Fitch Downgrades Harsco's IDR to 'BBB-'; Outlook Negative
CHICAGO -- May 13, 2013
Fitch Ratings has downgraded Harsco Corporation's (Harsco) (NYSE: HSC)
Long-term Issuer Default Rating (IDR) and other long-term ratings to 'BBB-'
from 'BBB'. The Rating Outlook is Negative. A full description of Harsco's
ratings follows at the end of this release.
The ratings and Outlook reflect Fitch's expectations for Harsco's continued
negative revenue growth and pressured free cash flow (FCF) through at least
2013. Revenues likely will decline in 2013 for Harsco's two largest operating
segments, which represent roughly 75% of total revenues, driven by the roll
off of exited locations and contracts as part of the company's restructuring
programs and weak demand within core end markets. Nonetheless, operating
metrics are stabilizing from cost savings related to restructuring, as well as
lower sales of less profitable business.
In Harsco's largest segment, Metals and Minerals (M&M, 46% of 2012 revenues),
the company faces the wind down of contracts exited during its restructuring
program, as well as lower global steel shipments with liquid steel tons (LST)
expected to be slightly down for the second consecutive year. Restructuring
and Harsco's shifting focus to contracts with higher margin technology based
and environmental services should drive improved operating results upon the
resumption of higher LST production.
For Harsco's Infrastructure segment (30% of 2012 revenues), the company's exit
from certain developed countries will drive negative revenue growth as part of
the restructuring program. Harsco's 60% sales exposure to Europe may constrain
growth but this should be more than offset by faster revenue growth in
emerging markets. Assuming Infrastructure achieves near-term growth targets,
the segment should approach operating profit break-even in 2013.
Revenues in Harsco's Rail segment (12% of 2012 revenues) should decline $50
million in 2013 due to the completion of a significant contract with the
Ministry of Rail in China. In addition, the higher profit profile of this
five-year contract will result in lower operating profit margin through the
intermediate term. Nonetheless, the segment will benefit from solid
longer-term growth rates in emerging markets. Growth in Harsco's fourth
segment, Industrial (12% of 2012 revenues), will be flat as a result of stable
end market demand but longer-term is expected to grow revenues in the
mid-single digits, due to increasing penetration in International markets.
Profitability will strengthen upon the full realization of costs savings
related to restructuring, which Harsco expects in 2013. Harsco estimates
completed restructuring will yield $95 million in total savings in 2013 after
achieving $86 million in 2012, resulting in operating leverage when revenue
growth resumes. As a result, Fitch believes operating income could grow to
more than $200 million over the intermediate term, up from $184 million
excluding special items, with operating income margin potentially expanding
100 basis points to 7% from 6%.
Fitch expects break even to slightly positive FCF in 2013, which includes
modest cash payments related to prior restructuring programs. Higher cash from
operations will be partially offset by a slight uptick in capital spending,
driven by M&M's shift in focus to higher margin resource recovery and
environmental services. FCF will be augmented by proceeds from asset sales,
including just over $10 million in the first quarter of 2013. Beyond the near
term, Fitch anticipates top line growth driven operating leverage will result
in more meaningful annual FCF.
Included in Fitch's FCF expectations are Harsco's planned $34.1 million
pension contribution in 2013 after making a $36 million contribution in 2012.
Harsco's net pension obligations increased to $384 million at the end of 2012,
up from $344 million at the end of 2011, mostly from lower discount rates.
Qualified and non-qualified U.S. plans were 69% funded at the end of 2012,
while international plans were 73% funded. Fitch believes the company has
sufficient cash balances and availability under its bank credit facility to
make near-term contributions.
Credit protection measures will improve slowly from current levels from
gradual profitability expansion. Fitch estimates total leverage (total debt to
operating EBITDA) was 2.3x for the LTM ended March 31, 2013, up from 2.0x for
the comparable year ago period, driven by higher borrowings to fund capital
expenditures in the first quarter of 2013. Fitch estimates interest coverage
(operating EBITDA to interest expense) was 9.7x for the LTM ended March 31,
2013, up from 7.8x in the prior year period, due to lower interest expense.
KEY RATINGS DRIVERS
Rating concerns include: i) significant exposure to Europe; ii) excess global
steel capacity; iii) weak construction activity; iv) low operating margins
through the cycle, and v) customer concentration in M&M. Strengths include: i)
adequate liquidity; ii) leading positions in a diversified set of end markets;
iii) solid growth prospects for businesses within the Industrial segment; iv)
manageable debt maturities; and v) commitment to conservative financial
policies and cash deployment through restructuring phase.
Negative ration actions could occur from: i) the continuation of negative
annual FCF, from more significant than expected revenue declines or inability
to realize the full benefits of current restructuring programs, or ii) slow
international markets penetration in conjunction with structural demand
weakness in developed markets. Fitch could stabilize the ratings with a
resumption of revenue growth and expanding operating profit margin in the
company's Infrastructure and M&M business, supporting the case that Harsco
appropriately scaled costs structures for its biggest segments.
Harsco's liquidity at March 31, 2013 was adequate and included: i) $92.9
million of cash and cash equivalents, and ii) $396 million of availability
under a $525 million revolving bank credit facility expiring in 2017. The
facility backs a $550 million commercial paper (CP) program, approximately $25
million of which was outstanding at March 31, 2013. Expectations for positive
annual FCF beyond 2013 also should strengthen liquidity.
Aside from $16 million of short-term borrowing and current portion of
long-term debt, liquidity is offset by $150 million of senior notes due Sept.
15, 2013, which Fitch believes the company will refinance. Fitch anticipates
that cash deployment for acquisitions and share repurchases will be minimal
while Harsco focuses on organic growth.
Total debt at March 31, 2013 includes:
--Borrowing under the CP program and RCF;
--$150 million of senior notes due 2013;
--$250 million of senior notes maturing in 2015;
--$450 million of senior notes due 2018.
The company increased borrowings to fund capital spending, primarily in the
M&M segment. As a result, debt to capital ratio was 55% at March 31, 2013, up
from 54% at Dec. 31, 2012 but below the financial covenant of not more than
Fitch has downgraded Harsco's ratings as follows:
--IDR to 'BBB-' from 'BBB';
--Senior unsecured credit facilities to 'BBB-' from 'BBB';
--Senior unsecured debt to 'BBB-' from 'BBB'.
Fitch has affirmed the short-term IDR and CP rating at 'F3'. The ratings
affect approximately $1 billion of debt outstanding at March 31, 2013.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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Jason Pompeii, +1-312-368-3210
Fitch Ratings, Inc.
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Eric Ause, +1-312-606-2302
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