NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The Company has prepared these unaudited condensed consolidated financial statements in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the SEC. Accordingly, the unaudited condensed consolidated financial statements do not include all information and disclosure required by U.S. GAAP for annual financial statements. The December 31, 2021 Condensed Consolidated Balance Sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2021 audited consolidated financial statements. 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, 2021. 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 components of the Condensed Consolidated Statements of Operations caption Facility fees and debt-related income (expense) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Gain (loss) on extinguishment of debt | | $ | 2,254 | | | $ | — | | | $ | 2,254 | | | $ | (2,668) | |
| Unused debt commitment and amendment fees | | (6) | | | (50) | | | (538) | | | (2,640) | |
| Securitization and factoring fees | | (99) | | | — | | | (99) | | | — | |
| Facility fees and debt-related income (expense) | | $ | 2,149 | | | $ | (50) | | | $ | 1,617 | | | $ | (5,308) | |
Liquidity
The Company’s cash flow forecasts, combined with existing cash and cash equivalents, indicate sufficient liquidity to fund the Company’s operations for at least the next twelve months. As such, the Company’s consolidated financial statements have been prepared on the basis that it will continue as a going concern for a period extending beyond twelve months from the date the consolidated financial statements are issued. This assessment includes the expected ability to meet required financial covenants and the continued ability to draw down on the Senior Secured Credit Facilities (see Note 9).
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
During the second quarter of 2022, the Company recognized $2.6 million in service revenues as an out-of-period adjustment in the Harsco Clean Earth Segment. The adjustment was not considered material to the interim or annual consolidated financial statements for the interim periods ended June 30, 2022 or the financial statements of any previously filed interim or annual periods.
2. Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in 2022:
On January 1, 2022, the Company adopted changes issued by the FASB which simplified the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. The adoption of these changes did not have a material impact on the Company's condensed consolidated financial statements.
On January 1, 2022, the Company adopted changes issued by the FASB which improve the transparency of government assistance received by entities. Other than expanded annual disclosures, the adoption of these changes did not have a material impact on the Company's consolidated financial statements.
The following accounting standard has been issued and becomes effective for the Company at a future date:
In March 2020, the FASB issued changes that provide companies with optional guidance to ease the potential accounting burden associated with transitioning from reference rates that are expected to be discontinued. In response to the concerns about risks of IBORs and, particularly, the risk of cessation of LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The changes provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued additional clarification changes. The changes can be adopted no later than December 31, 2022 with early adoption permitted. Management does not believe these changes will have a material impact on the Company's consolidated financial statements.
3. Dispositions
Harsco Rail Segment
In November 2021, the Company announced its intention to sell its Rail business. The sales process was ongoing during the second quarter of 2022. The former Harsco Rail Segment has historically been a separate reportable segment with primary operations in the United States, Europe and Asia Pacific.
The former Harsco Rail Segment's balance sheet positions as of June 30, 2022 and December 31, 2021 are presented as Assets held-for-sale and Liabilities of assets held-for-sale in the Condensed Consolidated Balance Sheets and are summarized as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | June 30
2022 | | December 31
2021 |
| Trade accounts receivable, net | | $ | 44,953 | | | $ | 33,689 | |
| Other receivables | | 4,102 | | | 4,740 | |
| Inventories | | 97,916 | | | 103,560 | |
| Current portion of contract assets | | 89,867 | | | 94,597 | |
| Other current assets | | 26,463 | | | 25,442 | |
| Property, plant and equipment, net | | 39,993 | | | 39,524 | |
| Right-of-use assets, net | | 2,308 | | | 3,108 | |
| Goodwill | | 13,026 | | | 13,026 | |
| Intangible assets, net | | 2,883 | | | 3,081 | |
| Deferred income tax assets | | 5,690 | | | 6,064 | |
| Other assets | | 1,179 | | | 6,432 | |
| Total Rail assets included in Assets held-for-sale | | $ | 328,380 | | | $ | 333,263 | |
| | | | |
| Accounts payable | | $ | 38,906 | | | $ | 46,076 | |
| Accrued compensation | | 1,995 | | | 2,171 | |
| Current portion of operating lease liabilities | | 1,229 | | | 1,619 | |
| Current portion of advances on contracts | | 44,817 | | | 62,401 | |
| Other current liabilities | | 64,422 | | | 49,732 | |
| | | | |
| Operating lease liabilities | | 1,246 | | | 1,775 | |
| Deferred tax liabilities | | 5,699 | | | 5,736 | |
| Other liabilities | | 882 | | | 981 | |
| Total Rail liabilities included in Liabilities of assets held-for-sale | | $ | 159,196 | | | $ | 170,491 | |
The results of the former Harsco Rail Segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the three and six months ended June 30, 2022, and 2021. Certain key selected financial information included in Income (loss) from discontinued operations, net of tax for the former Harsco Rail Segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Amounts directly attributable to the former Harsco Rail Segment: | | | | |
| Service revenues | | $ | 7,488 | | | $ | 7,081 | | | $ | 14,198 | | | $ | 17,190 | |
Product revenues (a) | | 64,396 | | | 94,065 | | | 109,392 | | | 165,546 | |
| Cost of services sold | | 4,589 | | | 3,527 | | | 9,264 | | | 8,180 | |
| Cost of products sold | | 53,260 | | | 75,396 | | | 126,421 | | | 134,458 | |
| Income (loss) from discontinued businesses | | 5,163 | | | 9,690 | | | (30,732) | | | 14,845 | |
| Additional amounts allocated to the former Harsco Rail Segment: | | | | |
Selling, general and administrative expenses (b) | | $ | 1,862 | | | $ | — | | | $ | 3,511 | | | $ | — | |
| | | | | | | | |
(a) The decrease in product revenues for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 is due to liquidated damages and penalties on certain long-term contracts, as discussed below.
(b) The Company has allocated directly attributable transaction costs to discontinued operations.
The Company has retained corporate overhead expenses previously allocated to the former Harsco Rail Segment of $1.1 million and $2.1 million for each of the three and six months ended June 30, 2022, and 2021, respectively, as part of Selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
The Company's former Harsco Rail Segment is currently manufacturing highly-engineered equipment under large long-term fixed-price contracts with SBB, Network Rail, and Deutsche Bahn. As disclosed previously, in the fourth quarter of 2021, the Company recognized an estimated forward loss provision of $33.4 million related to these contracts. In the first quarter of 2022, the Company encountered continued supply chain related delays and additional costs in the build of the machines.
For the Network Rail contracts, the Company encountered additional supply chain delays in the build of the initial machine, and there were further changes to the production schedule based on the manufacturing experience gained from assembling the first unit during the quarter which had a cascading effect on the delivery schedule of remaining machines. During the three and six months ended June 30, 2022, the Company recorded forward loss provisions of $0.3 million and $24.5 million, respectively, principally for additional estimated contractual liquidated damages. The Company continues to negotiate with Network Rail regarding a reduction to these liquidated damages, which could result in additional favorable or unfavorable adjustments in future periods.
For the Deutsche Bahn contract, on March 8, 2022 a European-based supplier of critical components to the project indicated it would be significantly late on the delivery of these components to the project, which has the impact of delaying the overall delivery schedule for the project. As a result, the Company recorded an additional $7.4 million estimated forward loss provision during the first quarter of 2022 due principally to the estimated contractual penalties that would be triggered by this delay. Additionally, this supplier filed for bankruptcy during the second quarter of 2022, although it continues to operate. Should this supplier cease operations, the Company many incur further losses if there are additional costs to change suppliers, an inability to recover the value of prepayments made to the supplier, as well as additional penalties and damages under the contract with Deutsche Bahn in the event of further production delays.
For the second SBB contract, the Company recorded an additional $3.5 million forward estimated loss provision during the first quarter of 2022 due to additional supply chain delays and cost overruns.
The estimated forward loss provisions represent the Company's best estimate based on currently available information. It is possible that the Company's overall estimate of liquidated damages, penalties and costs to complete these contracts may change, which would result in an additional estimated forward loss provision at such time.
The first contract with SBB is complete, and the second contract is 81% complete as of June 30, 2022. The contracts with Network Rail and Deutsche Bahn are 48% and 26% complete, respectively, as of June 30, 2022.
