Harsco Expands Countermeasures and Now Expects Annual Savings of Approximately $100 Million, Up From $50 Million, in Response to Continued Deterioration in the Global Economy and the Continuing Strengthening of the U.S. Dollar; the Global Economic Recovery Previously Anticipated in the Second Half of 2009 Now Appears Unlikely But the Company is Expected to Benefit Modestly Later in the Year From Global Infrastructure Stimulus Packages; Capital Expenditures Will Now be Reduced by $300 Million From Previously Estimated $150 Million Reduction; 2009 Earnings Guidance Revised to a Range of $1.90 to $2.10, From a Previous Range of $2.80 to $3.00.
HARRISBURG, Pa., April 23, 2009 (GLOBE NEWSWIRE) -- Worldwide industrial services company Harsco Corporation (NYSE:HSC) reported first quarter 2009 results from continuing operations.
First Quarter 2009 Highlights
As expected, the soaring U.S. dollar and unprecedented low global steel production as well as the ongoing credit freeze had a substantial negative impact on sales and income in the first quarter. First quarter 2009 diluted Earnings Per Share from continuing operations were $0.25, compared with $0.67 in the first quarter of last year. First quarter income from continuing operations was $21.0 million, compared with $59.4 million last year. Sales in the quarter totaled $697 million, compared with $988 million in the first quarter of last year. Foreign currency translation decreased sales by $140 million and accounted for about half of the sales decline. Foreign currency translation decreased operating income by $14.0 million or $0.13 per share in this year's first quarter, in addition to reducing overall operating margins by 80 basis points. Historically low global steel production caused Harsco Metals to incur its first-ever quarterly operating loss excluding restructuring charges.
Despite the tremendous global economic challenges, the Company posted strong first quarter cash flow from operations performance. Cash flow from operations increased by 24 percent over last year's first quarter.
Comment
Commenting on the Company's results, Harsco Chairman and Chief Executive Officer Salvatore D. Fazzolari said, "As we anticipated, our performance was sharply lower for the quarter due to the global financial and economic crisis. The outlook for global steel production and non-residential construction markets continued to deteriorate throughout the quarter. The global economic recovery previously anticipated to begin in the second half of 2009 cannot now be predicted with any certainty. Our markets have deteriorated more than we expected.
"We continue to face three substantial headwinds that are having a significant adverse impact on our business. They are: the soaring U.S. dollar, which negatively impacts the translation of approximately 70 percent of our total revenues; the worst downturn in the history of the steel industry, where global production remains at unprecedented low levels; and the continuing credit freeze, which is causing cancellation and deferral of non-residential construction activity. It is difficult to see any short-term improvement in these drivers of our business. It now appears that the entire year will be extremely challenging. We will see seasonal improvement in our business and thus sequentially we expect each quarter will show improvement in our performance over the previous quarter.
"In light of the deepening global economic and financial crisis, we have proactively and prudently implemented additional countermeasures in the first quarter which continue into the second quarter. We strongly believe that the countermeasures that we implemented in the fourth quarter of 2008 and the additional countermeasures taken in 2009 will manifest themselves as we operate throughout 2009 and beyond. At a full run-rate, we now expect these benefits to approximate $100 million in total cost reductions. In addition, we believe that the second half of 2009 will benefit fully from cost reduction initiatives, modest stimulus packages benefits, and new projects in the Gulf Region of the Middle East and the Asia-Pacific region.
"We remain confident that we have the people, the fortitude, and the discipline, along with the market opportunities and a significantly lower cost base, to weather the storm, and we have the unwavering faith that we will emerge from this crisis an even stronger company."
First Quarter Business Review
Harsco Infrastructure
Several factors contributed to this Segment's expected lower performance in the first quarter. These include the soaring U.S. dollar which negatively affects approximately 80 percent of Harsco Infrastructure's revenues and earnings; the continued lack of available credit that has resulted in cancelled and delayed construction projects, as well as export sales of infrastructure-related equipment being sharply down; the deepening recession in key markets; higher pension costs; and a harsh winter, particularly in Eastern Europe.
