Harsco Corporation (HSC) posted adjusted diluted earnings per share of 43 cents from continuing operations in the second quarter of 2012 compared with 40 cents in the year-earlier quarter, beating the Zacks Consensus Estimate of 35 cents per share and also surpassing management’s expectation range of 32 -38 cents per share for the quarter.
Revenue
Revenues in the quarter amounted to $770.6 million, decreasing approximately by 12% year over year but rising 2.5% sequentially. The sales in the quarter missed the Zacks Consensus Estimate of $821 million. The annual decline in sales was due to the adverse impact from the foreign currency translation and change in the operational structure for the company’s Infrastructure segment which reduced the quarter’s revenue by $60 million and $23 million, respectively.
On a segmental basis, Metals & Minerals generated revenues of $365 million, down nearly by 14% from the year earlier quarter but up 1.4% sequentially. The year-over-year drop in the segment’s sales was attributed to the clouded world steel demands and low international steel production.
Revenue from the Infrastructure segment was $235 million, down 21.1% from the year-earlier quarter and 1.3% sequentially, primarily owing to the foreign currency translation which was unfavorable to the segment’s sales in the quarter and reduced sales by $23 million. Additionally, the slow end-market demands specifically in industrial maintenance in the North America regions were also damaging the segment’s sales during the quarter.
The Rail segment generated revenues of $80 million, up 2.6% from the year-ago quarter and 17.6% sequentially. The annual hike was attributable to ameliorated order booking, improved bidding activity and equipment revenue growth occurring during the quarter.
Revenues from the Industrial segment were $91 million, up 22% year over year and increased nearly by 6% sequentially. The segment’s sales were encouraged by the developed energy markets and mounting market demand during the second quarter of 2012.
In terms of business mix, Service revenues were $598.8 million, down from $723.5 million in the year-earlier quarter. Product revenues improved to $171.8 million from $151.6 million in the year-earlier quarter.
Operating margin in the second quarter of 2012 came in at 4.5% compared to 7.4% in the year-ago quarter and (1.7%) in the previous quarter. Effective tax rate (restructuring charges excluded) during the quarter came in at 24.7% versus 25.4% in the prior year quarter.
Balance Sheet and Cash Flow
Harsco ended the quarter with cash and cash equivalents of $121.4 million, down from $136.6 million at the end of the previous quarter. Net trade accounts receivable in the quarter was $615.2 million compared with $631.6 million in the previous quarter. As of June 30, 2012, long-term debt was recorded at $949.6 million, increasing from $932.8 million in the previous quarter.
In the second quarter of 2012, net cash provided by operating activities was recorded at $37.6 million compared with $73.8 million in the prior year quarter.
Guidance
Management expects earnings per share from continuing operations (excluding the restructuring charge) in the range of 32 cents to 38 cents for the third quarter of 2012. Effective tax rate is projected to be around 28% for 2012.
Management expects that the clouded end market situation, especially in Europe and the Middle East is likely to negatively impact the company’s Metals & Minerals and Infrastructure segments in the upcoming third quarter of 2012. However, the second half of 2012 would gain from the company’s contract award and restructuring activities. Harsco anticipates that its Rail segments will deliver a strong performance in the coming quarter on the backs of increased order book and bidding activity, while the company’s Industrial segment is likely to be affected by unstable energy prices and decreased drilling actions.
The company currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. We also maintain a long-term ‘Underperform’ recommendation on the stock.
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