Financial Instruments

Off-Balance Sheet Risk

As collateral for the Company's performance and to insurers, the Company is contingently liable under standby letters of credit, bonds and bank guarantees in the amounts of $208.8 million and $273.6 million at December 31, 2012 and 2011, respectively. These standby letters of credit, bonds and bank guarantees are generally in force for up to five years. Certain issues have no scheduled expiration date. The Company pays fees to various banks and insurance companies that range from 0.32% to 1.93% per annum of the instruments' face value. If the Company were required to obtain replacement standby letters of credit, bonds and bank guarantees at December 31, 2012 for those currently outstanding, it is the Company's opinion that the replacement costs would be within the present fee structure.

The Company has currency exposures in approximately 50 countries. The Company's primary foreign currency exposures during 2012 were in the European Economic and Monetary Union, the United Kingdom and Brazil.

Off-Balance Sheet Risk—Third-Party Guarantees

In connection with the licensing of one of the Company's trade names and providing certain management services (the furnishing of selected employees), the Company guarantees the debt of certain third parties related to its international operations. These guarantees are provided to enable the third parties to obtain financing for their operations. The Company receives fees from these operations, which are included as Service revenues in the Company's Consolidated Statements of Operations. The Company recorded revenue from these entities of $1.3 million, $1.2 million and $1.9 million during 2012, 2011 and 2010, respectively. The guarantees are renewed on an annual basis and the Company would only be required to perform under the guarantees if the third parties default on their debt. The maximum potential amount of future payments (undiscounted) related to these guarantees was $0.7 million and $1.6 million at December 31, 2012 and 2011, respectively. There is no recognition of this potential future payment in the consolidated financial statements as the Company believes the potential for making these payments is remote. At December 31, 2012, there is one guarantee outstanding that was renewed in December 2012.

The Company provided an environmental indemnification for properties that were sold to a third-party in 2007. The maximum term of this guarantee is 20 years, and the Company would be required to perform under the guarantee only if an environmental matter is discovered on the properties. The Company is not aware of environmental issues related to these properties. There is no recognition of this potential future payment in the consolidated financial statements as the Company believes the potential for making this payment is remote.

The Company provided an environmental indemnification for property from a lease that terminated in 2006. The term of this guarantee is indefinite, and the Company would be required to perform under the guarantee only if an environmental matter was discovered on the property relating to the time the Company leased the property. The Company is not aware of any environmental issues related to this property. The maximum potential amount of future payments (undiscounted) related to this guarantee is estimated to be $3.0 million at both December 31, 2012 and 2011. There is no recognition of this potential future payment in the consolidated financial statements as the Company believes the potential for making this payment is remote.

The Company provides guarantees related to arrangements with certain customers that include joint and several liability for actions for which the Company may be partially at fault. The terms of these guarantees generally do not exceed four years, and the maximum amount of future payments (undiscounted) related to these guarantees is $3.0 million per occurrence. This amount represents the Company's self-insured maximum limitation. There is no specific recognition of potential future payments in the consolidated financial statements as the Company is not aware of any claims.

Any liabilities related to the Company's obligation to stand ready to act on third-party guarantees are included in Other current liabilities or Other liabilities (as appropriate) on the Consolidated Balance Sheets. Any recognition of these liabilities did not have a material impact on the Company's financial condition or results of operations for 2012, 2011 or 2010.

In the normal course of business, the Company provides legal indemnifications related primarily to the performance of its products and services and patent and trademark infringement of its products and services sold. These indemnifications generally relate to the performance (regarding function, not price) of the respective products or services and therefore no liability is recognized related to the fair value of such guarantees.

Derivative Instruments and Hedging Activities

The Company uses derivative instruments, including foreign currency forward exchange contracts, commodity contracts and cross currency interest rate swaps, to manage certain foreign currency, commodity price 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 Consolidated Balance Sheets at fair value. Changes in the fair value of derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases may be accounted for as cash flow hedges, as deemed appropriate and if the criteria for hedge accounting are met. Gains and losses on derivatives designated as cash flow hedges are deferred as a separate component of equity and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. Generally, at December 31, 2012, these deferred gains and losses will be reclassified to earnings over 10 to 15 years from the balance sheet date. The ineffective portion of all hedges, if any, is recognized currently in earnings.

