NVRI 10-Q
Enviri Corp (NVRI)
10-Q
2022-05-03
For: 2022-03-31
View Original
Added on
June 09, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM | |||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Quarterly Period Ended March 31, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number 001-03970
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code 717 -763-7064
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | |||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at April 29, 2022 | |||||||
HARSCO CORPORATION
FORM 10-Q
INDEX
| Page | ||||||||
2
Glossary of Defined Terms
Unless the context requires otherwise, "Harsco," the "Company," "we," "our," or "us" refers to Harsco Corporation on a consolidated basis. The Company also uses several other terms in this Quarterly Report on Form 10-Q, which are further defined below:
| Term | Description | |||||||
| AOCI | Accumulated Other Comprehensive Income (Loss) | |||||||
| AXC | The former Harsco Industrial Air-X-Changers business | |||||||
| CERCLA | Comprehensive Environmental Response, Compensation, and Liability Act of 1980 | |||||||
| COVID-19 | The COVID-19 coronavirus pandemic | |||||||
| Credit Agreement | Credit Agreement governing the Senior Secured Credit Facilities | |||||||
| DEA | United States Drug Enforcement Agency | |||||||
| DTSC | California Department of Toxic Substances Control | |||||||
| EBITDA | Earnings before interest, tax, depreciation and amortization | |||||||
| ESOL | Stericycle Environmental Solutions business | |||||||
| FASB | Financial Accounting Standards Board | |||||||
| IBORs | Interbank offered rates | |||||||
| ICMS | Type of value-added tax in Brazil | |||||||
| IKG | The former Harsco Industrial IKG business | |||||||
| ISDA | International Swaps and Derivatives Association | |||||||
| LIBOR | London Interbank Offered Rates | |||||||
| New Term Loan | $500 million term loan raised in March 2021 under the Senior Secured Credit Facilities, maturing on March 10, 2028 | |||||||
| Notes | 5.75% Notes due July 31, 2027 | |||||||
| OCI | Other Comprehensive Income (Loss) | |||||||
| PA DEP | Pennsylvania Department of Environmental Protection | |||||||
| Revolving Credit Facility | Multi-year revolving credit facility under the Senior Secured Credit Facility, with a facility limit of $700 million | |||||||
| ROU | Right of use | |||||||
| SBB | Federal railway system of Switzerland | |||||||
| SCE | Supreme Council for Environment in Bahrain | |||||||
| SEC | Securities and Exchange Commission | |||||||
| Senior Secured Credit Facilities | Primary source of borrowings comprised of the Revolving Credit Facility and the New Term Loan | |||||||
| SPRA | State Revenue Authorities from the State of São Paulo, Brazil | |||||||
| TSDF | Treatment, storage, and disposal facility permits issued under the Resource Conservation and Recovery Act | |||||||
| U.S. GAAP | Accounting principles generally accepted in the U.S. | |||||||
3
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARSCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| (In thousands) | March 31 2022 | December 31 2021 | ||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash | ||||||||||||||
| Trade accounts receivable, net | ||||||||||||||
| Other receivables | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid expenses | ||||||||||||||
| Current portion of assets held-for-sale | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Right-of-use assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Deferred income tax assets | ||||||||||||||
| Assets held-for-sale | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Short-term borrowings | $ | $ | ||||||||||||
| Current maturities of long-term debt | ||||||||||||||
| Accounts payable | ||||||||||||||
| Accrued compensation | ||||||||||||||
| Income taxes payable | ||||||||||||||
| Current portion of operating lease liabilities | ||||||||||||||
| Current portion of liabilities of assets held-for-sale | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Retirement plan liabilities | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Liabilities of assets held-for-sale | ||||||||||||||
| Environmental liabilities | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||||||||
| HARSCO CORPORATION STOCKHOLDERS’ EQUITY | ||||||||||||||
| Common stock | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Retained earnings | ||||||||||||||
| Treasury stock | ( | ( | ||||||||||||
| Total Harsco Corporation stockholders’ equity | ||||||||||||||
| Noncontrolling interests | ||||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| Three Months Ended | |||||||||||||||||
| March 31 | |||||||||||||||||
| (In thousands, except per share amounts) | 2022 | 2021 | |||||||||||||||
| Revenues from continuing operations: | |||||||||||||||||
| Service revenues | $ | $ | |||||||||||||||
| Product revenues | |||||||||||||||||
| Total revenues | |||||||||||||||||
| Costs and expenses from continuing operations: | |||||||||||||||||
| Cost of services sold | |||||||||||||||||
| Cost of products sold | |||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Research and development expenses | |||||||||||||||||
| Other (income) expenses, net | ( | ( | |||||||||||||||
| Total costs and expenses | |||||||||||||||||
| Operating income from continuing operations | |||||||||||||||||
| Interest income | |||||||||||||||||
| Interest expense | ( | ( | |||||||||||||||
| Unused debt commitment fees, amendment fees and loss on extinguishment of debt | ( | ( | |||||||||||||||
| Defined benefit pension income | |||||||||||||||||
| Income (loss) from continuing operations before income taxes and equity income | ( | ||||||||||||||||
| Income tax benefit (expense) from continuing operations | ( | ( | |||||||||||||||
| Equity income (loss) of unconsolidated entities, net | ( | ( | |||||||||||||||
| Income (loss) from continuing operations | ( | ( | |||||||||||||||
| Discontinued operations: | |||||||||||||||||
| Income (loss) from discontinued businesses | ( | ||||||||||||||||
| Income tax benefit (expense) from discontinued businesses | ( | ||||||||||||||||
| Income (loss) from discontinued operations, net of tax | ( | ||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||
| Less: Net income attributable to noncontrolling interests | ( | ( | |||||||||||||||
| Net income (loss) attributable to Harsco Corporation | $ | ( | $ | ||||||||||||||
| Amounts attributable to Harsco Corporation common stockholders: | |||||||||||||||||
| Income (loss) from continuing operations, net of tax | $ | ( | $ | ( | |||||||||||||
| Income (loss) from discontinued operations, net of tax | ( | ||||||||||||||||
| Net income (loss) attributable to Harsco Corporation common stockholders | $ | ( | $ | ||||||||||||||
| Weighted-average shares of common stock outstanding | |||||||||||||||||
| Basic earnings (loss) per common share attributable to Harsco Corporation common stockholders: | |||||||||||||||||
| Continuing operations | $ | ( | $ | ( | |||||||||||||
| Discontinued operations | ( | ||||||||||||||||
| Basic earnings (loss) per share attributable to Harsco Corporation common stockholders | $ | ( | $ | ||||||||||||||
| Diluted weighted-average shares of common stock outstanding | |||||||||||||||||
| Diluted earnings (loss) per common share attributable to Harsco Corporation common stockholders: | |||||||||||||||||
| Continuing operations | $ | ( | $ | ( | |||||||||||||
| Discontinued operations | ( | ||||||||||||||||
| Diluted earnings (loss) per share attributable to Harsco Corporation common stockholders | $ | ( | $ | ||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Net income (loss) | $ | ( | $ | |||||||||||
| Other comprehensive income (loss): | ||||||||||||||
Foreign currency translation adjustments, net of deferred income taxes of $( | ( | ( | ||||||||||||
Net income (loss) on cash flow hedging instruments, net of deferred income taxes of $( | ||||||||||||||
Pension liability adjustments, net of deferred income taxes of $( | ||||||||||||||