Sales in the first quarter decreased 25 percent to $284 million from $379 million last year, due mainly to the soaring U.S. dollar. The significant strengthening of the U.S. dollar in the first quarter had a negative impact on sales from foreign currency translation of $59 million, and accounted for nearly two-thirds of the 25 percent decline in year-over-year sales. The remainder of the decline was due to lower operating performance, principally in the U.K., which reduced sales by approximately $36 million. Operating income was $18.8 million in the quarter, compared with $37.8 million in last year's first quarter. Here again, negative foreign currency translation was the largest factor in the decline. Negative foreign currency translation reduced operating income by $5.9 million, or nearly one third of the year-over-year decline. Also contributing to the decline in income in the first quarter were lower business activity across many regions, principally in the U.K.; higher defined benefit pension costs of $2.5 million; frozen credit markets that adversely affected the Company's Germany-based equipment sales export business; and severe winter weather in Eastern Europe. Partially offsetting these negative markets were improved results from the Gulf Region of the Middle East and the industrial maintenance work in both the U.S. and Holland, all of which contributed solidly to the first quarter performance.
Operating margins were 6.6 percent in the first quarter, compared with 10.0 percent last year. Negative foreign currency translation reduced margins approximately 60 basis points, with the remainder due to higher pension costs and the ongoing global economic and financial crisis.
Continued strengthening of the U.S. dollar and a difficult project funding environment due to the tight credit markets are now expected to negatively impact year-over-year results for much of 2009, as will higher pension costs. Spring construction activity should show an increase in volumes, but this will continue to be mitigated until the difficult tight credit environment abates and banks begin to lend again. However, as the Company's growing geographic expansion efforts take hold, and with a modest expectation of a loosening of credit for project financing as the year progresses, the implementation of global economic stimulus packages later in the year, and the benefits to be realized in 2009 from the Company's countermeasures, the Company expects results to improve during the seasonally stronger quarters. However, full year results for the Segment will still be down from 2008's record performance.
Harsco Metals
The soaring U.S. dollar, which also negatively affects approximately 80 percent of the revenues and earnings of Harsco Metals; the deterioration of the global steel markets and unprecedented low steel production, the breadth and depth of which the Company has never seen before; and the deepening global recession all contributed to an operating loss for the first quarter. Excluding restructuring costs, this is the first time in the history of this business that an operating loss was incurred in a quarter.
Sales in the first quarter decreased 43 percent to $238 million from $417 million last year. Here again, the significant strengthening of the U.S. dollar in the first quarter had a negative impact on sales from foreign currency translation of $74 million, or over 40 percent of the reduction in year-over-year sales in the quarter. Operating performance was also down sharply due to the deterioration of the global steel markets and unprecedented declines in global steel production. Many mills throughout the world are only operating in the forty percent-plus capacity range. The operating loss of $2.8 million compares with income of $29.2 million last year. Negative foreign currency translation represented $7 million, or 22 percent of the year-over-year decline in income. The remainder of the decline in operating income is due to the substantial reduction in global steel production.
Operating margins were a negative 1.2 percent in the first quarter, compared with 7.0 percent last year. Negative foreign currency translation reduced margins approximately 250 basis points, with the remainder of the decline resulting from the current global economic crisis.
While steel inventories are reported to be near 20-year lows in the U.S., global demand for steel remains weak and the Company does not foresee any measurable pickup in its Harsco Metals operations until at least the second half of the year. The second quarter is expected to remain weak, but should show some improvement over the first quarter. A stronger U.S. dollar will also result in difficult year-over-year comparisons for the Segment in 2009. However, the Company expects to realize positive contribution to earnings from its countermeasures, as well as the start-up of new contracts and, sequentially, a modest improvement in steel production in each quarter of 2009 off the historic lows of the first quarter.
Harsco Minerals & Rail
As expected, operating results in the first quarter for Harsco Rail were strong. The significant decline in metal prices and production adversely impacted the sales and earnings of the Harsco Minerals operations. Harsco Industrial performed relatively well in the quarter although the ongoing economic and financial crisis poses many challenges.
Sales of $175 million in the first quarter of 2009 were 9 percent lower than the $192 million in the same period last year. Foreign currency translation negatively impacted sales by $8 million or 43 percent of the year-over-year decline. Operating income was $23.4 million in the first quarter, compared with $33.9 million last year. Negative foreign currency translation in the quarter lowered income by $0.9 million over last year. Operating margins were 13.4 percent in the first quarter of 2009, compared with 17.7 percent last year.
