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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2022
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-03970
HARSCO CORPORATION
(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
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 by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
| | | | | | | | |
Class | | Outstanding at April 29, 2022 |
Common stock, par value $1.25 per share | | 79,417,543 |
HARSCO CORPORATION
FORM 10-Q
INDEX
Glossary of Defined Terms
Unless the context requires otherwise, "Harsco," the "Company," "we," "our," or "us" refers to Harsco Corporation on a consolidated basis. The Company also uses several other terms in this Quarterly Report on Form 10-Q, which are further defined below:
| | | | | | | | |
Term | | Description |
AOCI | | Accumulated Other Comprehensive Income (Loss) |
AXC | | The former Harsco Industrial Air-X-Changers business |
CERCLA | | Comprehensive Environmental Response, Compensation, and Liability Act of 1980 |
COVID-19 | | The COVID-19 coronavirus pandemic |
Credit Agreement | | Credit Agreement governing the Senior Secured Credit Facilities |
DEA | | United States Drug Enforcement Agency |
DTSC | | California Department of Toxic Substances Control |
EBITDA | | Earnings before interest, tax, depreciation and amortization |
ESOL | | Stericycle Environmental Solutions business |
FASB | | Financial Accounting Standards Board |
IBORs | | Interbank offered rates |
ICMS | | Type of value-added tax in Brazil |
IKG | | The former Harsco Industrial IKG business |
ISDA | | International Swaps and Derivatives Association |
LIBOR | | London Interbank Offered Rates |
New Term Loan | | $500 million term loan raised in March 2021 under the Senior Secured Credit Facilities, maturing on March 10, 2028 |
Notes | | 5.75% Notes due July 31, 2027 |
OCI | | Other Comprehensive Income (Loss) |
| | |
PA DEP | | Pennsylvania Department of Environmental Protection |
Revolving Credit Facility | | Multi-year revolving credit facility under the Senior Secured Credit Facility, with a facility limit of $700 million |
ROU | | Right of use |
SBB | | Federal railway system of Switzerland |
SCE | | Supreme Council for Environment in Bahrain |
SEC | | Securities and Exchange Commission |
Senior Secured Credit Facilities | | Primary source of borrowings comprised of the Revolving Credit Facility and the New Term Loan |
SPRA | | State Revenue Authorities from the State of São Paulo, Brazil |
| | |
| | |
TSDF | | Treatment, storage, and disposal facility permits issued under the Resource Conservation and Recovery Act |
U.S. GAAP | | Accounting principles generally accepted in the U.S. |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARSCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| | | | | | | | | | | | | | |
(In thousands) | | March 31 2022 | | December 31 2021 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 85,216 | | | $ | 82,908 | |
Restricted cash | | 4,337 | | | 4,220 | |
Trade accounts receivable, net | | 385,871 | | | 377,881 | |
| | | | |
Other receivables | | 26,128 | | | 33,059 | |
Inventories | | 76,854 | | | 70,493 | |
| | | | |
Prepaid expenses | | 32,393 | | | 31,065 | |
Current portion of assets held-for-sale | | 268,590 | | | 265,413 | |
Other current assets | | 13,096 | | | 9,934 | |
Total current assets | | 892,485 | | | 874,973 | |
| | | | |
Property, plant and equipment, net | | 654,765 | | | 653,913 | |
Right-of-use assets, net | | 96,007 | | | 101,576 | |
