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EX-21 - EXHIBIT 21 - HARSCO CORPhsc-ex21q4.htm
EX-23 - EXHIBIT 23 - HARSCO CORPhsc-ex23_2015q4.htm
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EX-32 - EXHIBIT 32 - HARSCO CORPhsc-ex32_2015q4.htm
EX-31.2 - EXHIBIT 31.2 - HARSCO CORPhsc-ex312_2015q4.htm
EX-31.1 - EXHIBIT 31.1 - HARSCO CORPhsc-ex311_2015q4.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-03970
HARSCO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
23-1483991
(I.R.S. employer identification number)
350 Poplar Church Road, Camp Hill, Pennsylvania
(Address of principal executive offices)
17011
(Zip Code)
Registrant's telephone number, including area code    717-763-7064
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, par value $1.25 per share
Preferred stock purchase rights
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:    NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý   No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 Act). Yes o    No ý
The aggregate market value of the Company's voting stock held by non-affiliates of the Company as of June 30, 2015 was $1,321,550,000.
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 January 29, 2016
Common stock, par value $1.25 per share
 
80,094,365
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 2016 Proxy Statement are incorporated by reference into Part III of this Report.



HARSCO CORPORATION
FORM 10-K
INDEX

 
 
Page
 
 
 
 
 
 
 
 



PART I
Item 1.    Business.
(a)
General Development of Business
Harsco Corporation (the "Company") is a diversified, multinational provider of industrial services and engineered products serving global industries that are fundamental to worldwide economic growth and infrastructure development. The Company's operations fall into three reportable segments: Harsco Metals & Minerals, Harsco Industrial and Harsco Rail. The Company has locations in approximately 30 countries, including the U.S. The Company was incorporated in 1956.
The Company's operations previously included the Harsco Infrastructure Segment. In November 2013, the Company consummated the sale of 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"). The Company contributed substantially all of the Company’s equity interests in, and the net assets of, the Harsco Infrastructure Segment to the strategic venture in exchange for approximately $300 million in cash, subject to working capital and other adjustments, and an approximate 29% equity interest in the Infrastructure strategic venture. The Company’s approximate 29% equity interest in the Infrastructure strategic venture is accounted for under the equity method of accounting as prescribed by generally accepted accounting principles in the U.S. See Note 3, Acquisitions and Dispositions, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional information on the Infrastructure Transaction.
The Company's executive offices are located at 350 Poplar Church Road, Camp Hill, Pennsylvania 17011 and the Company's main telephone number is (717) 763-7064. The public may read and copy any material the Company files with the Securities and Exchange Commission ("SEC") at their Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished to the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on the SEC's Internet website at www.sec.gov and on the Company's Internet website at www.harsco.com as soon as reasonably practicable after such reports are electronically filed with the SEC. The information posted on the Company's website is not incorporated into the Company's SEC filings.
The Company's principal lines of business and related principal business drivers are as follows:
Principal Lines of Business
 
Principal Business Drivers
l
Global expertise in providing on-site services of material logistics, product quality improvement and resource recovery for iron, steel and metals manufacturing; as well as value added environmental solutions for industrial co-products
 
l
Global metals production and capacity utilization
 
 
l
Outsourcing of services by metals producers
 
 
l
Demand for high-value specialty steel and ferro alloys
 
 
l
Demand for environmental solutions for metals and minerals waste streams
 
 
 
l
Demand for industrial and infrastructure surface preparation and restoration
 
 
 
l
Demand for residential roofing shingles
 
 
 
l
Demand for road making materials
l
Air-cooled heat exchangers
 
l
Demand in the natural gas, natural gas processing and petrochemical markets
l
Industrial grating products
 
l
Industrial plant and warehouse construction and expansion
 
 
 
l
Off-shore drilling and new rig construction
l
Heat transfer products
 
l
Demand for commercial and institutional boilers and water heaters
l
Railway track maintenance services and equipment
 
l
Global railway track maintenance-of-way capital spending
 
 
 
l
Outsourcing of track maintenance and new track construction by railroads
The Company reports segment information using the "management approach," based on the way management organizes and reports the segments within the enterprise for making operating decisions and assessing performance. The Company's reportable segments are identified based upon differences in products, services and markets served. These segments and the types of products and services offered are more fully described in section (c) below.



