10-Q 1 hsc-03312015_10q.htm 10-Q HSC-03.31.2015_10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2015
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, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
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 April 30, 2015
Common stock, par value $1.25 per share
 
80,087,180




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)
 
March 31
2015
 
December 31
2014
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
66,549

 
$
62,843

Trade accounts receivable, net
 
332,005

 
325,104

Other receivables
 
21,709

 
28,145

Inventories
 
194,598

 
178,922

Assets held-for-sale
 
1,328

 
1,355

Other current assets
 
85,860

 
87,110

Total current assets
 
702,049

 
683,479

Investments
 
284,693

 
288,505

Property, plant and equipment, net
 
623,364

 
663,244

Goodwill
 
402,754

 
416,155

Intangible assets, net
 
58,385

 
58,524

Other assets
 
192,138

 
159,320

Total assets
 
$
2,263,383

 
$
2,269,227

LIABILITIES
 
 

 
 

Current liabilities:
 
 

 
 

Short-term borrowings
 
$
18,643

 
$
16,748

Current maturities of long-term debt
 
24,899

 
25,188

Accounts payable
 
143,823

 
146,506

Accrued compensation
 
41,824

 
53,780

Income taxes payable
 
6,732

 
1,985

Dividends payable
 
16,418

 
16,535

Insurance liabilities
 
12,192

 
12,415

Advances on contracts
 
116,514

 
117,398

Due to unconsolidated affiliate
 
8,317

 
8,142

Unit adjustment liability
 
22,320

 
22,320

Other current liabilities
 
145,356

 
144,543

Total current liabilities
 
557,038

 
565,560

Long-term debt
 
875,277

 
829,709

Deferred income taxes
 
7,164

 
6,379

Insurance liabilities
 
35,837

 
35,470

Retirement plan liabilities
 
316,948

 
350,889

Due to unconsolidated affiliate
 
20,469

 
20,169

Unit adjustment liability
 
68,107

 
71,442

Other liabilities
 
34,722

 
37,699

Total liabilities
 
1,915,562

 
1,917,317

COMMITMENTS AND CONTINGENCIES
 


 


HARSCO CORPORATION STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock
 

 

Common stock
 
140,489

 
140,444

Additional paid-in capital
 
166,346

 
165,666

Accumulated other comprehensive loss
 
(527,475
)
 
(532,256
)
Retained earnings
 
1,282,465

 
1,283,549

Treasury stock
 
(760,227
)
 
(749,815
)
Total Harsco Corporation stockholders’ equity
 
301,598

 
307,588

Noncontrolling interests
 
46,223

 
44,322

Total equity
 
347,821

 
351,910

Total liabilities and equity
 
$
2,263,383

 
$
2,269,227


See accompanying notes to unaudited condensed consolidated financial statements.

3


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
Three Months Ended
 
 
March 31
(In thousands, except per share amounts)
 
2015
 
2014
Revenues from continuing operations:
 
 

 
 

Service revenues
 
$
287,428

 
$
350,794

Product revenues
 
164,151

 
161,689

Total revenues
 
451,579

 
512,483

Costs and expenses from continuing operations:
 
 

 
 

Cost of services sold
 
245,861

 
294,308

Cost of products sold
 
115,221

 
115,466

Selling, general and administrative expenses
 
63,902

 
66,794

Research and development expenses
 
919

 
2,663

Loss on disposal of the Harsco Infrastructure Segment and transaction costs
 

 
1,681

Other income
 
(13,205
)
 
(656
)
Total costs and expenses
 
412,698

 
480,256

Operating income from continuing operations
 
38,881

 
32,227

Interest income
 
256

 
297

Interest expense
 
(11,884
)
 
(11,421
)
Change in fair value to the unit adjustment liability
 
(2,245
)
 
(2,546
)
Income from continuing operations before income taxes and equity income
 
25,008

 
18,557

Income tax expense
 
(12,855
)
 
(5,311
)
Equity in income (loss) of unconsolidated entities, net
 
4,083

 
(1,230
)
Income from continuing operations
 
16,236

 
12,016

Discontinued operations:
 
 

 
 

Loss on disposal of discontinued business
 
(646
)
 
(640
)
Income tax benefit related to discontinued business
 
239

 
237

Loss from discontinued operations
 
(407
)
 
(403
)
Net income
 
15,829

 
11,613

Less: Net income attributable to noncontrolling interests
 
(565
)
 
(1,402
)
Net income attributable to Harsco Corporation
 
$
15,264

 
$
10,211

Amounts attributable to Harsco Corporation common stockholders:
Income from continuing operations, net of tax
 
$
15,671

 
$
10,614

Loss from discontinued operations, net of tax
 
(407
)
 
(403
)
Net income attributable to Harsco Corporation common stockholders
 
$
15,264

 
$
10,211

 
 
 
 
 
Weighted-average shares of common stock outstanding
 
80,240

 
80,816

Basic earnings (loss) per common share attributable to Harsco Corporation common stockholders:
Continuing operations
 
$
0.20

 
$
0.13

Discontinued operations
 
(0.01
)
 

Basic earnings per share attributable to Harsco Corporation common stockholders
 
$
0.19

 
$
0.13

 
 
 
 
 
Diluted weighted-average shares of common stock outstanding
 
80,352

 
81,022

Diluted earnings (loss) per common share attributable to Harsco Corporation common stockholders:
Continuing operations
 
$
0.20

 
$
0.13

Discontinued operations
 
(0.01
)
 

Diluted earnings per share attributable to Harsco Corporation common stockholders
 
$
0.19

 
$
0.13

 
 
 
 
 
Cash dividends declared per common share
 
$
0.205

 
$
0.205


See accompanying notes to unaudited condensed consolidated financial statements.

