NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
Harsco Corporation (the “Company”) has prepared these unaudited condensed consolidated financial statements based on Securities and Exchange Commission rules that permit reduced disclosure for interim periods. In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements. The
December 31, 2015
Condensed Consolidated Balance Sheet information contained in this Quarterly Report on Form 10-Q was derived from the
2015
audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for an annual report. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
Operating results and cash flows for the
three and six months ended
June 30, 2016
are not indicative of the results that may be expected for the year ending
December 31, 2016
.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
Significant Accounting Policies - Revenue Recognition
Product revenues are recognized when they are realized or realizable and when earned. Revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company's price to the buyer is fixed or determinable and collectability is reasonably assured. Product revenues include the Harsco Industrial Segment and the product revenues of the Harsco Metals & Minerals and Harsco Rail Segments.
Certain contracts within the Harsco Rail Segment, which meet specific criteria established in U.S. GAAP, are accounted for as long-term contracts. The Company recognizes revenues on two contracts from the federal railway system of Switzerland ("SBB") based on the percentage of completion (units-of-delivery) method of accounting, whereby revenues and estimated average costs of the units to be produced under the contracts are recognized as deliveries are made or accepted. Contract revenues and cost estimates are reviewed and revised, at a minimum quarterly, and adjustments are reflected in the accounting period as such amounts are determined.
Change in Estimates
Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks, estimating contract revenues and costs (including estimating any liquidating damages or penalties related to performance) and making assumptions for schedule and technical items. Due to the number of years it may take to complete these contracts and the scope and nature of the work required to be performed on those contracts, estimating total sales and costs at completion is inherently complicated and subject to many variables and, accordingly estimates are subject to change. When adjustments in estimated total contract sales or estimated total costs are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract, using the percentage-of-completion method, exceed estimates of total sales to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.
During the second quarter of 2016, as a result of increased vendor costs, ongoing discussions with the customer, and increased estimates for commissioning, certification and testing costs, as well as expected settlements with respect to the customer, the Company has concluded it will have a loss on the contracts with SBB. The majority of the equipment deliveries and related revenue recognition under these contracts are expected in 2017 through 2020. The Company recognized an estimated loss provision related to the SBB contracts of
$40.1 million
at June 30, 2016 in the caption Costs of products sold in the Condensed Consolidated Statements of Operations. There was
no
loss provision at December 31, 2015. See Note 3, Accounts Receivable and Inventories, for additional information related to the SBB contracts.
2. Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in
2016
:
On January 1, 2016, the Company adopted changes issued by the Financial Accounting Standards Board ("FASB") related to reporting extraordinary and unusual items. The changes simplified income statement presentation by eliminating the concept of extraordinary items. The changes became effective for the Company on January 1, 2016. The adoption of these changes did not have an impact on the Company's condensed consolidated financial statements.
On January 1, 2016, the Company adopted changes issued by the FASB related to consolidation. The changes updated consolidation analysis and affected reporting entities that are required to evaluate whether they should consolidate certain legal entities. The changes became effective for the Company on January 1, 2016. The adoption of these changes did not have a material impact on the Company's condensed consolidated financial statements.
On January 1, 2016, the Company adopted changes issued by the FASB related to simplifying the presentation of debt issuance costs. The changes required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability. In August 2015, the FASB added guidance about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The changes became effective for the Company on January 1, 2016. The adoption of these changes resulted in the reclassification of approximately
$10 million
in deferred financing costs from Other assets to Long-term debt on the Company's Condensed Consolidated Balance Sheets for all periods presented.
On January 1, 2016, the Company adopted changes issued by the FASB related to the determination of whether a cloud computing arrangement includes a software license. If a cloud computing arrangement is determined to include a software license, then the customer accounts for the software license element consistent with the acquisition of other software licenses. If the arrangement is determined not to contain a software license, the customer should account for the arrangement as a service contract. The changes became effective for the Company on January 1, 2016. The adoption of these changes did not have a material impact on the Company's condensed consolidated financial statements.
On January 1, 2016, the Company adopted changes issued by the FASB simplifying the accounting for measurement period adjustments for business combinations. The changes resulted in an acquirer no longer being required to retrospectively reflect adjustments to provisional amounts during the measurement period as if they were recognized as of the acquisition date. Instead the acquirer would record the effect of the change to the provisional amounts during the measurement period in which the adjustment is identified. The changes also required additional disclosure related to such measurement period adjustments. The changes became effective for the Company on January 1, 2016. The adoption of these changes did not have an impact on the Company's condensed consolidated financial statements; however in the future will have an effect on how the Company reports adjustments to provisional amounts during the measurement period.
The following accounting standards have been issued and become effective for the Company at a future date:
In May 2014, the FASB issued changes related to the recognition of revenue from contracts with customers. The changes clarify the principles for recognizing revenue and develop a common revenue standard. The core principle of the changes is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The changes also require additional disclosures related to revenue recognition. In July 2015, the FASB deferred the effective date of these changes by one year, but will permit entities to adopt one year earlier. During 2016, the FASB clarified the implementation guidance for principal versus agent considerations, identifying performance obligations, accounting for intellectual property licenses, collectability, non-cash consideration and the presentation of sales and other similar taxes, as well as introduced practical expedients related to disclosures of remaining performance obligations. These changes become effective for the Company on January 1, 2018. Management is currently evaluating these changes.
In August 2014, the FASB issued changes related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The changes become effective for the Company for the annual period ending December 31, 2016 and interim periods thereafter. Management has evaluated these changes and does not expect these changes will have a material impact on the Company's condensed consolidated financial statements.
In July 2015, the FASB issued changes related to the simplification of the measurement of inventory. The changes require entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The changes do not apply to inventories that are measured using either the last-in, first-out method or the retail inventory method. The changes become effective for the Company on January 1, 2017. Management has determined that these changes will not have a material impact on the Company's condensed consolidated financial statements.
In November 2015, the FASB issued changes that require deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position. The changes apply to all entities that present a classified statement of financial position. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected. The changes become effective for the Company on January 1, 2017. Had these changes been adopted, the Company's working capital would have decreased by approximately
$34 million
and
$38 million
at June 30, 2016 and December 31, 2015, respectively.
In February 2016, the FASB issued changes in accounting for leases. The changes introduce a lessee model that brings most leases on the balance sheet. The changes also align many of the underlying principles of the new lessor model with those in the FASB’s new revenue recognition standard. Furthermore, the changes address other concerns related to the current leases model such as eliminating the requirement in current guidance for an entity to use bright-line tests in determining lease classification. The changes also require lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The changes become effective for the Company on January 1, 2019. The Company is currently evaluating the impact of these changes on its condensed consolidated financial statements.
In March 2016, the FASB issued changes related to the simplification of several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The changes become effective for the Company on January 1, 2017. The Company is currently evaluating the impact of these changes on its condensed consolidated financial statements.
3. Accounts Receivable and Inventories
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2016
|
|
December 31
2015
|
Trade accounts receivable
|
|
$
|
278,424
|
|
|
$
|
280,526
|
|
Less: Allowance for doubtful accounts
|
|
(13,183
|
)
|
|
(25,649
|
)
|
Trade accounts receivable, net
|
|
$
|
265,241
|
|
|
$
|
254,877
|
|
|
|
|
|
|
Other receivables
(a)
|
|
$
|
16,875
|
|
|
$
|
30,395
|
|
(a) Other receivables include insurance claim receivables, employee receivables, tax claim receivables, receivables from affiliates and other miscellaneous receivables not included in Trade accounts receivable, net.