1


In 2015, 2014 and 2013, sales in the U.S. contributed total revenues of $0.8 billion, $0.9 billion and $1.0 billion, equal to approximately 44%, 43% and 35% of total revenues, respectively. The Company's sales in euro-currency countries contributed total revenues of $0.3 billion, $0.4 billion and $0.7 billion, in 2015, 2014 and 2013, equal to approximately 16%, 17% and 25% of total revenues, respectively. Sales in the U.K. contributed total revenues of $0.2 billion, $0.3 billion and $0.4 billion in 2015, 2014 and 2013, equal to approximately 13%, 12% and 12% of total revenues, respectively. There were no significant inter-segment revenues.
(b)
Financial Information about Segments
Financial information concerning segments is included in Note 16, Information by Segment and Geographic Area, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," which information is incorporated herein by reference.
(c)
Narrative Description of Business
(1)   A narrative description of the businesses by reportable segment is as follows:
Harsco Metals & Minerals Segment—64% of consolidated revenues for 2015
The Harsco Metals & Minerals Segment is one of the world's largest providers of on-site services of material logistics, product quality improvement and resource recovery for iron, steel and metals manufacturing. There are no significant metals services contracts for which the estimated costs to complete the contract currently exceed the estimated revenue to be realized included in the below estimated future revenues though certain contracts may have lower near-term operating margins due to continued reduced steel production and weaker commodity prices. The Metals business's multi-year contracts had estimated future revenues of $3.2 billion at expected production levels at December 31, 2015. This provides the Company with a substantial base of long-term revenues. Approximately 22% of these revenues are expected to be recognized by December 31, 2016; approximately 43% of these revenues are expected to be recognized between January 1, 2017 and December 31, 2019; approximately 15% of these revenues are expected to be recognized between January 1, 2020 and December 31, 2022; and the remaining revenues are expected to be recognized thereafter.
The Minerals business extracts high-value metallic content from stainless steel by-products and also specializes in the development of minerals technologies for commercial applications, including agriculture fertilizers. The Minerals business also produces industrial abrasives and roofing granules from power-plant utility coal slag at a number of locations throughout the U.S. Harsco Minerals' BLACK BEAUTY® abrasives are used for industrial surface preparation, such as rust removal and cleaning of bridges, ship hulls and various structures. Roofing granules are sold to residential roofing shingle manufacturers in the U.S., primarily for the replacement roofing market. This business is one of the largest U.S. producers of slag abrasives and residential roofing granules.
As part of the Harsco Metals & Minerals Segment's initiatives to develop new products and services, in particular environmental solutions, the Segment is involved with several initiatives and technology alliances focused on developing greater environmental sustainability through the recovery of resources from production by-products and waste streams.
The Harsco Metals & Minerals Segment operates in approximately 30 countries. In 2015 and 2014, this Segment's revenues were generated in the following regions:
 
 
Percentage of Revenues
Region
 
2015
 
2014
Western Europe
 
41
%
 
40
%
North America
 
24
%
 
24
%
Latin America (a)
 
14
%
 
16
%
Asia-Pacific
 
12
%
 
10
%
Middle East and Africa
 
5
%
 
5
%
Eastern Europe
 
4
%
 
5
%
(a)
Including Mexico.
For 2015, 2014 and 2013, the Harsco Metals & Minerals Segment's percentage of the Company's consolidated revenues were 64%, 67% and 47%, respectively.
The Company has announced its intention to pursue strategic options for the separation of the Harsco Metals & Minerals Segment from the rest of the Company. There is no specific timetable related to this initiative and there can be no assurance that a sale, spin-off or any other transaction will take place.