4


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
 
 
 
 
 
Three Months Ended
 
 
March 31
(In thousands)
 
2015
 
2014
Net income
 
$
15,829

 
$
11,613

Other comprehensive income (loss):
 
 

 
 

Foreign currency translation adjustments, net of deferred income taxes of $(1,650) and $(101) in 2015 and 2014, respectively
 
(28,842
)
 
(1,270
)
Net gain (loss) on cash flow hedging instruments, net of deferred income taxes of $(1,522) and $386 in 2015 and 2014, respectively
 
7,574

 
(3,963
)
Pension liability adjustments, net of deferred income taxes of $(3,091) and $(406) in 2015 and 2014, respectively
 
25,293

 
3,681

Unrealized loss on marketable securities, net of deferred income taxes of $4 and $3 in 2015 and 2014, respectively
 
(8
)
 
(5
)
Total other comprehensive income (loss)
 
4,017

 
(1,557
)
Total comprehensive income
 
19,846

 
10,056

Less: Comprehensive (income) loss attributable to noncontrolling interests
 
199

 
(1,102
)
Comprehensive income attributable to Harsco Corporation
 
$
20,045

 
$
8,954

 
 
 
 
 
See accompanying notes to unaudited condensed consolidated financial statements.

5


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
Three Months Ended
 
 
March 31
(In thousands)
 
2015
 
2014
Cash flows from operating activities:
 
 

 
 

Net income
 
$
15,829

 
$
11,613

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation
 
36,654

 
41,834

Amortization
 
3,237

 
3,001

Change in fair value to the unit adjustment liability
 
2,245

 
2,546

Deferred income tax expense
 
2,526

 
2,352

Equity in (income) loss of unconsolidated entities, net
 
(4,083
)
 
1,230

Loss on disposal of Harsco Infrastructure Segment
 

 
242

Other, net
 
(9,612
)
 
(750
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
(20,151
)
 
(49,455
)
Inventories
 
(19,496
)
 
(4,273
)
Accounts payable
 
5,775

 
(6,246
)
Accrued interest payable
 
6,828

 
8,207

Accrued compensation
 
(9,019
)
 
(3,586
)
Advances on contracts
 
8,693

 
34,006

Harsco 2011/2012 Restructuring Program accrual
 
(188
)
 
(528
)
Other assets and liabilities
 
(8,765
)
 
(12,709
)
Net cash provided by operating activities
 
10,473

 
27,484

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(31,630
)
 
(39,839
)
Proceeds from the Infrastructure Transaction
 

 
3,296

Proceeds from sales of assets
 
6,781

 
3,806

Purchases of businesses, net of cash acquired
 
(6,828
)
 
(26,046
)
Payment of unit adjustment liability
 
(5,580
)
 
(5,580
)
Other investing activities, net
 
2,360

 
(1,178
)
Net cash used by investing activities
 
(34,897
)
 
(65,541
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Short-term borrowings, net
 
4,898

 
(1,721
)
Current maturities and long-term debt:
 
 

 
 

Additions
 
52,039

 
65,000

Reductions
 
(5,147
)
 
(18,424
)
Cash dividends paid on common stock
 
(16,443
)
 
(16,562
)
Common stock acquired for treasury
 
(12,143
)
 

Other financing activities, net
 
(2,049
)
 

Net cash provided by financing activities
 
21,155

 
28,293

 
 
 
 
 
Effect of exchange rate changes on cash
 
6,975

 
(479
)
Net increase (decrease) in cash and cash equivalents
 
3,706

 
(10,243
)
Cash and cash equivalents at beginning of period
 
62,843

 
93,605

Cash and cash equivalents at end of period
 
$
66,549

 
$
83,362

 
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 and per share amounts)
 
Issued
 
Treasury
 
 
 
 
 
Total
Balances, January 1, 2014
 
$
140,248

 
$
(746,237
)
 
$
159,025

 
$
1,372,041

 
$
(370,615
)
 
$
43,093

 
$
597,555

Net income
 
 

 
 

 
 

 
10,211

 
 

 
1,402

 
11,613

Cash dividends declared:
 
 

 
 

 
 

 
 

 
 

 
 

 


Common @ $0.205 per share
 
 

 
 

 
 

 
(16,572
)
 
 

 
 

 
(16,572
)
   Noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
(133
)
 
(133
)
Total other comprehensive loss, net of deferred income taxes of $(118)
 
 
 
 
 
 
 
 
 
(1,257
)
 
(300
)
 
(1,557
)
Contributions from noncontrolling interests
 
 

 
 

 
 

 
 

 
 

 
1,560

 
1,560

Noncontrolling interests transferred in the Infrastructure Transaction
 
 
 
 
 
 
 
 
 
 
 
(905
)
 
(905
)
Vesting of restricted stock units and other stock grants, net 39,941 shares
 
79

 
(593
)
 
1,571

 
 

 
 

 
 

 
1,057

Amortization of unearned portion of stock-based compensation, net of forfeitures
 
 

 
 

 
452

 
 

 
 

 
 

 
452

Balances, March 31, 2014
 
$
140,327

 
$
(746,830
)
 
$
161,048

 
$
1,365,680

 
$
(371,872
)
 
$
44,717

 
$
593,070

 
 
Harsco Corporation Stockholders’ Equity
 
 
 
 
(In thousands, except share and per share amounts)
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
 
 
Issued
 
Treasury
 
 
 
 
 
Total
Balances, January 1, 2015
 
$
140,444

 
$
(749,815
)
 
$
165,666

 
$
1,283,549

 
$
(532,256
)
 
$
44,322

 
$
351,910

Net income
 
 

 
 

 
 

 
15,264

 
 

 
565

 
15,829

Cash dividends declared:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Common @ $0.205 per share
 
 

 
 

 
 

 
(16,348
)
 
 

 
 

 
(16,348
)
Total other comprehensive income, net of deferred income taxes of $(6,259)
 
 
 
 
 
 
 
 
 
4,781

 
(764
)
 
4,017

Contributions from noncontrolling interests
 
 

 
 

 
 

 
 

 
 

 
2,100

 
2,100

Vesting of restricted stock units and other stock grants, net 23,962 shares
 
45

 
(192
)
 
(81
)
 
 

 
 

 
 

 
(228
)
Treasury shares repurchased, 596,632 shares
 
 
 
(10,220
)
 
 
 
 
 
 
 
 
 
(10,220
)
Amortization of unearned portion of stock-based compensation, net of forfeitures
 
 

 
 

 
761

 
 

 
 

 
 

 
761

Balances, March 31, 2015
 
$
140,489

 
$
(760,227
)
 
$
166,346

 
$
1,282,465

 
$
(527,475
)
 
$
46,223

 
$
347,821

 
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 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 presentation are reflected in the unaudited condensed consolidated financial statements.  The December 31, 2014 Condensed Consolidated Balance Sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2014 audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“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, 2014.
Operating results and cash flows for the three months ended March 31, 2015 are not indicative of the results that may be expected for the year ending December 31, 2015.