Unrealized gain on marketable securities, net of deferred income taxes of $ | ( | |||||||||||||
| Total other comprehensive income (loss) | ||||||||||||||
| Total comprehensive income (loss) | ( | |||||||||||||
| Comprehensive income attributable to noncontrolling interests | ( | ( | ||||||||||||
| Comprehensive income (loss) attributable to Harsco Corporation | $ | ( | $ | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||
| Net income (loss) | $ | ( | $ | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||
| Depreciation | ||||||||||||||
| Amortization | ||||||||||||||
| Deferred income tax (benefit) expense | ( | ( | ||||||||||||
| Equity (income) loss of unconsolidated entities, net | ||||||||||||||
| Dividends from unconsolidated entities | ||||||||||||||
| Loss on early extinguishment of debt | ||||||||||||||
| Other, net | ||||||||||||||
| Changes in assets and liabilities, net of acquisitions and dispositions of businesses: | ||||||||||||||
| Accounts receivable | ( | ( | ||||||||||||
| Income tax refunds receivable, reimbursable to seller | ||||||||||||||
| Inventories | ( | |||||||||||||
| Contract assets | ( | |||||||||||||
| Right-of-use assets | ||||||||||||||
| Accounts payable | ( | |||||||||||||
| Accrued interest payable | ( | ( | ||||||||||||
| Accrued compensation | ( | ( | ||||||||||||
| Advances on contracts | ( | ( | ||||||||||||
| Operating lease liabilities | ( | ( | ||||||||||||
| Retirement plan liabilities, net | ( | ( | ||||||||||||
| Other assets and liabilities | ||||||||||||||
| Net cash used by operating activities | ( | ( | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||
| Purchases of property, plant and equipment | ( | ( | ||||||||||||
| Proceeds from sales of assets | ||||||||||||||
| Expenditures for intangible assets | ( | ( | ||||||||||||
| Net proceeds (payments) from settlement of foreign currency forward exchange contracts | ( | |||||||||||||
| Payments for settlements of interest rate swaps | ( | |||||||||||||
| Other investing activities, net | ||||||||||||||
| Net cash used by investing activities | ( | ( | ||||||||||||
| Cash flows from financing activities: | ||||||||||||||
| Short-term borrowings, net | ||||||||||||||
| Current maturities and long-term debt: | ||||||||||||||
| Additions | ||||||||||||||
| Reductions | ( | ( | ||||||||||||
| Stock-based compensation - Employee taxes paid | ( | ( | ||||||||||||
| Payment of contingent consideration | ( | |||||||||||||
| Deferred financing costs | ( | |||||||||||||
| Other financing activities, net | ( | |||||||||||||
| Net cash provided by financing activities | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents, including restricted cash | ( | |||||||||||||
| Net increase in cash and cash equivalents, including restricted cash | ||||||||||||||
| Cash and cash equivalents, including restricted cash, at beginning of period | ||||||||||||||
| Cash and cash equivalents, including restricted cash, at end of period | $ | $ | ||||||||||||
| Supplementary cash flow information: | ||||||||||||||
| Change in accrual for purchases of property, plant and equipment included in accounts payable | $ | ( | $ | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
7
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
| Harsco Corporation Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share amounts) | Issued | Treasury | Total | |||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2020 | $ | $ | ( | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss), net of deferred income taxes of $ | ( | |||||||||||||||||||||||||||||||||||||||||||
Stock appreciation rights exercised, net | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units and other stock grants, net | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
Vesting of performance share units, net | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned portion of stock-based compensation, net of forfeitures | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2021 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Harsco Corporation Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share amounts) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | |||||||||||||||||||||||||||||||||||||||
| Issued | Treasury | Total | ||||||||||||||||||||||||||||||||||||||||||
| Balances, December 31, 2021 | $ | $ | ( | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||
| Net income | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive income (loss), net of deferred income taxes of $( | ( | |||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock units and other stock grants, net | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Amortization of unearned portion of stock-based compensation, net of forfeitures | ||||||||||||||||||||||||||||||||||||||||||||
| Balances, March 31, 2022 | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
8
HARSCO CORPORATION
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.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
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 the Rail business. The sales process was ongoing during the first 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.
9
| (in thousands) | March 31 2022 | December 31 2021 | ||||||||||||
| Trade accounts receivable, net | $ | $ | ||||||||||||
| Other receivables | ||||||||||||||
| Inventories | ||||||||||||||
| Current portion of contract assets | ||||||||||||||
| Other current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Right-of-use assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Deferred income tax assets | ||||||||||||||
| Other assets | ||||||||||||||
| Total Rail assets included in Assets held-for-sale | $ | $ | ||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued compensation | ||||||||||||||
| Current portion of operating lease liabilities | ||||||||||||||
| Current portion of advances on contracts | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total Rail liabilities included in Liabilities of assets held-for-sale | $ | $ | ||||||||||||
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 months ended March 31, 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 March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Amounts directly attributable to the former Harsco Rail Segment: | ||||||||||||||
| Service revenues | $ | $ | ||||||||||||
Product revenues (a) | ||||||||||||||
| Cost of services sold | ||||||||||||||
| Cost of products sold | ||||||||||||||
| Income (loss) from discontinued businesses | ( | |||||||||||||
| Additional amounts allocated to the former Harsco Rail Segment: | ||||||||||||||
Selling, general and administrative expenses (b) | $ | $ | ||||||||||||
(a) The decrease in product revenues for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 is principally due to the 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 $1.0
The Company's former Harsco Rail Segment is currently manufacturing highly-engineered equipment under large long-term fixed-price contracts with the SBB, the infrastructure manager for most of the railway in the U.K. ("Network Rail"), and the national railway company in Germany ("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 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. As a result, the Company recorded a $24.2 million forward estimated loss provision 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
10
million estimated forward loss provision due principally to the estimated contractual penalties that would be triggered by this delay. For the second SBB contract, the Company recorded an additional $3.5 million forward estimated loss provision due to additional supply chain delays and cost overruns. The estimated forward loss provision represents the Company's best estimate based on currently available information. It is possible that the Company's overall estimate of 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 79 % complete as of March 31, 2022. The contracts with Network Rail and Deutsche Bahn are 45 % and 22 % complete, respectively, as of March 31, 2022.