The decrease in Allowance for doubtful accounts in 2016 is due to the write-off of previously reserved accounts receivable balances.
The provision for doubtful accounts related to trade accounts receivable was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Provision for doubtful accounts related to trade accounts receivable
|
|
$
|
323
|
|
|
$
|
414
|
|
|
$
|
177
|
|
|
$
|
610
|
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2016
|
|
December 31
2015
|
Finished goods
|
|
$
|
38,207
|
|
|
$
|
32,586
|
|
Work-in-process
|
|
29,349
|
|
|
30,959
|
|
Contracts-in-process
|
|
44,335
|
|
|
55,786
|
|
Raw materials and purchased parts
|
|
69,975
|
|
|
70,755
|
|
Stores and supplies
|
|
26,377
|
|
|
26,881
|
|
Inventories
|
|
$
|
208,243
|
|
|
$
|
216,967
|
|
Contracts-in-process consist of the following:
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2016
|
|
December 31
2015
|
Contract costs accumulated to date
|
|
78,922
|
|
|
55,786
|
|
Estimated loss provisions for contracts-in-process
(a)
|
|
(34,587
|
)
|
|
—
|
|
Contracts-in-process
|
|
44,335
|
|
|
55,786
|
|
|
|
(a)
|
To the extent that the estimated loss provision exceeds accumulated contract costs it is included in the caption Other current liabilities on the Condensed Consolidated Balance Sheets. At June 30, 2016 this amount totaled
$5.5 million
.
|
At June 30, 2016 and December 31, 2015, the Company has
$84.7 million
and
$82.7 million
, of customer advances related to contracts-in-process. These amounts are included in the caption Advances on contracts and other customer advances on the Condensed Consolidated Balance Sheets.
4. Equity Method Investments
In November 2013, the Company sold the Company's Harsco Infrastructure Segment into a strategic venture with Clayton, Dubilier & Rice ("CD&R") as part of a transaction that combined the Harsco Infrastructure Segment with Brand Energy & Infrastructure Services, Inc., which CD&R simultaneously acquired (the "Infrastructure Transaction"). As a result of the Infrastructure Transaction, the Company retained an equity interest in Brand Energy & Infrastructure Service, Inc. and Subsidiaries ("Brand" or the "Infrastructure strategic venture") which is accounted for as an equity method investment in accordance with U.S. GAAP. The Company's equity interest in Brand at June 30, 2016 and December 31, 2015 was approximately
26%
and approximately
29%
, respectively.
As part of the Infrastructure Transaction, the Company is required to make a quarterly payment to the Company's partner in the Infrastructure strategic venture, either (at the Company's election) (i) in cash, with total payments to equal approximately
$22 million
per year on a pre-tax basis (approximately
$15 million
per year after-tax), or (ii) in kind, through the transfer of approximately
3%
of the Company's ownership interest in the Infrastructure strategic venture on an annual basis (the "unit adjustment liability"). The Company will recognize the change in fair value to the unit adjustment liability each period until the Company is no longer required to make these payments or chooses not to make these payments. The change in fair value to the unit adjustment liability is a non-cash expense.
In March 2016, the Company elected not to make the quarterly cash payments to the Company's partner in the Infrastructure strategic venture for the remainder of 2016. Instead, the Company will transfer approximately
3%
of its ownership interest in satisfaction of the Company's 2016 obligation related to the unit adjustment liability. As a result of not making the quarterly cash payments for 2016, the Company's ownership interest in the Infrastructure strategic venture decreased by approximately
3%
and the value of the unit adjustment liability was updated to reflect this change. Accordingly, the book value of the Company's equity method investment in Brand decreased by
$29.4 million
and the unit adjustment liability decreased by
$19.1 million
. The resulting net loss of
$10.3 million
was recognized in the Condensed Consolidated Statement of Operations caption Change in fair value to the unit adjustment liability and loss on dilution of equity method investment. This net loss is non-cash expense.
For the
three and six months ended
June 30, 2016
, the Company recognized
$1.5 million
and
$3.4 million
, respectively, of change in fair value to the unit adjustment liability, exclusive of the fair value adjustment resulting from the decision not to make the quarterly payments in 2016, in the Condensed Consolidated Statement of Operations caption Change in fair value to the unit adjustment liability and loss on dilution of equity method investment. This compared to
$2.2 million
and
$4.4 million
for the three and six months ended June 30, 2015, respectively. The Condensed Consolidated Balance Sheets as of
June 30, 2016
and
December 31, 2015
include balances related to the unit adjustment liability of
$64.2 million
and
$79.9 million
, respectively, in the current and non-current captions, Unit adjustment liability. A reconciliation of beginning and ending balances related to the unit adjustment liability is included in Note 11, Derivative Instruments, Hedging Activities and Fair Value.
The Company will continue to evaluate whether to make payments in cash or in kind in 2017 and beyond based upon performance of the Infrastructure strategic venture and the Company's liquidity and capital resources. Should the Company decide not to make additional cash payments in 2017 and beyond, the value of both the equity method investment in Brand and the related unit adjustment liability may be further impacted, and the change may be reflected in earnings in that period.
The book value of the Company's equity method investment in Brand at
June 30, 2016
and
December 31, 2015
was
$233.9 million
and
$250.1 million
, respectively. The Company's proportionate share of Brand's net income or loss is recorded one quarter in arrears.