2.     Revised Financial Statements

During the first quarter of 2015, the Company identified an error that would have had the net effect of decreasing after-tax income by $7.5 million, related to an unasserted multiemployer pension plan withdrawal liability that should have been recorded by the Company in the fourth quarter of 2012. The Company became aware of a potential withdrawal liability during the first quarter of 2015 and followed the Company's standard procedure of engaging outside experts to determine the amount of potential liability. Based on these procedures, the Company determined it had triggered a partial withdrawal during the fourth quarter of 2012 due to a decrease in hours worked by the Company's employees who participate in the plan and that such amount should have been accrued in that period. The Company assessed the individual and aggregate impact of this error on the current year and all prior periods and determined that the cumulative effect of this error was material to both the first quarter and expected full-year 2015 results, but did not result in a material misstatement to any previously issued annual or quarterly financial statements. Accordingly, the Company is revising the relevant financial statements for all applicable periods and will revise additional financial statements as they appear in future filings.

In connection with the revision, the Company additionally corrected all previously disclosed immaterial out-of-period adjustments, including tax adjustments. The impact of revising the Company’s Condensed Consolidated Balance Sheets, Condensed Statements of Operations and Condensed Consolidated Statements of Cash Flows for all period presented are as follows:
 
 
December 31, 2014
(In thousands)
 
As Previously Reported
 
Revision
 
As Revised
ASSETS
 
 
 
 
 
 
Inventories
 
$
177,265

 
$
1,657

 
$
178,922

Total current assets
 
681,822

 
1,657

 
683,479

Other assets
 
155,551

 
3,769

 
159,320

Total assets
 
2,263,801

 
5,426

 
2,269,227

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Other liabilities
 
$
25,849

 
$
11,850

 
$
37,699

Total liabilities
 
1,905,467

 
11,850

 
1,917,317

 
 
 
 
 
 
 
HARSCO CORPORATION STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Accumulated other comprehensive loss
 
$
(532,491
)
 
$
235

 
$
(532,256
)
Retained earnings
 
1,290,208

 
(6,659
)
 
1,283,549

Total Harsco Corporation stockholders’ equity
 
314,012

 
(6,424
)
 
307,588

Total equity
 
358,334

 
(6,424
)
 
351,910

Total liabilities and equity
 
2,263,801

 
5,426

 
2,269,227


8


 
 
Three Months Ended
 
 
March 31, 2014
(In thousands, except per share amounts)
 
As Previously Reported
 
Revision
 
As Revised
Revenues from continuing operations:
 
 
 
 
 
 
Service revenues
 
$
351,010

 
$
(216
)
 
$
350,794

Total revenues
 
512,699

 
(216
)
 
512,483

 
 
 
 
 
 
 
Costs and expenses from continuing operations:
 
 
 
 
 
 
Cost of services sold
 
$
293,999

 
$
309

 
$
294,308

Research and development expenses
 
2,619

 
44

 
2,663

Loss on disposal of the Harsco Infrastructure Segment and transaction costs
 
2,138

 
(457
)
 
1,681

Total costs and expenses
 
480,360

 
(104
)
 
480,256

 
 
 
 
 
 
 
Operating income from continuing operations
 
$
32,339

 
$
(112
)
 
$
32,227

Income from continuing operations before income taxes and equity income
 
18,669

 
(112
)
 
18,557

Income tax expense
 
(4,495
)
 
(816
)
 
(5,311
)
Income from continuing operations
 
12,944

 
(928
)
 
12,016

Net income
 
12,541

 
(928
)
 
11,613

Net income attributable to Harsco Corporation
 
11,139

 
(928
)
 
10,211

 
 
 
 
 
 
 
Amounts attributable to Harsco Corporation common stockholders:
Income from continuing operations, net of tax
 
$
11,542

 
$
(928
)
 
$
10,614

Net income attributable to Harsco Corporation common stockholders
 
11,139

 
(928
)
 
10,211

 
 
 
 
 
 
 
Basic earnings (loss) per common share attributable to Harsco Corporation common stockholders:
Continuing operations
 
$
0.14

 
$
(0.01
)
 
$
0.13

Basic earnings per share attributable to Harsco Corporation common stockholders
 
0.14

 
(0.01
)
 
0.13

 
 
 
 
 
 
 
Diluted earnings (loss) per common share attributable to Harsco Corporation common stockholders:
Continuing operations
 
$
0.14

 
$
(0.01
)
 
$
0.13

Diluted earnings per share attributable to Harsco Corporation common stockholders
 
0.14

 
(0.01
)
 
0.13


 
 
Three Months Ended
 
 
March 31, 2014
(In thousands)
 
As Previously Reported
 
Revision
 
As Revised
Net cash provided (used) by:
 
 
 
 
 
 
Operating activities
 
$
27,528

 
$
(44
)
 
$
27,484

Investing activities
 
(65,585
)
 
44

 
(65,541
)

As of March 31, 2015, the cumulative impact of this revision was a $6.7 million reduction in retained earnings. The diluted loss per share from continuing operations decrease for the year ended December 31, 2014 was $0.03. The diluted loss per share from continuing operations increase for the years ended December 31, 2013 and 2012 was $0.06 for both periods. The notes to the condensed consolidated financial statements for the three months ended March 31, 2015 have been revised, as applicable.







9


3.     Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in 2015:
On January 1, 2015, the Company adopted changes issued by the Financial Accounting Standards Board ("FASB") related to reporting discontinued operations and the disclosure of disposals of components of an entity. The changes modify the criteria related to what transactions constitute discontinued operations and expand disclosure requirements. The adoption of these changes did not have a material impact on the Company's condensed consolidated financial statements.
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. The changes become effective for the Company on January 1, 2017; however, on April 1, 2015 the FASB proposed a deferral of the effective date by one year, but permits entities to adopt one year earlier. These proposed changes are not yet final. Management is currently evaluating these changes.
In August 2014, the FASB issued changes related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The changes become effective for the Company on January 1, 2017. Management has determined that these changes will not have a material impact on the Company's condensed consolidated financial statements.
In January 2015, the FASB issued changes related to reporting extraordinary and unusual items. The changes simplify income statement presentation by eliminating the concept of extraordinary items. The changes become effective for the Company on January 1, 2016. Management has determined that these changes will not have a material impact on the Company's condensed consolidated financial statements.
In February 2015, the FASB issued changes related to consolidation. The changes update consolidation analysis and affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. The changes become effective for the Company on January 1, 2016. Management has determined that these changes will not have a material impact on the Company's condensed consolidated financial statements.

4.    Acquisitions

Acquisitions
In March 2015, the Company acquired Protran Technology ("Protran"), a U.S. designer and producer of safety systems for transportation and industrial applications. Protran has been included in the results of the Harsco Rail Segment. Inclusion of pro forma financial information for this transaction is not necessary as the acquisition is immaterial. The purchase price allocation is not yet final for this acquisition.


5.    Accounts Receivable and Inventories
Accounts receivable consist of the following:
(In thousands)
 
March 31
2015
 
December 31
2014
Trade accounts receivable
 
$
346,241

 
$
340,223

Less: Allowance for doubtful accounts
 
(14,236
)
 
(15,119
)
Trade accounts receivable, net
 
$
332,005

 
$
325,104

 
 
 
 
 
Other receivables (a)
 
$
21,709

 
$
28,145

(a) Other receivables include insurance claim receivables, employee receivables, tax claim receivables, receivables from affiliates and other miscellaneous receivables not included in Trade accounts receivable, net. 

10


The provision for doubtful accounts related to trade accounts receivable was as follows:
 
 
Three Months Ended
 
 
March 31
(In thousands)
 
2015
 
2014
Provision for doubtful accounts related to trade accounts receivable
 
$
196

 
$
(19
)
Inventories consist of the following:
(In thousands)
 
March 31
2015
 
December 31
2014
Finished goods
 
$
33,480

 
$
30,525

Work-in-process
 
43,261

 
28,690

Raw materials and purchased parts
 
85,599

 
87,985

Stores and supplies
 
32,258

 
31,722

Inventories
 
$
194,598

 
$
178,922


6. Equity Method Investments

In November 2013, the Company consummated the previously announced transaction to sell the Company's Harsco Infrastructure Segment into a strategic venture with Clayton, Dubilier & Rice ("CD&R") as part of a transaction that combines 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 owns an approximate 29% equity interest in Brand Energy & Infrastructure Services Inc. and Subsidiaries ("Brand" or the "Infrastructure strategic venture") at both March 31, 2015 and December 31, 2014.

The book value of the Company's equity method investment in Brand at March 31, 2015 and December 31, 2014 was $281.9 million and $285.7 million, respectively. No instances of impairment were noted on the Company's equity method investments as of March 31, 2015. The Company records the Company's proportionate share of Brand's net income or loss one quarter in arrears. Brand's results of operations for the three month ended December 31, 2014 and the period from November 27, 2013 through December 31, 2013, respectively, are summarized as follows:
 
 
 
(In thousands)
 
Three Months Ended December 31 2014
 
Period From November 27 2013 Through December 31 2013 (a)
Summarized Statement of Operations Information of Brand:
 
 
 
 
Net revenues
 
$
804,199

 
$
236,094

Gross profit
 
197,241

 
48,832

Net income (loss) attributable to Brand Energy & Infrastructure Services, Inc. and Subsidiaries
 
14,217

 
(4,245
)
 
 
 
 
 
Harsco's equity in income (loss) of Brand
 
4,083

 
(1,231
)
(a) The Company's equity method investment in Brand began on November 26, 2013; accordingly, there is only approximately one month of related equity income (loss).
 
The Company is 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 2.5% of the Company's ownership interest in the Infrastructure strategic venture on an annual basis (the "unit adjustment liability"). The resulting liability is reflected in the caption, Unit adjustment liability, on the Company's Condensed Consolidated Balance Sheets. The Company will recognize the change in fair value to the unit adjustment liability each period until the Company is no longer required to make these payments or chooses not to make these payments. The change in fair value to the unit adjustment liability is a non-cash expense. For the three months ended March 31, 2015 and 2014, the Company recognized $2.2 million and $2.5 million, respectively, of change in fair value to the unit adjustment liability.



11


The Company's obligation to make a quarterly payment will cease upon the earlier of (i) Brand achieving $487.0 million in last twelve months' earnings before interest, taxes, depreciation and amortization ("EBITDA") for three quarters, which need not be consecutive, or (ii) eight years after the closing of the Infrastructure Transaction. In addition, upon the initial public offering of Brand, the Company's quarterly payment obligation will decrease by the portion of CD&R's ownership interest sold or eliminated completely once CD&R's ownership interest in Brand falls below 20%. In the event of a liquidation of Brand, CD&R is entitled to a liquidation preference of approximately $336 million, plus any quarterly payments that had been paid in kind.

The Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 include balances related to the unit adjustment liability of $90.4 million and $93.8 million, respectively, in the current and non-current captions, Unit adjustment liability. A reconciliation of beginning and ending balances related to the unit adjustment liability is included in Note 14, Derivative Instruments, Hedging Activities and Fair Value.