The following is selected financial information included on the Condensed Consolidated Statements of Cash Flows attributable to the former Harsco Rail Segment:
| Three Months Ended March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Non-cash operating items | ||||||||||||||
| Depreciation and amortization | $ | $ | ||||||||||||
| Cash flows from investing activities | ||||||||||||||
| Purchases of property, plant and equipment | ||||||||||||||
4. Accounts Receivable and Note Receivable
Accounts receivable consist of the following:
| (In thousands) | March 31 2022 | December 31 2021 | ||||||||||||
| Trade accounts receivable | $ | $ | ||||||||||||
| Less: Allowance for expected credit losses | ( | ( | ||||||||||||
| Trade accounts receivable, net | $ | $ | ||||||||||||
Other receivables (a) | $ | $ | ||||||||||||
(a) Other receivables include employee receivables, insurance receivable, tax claims and refunds and other miscellaneous items not included in Trade accounts receivable, net.
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Provision for expected credit losses and doubtful accounts related to trade accounts receivable | $ | $ | ||||||||||||
At March 31, 2022, $6.5 million of the Company's trade accounts receivable were past due by twelve months or more, with $3.5 million of this amount reserved. Collection of the remaining balance is still ultimately expected.
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 March 31, 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. At March 31, 2022 the amortized cost of the note receivable was $31.4 million, compared with a fair value of $31.8 million.
| (In thousands) | March 31 2022 | December 31 2021 | ||||||||||||
| Note receivable | $ | $ | ||||||||||||
11
5. Inventories
Inventories consist of the following:
| (In thousands) | March 31 2022 | December 31 2021 | ||||||||||||
| Finished goods | $ | $ | ||||||||||||
| Work-in-process | ||||||||||||||
| Raw materials and purchased parts | ||||||||||||||
| Stores and supplies | ||||||||||||||
| Total inventories | $ | $ | ||||||||||||
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
| (In thousands) | March 31 2022 | December 31 2021 | ||||||||||||
| Land | $ | $ | ||||||||||||
| Land improvements | ||||||||||||||
| Buildings and improvements | ||||||||||||||
| Machinery and equipment | ||||||||||||||
| Uncompleted construction | ||||||||||||||
| Gross property, plant and equipment | ||||||||||||||
| Less: Accumulated depreciation | ( | ( | ||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
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 will continue 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 $20 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. At this point, considering the ongoing discussions with the customer, and other 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 March 31, 2022. However, the Company will continue to evaluate changes in facts and circumstances and record any impairment charge when and if indicated.
7. Leases
The components of lease expense were as follows:
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Finance leases: | ||||||||||||||
| Amortization expense | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Operating leases | ||||||||||||||
| Variable and short-term lease expense | ||||||||||||||
| Sublease income | ( | ( | ||||||||||||
| Total lease expense from continuing operations | $ | $ | ||||||||||||
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8. Goodwill and Other Intangible Assets
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. The Company determined that, as of March 31, 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, and/or result in a sustained decrease in the Company's share price, which could result in an impairment charge in a future period.
Because of the 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 $36 million at March 31, 2022. The Company has not identified any triggering events for the Altek asset group in the first 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 Credit Facilities to reset the levels of the net debt to consolidated adjusted EBITDA ratio covenant. As a result of this amendment, the net debt to consolidated adjusted EBITDA ratio covenant was set at 5.75 for the quarter ending March 31, 2022, and then 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 net debt to consolidated adjusted EBITDA ratio covenant will decrease by an additional 0.25 , provided, however, it will not go below 4.00 .
During the three months ended March 31, 2022 and 2021, the Company recognized total expenses of $0.5 million and $5.3 million, respectively, related to the amended Senior Secured Credit Facilities in the caption Unused debt commitment fees, amendment fees and loss on extinguishment of debt on the Condensed Consolidated Statements of Operations.
| (In thousands) | March 31 2022 | December 31 2021 | ||||||||||||
| Senior Secured Credit Facilities: | ||||||||||||||
| New Term Loan | $ | $ | ||||||||||||
| Revolving Credit Facility | ||||||||||||||
| 5.75% Notes, due July 31, 2027 | ||||||||||||||
| Other financing payable (including finance leases) in varying amounts | ||||||||||||||
| Total debt obligations | ||||||||||||||
| Less: deferred financing costs | ( | ( | ||||||||||||
| Total debt obligations, net of deferred financing costs | ||||||||||||||
| Less: current maturities of long-term debt | ( | ( | ||||||||||||
| Long-term debt | $ | $ | ||||||||||||
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10. Employee Benefit Plans
| Three Months Ended | ||||||||||||||||||||||||||
| March 31 | ||||||||||||||||||||||||||
| Defined Benefit Pension Plan Income | U.S. Plans | International Plans | ||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ||||||||||||||||||||||
| Recognized prior service costs | ||||||||||||||||||||||||||
| Recognized losses | ||||||||||||||||||||||||||
| Defined benefit pension plan income | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||
| Three Months Ended | ||||||||||||||
| Company Contributions | March 31 | |||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Defined benefit pension plans (U.S.) | $ | $ | ||||||||||||
| Defined benefit pension plans (International) | ||||||||||||||
| Multiemployer pension plans | ||||||||||||||
| Defined contribution pension plans | ||||||||||||||
11. Income Taxes
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.
14
| (In thousands) | March 31 2022 | December 31 2021 | ||||||||||||
Current portion of environmental liabilities (a) | $ | $ | ||||||||||||
| Long-term environmental liabilities | ||||||||||||||
| Total environmental liabilities | $ | $ | ||||||||||||
(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. The Company has the ability to appeal this decision, and is currently reviewing the decision and its options. The Company has filed a Motion for a Temporary Restraining Order to stop the closure of the site pending its appeal of the DTSC's action. 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 $6.9 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 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
15
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 $21 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. 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 EURO 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 . 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. Although some loss is probable, it is the Company's position that it has indemnity rights that would offset at least a significant portion of any loss within this deductible; 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
16
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 March 31, 2022 the principal amount of the tax assessment from the SPRA with regard to this case is approximately $1.3 million, with penalty, interest and fees assessed to date increasing such amount by an additional $18.1 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 $1.3 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 $7.7 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 $5.3 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 $1.3 million, with penalty and interest assessed through that date increasing such amount by an additional $4.0 million. On December 6, 2018 the administrative tribunal reduced the applicable penalties to $0.9 million. After calculating the interest accrued on the current penalty, the Company estimates that the current overall liability for this case to be approximately $5.8 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 $2.2 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 $3.7 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.
