NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
Harsco Corporation (the "Company") has prepared these unaudited condensed consolidated financial statements based on Securities and Exchange Commission rules that permit reduced disclosure for interim periods. In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements. The
December 31, 2016
Condensed Consolidated Balance Sheet information contained in this Quarterly Report on Form 10-Q was derived from the
2016
audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. ("U.S. GAAP") for an annual report. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
Operating results and cash flows for the
three and six months ended
June 30, 2017
are not indicative of the results that may be expected for the year ending
December 31, 2017
.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
Restricted Cash
The Company had restricted cash of
$4.7 million
and
$2.0 million
at June 30, 2017 and December 31, 2016, respectively, and the restrictions are primarily related to collateral provided for certain guarantees of the Company’s performance.
2. Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in
2017
:
On January 1, 2017, the Company adopted changes issued by the Financial Accounting Standards Board ("FASB") related to the simplification of the measurement of inventory. The changes required entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the previous guidance under which an entity must measure inventory at the lower of cost or market. The changes did not apply to inventories that are measured using either the last-in, first-out method or the retail inventory method. The adoption of these changes did not have an impact on the Company's condensed consolidated financial statements.
On January 1, 2017, the Company adopted changes issued by the FASB that required deferred tax assets and liabilities to be classified as non-current in a classified statement of financial position. The changes applied to all entities that present a classified statement of financial position. The requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount was not affected. The adoption of these changes resulted in the Company reclassifying approximately
$27 million
from reported current assets to Deferred income tax assets based on balances at
December 31, 2016
.
On January 1, 2017, the Company adopted changes issued by the FASB amending the accounting for stock-based compensation and requiring excess tax benefits and shortfalls to be recognized as a component of income tax expense rather than equity. These changes also required excess tax benefits and shortfalls to be presented as an operating activity on the Condensed Consolidated Statement of Cash Flows and allowed an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. These changes resulted in the Company recording the cumulative impact of approximately
$1 million
pre-tax on January 1, 2017 to retained earnings, related to the Company electing to not estimate forfeitures on stock compensation plans but rather recognize forfeitures as they occur. The inclusion of excess tax benefits and shortfalls as a component of the Company’s income tax expense will increase volatility within the provision for income taxes as the amount of excess tax benefits or deficiencies from stock-based compensation awards are dependent on the Company's stock price at the date an award vests. The impact to income tax expense resulting from this change was a tax benefit of
$0.5 million
for both the three and six months ended June 30, 2017.
During the second quarter of 2017, the Company early-adopted changes issued by the FASB that added and clarified guidance related to the classification, presentation and disclosure of restricted cash in the statement of cash flows. The adoption of these changes did not have an impact on the Company's condensed consolidated statement of cash flows for the current and prior periods.
The following accounting standards have been issued and become effective for the Company at a future date:
In May 2014, the FASB issued changes related to the recognition of revenue from contracts with customers. The changes clarify the principles for recognizing revenue and develop a common revenue standard. The core principle of the changes is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The changes also require additional disclosures related to revenue recognition. In July 2015, the FASB deferred the effective date of these changes by one year, but will permit entities to adopt one year earlier. During 2016, the FASB clarified the implementation guidance for principal versus agent considerations; identifying performance obligations; accounting for intellectual property licenses; collectability; non-cash consideration; and the presentation of sales and other similar taxes. The FASB also introduced practical expedients related to disclosures of remaining performance obligations and other technical corrections and improvements. These changes become effective for the Company on January 1, 2018. Management is currently finalizing its evaluation, but currently believes the most significant impact will be with regard to the timing of revenue recognition associated with the air-cooled heat exchanger business of the Harsco Industrial Segment and limited equipment sales in the Harsco Rail Segment. The Company currently recognizes revenues on such arrangements upon the completion of the efforts associated with these arrangements, but as a result of these changes, revenue from these arrangements will be recognized over time and increase revenue in earlier periods. Management does not currently believe that there will be any significant impact with regards to the timing of revenue recognition associated with the Harsco Metals & Minerals Segment or the industrial grating and fencing or heat transfer businesses of the Harsco Industrial Segment, but continues to evaluate the effect of these changes. The Company will adopt the standard using the modified retrospective method of implementation with the cumulative effect of initially applying the changes recognized in retained earnings at the date of initial application and continues to progress with regard to the quantification of the above identified differences.
In February 2016, the FASB issued changes in accounting for leases. The changes introduce a lessee model that brings most leases onto the balance sheet. The changes also align many of the underlying principles of the new lessor model with those in the FASB’s new revenue recognition standard. Furthermore, the changes address other concerns related to the current leases model such as eliminating the requirement in current guidance for an entity to use bright-line tests in determining lease classification. The changes also require lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The changes become effective for the Company on January 1, 2019. Management is currently evaluating the impact of these changes on its condensed consolidated financial statements.
In January 2017, the FASB issued changes that remove the second step of the annual goodwill impairment test, which requires a hypothetical purchase price allocation. The changes provide that the amount of goodwill impairment will be equal to the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The changes become effective for the Company on January 1, 2020. Management has determined that these changes will not have a material impact on the Company's condensed consolidated financial statements. However, should the Company be required to record a goodwill impairment charge in future periods, the amount recorded may differ compared to current practice.
In March 2017, the FASB issued changes to how employers that sponsor defined benefit pension plans and other postretirement plans present the net periodic pension cost ("NPPC") in the statement of operations. An employer will be required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of NPPC are required to be presented in the statement of operations separately from the service cost component and outside of the subtotal of income from operations. The changes also allow only the service cost component to be eligible for capitalization. The changes become effective for the Company on
January 1, 2018. Management is currently evaluating the impact of these changes on its condensed consolidated financial statements.
In May 2017, the FASB issued changes to clarify when revisions to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The changes require modification accounting only in circumstances when the terms or conditions result in changes to the fair value, vesting conditions or classification of the award as an equity instrument or a liability. The changes become effective for the Company on January 1, 2018. Management does not believe these changes will impact its condensed consolidated financial statements.
3. Accounts Receivable and Inventories
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2017
|
|
December 31
2016
|
Trade accounts receivable
|
|
$
|
297,221
|
|
|
$
|
248,354
|
|
Less: Allowance for doubtful accounts
|
|
(7,941
|
)
|
|
(11,800
|
)
|
Trade accounts receivable, net
|
|
$
|
289,280
|
|
|
$
|
236,554
|
|
|
|
|
|
|
Other receivables
(a)
|
|
$
|
22,340
|
|
|
$
|
21,053
|
|
(a) Other receivables include insurance claim receivables, employee receivables, tax claim receivables and other miscellaneous receivables not included in Trade accounts receivable, net.
The decrease in the Allowance for doubtful accounts during 2017 is due to the write-off of previously reserved trade accounts receivable balances.