The following is selected financial information included on the Condensed Consolidated Statements of Cash Flows attributable to the former Harsco Rail Segment:
| | | | | | | | | | | | | | |
| | Six Months Ended June 30 |
| (In thousands) | | 2022 | | 2021 |
| Non-cash operating items | | | | |
| Depreciation and amortization | | $ | — | | | $ | 2,588 | |
| Cash flows from investing activities | | | | |
| Purchases of property, plant and equipment | | 1,031 | | | 800 | |
4. Accounts Receivable and Note Receivable
Accounts receivable consist of the following:
| | | | | | | | | | | | | | |
| | June 30
2022 | | December 31
2021 |
| Trade accounts receivable (a) | | $ | 275,946 | | | $ | 389,535 | |
| Less: Allowance for expected credit losses (a) | | (8,199) | | | (11,654) | |
| | | | |
| Trade accounts receivable, net | | $ | 267,747 | | | $ | 377,881 | |
| | | | |
Other receivables (b) | | $ | 28,174 | | | $ | 33,059 | |
(a) The December 31, 2021 amounts for trade accounts receivable and allowance for expected credit losses have been corrected from their previous presentation. These corrections did not impact the amount of the allowance for expected credit losses recorded in the June 30, 2022 Condensed Consolidated Balance Sheets or the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022.
(b) Other receivables include employee receivables, insurance receivable, tax claims and refunds and other miscellaneous items not included in Trade accounts receivable, net.
The provision for expected credit losses related to trade accounts receivable was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Provision for expected credit losses and doubtful accounts related to trade accounts receivable | | $ | (268) | | | $ | 74 | | | $ | 57 | | | $ | 728 | |
At June 30, 2022, $5.6 million of the Company's trade accounts receivable were past due by twelve months or more, with $2.9 million of this amount reserved. Collection of the remaining balance is still ultimately expected.
Accounts Receivable Securitization Facility
On June 24, 2022, the Company entered into a trade receivables securitization facility (“AR Facility”) to accelerate cash flows from trade accounts receivable. Under the AR Facility, the Company and its subsidiaries continuously sell their trade receivables as they are originated to a wholly-owned special purpose entity (“SPE”). The SPE transfers ownership and control of qualifying receivables to PNC Bank, National Association (“PNC”) and other unaffiliated purchasers in exchange for cash. None of the assets or credit of the SPE is available to satisfy the debts and obligations owed to the creditors of the Company or any other person until the obligations of the SPE under the facility have been satisfied. The Company controls and consolidates the SPE in its condensed consolidated financial statements. The AR Facility has a term of three years.
As cash is collected on the trade receivables, the SPE has the ability to continuously transfer ownership and control of new qualifying receivables to PNC and the other unaffiliated purchasers such that the total outstanding balance of trade receivables sold can be up to $150 million at any point in time, which is the maximum purchase commitment of PNC and the other unaffiliated purchasers. The future outstanding balance of trade receivables that are sold is expected to vary based on the level of activity and other factors and could be less than the maximum purchase commitment of $150 million. The Company accounts for receivables sold under the AR Facility as a sale of financial assets and derecognizes these trade receivables from the Company’s Condensed Consolidated Balance Sheets. The total outstanding balance of trade receivables that have been sold and derecognized by the SPE is $120 million as of June 30, 2022. The SPE owned $92.0 million of trade receivables as of June 30, 2022, and these amounts are included in the caption Trade accounts receivable, net on the Condensed Consolidated Balance Sheets. The Company continues to be involved with the trade receivables after they are sold to PNC by acting as servicer.
The fees incurred for the AR Facility are included in Facility fees and debt-related income (expense) on the Condensed Consolidated Statements of Operations. See Note 1, Basis of Presentation, for additional details. The Company capitalized fees of $1.8 million related to the securitization facility, which will be amortized over the term of the agreement.
Upon execution of the AR Facility during the second quarter of 2022, the Company received proceeds of $120.0 million, which is presented as a cash flow from operating activities in the Condensed Consolidated Statements of Cash Flows.
Factoring Arrangement
The Company maintains a factoring arrangement with a financial institution to sell certain accounts receivable that are also accounted for as a sale of financial assets. At June 30, 2022 and December 31, 2021, the amounts outstanding under the arrangement was $12.6 million and $12.9 million, respectively, under a program capacity of $18.8 million and $16.5 million, respectively.
Note Receivable
In January 2020 the Company sold IKG for $85.0 million including cash and a note receivable, subject to post-closing adjustments. The note receivable from the buyer has a face value of $40.0 million, bearing interest at 2.50%, that is paid in kind and matures on January 31, 2027. Any unpaid principal, along with any accrued but unpaid interest is payable at maturity. Prepayment is required in case of a change in control or a percentage of excess cash flow, as defined in the note receivable agreement. Because there are no scheduled payments under the terms of the note receivable, the balance is not classified as current as of June 30, 2022 and is included in the caption Other assets on the Condensed Consolidated Balance Sheet. The initial fair value of the note receivable was $34.3 million which was calculated using an average of various discounted cash flow scenarios based on anticipated timing of repayments (Level 3) and was a non-cash transaction. The note receivable is subsequently measured at amortized cost. Key inputs into the valuation model include: projected timing and amount of cash flows, pro forma debt rating, option-adjusted spread and U.S. Treasury spot rate. During the three and six months ended June 30, 2022, the Company received a payment of $8.6 million related to excess cash flow. At June 30, 2022 the amortized cost of the note receivable was $23.2 million, compared with a fair value of $23.3 million.
| | | | | | | | | | | | | | |
| (In thousands) | | June 30
2022 | | December 31
2021 |
| Note receivable | | $ | 23,205 | | | $ | 31,025 | |
5. Inventories
Inventories consist of the following:
| | | | | | | | | | | | | | |
| (In thousands) | | June 30
2022 | | December 31
2021 |
| Finished goods | | $ | 8,821 | | | $ | 8,323 | |
| Work-in-process | | 4,894 | | | 5,393 | |
| | | | |
| Raw materials and purchased parts | | 27,866 | | | 21,188 | |
| Stores and supplies | | 39,418 | | | 35,589 | |
| Total inventories | | $ | 80,999 | | | $ | 70,493 | |
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
| | | | | | | | | | | | | | |
| (In thousands) | | June 30
2022 | | December 31
2021 |
| Land | | $ | 72,678 | | | $ | 73,067 | |
| Land improvements | | 16,706 | | | 16,970 | |
| Buildings and improvements | | 218,950 | | | 221,236 | |
| Machinery and equipment | | 1,490,695 | | | 1,507,214 | |
| Uncompleted construction | | 61,594 | | | 63,816 | |
| Gross property, plant and equipment | | 1,860,623 | | | 1,882,303 | |
| Less: Accumulated depreciation | | (1,223,143) | | | (1,228,390) | |
| Property, plant and equipment, net | | $ | 637,480 | | | $ | 653,913 | |
In the third quarter of 2020, a customer of the Harsco Environmental Segment in China ceased steel making operations at its steel mill site in order to relocate the operations to a new site, as a result of a government mandate to improve environmental conditions of the area. The Company continues to provide services to the same customer at the new site. The net book value of the idled equipment associated with the previous location is approximately $19 million. The customer has entered into an agreement with the government where it will receive compensation for the losses the customer has incurred as a result of the forced shutdown. The Company has continued discussions with the customer regarding compensation, which are expected to be protracted. While the customer has initially indicated that they will not provide compensation, the Company and the customer continue to discuss and the Company is evaluating its legal position. In addition, there may be other avenues of pursuing recovery, including seeking relief directly from the local government. Considering the ongoing discussions with the customer, and other available avenues, the Company believes it will recover the book value of the equipment and thus does not believe it has an asset impairment as of June 30, 2022. The Company continues to evaluate changes in facts and circumstances and will record any impairment charge, when and if indicated.
7. Leases
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Finance leases: | | | | | | | | |
| Amortization expense | | $ | 979 | | | $ | 474 | | | $ | 1,957 | | | $ | 949 | |
| Interest on lease liabilities | | 182 | | | 109 | | | 365 | | | 211 | |
| Operating leases | | 8,432 | | | 7,933 | | | 16,501 | | | 15,829 | |
| Variable and short-term lease expense | | 11,986 | | | 13,024 | | | 25,329 | | | 25,126 | |
| Sublease income | | (1) | | | (2) | | | (3) | | | (51) | |
| Total lease expense from continuing operations | | $ | 21,578 | | | $ | 21,538 | | | $ | 44,149 | | | $ | 42,064 | |
As of June 30, 2022, the Company had additional operating leases for equipment that had not yet commenced with estimated operating lease obligations of approximately $19 million to be recognized upon anticipated lease commencement in the third and fourth quarters of 2022.
