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10-Q
HARSCO CORP filed this Form 10-Q on 11/08/2017
Entire Document
 
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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 September 30, 2017
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11878839&doc=11
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
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 October 31, 2017
Common stock, par value $1.25 per share
 
80,444,425




HARSCO CORPORATION
FORM 10-Q
INDEX
 
 
 
Page
 
 
 
 
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I — FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

HARSCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
 
September 30
2017
 
December 31
2016
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
59,544

 
$
69,831

Restricted cash
 
5,819

 
2,048

Trade accounts receivable, net
 
279,232

 
236,554

Other receivables
 
22,647

 
21,053

Inventories
 
227,008

 
187,681

Other current assets
 
35,825

 
33,108

Total current assets
 
630,075

 
550,275

Property, plant and equipment, net
 
479,141

 
490,255

Goodwill
 
399,916

 
382,251

Intangible assets, net
 
39,340

 
41,567

Deferred income tax assets
 
108,754

 
106,311

Other assets
 
13,767

 
10,679

Total assets
 
$
1,670,993

 
$
1,581,338

LIABILITIES
 
 

 
 

Current liabilities:
 
 

 
 

Short-term borrowings
 
$
5,668

 
$
4,259

Current maturities of long-term debt
 
15,569

 
25,574

Accounts payable
 
123,290

 
107,954

Accrued compensation
 
50,367

 
46,658

Income taxes payable
 
8,668

 
4,301

Insurance liabilities
 
11,616

 
11,850

Advances on contracts and other customer advances
 
126,019

 
117,329

Other current liabilities
 
144,649

 
109,748

Total current liabilities
 
485,846

 
427,673

Long-term debt
 
602,673

 
629,239

Insurance liabilities
 
24,097

 
25,265

Retirement plan liabilities
 
305,330

 
319,597

Other liabilities
 
43,029

 
42,001

Total liabilities
 
1,460,975

 
1,443,775

COMMITMENTS AND CONTINGENCIES
 


 


HARSCO CORPORATION STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock
 

 

Common stock
 
141,093

 
140,625

Additional paid-in capital
 
178,287

 
172,101

Accumulated other comprehensive loss
 
(581,551
)
 
(606,722
)
Retained earnings
 
1,191,205

 
1,150,688

Treasury stock
 
(761,998
)
 
(760,391
)
Total Harsco Corporation stockholders’ equity
 
167,036

 
96,301

Noncontrolling interests
 
42,982

 
41,262

Total equity
 
210,018

 
137,563

Total liabilities and equity
 
$
1,670,993

 
$
1,581,338


See accompanying notes to unaudited condensed consolidated financial statements.

3


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30
 
September 30
 
(In thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
 
Revenues from continuing operations:
 
 

 
 

 
 
 
 
 
Service revenues
 
$
246,144

 
$
239,057

 
$
738,059

 
$
714,177

 
Product revenues
 
138,509

 
128,730

 
414,033

 
376,824

 
Total revenues
 
384,653

 
367,787

 
1,152,092

 
1,091,001

 
Costs and expenses from continuing operations:
 
 

 
 

 
 
 
 
 
Cost of services sold
 
193,314

 
192,812

 
574,905

 
574,137

 
Cost of products sold
 
96,469

 
93,499

 
296,062

 
312,131

 
Selling, general and administrative expenses
 
61,221

 
50,249

 
171,968

 
150,553

 
Research and development expenses
 
936

 
910

 
3,096

 
2,748

 
Other (income) expenses, net
 
(1,237
)
 
1,741

 
1,729

 
12,111

 
Total costs and expenses
 
350,703

 
339,211

 
1,047,760

 
1,051,680

 
Operating income from continuing operations
 
33,950

 
28,576

 
104,332

 
39,321

 
Interest income
 
610

 
673

 
1,615

 
1,760

 
Interest expense
 
(12,123
)
 
(13,756
)
 
(36,181
)
 
(39,924
)
 
Change in fair value to the unit adjustment liability and loss on dilution and sale of equity method investment
 

 
(44,788
)
 

 
(58,494
)
 
Income (loss) from continuing operations before income taxes and equity income
 
22,437

 
(29,295
)
 
69,766

 
(57,337
)
 
Income tax expense
 
(8,270
)
 
(5,079
)
 
(25,757
)
 
(14,913
)
 
Equity income of unconsolidated entities, net
 

 
3,205

 

 
5,686

 
Income (loss) from continuing operations
 
14,167

 
(31,169
)
 
44,009

 
(66,564
)
 
Discontinued operations:
 
 

 
 

 
 
 
 
 
Income (loss) on disposal of discontinued business
 
(578
)
 
(592
)
 
(538
)
 
1,788

 
Income tax benefit (expense) related to discontinued business
 
207

 
217

 
193

 
(661
)
 
Income (loss) from discontinued operations
 
(371
)
 
(375
)
 
(345
)
 
1,127

 
Net income (loss)
 
13,796

 
(31,544
)
 
43,664

 
(65,437
)
 
Less: Net income attributable to noncontrolling interests
 
(498
)
 
(1,443
)
 
(2,438
)
 
(4,592
)
 
Net income (loss) attributable to Harsco Corporation
 
$
13,298

 
$
(32,987
)
 
$
41,226

 
$
(70,029
)
 
Amounts attributable to Harsco Corporation common stockholders:
 
Income (loss) from continuing operations, net of tax
 
$
13,669

 
$
(32,612
)
 
$
41,571

 
$
(71,156
)
 
Income (loss) from discontinued operations, net of tax
 
(371
)
 
(375
)
 
(345
)
 
1,127

 
Net income (loss) attributable to Harsco Corporation common stockholders
 
$
13,298

 
$
(32,987
)
 
$
41,226

 
$
(70,029
)
 
Weighted-average shares of common stock outstanding
 
80,637

 
80,379

 
80,519

 
80,318

 
Basic earnings (loss) per common share attributable to Harsco Corporation common stockholders:
 
Continuing operations
 
$
0.17

 
$
(0.41
)
 
$
0.52

 
$
(0.89
)
 
Discontinued operations
 

 