The provision for doubtful accounts related to trade accounts receivable was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Provision for doubtful accounts related to trade accounts receivable
|
|
$
|
1,197
|
|
|
$
|
323
|
|
|
$
|
1,175
|
|
|
$
|
177
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2017
|
|
December 31
2016
|
Finished goods
|
|
$
|
23,272
|
|
|
$
|
26,464
|
|
Work-in-process
|
|
23,415
|
|
|
22,815
|
|
Contracts-in-process
|
|
73,156
|
|
|
54,044
|
|
Raw materials and purchased parts
|
|
57,967
|
|
|
61,450
|
|
Stores and supplies
|
|
24,041
|
|
|
22,908
|
|
Total inventories
|
|
$
|
201,851
|
|
|
$
|
187,681
|
|
Contracts-in-process consist of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2017
|
|
December 31
2016
|
Contract costs accumulated to date
|
|
$
|
110,281
|
|
|
$
|
90,276
|
|
Estimated forward loss provisions for contracts-in-process
(b)
|
|
(37,125
|
)
|
|
(36,232
|
)
|
Contracts-in-process
(c)
|
|
$
|
73,156
|
|
|
$
|
54,044
|
|
|
|
(b)
|
To the extent that the estimated forward loss provision exceeds accumulated contract costs it is included in the caption Other current liabilities on the Condensed Consolidated Balance Sheets. At
June 30, 2017
and
December 31, 2016
this amount totaled
$5.1 million
and
$6.7 million
, respectively.
|
(c) At
June 30, 2017
and
December 31, 2016
, the Company has
$109.9 million
and
$101.1 million
, respectively, of customer advances related to contracts-in-process. These amounts are included in the caption Advances on contracts and other customer advances on the Condensed Consolidated Balance Sheets.
The Company recognized an estimated forward loss provision related to the contracts with the federal railway system of Switzerland ("SBB") of
$45.1 million
, for the year ended
December 31, 2016
in Costs of products sold on the Condensed Consolidated Statements of Operations, of which
$40.1 million
was recognized during the
three and six months ended
June 30, 2016
. There was
no
additional estimated forward loss provision recognized, excluding the impact of foreign currency fluctuation, for the
three and six months ended
June 30, 2017
. The estimated forward loss provision represents the Company's best estimate based on currently available information. It is possible that the Company's overall estimate of costs to complete these contracts may increase, which would result in an additional estimated forward loss provision at such time, but the Company is unable to estimate any further possible loss or range of loss at this time.
The Company did not recognize any revenue for the contracts with SBB for the
three and six months ended
June 30, 2017
and
2016
under the percentage-of-completion (units-of-delivery) method and accordingly, there was no impact on the Company's gross margins or results of operations for these periods. The Company has not yet recognized any revenue associated with the major equipment deliveries under the contracts with SBB. The majority of the equipment deliveries and related revenue recognition under these contracts are expected through 2020.
4. Equity Method Investments
In November 2013, the Company sold the Company's Harsco Infrastructure Segment into a strategic venture with Clayton, Dubilier & Rice ("CD&R") as part of a transaction that combined the Harsco Infrastructure Segment with Brand Energy & Infrastructure Services, Inc., which CD&R simultaneously acquired (the "Infrastructure Transaction"). As a result of the Infrastructure Transaction, the Company retained an equity interest in Brand Energy & Infrastructure Service, Inc. and Subsidiaries ("Brand" or the "Infrastructure strategic venture") which was accounted for as an equity method investment in accordance with U.S. GAAP.
As part of the Infrastructure Transaction, the Company was required to make a quarterly payment to the Company's partner in the Infrastructure strategic venture, either (at the Company's election) (i) in cash, with total payments to equal approximately
$22 million
per year on a pre-tax basis (approximately
$15 million
per year after-tax), or (ii) in kind, through the transfer of approximately
3%
of the Company's ownership interest in the Infrastructure strategic venture on an annual basis (the "unit adjustment liability"). The Company recognized the change in fair value to the unit adjustment liability each period until the Company was no longer required to make these payments or chose not to make these payments. The change in fair value to the unit adjustment liability was a non-cash expense.
In March 2016, the Company elected not to make the quarterly cash payments to the Company's partner in the Infrastructure strategic venture for the remainder of 2016. Instead, the Company transferred approximately
3%
of its ownership interest in satisfaction of the Company's 2016 obligation related to the unit adjustment liability. As a result of not making the quarterly cash payments for 2016, the Company's ownership interest in the Infrastructure strategic venture decreased by approximately
3%
and the value of the unit adjustment liability was updated to reflect this change. Accordingly, the book value of the Company's equity method investment in Brand decreased by
$29.4 million
and the unit adjustment liability decreased by
$19.1 million
. The resulting net loss of
$10.3 million
was recognized in Change in fair value to the unit adjustment liability and loss on dilution of equity method investment on the Condensed Consolidated Statement of Operations. This net loss was a non-cash expense.
For the
three and six months ended
June 30, 2016
the Company recognized
$1.5 million
and
$3.4 million
, respectively, of change in fair value to the unit adjustment liability exclusive of the fair value adjustment resulting from the decision not to make the quarterly payments in 2016, in the Condensed Consolidated Statement of Operations caption Change in fair value to the unit adjustment liability and loss on dilution of equity method investment.
In September 2016, the Company sold its remaining, approximately
26%
interest in Brand. Accordingly, there has been no activity related to Brand subsequent to the date of sale.
The Company’s proportionate share of Brand's net income was recorded one quarter in arrears. Accordingly, Brand’s results of operations for the
three and six months ended
March 31, 2016 were utilized by the Company to record its proportional share of income in the
three and six months ended
June 30, 2016
. There was no equity income recorded for Brand for the
three and six months ended
June 30, 2017
due to the sale of the interest in Brand. Brand's results of operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
March 31
|
|
March 31
|
(In thousands)
|
|
2016
|
|
2016
|
Net revenues
|
|
$
|
750,394
|
|
|
$
|
1,551,146
|
|
Gross profit
|
|
148,972
|
|
|
329,549
|
|
Net income (loss) attributable to Brand Energy & Infrastructure Services, Inc. and Subsidiaries
|
|
(2,682
|
)
|
|
8,378
|
|
Harsco's equity in income (loss) of Brand
|
|
(694
|
)
|
|
2,481
|
|
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2017
|
|
December 31
2016
|
Land
|
|
$
|
10,822
|
|
|
$
|
10,606
|
|
Land improvements
|
|
15,398
|
|
|
15,032
|
|
Buildings and improvements
|
|
192,785
|
|
|
185,657
|
|
Machinery and equipment
|
|
1,589,309
|
|
|
1,525,156
|
|
Uncompleted construction
|
|
21,088
|
|
|
21,035
|
|
Gross property, plant and equipment
|
|
1,829,402
|
|
|
1,757,486
|
|
Less: Accumulated depreciation
|
|
(1,345,302
|
)
|
|
(1,267,231
|
)
|
Property, plant and equipment, net
|
|
$
|
484,100
|
|
|
$
|
490,255
|
|
6. Goodwill and Other Intangible Assets
The following table reflects the changes in carrying amounts of goodwill by segment for the
six months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Harsco Metals & Minerals Segment
|
|
Harsco Industrial Segment
|
|
Harsco Rail
Segment
|
|
Consolidated
Totals
|
Balance at December 31, 2016
|
|
$
|
362,386
|
|
|
$
|
6,839
|
|
|
$
|
13,026
|
|
|
$
|
382,251
|
|
Foreign currency translation
|
|
11,553
|
|
|
—
|
|
|
—
|
|
|
11,553
|
|
Balance at June 30, 2017
|
|
$
|
373,939
|
|
|
$
|
6,839
|
|
|
$
|
13,026
|
|
|
$
|
393,804
|
|
The Company’s
2016
annual goodwill impairment testing did not result in any impairment of the Company’s goodwill. The fair value of the Harsco Metals & Minerals Segment exceeded the carrying value by approximately 12%. The Company tests for goodwill impairment annually or more frequently if indicators of impairment exist, or if a decision is made to dispose of a business. The Company performs the annual goodwill impairment test as of October 1 and monitors for triggering events on an ongoing basis. The Company determined that, as of
June 30, 2017
, no interim goodwill impairment testing was necessary.