17
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 March 31, 2022 and December 31, 2021 the Company has established reserves of $3.6 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 March 31, 2022 there were approximately 17,220 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 120 were filed in other New York State Supreme Court Counties and approximately 510 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 March 31, 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 March 31, 2022 the Company has obtained dismissal in approximately 28,380 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
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13. Reconciliation of Basic and Diluted Shares
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands, except per share amounts) | 2022 | 2021 | ||||||||||||
| Income (loss) from continuing operations attributable to Harsco Corporation common stockholders | $ | ( | $ | ( | ||||||||||
| Weighted-average shares outstanding: | ||||||||||||||
| Weighted-average shares outstanding - basic | ||||||||||||||
| Dilutive effect of stock-based compensation | ||||||||||||||
| Weighted-average shares outstanding - diluted | ||||||||||||||
| Earnings (loss) from continuing operations per common share, attributable to Harsco Corporation common stockholders: | ||||||||||||||
| Basic | $ | ( | $ | ( | ||||||||||
| Diluted | $ | ( | $ | ( | ||||||||||
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 | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Restricted stock units | ||||||||||||||
| Stock appreciation rights | ||||||||||||||
| Performance share units | ||||||||||||||
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.
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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 | ||||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||||||||
| Asset derivatives (Level 2): | ||||||||||||||||||||||||||
| Foreign currency exchange forward contracts | Other current assets | $ | $ | $ | ||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
| Liability derivatives (Level 2): | ||||||||||||||||||||||||||
| Foreign currency exchange forward contracts | Other current liabilities | $ | $ | $ | ||||||||||||||||||||||
| Interest rate swaps | Other current liabilities | |||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||
| Asset derivatives (Level 2): | ||||||||||||||||||||||||||
| Foreign currency exchange forward contracts | Other current assets | $ | $ | $ | ||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
| Liability derivatives (Level 2): | ||||||||||||||||||||||||||
| Foreign currency exchange forward contracts | Other current liabilities | $ | $ | $ | ||||||||||||||||||||||
| Interest rate swaps | Other current liabilities | |||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
All of the Company's derivatives are recorded on the Condensed Consolidated Balance Sheets at gross amounts and 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 liability of $0.3 million and $0.9 million at March 31, 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 | |||||||||||||||||||||||||||||||
| March 31 | March 31 | |||||||||||||||||||||||||||||||
| (In thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
| Foreign currency exchange forward contracts | $ | $ | ( | Income (loss) from discontinued businesses | $ | ( | $ | ( | ||||||||||||||||||||||||
| Interest rate swaps | Interest expense | |||||||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||||||||
20
The location and amount of gain (loss) recognized on the Company's Condensed Consolidated Statements of Operations was as follows:
| Three Months Ended | ||||||||||||||||||||||||||
| March 31 | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| (in thousands) | Interest Expense | Income From Discontinued Businesses | Interest Expense | Income From Discontinued Businesses | ||||||||||||||||||||||
| Total amounts of line items presented in the Condensed Consolidated Statement of Operations in which the effects of derivatives designated as hedging instruments are recorded | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||
| Interest rate swaps: | ||||||||||||||||||||||||||
| Gain or (loss) reclassified from AOCI into income | ( | ( | ||||||||||||||||||||||||
| Amount recognized in earnings due to ineffectiveness | ||||||||||||||||||||||||||
| Foreign exchange contracts: | ||||||||||||||||||||||||||
| Gain or (loss) reclassified from AOCI into income | ||||||||||||||||||||||||||
| Amount excluded from effectiveness testing recognized in earnings based on changes in fair value | ( | |||||||||||||||||||||||||
| Amount excluded from the effectiveness testing recognized in earnings based on an amortization approach | ( | |||||||||||||||||||||||||
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 | ||||||||||||||||||||
| March 31 | ||||||||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||||||||
| Foreign currency exchange forward contracts | Cost of services and products sold | $ | $ | |||||||||||||||||
(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 March 31, 2022 and December 31, 2021 the notional amounts of
21
foreign currency exchange forward contracts were $404.0 million and $425.8 million, respectively. These contracts are primarily denominated in British Pound Sterling and Euros and mature through March 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 for the three months ended March 31, 2022, and pre-tax net gains of $3.3 million for the three months ended March 31, 2021 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.
At March 31, 2022, the Company has entered into 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 were recorded in earnings in the current period.
Fair Value of Other Financial Instruments
15. Review of Operations by Segment
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Revenues From Continuing Operations | ||||||||||||||
| Harsco Environmental | $ | $ | ||||||||||||
| Harsco Clean Earth | ||||||||||||||
| Total Revenues From Continuing Operations | $ | $ | ||||||||||||
| Operating Income (Loss) From Continuing Operations | ||||||||||||||
| Harsco Environmental | $ | $ | ||||||||||||
| Harsco Clean Earth | ( | |||||||||||||
| Corporate | ( | ( | ||||||||||||
| Total Operating Income From Continuing Operations | $ | $ | ||||||||||||
| Depreciation | ||||||||||||||
| Harsco Environmental | $ | $ | ||||||||||||
| Harsco Clean Earth | ||||||||||||||
| Corporate | ||||||||||||||
| Total Depreciation | $ | $ | ||||||||||||
| Amortization | ||||||||||||||
| Harsco Environmental | $ | $ | ||||||||||||
| Harsco Clean Earth | ||||||||||||||
Corporate (a) | ||||||||||||||
| Total Amortization | $ | $ | ||||||||||||
| Capital Expenditures | ||||||||||||||
| Harsco Environmental | $ | $ | ||||||||||||
| Harsco Clean Earth | ||||||||||||||
| Corporate | ||||||||||||||
| Total Capital Expenditures | $ | $ | ||||||||||||
(a) Amortization expense on Corporate relates to the amortization of deferred financing costs.