The Company intends to make these quarterly payments in cash and will continue to evaluate the implications of making payments in cash or in kind based upon performance of the Infrastructure strategic venture. In the future, should the Company decide not to make the cash payment, the value of both the equity method investment in Brand and the related unit adjustment liability may be impacted, and the change may be reflected in earnings in that period.

Balances related to transactions between the Company and Brand are as follows:
(In thousands)
 
March 31
2015
 
December 31
2014
Balances due from Brand
 
$
2,579

 
$
1,860

Balances due to Brand
 
28,786

 
28,311


These balances between the Company and Brand relate primarily to transition services and the funding of certain transferred defined benefit pension plan obligations through 2018. There is not expected to be any significant level of revenue or expense between the Company and Brand on an ongoing basis once all aspects of the Infrastructure Transaction have been finalized.


7.     Property, Plant and Equipment
Property, plant and equipment consists of the following:
(In thousands)
 
March 31
2015
 
December 31
2014
Land
 
$
14,962

 
$
15,721

Land improvements
 
15,621

 
15,898

Buildings and improvements
 
199,362

 
205,409

Machinery and equipment
 
1,773,141

 
1,861,965

Construction in progress
 
72,367

 
87,414

Gross property, plant and equipment
 
2,075,453

 
2,186,407

Less: Accumulated depreciation
 
(1,452,089
)
 
(1,523,163
)
Property, plant and equipment, net
 
$
623,364

 
$
663,244


8.     Goodwill and Other Intangible Assets
The following table reflects the changes in carrying amounts of goodwill by segment for the three months ended March 31, 2015:
(In thousands)
 
Harsco Metals  & Minerals Segment
 
Harsco Industrial Segment
 
Harsco Rail
Segment
 
Consolidated
Totals
Balance at December 31, 2014
 
$
400,006

 
$
6,839

 
$
9,310

 
$
416,155

Changes to goodwill (a)
 

 

 
2,060

 
2,060

Foreign currency translation
 
(15,461
)
 

 

 
(15,461
)
Balance at March 31, 2015
 
$
384,545

 
$
6,839

 
$
11,370

 
$
402,754

(a) Changes to goodwill relate to the acquisition of Protran. The purchase price allocation is not yet final for this acquisition. See Note 4, Acquisitions.

12


The Company’s 2014 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 10%.  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, 2015, no interim goodwill impairment testing was necessary.  There can be no assurance that the Company’s annual goodwill impairment testing will not result in a charge to earnings. Should the Company’s analysis indicate a further degradation in the overall markets served by the Harsco Metals & Minerals Segment, impairment losses for associated assets could be required. Any impairment could result in the write-down of the carrying value of goodwill to its implied fair value.
Intangible assets included in the captions, Other current assets and Intangible assets, net, on the Condensed Consolidated Balance Sheets consist of the following:
 
 
March 31, 2015
 
December 31, 2014
(In thousands)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer related
 
$
154,415

 
$
109,674

 
$
157,530

 
$
112,211

Non-compete agreements
 
1,092

 
1,032

 
1,107

 
1,039

Patents
 
6,866

 
5,369

 
6,079

 
5,399

Technology related
 
26,009

 
21,476

 
26,548

 
21,233

Trade names
 
8,314

 
3,841

 
7,745

 
3,733

Other
 
7,576

 
4,269

 
7,420

 
4,290

Total
 
$
204,272

 
$
145,661

 
$
206,429

 
$
147,905


Amortization expense for intangible assets was as follows:
 
 
Three Months Ended
 
 
March 31
(In thousands)
 
2015
 
2014
Amortization expense for intangible assets
 
$
2,137

 
$
2,553


The estimated amortization expense for the next five fiscal years based on current intangible assets is as follows:
 
 
Full Year
(In thousands)
 
2015
 
2016
 
2017
 
2018
 
2019
Estimated amortization expense (b)
 
$
8,750

 
$
8,250

 
$
5,500

 
$
5,250

 
$
5,250

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



9.     Debt and Credit Agreements

In March 2012, the Company entered into an Amended and Restated Five Year Credit Agreement (the "Credit Agreement") providing for $525 million of borrowing capacity through a syndicate of 14 banks.

On March 27, 2015, the Company entered into Amendment No. 3 ("Amendment No. 3") to the Credit Agreement.  Amendment No. 3 provides for (i) $500 million of borrowing capacity, which the Company may request be increased to $550 million pending lenders’ agreement, through a syndicate of 11 banks; (ii) extension of the current termination date for the Credit Agreement from March 2, 2017 to June 2, 2019 upon successful completion of refinancing the Company's 2.7% notes due October 15, 2015; (iii) replacement of the existing consolidated debt to consolidated EBITDA ratio with a net debt to consolidated EBITDA ratio not to exceed 3.75 to 1.0 through March 31, 2016 and 3.5 to 1.0 thereafter; and (iv) modification to certain defined terms.  During the three months ended March 31, 2015, the Company expensed $0.6 million of previously deferred financing costs associated with the Credit Agreement for banks which did not participate in Amendment No. 3 to the Credit Agreement.




13


At March 31, 2015 and December 31, 2014, the Company had $147.0 million and $98.5 million, respectively, of Credit Agreement borrowings outstanding. At March 31, 2015 and December 31, 2014, all such balances were classified as long-term borrowings in the Condensed Consolidated Balance Sheets. Classification of such balances is based on the Company's ability and intent to repay such amounts over the subsequent twelve months, as well as reflects the Company's ability and intent to borrow for a period longer than a year. To the extent the Company expects to repay any amounts within the subsequent twelve months, the amounts are classified as short-term borrowings.
At March 31, 2015, the Company's 2.7% notes due October 15, 2015 are classified as long-term debt on the Condensed Consolidated Balance Sheet based on the Company's intent and ability to refinance this debt using the debt capital markets and ability to refinance this debt under borrowings under the Credit Agreement.