The fair value of outstanding derivative contracts recorded as assets and liabilities on the Consolidated Balance Sheets at December 31, 2012 and 2011 was as follows:

Asset Derivatives

Liability Derivatives

(in thousands)

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

December 31, 2012

Derivatives designated as hedging instruments:

Cross currency interest rate swaps

Other assets

39,058

Other liabilities

14,346

Derivatives not designated as hedging instruments:

Foreign currency forward exchange contracts

Other current assets

853

Other current liabilities

1,775



	Asset Derivatives			Liability Derivatives
(in thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
December 31, 2011
Derivatives designated as hedging instruments:
Foreign currency forward exchange contracts	Other current assets	$	274	Other current liabilities	$	—
Cross currency interest rate swaps	Other assets	44,636		Other liabilities	1,792
Total derivatives designated as hedging instruments		$	44,910		$	1,792

Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts	Other current assets	$	2,912	Other current liabilities	$	1,207

The effect of derivative instruments in the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income during 2012, 2011 and 2010 was as follows:

Derivatives Designated as Hedging Instruments



(In thousands)	Amount of Gain (Loss) Recognized in Other Comprehensive Income ("OCI") on Derivative—Effective Portion			Location of Gain (Loss) Reclassified from Accumulated OCI into Income—Effective Portion	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income—Effective Portion		Location of Gain (Loss) Recognized in Income on Derivative—Ineffective Portion and Amount Excluded from Effectiveness Testing	Amount of Gain (Loss) Recognized in Income on Derivative—Ineffective Portion and Amount Excluded from Effectiveness Testing
Twelve Months Ended December 31, 2012:
Foreign currency forward exchange contracts	$	(152	)	Cost of services and products sold	$	270		$	—
Cross currency interest rate swaps	(4,748		)		—		Cost of services and products sold	(13,384		)	(a)
	$	(4,900	)		$	270		$	(13,384	)
Twelve Months Ended December 31, 2011:
Foreign currency forward exchange contracts	$	887			$	83		$	—
Cross currency interest rate swaps	7,230				—		Cost of services and products sold	7,642			(a)
	$	8,117			$	83		$	7,642
Twelve Months Ended December 31, 2010:
Foreign currency forward exchange contracts	$	32			$	—		$	—
Commodity contracts	20			Cost of services and products sold	20		Cost of services and products sold	10
Cross currency interest rate swaps	(1,119		)		—		Cost of services and products sold	21,734			(a)
	$	(1,067	)		$	20		$	21,744


(a)	These gains (losses) offset foreign currency fluctuation effects on the debt principal.

Derivatives Not Designated as Hedging Instruments



	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative for the Twelve Months Ended December 31(a)
(In thousands)	Location of Gain (Loss) Recognized in Income on Derivative	2012			2011		2010
Foreign currency forward exchange contracts	Cost of services and products sold	$	(3,529	)	$	7,238	$	1,483


(a)	These gains (losses) offset amounts recognized in cost of service and products sold principally as a result of intercompany or third-party foreign currency exposures.

Commodity Derivatives

The Company periodically uses derivative instruments to hedge cash flows associated with purchase or selling price exposure to certain commodities. The Company's commodity derivative activities are subject to the management, direction and control of the Company's Risk Management Committee, which approves the use of all commodity derivative instruments. There were no commodity derivative contracts outstanding at December 31, 2012 and 2011.

Foreign Currency Forward Exchange Contracts

The Company conducts business in multiple currencies and, accordingly, is subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of substantially all of the Company's foreign subsidiaries are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred and recorded in Accumulated other comprehensive loss, which is a separate component of equity.

The Company uses derivative instruments to hedge cash flows related to foreign currency fluctuations. Foreign currency forward exchange 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 its 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 forward exchange contracts are used to hedge commitments, such as foreign currency debt, firm purchase commitments and foreign currency cash flows for certain export sales transactions.

The following tables summarize, by major currency, the contractual amounts of the Company's foreign currency forward exchange contracts in U.S. dollars at December 31, 2012 and 2011. The "Buy" amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the "Sell" amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. The recognized gains and losses offset amounts recognized in cost of services and products sold principally as a result of intercompany or third-party foreign currency exposures.

Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at December 31, 2012:



(In thousands)	Type	U.S. Dollar Equivalent		Maturity	Recognized Gain (Loss)
British pounds sterling	Sell	$	—		$	—
British pounds sterling	Buy	6,141		January 2013 through February 2013	58
Euros	Sell	264,234		January 2013 through March 2013	(1,082		)
Euros	Buy	116,618		January 2013 through February 2013	187
Other currencies	Sell	2,811		January 2013 through March 2013	(15		)
Other currencies	Buy	44,291		January 2013	(71		)
Total		$	434,095		$	(923	)

Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at December 31, 2011:



(In thousands)	Type	U.S. Dollar Equivalent		Maturity	Recognized Gain (Loss)
British pounds sterling	Sell	$	18,350	January 2012	$	(20	)
British pounds sterling	Buy	4,364		January 2012	(12		)
Euros	Sell	178,889		January 2012 through October 2012	2,345
Euros	Buy	105,247		January 2012 through April 2012	(878		)
Other currencies	Sell	2,957		January 2012 through March 2012	62
Other currencies	Buy	14,656		January 2012	235
Total		$	324,463		$	1,732

In addition to foreign currency forward exchange contracts, the Company designates certain loans as hedges of net investments in international subsidiaries. The Company recorded pre-tax net losses of $5.3 million and pre-tax net gains of $6.3 million and $19.0 million related to hedges of net investments during 2012, 2011 and 2010, respectively, in Accumulated other comprehensive loss.

Cross Currency Interest Rate Swaps

The Company uses cross currency interest rate swaps in conjunction with certain debt issuances in order to secure a fixed local currency interest rate. Under these cross currency interest rate swaps, the Company receives interest based on a fixed or floating U.S. dollar rate and pays interest on a fixed local currency rate based on the contractual amounts in dollars and the local currency, respectively. The cross currency interest rate swaps are recorded on the Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps' interest spread recorded in Accumulated other comprehensive loss. Changes in value attributed to the effect of foreign currency fluctuations are recorded in the Consolidated Statements of Operations and offset currency fluctuation effects on the debt principal. The following table indicates the contractual amounts of the Company's cross currency interest rate swaps:



	Contractual Amounts		Interest Rates
(In millions)	Contractual Amounts		Receive	Pay
Maturing 2018	$	250.0	Fixed U.S. dollar rate	Fixed euro rate
Maturing 2020	220.0		Fixed U.S. dollar rate	Fixed British pound sterling rate
Maturing 2013 through 2017	4.8		Floating U.S. dollar rate	Fixed rupee rate

Fair Value of Derivative Assets and Liabilities and Other Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The Company utilizes market data or assumptions that the Company believes market participants would use in valuing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:


•	Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3—Inputs that are both significant to the fair value measurement and unobservable.

In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following table indicates the fair value hierarchy of the financial instruments of the Company at December 31, 2012 and 2011:



Level 2 Fair Value Measurements (In thousands)	December 31 2012		December 31 2011
Assets
Foreign currency forward exchange contracts	$	853	$	3,186
Cross currency interest rate swaps	39,058		44,636
Liabilities
Foreign currency forward exchange contracts	1,775		1,207
Cross currency interest rate swaps	14,346		1,792

The following table reconciles the beginning and ending balances for liabilities measured on a recurring basis using unobservable inputs (Level 3) for 2012 and 2011:



Level 3 Liabilities—Contingent Consideration for the Twelve Months Ended December 31 (In thousands)	2012		2011
Balance at beginning of year	$	—	$	3,872
Fair value adjustments included in earnings	—		(3,966		)
Effect of exchange rate changes	—		94
Balance at end of year	$	—	$	—

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. Commodity derivatives, foreign currency forward exchange contracts and cross currency interest rate swaps are classified as Level 2 fair value based upon pricing models using market-based inputs. Model inputs can be verified, and valuation techniques do not involve significant management judgment.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short-term maturities of these assets and liabilities. At December 31, 2012 and 2011, the total fair value of long-term debt, including current maturities, was $1.0 billion and $935.1 million, respectively, compared to carrying value of $960.7 million and $857.4 million, respectively. Fair values for debt are based on quoted market prices (Level 1) for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.

Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high-quality financial institutions and, by policy, limits the amount of credit exposure to any single institution.

Concentrations of credit risk with respect to accounts receivable are generally limited in the Harsco Infrastructure and Harsco Industrial Segments due to the Company's large number of customers and their dispersion across different industries and geographies. However, the Company's Harsco Metals & Minerals Segment and, to a lesser extent, the Harsco Rail Segment have several large customers throughout the world with significant accounts receivable balances. Consolidation in the global steel or rail industries could result in an increase in concentration of credit risk for the Company.

The Company generally does not require collateral or other security to support customer receivables. If a receivable from one or more of the Company's larger customers becomes uncollectible, it could have a material effect on the Company's results of operations or cash flows.