Goodwill | | 878,935 | | | 883,109 | |
Intangible assets, net | | 393,733 | | | 402,801 | |
| | | | |
| | | | |
Deferred income tax assets | | 18,207 | | | 17,883 | |
Assets held-for-sale | | 66,518 | | | 71,234 | |
Other assets | | 50,809 | | | 48,419 | |
Total assets | | $ | 3,051,459 | | | $ | 3,053,908 | |
LIABILITIES | | | | |
Current liabilities: | | | | |
Short-term borrowings | | $ | 7,292 | | | $ | 7,748 | |
Current maturities of long-term debt | | 17,379 | | | 10,226 | |
Accounts payable | | 189,896 | | | 186,126 | |
| | | | |
Accrued compensation | | 41,780 | | | 48,165 | |
Income taxes payable | | 4,085 | | | 6,378 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Current portion of operating lease liabilities | | 25,055 | | | 25,590 | |
Current portion of liabilities of assets held-for-sale | | 168,412 | | | 161,999 | |
Other current liabilities | | 139,661 | | | 155,159 | |
Total current liabilities | | 593,560 | | | 601,391 | |
Long-term debt | | 1,422,384 | | | 1,359,446 | |
| | | | |
| | | | |
Retirement plan liabilities | | 73,710 | | | 93,693 | |
| | | | |
| | | | |
| | | | |
Operating lease liabilities | | 69,563 | | | 74,571 | |
Liabilities of assets held-for-sale | | 8,326 | | | 8,492 | |
Environmental liabilities | | 27,565 | | | 28,435 | |
Deferred tax liabilities | | 26,832 | | | 33,826 | |
Other liabilities | | 48,424 | | | 48,284 | |
Total liabilities | | 2,270,364 | | | 2,248,138 | |
COMMITMENTS AND CONTINGENCIES | | | | |
HARSCO CORPORATION STOCKHOLDERS’ EQUITY | | | | |
| | | | |
Common stock | | 145,261 | | | 144,883 | |
Additional paid-in capital | | 218,779 | | | 215,528 | |
Accumulated other comprehensive loss | | (547,649) | | | (560,139) | |
Retained earnings | | 1,754,671 | | | 1,794,510 | |
Treasury stock | | (848,254) | | | (846,622) | |
Total Harsco Corporation stockholders’ equity | | 722,808 | | | 748,160 | |
Noncontrolling interests | | 58,287 | | | 57,610 | |
Total equity | | 781,095 | | | 805,770 | |
Total liabilities and equity | | $ | 3,051,459 | | | $ | 3,053,908 | |
See accompanying notes to unaudited condensed consolidated financial statements.
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | |
| | | | March 31 | |
(In thousands, except per share amounts) | | | | | | 2022 | | 2021 | |
Revenues from continuing operations: | | | | | | | | | |
Service revenues | | | | | | $ | 418,435 | | | $ | 414,339 | | |
Product revenues | | | | | | 34,362 | | | 32,926 | | |
Total revenues | | | | | | 452,797 | | | 447,265 | | |
Costs and expenses from continuing operations: | | | | | | | | | |
Cost of services sold | | | | | | 346,357 | | | 329,853 | | |
Cost of products sold | | | | | | 30,662 | | | 27,514 | | |
Selling, general and administrative expenses | | | | | | 69,153 | | | 71,614 | | |
Research and development expenses | | | | | | 56 | | | 157 | | |
| | | | | | | | | |
Other (income) expenses, net | | | | | | (1,179) | | | (991) | | |
Total costs and expenses | | | | | | 445,049 | | | 428,147 | | |
Operating income from continuing operations | | | | | | 7,748 | | | 19,118 | | |
Interest income | | | | | | 644 | | | 547 | | |
Interest expense | | | | | | (15,092) | | | (16,256) | | |
Unused debt commitment fees, amendment fees and loss on extinguishment of debt | | | | | | (532) | | | (5,258) | | |
| | | | | | | | | |
Defined benefit pension income | | | | | | 2,410 | | | 3,934 | | |
Income (loss) from continuing operations before income taxes and equity income | | | | | | (4,822) | | | 2,085 | | |