 

 
0.01

 
Basic earnings (loss) per share attributable to Harsco Corporation common stockholders
 
$
0.16

(a)
$
(0.41
)

$
0.51

(a)
$
(0.87
)
(a)
Diluted weighted-average shares of common stock outstanding
 
83,136

 
80,379

 
82,753

 
80,318

 
Diluted earnings (loss) per common share attributable to Harsco Corporation common stockholders:
 
Continuing operations
 
$
0.16

 
$
(0.41
)
 
$
0.50

 
$
(0.89
)
 
Discontinued operations
 

 

 

 
0.01

 
Diluted earnings (loss) per share attributable to Harsco Corporation common stockholders
 
$
0.16

 
$
(0.41
)

$
0.50

 
$
(0.87
)
(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 (LOSS) (Unaudited)
 
 
Three Months Ended
 
 
September 30
(In thousands)
 
2017
 
2016
Net income (loss)
 
$
13,796

 
$
(31,544
)
Other comprehensive income (loss):
 
 

 
 

Foreign currency translation adjustments, net of deferred income taxes of $1,747 and $(16,992) in 2017 and 2016, respectively
 
16,005

 
9,613

Net gain on cash flow hedging instruments, net of deferred income taxes of $21 and $(813) in 2017 and 2016, respectively
 
2,199

 
1,609

Pension liability adjustments, net of deferred income taxes of $(523) and $254 in 2017 and 2016, respectively
 
(7,324
)
 
10,712

Unrealized gain on marketable securities, net of deferred income taxes of $(3) and $(9) in 2017 and 2016, respectively
 
5

 
14

Total other comprehensive income
 
10,885

 
21,948

Total comprehensive income (loss)
 
24,681

 
(9,596
)
Less: Comprehensive income attributable to noncontrolling interests
 
(1,200
)
 
(1,448
)
Comprehensive income (loss) attributable to Harsco Corporation
 
$
23,481

 
$
(11,044
)
 
 
Nine Months Ended
 
 
September 30
(In thousands)
 
2017
 
2016
Net income (loss)
 
$
43,664

 
$
(65,437
)
Other comprehensive income (loss):
 
 

 
 

Foreign currency translation adjustments, net of deferred income taxes of $3,598 and $(27,680) in 2017 and 2016, respectively
 
42,391

 
6,840

Net gain (loss) on cash flow hedging instruments, net of deferred income taxes of $888 and $(398) in 2017 and 2016, respectively
 
1,471

 
(942
)
Pension liability adjustments, net of deferred income taxes of $(1,567) and $(1,002) in 2017 and 2016, respectively
 
(16,467
)
 
43,007

Unrealized gain on marketable securities, net of deferred income taxes of $(6) and $(7) in 2017 and 2016, respectively
 
11

 
11

Total other comprehensive income
 
27,406

 
48,916

Total comprehensive income (loss)
 
71,070

 
(16,521
)
Less: Comprehensive income attributable to noncontrolling interests
 
(4,674
)
 
(4,179
)
Comprehensive income (loss) attributable to Harsco Corporation
 
$
66,396

 
$
(20,700
)

See accompanying notes to unaudited condensed consolidated financial statements.

5


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
Nine Months Ended
 
 
September 30
(In thousands)
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net income (loss)
 
$
43,664

 
$
(65,437
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Depreciation
 
91,519

 
98,284

Amortization
 
5,989

 
10,003

Change in fair value to the unit adjustment liability and loss on dilution and sale of equity method investment
 

 
58,494

Deferred income tax expense (benefit)
 
2,018

 
(2,015
)
Equity income of unconsolidated entities, net
 

 
(5,686
)
Dividends from unconsolidated entities
 
93

 
16

Contract estimated forward loss provision for Harsco Rail Segment
 

 
40,050

Other, net
 
2,567

 
1,911

Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
(26,633
)
 
4,055

Inventories
 
(30,112
)
 
(24,295
)
Accounts payable
 
9,045

 
(10,740
)
Accrued interest payable
 
287

 
6,245

Accrued compensation
 
979

 
4,481

Advances on contracts and other customer advances
 
(6,534
)
 
15,352

Retirement plan liabilities, net
 
(17,890
)
 
(17,151
)
Other assets and liabilities
 
7,913

 
(8,721
)
Net cash provided by operating activities
 
82,905

 
104,846

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(64,131
)
 
(49,946
)
Proceeds from sales of assets
 
10,746

 
7,178

Purchases of businesses, net of cash acquired
 

 
(26
)
Proceeds from sale of equity investment
 

 
165,640

Other investing activities, net
 
4,450

 
7,058

Net cash provided (used) by investing activities
 
(48,935
)
 
129,904

 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Short-term borrowings, net
 
1,915

 
(1,527
)
Current maturities and long-term debt:
 
 

 
 

Additions
 
26,000

 
50,835

Reductions
 
(65,245
)
 
(275,768
)
Cash dividends paid on common stock
 

 
(4,105
)
Dividends paid to noncontrolling interests
 
(1,783
)
 
(1,702
)
Purchase of noncontrolling interests
 
(3,412
)
 
(4,731
)
Stock-based compensation - Employee taxes paid
 
(1,607
)
 
(91
)
Proceeds from cross-currency interest rate swap termination
 

 
16,625

Deferred pension underfunding payment to unconsolidated affiliate
 

 
(20,640
)
Deferred financing costs
 
(42
)
 
(946
)
Other financing activities, net
 
(370
)
 

Net cash used by financing activities
 
(44,544
)
 
(242,050
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents, including restricted cash
 
4,058

 
7,455

Net increase (decrease) in cash and cash equivalents, including restricted cash
 
(6,516
)
 
155

Cash and cash equivalents, including restricted cash, at beginning of period
 
71,879

 
79,756

Cash and cash equivalents, including restricted cash, at end of period
 
$
65,363

 
$
79,911

 
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, January 1, 2016
 
$
140,503

 
$
(760,299
)
 
$
170,699

 
$
1,236,355

 
$
(515,688
)
 
$
39,233

 
$
310,803

Net income (loss)
 
