Harsco Metals & Minerals
The Metals & Minerals operating results were impacted by approximately USD 2.6 million of net exit costs, including costs from the company's decision not to renew certain lower return, long term contracts in the metals part of the business, and substantially lower stainless steel production (a 22% decline in volume) in the Minerals part of the business.
Sales for this segment in the third quarter increased approximately USD 31 million to USD 400 million, up 8% from USD 369 million in last year's comparable quarter. Foreign currency translation increased sales in the quarter by approximately USD 15 million and operating income by approximately USD 1.3 million. Operating income in the third quarter decreased by USD 3.1 million to USD 30.9 million or by approximately 9% from operating income of USD 34.0 million in the third quarter last year. Likewise, operating margins of 7.7% in the third quarter were lower than the 9.2% in the third quarter of 2010.
This segment is expected to show modest YoY improvement in results in the fourth quarter. Steel production for the remainder of 2011 is expected to slow from third quarter 2011 levels and, as discussed last quarter, stainless steel production is expected to remain lower year over year. The company continues to see success in new contract signings and in its efforts to exit existing lower return contracts, which should increase future margins and returns on capital. The segment has also entered into two new strategic technology alliances which the Company believes have the potential for future growth opportunities.
Harsco Infrastructure
The Harsco Infrastructure segment continued to benefit in the third quarter from cost savings generated from the successful implementation of its major restructuring plan announced at the end of 2010. However, during the third quarter there was a significant further deterioration in the operating results in the United Kingdom due to that country's worsening economic conditions. According to published reports in early September, new construction orders in the UK had reached a thirty year low. Had it not been for the significant negative impact of the UK, the overall Infrastructure business results would have been close to break even for the third quarter. As a result of the further decline of the UK market and the slowdown in Western Europe, the Company is currently reviewing additional countermeasures and cost reduction actions to improve future results.
Sales in the third quarter increased approximately 11% to USD 282 million, from USD 254 million in the third quarter of last year. Foreign currency translation increased sales by approximately USD 12 million in the third quarter compared with the third quarter of 2010, but did not have a material impact on operating income. An operating loss of USD 3.3 million was incurred in the third quarter, compared with an operating loss of USD 13.6 million in the third quarter of last year and an operating loss of USD 5.1 million in the second quarter of this year on sales of USD 298 million.
The company expects Infrastructure's fourth quarter loss to be higher than those of both the second and the third quarters of 2011, due principally to the UK market conditions and an expected seasonal slow down in business activity in the fourth quarter, but expects to show measurable improvement over last year's fourth quarter, excluding the restructuring charge.
Harsco Rail
Operating margins in the third quarter of 13.3% were lower than the 20.4% in the comparable quarter of the prior year. Lower operating income and margins in the third quarter were the result of several factors, including higher year over year LIFO costs and the large sale at book value of previously used machines, as well as business mix. Operating income in the quarter decreased to USD 11.6 million from USD 14.4 million in the third quarter of last year due to these items.
Sales in the third quarter increased approximately 24% to USD 87 million, from USD 71 million in the third quarter of 2010. A majority of the sales increase, however, was due to the aforementioned large sale of machines sold at book value. Foreign currency translation also increased sales in the third quarter by almost USD 1 million, but did not have a material impact on operating income.
Sequential improvement in operating income and margins is expected in the fourth quarter of 2011 over the third quarter of 2011. As previously reported, however, fourth quarter 2011 results are expected to be tempered by the timing of several machine sales that were expected to be delivered late in the fourth quarter of 2011, but which are now expected to be delivered in the first quarter of 2012. Nevertheless, total 2011 revenues for this Segment are still expected to approximate those of 2010 and again exceed the USD 300 million level.
The global demand for railway maintenance of way equipment, parts, and services continues to be strong and the Class I railroads in the United States continue to report increased freight shipments, a positive indication of further opportunities for this Segment going into 2012. The Company expects to enter 2012 with a solid order book.
Harsco Industrial
Operating margins of 16.1% were slightly lower than last year's 17.6%, due in part to higher LIFO costs in the third quarter of 2011 as compared with the third quarter of 2010.
Sales in the third quarter increased 46% to USD 86 million from last year's third quarter sales of USD 59 million. Likewise, operating income increased approximately 33% to USD 13.8 million, from USD 10.3 million in the third quarter of last year.
The fourth quarter of 2011 is expected to produce operating income comparable to that of the fourth quarter of last year. The longer term outlook for this Segment remains favorable as many of this Segment's manufactured products are utilized in the energy markets. This, combined with the Company's continued success in expanding this Segment globally, is expected to result in significant growth.
Liquidity, Capital Resources and Other Matters
As expected, net cash provided by operating activities for the third quarter improved considerably over the first half of 2011 and bettered last year's third quarter by 12%. Net cash provided by operating activities for the third quarter of 2011 was USD 123 million as compared with USD 110 million for the third quarter of the prior year. Net cash provided by operating activities for the first nine months of 2011 was USD 190 million as compared with USD 236 million for the first nine months of the prior year. The decline in cash from operations is due principally to higher working capital from increased sales and USD 17 million in cash used for the restructuring of the Harsco Infrastructure Segment.
The total debt to capital ratio at September 30th 2011 was 38%, unchanged from June 30th 2011 and only slightly higher than the 37.6% ratio at December 31st 2010, which was the Company's lowest level since 1998. Total debt outstanding stood at USD 917 million as of September 30th 2011, compared with USD 884.9 million at the end of 2010.
Economic Value Added increased in the third quarter and first nine months of 2011 over the comparable periods in 2010, due principally to higher earnings.