8. 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, 2022:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Harsco Environmental
Segment | | Harsco
Clean Earth
Segment | | Consolidated
Totals |
| Balance at December 31, 2021 | | $ | 399,230 | | | $ | 483,879 | | | $ | 883,109 | |
| | | | | | |
| Goodwill impairment | | — | | | (104,580) | | | (104,580) | |
| Foreign currency translation | | (19,090) | | | — | | | (19,090) | |
| Balance at June 30, 2022 | | $ | 380,140 | | | $ | 379,299 | | | $ | 759,439 | |
|
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 its annual goodwill impairment test as of October 1 and monitors for triggering events on an ongoing basis.
As of June 30, 2022, the Company determined that an interim test of goodwill was required. The triggering event was principally due to lower near-term earnings expectations due to the impacts of inflation. The Company used a discounted cash flow model (“DCF model”) to estimate the current fair value of the Clean Earth reporting unit (Level 3), which is defined as the Clean Earth Segment. A number of significant assumptions and estimates are involved in the preparation of DCF models including future revenues and operating margin growth, the weighted-average cost of capital (“WACC”), tax rates, capital spending, pension funding, the impact of business initiatives and working capital projections. The DCF model is based on approved forecasts for the early years and historical relationships and projections for later years. The WACC rate is derived from internal and external factors including, but not limited to, the average market price of the Company's stock, shares outstanding, book value of the Company's debt, the long-term risk-free interest rate, and both market and size-specific risk premiums. As a result of this testing, the Company recorded a goodwill impairment charge of $104.6 million for the Clean Earth Segment in the second quarter of 2022. This charge had no impact on the Company's cash flows or compliance with debt covenants.
For the Harsco Environmental Segment and the Rail business, the Company determined that, as of June 30, 2022, no interim goodwill impairment testing was necessary. However, a continued economic downturn, including continued cost inflation and labor shortages could impact the Company's future projected cash flows used to estimate fair value, which could result in an impairment charge to any of the Company's segments in a future period.
Other Intangibles
Because of lower-than-expected results for the Altek Group of the Harsco Environmental Segment for 2021 due to the timing of customer orders, the Company tested Altek's asset group's recoverability in the fourth quarter of 2021 and no impairment was recorded. The long-lived assets (other than goodwill) of the Altek Group within the Harsco Environmental Segment primarily consist of intangible assets which have a carrying value of approximately $33 million at June 30, 2022. The Company has not identified any triggering events for the Altek asset group in the second quarter of 2022. However, if actual results prove inconsistent with the Company’s assumptions and judgments of the projected cash flows, it could result in impairment of the Altek intangible assets in future periods.
9. Debt and Credit Agreements
On February 22, 2022, the Company amended its Senior Secured Credit Facilities to reset the levels of its net debt to consolidated adjusted EBITDA ratio covenant. As a result of this amendment, the total net debt to consolidated adjusted EBITDA ratio covenant was set at 5.50 for the quarter ending June 30, 2022, and decreases quarterly by 0.25 until reaching 4.00 for the quarter ending December 31, 2023 and thereafter. In addition, upon closing on the divestiture of the former Harsco Rail Segment, the total net debt to consolidated adjusted EBITDA ratio covenant will decrease by an additional 0.25, provided, however, it will not go below 4.00 and a minimum consolidated adjusted EBITDA to consolidated interest charges ratio covenant, which is not to be less than 3.0. At June 30, 2022 the Company was in compliance with these covenants, as the total net debt to consolidated adjusted EBITDA ratio (as defined in the Credit Agreement) was 4.98 and total interest coverage ratio was 3.8.
The Company believes it will continue to maintain compliance with these covenants based on its current outlook. However, the Company’s estimates of compliance with these covenants could change in the future with a continued deterioration in economic conditions or an inability to successfully execute its plans to realize increased pricing and to implement cost reduction initiatives that substantially mitigate the impacts of inflation and other factors adversely impacting its realized operating margins.
In connection with entering into the AR Facility on June 24, 2022, the Company amended its Senior Secured Credit Facilities to increase the permitted maximum outstanding amount of a securitization facility to $150 million and certain other covenants and definitions were modified to facilitate the AR Facility.
In June 2022, the Company repurchased $25.0 million of its 5.75% Senior Notes on the open market at a discount for $22.4 million. The Company recognized a gain on the extinguishment of debt of $2.3 million, net of the write-off of $0.3 million of previously recorded deferred financing costs, in the caption Facility fees and debt-related income (expense) on the Condensed Consolidated Statement of Operations.
Long-term debt consists of the following: | | | | | | | | | | | | | | |
| (In thousands) | | June 30
2022 | | December 31
2021 |
| | | | |
| Senior Secured Credit Facilities: | | | | |
| New Term Loan | | $ | 495,000 | | | $ | 497,500 | |
| | | | |
| | | | |
| Revolving Credit Facility | | 341,000 | | | 362,000 | |
| 5.75% Senior Notes | | 475,000 | | | 500,000 | |
| Other financing payable (including finance leases) in varying amounts | | 26,392 | | | 28,389 | |
| Total debt obligations | | 1,337,392 | | | 1,387,889 | |
| Less: deferred financing costs | | (16,583) | | | (18,217) | |
| Total debt obligations, net of deferred financing costs | | 1,320,809 | | | 1,369,672 | |
| Less: current maturities of long-term debt | | (17,952) | | | (10,226) | |
| Long-term debt | | $ | 1,302,857 | | | $ | 1,359,446 | |
10. Employee Benefit Plans
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Three Months Ended |
| | June 30 |
| Defined Benefit Pension Plan Net Periodic Pension Cost (Benefit) | | U.S. Plans | | International Plans |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Service costs | | $ | — | | | $ | — | | | $ | 417 | | | $ | 467 | |
| Interest costs | | 1,429 | | | 1,203 | | | 4,128 | | | 3,205 | |
| Expected return on plan assets | | (2,698) | | | (3,050) | | | (9,720) | | | (11,392) | |
| Recognized prior service costs | | — | | | — | | | 113 | | | 128 | |
| Recognized actuarial losses | | 1,183 | | | 1,385 | | | 3,313 | | | 4,586 | |
| | | | | | | | |
| Defined benefit pension plan net periodic pension cost (benefit) | | $ | (86) | | | $ | (462) | | | $ | (1,749) | | | $ | (3,006) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | Six Months Ended |
| | June 30 |
| Defined Benefit Pension Plans Net Periodic Pension Cost (Benefit) | | U.S. Plans | | International Plans |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Service costs | | $ | — | | | $ | — | | | $ | 849 | | | $ | 929 | |
| Interest costs | | 2,858 | | | 2,406 | | | 8,522 | | | 6,382 | |
| Expected return on plan assets | | (5,397) | | | (6,100) | | | (20,104) | | | (22,723) | |
| Recognized prior service costs | | — | | | — | | | 233 | | | 255 | |
| Recognized actuarial losses | | 2,366 | | | 2,770 | | | 6,857 | | | 9,149 | |
| | | | | | | | |
| | | | | | | | |
| Defined benefit pension plans net periodic pension cost (benefit) | | $ | (173) | | | $ | (924) | | | $ | (3,643) | | | $ | (6,008) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| Company Contributions | | June 30 | | June 30 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Defined benefit pension plans (U.S.) | | $ | 441 | | | $ | 451 | | | $ | 887 | | | $ | 3,317 | |
| Defined benefit pension plans (International) | | 4,230 | | | 4,301 | | | 15,587 | | | 16,923 | |
| Multiemployer pension plans | | 478 | | | 421 | | | 935 | | | 861 | |
| Defined contribution pension plans | | 3,135 | | | 3,051 | | | 6,929 | | | 6,430 | |
The Company's estimate of expected cash contributions to be paid during the remainder of 2022 for the U.S. and international defined benefit pension plans is $0.9 million and $6.6 million, respectively.
11. Income Taxes
Income tax benefit related to continuing operations for the three and six months ended June 30, 2022 was $3.1 million and $1.9 million, respectively. Income tax expense related to continuing operations for the three and six months ended June 30, 2021 was $4.8 million and $6.9 million, respectively. The change in the income tax benefit for the three and six months ended June 30, 2022 compared with the income tax expense for the three months and six months ended June 30, 2021 is the result of lower taxable income, primarily resulting from decreased operating income as a result of cost increases due to inflation and labor shortages, as well as the tax benefit on a portion of the Harsco Clean Earth Segment goodwill impairment.