Intangible assets included in the caption, Intangible assets, net, on the Condensed Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Customer related
|
|
$
|
150,373
|
|
|
$
|
117,365
|
|
|
$
|
146,840
|
|
|
$
|
112,610
|
|
Patents
|
|
5,783
|
|
|
5,649
|
|
|
5,729
|
|
|
5,534
|
|
Technology related
|
|
25,918
|
|
|
25,907
|
|
|
25,687
|
|
|
25,634
|
|
Trade names
|
|
8,312
|
|
|
4,687
|
|
|
8,306
|
|
|
4,529
|
|
Other
|
|
8,709
|
|
|
5,515
|
|
|
8,512
|
|
|
5,200
|
|
Total
|
|
$
|
199,095
|
|
|
$
|
159,123
|
|
|
$
|
195,074
|
|
|
$
|
153,507
|
|
Amortization expense for intangible assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amortization expense for intangible assets
|
|
$
|
1,280
|
|
|
$
|
2,050
|
|
|
$
|
2,598
|
|
|
$
|
4,155
|
|
The estimated amortization expense for the next five fiscal years based on current intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
Estimated amortization expense
(a)
|
|
$
|
5,000
|
|
|
$
|
4,750
|
|
|
$
|
4,500
|
|
|
$
|
4,250
|
|
|
$
|
4,000
|
|
(a) These estimated amortization expense amounts do not reflect the potential effect of future foreign currency exchange fluctuations.
7. Employee Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30
|
Defined Benefit Pension Plans Net Periodic Pension Cost
|
|
U.S. Plans
|
|
International Plans
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
942
|
|
|
$
|
946
|
|
|
$
|
406
|
|
|
$
|
405
|
|
Interest cost
|
|
2,470
|
|
|
2,545
|
|
|
5,773
|
|
|
6,984
|
|
Expected return on plan assets
|
|
(3,552
|
)
|
|
(3,601
|
)
|
|
(10,515
|
)
|
|
(11,219
|
)
|
Recognized prior service costs
|
|
8
|
|
|
15
|
|
|
46
|
|
|
45
|
|
Recognized loss
|
|
1,425
|
|
|
1,372
|
|
|
4,087
|
|
|
3,142
|
|
Defined benefit pension plans net periodic pension cost (income)
|
|
$
|
1,293
|
|
|
$
|
1,277
|
|
|
$
|
(203
|
)
|
|
$
|
(643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30
|
Defined Benefit Pension Plans Net Periodic Pension Cost
|
|
U.S. Plans
|
|
International Plans
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service costs
|
|
$
|
1,884
|
|
|
$
|
1,892
|
|
|
$
|
817
|
|
|
$
|
809
|
|
Interest cost
|
|
4,939
|
|
|
5,090
|
|
|
11,507
|
|
|
14,107
|
|
Expected return on plan assets
|
|
(7,104
|
)
|
|
(7,202
|
)
|
|
(20,939
|
)
|
|
(22,682
|
)
|
Recognized prior service costs
|
|
16
|
|
|
31
|
|
|
91
|
|
|
89
|
|
Recognized loss
|
|
2,850
|
|
|
2,744
|
|
|
8,129
|
|
|
6,360
|
|
Defined benefit pension plans net periodic pension cost (income)
|
|
$
|
2,585
|
|
|
$
|
2,555
|
|
|
$
|
(395
|
)
|
|
$
|
(1,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Company Contributions
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Defined benefit pension plans (U.S.)
|
|
$
|
471
|
|
|
$
|
470
|
|
|
$
|
942
|
|
|
$
|
940
|
|
Defined benefit pension plans (International)
|
|
2,963
|
|
|
3,254
|
|
|
11,300
|
|
|
13,052
|
|
Multiemployer pension plans
|
|
498
|
|
|
505
|
|
|
983
|
|
|
1,026
|
|
Defined contribution pension plans
|
|
2,468
|
|
|
2,476
|
|
|
5,028
|
|
|
5,302
|
|
The Company's estimate of expected contributions to be paid during the remainder of
2017
for the U.S. and international defined benefit pension plans are
$5.3 million
and
$6.2 million
, respectively.
8. Income Taxes
Income tax expense related to continuing operations for the
three and six months ended
June 30, 2017
was
$11.2 million
and
$17.5 million
, respectively. Income tax expense related to continuing operations for the
three and six months ended
June 30, 2016
was
$12.0 million
and
$9.8 million
, respectively.
An income tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, based on technical merits, including resolutions of any related appeals or litigation processes. The reserve for uncertain tax positions at
June 30, 2017
was
$5.7 million
, including interest and penalties. Within the next twelve months, it is reasonably possible that
$0.8 million
of unrecognized income tax benefits will be recognized upon settlement of tax examinations and the expiration of various statutes of limitations.
9. Commitments and Contingencies
Environmental
The Company is involved in a number of environmental remediation investigations and cleanups and, along with other companies, has been identified as a “potentially responsible party” for certain waste disposal sites. While each of these matters is subject to various uncertainties, it is probable that the Company will agree to make payments toward funding certain of these activities, and it is possible that some of these matters will be decided unfavorably to the Company. The Company has evaluated its potential liability, and its financial exposure is dependent upon such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the allocation of cost among potentially responsible parties, the years of remedial activity required and the remediation methods selected. The Company did not have any material accruals or record any material expenses related to environmental matters during the periods presented.
The Company evaluates its liability for future environmental remediation costs on a quarterly basis. Although actual costs to be incurred at identified sites in future periods may vary from the estimates (given inherent uncertainties in evaluating environmental exposures), the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with environmental matters in excess of the amounts accrued would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Brazilian Tax Disputes
The Company is involved in a number of tax disputes with federal, state and municipal tax authorities in Brazil. These disputes are at various stages of the legal process, including the administrative review phase and the collection action phase, and include assessments of fixed amounts of principal and penalties, plus interest charges that increase at statutorily determined amounts per month and are assessed on the aggregate amount of the principal and penalties. In addition, the losing party at the collection action or court of appeals phase could be subject to a charge to cover statutorily mandated legal fees, which are generally calculated as a percentage of the total assessed amounts due, inclusive of penalty and interest. A large number of the claims relate to value-added ("ICMS"), services and social security tax disputes. The largest proportion of the assessed amounts relate to ICMS claims filed by the State Revenue Authorities from the State of São Paulo, Brazil (the "SPRA"), encompassing the period from January 2002 to May 2005.
In October 2009, the Company received notification of the SPRA’s final administrative decision regarding the levying of ICMS in the State of São Paulo in relation to services provided to a customer in the State between January 2004 and May 2005. As of
June 30, 2017
, the principal amount of the tax assessment from the SPRA with regard to this case is approximately
$2 million
, with penalty, interest and fees assessed to date increasing such amount by an additional
$24 million
. Any change in the aggregate amount since the Company’s last Annual Report on Form 10-K for the year ended
December 31, 2016
is due to an increase in assessed interest and statutorily mandated legal fees for the period, as well as foreign currency translation.
Another ICMS tax case involving the SPRA refers to the tax period from January 2002 to December 2003, and has not yet reached the judicial phase. The aggregate amount assessed by the tax authorities in August 2005 was
$7.6 million
(the amounts with regard to this claim are valued as of the date of the assessment since it has not yet reached the collection phase), composed of a principal amount of
$1.8 million
, with penalty and interest assessed through that date increasing such amount by an additional
$5.8 million
. All such amounts include the effect of foreign currency translation.
The Company continues to believe that it is not probable that it will incur a loss for these assessments by the SPRA. The Company also continues to believe that sufficient coverage for these claims exists as a result of the Company’s customer’s indemnification obligations and such customer’s pledge of assets in connection with the October 2009 notice, as required by Brazilian law.
The Company intends to continue its practice of vigorously defending itself against these tax claims under various alternatives, including judicial appeal. The Company will continue to evaluate its potential liability with regard to these claims on a quarterly basis; however, it is not possible to predict the ultimate outcome of these tax-related disputes in Brazil. No loss provision has been recorded in the Company's condensed consolidated financial statements for the disputes described above because the loss contingency is not deemed probable, and the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with Brazilian tax disputes would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Brazilian Labor Disputes
The Company is subject to collective bargaining and individual labor claims in Brazil through the Harsco Metals & Minerals Segment which allege, among other things, the Company's failure to pay required amounts for overtime and vacation at certain sites. The Company is vigorously defending itself against these claims; however, litigation is inherently unpredictable, particularly in foreign jurisdictions. While the Company does not currently expect that the ultimate resolution of these claims will have a material adverse effect on the Company’s financial condition, results of operations or cash flows, it is not possible to predict the ultimate outcome of these labor-related disputes.
The Company is continuing to review all known labor claims and as of
June 30, 2017
and
December 31, 2016
, the Company has established reserves of
$8.0 million
and
$7.9 million
, respectively, on the Company's Condensed Consolidated Balance Sheets for amounts considered to be probable and estimable. As the Company continues to evaluate these claims and takes actions to address them, the amount of established reserves may be impacted.
Customer Disputes
The Company, through its Harsco Metals & Minerals Segment, may, in the normal course of business, become involved in commercial disputes with subcontractors or customers.
During the first quarter of 2015, a rail grinder manufactured by the Company's Harsco Rail Segment and operated by a subcontractor caught fire, causing a customer to incur monetary damages. Depending on the cause of the fire and the extent of insurance coverage, the Company's results of operations and cash flows may be impacted in future periods.
Although results of operations and cash flows for a given period could be adversely affected by a negative outcome in these or other lawsuits, claims or proceedings, management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Lima Refinery Litigation
On April 8, 2016, Lima Refining Company filed a lawsuit against the Company in the District Court of Harris County, Texas related to a January 2015 explosion at an oil refinery operated by Lima Refining Company. The action seeks approximately
$106 million
in property damages and approximately
$289 million
in lost profits and business interruption damages. The action alleges the explosion occurred because of a defect in a heat exchange cooler manufactured by Hammco Corporation ("Hammco") in 2009, prior to the Company’s acquisition of Hammco in 2014. The Company is vigorously contesting the allegations against it, both as to liability for the accident and the amount of the claimed damages. As a result, the Company believes the situation will not result in a probable loss. The Company has both an indemnity right from the sellers of Hammco and liability insurance coverage under various primary and excess policies that the Company believes will be available, if necessary, to cover substantially all of any such liability that might ultimately be incurred in the above action.
U.K. Health and Safety Executive Matter
In the third quarter of 2016, a subsidiary in the Company’s Harsco Metals & Minerals Segment, along with one of its customers, was named as a co-defendant in an action brought by the U.K. Health and Safety Executive in the U.K. Crown Court Sitting at Kingston-Upon-Hull. The action relates to a fatal accident involving one of the customer’s employees in 2010. The action seeks to levy a fine against the Company. The Company believes it is not responsible for the accident and is defending the action vigorously. A loss provision related to this action has not been recorded in the Company’s condensed consolidated financial statements, because the Company believes that a loss is not probable. If the outcome of the proceedings is unfavorable, the Company does not believe it would have a material adverse effect on the Company's financial condition, however an unfavorable decision could have a material impact on the Company's results of operations in any one period.
Other
The Company is named as one of many defendants (approximately
90
or more in most cases) in legal actions in the U.S. alleging personal injury from exposure to airborne asbestos over the past several decades. In their suits, the plaintiffs have named as defendants, among others, many manufacturers, distributors and installers of numerous types of equipment or products that allegedly contained asbestos.
The Company believes that the claims against it are without merit. The Company has never been a producer, manufacturer or processor of asbestos fibers. Any asbestos-containing part of a Company product used in the past was purchased from a supplier and the asbestos encapsulated in other materials such that airborne exposure, if it occurred, was not harmful and is not associated with the types of injuries alleged in the pending actions.
At
June 30, 2017
, there were
17,164
pending asbestos personal injury actions filed against the Company. Of those actions,
16,752
were filed in the New York Supreme Court (New York County),
111
were filed in other New York State Supreme Court Counties and
301
were filed in courts located in other states.
The complaints in most of those actions generally follow a form that contains a standard damages demand of
$20 million
or
$25 million
, regardless of the individual plaintiff’s alleged medical condition, and without identifying any specific Company product.
At
June 30, 2017
,
16,730
of the actions filed in New York Supreme Court (New York County) were on the Deferred/Inactive Docket created by the court in December 2002 for all pending and future asbestos actions filed by persons who cannot demonstrate that they have a malignant condition or discernible physical impairment. The remaining
22
cases in New York County are pending on the Active or In Extremis Docket created for plaintiffs who can demonstrate a malignant condition or physical impairment.
The Company has liability insurance coverage under various primary and excess policies that the Company believes will be available, if necessary, to substantially cover any liability that might ultimately be incurred in the asbestos actions referred to above. The Company believes that a substantial portion of the costs and expenses of the asbestos actions will be paid by the Company’s insurers.
In view of the persistence of asbestos litigation in the U.S., the Company expects to continue to receive additional claims in the future. The Company intends to continue its practice of vigorously defending these claims and cases. At
June 30, 2017
, the Company has obtained dismissal in
27,921
cases by stipulation or summary judgment prior to trial.
It is not possible to predict the ultimate outcome of asbestos-related actions in the U.S. due to the unpredictable nature of this litigation, and no loss provision has been recorded in the Company's condensed consolidated financial statements because a loss contingency is not deemed probable or estimable. Despite this uncertainty, and although results of operations and cash flows for a given period could be adversely affected by asbestos-related actions, the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with asbestos litigation would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
The Company is subject to various other claims and legal proceedings covering a wide range of matters that arose in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or by established reserves, and, if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
Insurance liabilities are recorded when it is probable that a liability has been incurred for a particular event and the amount of loss associated with the event can be reasonably estimated. Insurance reserves have been estimated based primarily upon actuarial calculations and reflect the undiscounted estimated liabilities for ultimate losses, including claims incurred but not reported. Inherent in these estimates are assumptions that are based on the Company's history of claims and losses, a detailed analysis of existing claims with respect to potential value, and current legal and legislative trends. If actual claims differ from those projected by management, changes (either increases or decreases) to insurance reserves may be required and would be recorded through income in the period the change was determined. When a recognized liability is covered by third-party insurance, the Company records an insurance claim receivable to reflect the covered liability. Insurance claim receivables are included in Other receivables on the Company's Condensed Consolidated Balance Sheets. See Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
for additional information on Accrued insurance and loss reserves.