2


Harsco Industrial Segment—21% of consolidated revenues for 2015
The Harsco Industrial Segment includes the Harsco Industrial Air-X-Changers, Harsco Industrial IKG and Harsco Industrial Patterson-Kelley businesses. Approximately 93% of this Segment's revenues originate in North America.
Harsco Industrial Air-X-Changers is a leading supplier of custom-engineered and manufactured air-cooled heat exchangers for the natural gas, natural gas processing and petrochemical industries in the U.S. Harsco Industrial Air-X-Changers' heat exchangers are the primary apparatus used to condition natural gas during recovery, compression and transportation from underground reserves through the major pipeline distribution channels. In January 2014, the Company acquired Hammco Corporation ("Hammco"), a U.S. manufacturer of high specification air-cooled heat exchangers for the natural gas and petrochemical processing markets.
Harsco Industrial IKG manufactures a varied line of industrial grating products at several plants in the U.S. and international plants located in Mexico and China. These products include a full range of metal bar grating configurations, which are used mainly in industrial flooring, as well as safety and security applications in the energy, paper, chemical, refining and processing industries. Harsco Industrial IKG recently introduced GrateGuardTM, a fencing solution for first-line physical security.
Harsco Industrial Patterson-Kelley is a leading manufacturer of energy-efficient heat transfer products such as boilers and water heaters for commercial and institutional applications.
For 2015, 2014 and 2013, this Segment's percentage of the Company's consolidated revenues were 21%, 20% and 13%, respectively.
Harsco Rail Segment—15% of consolidated revenues for 2015
The Harsco Rail Segment is a global provider of equipment, after-market parts and services for the maintenance, repair and construction of railway track. The Segment's equipment and services support private and government-owned railroads and urban transit systems worldwide. In March 2015, the Company acquired Protran Technology ("Protran"), a U.S. designer and producer of safety systems for transportation and industrial applications; and in April 2015, the Company acquired JK Rail Products, LLC ("JK Rail"), a provider of after-market parts for railroad track maintenance.
The Harsco Rail Segment's products are produced in three countries and products and services are provided worldwide. In 2015, 2014 and 2013, export product sales from the U.S. for the Harsco Rail Segment were $67.1 million, $104.9 million and $109.3 million, respectively.
For 2015, 2014 and 2013, the Harsco Rail Segment's percentage of the Company's consolidated revenues were 15%, 13% and 10%, respectively.
(1)(i)  The products and services of the Company are generated through a number of product groups. These product groups are more fully discussed in Note 16, Information by Segment and Geographic Area, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data." The product groups that contributed 10% or more as a percentage of consolidated revenues in any of the last three fiscal years are set forth in the following table:
 
 
Percentage of Consolidated Revenues
Product Group
 
2015
 
2014
 
2013
Outsourced, on-site services of material logistics, product quality improvement and resource recovery for iron, steel and metals manufacturing; as well as value added environmental solutions for industrial co-products
 
64
%
 
67
%
 
47
%
Engineered scaffolding, concrete forming and shoring, and other access-related services, rentals and sales (a)
 
%
 
%
 
30
%
Air-cooled heat exchangers
 
11
%
 
11
%
 
6
%
Railway track maintenance services and equipment
 
15
%
 
13
%
 
10
%
(a) The Engineered scaffolding, concrete forming and shoring, and other access-related services, rentals and sales product group is associated with the Harsco Infrastructure Segment, which was disposed of as part of the Infrastructure Transaction. See Note 3, Acquisitions and Dispositions, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional information on the Infrastructure Transaction.
(1)(ii)  New products and services are added from time to time; however, in 2015, 2014 and 2013 none required the investment of a material amount of the Company's assets.
(1)(iii)  The manufacturing requirements of the Company's operations are such that no unusual sources of supply for raw materials are required. The raw materials used by the Company for its product manufacturing principally include steel and, to a lesser extent, aluminum, which are usually readily available. The profitability of the Company's manufactured products is affected by changing purchase prices of steel and other materials and commodities.