22
Reconciliation of Segment Operating Income to Income (Loss) From Continuing Operations Before Income Taxes and Equity Income
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Segment operating income | $ | $ | ||||||||||||
| General Corporate expense | ( | ( | ||||||||||||
| Operating income from continuing operations | ||||||||||||||
| Interest income | ||||||||||||||
| Interest expense | ( | ( | ||||||||||||
| Unused debt commitment fees, amendment fees and loss on extinguishment of debt | ( | ( | ||||||||||||
| Defined benefit pension income | ||||||||||||||
| Income (loss) from continuing operations before income taxes and equity income | $ | ( | $ | |||||||||||
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 | ||||||||||||||||||||
| March 31, 2022 | ||||||||||||||||||||
| (In thousands) | Harsco Environmental Segment | Harsco Clean Earth Segment | Consolidated Totals | |||||||||||||||||
Primary Geographical Markets (a): | ||||||||||||||||||||
| North America | $ | $ | $ | |||||||||||||||||
| Western Europe | ||||||||||||||||||||
Latin America (b) | ||||||||||||||||||||
| Asia-Pacific | ||||||||||||||||||||
| Middle East and Africa | ||||||||||||||||||||
| Eastern Europe | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | |||||||||||||||||
| Key Product and Service Groups: | ||||||||||||||||||||
| Environmental services related to resource recovery for metals manufacturing and related logistical services | $ | $ | $ | |||||||||||||||||
| Ecoproducts | ||||||||||||||||||||
| Environmental systems for aluminum dross and scrap processing | ||||||||||||||||||||
| Waste processing, recycling, reuse and transportation solutions | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | |||||||||||||||||
| Three Months Ended | ||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||
| (In thousands) | Harsco Environmental Segment | Harsco Clean Earth Segment | Consolidated Totals | |||||||||||||||||
Primary Geographical Markets (a): | ||||||||||||||||||||
| North America | $ | $ | $ | |||||||||||||||||
| Western Europe | ||||||||||||||||||||
Latin America (b) | ||||||||||||||||||||
| Asia-Pacific | ||||||||||||||||||||
| Middle East and Africa | ||||||||||||||||||||
23
| Three Months Ended | ||||||||||||||||||||
| March 31, 2021 | ||||||||||||||||||||
| (In thousands) | Harsco Environmental Segment | Harsco Clean Earth Segment | Consolidated Totals | |||||||||||||||||
| Eastern Europe | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | |||||||||||||||||
| Key Product and Service Groups: | ||||||||||||||||||||
| Environmental services related to resource recovery for metals manufacturing and related logistical services | $ | $ | $ | |||||||||||||||||
| Ecoproducts | ||||||||||||||||||||
| Environmental systems for aluminum dross and scrap processing | ||||||||||||||||||||
| Waste processing, recycling, reuse and transportation solutions | ||||||||||||||||||||
| Total Revenues | $ | $ | $ | |||||||||||||||||
(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 $3.7 million and $3.1 million at March 31, 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 $4.0 million and $4.1 million at March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, the Company recognized approximately $3 million of revenue related to amounts previously included in advances on contracts. During the three months ended March 31, 2021, the Company recognized approximately $2 million of revenue related to amounts previously included in advances on contracts.
17. Other (Income) Expenses, Net
The major components of this Condensed Consolidated Statements of Operations caption were as follows:
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Employee termination benefit costs | $ | ( | $ | |||||||||||
| Other costs to exit activities | ||||||||||||||
| Impaired asset write-downs | ||||||||||||||
| Net gains | ( | ( | ||||||||||||
| Other | ( | |||||||||||||
| Other (income) expenses, net | $ | ( | $ | ( | ||||||||||
18. Components of Accumulated Other Comprehensive Loss
24
| 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 | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||
| OCI before reclassifications | ( | (a) | (b) | ( | (a) | ( | ||||||||||||||||||||||||||
| Amounts reclassified from AOCI, net of tax | ||||||||||||||||||||||||||||||||
| Total OCI | ( | |||||||||||||||||||||||||||||||
| OCI attributable to noncontrolling interests | ||||||||||||||||||||||||||||||||
| OCI attributable to Harsco Corporation | ( | |||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | ( | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| 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 | $ | ( | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| OCI before reclassifications | ( | (a) | (b) | (a) | ( | |||||||||||||||||||||||||||
| Amounts reclassified from AOCI, net of tax | ||||||||||||||||||||||||||||||||
| Total OCI | ( | ( | ||||||||||||||||||||||||||||||
| OCI attributable to noncontrolling interests | ||||||||||||||||||||||||||||||||
| OCI attributable to Harsco Corporation | ( | ( | ||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | ( | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||
(a) Principally foreign currency fluctuation.
(b) Net change from periodic revaluations.
Amounts reclassified from AOCI were as follows:
| (In thousands) | Three Months Ended | Location on the Condensed Consolidated Statements of Operations | ||||||||||||||||||
| March 31 | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| Amortization of cash flow hedging instruments: | ||||||||||||||||||||
| Foreign currency exchange forward contracts | $ | ( | $ | ( | Discontinued Operations | |||||||||||||||
| Interest rate swaps | Interest expense | |||||||||||||||||||
| Total before taxes | ||||||||||||||||||||
| Income taxes | ( | ( | ||||||||||||||||||
| Total reclassification of cash flow hedging instruments, net of tax | $ | $ | ||||||||||||||||||
Amortization of defined benefit pension items (c): | ||||||||||||||||||||
| Actuarial losses | $ | $ | Defined benefit pension income | |||||||||||||||||
| Prior service costs | Defined benefit pension income | |||||||||||||||||||
| Total before taxes | ||||||||||||||||||||
| Income taxes | ( | ( | ||||||||||||||||||
| Total reclassification of defined benefit pension items, net of tax | $ | $ | ||||||||||||||||||
(c) These AOCI components are included in the computation of net periodic pension costs. See Note 10, Employee Benefit Plans, for additional details.
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as well as the audited consolidated financial statements of the Company, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 which includes additional information about the Company’s critical accounting policies, contractual obligations, practices and the transactions that support the financial results, and provides a more comprehensive summary of the Company’s outlook, trends and strategies for 2022 and beyond.
Certain amounts included in Item 2 of this Quarterly Report on Form 10-Q are rounded in millions and all percentages are calculated based on actual amounts. As a result, minor differences may exist due to rounding.
Forward-Looking Statements
The nature of the Company's business, together with the number of countries in which it operates, subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In accordance with the "safe harbor" provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, the Company provides the following cautionary remarks regarding important factors that, among others, could cause future results to differ materially from the results contemplated by forward-looking statements, including the expectations and assumptions expressed or implied herein. Forward-looking statements contained herein could include, among other things, statements about management's confidence in and strategies for performance; expectations for new and existing products, technologies and opportunities and expectations regarding growth, sales, cash flows, and earnings. Forward-looking statements can be identified by the use of such terms as "may," "could," "expect," "anticipate," "intend," "believe," "likely," "estimate," "outlook," "plan" or other comparable terms.
Factors that could cause actual results to differ, perhaps materially, from those implied by forward-looking statements include, but are not limited to: (1) changes in the worldwide business environment in which the Company operates, including changes in general economic conditions or changes due to COVID-19 and governmental and market reactions to COVID-19; (2) changes in currency exchange rates, interest rates, commodity and fuel costs and capital costs; (3) changes in the performance of equity and bond markets that could affect, among other things, the valuation of the assets in the Company's pension plans and the accounting for pension assets, liabilities and expenses; (4) changes in governmental laws and regulations, including environmental, occupational health and safety, tax and import tariff standards and amounts; (5) market and competitive changes, including pricing pressures, market demand and acceptance for new products, services and technologies; (6) the Company's inability or failure to protect its intellectual property rights from infringement in one or more of the many countries in which the Company operates; (7) failure to effectively prevent, detect or recover from breaches in the Company's cybersecurity infrastructure; (8) unforeseen business disruptions in one or more of the many countries in which the Company operates due to political instability, civil disobedience, armed hostilities, public health issues or other calamities; (9) disruptions associated with labor disputes and increased operating costs associated with union organization; (10) the seasonal nature of the Company's business; (11) the Company's ability to successfully enter into new contracts and complete new acquisitions or strategic ventures in the time-frame contemplated, or at all; (12) the Company's ability to negotiate, complete, and integrate strategic transactions; (13) failure to conduct and complete a satisfactory process for the divestiture of the Rail division, as announced on November 2, 2021; (14) potential severe volatility in the capital or commodity markets; (15) failure to retain key management and employees; (16) the outcome of any disputes with customers, contractors and subcontractors; (17) the financial condition of the Company's customers, including the ability of customers (especially those that may be highly leveraged, have inadequate liquidity or whose business is significantly impacted by COVID-19) to maintain their credit availability; (18) implementation of environmental remediation matters; (19) risk and uncertainty associated with intangible assets and (20) other risk factors listed from time to time in the Company's SEC reports. A further discussion of these, along with other potential risk factors, can be found in Part II, Item 1A, "Risk Factors," below, as well as Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2021. The Company cautions that these factors may not be exhaustive and that many of these factors are beyond the Company's ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty to update forward-looking statements except as may be required by law.