10. Reconciliation of Basic and Diluted Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands, except per share amounts)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income (loss) from continuing operations attributable to Harsco Corporation common stockholders
|
|
$
|
18,635
|
|
|
$
|
(27,994
|
)
|
|
$
|
27,902
|
|
|
$
|
(38,544
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
|
80,535
|
|
|
80,337
|
|
|
80,460
|
|
|
80,288
|
|
Dilutive effect of stock-based compensation
|
|
2,315
|
|
|
—
|
|
|
2,098
|
|
|
—
|
|
Weighted-average shares outstanding - diluted
|
|
82,850
|
|
|
80,337
|
|
|
82,558
|
|
|
80,288
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common share, attributable to Harsco Corporation common stockholders:
|
Basic
|
|
$
|
0.23
|
|
|
$
|
(0.35
|
)
|
|
$
|
0.35
|
|
|
$
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.22
|
|
|
$
|
(0.35
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.48
|
)
|
The following average outstanding stock-based compensation units were not included in the computation of diluted earnings (loss) per share because the effect was antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Restricted stock units
|
|
—
|
|
|
957
|
|
|
—
|
|
|
694
|
|
Stock options
|
|
55
|
|
|
90
|
|
|
55
|
|
|
90
|
|
Stock appreciation rights
|
|
972
|
|
|
1,641
|
|
|
1,117
|
|
|
1,364
|
|
Performance share units
|
|
176
|
|
|
835
|
|
|
320
|
|
|
572
|
|
11. Derivative Instruments, Hedging Activities and Fair Value
Derivative Instruments and Hedging Activities
The Company uses derivative instruments, including foreign currency exchange forward contracts, interest rate swaps and cross-currency interest rate swaps ("CCIRs"), to manage certain foreign currency and interest rate exposures. Derivative instruments are viewed as risk management tools by the Company and are not used for trading or speculative purposes.
All derivative instruments are recorded on the Condensed Consolidated Balance Sheets at fair value. Changes in the fair value of derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings, along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments may be accounted for as cash flow hedges, as deemed appropriate if the criteria for hedge accounting are met. Gains and losses on derivatives designated as cash flow hedges are deferred in Accumulated other comprehensive loss, a separate component of equity, and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, is recognized currently in earnings.
The fair value of outstanding derivative contracts recorded as assets and liabilities on the Condensed Consolidated Balance Sheets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(In thousands)
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
June 30, 2017
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
Foreign currency exchange forward contracts
|
|
Other current assets
|
|
$
|
895
|
|
|
Other current liabilities
|
|
$
|
60
|
|
Cross-currency interest rate swaps
|
|
Other current assets
|
|
206
|
|
|
|
|
—
|
|
Interest rate swaps
|
|
|
|
—
|
|
|
Other current liabilities
|
|
196
|
|
Interest rate swaps
|
|
Other assets
|
|
35
|
|
|
Other liabilities
|
|
2,382
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
1,136
|
|
|
|
|
$
|
2,638
|
|
Derivatives not designated as hedging instruments
:
|
Foreign currency exchange forward contracts
|
|
Other current assets
|
|
$
|
2,311
|
|
|
Other current liabilities
|
|
$
|
17,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(In thousands)
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
Foreign currency exchange forward contracts
|
|
Other current assets
|
|
$
|
473
|
|
|
Other current liabilities
|
|
$
|
166
|
|
Cross-currency interest rate swaps
|
|
Other current assets
|
|
514
|
|
|
|
|
—
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
987
|
|
|
|
|
$
|
166
|
|
Derivatives not designated as hedging instruments
:
|
Foreign currency exchange forward contracts
|
|
Other current assets
|
|
$
|
4,459
|
|
|
Other current liabilities
|
|
$
|
3,372
|
|
All of the Company's derivatives are recorded in the Condensed Consolidated Balance Sheets at gross amounts and not offset. All of the Company's interest rate swaps, CCIRs and certain foreign currency exchange forward contracts are transacted under International Swaps and Derivatives Association ("ISDA") documentation. Each ISDA master agreement permits the net settlement of amounts owed in the event of default. The Company's derivative assets and liabilities subject to enforceable master netting arrangements did not result in a net asset or net liability at either
June 30, 2017
or
December 31, 2016
.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income (Loss), was as follows:
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amount
Recognized in Other
Comprehensive
Income (“OCI”) on Derivative -
Effective Portion
|
|
Location of Amount Reclassified
from Accumulated
OCI into Income -
Effective Portion
|
|
Amount
Reclassified from
Accumulated OCI into Income -
Effective Portion
|
|
Location of Amount Recognized in Income on Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
|
|
Amount Recognized in Income on Derivative - Ineffective Portion and Amount
Excluded from
Effectiveness Testing
|
|
Three Months Ended June 30, 2017:
|
Foreign currency exchange forward contracts
|
|
$
|
1,001
|
|
|
Product revenues/Cost of services and products sold
|
|
$
|
(186
|
)
|
|
|
|
$
|
—
|
|
|
Interest rate swaps
|
|
(2,021
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
|
Cross-currency interest rate swaps
|
|
3
|
|
|
Interest expense
|
|
251
|
|
|
Cost of services and products sold
|
|
(107
|
)
|
(a)
|
|
|
$
|
(1,017
|
)
|
|
|
|
$
|
65
|
|
|
|
|
$
|
(107
|
)
|
|
Three Months Ended June 30, 2016:
|
Foreign currency exchange forward contracts
|
|
$
|
(305
|
)
|
|
Cost of services and products sold
|
|
$
|
(1
|
)
|
|
|
|
$
|
—
|
|
|
Cross-currency interest rate swaps
|
|
(520
|
)
|
|
Interest expense
|
|
281
|
|
|
Cost of services and products sold
|
|
(42
|
)
|
(a)
|
|
|
$
|
(825
|
)
|
|
|
|
$
|
280
|
|
|
|
|
$
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amount
Recognized in OCI on Derivative -
Effective Portion
|
|
Location Amount
Reclassified
from Accumulated
OCI into Income -
Effective Portion
|
|
Amount
Reclassified from
Accumulated OCI into Income -
Effective Portion
|
|
Location of Amount Recognized in Income on Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
|
|
Amount Recognized in Income on Derivative - Ineffective Portion and Amount
Excluded from
Effectiveness Testing
|
|
Six Months Ended June 30, 2017:
|
Foreign currency forward exchange contracts
|
|
$
|
763
|
|
|
Product revenues / Cost of services and products sold
|
|
$
|
(185
|
)
|
|
|
|
$
|
—
|
|
|
Interest rate swaps
|
|
(2,543
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
|
Cross currency interest rate swaps
|
|
(123
|
)
|
|
Interest expense
|
|
493
|
|
|
Cost of services and products sold
|
|
(317
|
)
|
(a)
|
|
|
$
|
(1,903
|
)
|
|
|
|
$
|
308
|
|
|
|
|
$
|
(317
|
)
|
|
Six Months Ended June 30, 2016:
|
Foreign currency forward exchange contracts
|
|
$
|
(630
|
)
|
|
Product revenues / Cost of services and products sold
|
|
$
|
(409
|
)
|
|
|
|
$
|
—
|
|
|
Cross currency interest rate swaps
|
|
(2,151
|
)
|
|
Interest expense
|
|
224
|
|
|
Cost of services and products sold
|
|
4,219
|
|
(a)
|
|
|
$
|
(2,781
|
)
|
|
|
|
$
|
(185
|
)
|
|
|
|
$
|
4,219
|
|
|
(a) These gains offset foreign currency fluctuation effects on the debt principal.