3


(1)(iv)  While the Company has a number of trademarks, patents and patent applications, it does not consider that any material part of its business is dependent upon them.
(1)(v)  The Company's Harsco Metals & Minerals Segment provides services which are usually subject to volume reductions at certain points of the year and the Company furnishes products within the Harsco Industrial Segment that are seasonal in nature. As a result, the Company's revenues and results of operations for the first quarter ending March 31 and the fourth quarter ending December 31 may be lower than the second and third quarters. Additionally, the Company has historically generated the majority of its cash flows in the second half of the year. This is a result of normally higher income during the latter part of the year. The Company's historical revenue patterns and cash provided by operating activities are as follows:
Historical Pattern of Revenue from Continuing Operations
(In millions)
 
2015
 
2014
 
2013
 
2012
 
2011
 
First quarter
 
$
451.6

 
$
512.5

 
$
715.4

 
$
752.3

 
$
778.2

 
Second quarter
 
455.7

 
535.3

 
759.6

 
770.6

 
874.6

 
Third quarter
 
428.3

 
526.4

 
739.9

 
756.8

 
855.5

 
Fourth quarter
 
387.4

 
492.1

 
681.1

 
766.3

 
796.9

 
Totals
 
$
1,723.1

(a)
$
2,066.3

 
$
2,896.0

 
$
3,046.0

 
$
3,305.2

 
(a)
Does not total due to rounding.
Historical Pattern of Cash Provided (Used) by Operations
(In millions)
 
2015
 
2014
 
2013
 
2012
 
2011
 
First quarter
 
$
10.5

 
$
27.5

 
$
3.0

 
$
(1.4
)
 
$
13.1

 
Second quarter
 
34.7

 
47.8

 
53.0

 
37.1

 
53.7

 
Third quarter
 
43.9

 
110.0

 
107.7

 
75.5

 
123.2

 
Fourth quarter
 
32.4

 
41.4

 
23.9

 
87.4

 
108.7

 
Totals
 
$
121.5

 
$
226.7

 
$
187.7

(a)
$
198.6

 
$
298.8

(a)
(a)
Does not total due to rounding.
(1)(vi)  The practices of the Company relating to working capital are similar to those of other industrial service providers or manufacturers servicing both domestic and international industrial customers and commercial markets. These practices include the following:
Standard accounts receivable payment terms of 30 to 60 days, with progress or advance payments required for certain long-lead-time or large orders. Payment terms are slightly longer in certain international markets.
Standard accounts payable payment terms of 30 to 90 days.
Inventories are maintained in sufficient quantities to meet forecasted demand. Due to the time required to manufacture certain railway track maintenance equipment to customer specifications, inventory levels of this business tend to increase for an extended period of time during the production phase and decline when the equipment is sold.
(1)(vii)  In 2015, 2014 and 2013, the Harsco Metals & Minerals Segment had two customers that each provided in excess of 10% of this Segment's revenues under multiple long-term contracts at several mill sites. The loss of any one of the contracts would not have a material adverse effect upon the Company's financial position or cash flows; however, it could have a significant effect on quarterly or annual results of operations. Additionally, a decline in economic conditions may further impact the ability of the Company's customers to meet their obligations to the Company on a timely basis and could result in bankruptcy or receivership filings by any of such customers. If customers are unable to meet their obligations on a timely basis, or if the Company is unable to collect amounts due from customers for any reason, it could adversely impact the realizability of receivables, the valuation of inventories and the valuation of long-lived assets across the Company's businesses. As part of its credit risk management practices, the Company closely monitors the credit standing and accounts receivable position of its customer base.
As previously disclosed, during the fourth quarter of 2013, the Company recorded a bad debt reserve of $2.6 million on receivables with a large steel mill customer who filed for protection under the Italian receivership procedures (the "Marzano Law"). During the second quarter of 2014, the customer terminated its contract with the Company under the provisions of the Marzano Law. As a result, during the second quarter of 2014, the Company recorded an additional bad debt reserve of $3.9 million on the remaining pre-receivership receivables with this customer.
Additionally, the Company recorded a bad debt reserve of $2.6 million during 2014 for one of its Canadian steel mill customers that filed for receivership protection during the course of the year, as the Company has previously disclosed.  The amount of the bad debt reserve for this customer represents the full pre-receivership balance.