Income tax benefit (expense) from continuing operations | | | | | | (1,221) | | | (2,101) | | |
Equity income (loss) of unconsolidated entities, net | | | | | | (131) | | | (119) | | |
Income (loss) from continuing operations | | | | | | (6,174) | | | (135) | | |
Discontinued operations: | | | | | | | | | |
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Income (loss) from discontinued businesses | | | | | | (39,097) | | | 3,364 | | |
Income tax benefit (expense) from discontinued businesses | | | | | | 6,591 | | | (1,664) | | |
Income (loss) from discontinued operations, net of tax | | | | | | (32,506) | | | 1,700 | | |
Net income (loss) | | | | | | (38,680) | | | 1,565 | | |
Less: Net income attributable to noncontrolling interests | | | | | | (1,159) | | | (1,430) | | |
Net income (loss) attributable to Harsco Corporation | | | | | | $ | (39,839) | | | $ | 135 | | |
Amounts attributable to Harsco Corporation common stockholders: | |
Income (loss) from continuing operations, net of tax | | | | | | $ | (7,333) | | | $ | (1,565) | | |
Income (loss) from discontinued operations, net of tax | | | | | | (32,506) | | | 1,700 | | |
Net income (loss) attributable to Harsco Corporation common stockholders | | | | | | $ | (39,839) | | | $ | 135 | | |
Weighted-average shares of common stock outstanding | | | | | | 79,363 | | | 79,088 | | |
Basic earnings (loss) per common share attributable to Harsco Corporation common stockholders: | |
Continuing operations | | | | | | $ | (0.09) | | | $ | (0.02) | | |
Discontinued operations | | | | | | (0.41) | | | 0.02 | | |
Basic earnings (loss) per share attributable to Harsco Corporation common stockholders | | | | | | $ | (0.50) | | | $ | — | | |
Diluted weighted-average shares of common stock outstanding | | | | | | 79,363 | | | 79,088 | | |
Diluted earnings (loss) per common share attributable to Harsco Corporation common stockholders: | |
Continuing operations | | | | | | $ | (0.09) | | | $ | (0.02) | | |
Discontinued operations | | | | | | (0.41) | | | 0.02 | | |
Diluted earnings (loss) per share attributable to Harsco Corporation common stockholders | | | | | | $ | (0.50) | | | $ | — | | |
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See accompanying notes to unaudited condensed consolidated financial statements.
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
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| | Three Months Ended |
| | March 31 |
(In thousands) | | 2022 | | 2021 |
Net income (loss) | | $ | (38,680) | | | $ | 1,565 | |
Other comprehensive income (loss): | | | | |
Foreign currency translation adjustments, net of deferred income taxes of $(1,838) and $623 in 2022 and 2021, respectively | | (2,847) | | | (3,296) | |
Net income (loss) on cash flow hedging instruments, net of deferred income taxes of $(330) and $(144) in 2022 and 2021, respectively | | 1,140 | | | 689 | |
Pension liability adjustments, net of deferred income taxes of $(352) and $(338) in 2022 and 2021, respectively | | 13,718 | | | 3,819 | |
Unrealized gain on marketable securities, net of deferred income taxes of $— and $(7) in 2022 and 2021, respectively | | (3) | | | 17 | |
Total other comprehensive income (loss) | | 12,008 | | | 1,229 | |
Total comprehensive income (loss) | | (26,672) | | | 2,794 | |
Comprehensive income attributable to noncontrolling interests | | (677) | | | (364) | |
Comprehensive income (loss) attributable to Harsco Corporation | | $ | (27,349) | | | $ | 2,430 | |
See accompanying notes to unaudited condensed consolidated financial statements.
