UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2019
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)
Delaware | 23-1483991 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification number) |
350 Poplar Church Road, Camp Hill, Pennsylvania | 17011 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code 717-763-7064
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 ý NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 ý NO o
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.
Large accelerated filer ý | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Emerging growth company o | |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, par value $1.25 per share | HSC | New York Stock Exchange | ||
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 30, 2019 | |
Common stock, par value $1.25 per share | ||
HARSCO CORPORATION
FORM 10-Q
INDEX
Page | ||
2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARSCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands) | March 31 2019 | December 31 2018 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Restricted cash | ||||||||
Trade accounts receivable, net | ||||||||
Other receivables | ||||||||
Inventories | ||||||||
Current portion of contract assets | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property, plant and equipment, net | ||||||||
Right-of-use assets, net | — | |||||||
Goodwill | ||||||||
Intangible assets, net | ||||||||
Deferred income tax assets | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | $ | ||||||
Current maturities of long-term debt | ||||||||
Accounts payable | ||||||||
Accrued compensation | ||||||||
Income taxes payable | ||||||||
Insurance liabilities | ||||||||
Current portion of advances on contracts | ||||||||
Current portion of operating lease liabilities | — | |||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt | ||||||||
Insurance liabilities | ||||||||
Retirement plan liabilities | ||||||||
Advances on contracts | ||||||||
Operating lease liabilities | — | |||||||
Other liabilities | ||||||||
Total liabilities | ||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
HARSCO CORPORATION STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock | ||||||||
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.
3
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands, except per share amounts) | 2019 | 2018 | ||||||
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 expenses, net | ||||||||
Total costs and expenses | ||||||||
Operating income from continuing operations | ||||||||
Interest income | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Defined benefit pension income (expense) | ( | ) | ||||||
Income from continuing operations before income taxes and equity income | ||||||||
Income tax expense | ( | ) | ( | ) | ||||
Equity income of unconsolidated entities, net | ||||||||
Income from continuing operations | ||||||||
Discontinued operations: | ||||||||
Loss on disposal of discontinued business | ( | ) | ( | ) | ||||
Income tax benefit related to discontinued business | ||||||||
Loss from discontinued operations | ( | ) | ( | ) | ||||
Net income | ||||||||
Less: Net income attributable to noncontrolling interests | ( | ) | ( | ) | ||||
Net income attributable to Harsco Corporation | $ | $ | ||||||
Amounts attributable to Harsco Corporation common stockholders: | ||||||||
Income from continuing operations, net of tax | $ | $ | ||||||
Loss from discontinued operations, net of tax | ( | ) | ( | ) | ||||
Net income 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 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 per share attributable to Harsco Corporation common stockholders | $ | (a) | $ | |||||
(a) Does not total due to rounding
See accompanying notes to unaudited condensed consolidated financial statements.
4
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Net income | $ | $ | ||||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustments, net of deferred income taxes of $1,131 and $1,627 in 2019 and 2018, respectively | ||||||||
Net gain (loss) on cash flow hedging instruments, net of deferred income taxes of $945 and $(839) in 2019 and 2018, respectively | ( | ) | ||||||
Pension liability adjustments, net of deferred income taxes of $(342) and $(325) in 2019 and 2018, respectively | ( | ) | ( | ) | ||||
Unrealized gain (loss) on marketable securities, net of deferred income taxes of $(5) and $4 in 2019 and 2018, respectively | ( | ) | ||||||
Total other comprehensive income | ||||||||
Total comprehensive income | ||||||||
Less: Comprehensive income attributable to noncontrolling interests | ( | ) | ( | ) | ||||
Comprehensive income attributable to Harsco Corporation | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||
Depreciation | ||||||||
Amortization | ||||||||
Deferred income tax expense | ||||||||
Equity income of unconsolidated entities, net | ( | ) | ||||||
Other, net | ( | ) | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | ( | ) | ( | ) | ||||
Inventories | ( | ) | ( | ) | ||||
Contract assets | ( | ) | ||||||
Right-of-use assets | — | |||||||
Accounts payable | ||||||||
Accrued compensation | ( | ) | ( | ) | ||||
Advances on contracts | ( | ) | ( | ) | ||||
Operating lease liabilities | ( | ) | — | |||||
Retirement plan liabilities, net | ( | ) | ( | ) | ||||
Other assets and liabilities | ( | ) | ( | ) | ||||
Net cash provided (used) by operating activities | ( | ) | ||||||
Cash flows from investing activities: | ||||||||
Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
Purchase of business, net of cash acquired | ||||||||
Proceeds from sales of assets | ||||||||
Net payments from settlement of foreign currency forward exchange contracts | ( | ) | ( | ) | ||||
Net cash used by investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Short-term borrowings, net | ( | ) | ( | ) | ||||
Current maturities and long-term debt: | ||||||||
Additions | ||||||||
Reductions | ( | ) | ( | ) | ||||
Sale of noncontrolling interests | ||||||||
Stock-based compensation - Employee taxes paid | ( | ) | ( | ) | ||||
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 | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
6
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, 2017 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
Adoption of new accounting standards | ( | ) | ||||||||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||
Total other comprehensive income, net of deferred income taxes of $467 | ||||||||||||||||||||||||||||
Sale of subsidiary shares to noncontrolling interest | ||||||||||||||||||||||||||||
Stock appreciation rights exercised, net 2,560 shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Vesting of restricted stock units and other stock grants, net 102,695 shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Amortization of unearned portion of stock-based compensation, net of forfeitures | ||||||||||||||||||||||||||||
Balances, March 31, 2018 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
Harsco Corporation Stockholders’ Equity | ||||||||||||||||||||||||||||
(In thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | |||||||||||||||||||||||
Issued | Treasury | Total | ||||||||||||||||||||||||||
Balances, December 31, 2018 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
Adoption of new accounting standards (See Note 2) | ( | ) | ||||||||||||||||||||||||||
Net income | ||||||||||||||||||||||||||||
Sale of subsidiary shares to noncontrolling interest | ||||||||||||||||||||||||||||
Total other comprehensive income, net of deferred income taxes of $1,729 | ||||||||||||||||||||||||||||
Stock appreciation rights exercised, net 927 shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Vesting of restricted stock units and other stock grants, net 94,229 shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Vesting of performance share units, net 529,213 shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Amortization of unearned portion of stock-based compensation, net of forfeitures | ||||||||||||||||||||||||||||
Balances, March 31, 2019 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
7
HARSCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
Harsco Corporation (the "Company") has prepared these unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the U.S. (“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 Securities and Exchange Commission (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, 2018 Condensed Consolidated Balance Sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2018 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, 2018. 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
2. Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in 2019:
On January 1, 2019, the Company adopted changes issued by the Financial Accounting Standards Board (“FASB”) related to accounting for leases. The changes introduce a lessee model that brings most leases onto the balance sheet. The changes also align many of the underlying principles of the new lessor model with those in the FASB’s new revenue recognition standard. Furthermore, the changes address other concerns related to the current leases model such as eliminating the requirement in current guidance for an entity to use bright-line tests in determining lease classification. The changes also require lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The Company elected the package of practical expedients permitted under the transition, which among other items, allowed the carry forward of the historical lease classification. The Company has elected to apply the transition requirements at the January 1, 2019 effective date and therefore, comparative information has not been restated and continues to be reported under U.S. GAAP in effect for those periods. The changes had a significant impact on the Condensed Consolidated Balance Sheets upon adoption and the Company recorded Right-of-use ("ROU") assets and lease liabilities of $53.0 million and $53.4 million, respectively. The difference between the ROU assets and lease liabilities was recorded primarily as adjustments to other assets and liabilities where prepaid rent and deferred expenses were previously recorded. Additionally, the Company's accounting for finance leases remained consistent. The changes did not have an impact on the Company’s Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows. The discount rates used to calculate the ROU assets and lease liabilities as of the effective date were based on the remaining lease terms as of the effective date. See Note 6, Leases for additional information.