4


One of the Company's steel mill customers in Europe ceased operations and began the formal process of liquidation in late 2015. The Company previously recorded bad debt reserves of approximately $3 million related to this customer and as a result of these events, recorded an additional bad debt reserve related to the remaining receivables balance of $9.9 million during 2015.
The Harsco Industrial Segment had two customers in 2015, and one customer in 2014 and 2013, that provided in excess of 10% of the Segment's revenues. The loss of any of these customers would not have a material adverse impact on the Company's financial positions or cash flows; however, it could have a material effect on quarterly or annual results of operations.
The Harsco Rail Segment had two customers in 2015, one customer in 2014, and two customers in 2013 that provided in excess of 10% of the Segment's revenues. The loss of any of these customers would not have a material adverse impact on the Company's financial positions or cash flows; however, it could have a material effect on quarterly or annual results of operations.
(1)(viii)  At December 31, 2015, the Company's metals services contracts had estimated future revenues of $3.2 billion at expected production levels, compared with $4.5 billion at December 31, 2014. This decrease is primarily due to exited contracts associated with strategic actions from the Harsco Metals & Minerals Improvement Plan ("Project Orion") related to the focus on underperforming contracts and the impact of foreign currency translation. At December 31, 2015, the Company had an estimated order backlog of $72.9 million in its Harsco Industrial Segment, compared with $146.9 million at December 31, 2014. This decrease is primarily due to low oil prices impacting capital expenditures and overall spending by customers in the natural gas, natural gas processing and petrochemical industries. In addition, at December 31, 2015, the Harsco Rail Segment had an estimated order backlog of $292.1 million, compared with $348.8 million at December 31, 2014. This decrease is primarily due to shipments which were not replaced due to decreased demand, primarily in the U.S., during 2015.
At December 31, 2015, $223.4 million or 61% of the Company's manufactured products order backlog is not expected to be filled in 2016. The remainder of this backlog is expected to be filled in 2017 and 2018. This is exclusive of long-term metals industry services contracts, roofing granules and industrial abrasives products, and minerals and metal recovery technologies services.
(1)(ix)  At December 31, 2015, the Company had no material contracts that were subject to renegotiation of profits or termination at the election of the U.S. Government.
(1)(x)  The Company's competitive environment is complex because of the wide diversity of services and products provided and the global breadth and depth of markets served. No single service provider or manufacturer competes with the Company with respect to all services provided or products manufactured and sold. In general, on a global basis, the Company's segments are among the market leaders in their respective sectors and compete with a range of global, regional and local businesses of varying size and scope.
Harsco Metals & Minerals Segment—This Segment provides outsourced on-site services to the global metals industries in approximately 30 countries, with the largest operations focused in the U.S., the U.K., France and Brazil. This Segment is one of the world's largest providers of these services. This Segment's key competitive factors are innovative resource recovery solutions, significant industry experience, technology, safety performance, service and value. This Segment competes principally with a number of privately-held businesses for services outsourced by customers. Additionally, due to the nature of this Segment's services, it encounters a certain degree of "competition" from customers' desire to perform similar services themselves instead of using an outsourced solution.
Harsco Industrial Segment—This Segment includes manufacturing businesses located principally in the U.S. with an increasing focus on international growth. Key competitive factors include quality, value, technology and energy-efficiency. Primary competitors are U.S.-based manufacturers of similar products. In January 2014, the Company acquired Hammco, a provider of process coolers for the natural gas, natural gas processing and petrochemical industries.
Harsco Rail Segment—This Segment manufactures and sells highly-engineered railway track maintenance equipment produced primarily in the U.S. for customers throughout the world. Additionally, this Segment provides railway track maintenance services principally in the U.S. and the U.K. This Segment's key competitive factors are quality, technology, customer service and value. Primary competitors for both products and services are privately-held global businesses as well as certain regional competitors. In March 2015, the Company acquired Protran, a U.S. designer and producer of safety systems for transportation and industrial applications; and in April 2015, the Company acquired JK Rail, a provider of after-market parts for railroad track maintenance.