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | | | | | | | | | | | | | | |
| | Three Months Ended March 31 |
(In thousands) | | 2022 | | 2021 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | (38,680) | | | $ | 1,565 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Depreciation | | 33,604 | | | 32,748 | |
Amortization | | 8,586 | | | 8,967 | |
Deferred income tax (benefit) expense | | (4,275) | | | (3,421) | |
Equity (income) loss of unconsolidated entities, net | | 131 | | | 119 | |
Dividends from unconsolidated entities | | 178 | | | — | |
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Loss on early extinguishment of debt | | — | | | 2,668 | |
Other, net | | 259 | | | 1,128 | |
Changes in assets and liabilities, net of acquisitions and dispositions of businesses: | | | | |
Accounts receivable | | (15,364) | | | (16,446) | |
Income tax refunds receivable, reimbursable to seller | | 7,687 | | | — | |
Inventories | | (4,610) | | | 407 | |
Contract assets | | 4,843 | | | (19,070) | |
Right-of-use assets | | 7,076 | | | 6,768 | |
Accounts payable | | 1,655 | | | (8,592) | |
Accrued interest payable | | (7,393) | | | (7,320) | |
Accrued compensation | | (5,692) | | | (1,541) | |
Advances on contracts | | (7,808) | | | (9,698) | |
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Operating lease liabilities | | (7,063) | | | (6,750) | |
Retirement plan liabilities, net | | (14,519) | | | (19,267) | |
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Other assets and liabilities | | 7,070 | | | 14,562 | |
Net cash used by operating activities | | (34,315) | | | (23,173) | |
Cash flows from investing activities: | | | | |
Purchases of property, plant and equipment | | (32,958) | | | (27,382) | |
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Proceeds from sales of assets | | 5,976 | | | 3,862 | |
Expenditures for intangible assets | | (54) | | | (68) | |
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Net proceeds (payments) from settlement of foreign currency forward exchange contracts | | 1,061 | | | (1,427) | |
Payments for settlements of interest rate swaps | | (1,062) | | | — | |
Other investing activities, net | | 124 | | | 46 | |
Net cash used by investing activities | | (26,913) | | | (24,969) | |
Cash flows from financing activities: | | | | |
Short-term borrowings, net | | 2,051 | | | 575 | |
Current maturities and long-term debt: | | | | |
Additions | | 72,005 | | | 434,873 | |
Reductions | | (2,566) | | | (374,530) | |
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Stock-based compensation - Employee taxes paid | | (1,377) | | | (2,485) | |
Payment of contingent consideration | | (6,915) | | | — | |
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Deferred financing costs | | — | | | (6,525) | |
Other financing activities, net | | — | | | (400) | |
Net cash provided by financing activities | | 63,198 | | | 51,508 | |
Effect of exchange rate changes on cash and cash equivalents, including restricted cash | | 455 | | | (710) | |
Net increase in cash and cash equivalents, including restricted cash | | 2,425 | | | 2,656 | |
Cash and cash equivalents, including restricted cash, at beginning of period | | 87,128 | | | 79,669 | |
Cash and cash equivalents, including restricted cash, at end of period | | $ | 89,553 | | | $ | 82,325 | |
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Supplementary cash flow information: | | | | |
Change in accrual for purchases of property, plant and equipment included in accounts payable | | $ | (745) | | | $ | 1,865 | |
See accompanying notes to unaudited condensed consolidated financial statements.
HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
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| | Harsco Corporation Stockholders’ Equity | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | |
(In thousands, except share amounts) | | Issued | | Treasury | | | | | | Total |
Balances, December 31, 2020 | | $ | 144,288 | | | $ | (843,230) | | | $ | 204,078 | | | $ | 1,797,759 | | | $ | (645,741) | | | $ | 56,245 | | | $ | 713,399 | |
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Net income | | | | | | | | 135 | | | | | 1,430 | | | 1,565 | |
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Total other comprehensive income (loss), net of deferred income taxes of $134 | | | | | | | | | | 2,295 | | | (1,066) | | | 1,229 | |
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Stock appreciation rights exercised, net 3,842 shares | | 9 | | | (70) | | | (9) | | | | | | | | | (70) | |
Vesting of restricted stock units and other stock grants, net 144,967 shares | | 312 | | | (1,850) | | | (312) | | | | | | | | | (1,850) | |
Vesting of performance share units, net 69,127 shares | | 155 | | | (1,032) | | | (155) | | | | | | | | | (1,032) | |
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Amortization of unearned portion of stock-based compensation, net of forfeitures | | | | | | 3,342 | | | | | | | | | 3,342 | |
Balances, March 31, 2021 | | 144,764 | | | (846,182) | | | 206,944 | | | 1,797,894 | | | (643,446) | | | 56,609 | | | 716,583 | |
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| | Harsco Corporation Stockholders’ Equity | | | | |
(In thousands, except share amounts) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | |
| Issued | | Treasury | | | | | | Total |
Balances, December 31, 2021 | | $ | 144,883 | | | $ | (846,622) | | | $ | 215,528 | | | $ | 1,794,510 | | | $ | (560,139) | | | $ | 57,610 | | | $ | 805,770 | |
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Net income | | | | | | | | (39,839) | | | | | 1,159 | | | (38,680) | |
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Total other comprehensive income (loss), net of deferred income taxes of $(2,520) | | | | | | | | | | 12,490 | | | (482) | | | 12,008 | |
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Vesting of restricted stock units and other stock grants, net 176,253 shares | | 378 | | | (1,632) | | | (378) | | | | | | | | | (1,632) | |
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Amortization of unearned portion of stock-based compensation, net of forfeitures | | | | | | 3,629 | | | | | | | | | 3,629 | |
Balances, March 31, 2022 | | 145,261 | | | (848,254) | | | 218,779 | | | 1,754,671 | | | (547,649) | | | 58,287 | | | 781,095 | |
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See accompanying notes to unaudited condensed consolidated financial statements.
HARSCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation
The Company has prepared these unaudited condensed consolidated financial statements in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the SEC. Accordingly, the unaudited condensed consolidated financial statements do not include all information and disclosure required by U.S. GAAP for annual financial statements. The December 31, 2021 Condensed Consolidated Balance Sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2021 audited consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
2. Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in 2022:
On January 1, 2022, the Company adopted changes issued by the FASB which simplified the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. The adoption of these changes did not have a material impact on the Company's condensed consolidated financial statements.
On January 1, 2022, the Company adopted changes issued by the FASB which improve the transparency of government assistance received by entities. Other than expanded annual disclosures, the adoption of these changes did not have a material impact on the Company's consolidated financial statements.
The following accounting standard has been issued and becomes effective for the Company at a future date:
In March 2020, the FASB issued changes that provide companies with optional guidance to ease the potential accounting burden associated with transitioning from reference rates that are expected to be discontinued. In response to the concerns about risks of IBORs and, particularly, the risk of cessation of LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. The changes provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued additional clarification changes. The changes can be adopted no later than December 31, 2022 with early adoption permitted. Management does not believe these changes will have a material impact on the Company's consolidated financial statements.
3. Dispositions
Harsco Rail Segment
In November 2021, the Company announced its intention to sell the Rail business. The sales process was ongoing during the first quarter of 2022. The former Harsco Rail Segment has historically been a separate reportable segment with primary operations in the United States, Europe and Asia Pacific.
The former Harsco Rail Segment's balance sheet positions as of March 31, 2022 and December 31, 2021 are presented as Assets held-for-sale and Liabilities of assets held-for-sale in the Condensed Consolidated Balance Sheets and are summarized as follows:
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(in thousands) | | March 31 2022 | | December 31 2021 |
Trade accounts receivable, net | | $ | 41,546 | | | $ | 33,689 | |
Other receivables | | 4,615 | | | 4,740 | |
Inventories | | 102,094 | | | 103,560 | |
Current portion of contract assets | | 94,360 | | | 94,597 | |
Other current assets | | 26,427 | | | 25,442 | |
Property, plant and equipment, net | | 40,009 | | | 39,524 | |
Right-of-use assets, net | | 2,664 | | | 3,108 | |
Goodwill | | 13,026 | | | 13,026 | |
Intangible assets, net | | 2,990 | | | 3,081 | |
Deferred income tax assets | | 6,153 | | | 6,064 | |
Other assets | | 1,224 | | | 6,432 | |
Total Rail assets included in Assets held-for-sale | | $ | 335,108 | | | $ | 333,263 | |
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Accounts payable | | $ | 42,874 | | | $ | 46,076 | |
Accrued compensation | | 3,023 | | | 2,171 | |
Current portion of operating lease liabilities | | 1,456 | | | 1,619 | |
Current portion of advances on contracts | | 53,732 | | | 62,401 | |
Other current liabilities | | 67,327 | | | 49,732 | |
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Operating lease liabilities | | 1,474 | | | 1,775 | |
Deferred tax liabilities | | 5,953 | | | 5,736 | |
Other liabilities | | 898 | | | 981 | |
Total Rail liabilities included in Liabilities of assets held-for-sale | | $ | 176,737 | | | $ | 170,491 | |
The results of the former Harsco Rail Segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the three months ended March 31, 2022, and 2021. Certain key selected financial information included in Income (loss) from discontinued operations, net of tax for the former Harsco Rail Segment is as follows:
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| | Three Months Ended March 31 |
(In thousands) | | 2022 | | 2021 |
Amounts directly attributable to the former Harsco Rail Segment: |
Service revenues | | $ | 6,710 | | | $ | 10,109 | |
Product revenues (a) | | 44,640 | | | 71,481 | |
Cost of services sold | | 4,675 | | | 4,653 | |
Cost of products sold | | 68,981 | | | 59,062 | |
Income (loss) from discontinued businesses | | (35,895) | | | 5,155 | |
Additional amounts allocated to the former Harsco Rail Segment: |
Selling, general and administrative expenses (b) | | $ | 1,649 | | | $ | — | |
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(a) The decrease in product revenues for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 is principally due to the liquidated damages and penalties on certain long-term contracts, as discussed below.