The reserve for uncertain tax positions at June 30, 2022 was $4.9 million, including interest and penalties. Within the next twelve months, it is reasonably possible that $0.4 million unrecognized income tax benefits will be recognized upon settlement of tax examinations and the expiration of various statutes of limitations.
12. 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 byproduct 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 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.
The following table summarizes information related to the location and undiscounted amount of the Company's environmental liabilities:
| | | | | | | | | | | | | | |
| (In thousands) | | June 30
2022 | | December 31
2021 |
Current portion of environmental liabilities (a) | | $ | 8,900 | | | $ | 7,338 | |
| Long-term environmental liabilities | | 26,669 | | | 28,435 | |
| Total environmental liabilities | | $ | 35,569 | | | $ | 35,773 | |
(a) The current portion of environmental liabilities is included in the caption Other current liabilities on the Condensed Consolidated Balance Sheets.
Legal Proceedings
In the ordinary course of business, the company is a defendant or party to various claims and lawsuits, including those discussed below.
On March 28, 2018, the United States Environmental Protection Agency (the “EPA”) conducted an inspection of ESOL’s off-site waste management facility in Detroit, MI. On November 23, 2021, the EPA proposed a civil penalty of $390,092 as part of a proposed Administrative Consent Order for alleged improper air emissions at the site. The allegations in the proposed Administrative Consent Order and civil penalty relate exclusively to the period prior the Company’s purchase of the ESOL business. The Company is vigorously contesting the allegations. While it is the Company's position that any loss related to this issue will be recoverable under indemnity rights under the ESOL purchase agreement and representations and warranties insurance policies purchased by the Company, there can be no assurance that the Company's position will ultimately prevail.
On January 27, 2020, the U.S. EPA issued a Notice of Potential Liability to the Company, along with several other companies, concerning the Newtown Creek Superfund Site located in Kings and Queens Counties in New York. The Notice alleges certain facilities formerly owned or operated by subsidiaries of the Company may have resulted in the discharge of hazardous substances into Newtown Creek or its Dutch Kills tributary. The site has been subject to CERCLA response activities since approximately 2011. The U.S. EPA expects to propose a sitewide cleanup plan no sooner than 2024 and announced in July 2021 that it would defer its decision on a potential early action response for the lower two miles of the Creek until the sitewide studies are completed. The Company is one of approximately twenty (20) Potentially Responsible Parties that have received notices, though it is believed other PRPs may exist. The Company vigorously contests the allegations of the Notice and currently does not believe that this matter will have a material effect on the Company’s financial position or results from operations.
On June 25 and 26, 2018, the DTSC conducted a compliance enforcement inspection of ESOL’s facility in Rancho Cordova, California, which was then owned by Stericycle, Inc. On February 14, 2020, the DTSC filed an action in the Superior Court for the State of California, Sacramento Division, alleging violations of California’s Hazardous Waste Control Law and the facility’s hazardous waste permit arising from the inspection. On August 27, 2020 the DTSC issued a Notice of Denial of Hazardous Waste Facility Permit Application, denying the renewal of the facility's hazardous waste permit. On April 8, 2022, the DTSC denied the Company's appeal of the Notice of Denial. On June 3, 2022, the Company's Motion for Temporary Restraining Order to stop the closure pending its appeal of the DTSC action was denied. The Company has the ability to appeal the Denial of Hazardous Waste Facility Permit Application, and is currently reviewing the decision and its options. The Company continues to utilize the site for non-hazardous waste and is evaluating potential alternate uses for the site. The DTSC investigation and compliance issues leading to the compliance tier assignment were ongoing well before the Company's acquisition of the ESOL business, and the Company was aware of the investigation and many of the issues raised in the investigation at the time of the purchase. Accordingly, the Company is indemnified for certain fines and other costs and expenses associated with this matter by Stericycle, Inc. As a result, the administrative appeal and public hearing process is led by Stericycle, Inc. The Company has not accrued any amounts in respect of these alleged violations and cannot estimate the reasonably possible loss or the range of reasonably possible losses that it may incur.
As previously disclosed, the Company has had ongoing meetings with the SCE over processing salt cakes, a processing byproduct, stored at the Al Hafeerah site. The Company’s Bahrain operations that produced the salt cakes has ceased operations. An Environmental Impact Assessment and Technical Feasibility Study for facilities to process the salt cakes was approved by the SCE during the first quarter of 2018. Commissioning of the facilities was completed during the third quarter of 2021 and the processing of the salt cakes has commenced. The current reserve of $6.7 million continues to represent the Company's best estimate of the ultimate costs to be incurred to resolve this matter. The Company continues to evaluate this reserve and any future change in estimated costs which could be material to the Company’s results of operations in any one period.
On July 27, 2018, Brazil’s Federal and Rio de Janeiro State Public Prosecution Offices (MPF and MPE) filed a Civil Public Action against one of the Company's customers (CSN), the Company’s Brazilian subsidiary, the Municipality of Volta Redonda, Brazil, and the Instituto Estadual do Ambiente (local environmental protection agency) seeking the implementation of various measures to limit and reduce the accumulation of customer-owned slag at the site in Brazil. On August 6, 2018 the 3rd Federal Court in Volta Redonda granted the MPF and MPE an injunction against the same parties requiring, among other things, CSN and the Company’s Brazilian subsidiary to limit the volume of slag sent to the site. Because the customer owns the site and the slag located on the site, the Company believes that complying with this injunction is the steel producer’s responsibility. On March 18, 2019 the Court issued an order fining the Company 5,000 Brazilian reais per day (or approximately $1 thousand per day) and CSN 20,000 Brazilian reais per day (or approximately $4 thousand per day) until the requirements of the injunction are met. On November 1, 2019 the Court issued an additional order increasing the fines assessed to the Company to 25,000 Brazilian reais per day (or approximately $5 thousand per day) and raising the fines assessed to CSN to 100,000 Brazilian reais per day (or approximately $19 thousand per day). The Court also assessed an additional fine of 10,000,000 Brazilian reais (or approximately $2 million) against CSN and the Company jointly. The Company is appealing the fines and the underlying injunction. Both the Company and CSN continue to have discussions with the Prosecution Offices and governmental authorities on the injunction and the possible resolution of the underlying case. Beginning on March 25, 2022, the Courts entered a series of orders suspending the litigation proceedings as well as the accrual of interest and penalties while the parties discuss a possible resolution of the matter. The Company does not believe that a loss relating to this matter is probable or estimable at this point.
On October 19, 2018, local environmental authorities issued an enforcement action against the Company concerning the Company’s operations at a customer site in Ijmuiden, Netherlands. The enforcement action alleged violations of the Company’s environmental permit at the site, which restricts the release of any visible dust emissions. On January 12, 2022, the Administrative Supreme Court upheld the Company’s challenge of these enforcement actions as they relate to the slag tipping area of the site. As a result, all fines asserted against the Company to date have been invalidated and all fines paid to date have been reimbursed. This order is not appealable. On or about October 14, 2021, the Company received a subpoena and two indictments on this matter before the Amsterdam District Court in the Netherlands. The Amsterdam Public Prosecutor’s Office issued the two indictments against the Company, alleging violations in connection with dust releases and/or events alleged to have occurred in 2018 through May 2020 at the site. The action cites provisions which permit fines for the alleged infractions and seeks €100,000 in fines with a smaller amount held in abeyance. On February 25, 2022, the Amsterdam District Court ruled that the Company was liable for only one alleged violation and that this alleged violation was unintentional. The court issued a fine of €5,000, to be held in abeyance. Both the Company and the Public Prosecutor’s Office have appealed this ruling. On February 2, 2022, the prosecutor announced that they would further investigate residents’ claims related to this matter. The Company is vigorously contesting all allegations against it and is also working with its customer to ensure the control of emissions. The Company has contractual indemnity rights from its customer that it believes will substantially cover any fines or penalties.