The quarter's lower operating performance and margins were negatively impacted by reduced steel mill activity and lower metal prices at the Company's Harsco Minerals unit. These results were partially offset by strong performance from Harsco Rail, as it began to deliver track maintenance units under its record order from China's Ministry of Railways. The Harsco Industrial businesses had overall results modestly below last year's first quarter.
The near-term outlook for the Harsco Minerals & Rail Group remains mixed. The continuation of low metal prices and historically low production levels will have a negative impact on Harsco Minerals. This should be mostly offset by continued strong performance from Harsco Rail. The Harsco Industrial units are expected to have results somewhat comparable to last year due principally to lower LIFO costs.
Liquidity, Capital Resources and Other Matters
Net cash provided by operating activities for the first quarter 2009 was $39.6 million, a 24 percent increase over the $32.0 million for the prior year.
Net cash used by investing activities was $31.4 million, a 71 percent decrease from the $107.1 million last year. The decreased use of cash was due primarily to lower capital expenditures, which is consistent with the Company's strategy of significantly reducing capital spending in 2009.
As previously announced, the Company began to sharply curtail its capital expenditures in the fourth quarter of 2008. For all of 2009, the Company now expects to reduce such expenditures by approximately $300 million from total capital expenditures in 2008 of some $458 million. Such action will allow the Company to significantly increase its level of free cash flows. This higher level of free or discretionary cash flow will allow the Company to further enhance its balance sheet and maintain its dividend, as well as take advantage of other opportunities for growth and debt reduction as they present themselves.
The Company now expects cash flow from operations in 2009 to be in the area of $400 million and total capital expenditures to be in the area of $150 million.
During the quarter, the Company reduced balance sheet debt by approximately $17 million. However, due solely to the strengthening of the U.S. dollar, the total debt-to-capital ratio at March 31, 2009 increased a modest 80 basis points over December 31, 2008 to 41.9 percent, from 41.1 percent at the end of 2008. The Company's liquidity remains strong.
Economic Value Added (EVA(r)) declined in first quarter of 2009 over the comparable 2008 period.
Outlook
Harsco Senior Vice President and Chief Financial Officer Stephen J. Schnoor said, "Given the negative impact from the continued strengthening of the U.S. dollar, and considering the challenging and uncertain global economic and financial environment we continue to face with no meaningful improvement expected in the major global economies in 2009, we believe it is prudent to modify our guidance for 2009 diluted EPS from continuing operations from a previous range of $2.80 to $3.00 to a new range of $1.90 to $2.10.
"As stated earlier, recent 2009 countermeasures will increase overall annual cost reduction benefits from approximately $50 million to $100 million. These additional countermeasures include rationalizing facilities, improving underperforming contracts, a further trimming of our global workforce, relentless cost consciousness, and the beginning of savings from LeanSigma-driven continuous improvement efficiencies. There will be an overall modest cost associated with these additional actions in 2009. In the first quarter of 2009, $1.3 million in charges were taken but were fully offset by asset sales gains. It is anticipated that additional costs will be incurred between the second and third quarters to fully implement these actions. These costs have been factored into our guidance. One of the many countermeasures that Harsco has been working on is the reduction of its effective global tax rate. The Company now expects its 2009 effective global income tax rate to be in the area of 26 percent.
"We believe the challenges we face will manifest themselves most prominently in the first half of 2009, particularly in the Harsco Metals business. For the second quarter of 2009 the Company is forecasting earnings from continuing operations in the range of $0.40 to $0.50 per share, compared with $1.07 in last year's second quarter."
Discontinued Operations
The first quarter of 2009 includes a loss after tax of $1.2 million, or $0.02 per diluted share from discontinued operations on the sale of the Gas Technologies business in December 2007, and certain ongoing costs related to this divestiture.