 

 
 

 
 

 
(70,029
)
 
 

 
4,592

 
(65,437
)
Cash dividends declared:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

   Noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
(1,702
)
 
(1,702
)
Total other comprehensive income (loss), net of deferred income taxes of $(29,087)
 
 
 
 
 
 
 
 
 
49,329

 
(413
)
 
48,916

Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
(5,128
)
 
 
 
 
 
397

 
(4,731
)
Vesting of restricted stock units and other stock grants, net 80,598 shares
 
122

 
(92
)
 
(595
)
 
 

 
 

 
 

 
(565
)
Amortization of unearned portion of stock-based compensation, net of forfeitures
 
 

 
 

 
5,740

 
 

 
 

 
 

 
5,740

Balances, September 30, 2016
 
$
140,625

 
$
(760,391
)
 
$
170,716

 
$
1,166,326

 
$
(466,359
)
 
$
42,107

 
$
293,024

 
 
Harsco Corporation Stockholders’ Equity
 
 
 
 
(In thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
 
 
Issued
 
Treasury
 
 
 
 
 
Total
Balances, January 1, 2017
 
$
140,625

 
$
(760,391
)
 
$
172,101

 
$
1,150,688

 
$
(606,722
)
 
$
41,262

 
$
137,563

Adoption of new accounting standard (See Note 2)
 
 
 
 
 
1,106

 
(709
)
 
 
 
 
 
397

Net income
 
 

 
 

 
 

 
41,226

 
 

 
2,438

 
43,664

Cash dividends declared:
 
 

 
 

 
 

 
 

 
 

 


 


Noncontrolling interests
 
 

 
 

 
 

 
 

 
 

 
(1,783
)
 
(1,783
)
Purchase of subsidiary shares from noncontrolling interest
 
 
 
 
 
(2,242
)
 
 
 
 
 
(1,170
)
 
(3,412
)
Total other comprehensive income, net of deferred income taxes of $2,913
 
 
 
 
 
 
 
 
 
25,171

 
2,235

 
27,406

Stock Appreciation Rights exercised, net 8,965 shares
 
16

 
(63
)
 
(16
)
 
 
 
 
 
 
 
(63
)
Vesting of restricted stock units and other stock grants, net 260,497 shares
 
452

 
(1,544
)
 
(452
)
 
 

 
 

 
 

 
(1,544
)
Amortization of unearned portion of stock-based compensation, net of forfeitures
 
 

 
 

 
7,790

 
 

 
 

 
 

 
7,790

Balances, September 30, 2017
 
$
141,093

 
$
(761,998
)
 
$
178,287

 
$
1,191,205

 
$
(581,551
)
 
$
42,982

 
$
210,018

 
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 based on Securities and Exchange Commission (the “SEC”) rules that permit reduced disclosure for interim periods.  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.  The December 31, 2016 Condensed Consolidated Balance Sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2016 audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. ("U.S. GAAP") for an annual report.  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, 2016.
Operating results and cash flows for the three and nine months ended September 30, 2017 are not indicative of the results that may be expected for the year ending December 31, 2017.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.

Restricted Cash
The Company had restricted cash of $5.8 million and $2.0 million at September 30, 2017 and December 31, 2016, respectively, and the restrictions are primarily related to collateral provided for certain guarantees of the Company’s performance.


2.     Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in 2017:
On January 1, 2017, the Company adopted changes issued by the Financial Accounting Standards Board ("FASB") related to the simplification of the measurement of inventory. The changes required entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the previous guidance under which an entity must measure inventory at the lower of cost or market. The changes did not apply to inventories that are measured using either the last-in, first-out method or the retail inventory method. The adoption of these changes did not have an impact on the Company's condensed consolidated financial statements.
On January 1, 2017, the Company adopted changes issued by the FASB that required deferred tax assets and liabilities to be classified as non-current in a classified statement of financial position. The changes applied to all entities that present a classified statement of financial position. The requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount was not affected. The adoption of these changes resulted in the Company reclassifying approximately $27 million from reported current assets to Deferred income tax assets based on balances at December 31, 2016.
On January 1, 2017, the Company adopted changes issued by the FASB amending the accounting for stock-based compensation and requiring excess tax benefits and shortfalls to be recognized as a component of income tax expense rather than equity. These changes also required excess tax benefits and shortfalls to be presented as an operating activity on the Condensed Consolidated Statement of Cash Flows and allowed an entity to make an accounting policy election to either estimate expected forfeitures or to account for them as they occur. These changes resulted in the Company recording the cumulative impact of approximately $1 million pre-tax on January 1, 2017 to retained earnings, related to the Company electing to not estimate forfeitures on stock compensation plans but rather recognize forfeitures as they occur. The inclusion of excess tax benefits and shortfalls as a component of the Company’s income tax expense will increase volatility within the provision for income taxes as the amount of excess tax benefits or deficiencies from stock-based compensation awards are dependent on the Company's stock price at the date an award vests. The impact to income tax expense resulting from this change was tax expense of $0.1 million and a tax benefit of $0.4 million for the three and nine months ended September 30, 2017, respectively.