On January 1, 2019, the Company adopted changes issued by the FASB which expand and refine hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedged items in the financial statements and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. Upon adoption, the Company’s recognition model for the excluded component was modified from a mark-to-market approach to an amortization approach for hedging relationships. Hedging relationships entered into on or after January 1, 2019 will be under the amortization approach while those entered into before
January 1, 2019 will continue to be recognized under the mark-to-market approach. As such, there was no effect of applying this election reflected as an adjustment to Accumulated other comprehensive loss with a corresponding adjustment to the opening balance of Retained earnings. Presentation and disclosure amendments are required to be applied prospectively. Other than required expanded disclosures, the adoption of these changes did not have a material impact on the Company's condensed consolidated financial statements.
8
On January 1, 2019, the Company adopted changes issued by the FASB which allow entities to reclassify stranded income tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings in the consolidated financial statements. Under the Tax Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate, which left the tax effects on items within accumulated other comprehensive income stranded at historical tax rates. The adoption of these changes resulted in the Company reclassifying approximately $21 million of stranded income tax effects into Retained earnings.
The following accounting standards have been issued and become effective for the Company at a future date:
In June 2016, the FASB issued changes which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. The changes become effective for the Company on January 1, 2020, with early adoption permitted. Management has not yet completed the assessment of the impact of the new standard on the Company’s condensed consolidated financial statements.
In January 2017, the FASB issued changes that remove the second step of the annual goodwill impairment test, which requires a hypothetical purchase price allocation. The changes provide that the amount of goodwill impairment will be equal to the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The changes become effective for the Company on January 1, 2020. Management has determined that these changes will not have a material impact on the Company's condensed consolidated financial statements. However, should the Company be required to record a goodwill impairment charge in future periods, the amount recorded may differ compared to any amounts that might be recorded under current practice.
In August 2018, the FASB issued changes which modify the disclosure requirements for fair value measurements. The amendments in this update remove the requirement to disclose the amount of, and reasons for, transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The changes require disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The changes become effective for the Company on January 1, 2020. Other than required expanded disclosures, the adoption of these changes will not have a material impact on the Company's condensed consolidated financial statements.
3. Acquisitions
In May 2018, the Company acquired Altek Europe Holdings Limited and its affiliated entities (collectively, "Altek"), a U.K.-based manufacturer of market-leading products that enable aluminum producers and recyclers to manage and efficiently extract value from critical byproduct streams, reduce byproduct generation and improve operating productivity. The Company acquired Altek, on a debt and cash free basis, for a purchase price of £45 million (approximately $60 million) in cash, with the potential for up to £25 million (approximately $33 million) in additional contingent consideration through 2021 subject to the future financial performance of Altek. The cash consideration transferred included payments of $59.4 million, net of cash acquired and normal working capital adjustments. In addition, the Company recognized contingent consideration with an initial fair value of $12.1 million as of the acquisition date. Altek's revenues and operating results have been included in the results of the Harsco Metals & Minerals Segment. Inclusion of pro forma financial information for this transaction is not necessary as the acquisition is immaterial to the Company's results of operations.
9
The initial fair value of contingent consideration was estimated using a probability simulation model, which uses assumptions and estimates to forecast a range of outcomes for the contingent consideration. Key inputs to the model include projected earnings before interest, tax, depreciation and amortization; the discount rate; the projection risk neutralization rate; and volatility, which are Level 3 data. The Company will assess these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. Any changes in the fair value of contingent consideration related to updated assumptions and estimates will be recognized in the Consolidated Statements of Operations during the period in which the change occurs.
Final Valuation | ||||||||||||
(In millions) | June 30 2018 | Measurement Period Adjustments (a) | March 31 2019 | |||||||||
Cash and cash equivalents | $ | $ | — | $ | ||||||||
Net working capital | ( | ) | ( | ) | ||||||||
Property, plant and equipment | — | |||||||||||
Intangible assets | ||||||||||||
Goodwill | ||||||||||||
Net deferred tax liabilities | ( | ) | — | ( | ) | |||||||
Other liabilities | ( | ) | — | ( | ) | |||||||
Total identifiable net assets of Altek | $ | $ | $ | |||||||||
(In thousands) | Contingent Consideration | |||
Balance, December 31, 2018 | $ | |||
Fair value adjustment (b) | ||||
Foreign currency translation | ||||
Balance, March 31, 2019 | $ | |||
4. Accounts Receivable and Inventories
(In thousands) | March 31 2019 | December 31 2018 | ||||||
Trade accounts receivable | $ | $ | ||||||
Less: Allowance for doubtful accounts | ( | ) | ( | ) | ||||
Trade accounts receivable, net | $ | $ | ||||||
Other receivables (a) | $ | $ | ||||||
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Provision (benefit) for doubtful accounts related to trade accounts receivable | $ | $ | ( | ) | ||||
10
(In thousands) | March 31 2019 | December 31 2018 | ||||||
Finished goods | $ | $ | ||||||
Work-in-process | ||||||||
Raw materials and purchased parts | ||||||||
Stores and supplies | ||||||||
Total inventories | $ | $ | ||||||
The Company recognized an initial estimated forward loss provision related to the contracts with the federal railway system of Switzerland ("SBB") of $45.1 million for the year ended December 31, 2016. The Company recorded an additional forward loss provision of $1.8 million for the year ended December 31, 2018. At March 31, 2019, the entire remaining estimated forward loss provision of $6.8 million is included in the caption Other current liabilities on the Condensed Consolidated Balance Sheets. The estimated forward loss provision represents the Company's best estimate based on currently available information. It is possible that the Company's overall estimate of costs to complete these contracts may increase, which would result in an additional estimated forward loss provision at such time, but the Company is unable to estimate any further possible loss or range of loss at this time. There are a number of key events expected to occur in 2019, including the finalization of the manufacturing designs for certain of the vehicles, and which could affect the cost estimates. Any adjustment to the cost estimates would be recorded when new information becomes available and could have a material impact on the Company’s results of operations in that period.
5. Property, Plant and Equipment
(In thousands) | March 31 2019 | December 31 2018 | ||||||
Land | $ | $ | ||||||
Land improvements | ||||||||
Buildings and improvements | ||||||||
Machinery and equipment | ||||||||
Uncompleted construction | ||||||||
Gross property, plant and equipment | ||||||||
Less: Accumulated depreciation | ( | ) | ( | ) | ||||
Property, plant and equipment, net | $ | $ | ||||||
6. Leases
The Company leases certain property and equipment under noncancelable lease agreements. The Company determines if a contract or arrangement contains a lease at inception. All leases are evaluated and classified as either an operating or finance lease. A lease is classified as a finance lease if any of the following criteria are met: (i) ownership of the underlying asset transfers to the Company by the end of the lease term; (ii) the lease contains an option to purchase the underlying asset that the Company is reasonably expected to exercise; (iii) the lease term is for a major part of the remaining economic life of the underlying asset; (iv) the present value of the sum of lease payments and any residual value guaranteed by the Company equals or exceeds substantially all of the fair value of the underlying asset; or (v) the underlying asset is of a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease that does not meet any of the criteria to be classified as a finance lease is classified as an operating lease.
11
Operating leases are included in the captions Right-of-use assets, net, Current portion of operating lease liabilities, and Operating lease liabilities on the Condensed Consolidated Balance Sheets. ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. As most of the Company’s leases do not provide an implicit rate for use in determining the present value of future payments, the Company uses an incremental borrowing rate that reflects the creditworthiness of the Company for a lending period commensurate to the term of the lease and the standard lending practices related to such loans in the respective jurisdiction where the underlying assets are located. This incremental borrowing rate reflects the creditworthiness of the Company for a lending period commensurate to the term of the lease and the standard lending practices related to such loans in the respective jurisdiction where the underlying assets are located. ROU assets also include any lease payments made and exclude any lease incentives and initial direct costs incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, including rent abatement periods and rent holidays.
Finance leases are included in the captions Property, plant and equipment, net; Current maturities of long-term debt and Long-term debt on the Condensed Consolidated Balance Sheets. Finance lease costs are split between depreciation expense related to the asset and interest expense on the lease liability, using the effective rate charged by the lessor.
The Company has lease agreements with lease and non-lease components, which the Company has elected to account for as a single lease component. Additionally, the Company has elected not to record short-term leases, those with expected terms of twelve months or less, on the Condensed Consolidated Balance Sheets. Certain lease agreements include fixed escalations, while others include rental payments adjusted periodically for inflation. There are no material residual value guarantees or material restrictive covenants. The Company's leases, excluding short-term leases, have remaining terms of less than one year to 24.5 years, some of which include options to extend for up to 10 years, and some of which include options to terminate within one year .