Brand's results of operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net revenues
|
|
$
|
750,394
|
|
|
$
|
677,527
|
|
|
$
|
1,551,146
|
|
|
$
|
1,481,726
|
|
Gross profit
|
|
148,972
|
|
|
134,705
|
|
|
329,549
|
|
|
331,946
|
|
Net income (loss) attributable to Brand Energy & Infrastructure Services, Inc. and Subsidiaries
|
|
(2,682
|
)
|
|
(26,418
|
)
|
|
8,378
|
|
|
(12,201
|
)
|
|
|
|
|
|
|
|
|
|
Harsco's equity in income (loss) of Brand
|
|
(694
|
)
|
|
(7,584
|
)
|
|
2,481
|
|
|
(3,501
|
)
|
Balances related to transactions between the Company and Brand are as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2016
|
|
December 31
2015
|
Balances due from Brand
|
|
$
|
1,101
|
|
|
$
|
1,557
|
|
Balances due to Brand
|
|
21,853
|
|
|
21,407
|
|
The remaining balances between the Company and Brand, at
June 30, 2016
, relate primarily to transition services and the funding of certain transferred defined benefit pension plan obligations through 2018. There is not expected to be any significant level of revenue or expense between the Company and Brand on an ongoing basis.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
June 30
2016
|
|
December 31
2015
|
Land
|
|
$
|
11,006
|
|
|
$
|
10,932
|
|
Land improvements
|
|
15,216
|
|
|
15,277
|
|
Buildings and improvements
|
|
189,376
|
|
|
191,356
|
|
Machinery and equipment
|
|
1,649,620
|
|
|
1,661,914
|
|
Construction in progress
|
|
25,877
|
|
|
36,990
|
|
Gross property, plant and equipment
|
|
1,891,095
|
|
|
1,916,469
|
|
Less: Accumulated depreciation
|
|
(1,359,803
|
)
|
|
(1,352,434
|
)
|
Property, plant and equipment, net
|
|
$
|
531,292
|
|
|
$
|
564,035
|
|
6. Goodwill and Other Intangible Assets
The following table reflects the changes in carrying amounts of goodwill by segment for the
six months ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Harsco Metals & Minerals Segment
|
|
Harsco Industrial Segment
|
|
Harsco Rail
Segment
|
|
Consolidated
Totals
|
Balance at December 31, 2015
|
|
$
|
380,761
|
|
|
$
|
6,806
|
|
|
$
|
12,800
|
|
|
$
|
400,367
|
|
Changes to goodwill
|
|
—
|
|
|
33
|
|
|
226
|
|
|
259
|
|
Foreign currency translation
|
|
(6,203
|
)
|
|
—
|
|
|
—
|
|
|
(6,203
|
)
|
Balance at June 30, 2016
|
|
$
|
374,558
|
|
|
$
|
6,839
|
|
|
$
|
13,026
|
|
|
$
|
394,423
|
|
The Company’s 2015 annual goodwill impairment testing did not result in any impairment of the Company’s goodwill. The fair value of the Harsco Metals & Minerals Segment exceeded the carrying value by approximately 15%. The Company tests for goodwill impairment annually or more frequently if indicators of impairment exist, or if a decision is made to dispose of a business. The Company performs the annual goodwill impairment test as of October 1 and monitors for triggering events on an ongoing basis. The Company determined that, as of
June 30, 2016
, no interim goodwill impairment testing was necessary. There can be no assurance that the Company’s annual goodwill impairment testing will not result in a charge to earnings. Should the Company’s analysis indicate further degradation in the overall markets served by the Harsco Metals & Minerals Segment, impairment losses for associated assets could be required. Any impairment could result in the write-down of the carrying value of goodwill to its implied fair value.
Intangible assets included in the captions, Other current assets and Intangible assets, net, on the Condensed Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
(In thousands)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Customer related
|
|
$
|
150,916
|
|
|
$
|
112,933
|
|
|
$
|
153,287
|
|
|
$
|
111,227
|
|
Non-compete agreements
|
|
1,095
|
|
|
1,095
|
|
|
1,092
|
|
|
1,092
|
|
Patents
|
|
5,827
|
|
|
5,519
|
|
|
5,882
|
|
|
5,495
|
|
Technology related
|
|
25,892
|
|
|
24,727
|
|
|
25,559
|
|
|
23,089
|
|
Trade names
|
|
8,310
|
|
|
4,379
|
|
|
8,303
|
|
|
4,194
|
|
Other
|
|
8,690
|
|
|
4,999
|
|
|
8,701
|
|
|
4,669
|
|
Total
|
|
$
|
200,730
|
|
|
$
|
153,652
|
|
|
$
|
202,824
|
|
|
$
|
149,766
|
|
Amortization expense for intangible assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Amortization expense for intangible assets
|
|
$
|
2,050
|
|
|
$
|
2,179
|
|
|
$
|
4,155
|
|
|
$
|
4,316
|
|
The estimated amortization expense for the next five fiscal years based on current intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
Estimated amortization expense
(a)
|
|
$
|
8,000
|
|
|
$
|
5,500
|
|
|
$
|
5,250
|
|
|
$
|
4,750
|
|
|
$
|
4,500
|
|
(a) These estimated amortization expense amounts do not reflect the potential effect of future foreign currency exchange fluctuations.
7. Employee Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
June 30
|
Defined Benefit Pension Plans Net Periodic Pension Cost
|
|
U.S. Plans
|
|
International Plans
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
946
|
|
|
$
|
722
|
|
|
$
|
405
|
|
|
$
|
453
|
|
Interest cost
|
|
2,545
|
|
|
3,089
|
|
|
6,984
|
|
|
9,140
|
|
Expected return on plan assets
|
|
(3,601
|
)
|
|
(4,203
|
)
|
|
(11,219
|
)
|
|
(12,611
|
)
|
Recognized prior service costs
|
|
15
|
|
|
20
|
|
|
45
|
|
|
48
|
|
Recognized loss
|
|
1,372
|
|
|
1,230
|
|
|
3,142
|
|
|
4,223
|
|
Defined benefit pension plans net periodic pension cost (income)
|
|
$
|
1,277
|
|
|
$
|
858
|
|
|
$
|
(643
|
)
|
|
$
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30
|
Defined Benefit Pension Plans Net Periodic Pension Cost
|
|
U.S. Plans
|
|
International Plans
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service costs
|
|
$
|
1,892
|
|
|
$
|
1,444
|
|
|
$
|
809
|
|
|
$
|
892
|
|
Interest cost
|
|
5,090
|
|
|
6,179
|
|
|
14,107
|
|
|
18,329
|
|
Expected return on plan assets
|
|
(7,202
|
)
|
|
(8,406
|
)
|
|
(22,682
|
)
|
|
(25,285
|
)
|
Recognized prior service costs
|
|
31
|
|
|
40
|
|
|
89
|
|
|
97
|
|
Recognized loss
|
|
2,744
|
|
|
2,459
|
|
|
6,360
|
|
|
8,457
|
|
Defined benefit pension plans net periodic pension cost (income)
|
|
$
|
2,555
|
|
|
$
|
1,716
|
|
|
$
|
(1,317
|
)
|
|
$
|
2,490
|
|
The Company has changed the method utilized to estimate the 2016 service cost and interest cost components of net periodic pension cost ("NPPC") for defined benefit pension plans. The more precise application of discount rates for measuring both service costs and interest costs employs yield curve spot rates on a year-by-year expected cash flow basis, using the same yield curves that the Company has previously used. This change in method represented a change in accounting estimate and has been accounted for in the period of change. This change in method decreased the Company's NPPC by approximately
$2 million
and approximately
$4 million
for the
three and six months ended
June 30, 2016
, respectively, compared to what NPPC would have been under the prior method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Company Contributions
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Defined benefit pension plans (U.S.)
|
|
$
|
470
|
|
|
$
|
592
|
|
|
$
|
940
|
|
|
$
|
1,274
|
|
Defined benefit pension plans (International)
|
|
3,254
|
|
|
4,165
|
|
|
13,052
|
|
|
20,231
|
|
Multiemployer pension plans
|
|
505
|
|
|
741
|
|
|
1,026
|
|
|
1,306
|
|
Defined contribution pension plans
|
|
2,476
|
|
|
2,817
|
|
|
5,302
|
|
|
6,265
|
|
The Company's estimate of expected contributions to be paid during the remainder of
2016
for the U.S. and international defined benefit plans are
$1.1 million
and
$5.3 million
, respectively.
8. Income Taxes
The income tax expense related to continuing operations for the
three and six months ended
June 30, 2016
was
$12.0 million
and
$9.8 million
, respectively, compared with
$7.1 million
and
$20.0 million
for the
three and six months ended
June 30, 2015
, respectively.
An income tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, based on technical merits, including resolutions of any related appeals or litigation processes. The unrecognized income tax benefit at
June 30, 2016
was
$6.7 million
, including interest and penalties. Within the next twelve months, it is reasonably possible that
no
unrecognized income tax benefits will be recognized upon settlement of tax examinations and the expiration of various statutes of limitations.