5


(1)(xi)  The Company's expense for research and development activities was $4.5 million, $5.5 million and $10.2 million in 2015, 2014 and 2013, respectively. This excludes technology development and engineering costs classified in cost of services and products sold or selling, general and administrative expense. For additional information regarding research and development activities, see the Research and Development section included under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(1)(xii)  The Company has become subject to, as have others, stringent air and water quality control legislation. In general, the Company has not experienced substantial difficulty complying with these environmental regulations, and does not anticipate making any material capital expenditures for environmental control facilities. While the Company expects that environmental regulations may expand, and that its expenditures for air and water quality control will continue, it cannot predict the effect on its business of such expanded regulations. For additional information regarding environmental matters see Note 12, Commitments and Contingencies, to the Consolidated Financial Statements included under Part II, Item 8, "Financial Statements and Supplementary Data."
(1)(xiii)  At December 31, 2015, the Company had approximately 10,800 employees.
(d)
Financial Information about Geographic Areas
Financial information concerning international and domestic operations is included in Note 16, Information by Segment and Geographic Area, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," which information is incorporated herein by reference. Export sales from the U.S. totaled $80.8 million, $134.0 million and $143.7 million in 2015, 2014 and 2013, respectively. The decrease in export sales from the U.S. is primarily attributable to decreased volumes in the Harsco Rail Segment and the air-cooled heat exchangers business.
(e)
Available Information
Information is provided in Part I, Item 1 (a), "General Development of Business."



Item 1A.    Risk Factors.
Set forth below are risks and uncertainties that could materially and adversely affect the Company's results of operations, financial condition, liquidity and cash flows. The risks set forth below are not the only risks faced by the Company. The Company's business operations could also be affected by other factors not presently known to the Company or factors that the Company currently does not consider to be material.
Negative economic conditions may adversely impact demand for the Company's products and services, as well as the ability of the Company's customers to meet their obligations to the Company on a timely basis.
Negative economic conditions, including the tightening of credit in financial markets, can lead businesses to postpone spending, which may impact the Company's customers, causing them to cancel, decrease or delay their existing and future orders with the Company. In addition, economic conditions may further impact the ability of the Company's customers by either causing them to close locations serviced by the Harsco Metals & Minerals Segment, or cause their financial condition to deteriorate to a point where they are unable to meet their obligations to the Company on a timely basis. One or more of these events could adversely impact the Company's operating results and realizability of receivables.
Cyclical industry and economic conditions may adversely affect the Company's businesses.
The Company's businesses are subject to general economic slowdowns and cyclical conditions in each of the industries served. In particular:
The Harsco Metals & Minerals Segment may be adversely impacted by continued slowdowns in steel mill production, excess production capacity, and bankruptcy or receivership of steel producers, as well as a reversal or slowing of current outsourcing trends in the steel industry;
The resource recovery technologies business of the Harsco Metals & Minerals Segment can also be adversely impacted by continued slowdowns in customer production or a reduction in the selling prices of its materials, which are market-based and vary based upon the current fair value of the components being sold. Therefore, the revenue generated from the sale of such recycled materials varies based upon the fair value of the commodity components being sold;
The industrial abrasives and roofing granules business of the Harsco Metals & Minerals Segment may be adversely impacted by reduced home resales or economic conditions that slow the rate of residential roof replacement, or by slowdowns in the industrial and infrastructure refurbishment industries;