8


During the second quarter of 2017, the Company early-adopted changes issued by the FASB that added and clarified guidance related to the classification, presentation and disclosure of restricted cash in the statement of cash flows. The adoption of these changes did not have an impact on the Company's condensed consolidated statement of cash flows for the current and prior periods.
The following accounting standards have been issued and become effective for the Company at a future date:
In May 2014, the FASB issued changes related to the recognition of revenue from contracts with customers. The changes clarify the principles for recognizing revenue and develop a common revenue standard. The core principle of the changes is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The changes also require additional disclosures related to revenue recognition. In July 2015, the FASB deferred the effective date of these changes by one year, but will permit entities to adopt one year earlier. During 2016, the FASB clarified the implementation guidance for principal versus agent considerations; identifying performance obligations; accounting for intellectual property licenses; collectability; non-cash consideration; and the presentation of sales and other similar taxes. The FASB also introduced practical expedients related to disclosures of remaining performance obligations and other technical corrections and improvements. These changes become effective for the Company on January 1, 2018. Management has determined that the most significant impact will be with regard to the timing of revenue recognition associated with the air-cooled heat exchanger business of the Harsco Industrial Segment and certain equipment sales in the Harsco Rail Segment. The Company currently recognizes revenues on such arrangements upon the completion of the efforts associated with these arrangements, but as a result of these changes, revenue from these arrangements will be recognized over time and increase revenue in earlier periods. Management has determined that there will not be any significant impact with regards to the timing of revenue recognition associated with the Harsco Metals & Minerals Segment or the industrial grating and fencing or heat transfer businesses of the Harsco Industrial Segment.  Management is currently quantifying the impact of these changes, including the impact of income taxes, training those with responsibilities related to revenue recognition and evaluating impacts on the Company's internal controls over financial reporting. The Company will adopt the standard using the modified retrospective method of implementation with the cumulative effect of initially applying the changes recognized in retained earnings at the date of initial application and continues to progress with regard to the quantification of the above identified differences.
In February 2016, the FASB issued changes in 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 changes become effective for the Company on January 1, 2019. Management is currently evaluating the impact of these changes on its 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 March 2017, the FASB issued changes to how employers that sponsor defined benefit pension plans and other postretirement plans present the net periodic pension cost ("NPPC") in the statement of operations. An employer will be required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of NPPC are required to be presented in the statement of operations separately from the service cost component and outside of the subtotal of income from operations. The changes also allow only the service cost component to be eligible for capitalization. The changes become effective for the Company on
January 1, 2018. Management is currently evaluating the impact of these changes on its condensed consolidated financial statements.

In May 2017, the FASB issued changes to clarify when revisions to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The changes require modification accounting only in circumstances when

9


the terms or conditions result in changes to the fair value, vesting conditions or classification of the award as an equity instrument or a liability. The changes become effective for the Company on January 1, 2018. Management does not believe these changes will impact its condensed consolidated financial statements.

In August 2017, the FASB issued changes 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. The amendments in this update should be applied to hedging relationships existing on the date of adoption, which includes a cumulative-effect adjustment to eliminate any ineffectiveness recorded to accumulated other comprehensive income or loss with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the fiscal year in which adoption occurred. Presentation and disclosure amendments are required to be applied prospectively. The changes become effect for the Company on January 1, 2019. Management is currently evaluating the impact of these changes on its condensed consolidated financial statements.


3.    Accounts Receivable and Inventories
Accounts receivable consist of the following:
(In thousands)
 
September 30
2017
 
December 31
2016
Trade accounts receivable
 
$
284,397

 
$
248,354

Less: Allowance for doubtful accounts
 
(5,165
)
 
(11,800
)
Trade accounts receivable, net
 
$
279,232

 
$
236,554

 
 
 
 
 
Other receivables (a)
 
$
22,647

 
$
21,053

(a) Other receivables include insurance claim receivables, employee receivables, tax claim receivables and other miscellaneous receivables not included in Trade accounts receivable, net. 
The decrease in the Allowance for doubtful accounts during 2017 is due to the write-off of previously reserved trade accounts receivable balances.
The provision for doubtful accounts related to trade accounts receivable was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
(In thousands)
 
2017
 
2016
 
2017
 
2016
Provision for doubtful accounts related to trade accounts receivable
 
$
4,087

 
$
(93
)
 
$
5,262

 
$
84

The increase in the Provision for doubtful accounts for the three months ended September 30, 2017 is due principally to the write-off of certain pre-administration accounts receivable balances for one of the Company's customers in Australia.

Inventories consist of the following:
(In thousands)
 
September 30
2017
 
December 31
2016
Finished goods
 
$
28,765

 
$
26,464

Work-in-process
 
32,364

 
22,815

Contracts-in-process
 
79,279

 
54,044

Raw materials and purchased parts
 
62,188

 
61,450

Stores and supplies
 
24,412

 
22,908

Total inventories
 
$
227,008

 
$
187,681

Contracts-in-process consist of the following:
(In thousands)
 
September 30
2017
 
December 31
2016
Contract costs accumulated to date
 
$
119,322

 
$
90,276

Estimated forward loss provisions for contracts-in-process (b)
 
(40,043
)
 
(36,232
)
Contracts-in-process (c)
 
$
79,279

 
$
54,044

(b)
To the extent that the estimated forward loss provision exceeds accumulated contract costs it is included in the caption Other current liabilities on the Condensed Consolidated Balance Sheets. At September 30, 2017 and December 31, 2016, this amount totaled $3.4 million and $6.7 million, respectively.

10


(c) At September 30, 2017 and December 31, 2016, the Company has $111.6 million and $101.1 million, respectively, of customer advances related to contracts-in-process. These amounts are included in the caption Advances on contracts and other customer advances on the Condensed Consolidated Balance Sheets.

The Company recognized an 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 in Costs of products sold on the Condensed Consolidated Statements of Operations, of which $40.1 million was recognized during the nine months ended September 30, 2016. There was no additional estimated forward loss provision recognized, excluding the impact of foreign currency fluctuation, for the three and nine months ended September 30, 2017. 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.

The Company recognized less than $1 million in revenue for the contracts with SBB for the three and nine months ended September 30, 2017 under the percentage-of-completion (units-of-delivery) method and accordingly, there was an insignificant impact on the Company's gross margins and results of operations for this period. The Company did not recognize any revenue for these contracts for 2016. The Company has not yet recognized any revenue associated with the major equipment deliveries under the contracts with SBB. The majority of the equipment deliveries and related revenue recognition under these contracts are expected through 2020.


4. Equity Method Investments

In November 2013, the Company sold the Company's Harsco Infrastructure Segment into a strategic venture with Clayton, Dubilier & Rice ("CD&R") as part of a transaction that combined the Harsco Infrastructure Segment with Brand Energy & Infrastructure Services, Inc., which CD&R simultaneously acquired (the "Infrastructure Transaction"). As a result of the Infrastructure Transaction, the Company retained an equity interest in Brand Energy & Infrastructure Service, Inc. and Subsidiaries ("Brand" or the "Infrastructure strategic venture") which was accounted for as an equity method investment in accordance with U.S. GAAP.
 