On March 22, 2022, the U.S. EPA issued a Notice of Intent to File an Administrative Complaint (NOI) alleging violations of the federal Emergency Planning and Community Right-to-Know Act at the Company’s facilities in Tacoma, WA and Kent, WA. The NOI relates exclusively or almost exclusively to the period when Stericycle owned and operated the sites. The NOI proposes a penalty of $3,000,000. The Company is currently reviewing the veracity of the allegations and the corresponding proposed penalty amount. While it is the Company’s position that it has recourse for some or all liabilities, if any, that arise from this matter under the ESOL purchase agreement and representations and warranties insurance policies purchased by the Company, there can be no assurances that the Company’s position will ultimately prevail.
On March 21, 2022, the Company received a draft penalty matrix from the PA DEP concerning alleged reporting, monitoring and related issues at the Company’s Hatfield, PA site prior to the time the Company acquired the site from Stericycle. The draft penalty matrix proposes a penalty of $1,000,000 . On June 29, 2022, the PA DEP issued a draft Consent Assessment of Civil Penalty ("CACP") related to the alleged issues at the site, although the draft CACP does not propose a specific penalty. The Company is currently reviewing the veracity of the allegations. While it is the Company’s position that it has recourse for some or all liabilities, if any, that arise from this matter under the ESOL purchase agreement and representations and warranties insurance policies purchased by the Company, there can be no assurances that the Company’s position will ultimately prevail.
On November 5, 2020, a worker suffered a fatal injury at a site owned by the Company’s customer, Gerdau Ameristeel US, Inc., in Midlothian, TX. Although the Company was not directly involved in the accident, the worker was employed by a sub-contractor of a sub-contractor of the Company. The worker’s family filed suit in the 125th Judicial District Court of Harris County, TX against multiple parties including the Company. The Company is vigorously defending the lawsuit and has insurance coverage subject to a $5 million deductible. The Company has recorded a liability for its insurance deductible and an indemnification receivable from its customer for the recovery of certain losses based upon the contractual indemnity rights. However, there can be no assurances that the Company's position will ultimately prevail.
DEA Investigation
Prior to the Company’s acquisition of ESOL, Stericycle, Inc. notified the Company that the DEA had served an administrative subpoena on Stericycle, Inc. and executed a search warrant at a facility in Rancho Cordova, California and an administrative inspection warrant at a facility in Indianapolis, Indiana. The Company has determined that the DEA and the DTSC have launched investigations involving, at least in part, the ESOL business of collecting, transporting, and destroying controlled substances from retail customers that transferred from Stericycle, Inc. to the Company. In connection with these investigations, the DEA also executed a search warrant on an ESOL facility in Austin Texas on July 2, 2020. The Company is cooperating with these inquiries, which relate primarily to the period before the Company owned the ESOL business. Since the acquisition of the ESOL business, the Company has performed a vigorous review of ESOL’s compliance program related to controlled substances and has made material changes to the manner in which controlled substances are transported from retail customers to DEA-registered facilities for destruction. The Company has not accrued any amounts in respect of these investigations and cannot estimate the reasonably possible loss or the range of reasonably possible losses that it may incur, if any. Investigations of this type are, by their nature, uncertain and unpredictable. While it is the Company’s position that it has recourse for some or all liabilities, if any, that arise from these matters under the ESOL purchase agreement and representations and warranties insurance policies purchased by the Company, there can be no assurances that the Company’s position will ultimately prevail.
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. Many of the claims relate to ICMS, services and social security tax disputes. The largest proportion of the assessed amounts relate to ICMS claims filed by 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, 2022 the principal amount of the tax assessment from the SPRA with regard to this case is approximately $1.2 million, with penalty, interest and fees assessed to date increasing such amount by an additional $16.8 million. On June 4, 2018 the Appellate Court of the State of Sao Paulo ruled in favor of the SPRA but ruled that the assessed penalty should be reduced to approximately $1.2 million. After calculating the interest accrued on the penalty, the Company estimates that this ruling reduces the current overall potential liability for this case to approximately $7.1 million. All such amounts include the effect of foreign currency translation. The Company has appealed the ruling in favor of the SPRA to the Superior Court of Justice. Due to multiple court precedents in the Company’s favor, as well as the Company’s ability to appeal, the Company does not believe a loss is probable.
Another ICMS tax case involving the SPRA refers to the tax period from January 2002 to December 2003. In December 2018, the administrative tribunal hearing the case upheld the Company's liability. The Company has appealed to the judicial phase. The aggregate amount assessed by the tax authorities in August 2005 was $4.9 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 $1.2 million, with penalty and interest assessed through that date increasing such amount by an additional $3.7 million. On December 6, 2018 the administrative tribunal reduced the applicable penalties to $0.8 million. After calculating the interest accrued on the current penalty, the Company estimates that the current overall liability for this case to be approximately $5.4 million. All such amounts include the effect of foreign currency translation. Due to multiple court precedents in the Company's favor, the Company does not believe a loss is probable.
The Company continues to believe that sufficient coverage for these claims exists as a result of the indemnification obligations of the Company's customer and such customer’s pledge of assets in connection with the October 2009 notice, as required by Brazilian law.
On December 30, 2020, the Company received an assessment from the municipal authority in Ipatinga, Brazil alleging $2.0 million in unpaid service taxes from the period 2015 to 2020. After calculating the interest and penalties accrued, the Company estimates that the current overall potential liability for this case to be approximately $3.4 million. On January 18, 2021, the Company filed a challenge to the assessment. Due to the multiple defenses that are available, the Company does not believe a loss is probable.
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 ongoing collective bargaining and individual labor claims in Brazil through the Harsco Environmental 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. As of June 30, 2022 and December 31, 2021, the Company has established reserves of $3.0 million and $3.2 million, respectively, on the Company's Condensed Consolidated Balance Sheets for amounts considered to be probable and estimable.
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, 2022, there were approximately 17,210 pending asbestos personal injury actions filed against the Company. Of those actions, approximately 16,590 were filed in the New York Supreme Court (New York County), approximately 115 were filed in other New York State Supreme Court Counties and approximately 505 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, 2022, approximately 16,550 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 approximately 40 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 costs and expenses of the asbestos actions are being 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, 2022, the Company has obtained dismissal in approximately 28,400 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 has been determined to be 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, 2021 for additional information on Accrued insurance and loss reserves.
13. Reconciliation of Basic and Diluted Shares
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (In thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
| Income (loss) from continuing operations attributable to Harsco Corporation common stockholders | | $ | (106,700) | | | $ | 8,540 | | | $ | (114,033) | | | $ | 6,975 | |
| Weighted-average shares outstanding: | | | | | | | | |
| Weighted-average shares outstanding - basic | | 79,509 | | | 79,265 | | | 79,437 | | | 79,177 | |
| Dilutive effect of stock-based compensation | | — | | | 1,509 | | | — | | | 1,220 | |
| Weighted-average shares outstanding - diluted | | 79,509 | | | 80,774 | | | 79,437 | | | 80,397 | |
| | | | | | | | |
| Earnings (loss) from continuing operations per common share, attributable to Harsco Corporation common stockholders: |
| Basic | | $ | (1.34) | | | $ | 0.11 | | | $ | (1.44) | | | $ | 0.09 | |
| | | | | | | | |
| Diluted | | $ | (1.34) | | | $ | 0.11 | | | $ | (1.44) | | | $ | 0.09 | |
The following average outstanding stock-based compensation units were not included in the computation of diluted earnings per share because the effect was either antidilutive or the market conditions for the performance share units were not met:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Restricted stock units | | 797 | | | — | | | 811 | | | — | |
| | | | | | | | |
| Stock appreciation rights | | 2,193 | | | 467 | | | 2,422 | | | 656 | |
| Performance share units | | 1,128 | | | 690 | | | 1,177 | | | 851 | |
| | | | | | | | |
| | | | | | | | |
14. Derivative Instruments, Hedging Activities and Fair Value
Derivative Instruments and Hedging Activities
The Company uses derivative instruments, including foreign currency exchange forward contracts and interest rate swaps 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 Company's Condensed Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
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 and interest rate swaps are based upon pricing models using market-based inputs (Level 2). Model inputs can be verified and valuation techniques do not involve significant management judgment.