26
Executive Overview
The Company is a market-leading, global provider of environmental solutions for industrial, retail and medical waste streams. The Company's operations consist of two reportable segments: Harsco Environmental and Harsco Clean Earth. The Harsco Environmental Segment operates primarily under long-term contracts, providing critical environmental services and material processing to the global steel and metals industries, including zero waste solutions for manufacturing byproducts within the metals industry. The Harsco Clean Earth Segment provides waste management services including transportation, specialty waste processing, recycling and beneficial reuse solutions for hazardous waste and soil and dredged materials. The Company has locations in approximately 30 countries, including the U.S. The Company was incorporated in 1956.
The Company maintains a positive outlook across all businesses supported by favorable underlying growth characteristics in its businesses and investments by the Company to further supplement growth. Please refer to Part I, Item 1A, "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 for additional information related to the potential impacts of COVID-19 on the Company.
The Company expects growth in both of our reporting segments for 2022:
•Harsco Environmental results are expected to increase in 2022 due to higher environmental services demand supported by higher steel production and growth in ecoproducts. The global steel market is in the process of rebalancing because of the Russia-Ukraine conflict, however the impacts on the Company are currently anticipated to be limited. Over the longer-term the Company expects that the Harsco Environmental Segment's growth will be driven by economic growth that supports higher global steel consumption as well as investments and innovation that support the environmental solutions needs of customers.
•Although the Harsco Clean Earth Segment expects organic growth within its hazardous waste processing business as well as the continuous improvement benefits and integration efforts in 2022; these will be partially offset by the current challenges related to labor availability and higher costs including transportation and containers. Beyond 2022, the Company expects this segment to benefit from positive underlying market trends, further growth opportunities and operational synergy opportunities as well as from the less cyclical and recurring nature of this business. These dynamics are expected to provide favorable returns on the Company's investments over time.
Results of Operations
Segment Results
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In millions, except percentages) | 2022 | 2021 | ||||||||||||
| Revenues: | ||||||||||||||
| Harsco Environmental | $ | 262.1 | $ | 258.0 | ||||||||||
| Harsco Clean Earth | 190.7 | 189.3 | ||||||||||||
| Total Revenues | $ | 452.8 | $ | 447.3 | ||||||||||
| Operating Income (Loss): | ||||||||||||||
| Harsco Environmental | $ | 18.3 | $ | 25.9 | ||||||||||
| Harsco Clean Earth | (1.3) | 3.2 | ||||||||||||
| Corporate | (9.2) | (10.0) | ||||||||||||
| Total Operating Income | $ | 7.7 | $ | 19.1 | ||||||||||
| Operating Margins: | ||||||||||||||
| Harsco Environmental | 7.0 | % | 10.1 | % | ||||||||||
| Harsco Clean Earth | (0.7) | % | 1.7 | % | ||||||||||
| Consolidated Operating Margin | 1.7 | % | 4.3 | % | ||||||||||
27
Harsco Environmental Segment:
| March 31, 2022 | ||||||||
Significant Effects on Revenues (In millions) | Three Months Ended | |||||||
| Revenues — 2021 | $ | 258.0 | ||||||
| Net effects of price/volume changes, primarily attributable to volume changes | 18.7 | |||||||
| Impact of foreign currency translation | (7.1) | |||||||
| Net impact of new and lost contracts | (6.8) | |||||||
| Other | (0.7) | |||||||
| Revenues — 2022 | $ | 262.1 | ||||||
The following factors contributed to the changes in operating income during the three months ended March 31, 2022.
Factors Positively Affecting Operating Income:
•Operating income was positively affected by improved net overall services volumes for customers under environmental services contracts for the first quarter ended March 31, 2022.
•Improved profitability at certain commodity-price linked sites due to higher nickel and scrap prices compared to prior year.
Factors Negatively Impacting Operating Income:
•Impact of cost increases relating to raw materials, labor, equipment rental, maintenance and fuel due to inflation.
•Less favorable mix of services.
•Lower recovery of Brazil sales and use tax expense of $1.0 million in the first quarter ended March 31, 2022 as compared to the first quarter ended March 31, 2021.
•Foreign currency translation did not significantly impact operating income in the first quarter ended March 31, 2022.
Harsco Clean Earth Segment:
| March 31, 2022 | ||||||||
Significant Effects on Revenues (In millions) | Three Months Ended | |||||||
| Revenues—2021 | $ | 189.3 | ||||||
| Net effects of price/volume changes | 1.5 | |||||||
| Other | (0.1) | |||||||
| Revenues—2022 | $ | 190.7 | ||||||
The following factors contributed to the changes in operating income (loss) during the three months ended March 31, 2022.
Factors Positively Affecting Operating Income:
•Favorable pricing and volume for the hazardous waste business during the three months ended March 31, 2022.
Factors Negatively Impacting Operating Income:
•Impact of cost inflation, principally transportation and container costs.
•Material processing constraints due to driver shortages and end-disposal availability.
•Impact of moderately lower soil and dredged material volume and unfavorable mix.