As part of the Infrastructure Transaction, the Company was required to make a quarterly payment to the Company's partner in the Infrastructure strategic venture, either (at the Company's election) (i) in cash, with total payments to equal approximately $22 million per year on a pre-tax basis (approximately $15 million per year after-tax), or (ii) in kind, through the transfer of approximately 3% of the Company's ownership interest in the Infrastructure strategic venture on an annual basis (the "unit adjustment liability"). The Company recognized the change in fair value to the unit adjustment liability each period until the Company was no longer required to make these payments or chose not to make these payments. The change in fair value to the unit adjustment liability was a non-cash expense.

In March 2016, the Company elected not to make the quarterly cash payments to the Company's partner in the Infrastructure strategic venture for the remainder of 2016. Instead, the Company transferred approximately 3% of its ownership interest in satisfaction of the Company's 2016 obligation related to the unit adjustment liability. As a result of not making the quarterly cash payments for 2016, the Company's ownership interest in the Infrastructure strategic venture decreased by approximately 3% and the value of the unit adjustment liability was updated to reflect this change. Accordingly, the book value of the Company's equity method investment in Brand decreased by $29.4 million and the unit adjustment liability decreased by
$19.1 million. The resulting net loss of $10.3 million was recognized in Change in fair value to the unit adjustment liability and loss on dilution and sale of equity method investment on the Condensed Consolidated Statement of Operations. This net loss was a non-cash expense.

For the three and nine months ended September 30, 2016 the Company recognized $1.3 million and $4.7 million, respectively, of change in fair value to the unit adjustment liability exclusive of the fair value adjustment resulting from the decision not to make the quarterly payments in 2016, in the Condensed Consolidated Statement of Operations caption Change in fair value to the unit adjustment liability and loss on dilution and sale of equity method investment.

In September 2016, the Company sold its remaining, approximately 26% interest in Brand. Accordingly, there has been no activity related to Brand subsequent to the date of sale. In exchange for the Company's interest, (i) the Company received $145 million in cash, net, and (ii) the requirement for the Company to fund certain obligations to Brand through 2018 were satisfied, the present value of which equaled $20.6 million. In addition, the Company received $1.4 million in accrued but unpaid fees, rent and expenses from the Brand. As a result of the sale, the Company’s obligation to make quarterly payments related to the unit adjustment liability under the terms of a limited partnership agreement that governed the operation of the strategic venture terminated. The Company recognized a loss on the sale of its equity interest in Brand in the amount of $43.5 million which

11


was reflected in the Condensed Consolidated Statement of Operations caption Change in fair value to unit adjustment liability and loss on dilution and sale of equity method investment.
The Company’s proportionate share of Brand's net income was recorded one quarter in arrears.  Accordingly, Brand’s results of operations for the three and nine months ended June 30, 2016 were utilized by the Company to record its proportional share of income in the three and nine months ended September 30, 2016.  There was no equity income recorded for Brand for the three and nine months ended September 30, 2017 due to the sale of the interest in Brand.  Brand's results of operations are summarized as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30
 
June 30
(In thousands)
 
2016
 
2016
Net revenues
 
$
782,415

 
$
2,333,561

Gross profit
 
169,456

 
499,005

Net income attributable to Brand Energy & Infrastructure Services, Inc. and Subsidiaries
 
12,378

 
20,756

Harsco's equity in income of Brand
 
3,205

 
5,686



5.     Property, Plant and Equipment
Property, plant and equipment consists of the following:
(In thousands)
 
September 30
2017
 
December 31
2016
Land
 
$
10,965

 
$
10,606

Land improvements
 
15,567

 
15,032

Buildings and improvements
 
195,739

 
185,657

Machinery and equipment
 
1,606,633

 
1,525,156

Uncompleted construction
 
23,490

 
21,035

Gross property, plant and equipment
 
1,852,394

 
1,757,486

Less: Accumulated depreciation
 
(1,373,253
)
 
(1,267,231
)
Property, plant and equipment, net
 
$
479,141

 
$
490,255



6.     Goodwill and Other Intangible Assets
The following table reflects the changes in carrying amounts of goodwill by segment for the nine months ended September 30, 2017:
(In thousands)
 
Harsco Metals  & Minerals Segment
 
Harsco Industrial Segment
 
Harsco Rail
Segment
 
Consolidated
Totals
Balance at December 31, 2016
 
$
362,386

 
$
6,839

 
$
13,026

 
$
382,251

Foreign currency translation
 
17,665

 

 

 
17,665

Balance at September 30, 2017
 
$
380,051

 
$
6,839

 
$
13,026

 
$
399,916

The Company’s 2016 annual goodwill impairment testing did not result in any impairment of the Company’s goodwill. The fair value of the Harsco Metals & Minerals Segment exceeded the carrying value by approximately 12%.  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 September 30, 2017, no interim goodwill impairment testing was necessary. 

12


Intangible assets included in the caption, Intangible assets, net, on the Condensed Consolidated Balance Sheets consist of the following:
 
 
September 30, 2017
 
December 31, 2016
(In thousands)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer related
 
$
152,423

 
$
119,870

 
$
146,840

 
$
112,610

Patents
 
5,832

 
5,697

 
5,729

 
5,534

Technology related
 
26,151

 
26,151

 
25,687

 
25,634

Trade names
 
8,316

 
4,767

 
8,306

 
4,529

Other
 
8,805

 
5,702

 
8,512

 
5,200

Total
 
$
201,527

 
$
162,187

 
$
195,074

 
$
153,507

Amortization expense for intangible assets was as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
(In thousands)
 
2017
 
2016
 
2017
 
2016
Amortization expense for intangible assets
 
$
1,269

 
$
2,053

 
$
3,868

 
$
6,208


The estimated amortization expense for the next five fiscal years based on current intangible assets is as follows:
(In thousands)
 
2017
 
2018
 
2019
 
2020
 
2021
Estimated amortization expense (a)
 
$
5,000

 
$
4,750

 
$
4,500

 
$
4,250

 
$
4,000

(a) These estimated amortization expense amounts do not reflect the potential effect of future foreign currency exchange fluctuations.


7.  Employee Benefit Plans
 
 
Three Months Ended
 
 
September 30
Defined Benefit Pension Plans Net Periodic Pension Cost
 
U.S. Plans
 
International Plans
(In thousands)
 
2017
 
2016
 
2017
 
2016
Service costs
 
$
942

 
$
945

 
$
426

 
$
405

Interest costs
 
2,469

 
2,545

 
5,843

 
6,542

Expected return on plan assets
 
(3,552
)
 
(3,601
)
 
(10,632
)
 
(10,475
)
Recognized prior service costs
 
8

 
16

 
48

 
44

Recognized loss
 
1,425

 
1,373

 
4,130

 
2,923

Settlement/curtailment losses
 

 
223

 

 

Defined benefit pension plans net periodic pension cost (income)
 
$
1,292

 
$
1,501

 
$
(185
)
 
$
(561
)
 
 
Nine Months Ended
 
 
September 30
Defined Benefit Pension Plans Net Periodic Pension Cost
 
U.S. Plans
 
International Plans
(In thousands)
 
2017
 
2016
 
2017
 
2016
Service costs
 
$
2,825

 
$
2,837

 
$
1,243

 
$
1,214

Interest costs
 
7,408

 
7,635

 
17,349

 
20,649

Expected return on plan assets
 
(10,656
)
 
(10,803
)
 
(31,571
)
 
(33,157
)
Recognized prior service costs
 
24

 
47

 
139

 
133

Recognized loss
 
4,276

 
4,117

 
12,260

 
9,283

Settlement/curtailment losses
 

 
223

 

 

Defined benefit pension plans net periodic pension cost (income)
 
$
3,877

 
$
4,056

 
$
(580
)
 
$
(1,878
)
 
 
Three Months Ended
 
Nine Months Ended
Company Contributions
 
September 30
 
September 30
(In thousands)
 
2017
 
2016
 
2017
 
2016
Defined benefit pension plans (U.S.)
 
$
4,112

 
$
471

 
$
5,054

 
$
1,411

Defined benefit pension plans (International)
 
3,038

 
3,170

 
14,338

 
16,222

Multiemployer pension plans
 
498

 
494

 
1,481

 
1,520

Defined contribution pension plans
 
3,278

 
2,291

 
8,306

 
7,593


13


The Company's estimate of expected contributions to be paid during the remainder of 2017 for the U.S. and international defined benefit pension plans are $0.8 million and $3.2 million, respectively.

8.     Income Taxes 

Income tax expense related to continuing operations for the three and nine months ended September 30, 2017 was $8.3 million and $25.8 million, respectively. Income tax expense related to continuing operations for the three and nine months ended
September 30, 2016 was $5.1 million and $14.9 million, respectively.

An income tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, based on technical merits, including resolutions of any related appeals or litigation processes. The reserve for uncertain tax positions at September 30, 2017 was $4.9 million, including interest and penalties.  Within the next twelve months, it is reasonably possible that $0.3 million of unrecognized income tax benefits will be recognized upon settlement of tax examinations and the expiration of various statutes of limitations.


9.   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 waste 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.  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.

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. A large number 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 September 30, 2017, 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 $25 million.  Any change in the aggregate amount since the Company’s last Annual Report on Form 10-K for the year ended December 31, 2016 is due to an increase in assessed interest and statutorily mandated legal fees for the period, as well as foreign currency translation.
Another ICMS tax case involving the SPRA refers to the tax period from January 2002 to December 2003, and has not yet reached the judicial phase. The aggregate amount assessed by the tax authorities in August 2005 was $7.9 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 $1.9 million, with penalty and interest assessed through that date increasing such amount by an additional $6.0 million.  All such amounts include the effect of foreign currency translation.

14


The Company continues to believe that it is not probable that it will incur a loss for these assessments by the SPRA. The Company also continues to believe that sufficient coverage for these claims exists as a result of the Company’s customer’s indemnification obligations and such customer’s pledge of assets in connection with the October 2009 notice, as required by Brazilian law.
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 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.

The Company is continuing to review all known labor claims and as of September 30, 2017 and December 31, 2016, the Company has established reserves of $9.2 million and $7.9 million, respectively, on the Company's Condensed Consolidated Balance Sheets for amounts considered to be probable and estimable. As the Company continues to evaluate these claims and takes actions to address them, the amount of established reserves may be impacted.

Customer Disputes
The Company may, in the normal course of business, become involved in commercial disputes with subcontractors or customers.

During the first quarter of 2015, a rail grinder manufactured by the Company's Harsco Rail Segment and operated by a subcontractor caught fire, causing a customer to incur monetary damages.  In August 2017, the Company reached a mutually agreed upon settlement with the customer whereby the Company (1) will make a net payment of $5.4 million to the customer; (2) received ownership of the underlying equipment; and (3) was released from all claims and potential claims.  Based on the evaluation of the terms of the settlement, this settlement did not have a material impact on the Company’s results of operations.

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 these 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 $106 million in property damages and approximately $289 million in 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, both as to liability for the accident and the amount of the claimed damages. As a result, the Company believes the situation will not result in a probable loss. 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 of any such liability that might ultimately be incurred in the above action.

U.K. Health and Safety Executive Matter
In the third quarter of 2016, a subsidiary in the Company’s Harsco Metals & Minerals Segment, along with one of its customers, was named as a co-defendant in an action brought by the U.K. Health and Safety Executive in the U.K. Crown Court Sitting at Kingston-Upon-Hull. In September 2017, the U.K. Health and Safety Executive withdrew its case against the Company, ending the Company’s involvement in these proceedings.




15


Compliance Matter
The Company recently began an internal investigation, with the assistance of outside counsel, after it became aware of allegations involving an employee and an agent of the Harsco Rail subsidiary in China (“Harsco Rail China”). During this investigation, which remains ongoing, the Company learned about certain payments that potentially violate the Foreign Corrupt Practices Act. Revenues attributed to Harsco Rail China were approximately 2% of the Company’s consolidated revenues for each of the past two years and through the third quarter of this year.