(b) The Company has allocated directly attributable transaction costs to discontinued operations.
The Company has retained corporate overhead expenses previously allocated to the former Harsco Rail Segment of $1.0 million for each of the three months ended March 31, 2022, and 2021 as part of Selling, general and administrative expenses on the Condensed Consolidated Statements of Operations.
The Company's former Harsco Rail Segment is currently manufacturing highly-engineered equipment under large long-term fixed-price contracts with the SBB, the infrastructure manager for most of the railway in the U.K. ("Network Rail"), and the national railway company in Germany ("Deutsche Bahn"). As disclosed previously, in the fourth quarter of 2021, the Company recognized an estimated forward loss provision of $33.4 million related to these contracts. In the first quarter of 2022, the Company encountered continued delays and additional costs in the build of the machines. For the Network Rail contracts, the Company encountered additional supply chain delays in the build of the initial machine, and there were further changes to the production schedule based on the manufacturing experience gained from assembling the first unit during the quarter which had a cascading effect on the delivery schedule of remaining machines. As a result, the Company recorded a $24.2 million forward estimated loss provision for additional estimated contractual liquidated damages. The Company continues to negotiate with Network Rail regarding a reduction to these liquidated damages, which could result in additional favorable or unfavorable adjustments in future periods. For the Deutsche Bahn contract, on March 8, 2022 a European-based supplier of critical components to the project indicated it would be significantly late on the delivery of these components to the project, which has the impact of delaying the overall delivery schedule for the project. As a result, the Company recorded an additional $7.4
million estimated forward loss provision due principally to the estimated contractual penalties that would be triggered by this delay. For the second SBB contract, the Company recorded an additional $3.5 million forward estimated loss provision due to additional supply chain delays and cost overruns. The estimated forward loss provision represents the Company's best estimate based on currently available information. It is possible that the Company's overall estimate of liquidated damages, penalties and costs to complete these contracts may change, which would result in an additional estimated forward loss provision at such time.
The first contract with SBB is complete, and the second contract is 79% complete as of March 31, 2022. The contracts with Network Rail and Deutsche Bahn are 45% and 22% complete, respectively, as of March 31, 2022.
The following is selected financial information included on the Condensed Consolidated Statements of Cash Flows attributable to the former Harsco Rail Segment:
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| | Three Months Ended March 31 |
(In thousands) | | 2022 | | 2021 |
Non-cash operating items | | | | |
Depreciation and amortization | | $ | — | | | $ | 1,296 | |
Cash flows from investing activities | | | | |
Purchases of property, plant and equipment | | 506 | | | 365 | |
4. Accounts Receivable and Note Receivable
Accounts receivable consist of the following:
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(In thousands) | | March 31 2022 | | December 31 2021 |
Trade accounts receivable | | $ | 392,198 | | | $ | 385,143 | |
Less: Allowance for expected credit losses | | (6,327) | | | (7,262) | |
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Trade accounts receivable, net | | $ | 385,871 | | | $ | 377,881 | |
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Other receivables (a) | | $ | 26,128 | | | $ | 33,059 | |
(a) Other receivables include employee receivables, insurance receivable, tax claims and refunds and other miscellaneous items not included in Trade accounts receivable, net.