Three Months Ended | ||||
(In thousands) | March 31 2019 | |||
Finance leases: | ||||
Amortization expense | $ | |||
Interest on lease liabilities | ||||
Operating leases | ||||
Short-term leases | ||||
Variable lease expense | ||||
Total lease expense | $ | |||
Supplemental cash flow information related to leases was as follows:
Three Months Ended | ||||
(In thousands) | March 31 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Cash flows from operating activities - Operating leases | $ | |||
Cash flows from financing activities - Finance leases | ||||
Right-of-use assets obtained in exchange for lease obligations: | ||||
Operating leases (a) | $ | |||
Finance leases | ||||
12
(In thousands) | March 31 2019 | |||
Operating Leases: | ||||
Operating lease right-of-use assets | $ | |||
Other current liabilities | ||||
Operating lease liabilities | ||||
Finance Leases: | ||||
Property, plant and equipment, net | $ | |||
Current maturities of long-term debt | ||||
Long-term debt | ||||
March 31 2019 | |||
Other information: | |||
Weighted average remaining lease term - Operating leases (in years) | |||
Weighted average remaining lease term - Finance leases (in years) | |||
Weighted average discount rate - Operating leases | % | ||
Weighted average discount rate - Finance leases | % | ||
(In thousand) | Operating Leases | Finance Leases | ||||||
Year Ending December 31st: | ||||||||
2019 (excluding the three months ended March 31, 2019) | $ | $ | ||||||
2020 | ||||||||
2021 | ||||||||
2022 | ||||||||
2023 | ||||||||
After 2023 | ||||||||
Total lease payments | ||||||||
Less imputed interest | ( | ) | ( | ) | ||||
Total | $ | $ | ||||||
(In thousands) | ||||
2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
After 2023 | ||||
13
7. Goodwill and Other Intangible Assets
(In thousands) | Harsco Metals & Minerals Segment | Harsco Industrial Segment | Harsco Rail Segment | Consolidated Totals | ||||||||||||
Balance at December 31, 2018 | $ | $ | $ | $ | ||||||||||||
Foreign currency translation | ||||||||||||||||
Balance at March 31, 2019 | $ | $ | $ | $ | ||||||||||||
March 31, 2019 | December 31, 2018 | |||||||||||||||
(In thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||
Customer related | $ | $ | $ | $ | ||||||||||||
Patents | ||||||||||||||||
Technology related | ||||||||||||||||
Trade names | ||||||||||||||||
Other | ||||||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Amortization expense for intangible assets | $ | $ | ||||||
(In thousands) | 2019 | 2020 | 2021 | 2022 | 2023 | |||||||||||||||
Estimated amortization expense (a) | $ | $ | $ | $ | $ | |||||||||||||||
8. Employee Benefit Plans
Three Months Ended | ||||||||||||||||
March 31 | ||||||||||||||||
Defined Benefit Pension Plans Net Periodic Pension Cost (Benefit) | U.S. Plans | International Plans | ||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Service costs | $ | $ | $ | $ | ||||||||||||
Interest costs | ||||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Recognized prior service costs | ( | ) | ||||||||||||||
Recognized loss | ||||||||||||||||
Settlement/curtailment losses | ||||||||||||||||
Defined benefit pension plans net periodic pension cost (benefit) | $ | $ | $ | $ | ( | ) | ||||||||||
14
Three Months Ended | ||||||||
Company Contributions | March 31 | |||||||
(In thousands) | 2019 | 2018 | ||||||
Defined benefit pension plans (U.S.) | $ | $ | ||||||
Defined benefit pension plans (International) | ||||||||
Multiemployer pension plans | ||||||||
Defined contribution pension plans | ||||||||
9. Income Taxes
Income tax expense related to continuing operations for the three months ended March 31, 2019 and March 31, 2018 was $4.9 million and $8.3 million, respectively.
10. 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. Other than set forth herein the Company did not have any material accruals or record any material expenses related to environmental matters during the periods presented.
The Company evaluates its liability for future environmental remediation costs on a quarterly basis. Although actual costs to be incurred at identified sites in future periods may vary from the estimates (given inherent uncertainties in evaluating environmental exposures), the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with environmental matters in excess of the amounts accrued would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
As previously disclosed, the Company has had ongoing meetings with the Supreme Council for Environment in Bahrain (“SCE”) over processing a byproduct (“salt cakes”) stored at the Al Hafeerah site. The Company’s Bahrain operations that produced the salt cakes has ceased operations and are owned under a strategic venture for which its strategic venture partner owns a 35 % minority interest. An Environmental Impact Assessment and Technical Feasibility Study were approved by the SCE during the first quarter of 2018. The Company has previously established a reserve of $7.0 million, which represents 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.
15
On July 27, 2018, Brazil’s Federal and Rio de Janeiro State Public Prosecution Offices (MPF and MPE) filed a Civil Public Action against one of the Company's customers (CSN), the Company’s Brazilian subsidiary, the Municipality of Volta Redonda, Brazil, and the Instituto Estadual do Ambiente (local environmental protection agency) seeking the implementation of various measures to limit and reduce the accumulation of customer-owned slag at the site in Brazil. On August 6, 2018, the 3rd Federal Court in Volta Redonda granted the MPF and MPE an injunction against the same parties requiring, among other things, CSN and the Company’s Brazilian subsidiary to limit the volume of slag sent to the site. Because the customer owns the site and the slag located on the site, the Company believes that complying with this injunction is the steel producer’s responsibility. On March 18, 2019, the Court issued an order fining the Company 5,000 Brazilian real per day (or approximately $1,300 per day) and CSN 20,000 Brazilian real per day until the requirements of the injunction are met. This fine is not yet currently being enforced, and the Company is appealing the fine and the underlying injunction. Both the Company and CSN continue to have discussions with the 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 alleges violations of the Company’s environmental permit at the site, which restricts the release of any visible dust emissions. The enforcement action ordered the Company to cease all violations of the permit by October 31, 2018. The authorities have issued fines of approximately $0.3 million, with the possibility of additional fines for any future violations. The Company is vigorously contesting the enforcement action and fines and is also working with its customer to ensure the control of emissions. The Company has contractual indemnity rights from its customer, should it be required to pay the assessed fines.
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 value-added ("ICMS"), services and social security tax disputes. The largest proportion of the assessed amounts relate to ICMS claims filed by the State Revenue Authorities from the State of São Paulo, Brazil (the "SPRA"), encompassing the period from January 2002 to May 2005.
In October 2009, the Company received notification of the SPRA’s final administrative decision regarding the levying of ICMS in the State of São Paulo in relation to services provided to a customer in the State between January 2004 and May 2005. As of March 31, 2019, the principal amount of the tax assessment from the SPRA with regard to this case is approximately $2 million, with penalty, interest and fees assessed to date increasing such amount by an additional $21 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 $2 million. After calculating the interest accrued on the penalty, the Company estimates that this ruling reduces the current overall liability for this case to approximately $9 million. 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 plans to appeal to the judicial phase. The aggregate amount assessed by the tax authorities in August 2005 was $6.5 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 $1.5 million, with penalty and interest assessed through that date increasing such amount by an additional $4.9 million. On December 6, 2018, the administrative tribunal reduced the applicable penalties to $1.2 million. After calculating the interest accrued on the current penalty, the Company estimates that this ruling reduces the current overall liability for this case to approximately $10 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.
16
The Company intends to continue its practice of vigorously defending itself against these tax claims under various alternatives, including judicial appeal. The Company will continue to evaluate its potential liability with regard to these claims on a quarterly basis; however, it is not possible to predict the ultimate outcome of these tax-related disputes in Brazil. No loss provision has been recorded in the Company's condensed consolidated financial statements for the disputes described above because the loss contingency is not deemed probable, and the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with Brazilian tax disputes would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Brazilian Labor Disputes
The Company is subject to ongoing collective bargaining and individual labor claims in Brazil through the Harsco Metals & Minerals Segment which allege, among other things, the Company's failure to pay required amounts for overtime and vacation at certain sites. The Company is vigorously defending itself against these claims; however, litigation is inherently unpredictable, particularly in foreign jurisdictions. While the Company does not currently expect that the ultimate resolution of these claims will have a material adverse effect on the Company’s financial condition, results of operations or cash flows, it is not possible to predict the ultimate outcome of these labor-related disputes. As of March 31, 2019 and December 31, 2018, the Company has established reserves of $7.0 million and $7.1 million, respectively, on the Company's Condensed Consolidated Balance Sheets for amounts considered to be probable and estimable.