6


The air-cooled heat exchangers business of the Harsco Industrial Segment is affected by cyclical conditions in the natural gas, natural gas processing and petrochemical industries. The continued depression of oil prices, or a further decline in such prices, may result in a continued slowdown in natural gas and petrochemical drilling or production, which could adversely affect this business;
Decreasing oil prices may adversely impact purchasing by energy sector customers in the Harsco Industrial Segment;
The industrial grating products business of the Harsco Industrial Segment may be adversely impacted by slowdowns in non-residential construction and industrial production;
The Harsco Rail Segment may be adversely impacted by developments in the railroad industry that lead to lower capital spending or reduced track maintenance spending; and
Capital constraints and increased borrowing costs may also adversely impact the financial position and operations of the Company's customers across all business segments.
Furthermore, realization of deferred tax assets is ultimately dependent on generating sufficient income in future periods to ensure recovery of those assets. The cyclicality of the Company's end markets and adverse economic conditions may negatively impact the future income levels that are necessary for the utilization of deferred tax assets.
The seasonality of the Company's business may cause its quarterly results to fluctuate.
The Company has historically generated the majority of its cash flows provided by operations in the second half of the year. This is a result of normally higher income during the second half of the year, as the Company's business tends to follow seasonal patterns. If the Company is unable to successfully manage the cash flow and other effects of seasonality on the business, its results of operations may suffer.
Increased customer concentration and related credit and commercial risks may adversely impact the Company's results of operations, financial condition and cash flows.
For the year ended December 31, 2015, the Company’s top five customers in the Harsco Metals & Minerals Segment accounted for approximately 38% of the Company’s revenues in that segment and 24% of the Company’s total revenues.
Certain of the several large customers in the Harsco Metals & Minerals Segment have significant accounts receivable balances. If a large customer were to experience financial difficulty, or file for bankruptcy or receivership protection it could adversely impact the Company's results of operations, cash flows and asset valuations.
Disputes with our largest customers, or customers with long term contracts, could adversely affect the Company’s financial condition.
The Company routinely enters into multiple contracts with its customers, many of which can be long term contracts. For example, the Company is currently party to multiple contracts in numerous countries with its largest customer, ArcelorMittal, which accounted for almost 10% of its total revenues for the year ended December 31, 2015. These contracts cover a variety of services and vary in contract length. From time to time, the Company may be negotiating the terms of current and potential future services to be rendered due to the scope and complexity of this relationship. Disagreements between the parties can arise as a result of the scope and nature of the relationship and these ongoing negotiations.
In addition, under long term contracts, the Company may incur capital expenditures or other costs at the beginning of the contract that it expects to recoup through the life of the contract. Some of these contracts provide for advance payments to assist the Company in covering these costs and expenses. A dispute with a customer during the life of a long term contract could impact the ability of the Company to receive these advance payments or otherwise recoup incurred costs and expenses.
The Company's global presence subjects it to a variety of risks arising from doing business internationally.
The Company operates in approximately 30 countries, generating 56% of its revenues outside of the U.S. (based on location of the facility generating the revenue) for the year ended December 31, 2015. In addition, as of December 31, 2015, approximately 75% of the Company’s property, plant and equipment are located outside of the U.S. The Company's global footprint exposes it to a variety of risks that may adversely affect the Company's results of operations, financial condition, liquidity and cash flows. These include, but may not be limited to, the following:
periodic economic downturns in the countries in which the Company does business;
imposition of or increases in currency exchange controls and hard currency shortages;
customs matters and changes in trade policy or tariff regulations;
changes in regulatory requirements in the countries in which the Company does business;
changes in tax regulations, higher tax rates in certain jurisdictions and potentially adverse tax consequences including restrictions on repatriating earnings, adverse tax withholding requirements and "double taxation";
longer payment cycles and difficulty in collecting accounts receivable;
complexities in complying with a variety of U.S. and foreign government laws, controls and regulations;

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political, economic and social instability, civil and political unrest, terrorist actions and armed hostilities in the regions or countries in which the Company does business;
inflation rates in the countries in which the Company does business;
complying with complex labor laws in foreign jurisdictions;
laws in various international jurisdictions that limit the right and ability of subsidiaries to pay dividends and remit earnings to affiliated companies unless specified conditions are met;
sovereign risk related to international governments that include, but may not be limited to, governments stopping interest payments or repudiating their debt, nationalizing private businesses or altering foreign exchange regulations; and
uncertainties arising from local business practices, cultural considerations and international political and trade tensions.
The Company has operations in several countries in the Middle East, including Bahrain, Egypt, Israel, Saudi Arabia and Oman, as well as India, some of which have recently experienced armed hostilities and civil unrest. Additionally, these countries are geographically close to other countries that may have a continued high risk of armed hostilities or civil unrest.
If the Company is unable to successfully manage the risks associated with its global business, the Company's results of operations, financial condition, liquidity and cash flows may be negatively impacted.
The Board of Directors has determined to explore strategic options for the separation of the Company’s Metals & Minerals Segment; there can be no assurance that the Company will be successful in entering into or consummating a transaction or that any such transaction will yield additional value for stockholders.
On November 9, 2015, the Company announced that the Board of Directors had authorized a process to explore a range of strategic options for the separation of the Company’s Harsco Metals & Minerals Segment from the Harsco Industrial and Rail Segments and Brand joint venture. There can be no assurances that any such process will result in a sale, spin-off or any other transaction being entered into or consummated. The process may be time-consuming, distracting to management and disruptive to the Company's business operations, and if the Company is unable to effectively manage the process, the business, financial condition, and results of operations could be adversely affected. In addition, identifying and evaluating potential strategic options may result in the incurrence of additional expenses.
 