The provision for expected credit losses related to trade accounts receivable was as follows: | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31 |
(In thousands) | | | | | | 2022 | | 2021 |
Provision for expected credit losses and doubtful accounts related to trade accounts receivable | | | | | | $ | 325 | | | $ | 654 | |
At March 31, 2022, $6.5 million of the Company's trade accounts receivable were past due by twelve months or more, with $3.5 million of this amount reserved. Collection of the remaining balance is still ultimately expected.
In January 2020 the Company sold IKG for $85.0 million including cash and a note receivable, subject to post-closing adjustments. The note receivable from the buyer has a face value of $40.0 million, bearing interest at 2.50%, that is paid in kind and matures on January 31, 2027. Any unpaid principal, along with any accrued but unpaid interest is payable at maturity. Prepayment is required in case of a change in control or a percentage of excess cash flow, as defined in the note receivable agreement. Because there are no scheduled payments under the terms of the note receivable, the balance is not classified as current as of March 31, 2022 and is included in the caption Other assets on the Condensed Consolidated Balance Sheet. The initial fair value of the note receivable was $34.3 million which was calculated using an average of various discounted cash flow scenarios based on anticipated timing of repayments (Level 3) and was a non-cash transaction. The note receivable is subsequently measured at amortized cost. Key inputs into the valuation model include: projected timing and amount of cash flows, pro forma debt rating, option-adjusted spread and U.S. Treasury spot rate. At March 31, 2022 the amortized cost of the note receivable was $31.4 million, compared with a fair value of $31.8 million.
| | | | | | | | | | | | | | |
(In thousands) | | March 31 2022 | | December 31 2021 |
Note receivable | | $ | 31,425 | | | $ | 31,025 | |
5. Inventories
Inventories consist of the following:
| | | | | | | | | | | | | | |
(In thousands) | | March 31 2022 | | December 31 2021 |
Finished goods | | $ | 7,856 | | | $ | 8,323 | |
Work-in-process | | 5,963 | | | 5,393 | |
| | | | |
Raw materials and purchased parts | | 22,276 | | | 21,188 | |
Stores and supplies | | 40,759 | | | 35,589 | |
Total inventories | | $ | 76,854 | | | $ | 70,493 | |
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
| | | | | | | | | | | | | | |
(In thousands) | | March 31 2022 | | December 31 2021 |
Land | | $ | 73,071 | | | $ | 73,067 | |
Land improvements | | 16,934 | | | 16,970 | |
Buildings and improvements | | 224,746 | | | 221,236 | |
Machinery and equipment | | 1,532,183 | | | 1,507,214 | |
Uncompleted construction | | 59,612 | | | 63,816 | |
Gross property, plant and equipment | | 1,906,546 | | | 1,882,303 | |
Less: Accumulated depreciation | | (1,251,781) | | | (1,228,390) | |
Property, plant and equipment, net | | $ | 654,765 | | | $ | 653,913 | |
In the third quarter of 2020, a customer of the Harsco Environmental Segment in China ceased steel making operations at its steel mill site in order to relocate the operations to a new site, as a result of a government mandate to improve environmental conditions of the area. The Company will continue to provide services to the same customer at the new site. The net book value of the idled equipment associated with the previous location is approximately $20 million. The customer has entered into an agreement with the government where it will receive compensation for the losses the customer has incurred as a result of the forced shutdown. The Company has continued discussions with the customer regarding compensation, which are expected to be protracted. While the customer has initially indicated that they will not provide compensation, the Company and the customer continue to discuss and the Company is evaluating its legal position. In addition, there may be other avenues of pursuing recovery, including seeking relief directly from the local government. At this point, considering the ongoing discussions with the customer, and other avenues, the Company believes it will recover the book value of the equipment and thus does not believe it has an asset impairment as of March 31, 2022. However, the Company will continue to evaluate changes in facts and circumstances and record any impairment charge when and if indicated.