Customer Disputes
The Company may, in the normal course of business, become involved in commercial disputes with subcontractors or customers. Although results of operations and cash flows for a given period could be adversely affected by a negative outcome in these or other lawsuits, claims or proceedings, management believes that the ultimate outcome of any ongoing matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Lima Refinery Litigation
On April 8, 2016, Lima Refining Company filed a lawsuit against the Company in the District Court of Harris County, Texas related to a January 2015 explosion at an oil refinery operated by Lima Refining Company. The action seeks approximately $317 million plus interest in property damages, lost profits and business interruption damages. The action alleges the explosion occurred because of a defect in a heat exchange cooler manufactured by Hammco Corporation ("Hammco") in 2009, prior to the Company’s acquisition of Hammco in 2014. The Company is vigorously contesting the allegations against it. The Company has both an indemnity right from the sellers of Hammco and liability insurance coverage under various primary and excess policies that the Company believes will be available, if necessary, to cover substantially all such liability that might ultimately be incurred in the above action. As a result, the Company believes the situation will not result in a net unreimbursed loss.
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, 2019, there were approximately 17,127 pending asbestos personal injury actions filed against the Company. Of those actions, approximately 16,586 were filed in the New York Supreme Court (New York County), approximately 119 were filed in other New York State Supreme Court Counties and approximately 422 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, 2019, 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 36 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.
17
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, 2019, the Company has obtained dismissal in approximately 28,189 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.
11. Reconciliation of Basic and Diluted Shares
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands, except per share amounts) | 2019 | 2018 | ||||||
Income from continuing operations attributable to Harsco Corporation common stockholders | $ | $ | ||||||
Weighted-average shares outstanding - basic | ||||||||
Dilutive effect of stock-based compensation | ||||||||
Weighted-average shares outstanding - diluted | ||||||||
Earnings from continuing operations per common share, attributable to Harsco Corporation common stockholders: | ||||||||
Basic | $ | $ | ||||||
Diluted | $ | $ | ||||||
Three Months Ended | ||||||
March 31 | ||||||
(In thousands) | 2019 | 2018 | ||||
Stock appreciation rights | ||||||
Performance share units | ||||||
18
12. Derivative Instruments, Hedging Activities and Fair Value
Derivative Instruments and Hedging Activities
The Company uses derivative instruments, including foreign currency exchange forward contracts, interest rate swaps and cross-currency interest rate swaps ("CCIRs"), to manage certain foreign currency and interest rate exposures. Derivative instruments are viewed as risk management tools by the Company and are not used for trading or speculative purposes. All derivative instruments are recorded on the Condensed Consolidated Balance Sheets at fair value. 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 risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The Company utilizes market data or assumptions that the Company believes market participants would use in valuing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy are described below:
• | Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
• | Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
• | Level 3—Inputs that are both significant to the fair value measurement and unobservable. |
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs, such as forward rates, interest rates, the Company’s credit risk and counterparties’ credit risks, and which minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the ability to observe those inputs. Foreign currency exchange forward contracts, interest rate swaps and CCIRs are based upon pricing models using market-based inputs (Level 2). Model inputs can be verified and valuation techniques do not involve significant management judgment.
19
The fair value of outstanding derivative contracts recorded as assets and liabilities on the 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, 2019 | ||||||||||||||
Asset derivatives (Level 2): | ||||||||||||||
Foreign currency exchange forward contracts | Other current assets | $ | $ | $ | ||||||||||
Interest rate swaps | Other current assets | |||||||||||||
Total | $ | $ | $ | |||||||||||
Liability derivatives (Level 2): | ||||||||||||||
Foreign currency exchange forward contracts | Other current liabilities | $ | $ | $ | ||||||||||
Interest rate swaps | Other current liabilities | |||||||||||||
Interest rate swaps | Other liabilities | |||||||||||||
Total | $ | $ | $ | |||||||||||
December 31, 2018 | ||||||||||||||
Asset derivatives (Level 2): | ||||||||||||||
Foreign currency exchange forward contracts | Other current assets | $ | $ | $ | ||||||||||
Interest rate swaps | Other current assets | |||||||||||||
Interest rate swaps | Other assets | $ | ||||||||||||
Total | $ | $ | $ | |||||||||||
Liability derivatives (Level 2): | ||||||||||||||
Foreign currency exchange forward contracts | Other current liabilities | $ | $ | $ | ||||||||||
Interest rate swaps | Other 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, CCIRs and certain foreign currency exchange forward contracts are transacted under International Swaps and Derivatives Association ("ISDA") documentation. Each ISDA master agreement permits the net settlement of amounts owed in the event of default. The Company's derivative assets and liabilities subject to enforceable master netting arrangements resulted in a net liability of $1.0 million and $0.1 million at March 31, 2019 and
December 31, 2018, respectively.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income:
Amount Recognized in Other Comprehensive Income (“OCI”) on Derivatives | Location of Amount Reclassified from Accumulated OCI into Income | Amount Reclassified from Accumulated OCI into Income - Effective Portion or Equity | |||||||||||||||||
Three Months Ended | Three Months Ended | ||||||||||||||||||
March 31 | March 31 | ||||||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||||||
Foreign currency exchange forward contracts | $ | ( | ) | $ | Product revenues | $ | ( | ) | $ | ( | ) | ||||||||
Foreign currency exchange forward contracts (a) | — | — | Retained earnings | — | ( | ) | |||||||||||||
Interest rate swaps | ( | ) | Interest expense | ( | ) | ||||||||||||||
Cross-currency interest rate swaps (b) | ( | ) | ( | ) | Interest expense | ||||||||||||||
( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
(a) The Company has adopted the new revenue recognition standard utilizing the modified retrospective transition method, including use of practical expedients. See Note 2, Recently Adopted and Recently Issued Accounting Standards for additional information.
(b) Amounts represent changes in foreign currency translation related to balances in Accumulated other comprehensive loss.
20
The location and amount of gain (loss) recognized on the Condensed Consolidated Statements of Operations:
Three Months Ended | ||||||||||||||||||||
March 31 | ||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||
(in thousands) | Product Revenues | Interest Expense | Product Revenues | Cost of Products Sold | Interest Expense | |||||||||||||||
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of cash flow hedges are recorded | $ | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||||
Interest rate swaps: | ||||||||||||||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | ||||||||||||||||||||
Foreign exchange contracts: | ||||||||||||||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | ||||||||||||||||||||
Amount excluded from effectiveness testing recognized in earnings based on changes in fair value | ( | ) | ||||||||||||||||||
Cross-currency interest rate swaps: | ||||||||||||||||||||
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income | ( | ) | ( | ) | ||||||||||||||||
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivatives | Amount of Gain (Loss) Recognized in Income on Derivatives for the Three Months Ended March 31(c) | |||||||||
(In thousands) | 2019 | 2018 | ||||||||
Foreign currency exchange forward contracts | Cost of services and products sold | $ | $ | ( | ) | |||||
(c) These gains (losses) offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.
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 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 Accumulated other comprehensive loss, a separate component of equity, and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, is recognized currently in earnings.
The 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, 2019 and December 31, 2018, the notional amounts of foreign currency exchange forward contracts were $444.3 million and $423.9 million, respectively. These contracts are primarily denominated in British pounds sterling and Euros and mature through October 2021.
21
In addition to foreign currency exchange forward contracts, the Company designates certain loans as hedges of net investments in international subsidiaries. The Company recorded pre-tax net gains of $4.8 million and $9.5 million for the three months ended March 31, 2019 and March 31, 2018, respectively, in Accumulated other comprehensive loss.
Interest Rate Swaps
The Company uses interest rate swaps in conjunction with certain debt issuances in order to secure a fixed interest rate. 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 Accumulated other comprehensive loss.
In January 2017 and February 2018, the Company entered into a series of interest rate swaps that cover the period from 2018 through 2022 and had the effect of converting $300.0 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, ranging from 2.12 % for 2019 to 3.12 % for 2022. The total notional of the Company's interest rate swaps was $300.0 million as of March 31, 2019.