Forward-Looking Statements
This news release contains forward-looking statements based on management's current expectations, estimates and projections. All statements that address expectations or projections about the future, including statements about the company's strategy for growth, product development, market position, expected expenditures and financial results are forward-looking statements. Some of the forward-looking statements may be identified by words like "may," "could," "believes," "expects," "anticipates," "plans," "intends," "projects," "indicates," and similar expressions. These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions. Many factors, including those discussed more fully elsewhere in this release and in documents filed with the Securities and Exchange Commission by Harsco, particularly its latest annual report on Form 10-K and quarterly report on Form 10-Q, as well as others, could cause results to differ materially from those stated. These factors include, but are not limited to, changes in the worldwide business environment in which the Company operates, including as a result of the current global financial and credit crisis; changes in the performance of the equity and debt markets; changes in governmental laws and regulations; market and competitive changes, including pricing pressures, market demand and acceptance for new products, services, and technologies; unforeseen business disruptions in one or more of the many countries in which the Company operates; the seasonal nature of the Company's business; the financial condition of the Company's customers; the successful integration of the Company's strategic acquisitions; and the amount and timing of repurchases of the Company's common stock, if any. The Company undertakes no duty to update forward-looking statements.
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 call can also be accessed by telephone by dialing (800) 611-4920, or (973) 200-3957 from outside the United States and Canada. Enter Conference ID number 90276821. Listeners are advised to dial in at least five minutes prior to the call. Replays will be available via the Harsco website, or by telephone beginning approximately 5:00 pm ET today. The telephone replay dial-in number is (800) 642-1687, or (706) 645-9291 from outside the United States and Canada. Enter Conference ID number 90276821.
About Harsco
Harsco Corporation is one of the world's leading industrial services companies, serving key industries that play a fundamental role in worldwide economic growth and recovery. Harsco's common stock is a component of the S&P MidCap 400 Index and the Russell 1000 Index. Additional information can be found at www.harsco.com.
The Harsco Corporation logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=361
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
March 31
(In thousands, except per share amounts) 2009 2008(a)
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Revenues from continuing operations:
Service revenues $ 562,432 $ 852,628
Product revenues 134,458 135,162
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Total revenues 696,890 987,790
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Costs and expenses from continuing
operations:
Cost of services sold 440,619 638,058
Cost of products sold 96,266 92,947
Selling, general and administrative
expenses 124,997 156,632
Research and development expenses 643 1,053
Other income (2,806) (280)
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Total costs and expenses 659,719 888,410
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Operating income from continuing
operations 37,171 99,380
Equity in income of unconsolidated
entities, net 87 405
Interest income 545 914
Interest expense (15,313) (17,120)
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Income from continuing operations
before income taxes 22,490 83,579
Income tax expense (1,511) (24,188)
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Income from continuing operations 20,979 59,391
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Discontinued operations:
Income (loss) from discontinued business (1,754) 255
Income tax benefit (expense) 530 (107)
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Income (loss) from discontinued operations (1,224) 148
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Net Income 19,755 59,539
Less: Net income attributable to
noncontrolling interest (1,163) (2,500)
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Net income attributable to Harsco Corporation $ 18,592 $ 57,039
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Amounts attributable to Harsco Corporation
common stockholders:
Income from continuing operations,
net of tax $ 19,816 $ 56,891
Income (loss) from discontinued
operations, net of tax (1,224) 148
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Net income $ 18,592 $ 57,039
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Average shares of common stock outstanding 80,249 84,374
Basic earnings per share attributable to
Harsco Corporation common stockholders:
Continuing operations $ 0.25 $ 0.67
Discontinued operations (0.02) 0.00
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Basic earnings per share attributable to
Harsco Corporation common stockholders $ 0.23 $ 0.68(b)
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Diluted average shares of common stock
outstanding 80,484 84,851
Diluted earnings per share attributable
to Harsco Corporation common stockholders:
Continuing operations $ 0.25 $ 0.67
Discontinued operations (0.02) 0.00
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Diluted earnings per share attributable
to Harsco Corporation common stockholders $ 0.23 $ 0.67
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(a) On January 1, 2009, the Company adopted SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51," the provisions of
which, among others, requires that minority interests be
renamed noncontrolling interests and that a company present a
consolidated net income measure that includes the amount
attributable to such noncontrolling interests for all periods
presented.
(b) Does not total due to rounding.