10.  Employee Benefit Plans
 
 
Three Months Ended
 
 
March 31
Defined Benefit Pension Plans Net Periodic Pension Cost
 
U. S. Plans
 
International Plans
(In thousands)
 
2015
 
2014
 
2015
 
2014
Service cost
 
$
722

 
$
558

 
$
438

 
$
407

Interest cost
 
3,089

 
3,217

 
9,189

 
10,912

Expected return on plan assets
 
(4,203
)
 
(4,196
)
 
(12,674
)
 
(12,588
)
Recognized prior service costs
 
20

 
22

 
49

 
46

Recognized loss
 
1,230

 
838

 
4,235

 
3,553

Defined benefit pension plans net periodic pension cost
 
$
858

 
$
439

 
$
1,237

 
$
2,330

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
Company Contributions
 
March 31
(In thousands)
 
2015
 
2014
Defined benefit pension plans:
 
 

 
 

United States
 
$
682

 
$
566

International
 
16,066

 
17,421

Multiemployer pension plans
 
565

 
701

Defined contribution pension plans
 
3,806

 
4,069

The Company's estimate of expected contributions to be paid during the remainder of 2015 for the U.S. and international defined benefit pension plans are $1.8 million and $13.8 million, respectively.
During the first quarter of 2015, the Company identified an out-of-period adjustment related to an unasserted multiemployer pension plan withdrawal liability. See Note 2, Revised Financial Statements, for additional details.

11.     Income Taxes 

The effective income tax rate related to continuing operations for the three months ended March 31, 2015 was 51.4% compared with 28.6% for the three months ended March 31, 2014.

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 unrecognized income tax benefit at March 31, 2015 was $14.5 million, including interest and penalties.  Within the next twelve months, it is reasonably possible that up to $0.1 million of unrecognized income tax benefits will be recognized upon settlement of tax examinations and the expiration of various statutes of limitations.







14


12.   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 Condensed Consolidated Balance Sheets at both March 31, 2015 and December 31, 2014 include accruals in Other current liabilities of $1.2 million for environmental matters. The amounts charged against pre-tax income related to environmental matters totaled $0.2 million and $0.7 million for the three months ended March 31, 2015 and 2014, respectively.

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 ("INSS") tax disputes. The largest proportion of the assessed amounts relate to ICMS claims filed by the State Revenue Authorities from the State of São Paulo, Brazil (the "SPRA"), encompassing the period from January 2002 to May 2005.
In October 2009, the Company received notification of the SPRA’s final administrative decision regarding the levying of ICMS in the State of São Paulo in relation to services provided to a customer in the State between January 2004 and May 2005.  As of March 31, 2015, the principal amount of the tax assessment from the SPRA with regard to this case was approximately $2 million, with penalty, interest and fees assessed to date increasing such amount by an additional $21 million.  Any change in the aggregate amount since the Company’s last Annual Report on Form 10-K 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 is still pending at the administrative phase, where the aggregate amount assessed by the tax authorities in August 2005 was $7.8 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 $1.8 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.
The Company continues to believe 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 procedure.
The Company intends to continue its practice of vigorously defending itself against the above-mentioned tax claims under various alternatives, including judicial appeal. The Company will continue to evaluate its potential liability with regard to the above-mentioned claims on a quarterly basis; however, it is not possible to predict the ultimate outcome of the above-mentioned 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.




15


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 March 31, 2015 and December 31, 2014, the Company has established reserves of $7.1 million and $8.6 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, through its Harsco Metals & Minerals Segment, provides services through long-term service contracts on a number of sites worldwide. As previously disclosed, a subcontractor at the site of a large customer has filed for arbitration against the Company, claiming that it is owed monetary damages from the Company in connection with its processing certain materials. The Company disputes that it is responsible for such alleged damages and intends to vigorously defend itself against this claim. In addition, the Company has impleaded its customer - which the Company believes has responsibility for any damages - into its arbitration with the subcontractor. The Company has concluded that a loss contingency is neither probable nor estimable and, therefore has not made any provision for any potential loss in its condensed consolidated financial statements. Moreover, based on the information currently available to the Company, the Company does not expect that the ultimate resolution of this arbitration will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company, through its Harsco Metals & Minerals Segment, may, in the normal of business, become involved in commercial disputes with other subcontractors or customers. Although results of operations and cash flows for a given period could be adversely affected by a negative outcome in these or other lawsuits, claims and 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.

Other
The Company is named as one of many defendants (approximately 90 or more in most cases) in legal actions in the United States alleging personal injury from exposure to airborne asbestos over the past several decades. In their suits, the plaintiffs have named as defendants, among others, many manufacturers, distributors and installers of numerous types of equipment or products that allegedly contained asbestos.

The Company believes that the claims against it are without merit. The Company has never been a producer, manufacturer or processor of asbestos fibers. Any asbestos-containing part of a Company product used in the past was purchased from a supplier and the asbestos encapsulated in other materials such that airborne exposure, if it occurred, was not harmful and is not associated with the types of injuries alleged in the pending actions.
At March 31, 2015, there were 17,266 pending asbestos personal injury actions filed against the Company.  Of those actions, 16,939 were filed in the New York Supreme Court (New York County), 126 were filed in other New York State Supreme Court Counties and 201 were filed in courts located in other states.
The complaints in most of those actions generally follow a form that contains a standard damages demand of $20 million or $25 million, regardless of the individual plaintiff’s alleged medical condition, and without identifying any specific Company product.
At March 31, 2015, 16,816 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 123 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.



16


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 Company believes that a substantial portion of the costs and expenses of the asbestos actions will be paid by the Company’s insurers.
In view of the persistence of asbestos litigation in the United States, the Company expects to continue to receive additional claims in the future. The Company intends to continue its practice of vigorously defending these claims and cases. At March 31, 2015, the Company has obtained dismissal in 27,621 cases by stipulation or summary judgment prior to trial.
It is not possible to predict the ultimate outcome of asbestos-related actions in the United States due to the unpredictable nature of this litigation, and no loss provision has been recorded in the Company's condensed consolidated financial statements because a loss contingency is not deemed probable or estimable. Despite this uncertainty, and although results of operations and cash flows for a given period could be adversely affected by asbestos-related actions, the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with asbestos litigation would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
The Company is subject to various other claims and legal proceedings covering a wide range of matters that arose in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or by established reserves, and, if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
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, 2014 for additional information on Accrued Insurance and Loss Reserves.