7. Leases
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | March 31 |
(In thousands) | | | | | | 2022 | | 2021 |
Finance leases: | | | | | | | | |
Amortization expense | | | | | | $ | 978 | | | $ | 475 | |
Interest on lease liabilities | | | | | | 183 | | | 102 | |
Operating leases | | | | | | 8,069 | | | 7,896 | |
| | | | | | | | |
Variable and short-term lease expense | | | | | | 13,343 | | | 12,102 | |
Sublease income | | | | | | (2) | | | (49) | |
Total lease expense from continuing operations | | | | | | $ | 22,571 | | | $ | 20,526 | |
As of March 31, 2022, the Company had additional operating leases for property and equipment that had not yet commenced with estimated operating lease obligations of approximately $16 million to be recognized upon anticipated lease commencement in the second and third quarters of 2022.
8. Goodwill and Other Intangible Assets
The Company tests for goodwill impairment annually, or more frequently if indicators of impairment exist, or if a decision is made to dispose of a business. The Company performs its annual goodwill impairment test as of October 1 and monitors for triggering events on an ongoing basis. The Company determined that, as of March 31, 2022, no interim goodwill impairment testing was necessary. However, a continued economic downturn, including continued cost inflation and labor shortages could impact the Company's future projected cash flows used to estimate fair value, and/or result in a sustained decrease in the Company's share price, which could result in an impairment charge in a future period.
Because of the lower-than-expected results for the Altek Group of the Harsco Environmental Segment for 2021 due to the timing of customer orders, the Company tested Altek's asset group's recoverability in the fourth quarter of 2021 and no impairment was recorded. The long-lived assets (other than goodwill) of the Altek Group within the Harsco Environmental Segment primarily consist of intangible assets which have a carrying value of approximately $36 million at March 31, 2022. The Company has not identified any triggering events for the Altek asset group in the first quarter of 2022. However, if actual results prove inconsistent with the Company’s assumptions and judgments of the projected cash flows, it could result in impairment of the Altek intangible assets in future periods.
9. Debt and Credit Agreements
On February 22, 2022, the Company amended its Senior Credit Facilities to reset the levels of the net debt to consolidated adjusted EBITDA ratio covenant. As a result of this amendment, the net debt to consolidated adjusted EBITDA ratio covenant was set at 5.75 for the quarter ending March 31, 2022, and then decreases quarterly by 0.25 until reaching 4.00 for the quarter ending December 31, 2023 and thereafter. In addition, upon closing on the divestiture of the former Harsco Rail Segment, the net debt to consolidated adjusted EBITDA ratio covenant will decrease by an additional 0.25, provided, however, it will not go below 4.00.
During the three months ended March 31, 2022 and 2021, the Company recognized total expenses of $0.5 million and $5.3 million, respectively, related to the amended Senior Secured Credit Facilities in the caption Unused debt commitment fees, amendment fees and loss on extinguishment of debt on the Condensed Consolidated Statements of Operations.
Long-term debt consists of the following: | | | | | | | | | | | | | | |
(In thousands) | | March 31 2022 | | December 31 2021 |
| | | | |
Senior Secured Credit Facilities: | | | | |
New Term Loan | | $ | 496,250 | | | $ | 497,500 | |
| | | | |
| | | | |
Revolving Credit Facility | | 434,000 | | | 362,000 | |
5.75% Notes, due July 31, 2027 | | 500,000 | | | 500,000 | |
Other financing payable (including finance leases) in varying amounts | | 27,047 | | | 28,389 | |
Total debt obligations | | 1,457,297 | | | 1,387,889 | |
Less: deferred financing costs | | (17,534) | | | (18,217) | |
Total debt obligations, net of deferred financing costs | | 1,439,763 | | | 1,369,672 | |
Less: current maturities of long-term debt | | (17,379) | | | (10,226) | |
Long-term debt | | $ | 1,422,384 | | | $ | 1,359,446 | |
10. Employee Benefit Plans
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended |
| | March 31 |
Defined Benefit Pension Plan Income | | U.S. Plans | | International Plans |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | | $ | — | | | $ | |