Acquisitions and Dispositions

6 Months Ended

Jun. 30, 2019

Clean Earth

On June 28, 2019, the Company acquired 100% of the outstanding stock of Clean Earth, one of the largest U.S. providers of environmental services for a variety of contaminated materials including soils, dredged material and hazardous waste, for an enterprise valuation of approximately $625 million on a cash free, debt free basis. The Company transferred approximately $628 million of cash consideration, subject to post-closing adjustments, and agreed to reimburse the sellers for any usage of assumed net operating losses in a post-closing period for up to five years, the present value of which is estimated at approximately $8 million. Clean Earth provides solutions that analyze, treat, document and recycle waste streams generated by multiple end-markets such as infrastructure, chemicals, aerospace and defense, non-public/private development, medical, industrial and dredging. Clean Earth treatment processes include thermal desorption, dredged material stabilization, bioremediation, physical treatment/screen and chemical fixation. Clean Earth operates 27 permitted facilities in the U.S. and maintains a portfolio of more than 200 scarce and difficult-to-replicate permits with a 100% permit renewal success rate to date. In addition, Clean Earth owns 9 Resource Conservation and Recovery Act (RCRA) Part B Permits which include 6 Treatment, Storage and Disposal Facility (TSDF) permits that enable the Company to process complex and highly recurring hazardous waste streams. Clean Earth is expected to generate approximately $300 million of full-year revenue in 2019.

The fair value recorded for the assets acquired and liabilities assumed for Clean Earth is as follows:



(In millions)	Preliminary Valuation June 28, 2019
Cash and cash equivalents (a)	$	42.8
Trade accounts receivable, net	63.7
Other receivables	0.8
Other current assets	8.7
Property, plant and equipment	75.6
Right-of-use assets	14.4
Goodwill	313.8
Intangible assets	261.1
Other assets	4.0
Accounts payable	(23.0		)
Acquisition consideration payable (a)	(39.2		)
Other current liabilities	(20.5		)
Net deferred taxes liabilities	(51.2		)
Operating lease liabilities	(11.1		)
Other liabilities (b)	(11.9		)
Total identifiable net assets of Clean Earth	$	628.0


(a)	Acquisition consideration payable represents a portion of the cash consideration not paid out until July 2019.


(b)	Includes $2.8 million of fair value related to a contingent consideration liability resulting from a prior Clean Earth acquisition.

The goodwill is attributable to strategic benefits, including enhanced operational and financial scale and product and market diversification that the Company expects to realize. The Company expects $16.3 million of goodwill to be deductible for income tax purposes.

The following table details the preliminary valuation of identifiable intangible assets and amortization periods for Clean Earth:



(Dollars in millions)	Weighted-Average Amortization Period	Preliminary Valuation June 28, 2019
Permits and rights	18 years	$	176.1
Customer relationships	6 years	33.4
Air rights	Usage based	25.6
Trade names	11.5 years	26.0
Total identifiable intangible assets of Clean Earth		$	261.1

The Company valued the identifiable intangible assets using an income-based approach that utilized either the multi-period excess earnings method or the relief from royalty method. The purchase price allocation for Clean Earth is not final and the fair value of intangible assets and goodwill may vary significantly from those reflected in the Company's condensed consolidated financial statements at June 30, 2019.

The three and six months ended June 30, 2019 include Clean Earth direct acquisition costs of $12.0 million and $12.5 million, respectively, which are included in Selling, general and administrative expenses in the Company’s Condensed Consolidated Statements of Operations. In addition to the acquisition-related costs reflected in the Company’s Condensed Consolidated Statements of Operations, the debt issuance costs associated with the issuance of debt to fund the acquisition are reflected, net of amortization subsequent to the acquisition date, as Long-term debt on the Company’s Condensed Consolidated Balance Sheets. The Company's acquisition of Clean Earth closed on June 28, 2019 and revenues and operating income for the three and six months ended June 30, 2019 for the Harsco Clean Earth Segment are immaterial.

The pro forma information below gives effect to the Clean Earth acquisition as if it had been completed on January 1, 2018 (the “pro forma period”). The pro forma information is not necessarily indicative of the Company’s results of operations had the acquisition been completed on the above date, nor is it necessarily indicative of future results. The pro forma information does not reflect any cost savings from operating efficiencies or synergies that could result from the acquisition and does not reflect the additional revenue opportunities following the acquisition. The pro forma information below includes adjustments to reflect additional depreciation and amortization expense based on the estimated fair value and useful lives of intangible assets and fixed assets acquired; includes additional interest expense of approximately $9.2 million and $18.2 million for the three and six months ended June 30, 2019, respectively and $9.0 million and $17.9 million for the three and six months ended

June 30, 2018, respectively, on the acquisition related borrowings used to finance the Clean Earth acquisition; and excludes certain directly attributable transaction costs and historic Clean Earth interest expense. These pro forma adjustments are subject to change as additional analysis is performed. The values assigned to the assets acquired and liabilities assumed are based on preliminary valuations and are subject to change as the Company obtains additional information during the measurement period.