13.  Reconciliation of Basic and Diluted Shares
 
 
Three Months Ended
 
 
March 31
(In thousands, except per share amounts)
 
2015
 
2014
Income from continuing operations attributable to Harsco Corporation common stockholders
 
$
15,671

 
$
10,614

 
 
 
 
 
Weighted-average shares outstanding - basic
 
80,240

 
80,816

Dilutive effect of stock-based compensation
 
112

 
206

Weighted-average shares outstanding - diluted
 
$
80,352

 
$
81,022

 
 
 
 
 
Earnings from continuing operations per common share, attributable to Harsco Corporation common stockholders:
Basic
 
$
0.20

 
$
0.13

 
 
 
 
 
Diluted
 
$
0.20

 
$
0.13


The following average outstanding stock-based compensation units were not included in the three months ended computation of diluted earnings per share because the effect was antidilutive:
 
 
Three Months Ended
 
 
March 31
(In thousands)
 
2015
 
2014
Stock options
 
114

 
215

Stock appreciation rights
 
864

 
15

Performance share units
 
122

 


17


14.   Derivative Instruments, Hedging Activities and Fair Value

Derivative Instruments and Hedging Activities
The Company uses derivative instruments, including foreign currency forward exchange contracts, commodity contracts and cross-currency interest rate swaps, to manage certain foreign currency, commodity price 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 or forecasted commodity purchases 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 as a separate component of equity and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions.  Generally, at March 31, 2015, these deferred gains and losses are reclassified to earnings over 10 to 15 years from the balance sheet date.  The ineffective portion of all hedges, if any, is recognized currently in earnings.
The fair values of outstanding derivative contracts recorded as assets and liabilities on the Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014 was as follows:
 
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
March 31, 2015
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
Foreign currency forward exchange contracts
 
Other current assets
 
$
902

 

 
$

Cross-currency interest rate swaps
 
Other assets
 
90,541

 
Other liabilities
 
17

Total derivatives designated as hedging instruments
 
 
 
$
91,443

 
 
 
$
17

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts
 
Other current assets
 
$
5,479

 
Other current liabilities
 
$
3,334

 
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
December 31, 2014
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
Foreign currency forward exchange contracts
 
Other current assets
 
$
420

 

 
$

Cross-currency interest rate swaps
 
Other assets
 
52,989

 
Other liabilities
 
2,599

Total derivatives designated as hedging instruments
 
 
 
$
53,409

 
 
 
$
2,599

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts
 
Other current assets
 
$
4,065

 
Other current liabilities
 
$
4,618


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 cross-currency interest rate swaps and certain foreign currency forward exchange contracts are transacted under International Swaps and Derivatives Association ("ISDA") documentation. Each ISDA master agreement permits the net settlement of amounts owed in the event of default. The Company's derivative assets and liabilities subject to enforceable master netting arrangements resulted in a $0.1 million net liability at March 31, 2015. At December 31, 2014, such arrangements did not result in a net asset or net liability.






18


The effect of derivative instruments on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2015 and 2014 was as follows:
Derivatives Designated as Hedging Instruments
(In thousands)
 
Amount of  Gain (Loss) Recognized in Other
Comprehensive
Income  (“OCI”)  on Derivative -
Effective  Portion
 
Location of Gain
(Loss) Reclassified
from Accumulated
OCI into Income -
Effective Portion
 
Amount of
Gain (Loss)
Reclassified  from
Accumulated OCI into  Income -
Effective  Portion
 
Location of Gain
(Loss) Recognized  in Income on  Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
 
Amount of  Gain (Loss)  Recognized  in Income  on Derivative - Ineffective  Portion and  Amount
Excluded from
Effectiveness  Testing
 
Three Months Ended March 31, 2015:
Foreign currency forward exchange contracts
 
$
475

 
Cost of services and products sold
 
$
1

 
 
 
$

 
Cross-currency interest rate swaps
 
8,621

 
 
 

 
Cost of services and products sold
 
30,742

(a)
 
 
$
9,096

 
 
 
$
1

 
 
 
$
30,742

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2014:
Foreign currency forward exchange contracts
 
$
11

 
Cost of services and products sold
 
$
(2
)
 

 
$

 
Cross-currency interest rate swaps
 
(4,360
)
 
 
 

 
Cost of services and products sold
 
(1,574
)
(a)
 
 
$
(4,349
)
 
 
 
$
(2
)
 
 
 
$
(1,574
)
 
(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 March 31 (b)
(In thousands)
 
 
2015
 
2014
Foreign currency forward exchange contracts
 
Cost of services and products sold
 
$
4,755

 
$
1,556

(b)  These gains offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.
 
 
 
 
 
 
 
Foreign Currency Forward Exchange 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 forward exchange 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 forward exchange contracts are used to hedge commitments, such as foreign currency debt, firm purchase commitments and foreign currency cash flows for certain export sales transactions.
The following tables summarize, by major currency, the contractual amounts of the Company’s foreign currency forward exchange contracts in U.S. dollars at March 31, 2015 and December 31, 2014.  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.