28
Consolidated Results
| March 31 | ||||||||||||||
| Three Months Ended | ||||||||||||||
| (In millions, except per share amounts) | 2022 | 2021 | ||||||||||||
| Total revenues | $ | 452.8 | $ | 447.3 | ||||||||||
| Cost of services and products sold | 377.0 | 357.4 | ||||||||||||
| Selling, general and administrative expenses | 69.2 | 71.6 | ||||||||||||
| Research and development expenses | 0.1 | 0.2 | ||||||||||||
| Other (income) expenses, net | (1.2) | (1.0) | ||||||||||||
| Operating income from continuing operations | 7.7 | 19.1 | ||||||||||||
| Interest income | 0.6 | 0.5 | ||||||||||||
| Interest expense | (15.1) | (16.3) | ||||||||||||
| Unused debt commitment fees, amendment fees and loss on extinguishment of debt | (0.5) | (5.3) | ||||||||||||
| Defined benefit pension income | 2.4 | 3.9 | ||||||||||||
| Income tax benefit (expense) from continuing operations | (1.2) | (2.1) | ||||||||||||
| Equity income (loss) of unconsolidated entities, net | (0.1) | (0.1) | ||||||||||||
| Income (loss) from continuing operations | (6.2) | (0.1) | ||||||||||||
| Income (loss) from discontinued businesses | (39.1) | 3.4 | ||||||||||||
| Income tax benefit (expense) related to discontinued operations | 6.6 | (1.7) | ||||||||||||
| Income (loss) from discontinued operations, net of tax | (32.5) | 1.7 | ||||||||||||
| Net income (loss) | (38.7) | 1.6 | ||||||||||||
| Total other comprehensive income (loss) | 12.0 | 1.2 | ||||||||||||
| Total comprehensive income (loss) | (26.7) | 2.8 | ||||||||||||
| Diluted earnings (loss) per common share from continuing operations attributable to Harsco Corporation common stockholders | (0.09) | (0.02) | ||||||||||||
| Effective income tax rate for continuing operations | (25.3) | % | 100.8 | % | ||||||||||
Comparative Analysis of Consolidated Results
Revenues
Revenues for the first quarter of 2022 increased $5.5 million or 1.2% from the first quarter of 2021. Foreign currency translation decreased revenues by $7.1 million for the first quarter ended March 31, 2022, compared with the same period in the prior year. Refer to the discussion of segment results above for information pertaining to factors positively affecting and negatively impacting revenues.
Cost of Services and Products Sold
Cost of services and products sold for the first quarter of 2022 increased $19.7 million or 5.5% from the first quarter of 2021. The changes in cost of services and products sold were attributable to the following significant items:
| March 31, 2022 | ||||||||
| (In millions) | Three Months Ended | |||||||
| Change in costs due to changes in revenues volume | $ | 9.0 | ||||||
| Change in revenue mix and changes in prices, including materials, labor, fuel, transportation and maintenance | 14.0 | |||||||
| Impact of foreign currency translation | (6.5) | |||||||
| Other | 3.2 | |||||||
| Total change in cost of services and products sold — 2022 vs. 2021 | $ | 19.7 | ||||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2022 decreased $2.5 million or 3.4% from the first quarter of 2021. The decrease for the first quarter of 2022 is due principally to cost management initiatives in the Clean Earth Segment
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and Corporate.
Other (Income) Expenses, Net
The major components of this Condensed Consolidated Statements of Operations caption are as follows:
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In thousands) | 2022 | 2021 | ||||||||||||
| Employee termination benefit costs | $ | (308) | $ | 510 | ||||||||||
| Other costs to exit activities | 581 | 238 | ||||||||||||
| Impaired asset write-downs | 59 | 22 | ||||||||||||
| Net gains | (1,812) | (1,693) | ||||||||||||
| Other | 301 | (68) | ||||||||||||
| Other (income) expenses, net | $ | (1,179) | $ | (991) | ||||||||||
Interest Expense
Interest expense during the first quarter of 2022 decreased by $1.2 million compared with the first quarter of 2021. The decrease in the first quarter of 2022 primarily relates to lower weighted average interest rates offset by higher outstanding borrowings.
Unused Debt Commitment Fees, Amendment Fees and Loss on Extinguishment of Debt
During the first quarter 2022 the Company recognized $0.5 million of fees and other costs primarily related to the amended Senior Secured Credit Facilities.
During the first quarter of 2021, the Company recognized $5.3 million of fees and other costs primarily related to the amended Senior Secured Credit Facilities.
Defined Benefit Pension Income
Defined benefit pension income for the first quarter of 2022 was $2.4 million, compared with defined benefit pension income of $3.9 million for the first quarter of 2021. The decrease is primarily the result of a lower assumed rate of return on plan assets at December 31, 2021.
Income Tax Expense
Income tax expense from continuing operations for the first three months of 2022 and 2021 was $1.2 million and $2.1 million, respectively. Income tax expense decreased in 2022 as a result of lower taxable income, primarily due to change in geographic mix of income. The $1.2 million income tax expense on the $4.8 million pre-tax losses for the three months ended March 31, 2022 is due to pretax losses in various foreign jurisdictions where no tax benefit is recorded.
Income (Loss) from Continuing Operations
Loss from continuing operations was $(6.2) million for the first quarter of 2022, compared with Loss from continuing operations of $(0.1) million for the first quarter of 2021. The primary drivers for these increases are noted above.
Income (Loss) from Discontinued Operations
The operating results of the former Harsco Rail Segment and costs directly attributable to the sale of the business, have been reflected as discontinued operations in the Company's Condensed Consolidated Statement of Operations for all periods presented. In addition, this caption includes costs directly attributable to retained contingent liabilities of other previously disposed businesses. The primary driver for the loss in the first quarter of 2022 is the recognition of additional forward estimated loss provisions of $35.1 million for certain contracts in the Rail business. It is possible that the Company's overall estimate of liquidated damages, penalties and costs to complete these contracts may increase, which would result in an additional estimated forward loss provision at such time. See Note 3, Dispositions, in Part I, Item 1, Financial Statements.
Total Other Comprehensive Income (Loss)
Total other comprehensive income was $12.0 million in the first quarter of 2022, respectively, compared with Total other comprehensive income of $1.2 million in the first quarter of 2021. The primary driver of this change is the fluctuation of the U.S. dollar against certain currencies inclusive of the impact of foreign currency translation of cumulative unrecognized actuarial losses on the Company’s pension obligations.
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Liquidity and Capital Resources
Cash Flow Summary
The Company currently expects to have sufficient financial liquidity and borrowing capacity to support the strategies within each of its businesses. The Company currently expects operational and business needs to be met by cash provided by operations supplemented with borrowings from time to time, principally under the Senior Secured Credit Facilities. The Company supplements the cash provided by operations with borrowings from time to time due to historical patterns of seasonal cash flow and the funding of various projects. The Company regularly assesses capital needs in the context of operational trends and strategic initiatives.
The Company’s cash flows from operating, investing and financing activities, as reflected on the Condensed Consolidated Statements of Cash Flows, are summarized in the following table:
| Three Months Ended | ||||||||||||||
| March 31 | ||||||||||||||
| (In millions) | 2022 | 2021 | ||||||||||||
| Net cash provided (used) by: | ||||||||||||||
| Operating activities | $ | (34.3) | $ | (23.2) | ||||||||||
| Investing activities | (26.9) | (25.0) | ||||||||||||
| Financing activities | 63.2 | 51.5 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents, including restricted cash | 0.5 | (0.7) | ||||||||||||
| Net change in cash and cash equivalents, including restricted cash | $ | 2.4 | $ | 2.7 | ||||||||||
Net cash used by operating activities — Net cash used by operating activities in the first three months of 2022 was $34.3 million, a decrease in cash flows of $11.1 million from the first three months of 2021. The primary driver for this decrease was lower cash net income partially offset by a favorable change in working capital. The primary drivers of the favorable change in working capital included a decrease in contract assets in the Rail business and the timing of accounts payable in all segments, including the Rail business and Corporate.