Cross-Currency Interest Rate Swaps
The Company may use CCIRs in conjunction with certain debt issuances in order to secure a fixed local currency interest rate. Under these CCIRs, the Company receives interest based on a fixed or floating U.S. dollar rate and pays interest on a fixed local currency rate based on the contractual amounts in dollars and the local currency, respectively. At maturity, there is also the payment of principal amounts between currencies. 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 Accumulated other comprehensive loss. Changes in value attributed to the effect of foreign currency fluctuations are recorded in the Condensed Consolidated Statements of Operations and offset currency fluctuation effects on the debt principal. The Company had no outstanding CCIRs at March 31, 2019.
Fair Value of Other Financial Instruments
13. Review of Operations by Segment
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Revenues From Continuing Operations | ||||||||
Harsco Metals & Minerals | $ | $ | ||||||
Harsco Industrial | ||||||||
Harsco Rail | ||||||||
Corporate | ||||||||
Total Revenues From Continuing Operations | $ | $ | ||||||
Operating Income (Loss) From Continuing Operations | ||||||||
Harsco Metals & Minerals | $ | $ | ||||||
Harsco Industrial | ||||||||
Harsco Rail | ||||||||
Corporate | ( | ) | ( | ) | ||||
Total Operating Income From Continuing Operations | $ | $ | ||||||
Depreciation and Amortization | ||||||||
Harsco Metals & Minerals | $ | $ | ||||||
Harsco Industrial | ||||||||
Harsco Rail | ||||||||
Corporate | ||||||||
Total Depreciation and Amortization | $ | $ | ||||||
22
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Capital Expenditures | ||||||||
Harsco Metals & Minerals | $ | $ | ||||||
Harsco Industrial | ||||||||
Harsco Rail | ||||||||
Corporate | ||||||||
Total Capital Expenditures | $ | $ | ||||||
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Segment operating income | $ | $ | ||||||
General Corporate expense | ( | ) | ( | ) | ||||
Operating income from continuing operations | ||||||||
Interest income | ||||||||
Interest expense | ( | ) | ( | ) | ||||
Defined benefit pension income (expense) | ( | ) | ||||||
Income from continuing operations before income taxes and equity income | $ | $ | ||||||
14. 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 service components of the Harsco Metals & Minerals and Harsco Rail Segments. Product revenues include the Harsco Industrial Segment and the product revenues of the Harsco Metals & Minerals and Harsco Rail Segments.
Three Months Ended | ||||||||||||||||||||
March 31, 2019 | ||||||||||||||||||||
(In thousands) | Harsco Metals & Minerals Segment | Harsco Industrial Segment | Harsco Rail Segment | Corporate | 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: | ||||||||||||||||||||
On-site services and material logistics, product quality improvement and resource recovery for iron, steel and metals manufacturing; value- added environmental solutions for industrial co-products; as well as aluminum dross and scrap processing systems | $ | $ | $ | $ | $ | |||||||||||||||
Railway track maintenance services and equipment | ||||||||||||||||||||
Air-cooled heat exchangers | ||||||||||||||||||||
Industrial grating and fencing products | ||||||||||||||||||||
Heat transfer products | ||||||||||||||||||||
Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
23
Three Months Ended | ||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||
(In thousands) | Harsco Metals & Minerals Segment | Harsco Industrial Segment | Harsco Rail Segment | Corporate | 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: | ||||||||||||||||||||
On-site services and material logistics, product quality improvement and resource recovery for iron, steel and metals manufacturing; value- added environmental solutions for industrial co-products; as well as aluminum dross and scrap processing systems | $ | $ | $ | $ | $ | |||||||||||||||
Railway track maintenance services and equipment | ||||||||||||||||||||
Air-cooled heat exchangers | ||||||||||||||||||||
Industrial grating and fencing products | ||||||||||||||||||||
Heat transfer products | ||||||||||||||||||||
General Corporate | ||||||||||||||||||||
Total Revenues | $ | $ | $ | $ | $ | |||||||||||||||
(a) | Revenues are attributed to individual countries based on the location of the facility generating the revenue. |
(b) | Includes Mexico. |
The Company had Contract assets totaling $17.5 million and $24.3 million at March 31, 2019 and December 31, 2018, respectively. The decrease is due principally to the transfer of contract assets to accounts receivable in excess of additional contract assets recognized during the three months ended March 31, 2019, primarily in the Harsco Rail Segment. The Company had Advances on contracts totaling $64.5 million and $69.0 million at March 31, 2019 and December 31, 2018, respectively. The decrease is due principally to the recognition of revenue on previously received advances on contracts in excess of receipts of new advances on contracts during the period and the impact of foreign currency translation during the three months ended March 31, 2019, primarily in the Harsco Rail Segment. During the three months ended March 31, 2019, the Company recognized $21.5 million of revenue related to amounts included in Advances on contracts at December 31, 2018.
At March 31, 2019, the Harsco Metals & Minerals Segment had remaining, fixed, unsatisfied performance obligations, where the expected contract duration exceeds one year totaling $136.7 million. Of this amount, $43.6 million is expected to be fulfilled by March 31, 2020, $35.4 million by March 31, 2021, $24.9 million by March 31, 2022, $22.9 million by
March 31, 2023 and the remainder thereafter. These amounts exclude any variable fees, fixed fees subject to indexation and any performance obligations expected to be satisfied within one year. The decrease from December 31, 2018 is primarily due to changes in foreign currency exchange rates.
24
15. Other Expenses, Net
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Employee termination benefit costs | $ | $ | ||||||
Other costs to exit activities | ||||||||
Impaired asset write-downs | ||||||||
Contingent consideration adjustments | ||||||||
Net gains | ( | ) | ||||||
Other | ( | ) | ||||||
Other expenses, net | $ | $ | ||||||
16. Components of Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is included in the Condensed Consolidated Statements of Equity. The components of Accumulated other comprehensive loss, net of the effect of income taxes, and activity for the three months ended
March 31, 2018 and 2019 was as follows:
Components of Accumulated Other Comprehensive Income (Loss) - Net of Tax | ||||||||||||||||||||
(In thousands) | Cumulative Foreign Exchange Translation Adjustments | Effective Portion of Derivatives Designated as Hedging Instruments | Cumulative Unrecognized Actuarial Losses on Pension Obligations | Unrealized Gain (Loss) on Marketable Securities | Total | |||||||||||||||
Balance at December 31, 2017 | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
Adoption of new accounting standard (a) | — | ( | ) | — | — | ( | ) | |||||||||||||
Other comprehensive income (loss) before reclassifications | (b) | (c) | ( | ) | (b) | ( | ) | |||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | ( | ) | ||||||||||||||||||
Total other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||
Other comprehensive income attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||
Other comprehensive income (loss) attributable to Harsco Corporation | ( | ) | ( | ) | ||||||||||||||||
Balance at March 31, 2018 | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
25
Components of Accumulated Other Comprehensive Income (Loss) - Net of Tax | ||||||||||||||||||||
(In thousands) | Cumulative Foreign Exchange Translation Adjustments | Effective Portion of Derivatives Designated as Hedging Instruments | Cumulative Unrecognized Actuarial Losses on Pension Obligations | Unrealized Gain (Loss) on Marketable Securities | Total | |||||||||||||||
Balance at December 31, 2018 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
Adoption of new accounting standard (c) | ( | ) | (d) | ( | ) | |||||||||||||||
Other comprehensive income (loss) before reclassifications | (b) | ( | ) | (c) | ( | ) | (b) | |||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax | ( | ) | ( | ) | ||||||||||||||||
Total other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||
Other comprehensive income attributable to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||
Other comprehensive income (loss) attributable to Harsco Corporation | ( | ) | ( | ) | ||||||||||||||||
Balance at March 31, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
(a) Represents the opening balance sheet adjustment to retained earnings related to the adoption of the revenue recognition standard adopted by the Company on January 1, 2018.
(b) | Principally foreign currency fluctuation. |
(c) Net change from periodic revaluations.
(In thousands) | Three Months Ended | Affected Caption in the Condensed Consolidated Statements of Operations | ||||||||
March 31 2019 | March 31 2018 | |||||||||
Recognition of cumulative foreign currency translation adjustments: | ||||||||||
Gain on substantial liquidation of subsidiary (e) | $ | ( | ) | $ | Other expenses, net | |||||
Amortization of cash flow hedging instruments: | ||||||||||
Foreign currency exchange forward contracts | $ | ( | ) | $ | ( | ) | Product revenues | |||
Cross-currency interest rate swaps | Interest expense | |||||||||
Interest rate swaps | ( | ) | Interest expense | |||||||
Total before tax | ( | ) | ||||||||
Tax expense | ( | ) | ( | ) | ||||||
Total reclassification of cash flow hedging instruments, net of tax | $ | ( | ) | $ | ( | ) | ||||
Amortization of defined benefit pension items (f): | ||||||||||
Recognized losses | $ | $ | Defined benefit pension income (expense) | |||||||
Recognized prior-service costs | ( | ) | Defined benefit pension income (expense) | |||||||
Settlement/curtailment losses | Defined benefit pension income (expense) | |||||||||
Total before tax | ||||||||||
Tax benefit | ( | ) | ( | ) | ||||||
Total reclassification of defined benefit pension items, net of tax | $ | $ | ||||||||
(e) | No tax impact. |
(f) |
26
17. Subsequent Events
On May 9, 2019 the Company announced two separate strategic transactions that accelerate the transformation of the Company’s portfolio of businesses into a leading provider of environmental solutions and aligns with the Company’s strategy to decrease the complexity of the Company’s business portfolio by focusing on less cyclical and higher-growth businesses.
The Company has entered into a definitive agreement to acquire CEHI Acquisition Corporation and Subsidiaries (“Clean Earth”), a leader in processing special waste and hazardous and non-hazardous waste, from Compass Diversified Holdings for approximately $625 million in cash, subject to post-closing adjustments. The transaction has been approved by the Company's Board of Directors ("Board") and is expected to close during the next few months, subject to customary closing conditions, including receipt of certain regulatory approvals. There are no material financial or other contingencies to close the transaction.
In addition, the Company has entered into a definitive agreement to sell the Harsco Industrial Air-X-Changers business to Chart Industries, Inc. for $592 million in cash, subject to post-closing adjustments. The transaction has been approved by the Company's Board and is expected to close during the next few months, subject to customary closing conditions, including receipt of certain regulatory approvals. There are no material financial or other contingencies to close the transaction.
27
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 Harsco Corporation (the "Company"), including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 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 2019 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 and the many 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," "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 general economic conditions; (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; (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 integration of the Company's strategic acquisitions, including the acquisition of CEHI Acquisition Corporation and Subsidiaries ("Clean Earth"); (13) risks associated with the acquisition of Clean Earth and the sale of the Harsco Industrial Air-X-Changers business generally, such as the inability to obtain, or delays in obtaining, regulatory approval; (14) the occurrence of any event, change or other circumstances that could give rise to the termination of the definitive agreements entered into for the acquisition of Clean Earth and the sale of the Harsco Industrial Air-X-Changers business; (15) potential severe volatility in the capital markets and the impact on the cost of the Company to obtain debt financing as may be necessary to consummate the acquisition of Clean Earth; (16) failure to retain key management and employees of Clean Earth; (17) the amount and timing of repurchases of the Company's common stock, if any; (18) the outcome of any disputes with customers, contractors and subcontractors; (19) the financial condition of the Company's customers, including the ability of customers (especially those that may be highly leveraged and those with inadequate liquidity) to maintain their credit availability; (20) implementation of environmental remediation matters; (21) risk and uncertainty associated with intangible assets; and (22) 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 I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2018 and Part II, Item 1A, Risk Factors herein. 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.
28
Executive Overview
The Company is a diversified, multinational provider of industrial services and engineered products serving global industries that are fundamental to worldwide economic growth and infrastructure development. The Company's operations consist of three reportable segments: Harsco Metals & Minerals, Harsco Industrial and Harsco Rail. In general, each of the Company’s segments are among the market leaders in their respective sectors. The Harsco Metals & Minerals Segment operates primarily under long-term contracts, providing critical services and support to the steelmaking process; and environmental and zero waste solutions for manufacturing by-products within the metals industry. The Harsco Industrial Segment is a supplier of custom-engineered and manufactured air-cooled heat exchangers that support the processing and distribution of natural gas and downstream refined products; manufactures a full range of metal bar grating configurations, used mainly in industrial flooring, as well as safety and security applications; and also manufactures energy-efficient heat transfer products such as boilers and water heaters, for various commercial and industrial applications. The Harsco Rail Segment is a provider of highly engineered maintenance equipment, after-market parts and safety and diagnostic systems which support railroad and transit customers worldwide. The Company has locations in approximately 30 countries, including the U.S. The Company was incorporated in 1956.
Highlights from the first quarter 2019 included (refer to the discussion of segment and consolidated results included within Results of Operations below, as well as Liquidity and Capital Resources, for additional information pertaining to the key drivers impacting these highlights):
• | Revenues for the first quarter of 2019 increased approximately 10% compared with the first quarter of 2018. The primary drivers for this increase were strong demand in the Harsco Industrial Segment's air-cooled heat exchangers business and increased maintenance of way equipment sales in the Harsco Rail Segment. |
• | Operating income from continuing operations for the first quarter of 2019 increased approximately 5% compared with the first quarter of 2018. The primary driver for this increase was improved operating results in the Harsco Industrial and Harsco Rail Segments. These improvements were partially offset by modestly lower operating results in the Harsco Metals & Minerals Segment primarily due to increased selling, general and administrative costs to support the Company's strategic growth initiatives and the impact of foreign currency translation. Additionally, Corporate costs increased during the first quarter of 2019 compared to the same period in prior year to support the Company's strategic initiatives such as the acquisition of Clean Earth, a leader in processing special waste and hazardous and non-hazardous waste, and the sale of the Harsco Industrial Air-X-Changers business as announced on May 9, 2019. See Note 17, Subsequent Events, in Part I, Item 1, “Financial Statements,” for additional information. |
• | Diluted earnings per common share from continuing operations attributable to Harsco Corporation for the first quarter of 2019 were $0.26, an increase of approximately 18% compared with the first quarter of 2018. The primary drivers for the increase were improved operating results and a decrease in income tax expense. As anticipated, these factors were partially offset by increased defined benefit pension expense. |
• | Cash flows from operating activities for the first quarter of 2019 were $14.8 million, an increase of $23.1 million compared with the first quarter of 2018. The primary driver for this increase was a favorable change in working capital. |
Looking forward, the Company maintains a positive outlook across all businesses. The Company’s view for the remainder of 2019 and beyond is supported by the below factors, which should be considered in the context of other risks, trends and strategies in the Company's Annual Report on Form 10-K for the year ended December 31, 2018:
• | Customers served by the Harsco Metals & Minerals Segment have benefited from recent improvements in global steel production. For 2019, (i) global growth in steel production and consumption are expected to increase demand for mill services; (ii) new site (contract) contributions are expected to outpace site exits; and (iii) continued operational savings are expected to improve operating results compared to 2018. Additionally, revenues for 2019 will be positively impacted by demand for aluminum dross and scrap processing systems and the inclusion of a full year of results for Altek. |
• | The Harsco Industrial Segment’s air-cooled heat exchangers business continues to be positively impacted by fundamental improvements within energy markets. Bookings for this business have increased significantly over the past year. For 2019, (i) the air-cooled heat exchangers business continues to maintain a robust backlog, (ii) improved demand is anticipated across this Segment's product offerings as the result of increased capital spending in end markets; and (iii) new product offerings are expected to positively impact operating results. |