The Company has voluntarily self-reported its initial findings to the Securities and Exchange Commission (the “SEC”) and the U.S. Department of Justice (the “DOJ”) and intends to fully cooperate with these agencies in their review. Based on information known to date, we believe the amounts of the potential improper payments are not material to our consolidated financial statements. Any determination that our operations or activities were not in compliance with existing laws or regulations could result in the imposition of fines and penalties. No provision with respect to this matter has been made in the Company’s consolidated financial statements. At this time, the Company cannot predict the outcome or impact of its investigation or the reviews by the SEC and the DOJ. However, based on information available at this time, we do not believe any potential liability would be material to our consolidated financial position, although an amount recorded, if any, could be material to the results of operations for the period in which it may be recorded.

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 September 30, 2017, there were 17,150 pending asbestos personal injury actions filed against the Company.  Of those actions, 16,752 were filed in the New York Supreme Court (New York County), 111 were filed in other New York State Supreme Court Counties and 287 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 September 30, 2017, 16,721 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 31 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.
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 September 30, 2017, the Company has obtained dismissal in 27,931 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

16


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.
Insurance liabilities are recorded when it is probable that a liability has been incurred for a particular event and the amount of loss associated with the event can be reasonably estimated. Insurance reserves have been estimated based primarily upon actuarial calculations and reflect the undiscounted estimated liabilities for ultimate losses, including claims incurred but not reported. Inherent in these estimates are assumptions that are based on the Company's history of claims and losses, a detailed analysis of existing claims with respect to potential value, and current legal and legislative trends. If actual claims differ from those projected by management, changes (either increases or decreases) to insurance reserves may be required and would be recorded through income in the period the change was determined. When a recognized liability is covered by third-party insurance, the Company records an insurance claim receivable to reflect the covered liability. Insurance claim receivables are included in Other receivables on the Company's Condensed Consolidated Balance Sheets. See Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional information on Accrued insurance and loss reserves.

10.  Reconciliation of Basic and Diluted Shares
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
(In thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Income (loss) from continuing operations attributable to Harsco Corporation common stockholders
 
$
13,669

 
$
(32,612
)
 
$
41,571

 
$
(71,156
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
 
80,637

 
80,379

 
80,519

 
80,318

Dilutive effect of stock-based compensation
 
2,499

 

 
2,234

 

Weighted-average shares outstanding - diluted
 
83,136

 
80,379

 
82,753

 
80,318

 
 
 
 
 
 
 
 
 
Earnings (loss) from continuing operations per common share, attributable to Harsco Corporation common stockholders:
Basic
 
$
0.17

 
$
(0.41
)
 
$
0.52

 
$
(0.89
)
 
 
 
 
 
 
 
 
 
Diluted
 
$
0.16

 
$
(0.41
)
 
$
0.50

 
$
(0.89
)

The following average outstanding stock-based compensation units were not included in the computation of diluted earnings (loss) per share because the effect was antidilutive:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30
 
September 30
(In thousands)
 
2017
 
2016
 
2017
 
2016
Restricted stock units
 

 
922

 

 
770

Stock options
 
55

 
90

 
55

 
90

Stock appreciation rights
 
526

 
1,567

 
918

 
1,432

Performance share units
 

 
801

 
212

 
649



11.   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.  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.

17


The fair value of outstanding derivative contracts recorded as assets and liabilities on the Condensed Consolidated Balance Sheets was as follows:
 
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
September 30, 2017
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
Foreign currency exchange forward contracts
 
Other current assets
 
$
2,673

 
Other current liabilities
 
$
92

Cross-currency interest rate swaps
 
Other current assets
 
110

 

 

Interest rate swaps
 

 

 
Other current liabilities
 
197

Interest rate swaps
 
Other assets
 
92

 
Other liabilities
 
2,773

Total derivatives designated as hedging instruments
 
 
 
$
2,875

 
 
 
$
3,062

Derivatives not designated as hedging instruments:
Foreign currency exchange forward contracts
 
Other current assets
 
$
572

 
Other current liabilities
 
$
22,698

 
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
December 31, 2016
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
Foreign currency exchange forward contracts
 
Other current assets
 
$
473

 
Other current liabilities
 
$
166

Cross-currency interest rate swaps
 
Other current assets
 
514

 

 

Total derivatives designated as hedging instruments
 
 
 
$
987

 
 
 
$
166

Derivatives not designated as hedging instruments:
Foreign currency exchange forward contracts
 
Other current assets
 
$
4,459

 
Other current liabilities
 
$
3,372

All of the Company's derivatives are recorded in 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 did not result in a net asset or net liability at either September 30, 2017 or December 31, 2016.
The effect of derivative instruments on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income (Loss), was as follows:
Derivatives Designated as Hedging Instruments
(In thousands)
 
Amount 
Recognized in Other
Comprehensive
Income  (“OCI”)  on Derivative -
Effective  Portion
 
Location of Amount Reclassified
from Accumulated
OCI into Income -
Effective Portion
 
Amount
Reclassified  from
Accumulated OCI into  Income -
Effective  Portion
 
Location of Amount Recognized  in Income on  Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
 
Amount  Recognized  in Income  on Derivative - Ineffective  Portion and  Amount
Excluded from
Effectiveness  Testing
 
Three Months Ended September 30, 2017:
Foreign currency exchange forward contracts
 
$
2,333

 

 
$

 
 
 
$

 
Interest rate swaps
 
(335
)
 
 
 

 
 
 

 
Cross-currency interest rate swaps
 
(72
)
 
Interest expense
 
252

 
Cost of services and products sold
 
(103
)
(a)
 
 
$
1,926

 
 
 
$
252

 
 
 
$
(103
)
 
Three Months Ended September 30, 2016:
Foreign currency exchange forward contracts
 
$
2,378

 

 
$

 

 
$

 
Cross-currency interest rate swaps
 
(210
)
 
Interest expense
 
254

 
Cost of services and products sold
 
(232
)
(a)
 
 
$
2,168

 
 
 
$
254

 
 
 
$
(232
)
 

