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
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
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.
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
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 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.
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.
In August 2018, the FASB issued changes which modify the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The changes remove the requirements to disclose: amounts in accumulated other comprehensive income (loss) expected to be recognized as components of net periodic benefit cost over the next fiscal year; the amount and timing of plan assets expected to be returned to the employer; and the effects of a one-percentage point change in assumed health care cost trend rates. The update also requires disclosure of an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The changes become effective for the Company on January 1, 2021. Management does not believe these changes will have a material impact on its 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.
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 (a)
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
(a) 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, December 31, 2018
$
8,420
Fair value adjustment (b)
369
Foreign currency translation
186
Balance, March 31, 2019
$
8,975
(b) These amounts are recorded in the caption Other expenses, net on the Condensed Consolidated Statements of Operations.
4. Accounts Receivable and Inventories
Accounts receivable consist of the following:
(In thousands)
March 31 2019
December 31 2018
Trade accounts receivable
$
301,439
$
295,847
Less: Allowance for doubtful accounts
(4,644
)
(4,634
)
Trade accounts receivable, net
$
296,795
$
291,213
Other receivables (a)
$
51,130
$
54,182
(a) Other receivables include insurance claims, employee receivables, tax claims and other miscellaneous items not included in Trade accounts receivable, net.
The provision (benefit) for doubtful accounts related to trade accounts receivable was as follows:
Three Months Ended
March 31
(In thousands)
2019
2018
Provision (benefit) for doubtful accounts related to trade accounts receivable
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.
The Company recognized $4.7 million and $7.9 million of revenues for the contracts with SBB at zero margin, on an over time basis, utilizing a cost-to-cost method for the three months endedMarch 31, 2019 and 2018, respectively. For the three months endedMarch 31, 2019 and 2018, consolidated product revenue gross margins were not significantly impacted by the revenue recognized under the SBB contracts. The Company has substantially completed the first contract and is approximately 30% complete on the second contract with SBB as of March 31, 2019.
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
(In thousands)
March 31 2019
December 31 2018
Land
$
10,515
$
10,621
Land improvements
15,932
16,156
Buildings and improvements
190,715
191,072
Machinery and equipment
1,566,706
1,538,166
Uncompleted construction
42,493
37,713
Gross property, plant and equipment
1,826,361
1,793,728
Less: Accumulated depreciation
(1,342,913
)
(1,323,828
)
Property, plant and equipment, net
$
483,448
$
469,900
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.
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.
The components of lease expense were as follows:
Three Months Ended
(In thousands)
March 31 2019
Finance leases:
Amortization expense
$
310
Interest on lease liabilities
4
Operating leases
4,608
Short-term leases
4,669
Variable lease expense
314
Total lease expense
$
9,905
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
$
4,670
Cash flows from financing activities - Finance leases
363
Right-of-use assets obtained in exchange for lease obligations:
Operating leases (a)
$
53,750
Finance leases
373
(a) Includes ROU assets of $53.0 million that were recorded upon adoption at January 1, 2019.
Supplemental balance sheet information related to leases was as follows:
(In thousands)
March 31 2019
Operating Leases:
Operating lease right-of-use assets
$
49,584
Other current liabilities
12,936
Operating lease liabilities
37,037
Finance Leases:
Property, plant and equipment, net
$
1,286
Current maturities of long-term debt
1,054
Long-term debt
945
Supplemental additional information related to leases is as follows:
March 31 2019
Other information:
Weighted average remaining lease term - Operating leases (in years)
4.42
Weighted average remaining lease term - Finance leases (in years)
2.01
Weighted average discount rate - Operating leases
6.9
%
Weighted average discount rate - Finance leases
4.1
%
Maturities of lease liabilities were as follows:
(In thousand)
Operating Leases
Finance
Leases
Year Ending December 31st:
2019 (excluding the three months ended March 31, 2019)
$
12,210
$
1,027
2020
12,943
631
2021
9,775
295
2022
7,563
117
2023
6,254
16
After 2023
21,576
2
Total lease payments
70,321
2,088
Less imputed interest
(20,348
)
(89
)
Total
$
49,973
$
1,999
As previously disclosed, under then in effect lease accounting in accordance with U.S. GAAP, future minimum payments under operating leases with noncancelable terms were as follows as of December 31, 2018:
(In thousands)
2019
$
13,985
2020
12,204
2021
9,448
2022
7,706
2023
6,201
After 2023
28,442
As of March 31, 2019, the Company has an additional operating lease for property that has not yet commenced with an estimated ROU asset and lease liability of approximately $5.0 million to be recognized upon the anticipated lease commencement in October 2019.
The following table reflects the changes in carrying amounts of goodwill by segment for the three months endedMarch 31, 2019:
(In thousands)
Harsco Metals & Minerals Segment
Harsco Industrial Segment
Harsco Rail
Segment
Consolidated
Totals
Balance at December 31, 2018
$
391,687
$
6,839
$
13,026
$
411,552
Foreign currency translation
897
—
—
897
Balance at March 31, 2019
$
392,584
$
6,839
$
13,026
$
412,449
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 the 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, 2019, no interim goodwill impairment testing was necessary.
Intangible assets included in the caption, Intangible assets, net, on the Condensed Consolidated Balance Sheets consist of the following:
