Harsco Corporation Reports First Quarter 2017 Results
- Q1 GAAP Operating Income of $28 Million, Above Guidance Range
- Favorable Q1 Performance Reflects Ongoing Execution of Strategic Initiatives and Positive Market Developments in Metals & Minerals and Industrial As Well As Timing in Rail
- Full-Year GAAP and Adjusted Operating Income Guidance Increased to Between $115 Million and $130 Million; Compared with Prior Range of $100 Million to $120 Million
- 2017 Free Cash Flow Expected to be Between $70 Million and $85 Million as Compared with Prior Range of $60 Million to $80 Million
CAMP HILL, Pa. – (May 3, 2017) – Harsco Corporation (NYSE:HSC) today reported first quarter 2017 results. Diluted earnings per share from continuing operations in the first quarter of 2017 were $0.11. This figure compares with a GAAP diluted loss per share from continuing operations of $0.13 and adjusted diluted earnings per share from continuing operations of $0.03 in the first quarter of 2016.
Operating income from continuing operations for the first quarter of 2017 was $28 million, which exceeded the guidance range of $15 million to $20 million previously provided by the Company.
"Looking ahead, we expect our positive momentum to continue and are accordingly raising our profit and cash flow guidance for the year."
“We started the year on a strong note, with each of our businesses performing well and contributing to results that exceeded our guidance,” said President and CEO Nick Grasberger. “M&M’s positive results reflect the strategic transformation we began a few years ago, as well as the beginning of a broader market recovery in our relevant geographies. Industrial and Rail also performed well and we are encouraged by the improving outlook for these markets. Looking ahead, we expect our positive momentum to continue and are accordingly raising our profit and cash flow guidance for the year."
“After carefully studying alternatives to separate M&M from our other businesses, and considering the future benefits of our ongoing business transformation and the expected recovery in our end markets, the Board has concluded such a separation is not in the best interest of our shareholders for the foreseeable future. We are focused on delivering value to our shareholders by driving results in each of our businesses, while also pursuing opportunities to optimize our portfolio.”
Harsco Corporation – Selected First Quarter Results
($ in millions, except per share amounts)
| Q1 2017 | Q1 2016 | |
|---|---|---|
| Revenues | $ 373 | $ 353 |
| Operating income from continuing operations - GAAP | $ 28 | $ 9 |
| Operating margin from continuing operations - GAAP | 7.5 % | 2.7 % |
| Diluted EPS from continuing operations | $ 0. 11 | $ (0.13) |
| Unusual items per diluted share | - | $ 0. 16 |
| Adjusted operating income - excluding unusual items | $ 28 | $ 18 |
| Adjusted operating margin - excluding unusual items | 7.5 % | 5.0 % |
| Adjusted diluted EPS from continuing operations - excluding unusual items | $ 0.11 | $ 0. 03 |
| Return on invested capital (TTM) - excluding unusual items | 5.3 % |
Consolidated First Quarter Operating Results
Total revenues were $373 million, with the increase attributable to higher revenues in the Company’s Metals & Minerals and Industrial segments. Foreign currency translation negatively impacted first quarter 2017 revenues by approximately $6 million.
GAAP operating income from continuing operations for the first quarter of 2017 was $28 million. This figure compares with GAAP operating income of $9 million and adjusted operating income of $18 million in the same quarter last year. Operating income in Metals & Minerals and Rail improved in comparison with the prior-year quarter, while operating income declined in the Industrial segment. Lastly, the Company's operating margin increased 250 basis points versus the adjusted operating margin in first quarter of 2016.
First Quarter Business Review
Metals & Minerals
($ in millions)
| Q1 2017 | Q1 2016 | % Change | |
|---|---|---|---|
| Revenues | $ 247 | $ 230 | 8% |
| Operating income - GAAP | $ 26 | $ 7 | nmf |
| Operating margin - GAAP | 10.7 % | 3.0 % | |
| Adjusted operating income - excluding unusual items (1) | $ 26 | $ 12 | nmf |
| Adjusted operating margin - excluding unusual items (1) | 10.7 % | 5.2 % | |
| Customer liquid steel tons (millions) | 36.8 | 33.3 | 11 % |
(1) no unusual items in Q1 2017; nmf = not meaningful
Revenues increased 8 percent to $247 million, as a result of higher steel output and service levels as well as increased nickel-related sales. Operating income totaled $26 million in comparison with GAAP operating income of $7 million and adjusted operating income of $12 million in the prior-year quarter. The sizable increase in operating income compared with adjusted operating income in the previous year can be attributed to the positive factors mentioned above, along with an improvement in operating costs. Finally, the segment's operating margin improved by 550 basis points to 10.7 percent versus the adjusted operating margin in last year’s first quarter.
Industrial
($ in millions)
| Q1 2017 | Q1 2016 | % Change | |
|---|---|---|---|
| Revenues | $ 66 | $ 62 | 6 % |
| Operating income - GAAP | $ 3 | $ 6 | (57)% |
| Operating margin - GAAP | 4.3 % | 10.5 % |
Revenues increased 6 percent to $66 million, as increased demand for air-cooled heat exchangers from U.S. energy customers fully offset lower demand for industrial grating. Meanwhile, operating income declined compared with the prior-year period as a result of product sales mix as well as increased material and healthcare costs. As a result, the segment’s operating margin decreased to 4.3 percent compared with 10.5 percent in the comparable quarter last year.
Rail
($ in millions)
| Q1 2017 | Q1 2016 | % Change | |
|---|---|---|---|
| Revenues | $ 60 | $ 62 | (3)% |
| Operating income - GAAP | $ 6 | $ 5 | 22% |
| Operating margin - GAAP | 10.0% | 7.9% |
Revenues totaled $60 million, a modest decrease compared with the prior-year quarter, as lower equipment sales within the North American market offset higher after-market parts sales. Meanwhile, operating income increased versus the comparable quarter in 2016 due to higher after-market parts contributions and a more favorable product sales mix. As a result, the segment's operating margin increased to 10.0 percent from 7.9 percent in the prior-year quarter.
Cash Flow
Net cash used by operating activities totaled $6 million in the first quarter of 2017, compared with $3 million in the prior-year period. Further, free cash flow was $(22) million in the first quarter of 2017, compared with $(17) million in the prior-year period. This cash flow performance reflects modestly lower net cash from operating activities as a result of working capital changes and the timing of incentive compensation and a slight increase in net capital expenditures, as expected, compared with last year's quarter.
Financial Position
At the end of the first quarter of 2017, the Company maintained net debt of approximately $609 million, and the Company's Credit Agreement net debt to adjusted EBITDA ratio was 2.3x, as compared with a maximum leverage covenant of 3.75x under the Company's Credit Agreement. Also, the Company's borrowing capacity and available cash totaled approximately $304 million at the end of the quarter.
2017 Outlook
The Company's 2017 Outlook is improved to reflect revised forecasts for the Metals & Minerals and Industrial segments as compared with the guidance provided as part of the Company's fourth quarter 2016 results. For Metals & Minerals, adjusted operating income is now anticipated to increase when compared with 2016 given improved fundamentals within the global mill services market. As a result, operational savings, new sites, higher customer steel output, and increased commodities prices are expected to offset foreign exchange impacts as well as lower nickel and Applied Products volumes. Meanwhile, the Industrial outlook has improved to reflect increased capital spending for heat exchangers from U.S. energy customers. The Company is now expecting a larger increase in operating income within Industrial as improved demand for heat exchangers and commercial boilers are projected to more fully offset lower industrial grating demand and a less favorable product mix.
The outlook for the Rail segment and Corporate are mostly unchanged. In Rail, the Q1 timing benefits are to reverse through the balance of the year, and in total, Rail's adjusted earnings are still expected to modestly increase. Higher contributions from after-market parts, Intelligent Solutions offerings, and international equipment sales are expected to more than offset weaker North American market demand and lower contract services contributions. Lastly, Corporate spending is projected to increase compared with 2016 largely as a result of higher pension and other benefit program costs as well as professional fees.
Key highlights in the Outlook are included below.
Full Year 2017
- GAAP and adjusted operating income for the full year is expected to range from $115 million to $130 million; this compares with guidance of $100 million to $120 million previously and GAAP operating income of $63 million and adjusted operating income of $116 million in 2016.
- Free cash flow is expected in the range of $70 million to $85 million, including capital expenditures of between $85 million and $95 million; compared with free cash flow guidance of $60 million to $80 million previously and $100 million in 2016.
- Net interest expense is forecasted to range from $45 million to $47 million.
- The effective tax rate is expected to range from 36 percent to 38 percent.
- GAAP and adjusted earnings per share for the full year are currently expected in the range of $0.47 to $0.61; this compares with guidance of $0.32 to $0.50 previously and a GAAP loss per share of $1.07 and adjusted earnings per share of $0.48 per share in 2016.
- Adjusted return on invested capital is expected to range from 8.5 percent to 9.5 percent; compared with 6.9 percent in 2016.
Q2 2017
- Adjusted operating income of $32 million to $38 million; compared with GAAP operating income of $1 million and adjusted operating income of $41 million in the prior-year quarter.
- Adjusted earnings per share of $0.14 to $0.19; compared with a GAAP loss per share of $0.35 and adjusted earnings per share of $0.15 in the prior-year quarter.
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 60443120. 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 17, 2017 by dialing (800) 585-8367, (855) 859-2056 or (404) 537-3406.
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About Harsco Corporation
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 SmallCap 600 Index and the Russell 2000 Index. Additional information can be found at www.harsco.com.
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," "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) implementation of environmental remediation matters; (18) risk and uncertainty associated with intangible assets; and (19) 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, 2016. 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.