Net cash used by investing activities — Net cash used by investing activities in the first three months of 2022 was $26.9 million, a decrease in cash flows of $1.9 million from the cash used in the first three months of 2021. The decrease reflects an increase in capital expenditures partially offset by an increase in the proceeds from sales of assets and more favorable settlements for hedging transactions.
Net cash provided by financing activities — Net cash provided by financing activities in the first three months of 2022 was $63.2 million, an increase of $11.7 million from the first three months of 2021. The increase was primarily due to higher net cash borrowings of $10.6 million in the first three months of 2022 resulting primarily from the decrease in cash flows from operating activities.
Sources and Uses of Cash
The Company’s principal sources of liquidity are cash provided by operations on an annual basis and borrowings under the Senior Secured Credit Facilities, augmented by cash proceeds from asset sales. In addition, the Company has other bank credit facilities available throughout the world. The Company expects to continue to utilize all of these sources to meet future cash requirements for operations and growth initiatives.
Summary of Senior Secured Credit Facilities and Notes: (In millions) | March 31 2022 | December 31 2021 | ||||||||||||
| By type: | ||||||||||||||
| New Term Loan | $ | 496.3 | $ | 497.5 | ||||||||||
| Revolving Credit Facility | 434.0 | 362.0 | ||||||||||||
| 5.75% Notes | 500.0 | 500.0 | ||||||||||||
| Total | $ | 1,430.3 | $ | 1,359.5 | ||||||||||
| By classification: | ||||||||||||||
| Current | $ | 5.0 | $ | 5.0 | ||||||||||
| Long-term | 1,425.3 | 1,354.5 | ||||||||||||
| Total | $ | 1,430.3 | $ | 1,359.5 | ||||||||||
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| March 31, 2022 | ||||||||||||||||||||||||||
| (In millions) | Facility Limit | Outstanding Balance | Outstanding Letters of Credit | Available Credit | ||||||||||||||||||||||
| Revolving credit facility (a U.S.-based program) | $ | 700.0 | $ | 434.0 | $ | 29.8 | $ | 236.2 | ||||||||||||||||||
Debt Covenants
The Senior Secured Credit Facilities contain a consolidated net debt to consolidated adjusted EBITDA ratio covenant, which is not to exceed 5.75 for the quarter ending March 31, 2022 and then decreasing quarterly until reaching 4.00 on December 31, 2023, and a minimum consolidated adjusted EBITDA to consolidated interest charges ratio covenant, which is not to be less than 3.0. At March 31, 2022 the Company was in compliance with these covenants, as the total net debt to adjusted EBITDA ratio (as defined in the Credit Agreement) was 5.1 and total interest coverage ratio was 4.2. Based on balances and covenants in effect at March 31, 2022 the Company could increase net debt by $172.9 million and remain in compliance with these debt covenants. Alternatively, adjusted EBITDA could decrease by $30.1 million, and the Company would remain in compliance with these covenants. 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 deterioration in economic conditions.
Cash Management
The Company has various cash management systems throughout the world that centralize cash in various bank accounts where it is economically justifiable and legally permissible to do so. These centralized cash balances are then redeployed to other operations to reduce short-term borrowings and to finance working capital needs or capital expenditures. Due to the transitory nature of cash balances, they are normally invested in bank deposits that can be withdrawn at will or in very liquid short-term bank time deposits and government obligations. The Company's policy is to use the largest banks in the various countries in which the Company operates. The Company monitors the creditworthiness of banks and, when appropriate, will adjust banking operations to reduce or eliminate exposure to less creditworthy banks.
At March 31, 2022 the Company's consolidated cash and cash equivalents included $83.4 million held by non-U.S. subsidiaries. At March 31, 2022 approximately 5% of the Company's consolidated cash and cash equivalents had regulatory restrictions that would preclude the transfer of funds with and among subsidiaries. Non-U.S. subsidiaries also held $28.0 million of cash and cash equivalents in consolidated strategic ventures. The strategic venture agreements may require strategic venture partner approval to transfer funds with and among subsidiaries. While the Company's remaining non-U.S. cash and cash equivalents can be transferred with and among subsidiaries, the majority of these non-U.S. cash balances will be used to support the ongoing working capital needs and continued growth of the Company's non-U.S. operations.
Recently Adopted and Recently Issued Accounting Standards
Information on recently adopted and recently issued accounting standards is included in Note 2, Recently Adopted and Recently Issued Accounting Standards, in Part I, Item 1, Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks have not changed significantly from those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2022, an evaluation was performed, under the supervision and with the participation of the Company’s management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a – 15 under the Securities and Exchange Act of 1934, as amended. Based upon that evaluation, such officers concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities and Exchange Act of 1934, as amended (1) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (2) is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
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Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information on legal proceedings is included in Note 12, Commitments and Contingencies, in Part I, Item 1, Financial Statements.
ITEM 1A. RISK FACTORS
The Company's risk factors as of March 31, 2022 have not changed materially from those described in Part 1, Item 1A, "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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ITEM 6. EXHIBITS
The following exhibits are included as part of this report by reference:
| Exhibit Number | Description | |||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | Amendment No. 9 to Third Amended and Restated Credit Agreement dated February 22, 2022, among Harsco Corporation, the subsidiaries of the Company party there to, Citibank, N.A., as administrator agent and collateral agent, and the lenders party there to (incorporated by reference to Exhibit 10(a)(xv) to the Company's Annual Report of Form 10-K for the year ended December 31, 2021. Commission file Number 001-03970). | |||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.Def | Definition Linkbase Document | |||||||
| 101.Pre | Presentation Linkbase Document | |||||||
| 101.Lab | Labels Linkbase Document | |||||||
| 101.Cal | Calculation Linkbase Document | |||||||
| 101.Sch | Schema Document | |||||||
| 101.Ins | Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HARSCO CORPORATION | |||||||||||
| (Registrant) | |||||||||||
| DATE | May 3, 2022 | /s/ ANSHOOMAN AGA | |||||||||
| Anshooman Aga | |||||||||||
| Senior Vice President and Chief Financial Officer | |||||||||||
| (On behalf of the registrant and as Principal Financial Officer) | |||||||||||
| DATE | May 3, 2022 | /s/ SAMUEL C. FENICE | |||||||||
| Samuel C. Fenice | |||||||||||
| Vice President and Corporate Controller | |||||||||||
| (Principal Accounting Officer) | |||||||||||
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