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
(Loss) Recognized in
Income on Derivative
|
|
Amount of Gain (Loss) Recognized in
Income on Derivative for the
Three Months Ended June 30 (b)
|
(In thousands)
|
|
|
2017
|
|
2016
|
Foreign currency exchange forward contracts
|
|
Cost of services and products sold
|
|
$
|
(13,289
|
)
|
|
$
|
8,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
(Loss) Recognized in
Income on Derivative
|
|
Amount of Gain (Loss) Recognized in
Income on Derivative for the
Six Months Ended June 30 (b)
|
(In thousands)
|
|
|
2017
|
|
2016
|
Foreign currency forward exchange contracts
|
|
Cost of services and products sold
|
|
$
|
(11,739
|
)
|
|
$
|
1,739
|
|
(b) These gains (losses) offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.
Foreign Currency Exchange Forward Contracts
The Company conducts business in multiple currencies and, accordingly, is subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of substantially all of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred and recorded in Accumulated other comprehensive loss, which is a separate component of equity.
The Company uses derivative instruments to hedge cash flows related to foreign currency fluctuations. Foreign currency exchange forward contracts outstanding are part of a worldwide program to minimize foreign currency exchange operating income and balance sheet exposure by offsetting foreign currency exposures of certain future payments between the Company and various subsidiaries, suppliers or customers. The unsecured contracts are with major financial institutions. The Company may be exposed to credit loss in the event of non-performance by the contract counterparties. The Company evaluates the creditworthiness of the counterparties and does not expect default by them. Foreign currency exchange forward contracts are used to hedge commitments, such as foreign currency debt, firm purchase commitments and foreign currency cash flows for certain export sales transactions.
The following tables summarize, by major currency, the contractual amounts of the Company’s foreign currency exchange forward contracts in U.S. dollars. The “Buy” amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the “Sell” amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. The recognized gains and losses offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.
Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Type
|
|
U.S. Dollar
Equivalent
|
|
Maturity
|
|
Recognized
Gain (Loss)
|
British pounds sterling
|
|
Sell
|
|
$
|
69,228
|
|
|
July 2017
|
|
$
|
(1,516
|
)
|
British pounds sterling
|
|
Buy
|
|
9,788
|
|
|
July 2017 through September 2017
|
|
108
|
|
Euros
|
|
Sell
|
|
304,566
|
|
|
July 2017 through December 2017
|
|
(14,233
|
)
|
Euros
|
|
Buy
|
|
163,183
|
|
|
July 2017 through May 2018
|
|
2,482
|
|
Other currencies
|
|
Sell
|
|
47,184
|
|
|
July 2017 through December 2017
|
|
(880
|
)
|
Other currencies
|
|
Buy
|
|
14,292
|
|
|
July 2017 through January 2018
|
|
54
|
|
Total
|
|
|
|
$
|
608,241
|
|
|
|
|
$
|
(13,985
|
)
|
Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Type
|
|
U.S. Dollar
Equivalent
|
|
Maturity
|
|
Recognized
Gain (Loss)
|
British pounds sterling
|
|
Sell
|
|
$
|
55,120
|
|
|
January 2017
|
|
$
|
(228
|
)
|
British pounds sterling
|
|
Buy
|
|
827
|
|
|
March 2017
|
|
(14
|
)
|
Euros
|
|
Sell
|
|
326,797
|
|
|
January 2017 through December 2017
|
|
628
|
|
Euros
|
|
Buy
|
|
171,578
|
|
|
January 2017 through January 2018
|
|
(468
|
)
|
Other currencies
|
|
Sell
|
|
43,455
|
|
|
January 2017 through September 2017
|
|
1,477
|
|
Other currencies
|
|
Buy
|
|
3,106
|
|
|
March 2017
|
|
(1
|
)
|
Total
|
|
|
|
$
|
600,883
|
|
|
|
|
$
|
1,394
|
|
In addition to foreign currency exchange forward contracts, the Company designates certain loans as hedges of net investments in international subsidiaries. The Company recorded pre-tax net gains of
$7.7 million
and
$9.5 million
during the
three and six months ended
June 30, 2017
, respectively and pre-tax net losses of
$16.4 million
and
$20.3 million
during the
three and six months ended
June 30, 2016
, respectively, in
Accumulated other comprehensive loss
.
Interest Rate Swaps
The Company uses interest rate swaps in conjunction with certain debt issuances in order to secure a fixed interest rate. The interest rate swaps are recorded on the Condensed Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps’ interest spread and changes in the credit worthiness of the counter-parties recorded in Accumulated other comprehensive loss.
In January 2017, the Company entered into a series of fixed to floating interest rate swaps that cover the period from 2018 through 2021, and had the effect of converting
$300.0 million
of the Term Loan Facility from floating-rate to fixed-rate beginning in 2018. The fixed rates provided by the swaps replace the adjusted LIBOR rate in the interest calculation, range from
1.65%
for 2018 to
2.71%
for 2021.
The following table indicates the notional amounts of the Company's interest rate swaps at
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Notional Amount
|
|
Interest Rates
|
(In millions)
|
|
|
Receive
|
|
Pay
|
Maturing 2018 through 2021
|
|
$
|
300.0
|
|
|
Floating U.S. dollar rate
|
|
Fixed U.S. dollar rate
|
Cross-Currency Interest Rate Swaps (CCIRs)
The Company uses CCIRs in conjunction with certain debt issuances in order to secure a fixed local currency interest rate. Under these CCIRs, the Company receives interest based on a fixed or floating U.S. dollar rate and pays interest on a fixed local currency rate based on the contractual amounts in dollars and the local currency, respectively. At maturity, there is also the payment of principal amounts between currencies. The CCIRs are recorded on the Condensed Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps’ interest spread and changes in the credit worthiness of the counter-parties recorded in Accumulated other comprehensive loss. Changes in value attributed to the effect of foreign currency fluctuations are recorded on the Condensed Consolidated Statements of Operations and offset currency fluctuation effects on the debt principal.
The following table indicates the contractual amounts of the Company's CCIRs at
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates
|
(In millions)
|
|
Contractual Amount
|
|
Receive
|
|
Pay
|
Maturing 2017
|
|
$
|
1.4
|
|
|
Floating U.S. dollar rate
|
|
Fixed rupee rate
|
During March 2016, the Company effected the early termination of the British pound sterling CCIR with an original maturity date of 2020. The Company received
$16.6 million
in cash related to this termination. There was no gain or loss recorded on the termination, as any change in value attributable to the effect of foreign currency translation was previously recognized in the Condensed Consolidated Statements of Operations.