29
• | The Harsco Rail Segment has experienced continued improvement in demand for maintenance of way equipment from North American railroads following a period of decreased demand in recent years. Harsco Rail has also benefited from continued growth, market penetration and investment in foreign markets to increase international equipment sales as well as after-market parts and Protran Technology. As a result, this Segment began 2019 with strong backlog. Additionally, the Harsco Rail Segment has undertaken a number of strategic actions over the past two years to improve manufacturing processes. As previously disclosed, the Company began to consolidate and centralize North American manufacturing and distribution into one facility, allowing for improved efficiency and better service to customers. The capital investment to complete this program and other expenditures will continue through 2019. The annualized savings anticipated from this latest action are approximately $7 million, with a portion of these benefits expected to materialize in the second-half of 2019. The net impact of such costs and savings will not have a significant impact on 2019 operating results. |
• | The Company anticipates higher selling, general and administrative costs across all Segments as well as increased research and development spending in the Harsco Rail Segment, necessary to support anticipated volume increases and the Company's strategic growth initiatives. |
• | Net periodic pension cost ("NPPC") will increase by approximately $9 million during 2019, which will primarily be reflected in the caption Defined benefit pension (income) expense on the consolidated statement of operations. The increase is primarily the result of lower plan assets at December 31, 2018. |
• | The Company anticipates that corporate spending will increase in 2019 in order to support the Company's strategic growth initiatives. |
Results of Operations
Segment Results
Three Months Ended | ||||||||
March 31 | ||||||||
(In millions, except percentages) | 2019 | 2018 | ||||||
Revenues: | ||||||||
Harsco Metals & Minerals | $ | 261.3 | $ | 264.7 | ||||
Harsco Industrial | 117.4 | 83.6 | ||||||
Harsco Rail | 68.6 | 59.7 | ||||||
Total Revenues | $ | 447.3 | $ | 408.0 | ||||
Operating Income (Loss): | ||||||||
Harsco Metals & Minerals | $ | 24.5 | $ | 27.7 | ||||
Harsco Industrial | 17.0 | 12.4 | ||||||
Harsco Rail | 5.4 | 2.0 | ||||||
Corporate | (8.7 | ) | (5.6 | ) | ||||
Total Operating Income: | $ | 38.2 | $ | 36.5 | ||||
Operating Margins: | ||||||||
Harsco Metals & Minerals | 9.4 | % | 10.5 | % | ||||
Harsco Industrial | 14.5 | 14.9 | ||||||
Harsco Rail | 7.9 | 3.3 | ||||||
8.6 | % | 9.0 | % | |||||
Harsco Metals & Minerals Segment:
March 31, 2019 | ||||
Significant Effects on Revenues (In millions) | Three Months Ended | |||
Revenues — 2018 | $ | 264.7 | ||
Impact of foreign currency translation. | (16.2 | ) | ||
Net effects of price/volume changes, primarily attributable to volume changes. | 8.9 | |||
Effect of Altek acquisition. | 4.4 | |||
Net impact of new and lost contracts. | (0.8 | ) | ||
Other. | 0.3 | |||
Revenues — 2019 | $ | 261.3 | ||
30
Factors Positively Affecting Operating Income:
• | Overall, steel production by customers under services contracts, including the impact of new and exited contracts increased modestly for the first quarter of 2019 compared with the same period in the prior year. |
• | Operating income was positively affected by a $2.3 million gain during the first quarter of 2019 related to the recognition of a foreign currency cumulative translation adjustment resulting from the substantial liquidation of a subsidiary. |
Factors Negatively Impacting Operating Income:
• | Operating results for the first quarter of 2019 were negatively impacted by decreased profitability in the Company's nickel-related sites partially due to decreased nickel prices. Nickel prices decreased 13% for the first quarter of 2019 compared with the same period in prior year. |
• | Higher operating costs in the industrial abrasives and roofing granules business. |
• | Operating results for the first quarter of 2019 were also negatively impacted by costs associated with the continued integration and scaling of the aluminum dross and scrap processing systems business acquired during 2018 including increased amortization expenses associated with intangible assets recognized as part of the acquisition. |
• | Higher selling, general and administrative costs due to higher compensation expense to support and execute the Company's growth strategies. |
• | Foreign currency translation decreased operating income by $1.6 million for the first quarter of 2019 compared with the same period in prior year. |
Harsco Industrial Segment:
March 31, 2019 | ||||
Significant Effects on Revenues (In millions) | Three Months Ended | |||
Revenues — 2018 | $ | 83.6 | ||
Net effects of price/volume changes, primarily attributable to volume changes. | 34.0 | |||
Impact of foreign currency translation. | (0.2 | ) | ||
Revenues — 2019 | $ | 117.4 | ||
Factors Positively Affecting Operating Income:
• | Higher overall volumes in the air-cooled heat exchanger business resulting in increased operating income during the first quarter of 2019 compared with the same period in prior year. |
• | A favorable sales mix and increased demand led to increased operating income in the industrial grating businesses. |
Factors Negatively Impacting Operating Income:
• | Higher selling, general and administrative costs for the first quarter of 2019 resulting primarily from increased external sales commissions due to increased volumes in the air-cooled heat exchanger business. |
Harsco Rail Segment:
March 31, 2019 | ||||
Significant Effects on Revenues (In millions) | Three Months Ended | |||
Revenues — 2018 | $ | 59.7 | ||
Net effect of price/volume changes, primarily attributable to volume changes. | 10.4 | |||
Impact of foreign currency translation. | (1.5 | ) | ||
Revenues — 2019 | $ | 68.6 | ||
Factors Positively Affecting Operating Income:
• | Improving demand for machine sales increased operating income during the first quarter of 2019 compared with the same period in the prior year. |
• | A favorable mix and increased demand for after-market part sales increased operating income during the first quarter of 2019 compared with the same period in the prior year. |
• | Results for the first quarter of 2018 included an additional forward contract loss provision related to the Company's first of two contracts with the federal railway system of Switzerland of $1.8 million resulting from incurring actual costs to complete in excess of originally estimated costs. |
31
Factors Negatively Impacting Operating Income:
• | Lower contract service volumes decreased operating income in the first quarter of 2019 compared with the same period in prior. |
• | Increased selling, general and administrative expenses for the first quarter of 2019 primarily related to higher compensation expense to support and execute the Company's growth strategy. |
• | Operating income was negatively impacted by $2.6 million of costs associated with the initiative to improve manufacturing efficiency, including the recently announced consolidation of U.S. manufacturing and distribution into one facility. |
Consolidated Results
March 31 | ||||||||
Three Months Ended | ||||||||
(In millions, except per share amounts) | 2019 | 2018 | ||||||
Total revenues | $ | 447.3 | $ | 408.0 | ||||
Cost of services and products sold | 338.9 | 311.4 | ||||||
Selling, general and administrative expenses | 67.0 | 57.1 | ||||||
Research and development expenses | 1.3 | 1.2 | ||||||
Other expenses, net | 1.9 | 1.8 | ||||||
Operating income from continuing operations | 38.2 | 36.5 | ||||||
Interest income | 0.5 | 0.5 | ||||||
Interest expense | (9.7 | ) | (9.6 | ) | ||||
Defined benefit pension income (expense) | (1.3 | ) | 0.8 | |||||
Income tax expense | (4.9 | ) | (8.3 | ) | ||||
Income from continuing operations | 22.9 | 20.0 | ||||||
Loss from discontinued operations | (0.3 | ) | (0.5 | ) | ||||
Net income | 22.5 | 19.6 | ||||||
Total other comprehensive income | 4.5 | 6.2 | ||||||
Total comprehensive income | 27.1 | 25.7 | ||||||
Diluted earnings per common share from continuing operations attributable to Harsco Corporation common stockholders | 0.26 | 0.22 | ||||||
Effective income tax rate for continuing operations | 17.5 | % | 29.2 | % | ||||
Comparative Analysis of Consolidated Results
Revenues
Revenues for the first quarter of 2019 increased $39.3 million or 9.6% from the first quarter of 2018. Foreign currency translation decreased revenues by approximately $18 million for the first quarter of 2019 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 2019 increased $27.5 million or 8.8% from the first quarter of 2018. The changes in cost of services and products sold was attributable to the following significant items:
March 31, 2019 | ||||
(In millions) | Three Months Ended | |||
Increased costs due to changes in revenues (exclusive of the effects of foreign currency translation and including fluctuations in commodity costs included in selling prices). | $ | 42.7 | ||
Impact of foreign currency translation. | (14.6 | ) | ||
Other. | (0.6 | ) | ||
Total change in cost of services and products sold — 2019 vs. 2018 | $ | 27.5 | ||
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the first quarter of 2019 increased $9.9 million or 17.4% from the first quarter of 2018. This increase was primarily related to higher compensation expense and professional fees needed to support personnel investment and execute the Company's growth strategy; the inclusion of selling, general and administrative expenses associated with the Altek acquisition which occurred in May 2018; and increased external sales commissions primarily in the Company's air-cooled heat exchange business; partially offset by the impact of foreign currency translation.