HARSCO CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31 December 31
(In thousands) 2009 2008(a)
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ASSETS
Current assets:
Cash and cash equivalents $ 69,169 $ 91,336
Trade accounts receivable, net 611,559 648,880
Other receivables, net 30,926 46,032
Inventories 308,233 309,530
Other current assets 99,047 104,430
Assets held-for-sale 2,284 5,280
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Total current assets 1,121,218 1,205,488
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Property, plant and equipment, net 1,406,395 1,482,833
Goodwill, net 616,480 631,490
Intangible assets, net 132,766 141,493
Other assets 108,514 101,666
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Total assets $ 3,385,373 $ 3,562,970
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LIABILITIES
Current liabilities:
Short-term borrowings $ 107,709 $ 117,854
Current maturities of long-term debt 2,988 3,212
Accounts payable 216,308 262,783
Accrued compensation 63,716 85,237
Income taxes payable 23,983 13,395
Dividends payable 16,056 15,637
Insurance liabilities 22,584 36,553
Advances on contracts 149,175 144,237
Other current liabilities 196,224 209,518
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Total current liabilities 798,743 888,426
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Long-term debt 885,078 891,817
Deferred income taxes 30,359 35,442
Insurance liabilities 62,233 60,663
Retirement plan liabilities 182,236 190,153
Other liabilities 45,284 46,497
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Total liabilities 2,003,933 2,112,998
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EQUITY
Harsco Corporation stockholders' equity:
Common stock 139,119 138,925
Additional paid-in capital 137,877 137,083
Accumulated other comprehensive loss (279,015) (208,299)
Retained earnings 2,081,708 2,079,170
Treasury stock (734,696) (733,203)
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Total Harsco Corporation
stockholders' equity 1,344,993 1,413,676
Noncontrolling interest 36,447 36,296
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Total equity 1,381,440 1,449,972
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Total liabilities and equity $ 3,385,373 $ 3,562,970
====================================================================
(a) On January 1, 2009, the Company adopted SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51," the provisions
of which, among others, requires that minority interests
be renamed noncontrolling interests and that a company
present such noncontrolling interests as equity for all
periods presented.
HARSCO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31
(In thousands) 2009 2008(a)
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Cash flows from operating activities:
Net income $ 19,755 $ 59,539
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation 67,701 76,622
Amortization 6,707 7,670
Equity in income of unconsolidated
entities, net (87) (405)
Other, net (8,031) (350)
Changes in assets and liabilities,
net of acquisitions and dispositions
of businesses:
Accounts receivable 28,719 (48,904)
Inventories (5,885) (42,027)
Accounts payable (44,191) 7,077
Accrued interest payable 9,536 4,279
Accrued compensation (18,839) (24,338)
Other assets and liabilities (15,785) (7,208)
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Net cash provided by operating
activities 39,600 31,955
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Cash flows from investing activities:
Purchases of property, plant and
equipment (36,042) (119,820)
Purchase of businesses, net of cash
acquired (108) (4,022)
Proceeds from sales of assets 5,988 1,967
Other investing activities (1,276) 14,796
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Net cash used by investing activities (31,438) (107,079)
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Cash flows from financing activities:
Short-term borrowings, net (10,069) 112,219
Current maturities and long-term debt:
Additions 116,857 139,152
Reductions (117,712) (157,871)
Cash dividends paid on common stock (15,633) (16,471)
Common stock issued-options 77 1,245
Common stock acquired for treasury -- (16,858)
Other financing activities -- (36)
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Net cash provided (used) by financing
activities (26,480) 61,380
-------------------------------------------------------------------
Effect of exchange rate changes on cash (3,849) 6,813
-------------------------------------------------------------------
Net decrease in cash and cash equivalents (22,167) (6,931)
Cash and cash equivalents at beginning
of period 91,336 121,833
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Cash and cash equivalents at end of period $ 69,169 $ 114,902
===================================================================
(a) On January 1, 2009, the Company adopted SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51," the provisions
of which, among others, requires that minority interests
be renamed noncontrolling interests for all periods presented.
HARSCO CORPORATION
REVIEW OF OPERATIONS BY SEGMENT (Unaudited)
(In thousands)
Three Months Ended Three Months Ended
March 31, 2009 March 31, 2008
Operating Operating
Income Income
Sales (loss) Sales (loss)
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Harsco Infrastructure $ 283,746 $ 18,837 $ 378,824 $ 37,838
Harsco Metals 238,386 (2,815) 416,716 29,207
All Other Category
(Harsco Minerals & Rail) 174,698 23,441 192,190 33,942
General Corporate 60 (2,292) 60 (1,607)
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Consolidated Totals $ 696,890 $ 37,171 $ 987,790 $ 99,380
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