The fair value of outstanding derivative contracts recorded as assets and liabilities on the Company's Condensed Consolidated Balance Sheets was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Balance Sheet Location | | Fair Value of Derivatives Designated as Hedging Instruments | | Fair Value of Derivatives Not Designated as Hedging Instruments | | Total Fair Value |
| June 30, 2022 | | | | | | | | |
| Asset derivatives (Level 2): | | | | | | | | |
| Foreign currency exchange forward contracts | | Other current assets | | $ | 1,710 | | | $ | 16,075 | | | $ | 17,785 | |
| | | | | | | | |
| | | | | | | | |
| Total | | | | $ | 1,710 | | | $ | 16,075 | | | $ | 17,785 | |
| | | | | | | | |
| Liability derivatives (Level 2): |
| Foreign currency exchange forward contracts | | Other current liabilities | | $ | 465 | | | $ | 502 | | | $ | 967 | |
| Interest rate swaps | | Other current liabilities | | 423 | | | — | | | 423 | |
| | | | | | | | |
| Total | | | | $ | 888 | | | $ | 502 | | | $ | 1,390 | |
| December 31, 2021 | | | | | | | | |
| Asset derivatives (Level 2): | | | | | | | | |
| Foreign currency exchange forward contracts | | Other current assets | | $ | 719 | | | $ | 1,405 | | | $ | 2,124 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total | | | | $ | 719 | | | $ | 1,405 | | | $ | 2,124 | |
| Liability derivatives (Level 2): |
| Foreign currency exchange forward contracts | | Other current liabilities | | $ | 560 | | | $ | 2,905 | | | $ | 3,465 | |
| Interest rate swaps | | Other current liabilities | | 4,157 | | | — | | | 4,157 | |
| | | | | | | | |
| Total | | | | $ | 4,717 | | | $ | 2,905 | | | $ | 7,622 | |
All of the Company's derivatives are recorded on the Condensed Consolidated Balance Sheets at gross amounts and do not offset. All of the Company's interest rate swaps and certain foreign currency exchange forward contracts are transacted under 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, if offset, would have resulted in a net asset of $2.2 million and $0.9 million at June 30, 2022 and December 31, 2021, respectively.
The effect of derivative instruments on the Company's Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income (Loss) was as follows:
Derivatives Designated as Hedging Instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount Recognized in
OCI on Derivatives | | Location of Amount Reclassified from
AOCI into Income | | Amount Reclassified from
AOCI into Income - Effective Portion or Equity |
| | Three Months Ended | | | Three Months Ended |
| | June 30 | | | June 30 |
| (In thousands) | | 2022 | | 2021 | | | 2022 | | 2021 |
| Foreign currency exchange forward contracts | | $ | 957 | | | $ | (440) | | | Income (loss) from discontinued businesses | | $ | (998) | | | $ | 3 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Interest rate swaps | | — | | | (33) | | | Interest expense | | 1,061 | | | 862 | |
| | | | | | | | | | |
| | | $ | 957 | | | $ | (473) | | | | | $ | 63 | | | $ | 865 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | Amount Recognized in
OCI on Derivatives | | Location of Amount Reclassified from AOCI into Income | | Amount Reclassified from
AOCI into Income - Effective Portion or Equity |
| | Six Months Ended | | | Six Months Ended |
| | June 30 | | | June 30 |
| (In thousands) | | 2022 | | 2021 | | | 2022 | | 2021 |
| Foreign currency exchange forward contracts | | $ | 1,966 | | | $ | (441) | | | Income (loss) from discontinued businesses | | $ | (1,586) | | | $ | (47) | |
| | | | | | | | | | |
| Interest rate swaps | | — | | | (14) | | | Interest expense | | 2,111 | | | 1,727 | |
| | | | | | | | | | |
| | | $ | 1,966 | | | $ | (455) | | | | | $ | 525 | | | $ | 1,680 | |
The location and amount of gain (loss) recognized on the Company's Condensed Consolidated Statements of Operations was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended |
| | | | | | June 30 |
| | | | | | 2022 | | | | | | 2021 |
| (in thousands) | | | | | | Interest Expense | | Income (loss) from Discontinued Businesses | | | | | | Interest Expense | | Income (loss) from Discontinued Businesses |
| Total amounts in the Condensed Consolidated Statement of Operations in which the effects of derivatives designated as hedging instruments are recorded | | | | | | $ | (16,692) | | | $ | 1,109 | | | | | | | $ | (15,643) | | | $ | 4,848 | |
| Interest rate swaps: | | | | | | | | | | | | | | | | |
| Gain or (loss) reclassified from AOCI into income | | | | | | (1,061) | | | — | | | | | | | (862) | | | — | |
| Amount recognized in earnings due to ineffectiveness | | | | | | 720 | | | — | | | | | | | — | | | — | |
| Foreign exchange contracts: | | | | | | | | | | | | | | | | |
| Gain or (loss) reclassified from AOCI into income | | | | | | | | 998 | | | | | | | — | | | (3) | |
| Amount excluded from effectiveness testing recognized in earnings based on changes in fair value | | | | | | | | (23) | | | | | | | — | | | 9 | |
| Amount excluded from the effectiveness testing recognized in earnings based on an amortization approach | | | | | | | | (3) | | | | | | | — | | | 1 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Six Months Ended |
| | June 30 |
| | 2022 | | | | | 2021 |
| (in thousands) | | Interest Expense | | Loss from Discontinued Businesses | | | | | | | | Interest Expense | | Income From Discontinued Operations |
| Total amounts in the Condensed Consolidated Statement of Operations in which the effects of cash flow hedges are recorded | | $ | (31,784) | | | $ | (31,397) | | | | | | | | | $ | (31,899) | | | $ | 6,548 | |
| Interest rate swaps: | | | | | | | | | | | | | | |
| Gain or (loss) reclassified from AOCI into income | | (2,111) | | | — | | | | | | | | | (1,727) | | | — | |
| Amount recognized in earnings due to ineffectiveness | | 1,611 | | | — | | | | | | | | | — | | | — | |
| Foreign exchange contracts: | | | | | | | | | | | | |
| Gain or (loss) reclassified from AOCI into income | | — | | | 1,586 | | | | | | | | | — | | | 47 | |
| Amount excluded from effectiveness testing recognized in earnings based on changes in fair value | | — | | | (64) | | | | | | | | | — | | | 38 | |
| Amount excluded from the effectiveness testing recognized in earnings based on an amortization approach | | — | | | (5) | | | | | | | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income on Derivatives (a) |
| | | Three Months Ended | | Six Months Ended |
| | | June 30 | | June 30 |
| (In thousands) | | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | |
| Foreign currency exchange forward contracts | | Cost of services and products sold | | $ | 18,234 | | | $ | (740) | | | $ | 22,072 | | | $ | 4,004 | |
| | | | | | | | | | |
| | | | | | | | | | |
(a) 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. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective consolidated balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods.
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.
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 AOCI, 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 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. At June 30, 2022 and December 31, 2021 the notional amounts of foreign currency exchange forward contracts were $450.9 million and $425.8 million, respectively. These contracts are primarily denominated in British Pound Sterling and Euros and mature through September 2023.
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 losses of $0.6 million and $1.2 million for the three and six months ended June 30, 2022, respectively, and pre-tax net gains of $0.3 million and $3.6 million for the three and six months ended June 30, 2021, respectively, in AOCI.
Interest Rate Swaps
The Company uses interest rate swaps in conjunction with certain variable rate debt issuances in order to secure a fixed interest rate. Changes in the fair value attributed to the effect of the swaps’ interest spread and changes in the credit worthiness of the counter-parties are recorded in AOCI and are reclassified into income as interest payments are made.
At June 30, 2022, the Company had a series of interest rate swaps that are in effect through 2022 and have the effect of converting $200.0 million of the Term Loan Facility from floating-rate to fixed-rate. The fixed rates provided by the swaps replace the adjusted LIBOR rate in the interest calculation to 3.12% for 2022. In the fourth quarter of 2021, the interest rate swaps were deemed ineffective and, thus, the subsequent changes in fair value continue to be recorded in earnings in the current period. The amounts previously recorded in AOCI will continue to be amortized into earnings over the remaining maturity of the interest rate swap.