Fair Value of Derivative Assets and Liabilities and Other Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The Company utilizes market data or assumptions that the Company believes market participants would use in valuing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described below:
|
|
•
|
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
•
|
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
•
|
Level 3—Inputs that are both significant to the fair value measurement and unobservable.
|
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The following table indicates the fair value hierarchy of the financial instruments of the Company:
|
|
|
|
|
|
|
|
|
|
Level 2 Fair Value Measurements
(In thousands)
|
|
June 30
2017
|
|
December 31
2016
|
Assets
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
|
$
|
3,206
|
|
|
$
|
4,932
|
|
Interest rate swaps
|
|
35
|
|
|
—
|
|
Cross-currency interest rate swaps
|
|
206
|
|
|
514
|
|
Liabilities
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
|
17,191
|
|
|
3,538
|
|
Interest rate swaps
|
|
2,578
|
|
|
—
|
|
The following table reconciles the beginning and ending balances for liabilities measured on a recurring basis using unobservable inputs (Level 3):
|
|
|
|
|
|
Level 3 Liabilities—Unit Adjustment Liability (c) for the Six Months Ended June 30
(In thousands)
|
|
Six Months Ended
|
|
June 30
|
|
2016
|
Balance at beginning of period
|
|
$
|
79,934
|
|
Reduction in the fair value related to election not to make 2016 payments
|
|
(19,145
|
)
|
Change in fair value to the unit adjustment liability
|
|
3,402
|
|
Balance at end of period
|
|
$
|
64,191
|
|
|
|
(c)
|
During the quarter ended March 31, 2016, the Company decided that it would not make the four quarterly payments to CD&R for 2016. This resulted in the Company revaluing the Unit Adjustment Liability. The Company sold its investment in Brand in September 2016 and the unit adjustment liability ceased at that time. See Note 4, Equity Method Investment, for additional information related to the unit adjustment liability.
|
The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs, such as forward rates, interest rates, the Company’s credit risk and counterparties’ credit risks, and which minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the ability to observe those inputs. Foreign currency exchange forward contracts, interest rate swaps and CCIRs are classified as Level 2 fair value based upon pricing models using market-based inputs. Model inputs can be verified, and valuation techniques do not involve significant management judgment.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short-term maturities of these assets and liabilities. At
June 30, 2017
and
December 31, 2016
, the total fair value of long-term debt (excluding deferred financing costs), including current maturities, was
$658.6 million
and
$682.9 million
, respectively, compared with a carrying value of
$651.4 million
and
$673.4 million
, respectively. Fair values for debt are based on quoted market prices (Level 1) for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities (Level 2).
12. Review of Operations by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues From Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
Harsco Metals & Minerals
|
|
$
|
259,306
|
|
|
$
|
253,560
|
|
|
$
|
506,340
|
|
|
$
|
483,232
|
|
Harsco Industrial
|
|
73,563
|
|
|
66,270
|
|
|
139,448
|
|
|
128,139
|
|
Harsco Rail
|
|
61,994
|
|
|
50,103
|
|
|
121,582
|
|
|
111,843
|
|
Corporate
|
|
35
|
|
|
—
|
|
|
69
|
|
|
—
|
|
Total Revenues From Continuing Operations
|
|
$
|
394,898
|
|
|
$
|
369,933
|
|
|
$
|
767,439
|
|
|
$
|
723,214
|
|
Operating Income (Loss) From Continuing Operations
|
Harsco Metals & Minerals
|
|
$
|
32,177
|
|
|
$
|
30,927
|
|
|
$
|
58,606
|
|
|
$
|
37,868
|
|
Harsco Industrial
|
|
9,151
|
|
|
7,300
|
|
|
11,955
|
|
|
13,771
|
|
Harsco Rail
|
|
7,961
|
|
|
(31,948
|
)
|
|
13,947
|
|
|
(27,042
|
)
|
Corporate
|
|
(6,815
|
)
|
|
(4,965
|
)
|
|
(14,126
|
)
|
|
(13,852
|
)
|
Total Operating Income From Continuing Operations
|
|
$
|
42,474
|
|
|
$
|
1,314
|
|
|
$
|
70,382
|
|
|
$
|
10,745
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
Harsco Metals & Minerals
|
|
$
|
27,928
|
|
|
$
|
30,662
|
|
|
$
|
55,808
|
|
|
$
|
61,687
|
|
Harsco Industrial
|
|
1,843
|
|
|
1,850
|
|
|
3,683
|
|
|
3,568
|
|
Harsco Rail
|
|
1,025
|
|
|
1,361
|
|
|
2,062
|
|
|
2,795
|
|
Corporate
|
|
1,479
|
|
|
1,744
|
|
|
2,950
|
|
|
3,612
|
|
Total Depreciation and Amortization
|
|
$
|
32,275
|
|
|
$
|
35,617
|
|
|
$
|
64,503
|
|
|
$
|
71,662
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Harsco Metals & Minerals
|
|
$
|
21,599
|
|
|
$
|
13,305
|
|
|
$
|
37,071
|
|
|
$
|
28,725
|
|
Harsco Industrial
|
|
796
|
|
|
1,162
|
|
|
1,548
|
|
|
2,296
|
|
Harsco Rail
|
|
1,083
|
|
|
767
|
|
|
1,303
|
|
|
1,139
|
|
Corporate
|
|
233
|
|
|
(9
|
)
|
|
778
|
|
|
16
|
|
Total Capital Expenditures
|
|
$
|
23,711
|
|
|
$
|
15,225
|
|
|
$
|
40,700
|
|
|
$
|
32,176
|
|
Reconciliation of Segment Operating Income to Income From Continuing Operations Before Income Taxes and Equity Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Segment operating income
|
|
$
|
49,289
|
|
|
$
|
6,279
|
|
|
$
|
84,508
|
|
|
$
|
24,597
|
|
General Corporate expense
|
|
(6,815
|
)
|
|
(4,965
|
)
|
|
(14,126
|
)
|
|
(13,852
|
)
|
Operating income from continuing operations
|
|
42,474
|
|
|
1,314
|
|
|
70,382
|
|
|
10,745
|
|
Interest income
|
|
493
|
|
|
552
|
|
|
1,005
|
|
|
1,087
|
|
Interest expense
|
|
(12,405
|
)
|
|
(13,805
|
)
|
|
(24,058
|
)
|
|
(26,168
|
)
|
Change in fair value to the unit adjustment liability and loss on dilution of equity method investment
|
|
—
|
|
|
(1,489
|
)
|
|
—
|
|
|
(13,706
|
)
|
Income (loss) from continuing operations before income taxes and equity income (loss)
|
|
$
|
30,562
|
|
|
$
|
(13,428
|
)
|
|
$
|
47,329
|
|
|
$
|
(28,042
|
)
|
13. Other Expenses
The major components of this Condensed Consolidated Statements of Operations caption are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Employee termination benefit costs
|
|
$
|
1,695
|
|
|
$
|
1,194
|
|
|
$
|
2,448
|
|
|
$
|
6,966
|
|
Harsco Metals & Minerals Segment separation costs
|
|
—
|
|
|
10
|
|
|
—
|
|
|
3,297
|
|
Net gains
(a)
|
|
(88
|
)
|
|
(105
|
)
|
|
(210
|
)
|
|
(757
|
)
|
Other costs to exit activities
|
|
247
|
|
|
36
|
|
|
347
|
|
|
218
|
|
Impaired asset write-downs
|
|
281
|
|
|
23
|
|
|
281
|
|
|
116
|
|
Other
|
|
(63
|
)
|
|
89
|
|
|
100
|
|
|
530
|
|
Other expenses
|
|
$
|
2,072
|
|
|
$
|
1,247
|
|
|
$
|
2,966
|
|
|
$
|
10,370
|
|
|
|
(a)
|
Net gains result from the sales of redundant properties (primarily land, buildings and related equipment) and non-core assets.
