operating Income $ 181 - $ 191m $ 192 - 207m $ 191m
Adjusted Operating Income before Acquisition Amortization $ 215 - 225m $ 216 - 231m $ 194m
Diluted Earnings Per Share $ 0.89 - 1.02 $ 1.15 - 1.33 $ 1.64
Adjusted Diluted Earnings Per Share (before Acquisition Amortization) $ 1.38 - 1.51 $ 1.44 - 1.61 $ 1.40
Free Cash Flow Before Growth Capital $125 - 135m $135 - 150m $104m
Free Cash Flow $55 -65 m $55 - 70m $73m
Adjusted Return on Invested Capital 14.0 - 15.0 % 16.0 - 17.0 % 16.2 %
Net Interest Expense $ 43 - 44m    
Non-Operating Defined Benefit Pension Expense $ 6m    
Effective Tax Rate, Excluding Any Unusual Items 25 - 27 %    

Note: Restated 2018 financial information to reflect Harsco Industrial as Discontinued Operations is included in the supporting schedules.

Q3 2019 Outlook

  Q3 2019 Q3 2018 (as previously reported)
Operating Income $ 50 - 55 m $ 57m
Adjusted Operating Income before Acquisition Amortization $56 - 61m $ 60m
Diluted Earnings Per Share $ 0.24 - 0.30 $ 0.40
Adjusted Diluted Earnings Per Share (before Acquisition Amortization) $ 0.35 - 0.41 $ 0.42

Note: Restated 2018 financial information to reflect Harsco Industrial as Discontinued Operations is included in the supporting schedules.

Conference Call

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 60531313. 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 August 14, 2019 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," "outlook," "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 and amounts; (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, including the acquisition of CEHI Acquisition Corporation and Subsidiaries ("Clean Earth"); (13) potential severe volatility in the capital markets; (14) failure to retain key management and employees of Clean Earth; (15) the amount and timing of repurchases of the Company's common stock, if any; (16) the outcome of any disputes with customers, contractors and subcontractors; (17) 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; (18) implementation of environmental remediation matters; (19) risk and uncertainty associated with intangible assets; and (20) 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, 2018.  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 is a global market leader providing environmental solutions for industrial and specialty waste streams, and innovative technologies for the rail and energy sectors. Based in Camp Hill, PA, the 11,000-employee company operates in more than 30 countries. Harsco’s common stock is a component of the S&P SmallCap 600 Index and the Russell 2000 Index. Additional information can be found at www.harsco.com.
 

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