18


(In thousands)
 
Amount
Recognized in  OCI  on Derivative -
Effective  Portion
 
Location Amount
Reclassified
from Accumulated
OCI into Income -
Effective Portion
 
Amount
Reclassified  from
Accumulated  OCI into  Income -
Effective  Portion
 
Location of Amount Recognized  in Income on  Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
 
Amount  Recognized  in Income  on Derivative - Ineffective  Portion and  Amount
Excluded from
Effectiveness  Testing
 
Nine Months Ended September 30, 2017:
Foreign currency forward exchange contracts
 
$
3,096

 
Product revenues / Cost of services and products sold
 
$
(185
)
 
 
 
$

 
Interest rate swaps
 
(2,878
)
 
 
 

 
 
 

 
Cross currency interest rate swaps
 
(195
)
 
Interest expense
 
745

 
Cost of services and products sold
 
(420
)
(a)
 
 
$
23

 
 
 
$
560

 
 
 
$
(420
)
 
Nine Months Ended September 30, 2016:
Foreign currency forward exchange contracts
 
$
1,748

 
Product revenues / Cost of services and products sold
 
$
(409
)
 

 
$

 
Cross currency interest rate swaps
 
(2,361
)
 
Interest expense
 
478

 
Cost of services and products sold
 
3,987

(a)
 
 
$
(613
)
 
 
 
$
69

 
 
 
$
3,987

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

Derivatives Not Designated as Hedging Instruments
 
 
Location of Gain
(Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative for the
Three Months Ended September 30 (b)
(In thousands)
 
 
2017
 
2016
Foreign currency exchange forward contracts
 
Cost of services and products sold
 
$
(7,025
)
 
$
552

 
 
Location of Gain
(Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative for the
Nine Months Ended September 30 (b)
(In thousands)
 
 
2017
 
2016
Foreign currency forward exchange contracts
 
Cost of services and products sold
 
$
(18,764
)
 
$
2,292

(b)  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.

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


19


The following tables summarize, by major currency, the contractual amounts of the Company’s foreign currency exchange forward contracts in U.S. dollars.  The “Buy” amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the “Sell” amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies.  The recognized gains and losses offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.
Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at September 30, 2017:
(In thousands)
 
Type
 
U.S. Dollar
Equivalent
 
Maturity
 
Recognized
Gain (Loss)
British pounds sterling
 
Sell
 
$
70,207

 
October 2017
 
$
(807
)
British pounds sterling
 
Buy
 
10,638

 
October 2017 through January 2018
 
17

Euros
 
Sell
 
317,163

 
October 2017 through December 2017
 
(19,028
)
Euros
 
Buy
 
196,214

 
October 2017 through May 2018
 
792

Other currencies
 
Sell
 
50,692

 
October 2017 through April 2018
 
(758
)
Other currencies
 
Buy
 
30,578

 
October 2017 through January 2018
 
239

Total
 
 
 
$
675,492

 
 
 
$
(19,545
)
Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at December 31, 2016:
(In thousands)
 
Type
 
U.S. Dollar
Equivalent
 
Maturity
 
Recognized
Gain (Loss)
British pounds sterling
 
Sell
 
$
55,120

 
January 2017
 
$
(228
)
British pounds sterling
 
Buy
 
827

 
March 2017
 
(14
)
Euros
 
Sell
 
326,797

 
January 2017 through December 2017
 
628

Euros
 
Buy
 
171,578

 
January 2017 through January 2018
 
(468
)
Other currencies
 
Sell
 
43,455

 
January 2017 through September 2017
 
1,477

Other currencies
 
Buy
 
3,106

 
March 2017
 
(1
)
Total
 
 
 
$
600,883

 
 
 
$
1,394

 

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 $7.6 million and $17.1 million during the three and nine months ended September 30, 2017, respectively and pre-tax net losses of $9.0 million and $29.3 million during the three and nine months ended September 30, 2016, 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.  The interest rate swaps are recorded on the Condensed Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps’ interest spread and changes in the credit worthiness of the counter-parties recorded in Accumulated other comprehensive loss. 

In January 2017, the Company entered into a series of interest rate swaps that cover the period from 2018 through 2021, and had the effect of converting $300.0 million of the Term Loan Facility from floating-rate to fixed-rate beginning in 2018.   The fixed rates provided by the swaps replace the adjusted LIBOR rate in the interest calculation, ranging from 1.65% for 2018 to 2.71% for 2021.

The following table indicates the notional amounts of the Company's interest rate swaps at September 30, 2017:
 
 
 Annual
Notional Amount
 
Interest Rates
(In millions)
 
 
Receive
 
Pay
Maturing 2018 through 2021
 
$
300.0

 
Floating U.S. dollar rate
 
Fixed U.S. dollar rate
Cross-Currency Interest Rate Swaps (CCIRs)
The Company uses 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. The CCIRs are recorded on the Condensed Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps’ interest spread and changes in the credit worthiness of the counter-parties recorded in Accumulated other comprehensive loss.  Changes in value attributed to the effect of foreign currency fluctuations are recorded on the Condensed Consolidated Statements of Operations and offset currency fluctuation effects on the debt principal.

20



The following table indicates the contractual amounts of the Company's CCIRs at September 30, 2017:
 
 
 
 
Interest Rates
(In millions)
 
Contractual Amount
 
Receive
 
Pay
Maturing 2017
 
$
0.7

 
Floating U.S. dollar rate
 
Fixed rupee rate
During March 2016, the Company effected the early termination of the British pound sterling CCIR with an original maturity date of 2020. The Company received $16.6 million in cash related to this termination. There was no gain or loss recorded on the termination, as any change in value attributable to the effect of foreign currency translation was previously recognized in the Condensed Consolidated Statements of Operations.

Fair Value of Derivative Assets and Liabilities and Other Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  The Company utilizes market data or assumptions that the Company believes market participants would use in valuing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs).  The fair value hierarchy consists of three broad levels, which 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 following table indicates the fair value hierarchy of the financial instruments of the Company:
Level 2 Fair Value Measurements
(In thousands)
 
September 30
2017
 
December 31
2016
Assets