9. Commitments and Contingencies
Environmental
The Company is involved in a number of environmental remediation investigations and cleanups and, along with other companies, has been identified as a “potentially responsible party” for certain waste disposal sites. While each of these matters is subject to various uncertainties, it is probable that the Company will agree to make payments toward funding certain of these activities and it is possible that some of these matters will be decided unfavorably to the Company. The Company has evaluated its potential liability, and its financial exposure is dependent upon such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the allocation of cost among potentially responsible parties, the years of remedial activity required and the remediation methods selected. The Company did not have any material accruals or record any material expenses related to environmental matters during the periods presented.
The Company evaluates its liability for future environmental remediation costs on a quarterly basis. Although actual costs to be incurred at identified sites in future periods may vary from the estimates (given inherent uncertainties in evaluating environmental exposures), the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with environmental matters in excess of the amounts accrued would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Brazilian Tax Disputes
The Company is involved in a number of tax disputes with federal, state and municipal tax authorities in Brazil. These disputes are at various stages of the legal process, including the administrative review phase and the collection action phase, and include assessments of fixed amounts of principal and penalties, plus interest charges that increase at statutorily determined amounts per month and are assessed on the aggregate amount of the principal and penalties. In addition, the losing party at the collection action or court of appeals phase could be subject to a charge to cover statutorily mandated legal fees, which are generally calculated as a percentage of the total assessed amounts due, inclusive of penalty and interest. A large number of the claims relate to value-added ("ICMS") services and social security ("INSS") tax disputes. The largest proportion of the assessed amounts relate to ICMS claims filed by the State Revenue Authorities from the State of São Paulo, Brazil (the "SPRA"), encompassing the period from January 2002 to May 2005.
In October 2009, the Company received notification of the SPRA’s final administrative decision regarding the levying of ICMS in the State of São Paulo in relation to services provided to a customer in the State between January 2004 and May 2005. As of
June 30, 2016
, the principal amount of the tax assessment from the SPRA with regard to this case is approximately
$2 million
, with penalty, interest and fees assessed to date increasing such amount by an additional
$23 million
. Any change in the aggregate amount since the Company’s last Annual Report on Form 10-K for the year ended
December 31, 2015
is due to an increase in assessed interest and statutorily mandated legal fees for the period as well as foreign currency translation.
Another ICMS tax case involving the SPRA refers to the tax period from January 2002 to December 2003, and is still pending at the administrative phase. The aggregate amount assessed by the tax authorities in August 2005 was
$7.8 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
$1.9 million
, with penalty and interest assessed through that date increasing such amount by an additional
$6.0 million
. All such amounts include the effect of foreign currency translation.
The Company continues to believe it is not probable that it will incur a loss for these assessments by the SPRA. The Company also continues to believe that sufficient coverage for these claims exists as a result of the Company’s customer’s indemnification obligations and such customer’s pledge of assets in connection with the October 2009 notice, as required by Brazilian procedure.
The Company intends to continue its practice of vigorously defending itself against these tax claims under various alternatives, including judicial appeal. The Company will continue to evaluate its potential liability with regard to these claims on a quarterly basis; however, it is not possible to predict the ultimate outcome of these tax-related disputes in Brazil. No loss provision has been recorded in the Company's condensed consolidated financial statements for the disputes described above because the loss contingency is not deemed probable, and the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with Brazilian tax disputes would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Brazilian Labor Disputes
The Company is subject to collective bargaining and individual labor claims in Brazil through the Harsco Metals & Minerals Segment which allege, among other things, the Company's failure to pay required amounts for overtime and vacation at certain sites. The Company is vigorously defending itself against these claims; however, litigation is inherently unpredictable, particularly in foreign jurisdictions. While the Company does not currently expect that the ultimate resolution of these claims
will have a material adverse effect on the Company’s financial condition, results of operations or cash flows, it is not possible to predict the ultimate outcome of these labor-related disputes.
The Company is continuing to review all known labor claims and as of
June 30, 2016
and
December 31, 2015
, the Company has established reserves of
$8.7 million
and
$6.9 million
, respectively, on the Company's Condensed Consolidated Balance Sheets for amounts considered to be probable and estimable. As the Company continues to evaluate these claims and takes actions to address them, the amount of established reserves may be impacted.
Customer Disputes
The Company, through its Harsco Metals & Minerals Segment, may, in the normal course of business, become involved in commercial disputes with subcontractors or customers.
During the first quarter of 2015, a rail grinder manufactured by the Company's Harsco Rail Segment and operated by a subcontractor caught fire, causing a customer to incur monetary damages. There is a legal action pending to determine the cause of the incident. Depending on the cause of the fire and the extent of insurance coverage, the Company's results of operations and cash flows may be impacted in future periods.
Although results of operations and cash flows for a given period could be adversely affected by a negative outcome in these or other lawsuits, claims or proceedings, management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Lima Refinery Litigation
On April 8, 2016, Lima Refining Company filed a lawsuit against the Company in the District Court of Harris County, Texas related to a January 2015 explosion at an oil refinery operated by Lima Refining Company. The action seeks approximately
$95 million
in property damages and
$250 million
in lost profits and business interruption damages. The action alleges the explosion occurred because of a defect in a heat exchange cooler manufactured by Hammco Corporation ("Hammco") in 2009, prior to the Company’s acquisition of Hammco in 2014. The Company plans to vigorously contest the allegations against it both as to liability for the accident and the amount of the claimed damages. As a result, the Company believes the situation does not result in a probable loss. The Company has both an indemnity right from the sellers of Hammco and liability insurance coverage under various primary and excess policies that the Company believes will be available, if necessary, to cover substantially all of any such liability that might ultimately be incurred in the above action.
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, 2016
, there were
17,096
pending asbestos personal injury actions filed against the Company. Of those actions,
16,767
were filed in the New York Supreme Court (New York County),
125
were filed in other New York State Supreme Court Counties and
204
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, 2016
,
16,752
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
15
cases in New York County are pending on the Active or In Extremis Docket created for plaintiffs who can demonstrate a malignant condition or physical impairment.
The Company has liability insurance coverage under various primary and excess policies that the Company believes will be available, if necessary, to substantially cover any liability that might ultimately be incurred in the asbestos actions referred to above. The Company believes that a substantial portion of the costs and expenses of the asbestos actions will be paid by the Company’s insurers.
In view of the persistence of asbestos litigation in the U.S., the Company expects to continue to receive additional claims in the future. The Company intends to continue its practice of vigorously defending these claims and cases. At
June 30, 2016
, the Company has obtained dismissal in
27,864
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 condition, results of operations or cash flows of the Company.
Insurance liabilities are recorded when it is probable that a liability has been incurred for a particular event and the amount of loss associated with the event can be reasonably estimated. Insurance reserves have been estimated based primarily upon actuarial calculations and reflect the undiscounted estimated liabilities for ultimate losses, including claims incurred but not reported. Inherent in these estimates are assumptions that are based on the Company's history of claims and losses, a detailed analysis of existing claims with respect to potential value, and current legal and legislative trends. If actual claims differ from those projected by management, changes (either increases or decreases) to insurance reserves may be required and would be recorded through income in the period the change was determined. When a recognized liability is covered by third-party insurance, the Company records an insurance claim receivable to reflect the covered liability. Insurance claim receivables are included in Other receivables on the Company's Condensed Consolidated Balance Sheets. See Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
for additional information on Accrued insurance and loss reserves.
10. Reconciliation of Basic and Diluted Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands, except per share amounts)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income (loss) from continuing operations attributable to Harsco Corporation common stockholders
|
|
$
|
(27,994
|
)
|
|
$
|
6,302
|
|
|
$
|
(38,544
|
)
|
|
$
|
21,973
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
|
80,337
|
|
|
80,221
|
|
|
80,288
|
|
|
80,230
|
|
Dilutive effect of stock-based compensation
|
|
—
|
|
|
197
|
|
|
—
|
|
|
155
|
|
Weighted-average shares outstanding - diluted
|
|
$
|
80,337
|
|
|
$
|
80,418
|
|
|
$
|
80,288
|
|
|
$
|
80,385
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations per common share, attributable to Harsco Corporation common stockholders:
|
Basic
|
|
$
|
(0.35
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.48
|
)
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.35
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.48
|
)
|
|
$
|
0.27
|
|
The following average outstanding stock-based compensation units were not included in the computation of diluted earnings (loss) per share because the effect was antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Restricted stock units
|
|
957
|
|
|
—
|
|
|
694
|
|
|
—
|
|
Stock options
|
|
90
|
|
|
100
|
|
|
90
|
|
|
107
|
|
Stock appreciation rights
|
|
1,641
|
|
|
1,334
|
|
|
1,364
|
|
|
1,100
|
|
Performance share units
|
|
835
|
|
|
350
|
|
|
572
|
|
|
236
|
|
11. Derivative Instruments, Hedging Activities and Fair Value
Derivative Instruments and Hedging Activities
The Company uses derivative instruments, including foreign currency exchange forward contracts and cross-currency interest rate swaps ("CCIRs"), to manage certain foreign currency and interest rate exposures. Derivative instruments are viewed as risk management tools by the Company and are not used for trading or speculative purposes.
All derivative instruments are recorded on the Condensed Consolidated Balance Sheets at fair value. Changes in the fair value of derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings, along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases 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 as a separate component of equity and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. Generally, at
June 30, 2016
, deferred gains and losses related to asset purchases are reclassified to earnings over
10
to
15 years
from the balance sheet date and those related to revenue are deferred until the revenue is recognized. The ineffective portion of all hedges, if any, is recognized currently in earnings.
The fair value of outstanding derivative contracts recorded as assets and liabilities on the Condensed Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(In thousands)
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
June 30, 2016
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
Foreign currency exchange forward contracts
|
|
Other current assets
|
|
$
|
92
|
|
|
Other current liabilities
|
|
$
|
31
|
|
Cross-currency interest rate swaps
|
|
Other assets
|
|
825
|
|
|
|
|
—
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
917
|
|
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
:
|
Foreign currency exchange forward contracts
|
|
Other current assets
|
|
$
|
8,982
|
|
|
Other current liabilities
|
|
$
|
4,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
(In thousands)
|
|
Balance Sheet Location
|
|
Fair Value
|
|
Balance Sheet Location
|
|
Fair Value
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
Foreign currency exchange forward contracts
|
|
Other current assets
|
|
$
|
1,640
|
|
|
|
|
$
|
—
|
|
Cross-currency interest rate swaps
|
|
Other assets
|
|
15,417
|
|
|
|
|
—
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
17,057
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
:
|
Foreign currency exchange forward contracts
|
|
Other current assets
|
|
$
|
4,188
|
|
|
Other current liabilities
|
|
$
|
1,738
|
|
All of the Company's derivatives are recorded in the Condensed Consolidated Balance Sheets at gross amounts and not offset. All of the Company's CCIRs and certain foreign currency exchange forward contracts are transacted under International Swaps and Derivatives Association ("ISDA") documentation. Each ISDA master agreement permits the net settlement of amounts owed in the event of default. The Company's derivative assets and liabilities subject to enforceable master netting arrangements did not result in a net asset or net liability at either
June 30, 2016
or
December 31, 2015
.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Loss was as follows:
Derivatives Designated as Hedging Instruments (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amount of Gain (Loss) Recognized in Other
Comprehensive
Income (“OCI”) on Derivative -
Effective Portion
|
|
Location of Gain
Reclassified
from Accumulated
OCI into Income -
Effective Portion
|
|
Amount of
Gain
Reclassified from
Accumulated OCI into Income -
Effective Portion
|
|
Location of Loss Recognized in Income on Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
|
|
Amount of Loss Recognized in Income on Derivative - Ineffective Portion and Amount
Excluded from
Effectiveness Testing
|
|
Three Months Ended June 30, 2016:
|
Foreign currency exchange forward contracts
|
|
$
|
(305
|
)
|
|
Cost of services and products sold
|
|
$
|
1
|
|
|
|
|
$
|
—
|
|
|
Cross-currency interest rate swaps
|
|
407
|
|
|
|
|
—
|
|
|
Cost of services and products sold
|
|
(42
|
)
|
(b)
|
|
|
$
|
102
|
|
|
|
|
$
|
1
|
|
|
|
|
$
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015:
|
Foreign currency exchange forward contracts
|
|
$
|
519
|
|
|
Cost of services and products sold
|
|
$
|
1
|
|
|
|
|
$
|
—
|
|
|
Cross-currency interest rate swaps
|
|
(2,536
|
)
|
|
|
|
—
|
|
|
Cost of services and products sold
|
|
(19,090
|
)
|
(b)
|
|
|
$
|
(2,017
|
)
|
|
|
|
$
|
1
|
|
|
|
|
$
|
(19,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amount of Gain (Loss)Recognized in OCI on Derivative -
Effective Portion
|
|
Location of Gain
Reclassified
from Accumulated
OCI into Income -
Effective Portion
|
|
Amount of
Gain
Reclassified from
Accumulated OCI into Income -
Effective Portion
|
|
Location of Gain Recognized in Income on Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
|
|
Amount of Gain Recognized in Income on Derivative - Ineffective Portion and Amount
Excluded from
Effectiveness Testing
|
|
Six Months Ended June 30, 2016:
|
Foreign currency forward exchange contracts
|
|
$
|
(630
|
)
|
|
Product revenues / Cost of services and products sold
|
|
$
|
409
|
|
|
|
|
$
|
—
|
|
|
Cross currency interest rate swaps
|
|
(2,084
|
)
|
|
|
|
—
|
|
|
Cost of services and products sold
|
|
4,219
|
|
(b)
|
|
|
$
|
(2,714
|
)
|
|
|
|
$
|
409
|
|
|
|
|
$
|
4,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015:
|
Foreign currency forward exchange contracts
|
|
$
|
1,600
|
|
|
Cost of services and products sold
|
|
$
|
2
|
|
|
|
|
$
|
—
|
|
|
Cross currency interest rate swaps
|
|
6,085
|
|
|
|
|
—
|
|
|
Cost of services and products sold
|
|
11,652
|
|
(b)
|
|
|
$
|
7,685
|
|
|
|
|
$
|
2
|
|
|
|
|
$
|
11,652
|
|
|
(a) Reflects only the activity of the Company and excludes derivative designated as hedging instruments held by the Company's equity method investments.
(b) These gains offset foreign currency fluctuation effects on the debt principal.
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
(Loss) Recognized in
Income on Derivative
|
|
Amount of Gain (Loss) Recognized in
Income on Derivative for the
Three Months Ended June 30 (c)
|
(In thousands)
|
|
|
2016
|
|
2015
|
Foreign currency exchange forward contracts
|
|
Cost of services and products sold
|
|
$
|
8,583
|
|
|
$
|
(11,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain
(Loss) Recognized in
Income on Derivative
|
|
Amount of Gain (Loss) Recognized in
Income on Derivative for the
Six Months Ended June 30 (c)
|
(In thousands)
|
|
|
2016
|
|
2015
|
Foreign currency forward exchange contracts
|
|
Cost of services and products sold
|
|
$
|
1,739
|
|
|
$
|
(7,234
|
)
|
(c) These gains (losses) offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.
Foreign Currency Exchange Forward Contracts
The Company conducts business in multiple currencies and, accordingly, is subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of substantially all of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred and recorded in Accumulated other comprehensive loss, which is a separate component of equity.
The Company uses derivative instruments to hedge cash flows related to foreign currency fluctuations. Foreign currency exchange forward contracts outstanding are part of a worldwide program to minimize foreign currency exchange operating income and balance sheet exposure by offsetting foreign currency exposures of certain future payments between the Company and various subsidiaries, suppliers or customers. These unsecured contracts are with major financial institutions. The Company may be exposed to credit loss in the event of non-performance by the contract counterparties. The Company evaluates the creditworthiness of the counterparties and does not expect default by them. Foreign currency exchange forward contracts are used to hedge commitments, such as foreign currency debt, firm purchase commitments and foreign currency cash flows for certain export sales transactions.
The following tables summarize, by major currency, the contractual amounts of the Company’s foreign currency exchange forward contracts in U.S. dollars. The “Buy” amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the “Sell” amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. The recognized gains and losses offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.
Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Type
|
|
U.S. Dollar
Equivalent
|
|
Maturity
|
|
Recognized
Gain (Loss)
|
British pounds sterling
|
|
Sell
|
|
$
|
41,995
|
|
|
July 2016
|
|
$
|
3,309
|
|
British pounds sterling
|
|
Buy
|
|
1,061
|
|
|
July 2016 through September 2016
|
|
(33
|
)
|
Euros
|
|
Sell
|
|
310,051
|
|
|
July 2016 through December 2016
|
|
(1,675
|
)
|
Euros
|
|
Buy
|
|
138,899
|
|
|
July 2016 through January 2018
|
|
3,511
|
|
Other currencies
|
|
Sell
|
|
35,952
|
|
|
July 2016 through March 2017
|
|
(198
|
)
|
Other currencies
|
|
Buy
|
|
8,521
|
|
|
September 2016
|
|
21
|
|
Total
|
|
|
|
$
|
536,479
|
|
|
|
|
$
|
4,935
|
|
Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Type
|
|
U.S. Dollar
Equivalent
|
|
Maturity
|
|
Recognized
Gain (Loss)
|
British pounds sterling
|
|
Sell
|
|
$
|
43,511
|
|
|
January 2016
|
|
$
|
822
|
|
British pounds sterling
|
|
Buy
|
|
2,062
|
|
|
January 2016
|
|
(54
|
)
|
Euros
|
|
Sell
|
|
336,397
|
|
|
January 2016 through December 2016
|
|
547
|
|
Euros
|
|
Buy
|
|
167,037
|
|
|
January 2016 through August 2016
|
|
2,497
|
|
Other currencies
|
|
Sell
|
|
35,426
|
|
|
January 2016 through March 2016
|
|
316
|
|
Other currencies
|
|
Buy
|
|
7,981
|
|
|
January 2016
|
|
(38
|
)
|
Total
|
|
|
|
$
|
592,414
|
|
|
|
|
$
|
4,090
|
|
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
$16.4 million
and
$20.3 million
during the
three and six months ended
June 30, 2016
, respectively, and pre-tax net gains of
$1.5 million
and
$4.6 million
during the
three and six months ended
June 30, 2015
, respectively, into
Accumulated other comprehensive loss
.
Cross-Currency Interest Rate Swaps
The Company uses CCIRs in conjunction with certain debt issuances in order to secure a fixed local currency interest rate. Under these CCIRs, the Company receives interest based on a fixed or floating U.S. dollar rate and pays interest on a fixed local currency rate based on the contractual amounts in dollars and the local currency, respectively. At maturity, there is also the payment of principal amounts between currencies. The CCIRs are recorded on the Condensed Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps’ interest spread and changes in the credit worthiness of the counter-parties recorded in the caption, Accumulated other comprehensive loss. Changes in value attributed to the effect of foreign currency fluctuations are recorded in the Condensed Consolidated Statements of Operations and offset currency fluctuation effects on the debt principal. The following table indicates the contractual amounts of the Company's CCIRs at
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates
|
(In millions)
|
|
Contractual Amount
|
|
Receive
|
|
Pay
|
Maturing 2016 through 2017
|
|
$
|
4.9
|
|
|
Floating U.S. dollar rate
|
|
Fixed rupee rate
|
During March 2016, the Company effected the early termination of the British pound sterling CCIR with an original maturity date of 2020. The Company received
$16.6 million
in cash related to this termination. There was no gain or loss recorded on the termination as any change in value attributable to the effect of foreign currency translation was previously recognized in the Condensed Consolidated Statements of Operations.
Fair Value of Derivative Assets and Liabilities and Other Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The Company utilizes market data or assumptions that the Company believes market participants would use in valuing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described below:
|
|
•
|
Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
•
|
Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
•
|
Level 3—Inputs that are both significant to the fair value measurement and unobservable.
|
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The following table indicates the fair value hierarchy of the financial instruments of the Company:
|
|
|
|
|
|
|
|
|
|
Level 2 Fair Value Measurements
(In thousands)
|
|
June 30
2016
|
|
December 31
2015
|
Assets
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
|
$
|
9,074
|
|
|
$
|
5,828
|
|
Cross-currency interest rate swaps
|
|
825
|
|
|
15,417
|
|
Liabilities
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
|
4,139
|
|
|
1,738
|
|
The following table reconciles the beginning and ending balances for liabilities measured on a recurring basis using unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
Level 3 Liabilities—Unit Adjustment Liability (d) for the Six Months Ended June 30
(In thousands)
|
|
Six Months Ended
|
|
|
June 30
|
|
|
2016
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
79,934
|
|
|
$
|
93,762
|
|
|
Reduction in the fair value related to election not to make 2016 payments
|
|
(19,145
|
)
|
|
—
|
|
|
Payments
|
|
—
|
|
|
(11,160
|
)
|
|
Change in fair value to the unit adjustment liability
|
|
3,402
|
|
|
4,409
|
|
|
Balance at end of period
|
|
$
|
64,191
|
|
|
$
|
87,012
|
|
(e)
|
|
|
(d)
|
During the quarter ended March 31, 2016, the Company decided that it will not make the four quarterly payments to CD&R for 2016. This resulted in the Company revaluing the Unit Adjustment Liability. See Note 4, Equity Method Investments, for additional information related to the unit adjustment liability.
|
|
|
(e)
|
Does not total due to rounding.
|
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 CCIRs are classified as Level 2 fair value based upon pricing models using market-based inputs. Model inputs can be verified, and valuation techniques do not involve significant management judgment.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short-term maturities of these assets and liabilities. At
June 30, 2016
and
December 31, 2015
, the total fair value of long-term debt (excluding deferred financing costs), including current maturities, was
$845.5 million
and
$834.6 million
, respectively, compared with a carrying value of
$877.7 million
and
$880.8 million
, respectively. Fair values for debt are based on quoted market prices for the same or similar issues, or on the current rates offered to the Company for debt of the same remaining maturities (Level 2).
12. Review of Operations by Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues From Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
Harsco Metals & Minerals
|
|
$
|
253,560
|
|
|
$
|
294,336
|
|
|
$
|
483,232
|
|
|
$
|
585,534
|
|
Harsco Industrial
|
|
66,270
|
|
|
91,881
|
|
|
128,139
|
|
|
190,684
|
|
Harsco Rail
|
|
50,103
|
|
|
69,530
|
|
|
111,843
|
|
|
131,108
|
|
Total revenues from continuing operations
|
|
$
|
369,933
|
|
|
$
|
455,747
|
|
|
$
|
723,214
|
|
|
$
|
907,326
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) From Continuing Operations
|
Harsco Metals & Minerals
|
|
$
|
30,927
|
|
|
$
|
18,599
|
|
|
$
|
37,868
|
|
|
$
|
29,182
|
|
Harsco Industrial
|
|
7,300
|
|
|
14,419
|
|
|
13,771
|
|
|
31,446
|
|
Harsco Rail
|
|
(31,948
|
)
|
|
11,400
|
|
|
(27,042
|
)
|
|
33,033
|
|
Corporate
|
|
(4,965
|
)
|
|
(8,689
|
)
|
|
(13,852
|
)
|
|
(19,051
|
)
|
Total operating income from continuing operations
|
|
$
|
1,314
|
|
|
$
|
35,729
|
|
|
$
|
10,745
|
|
|
$
|
74,610
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
Harsco Metals & Minerals
|
|
$
|
30,662
|
|
|
$
|
34,841
|
|
|
$
|
61,687
|
|
|
$
|
69,732
|
|
Harsco Industrial
|
|
1,850
|
|
|
1,365
|
|
|
3,568
|
|
|
2,652
|
|
Harsco Rail
|
|
1,361
|
|
|
1,638
|
|
|
2,795
|
|
|
3,194
|
|
Corporate
|
|
1,744
|
|
|
1,845
|
|
|
3,612
|
|
|
4,002
|
|
Total Depreciation and Amortization
|
|
$
|
35,617
|
|
|
$
|
39,689
|
|
|
$
|
71,662
|
|
|
$
|
79,580
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Harsco Metals & Minerals
|
|
$
|
13,305
|
|
|
$
|
27,715
|
|
|
$
|
28,725
|
|
|
$
|
49,543
|
|
Harsco Industrial
|
|
1,162
|
|
|
1,584
|
|
|
2,296
|
|
|
8,805
|
|
Harsco Rail
|
|
767
|
|
|
688
|
|
|
1,139
|
|
|
1,225
|
|
Corporate
|
|
(9
|
)
|
|
1,629
|
|
|
16
|
|
|
3,673
|
|
Total Capital Expenditures
|
|
$
|
15,225
|
|
|
$
|
31,616
|
|
|
$
|
32,176
|
|
|
$
|
63,246
|
|
Reconciliation of Segment Operating Income to Income (Loss) From Continuing Operations Before Income Taxes and Equity Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Segment operating income
|
|
$
|
6,279
|
|
|
$
|
44,418
|
|
|
$
|
24,597
|
|
|
$
|
93,661
|
|
General Corporate expense
|
|
(4,965
|
)
|
|
(8,689
|
)
|
|
(13,852
|
)
|
|
(19,051
|
)
|
Operating income from continuing operations
|
|
1,314
|
|
|
35,729
|
|
|
10,745
|
|
|
74,610
|
|
Interest income
|
|
552
|
|
|
431
|
|
|
1,087
|
|
|
687
|
|
Interest expense
|
|
(13,805
|
)
|
|
(11,818
|
)
|
|
(26,168
|
)
|
|
(23,702
|
)
|
Change in fair value to the unit adjustment liability and loss on dilution of equity method investment
|
|
(1,489
|
)
|
|
(2,164
|
)
|
|
(13,706
|
)
|
|
(4,409
|
)
|
Income (loss) from continuing operations before income taxes and equity income (loss)
|
|
$
|
(13,428
|
)
|
|
$
|
22,178
|
|
|
$
|
(28,042
|
)
|
|
$
|
47,186
|
|
13. Other (Income) Expenses
The major components of this Condensed Consolidated Statements of Operations caption are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30
|
|
June 30
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Employee termination benefit costs
|
|
$
|
1,194
|
|
|
$
|
1,105
|
|
|
$
|
6,966
|
|
|
$
|
2,508
|
|
Harsco Metals & Minerals Segment separation costs
|
|
10
|
|
|
—
|
|
|
3,297
|
|
|
—
|
|
Net gains
(a)
|
|
(105
|
)
|
|
(2,942
|
)
|
|
(757
|
)
|
|
(6,732
|
)
|
Foreign currency gains related to Harsco Rail Segment advances on contracts and other customer advances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,940
|
)
|
Other
|
|
148
|
|
|
1,479
|
|
|
864
|
|
|
1,601
|
|
Other (income) expenses
|
|
$
|
1,247
|
|
|
$
|
(358
|
)
|
|
$
|
10,370
|
|
|
$
|
(13,563
|
)
|
|
|
(a)
|
Net gains result from the sales of redundant properties (primarily land, buildings and related equipment) and non-core assets.
|
14. Components of Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is included on the Condensed Consolidated Statements of Equity. The components of Accumulated other comprehensive loss, net of the effect of income taxes, and activity for the
six months ended
June 30, 2015
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Accumulated Other Comprehensive Income (Loss) - Net of Tax
|
(In thousands)
|
|
Cumulative Foreign Exchange Translation Adjustments
|
|
Effective Portion of Derivatives Designated as Hedging Instruments
|
|
Cumulative Unrecognized Actuarial Losses on Pension Obligations
|
|
Unrealized Loss on Marketable Securities
|
|
Total
|
Balance at December 31, 2014
|
|
$
|
(39,938
|
)
|
|
$
|
(9,025
|
)
|
|
$
|
(483,278
|
)
|
|
$
|
(15
|
)
|
|
$
|
(532,256
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(23,957
|
)
|
(a)
|
6,681
|
|
(b)
|
(2,493
|
)
|
(a)
|
(4
|
)
|
|
(19,773
|
)
|
Realized (gains) losses reclassified from accumulated other comprehensive loss, net of tax
|
|
—
|
|
|
(2
|
)
|
|
10,114
|
|
|
—
|
|
|
10,112
|
|
Other comprehensive income (loss) from equity method investee
|
|
(13,860
|
)
|
|
(798
|
)
|
|
595
|
|
|
—
|
|
|
(14,063
|
)
|
Total other comprehensive income (loss)
|
|
(37,817
|
)
|
|
5,881
|
|
|
8,216
|
|
|
(4
|
)
|
|
(23,724
|
)
|
Less: Other comprehensive loss attributable to noncontrolling interests
|
|
1,091
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
1,105
|
|
Other comprehensive income (loss) attributable to Harsco Corporation
|
|
(36,726
|
)
|
|
5,895
|
|
|
8,216
|
|
|
(4
|
)
|
|
(22,619
|
)
|
Balance at June 30, 2015
|
|
$
|
(76,664
|
)
|
|
$
|
(3,130
|
)
|
|
$
|
(475,062
|
)
|
|
$
|
(19
|
)
|
|
$
|
(554,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Accumulated Other Comprehensive Income (Loss) - Net of Tax
|
(In thousands)
|
|
Cumulative Foreign Exchange Translation Adjustments
|
|
Effective Portion of Derivatives Designated as Hedging Instruments
|
|
Cumulative Unrecognized Actuarial Losses on Pension Obligations
|
|
Unrealized Loss on Marketable Securities
|
|
Total
|
Balance at December 31, 2015
|
|
$
|
(125,561
|
)
|
|
$
|
(400
|
)
|
|
$
|
(389,696
|
)
|
|
$
|
(31
|
)
|
|
$
|
(515,688
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(9,502
|
)
|
(a)
|
(2,133
|
)
|
(b)
|
23,873
|
|
(a)
|
(3
|
)
|
|
12,235
|
|
Realized (gains) losses reclassified from accumulated other comprehensive loss, net of tax
|
|
—
|
|
|
(258
|
)
|
|
8,190
|
|
|
—
|
|
|
7,932
|
|
Realized (gains) losses reclassified from accumulated other comprehensive loss in connection with loss on dilution of equity method investment (See Note 4, Equity Method Investments)
|
|
3,079
|
|
|
106
|
|
|
(148
|
)
|
|
—
|
|
|
3,037
|
|
Other comprehensive income (loss) from equity method investee
|
|
3,650
|
|
|
(266
|
)
|
|
380
|
|
|
—
|
|
|
3,764
|
|
Total other comprehensive income (loss)
|
|
(2,773
|
)
|
|
(2,551
|
)
|
|
32,295
|
|
|
(3
|
)
|
|
26,968
|
|
Less: Other comprehensive (income) loss attributable to noncontrolling interests
|
|
425
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
418
|
|
Other comprehensive income (loss) attributable to Harsco Corporation
|
|
(2,348
|
)
|
|
(2,558
|
)
|
|
32,295
|
|
|
(3
|
)
|
|
27,386
|
|
Balance at June 30, 2016
|
|
$
|
(127,909
|
)
|
|
$
|
(2,958
|
)
|
|
$
|
(357,401
|
)
|
|
$
|
(34
|
)
|
|
$
|
(488,302
|
)
|
|
|
(a)
|
Principally foreign currency fluctuation.
|
|
|
(b)
|
Net change from periodic revaluations.
|
Realized (gains) losses reclassified from accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Affected Caption in the Condensed Consolidated Statements of Operations
|
|
June 30
2016
|
|
June 30
2015
|
|
June 30
2016
|
|
June 30
2015
|
Amortization of cash flow hedging instruments:
|
Foreign currency exchange forward contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(408
|
)
|
|
$
|
—
|
|
|
Product revenues
|
Foreign currency exchange forward contracts
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
Cost of services and products sold
|
Tax expense
|
|
—
|
|
|
—
|
|
|
151
|
|
|
—
|
|
|
|
Total reclassification of cash flow hedging instruments, net of tax
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(258
|
)
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefit pension items:
|
Actuarial losses
(c)
|
|
$
|
2,285
|
|
|
$
|
3,995
|
|
|
$
|
4,661
|
|
|
$
|
7,942
|
|
|
Selling, general and administrative expenses
|
Actuarial losses
(c)
|
|
2,229
|
|
|
1,456
|
|
|
4,443
|
|
|
2,974
|
|
|
Cost of services and products sold
|
Prior-service costs (benefits)
(c)
|
|
(3
|
)
|
|
31
|
|
|
(4
|
)
|
|
62
|
|
|
Selling, general and administrative expenses
|
Prior-service costs
(c)
|
|
63
|
|
|
37
|
|
|
124
|
|
|
75
|
|
|
Cost of services and products sold
|
Total before tax
|
|
4,574
|
|
|
5,519
|
|
|
9,224
|
|
|
11,053
|
|
|
|
Tax benefit
|
|
(517
|
)
|
|
(469
|
)
|
|
(1,034
|
)
|
|
(939
|
)
|
|
|
Total reclassification of defined benefit pension items, net of tax
|
|
$
|
4,057
|
|
|
$
|
5,050
|
|
|
$
|
8,190
|
|
|
$
|
10,114
|
|
|
|
(c) These accumulated other comprehensive loss components are included in the computation of net periodic pension costs. See Note 7, Employee Benefit Plans, for additional details.
Realized (gains) losses reclassified from accumulated other comprehensive loss in connection with loss on dilution of equity method investment are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
|
Six Months Ended
|
|
Affected Caption in the Condensed Consolidated Statements of Operations
|
|
June 30
2016
|
|
Foreign exchange translation adjustments
|
|
$
|
4,880
|
|
|
Change in fair value to the adjustment liability and loss on dilution of equity method investment
|
Cash flow hedging instruments
|
|
168
|
|
|
Change in fair value to the adjustment liability and loss on dilution of equity method investment
|
Defined benefit pension obligations
|
|
(235
|
)
|
|
Change in fair value to the adjustment liability and loss on dilution of equity method investment
|
Total before tax
|
|
4,813
|
|
|
|
Tax benefit
|
|
(1,776
|
)
|
|
|
Total amounts reclassified from accumulated other comprehensive loss in connection with loss on dilution of equity method investment
|
|
$
|
3,037
|
|
|
|
15. Restructuring Programs
In recent years, the Company has instituted restructuring programs to balance short-term profitability goals with long-term strategies. A primary objective of these programs has been to establish platforms upon which the affected businesses can grow with reduced fixed investment and generate annual operating expense savings. The restructuring programs have been instituted in response to the continuing impact of global financial and economic uncertainty on the Company’s end markets. Restructuring costs incurred in these programs were recorded as part of the caption, Other expenses, of the Condensed Consolidated Statements of Operations. The timing of associated cash payments is dependent on the type of restructuring cost and can extend over a multi-year period.
Project Orion
Under the Harsco Metals & Minerals Segment's Improvement Plan ("Project Orion"), the Harsco Metals & Minerals Segment made organizational and process improvement changes that are expected to improve its return on capital and deliver a higher and more consistent level of service to customers. These changes include improving several core processes and simplifying the organizational structure. During the fourth quarter of 2015, Project Orion was expanded with additional targeted workforce and operational savings of
$20 million
to
$25 million
. The majority of these benefits are expected to be realized in 2016.
The restructuring accrual for Project Orion at
June 30, 2016
and the activity for the
six months ended
June 30, 2016
were as follows:
|
|
|
|
|
|
(In thousands)
|
|
Employee Termination Benefit Costs
|
Balance, December 31, 2015
|
|
$
|
5,807
|
|
Cash expenditures
|
|
(3,902
|
)
|
Foreign currency translation
|
|
70
|
|
Other adjustments
|
|
160
|
|
Balance, June 30, 2016
|
|
$
|
2,135
|
|
The remaining accrual related to Project Orion is expected to be paid principally through the second half of 2016.