	Three Months Ended				Six Months Ended
	June 30				June 30
(In millions)	2019		2018		2019		2018
Pro forma revenues	$	420.0	$	410.1	$	813.5	$	792.8
Pro forma net income (including discontinued operations)	24.8		37.8		39.1		43.0

Altek

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 $57.4 million, inclusive of 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 Environmental 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.

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.

The fair value recorded for the assets acquired and liabilities assumed for Altek is as follows:



	Final Valuation
(In millions)	June 30 2018			Measurement Period Adjustments (b)		March 31 2019
Cash and cash equivalents	$	1.7		$	—	$	1.7
Net working capital	(1.5		)	0.2		(1.3		)
Property, plant and equipment	3.3			—		3.3
Intangible assets	52.5			0.2		52.7
Goodwill	20.9			1.6		22.5
Net deferred tax liabilities	(8.5		)	—		(8.5		)
Other liabilities	(0.3		)	—		(0.3		)
Total identifiable net assets of Altek	$	68.1		$	2.0	$	70.1


(b)	The measurement period adjustments did not have a material impact on the Company's previously reported operating results.

The following table reflects the changes in the fair value of contingent consideration:



(In thousands)	Contingent Consideration
Balance at December 31, 2018	$	8,420
Fair value adjustment (c)	(3,511		)
Foreign currency translation	(68		)
Balance at June 30, 2019	$	4,841


(c)	The fair value adjustment resulted from the decreased probability of Altek achieving cumulative financial and non-financial performance goals within the required time frame. This amount is recorded in Other expenses, net on the Company's Condensed Consolidated Statements of Operations.

Harsco Industrial Segment

On May 8, 2019, the Company entered into a definitive agreement to sell AXC to Chart Industries, Inc. for $592 million in cash, subject to post-closing adjustments. The Company completed the sale of AXC on July 1, 2019. The final value of the transaction, transaction expenses and the anticipated net gain on the sale are being finalized. Also, in May 2019, the Company announced the intent to divest the remainder of the businesses in the Harsco Industrial Segment, IKG and PK. The sale of these businesses is expected to occur within one year. The disposal of the former Harsco Industrial Segment represents a strategic shift and accelerates the transformation of the Company's portfolio of businesses into a leading provider of environmental solutions and services.

The former Harsco Industrial Segment's balance sheet positions as of June 30, 2019 and December 31, 2018 are presented as Assets held-for-sale and Liabilities of assets held-for-sale in the Company’s Condensed Consolidated Balance Sheets and are summarized as follows:



(in thousands)	June 30 2019		December 31 2018
Trade accounts receivable, net	$	53,789	$	44,786
Other receivables	333		412
Inventories	20,407		16,926
Current portion of contract assets	15,352		12,124
Other current assets	1,558		984
Property, plant and equipment, net	39,337		37,107
Right-of-use assets, net	17,822		—
Goodwill	6,839		6,839
Intangible assets, net	10,058		10,618
Deferred income tax assets	498		563
Other assets	189		204
Total assets	$	166,182	$	130,563
Accounts payable	$	21,415	$	24,426
Accrued compensation	4,988		7,385
Current portion of advances on contracts	2,792		1,910
Current portion of operating lease liabilities	2,872		—
Other current liabilities	6,010		5,689
Operating lease liabilities	15,180		—
Other liabilities	369		555
Total liabilities	$	53,626	$	39,965

The Harsco Industrial Segment has historically been a separate reportable segment with primary operations in North America and Latin America. In accordance with U.S. GAAP, the results of the former Harsco Industrial Segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the three and six months ended June 30, 2019 and 2018. Certain key selected financial information included in net income from discontinued operations for the former Harsco Industrial Segment is as follows:



	Three Months Ended				Six Months Ended
	June 30				June 30
(In millions)	2019		2018		2019		2018
Amounts directly attributable to the former Harsco Industrial Segment:
Total revenues	$	116,796	$	92,065	$	234,182	$	175,663
Cost of products sold	85,319		66,640		173,014		127,365
Income before income taxes	9,882		11,251		24,074		21,075
Additional amounts allocated to the former Harsco Industrial Segment:
Selling, general and administrative expenses (d)	$	3,527	$	—	$	3,527	$	—
Interest expense (e)	7,005		4,295		11,237		8,257

(d) The Company has allocated directly attributable transaction costs to discontinued operations.

(e) The Company has allocated interest expense, including a portion of the amount reclassified into income for the Company's interest rate swaps, amortization of deferred financing costs, and the impact of interest rate swap terminations, all of which were directly associated with the mandatory repayment of the Company's Term Loan Facility, resulting from the AXC disposal, as part of discontinued operations.

The Company has retained corporate overhead expenses previously allocated to the Harsco Industrial Segment of $1.4 million and $2.8 million for both the three and six months ended June 30, 2018 and 2019, respectively, as part of Selling, general and administrative expenses on the Company's Condensed Consolidated Statements of Operations.

The following is selected financial information included on the Company's Condensed Consolidated Statements of Cash Flows attributable to the former Harsco Industrial Segment:



	Six Months Ended
	June 30
(In millions)	2019		2018
Non-cash operating items
Depreciation and amortization	$	3,301	$	3,737
Cash flows from investing activities
Purchases of property, plant and equipment	5,221		4,003