Fair Value of Other Financial Instruments
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, 2022 and December 31, 2021, the total fair value of long-term debt and current maturities (excluding deferred financing costs) was $1,202.8 million and $1,394.2 million, respectively, compared with a carrying value of $1,337.4 million and $1,387.9 million, respectively. Fair values for debt are based on pricing models using market-based inputs (Level 2) for similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
15. Review of Operations by Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Revenues From Continuing Operations | | | | | | | | |
| Harsco Environmental | | $ | 277,599 | | | $ | 272,546 | | | $ | 539,650 | | | $ | 530,532 | |
| Harsco Clean Earth | | 203,453 | | | 196,128 | | | 394,199 | | | 385,407 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total Revenues From Continuing Operations | | $ | 481,052 | | | $ | 468,674 | | | $ | 933,849 | | | $ | 915,939 | |
| | | | | | | | |
| | | | | | | | |
| Operating Income (Loss) From Continuing Operations |
| Harsco Environmental | | $ | 23,547 | | | $ | 30,223 | | | $ | 41,814 | | | $ | 56,158 | |
| Harsco Clean Earth | | (111,668) | | | 7,386 | | | (112,965) | | | 10,564 | |
| | | | | | | | |
| | | | | | | | |
| Corporate | | (8,882) | | | (11,344) | | | (18,104) | | | (21,339) | |
| Total Operating Income From Continuing Operations | | $ | (97,003) | | | $ | 26,265 | | | $ | (89,255) | | | $ | 45,383 | |
| | | | | | | | |
| Depreciation | | | | | | | | |
| Harsco Environmental | | $ | 27,467 | | | $ | 25,550 | | | $ | 55,539 | | | $ | 51,267 | |
| Harsco Clean Earth | | 4,536 | | | 4,905 | | | 9,637 | | | 10,242 | |
| | | | | | | | |
| | | | | | | | |
| Corporate | | 460 | | | 494 | | | 891 | | | 977 | |
| Total Depreciation | | $ | 32,463 | | | $ | 30,949 | | | $ | 66,067 | | | $ | 62,486 | |
| | | | | | | | |
| Amortization | | | | | | | | |
| Harsco Environmental | | $ | 1,714 | | | $ | 2,035 | | | $ | 3,542 | | | $ | 4,083 | |
| Harsco Clean Earth | | 6,131 | | | 6,063 | | | 12,206 | | | 12,146 | |
| | | | | | | | |
Corporate (a) | | 636 | | | 633 | | | 1,319 | | | 1,384 | |
| Total Amortization | | $ | 8,481 | | | $ | 8,731 | | | $ | 17,067 | | | $ | 17,613 | |
| Capital Expenditures | | | | | | | | |
| Harsco Environmental | | $ | 23,585 | | | $ | 35,993 | | | $ | 48,375 | | | $ | 60,412 | |
| Harsco Clean Earth | | 3,550 | | | 4,725 | | | 10,246 | | | 7,255 | |
| | | | | | | | |
| | | | | | | | |
| Corporate | | 1,172 | | | 111 | | | 2,138 | | | 179 | |
| Total Capital Expenditures | | $ | 28,307 | | | $ | 40,829 | | | $ | 60,759 | | | $ | 67,846 | |
(a) Amortization expense on Corporate relates to the amortization of deferred financing costs.
Reconciliation of Segment Operating Income to Income (Loss) From Continuing Operations Before Income Taxes and Equity Income
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Segment operating income | | $ | (88,121) | | | $ | 37,609 | | | $ | (71,151) | | | $ | 66,722 | |
| General Corporate expense | | (8,882) | | | (11,344) | | | (18,104) | | | (21,339) | |
| Operating income (loss) from continuing operations | | (97,003) | | | 26,265 | | | (89,255) | | | 45,383 | |
| Interest income | | 693 | | | 577 | | | 1,337 | | | 1,124 | |
| Interest expense | | (16,692) | | | (15,643) | | | (31,784) | | | (31,899) | |
| Facility fees and debt-related income (expense) | | 2,149 | | | (50) | | | 1,617 | | | (5,308) | |
| | | | | | | | |
| Defined benefit pension income | | 2,247 | | | 3,956 | | | 4,657 | | | 7,890 | |
| Income (loss) from continuing operations before income taxes and equity income | | $ | (108,606) | | | $ | 15,105 | | | $ | (113,428) | | | $ | 17,190 | |
16. Revenue Recognition
The Company recognizes revenues to depict the transfer of promised services and products to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services or products. Service revenues include the Harsco Clean Earth Segment revenue and the service components of the Harsco Environmental Segment. Product revenues include portions of the Harsco Environmental Segment.
A summary of the Company's revenues by primary geographical markets as well as by key product and service groups is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, 2022 |
| (In thousands) | | Harsco Environmental Segment | | Harsco
Clean Earth
Segment | | | | | | Consolidated Totals |
Primary Geographical Markets (a): | | | | | | | | | | |
| North America | | $ | 80,709 | | | $ | 203,453 | | | | | | | $ | 284,162 | |
| Western Europe | | 99,591 | | | — | | | | | | | 99,591 | |
Latin America (b) | | 39,202 | | | — | | | | | | | 39,202 | |
| Asia-Pacific | | 31,950 | | | — | | | | | | | 31,950 | |
| Middle East and Africa | | 20,762 | | | — | | | | | | | 20,762 | |
| Eastern Europe | | 5,385 | | | — | | | | | | | 5,385 | |
| Total Revenues | | $ | 277,599 | | | $ | 203,453 | | | | | | | $ | 481,052 | |
| Key Product and Service Groups: | | | | | | | | | | |
| Environmental services related to resource recovery for metals manufacturing and related logistical services | | $ | 236,165 | | | $ | — | | | | | | | $ | 236,165 | |
| Ecoproducts | | 38,083 | | | — | | | | | | | 38,083 | |
| Environmental systems for aluminum dross and scrap processing | | 3,351 | | | — | | | | | | | 3,351 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Waste processing, recycling, reuse and transportation solutions | | — | | | 203,453 | | | | | | | 203,453 | |
| | | | | | | | | | |
| Total Revenues | | $ | 277,599 | | | $ | 203,453 | | | | | | | $ | 481,052 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | June 30, 2021 |
| (In thousands) | | Harsco Environmental Segment | | Harsco
Clean Earth
Segment | | | | | | Consolidated Totals |
Primary Geographical Markets (a): | | | | | | | | | | |
| North America | | $ | 69,735 | | | $ | 196,128 | | | | | | | $ | 265,863 | |
| Western Europe | | 116,981 | | | — | | | | | | | 116,981 | |
Latin America (b) | | 33,799 | | | — | | | | | | | 33,799 | |
| Asia-Pacific | | 26,922 | | | — | | | | | | | 26,922 | |
| Middle East and Africa | | 19,873 | | | — | | | | | | | 19,873 | |
| Eastern Europe | | 5,236 | | | — | | | | | | | 5,236 | |
| Total Revenues | | $ | 272,546 | | | $ | 196,128 | | | | | | | $ | 468,674 | |
| | | | | | | | | | |
| Key Product and Service Groups: | | | | | | | | | | |
| Environmental services related to resource recovery for metals manufacturing and related logistical services | | $ | 233,523 | | | $ | — | | | | | | | $ | 233,523 | |
| Ecoproducts | | 34,830 | | | — | | | | | | | 34,830 | |
| Environmental systems for aluminum dross and scrap processing | | 4,193 | | | — | | | | | | | 4,193 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Waste processing, recycling, reuse and transportation solutions | | — | | | 196,128 | | | | | | | 196,128 | |
| | | | | | | | | | |
| Total Revenues | | $ | 272,546 | | | $ | 196,128 | | | | | | | $ | 468,674 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2022 |
| (In thousands) | | Harsco Environmental Segment | | Harsco
Clean Earth
Segment | | | | | | | | Consolidated Totals |
Primary Geographical Markets (a): | | | | | | | | | | | | |
| North America | | $ | 151,788 | | | $ | 394,199 | | | | | | | | | $ | 545,987 | |
| Western Europe | | 201,670 | | | — | | | | | | | | | 201,670 | |
Latin America (b) | | 75,007 | | | — | | | | | | | | | 75,007 | |
| Asia-Pacific | | 60,018 | | | — | | | | | | | | | 60,018 | |
| Middle East and Africa | | 40,648 | | | — | | | | | | | | | 40,648 | |
| Eastern Europe | | 10,519 | | | — | | | | | | | | | 10,519 | |
| Total Revenues | | $ | 539,650 | | | $ | 394,199 | | | | | | | | | $ | 933,849 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2022 |
| Key Product and Service Groups: | | | | | | | | | | | | |
| Environmental services related to resource recovery for metals manufacturing and related logistical services | | $ | 463,854 | | | $ | — | | | | | | | | | $ | 463,854 | |
| Ecoproducts | | 70,048 | | | — | | | | | | | | | 70,048 | |
| Environmental systems for aluminum dross and scrap processing | | 5,748 | | | — | | | | | | | | | 5,748 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Waste processing, recycling, reuse and transportation solutions | | — | | | 394,199 | | | | | | | | | 394,199 | |
| Total Revenues | | $ | 539,650 | | | $ | 394,199 | | | | | | | | | $ | 933,849 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Six Months Ended |
| | June 30, 2021 |
| (In thousands) | | Harsco Environmental Segment | | Harsco
Clean Earth
Segment | | | | | | | | Consolidated Totals |
Primary Geographical Markets (a): | | | | | | | | | | | | |
| North America | | $ | 136,916 | | | $ | 385,407 | | | | | | | | | $ | 522,323 | |
| Western Europe | | 229,152 | | | — | | | | | | | | | 229,152 | |
Latin America (b) | | 64,452 | | | — | | | | | | | | | 64,452 | |
| Asia-Pacific | | 50,292 | | | — | | | | | | | | | 50,292 | |
| Middle East and Africa | | 39,994 | | | — | | | | | | | | | 39,994 | |
| Eastern Europe | | 9,726 | | | — | | | | | | | | | 9,726 | |
| Total Revenues | | $ | 530,532 | | | $ | 385,407 | | | | | | | | | $ | 915,939 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Key Product and Service Groups: | | | | | | | | | | | | |
| Environmental services related to resource recovery for metals manufacturing and related logistical services | | $ | 458,583 | | | $ | — | | | | | | | | | $ | 458,583 | |
| Ecoproducts | | 64,615 | | | — | | | | | | | | | 64,615 | |
| Environmental systems for aluminum dross and scrap processing | | 7,334 | | | — | | | | | | | | | 7,334 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Waste processing, recycling, reuse and transportation solutions | | — | | | 385,407 | | | | | | | | | 385,407 | |
| Total Revenues | | $ | 530,532 | | | $ | 385,407 | | | | | | | | | $ | 915,939 | |
(a) Revenues are attributed to individual countries based on the location of the facility generating the revenue.