|
14. Components of Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is included on the Condensed Consolidated Statements of Equity. The components of Accumulated other comprehensive loss, net of the effect of income taxes, and activity for the
six months ended
June 30, 2016
and
2017
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Accumulated Other Comprehensive Income (Loss) - Net of Tax
|
(In thousands)
|
|
Cumulative Foreign Exchange Translation Adjustments
|
|
Effective Portion of Derivatives Designated as Hedging Instruments
|
|
Cumulative Unrecognized Actuarial Losses on Pension Obligations
|
|
Unrealized Gain (Loss) on Marketable Securities
|
|
Total
|
Balance at December 31, 2015
|
|
$
|
(125,561
|
)
|
|
$
|
(400
|
)
|
|
$
|
(389,696
|
)
|
|
$
|
(31
|
)
|
|
$
|
(515,688
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(9,502
|
)
|
(a)
|
(2,262
|
)
|
(b)
|
23,873
|
|
(a)
|
(3
|
)
|
|
12,106
|
|
Amounts reclassified from accumulated other comprehensive loss, net of tax
|
|
—
|
|
|
(129
|
)
|
|
8,190
|
|
|
—
|
|
|
8,061
|
|
Realized (gains) losses reclassified from accumulated other comprehensive loss in connection with loss on dilution of equity method investment (See Note 4, Equity Method Investments)
|
|
3,079
|
|
|
106
|
|
|
(148
|
)
|
|
—
|
|
|
3,037
|
|
Other comprehensive income (loss) from equity method investee
|
|
3,650
|
|
|
(266
|
)
|
|
380
|
|
|
—
|
|
|
3,764
|
|
Total other comprehensive income (loss)
|
|
(2,773
|
)
|
|
(2,551
|
)
|
|
32,295
|
|
|
(3
|
)
|
|
26,968
|
|
Less: Other comprehensive income (loss) attributable to noncontrolling interests
|
|
425
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
418
|
|
Other comprehensive income (loss) attributable to Harsco Corporation
|
|
(2,348
|
)
|
|
(2,558
|
)
|
|
32,295
|
|
|
(3
|
)
|
|
27,386
|
|
Balance at June 30, 2016
|
|
$
|
(127,909
|
)
|
|
$
|
(2,958
|
)
|
|
$
|
(357,401
|
)
|
|
$
|
(34
|
)
|
|
$
|
(488,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Accumulated Other Comprehensive Income (Loss) - Net of Tax
|
(In thousands)
|
|
Cumulative Foreign Exchange Translation Adjustments
|
|
Effective Portion of Derivatives Designated as Hedging Instruments
|
|
Cumulative Unrecognized Actuarial Losses on Pension Obligations
|
|
Unrealized Gain (Loss) on Marketable Securities
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
(144,534
|
)
|
|
$
|
(1,089
|
)
|
|
$
|
(461,094
|
)
|
|
$
|
(5
|
)
|
|
$
|
(606,722
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
26,386
|
|
(a)
|
(913
|
)
|
(b)
|
(19,185
|
)
|
(a)
|
6
|
|
|
6,294
|
|
Amounts reclassified from accumulated other comprehensive loss, net of tax
|
|
—
|
|
|
185
|
|
|
10,042
|
|
|
—
|
|
|
10,227
|
|
Total other comprehensive income (loss)
|
|
26,386
|
|
|
(728
|
)
|
|
(9,143
|
)
|
|
6
|
|
|
16,521
|
|
Less: Other comprehensive income attributable to noncontrolling interests
|
|
(1,534
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,534
|
)
|
Other comprehensive income (loss) attributable to Harsco Corporation
|
|
24,852
|
|
|
(728
|
)
|
|
(9,143
|
)
|
|
6
|
|
|
14,987
|
|
Balance at June 30, 2017
|
|
$
|
(119,682
|
)
|
|
$
|
(1,817
|
)
|
|
$
|
(470,237
|
)
|
|
$
|
1
|
|
|
$
|
(591,735
|
)
|
|
|
(a)
|
Principally foreign currency fluctuation.
|
|
|
(b)
|
Net change from periodic revaluations.
|
Amounts reclassified from accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Affected Caption in the Condensed Consolidated Statements of Operations
|
|
June 30
2017
|
|
June 30
2016
|
|
June 30
2017
|
|
June 30
2016
|
Amortization of cash flow hedging instruments:
|
Foreign currency exchange forward contracts
|
|
$
|
(189
|
)
|
|
$
|
—
|
|
|
$
|
(189
|
)
|
|
$
|
(408
|
)
|
|
Product revenues
|
Foreign currency exchange forward contracts
|
|
3
|
|
|
(1
|
)
|
|
4
|
|
|
(1
|
)
|
|
Cost of services and products sold
|
Cross-currency interest rate swaps
|
|
251
|
|
|
281
|
|
|
493
|
|
|
224
|
|
|
Interest expense
|
Total before tax
|
|
65
|
|
|
280
|
|
|
308
|
|
|
(185
|
)
|
|
|
Tax expense
|
|
(29
|
)
|
|
(109
|
)
|
|
(123
|
)
|
|
56
|
|
|
|
Total reclassification of cash flow hedging instruments, net of tax
|
|
$
|
36
|
|
|
$
|
171
|
|
|
$
|
185
|
|
|
$
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items
(c)
:
|
Actuarial losses
|
|
$
|
2,706
|
|
|
$
|
2,285
|
|
|
$
|
5,358
|
|
|
$
|
4,661
|
|
|
Selling, general and administrative expenses
|
Actuarial losses
|
|
2,806
|
|
|
2,229
|
|
|
5,621
|
|
|
4,443
|
|
|
Cost of services and products sold
|
Prior-service benefits
|
|
(10
|
)
|
|
(3
|
)
|
|
(22
|
)
|
|
(4
|
)
|
|
Selling, general and administrative expenses
|
Prior-service costs
|
|
64
|
|
|
63
|
|
|
129
|
|
|
124
|
|
|
Cost of services and products sold
|
Total before tax
|
|
5,566
|
|
|
4,574
|
|
|
11,086
|
|
|
9,224
|
|
|
|
Tax benefit
|
|
(522
|
)
|
|
(517
|
)
|
|
(1,044
|
)
|
|
(1,034
|
)
|
|
|
Total reclassification of defined benefit pension items, net of tax
|
|
$
|
5,044
|
|
|
$
|
4,057
|
|
|
$
|
10,042
|
|
|
$
|
8,190
|
|
|
|
(c) These accumulated other comprehensive loss components are included in the computation of net periodic pension costs. See Note 7, Employee Benefit Plans, for additional details.
Amounts reclassified from accumulated other comprehensive loss in connection with loss on dilution of equity method investment are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
|
Six Months Ended
|
|
Affected Caption in the Condensed Consolidated Statements of Operations
|
|
June 30
2016
|
|
Foreign exchange translation adjustments
|
|
$
|
4,880
|
|
|
Change in fair value to the adjustment liability and loss on dilution of equity method investment
|
Cash flow hedging instruments
|
|
168
|
|
|
Change in fair value to the adjustment liability and loss on dilution of equity method investment
|
Defined benefit pension obligations
|
|
(235
|
)
|
|
Change in fair value to the adjustment liability and loss on dilution of equity method investment
|
Total before tax
|
|
4,813
|
|
|
|
Tax benefit
|
|
(1,776
|
)
|
|
|
Total amounts reclassified from accumulated other comprehensive loss in connection with loss on dilution of equity method investment
|
|
$
|
3,037
|
|
|
|