32
Other Expenses, Net
The major components of this Condensed Consolidated Statements of Operations caption are as follows:
Three Months Ended | ||||||||
March 31 | ||||||||
(In thousands) | 2019 | 2018 | ||||||
Employee termination benefit costs | $ | 2,598 | $ | 1,443 | ||||
Other costs to exit activities | 1,165 | 364 | ||||||
Impaired asset write-downs | 214 | 9 | ||||||
Contingent consideration adjustments | 369 | — | ||||||
Net gains | (2,271 | ) | — | |||||
Other | (199 | ) | 6 | |||||
Other expenses, net | $ | 1,876 | $ | 1,822 | ||||
Interest Expense
Interest expense during the first quarter of 2019 increased $0.2 million compared with the first quarter of 2018. The increase primarily relates to modestly higher borrowings under the Company's Senior Secured Credit Facility.
Defined Benefit Pension Income (Expense)
Defined benefit pension expense for the first quarter of 2019 was $1.3 million, compared with defined benefit pension income of $0.8 million for the first quarter of 2018. The change is primarily the result of lower plan assets at December 31, 2018.
Income Tax Expense
Income tax expense related to continuing operations for the first quarter of 2019 was $4.9 million, compared with $8.3 million for the first quarter of 2018. Income tax expense decreased primarily due to the income tax benefit recognized for stock-based compensation which vested during the first quarter of 2019.
Income from Continuing Operations
Income from continuing operations was $22.9 million in the first quarter of 2019, compared with $20.0 million in the first quarter of 2018. The primary driver for these increases was improved operating results in the Harsco Industrial and Harsco Rail Segments; and a decrease in income tax expense; partially offset by increased defined benefit pension expense.
Total Other Comprehensive Income
Total other comprehensive income was $4.5 million in the first quarter of 2019, compared with total other comprehensive income of $6.2 million in the first quarter of 2018. The primary drivers of this decrease were unrealized cash flow hedge losses for the three months ended March 31, 2019 compared to unrealized cash flow hedge gains for the same period in the prior year, partially offset by the net favorable impact of foreign currency translation due to the weakinging of the U.S. dollar against certain currencies during the first three months of 2019 including foreign currency translation of cumulative unrecognized actuarial losses on the Company's pension obligations.
33
Liquidity and Capital Resources
Cash Flow Summary
The Company has 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 due to historical patterns of seasonal cash flow and for 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 in the Condensed Consolidated Statements of Cash Flows, are summarized in the following table:
Three Months Ended | ||||||||
March 31 | ||||||||
(In millions) | 2019 | 2018 | ||||||
Net cash provided (used) by: | ||||||||
Operating activities | $ | 14.8 | $ | (8.2 | ) | |||
Investing activities | (38.6 | ) | (30.3 | ) | ||||
Financing activities | 44.4 | 39.2 | ||||||
Effect of exchange rate changes on cash and cash equivalents, including restricted cash | — | 0.7 | ||||||
Net change in cash and cash equivalents, including restricted cash | $ | 20.5 | $ | 1.3 | ||||
Net cash provided (used) by operating activities — Net cash provided by operating activities in the first three months of 2019 was $14.8 million, an increase of $23.1 million from net cash used by operating activities in the first three months of 2018. The increase is primarily attributable to customer receipts in the Harsco Rail Segment and lower accrued compensation payments compared to the same period prior year.
Net cash used by investing activities — Net cash used by investing activities in the first three months of 2019 was $38.6 million, an increase of $8.3 million from the net cash used by investing activities in the first three months of 2018. The increase was primarily due to the increase in capital expenditures, primarily in the Company's Harsco Metals & Minerals Segment in the first three months of 2019, compared with the first three months of 2018.
Net cash provided by financing activities — Net cash provided by financing activities in the first three months of 2019 was $44.4 million, an increase of $5.2 million from net cash provided by financing activities in the first three months of 2018. The change was primarily due to net cash borrowings of $51.7 million in the first three months of 2019 compared with net cash borrowings of $39.4 million in the three months of 2018; partially offset by the payment of employee taxes related to stock-based compensation vesting.
Sources and Uses of Cash
The Company’s principal sources of liquidity are cash provided by operations and borrowings under the Senior Secured Credit Facility, 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 Facility Borrowings: (In millions) | March 31 2019 | December 31 2018 | ||||||
By type: | ||||||||
Revolving Credit Facility | $ | 119.0 | $ | 62.0 | ||||
Term Loan Facility | 540.4 | 541.8 | ||||||
Total | $ | 659.4 | $ | 603.8 | ||||
By classification: | ||||||||
Current | $ | 5.4 | $ | 5.4 | ||||
Long-term | 654.0 | 598.3 | ||||||
Total | $ | 659.4 | $ | 603.8 | ||||
March 31, 2019 | ||||||||||||||||
(In millions) | Facility Limit | Outstanding Balance | Outstanding Letters of Credit | Available Credit | ||||||||||||
Multi-year revolving credit facility | $ | 500.0 | $ | 119.0 | $ | 30.4 | $ | 350.6 | ||||||||
34
Debt Covenants
The Senior Secured Credit Facility contains a consolidated net debt to consolidated adjusted earnings before interest, tax depreciation and amortization ("EBITDA") ratio covenant, which is not to exceed 3.50 to 1.0, and a minimum consolidated adjusted EBITDA to consolidated interest charges ratio covenant, which is not to be less than 3.0 to 1.0. At
March 31, 2019, the Company was in compliance with these covenants, as the total net leverage ratio was 1.8 to 1.0 and total interest coverage ratio was 8.6 to 1.0. Based on balances and covenants in effect at March 31, 2019, the Company could increase net debt by $558.8 million, and still be in compliance with these debt covenants. Alternatively, keeping all other factors constant, the Company's adjusted EBITDA could decrease by $159.7 million and the Company would still be within these debt covenants. The Company expects to continue to be in compliance with these debt covenants for at least the next twelve months.
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. The Company plans to continue the strategy of targeted, prudent investing for strategic purposes for the foreseeable future, and to make more efficient use of existing investments.
At March 31, 2019, the Company's consolidated cash and cash equivalents included $84.1 million held by non-U.S. subsidiaries. At March 31, 2019, approximately 1% 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 $25.6 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, 2018.
ITEM 4. CONTROLS AND PROCEDURES
The Company adopted changes issued by the Financial Accounting Standards Board related to accounting for leases, which required the implementation of new accounting processes, which changed the Company's internal controls over lease accounting. The Company has completed the design of these controls and they have been implemented as of March 31, 2019. Other than these changes, there have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the first quarter of 2019.
Based on the evaluation required by Securities Exchange Act Rules 13a-15(b) and 15d-15(b), the Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), at March 31, 2019. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective at March 31, 2019.
35
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information on legal proceedings is included in Note 10, Commitments and Contingencies, in Part I, Item 1, Financial Statements.
ITEM 1A. RISK FACTORS
The Company's risk factors as of March 31, 2019 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, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 2, 2018, the Company announced that the Board of Directors adopted a share repurchase program authorizing the Company to repurchase up to $75,000,000 of outstanding shares of the Company’s common stock through April 24, 2021. The Company did not purchase any shares of common stock under this program during the quarter ended March 31, 2019. The approximate dollar value of shares that may yet be purchased under the share repurchase program is $44,989,369. When and if appropriate, repurchases are made in open market transactions, depending on market conditions. Share repurchases may not occur and may be discontinued at any time.
ITEM 6. EXHIBITS
The following exhibits are included as part of this report by reference:
Exhibit Number | Description | |
Form of RSU Award Agreement (for awards granted on or after March 6, 2019). | ||
Form of PSU Award Agreement (for awards granted on or after March 6, 2019). | ||
Form of SAR Award Agreement (for awards granted on or after March 6, 2019). | ||
Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chairman, President and Chief Executive Officer). | ||
Certification Pursuant to Rule 13a-14(a) or 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). | ||
Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chairman, President and Chief Executive Officer and Chief Financial Officer). | ||
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. | |
36
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 9, 2019 | /s/ PETER F. MINAN | |
Peter F. Minan | |||
Senior Vice President and Chief Financial Officer | |||
(On behalf of the registrant and as Principal Financial Officer) | |||
DATE | May 9, 2019 | /s/ SAMUEL C. FENICE | |
Samuel C. Fenice | |||
Vice President and Corporate Controller | |||
(Principal Accounting Officer) | |||
37