19


Contracted Amounts of Foreign Currency Forward Exchange Contracts Outstanding at March 31, 2015:
(In thousands)
 
Type
 
U.S. Dollar
Equivalent
 
Maturity
 
Recognized
Gain (Loss)
British pounds sterling
 
Sell
 
$
163

 
April 2015
 
$
4

British pounds sterling
 
Buy
 
2,138

 
April 2015
 
(46
)
Euros
 
Sell
 
230,113

 
April 2015 through August 2015
 
1,473

Euros
 
Buy
 
210,841

 
April 2015 through July 2015
 
810

Other currencies
 
Sell
 
35,657

 
April 2015 through December 2015
 
840

Other currencies
 
Buy
 
7,955

 
April 2015
 
(34
)
Total
 
 
 
$
486,867

 
 
 
$
3,047

Contracted Amounts of Foreign Currency Forward Exchange Contracts Outstanding at December 31, 2014:
(In thousands)
 
Type
 
U.S. Dollar
Equivalent
 
Maturity
 
Recognized
Gain (Loss)
British pounds sterling
 
Sell
 
$
37,943

 
January 2015
 
$
179

British pounds sterling
 
Buy
 
2,783

 
January 2015
 
(4
)
Euros
 
Sell
 
193,370

 
January 2015 through March 2015
 
2,993

Euros
 
Buy
 
194,084

 
January 2015 through March 2015
 
(3,767
)
Other currencies
 
Sell
 
12,641

 
January 2015 through December 2015
 
439

Other currencies
 
Buy
 
28,001

 
January 2015 through June 2015
 
27

Total
 
 
 
$
468,822

 
 
 
$
(133
)
 
In addition to foreign currency forward exchange contracts, the Company designates certain loans as hedges of net investments in international subsidiaries.  The Company recorded pre-tax net gains of $3.1 million and $0.2 million during the three months ended March 31, 2015 and 2014, respectively, into Accumulated other comprehensive loss.
Cross-Currency Interest Rate Swaps
The Company uses cross-currency interest rate swaps in conjunction with certain debt issuances in order to secure a fixed local currency interest rate.  Under these cross-currency interest rate swaps, 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 cross-currency 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 the caption, Accumulated other comprehensive loss.  Changes in value attributed to the effect of foreign currency fluctuations are recorded in the Condensed Consolidated Statements of Operations and offset currency fluctuation effects on the debt principal. The following table indicates the contractual amounts of the Company's cross-currency interest rate swaps at March 31, 2015:
 
 
 
 
Interest Rates
(In millions)
 
Contractual Amount
 
Receive
 
Pay
Maturing 2018
 
$
250.0

 
Fixed U.S. dollar rate
 
Fixed euro rate
Maturing 2020
 
220.0

 
Fixed U.S. dollar rate
 
Fixed British pound sterling rate
Maturing 2016 through 2017
 
8.2

 
Floating U.S. dollar rate
 
Fixed rupee rate
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.


20


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 at March 31, 2015 and December 31, 2014:
Level 2 Fair Value Measurements
(In thousands)
 
March 31
2015
 
December 31
2014
 
Assets
 
 

 
 

 
Foreign currency forward exchange contracts
 
$
6,381

 
$
4,485

 
Cross-currency interest rate swaps
 
90,541

 
52,989

 
Liabilities
 
 

 
 

 
Foreign currency forward exchange contracts
 
3,334

 
4,618

 
Cross-currency interest rate swaps
 
17

 
2,599

 
The following tables reconciles the beginning and ending balances for liabilities measured on a recurring basis using unobservable inputs (Level 3) for the three months ended March 31, 2015:
Level 3 Liabilities—Unit Adjustment Liability (a) for the Three Months Ended March 31
(In thousands)
 
Three Months Ended
 
 
March 31
 
 
2015
 
2014
 
Balance at beginning of period
 
$
93,762

 
$
106,343

 
Payments
 
(5,580
)
 
(5,580
)
 
Change in fair value to the unit adjustment liability
 
2,245

 
2,546

 
Balance at end of period
 
$
90,427

 
$
103,308

(b)
(a) See Note 6, Equity Method Investments, for additional information related to the unit adjustment liability.
(b) Does not total due to rounding.
 
 
 
The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information.  Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs, such as forward rates, interest rates, the Company’s credit risk and counterparties’ credit risks, and which minimize the use of unobservable inputs.  The Company is able to classify fair value balances based on the ability to observe those inputs.  Commodity derivatives, foreign currency forward exchange contracts and cross-currency interest rate swaps are classified as Level 2 fair value based upon pricing models using market-based inputs.  Model inputs can be verified, and valuation techniques do not involve significant management judgment.
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short-term maturities of these assets and liabilities.  At March 31, 2015 and December 31, 2014, the total fair value of long-term debt, including current maturities, was $927.5 million and $885.0 million, respectively, compared with a carrying value of $900.2 million and $854.9 million, respectively.  Fair values for long-term debt are based on quoted market prices (Level 1) for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.


21


15. Review of Operations by Segment 
 
 
Three Months Ended
 
 
March 31
(In thousands)
 
2015
 
2014
Revenues From Continuing Operations
 
 

 
 

Harsco Metals & Minerals
 
$
291,198

 
$
352,822

Harsco Industrial
 
98,803

 
102,100

Harsco Rail
 
61,578

 
57,561

Total revenues from continuing operations
 
$
451,579

 
$
512,483

 
 
 
 
 
Operating Income (Loss) From Continuing Operations
Harsco Metals & Minerals
 
$
10,583

 
$
22,649

Harsco Industrial
 
17,027

 
16,571

Harsco Rail
 
21,633

 
5,499

Corporate
 
(10,362
)
 
(12,492
)
Total operating income from continuing operations
 
$
38,881

 
$
32,227

 
 
 
 
 
Depreciation and Amortization
 
 
 
 
Harsco Metals & Minerals
 
$
34,891

 
$
40,701

Harsco Industrial
 
1,287

 
1,202

Harsco Rail
 
1,556

 
1,419

Corporate
 
2,157

 
1,513

Total Depreciation and Amortization
 
$
39,891

 
$
44,835

 
 
 
 
 
Capital Expenditures
 
 
 
 
Harsco Metals & Minerals
 
$
21,828

 
$
37,741

Harsco Industrial
 
7,221

 
643

Harsco Rail
 
537

 
886

Corporate
 
2,044

 
569

Total Capital Expenditures
 
$
31,630

 
$
39,839


Reconciliation of Segment Operating Income to Income From Continuing Operations Before Income Taxes and Equity Income
 
 
Three Months Ended
 
 
March 31
(In thousands)
 
2015
 
2014
Segment operating income
 
$
49,243

 
$
44,719

General Corporate expense
 
(10,362
)