(b) Includes Mexico.
The Company may receive payments in advance of earning revenue (advances on contracts), which is included in Other current liabilities and Other liabilities on the Condensed Consolidated Balance Sheets. The Company may recognize revenue in advance of being able to contractually invoice the customer (contract assets), which is included in Other current assets on the Condensed Consolidated Balance Sheets. Contract assets are transferred to Trade accounts receivable, net, when the right to payment becomes unconditional. Contract assets and advances on contracts are reported as a net position, on a contract-by-contract basis, at the end of each reporting period.
The Company had contract assets totaling $3.9 million and $3.1 million at June 30, 2022 and December 31, 2021, respectively. The increase is due principally to additional contract assets recognized in excess of the transfer of contract assets to accounts receivable. The Company had advances on contracts totaling $4.2 million and $4.1 million at June 30, 2022 and December 31, 2021, respectively. During the three and six months ended June 30, 2022, the Company recognized approximately $7 million and $10 million, respectively, of revenue related to amounts previously included in advances on contracts. During the three and six months ended June 30, 2021, the Company recognized approximately $4 million and $6 million, respectively, of revenue related to amounts previously included in advances on contracts.
At June 30, 2022 the Harsco Environmental Segment had remaining, fixed, unsatisfied performance obligations where the expected contract duration exceeds one year totaling $69.2 million. Of this amount, $19.2 million is expected to be fulfilled by June 30, 2023, $17.6 million by June 30, 2024, $17.1 million by June 30, 2025, $9.0 million by June 30, 2026 and the remainder thereafter. These amounts exclude any variable fees, fixed fees subject to indexation and any performance obligations expected to be satisfied within one year.
17. Other (Income) Expenses, Net
The major components of this Condensed Consolidated Statements of Operations caption were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | Six Months Ended |
| | June 30 | | June 30 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| Employee termination benefit costs | | $ | 605 | | | $ | 656 | | | $ | 297 | | | $ | 1,166 | |
| | | | | | | | |
| Other costs to exit activities | | 477 | | | 400 | | | 1,058 | | | 638 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Impaired asset write-downs | | 296 | | | 140 | | | 355 | | | 162 | |
| | | | | | | | |
| | | | | | | | |
| Net gains | | (92) | | | (5,354) | | | (1,904) | | | (7,047) | |
| Other | | 759 | | | (9) | | | 1,060 | | | (77) | |
| Other (income) expenses, net | | $ | 2,045 | | | $ | (4,167) | | | $ | 866 | | | $ | (5,158) | |
18. Components of Accumulated Other Comprehensive Loss
AOCI is included on the Condensed Consolidated Statements of Stockholders' Equity. The components of AOCI, net of the effect of income taxes, and activity for the six months ended June 30, 2021 and 2022 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Components of AOCI, 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, 2020 | | $ | (125,392) | | | $ | (5,840) | | | $ | (514,500) | | | $ | (9) | | | $ | (645,741) | |
| | | | | | | | | | |
| OCI before reclassifications | | 12,150 | | (a) | (259) | | (b) | (5,451) | | (a) | 25 | | | 6,465 | |
| Amounts reclassified from AOCI, net of tax | | — | | | 1,182 | | | 11,495 | | | — | | | 12,677 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total OCI | | 12,150 | | | 923 | | | 6,044 | | | 25 | | | 19,142 | |
| Less: OCI attributable to noncontrolling interests | | (393) | | | — | | | — | | | — | | | (393) | |
| OCI attributable to Harsco Corporation | | 12,543 | | | 923 | | | 6,044 | | | 25 | | | 19,535 | |
Balance at June 30, 2021 | | $ | (112,849) | | | $ | (4,917) | | | $ | (508,456) | | | $ | 16 | | | $ | (626,206) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Components of AOCI, 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, 2021 | | $ | (134,889) | | | $ | (3,024) | | | $ | (422,248) | | | $ | 22 | | | $ | (560,139) | |
| | | | | | | | | | |
| OCI before reclassifications | | (61,493) | | (a) | 1,692 | | (b) | 33,697 | | (a) | (13) | | | (26,117) | |
| Amounts reclassified from AOCI, net of tax | | — | | | 168 | | | 8,831 | | | — | | | 8,999 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total OCI | | (61,493) | | | 1,860 | | | 42,528 | | | (13) | | | (17,118) | |
| Less: OCI attributable to noncontrolling interests | | (3,385) | | | — | | | — | | | — | | | (3,385) | |
| OCI attributable to Harsco Corporation | | (58,108) | | | 1,860 | | | 42,528 | | | (13) | | | (13,733) | |
| Balance at June 30, 2022 | | $ | (192,997) | | | $ | (1,164) | | | $ | (379,720) | | | $ | 9 | | | $ | (573,872) | |
(a) Principally foreign currency fluctuation.
(b) Net change from periodic revaluations.
Amounts reclassified from AOCI were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Three Months Ended | | Six Months Ended | | Location on the Condensed Consolidated Statements of Operations |
| June 30 | | June 30 |
| 2022 | | 2021 | | 2022 | | 2021 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Amortization of cash flow hedging instruments: |
| Foreign currency exchange forward contracts | | $ | (998) | | | $ | 3 | | | $ | (1,586) | | | $ | (47) | | | Income (loss) from discontinued operations |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Interest rate swaps | | 1,061 | | | 862 | | | 2,111 | | | 1,727 | | | Interest expense |
| | | | | | | | | | |
| Total before taxes | | 63 | | | 865 | | | 525 | | | 1,680 | | | |
| Income taxes | | (233) | | | (253) | | | (357) | | | (498) | | | |
| Total reclassification of cash flow hedging instruments, net of tax | | $ | (170) | | | $ | 612 | | | $ | 168 | | | $ | 1,182 | | | |
| | | | | | | | | | |
Amortization of defined benefit pension items (c): |
| Actuarial losses | | $ | 4,496 | | | $ | 6,007 | | | $ | 9,223 | | | $ | 11,955 | | | Defined benefit pension income |
| Prior service costs | | 113 | | | 129 | | | 233 | | | 256 | | | Defined benefit pension income |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total before taxes | | 4,609 | | | 6,136 | | | 9,456 | | | 12,211 | | | |
| Income taxes | | (312) | | | (358) | | | (625) | | | (716) | | | |
| Total reclassification of defined benefit pension items, net of tax | | $ | 4,297 | | | $ | 5,778 | | | $ | 8,831 | | | $ | 11,495 | | | |
(c) These AOCI components are included in the computation of net periodic pension costs. See Note 10, Employee Benefit Plans, for additional details.