Any strategic decision will involve risks and uncertainties, and the Company cannot guarantee that any potential transaction or other strategic option, if identified, evaluated and consummated, will provide greater value to the Company's stockholders than that reflected in the current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond the Company's control, including, among other factors, market conditions, industry trends and the interest of third parties in the Harsco Metals & Minerals Segment.
 
The Company has not set a specific timetable for completion of this process and does not intend to discuss or disclose developments with respect to the process unless and until such time as the Board of Directors has approved a definitive course of action or otherwise deems disclosure to be required or appropriate.  As a consequence, perceived uncertainties related to the future of the Company’s Harsco Metals & Minerals Segment may result in the loss of potential business opportunities and may make it more difficult for the Company to attract and retain qualified personnel and business partners.

 Due to the international nature of the Company's business, the Company could be adversely affected by violations of certain laws.
The U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws in non-U.S. jurisdictions generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. The FCPA also imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which, among other things, are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off the books” slush funds from which improper payments can be made. The Company may not always prevent reckless or criminal acts by its employees or agents and may be exposed to liability due to pre-acquisition conduct of employees or agents of businesses or operations the Company may acquire. Violations of these laws, or allegations of such violations, could disrupt the Company’s operations, involve significant management distraction and have a material adverse effect on the Company’s results of operations, financial condition and cash flows. If the Company is found to be liable for violations of these laws (either due to its own acts, out of inadvertence or due to the acts or inadvertence of others), the Company could also be subject to severe criminal or civil penalties or other sanctions, disgorgement, further changes or enhancements to its procedures, policies and controls, personnel changes and other remedial actions.


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Furthermore, the Company is subject to the export controls and economic embargo rules and regulations of the U.S., including the Export Administration Regulations and trade sanctions against embargoed countries, which are administered by the Office of Foreign Asset Control within the Department of Treasury (“OFAC”), as well as other laws and regulations administered by the Department of Commerce. These regulations limit the Company’s ability to market, sell, distribute or otherwise transfer its products to prohibited countries or persons. Failure to comply with these rules and regulations may result in substantial civil and criminal penalties, including fines and disgorgement of profits, the imposition of a court-appointed monitor, the denial of export privileges and debarment from participation in U.S. government contracts.
The Company is subject to potential disruption of its access to credit.
Disruptions in the credit markets have severely restricted access to capital for companies. When credit markets deteriorate, the Company's ability to incur additional indebtedness to fund operations or refinance maturing obligations as they become due may be constrained. This risk could be exacerbated by future deterioration in the Company's credit ratings. The Company is unable to predict any duration or severity of disruptions in the credit and financial markets and adverse global economic conditions.
Exchange rate fluctuations may adversely impact the Company's business.
Fluctuations in foreign exchange rates between the U.S. dollar and the approximately 25 other currencies in which the Company currently conducts business may adversely impact the Company's results of operations in any given fiscal period. The Company’s principal foreign currency exposures are in the European Economic and Monetary Union, the U.K. and Brazil. Given the structure of the Company's operations, an increase in the value of the U.S. dollar relative to the foreign currencies in which the Company earns its revenues generally has a negative impact on the translated amounts of the assets and liabilities, results of operations, and cash flows. The Company's foreign currency exposures increase the risk of volatility in its financial position, results of operations and cash flows. If currencies in the below regions change materially in relation to the U.S. dollar, the Company's financial position, results of operations, or cash flows may be materially affected.
Compared with the corresponding full-year period in 2014, the average value of major currencies changed as follows in relation to the U.S. dollar during the full-year 2015, impacting the Company's revenues and income:
British pound sterling weakened by 7%
euro weakened by 16%
Brazilian real weakened by 30%
Compared with exchange rates at December 31, 2014, the value of major currencies at December 31, 2015 changed as follows:
British pound sterling weakened by 5%
euro weakened by 10%
Brazilian real weakened by 33%
To illustrate the effect of foreign exchange rate changes in certain key markets of the Company, in 2015 revenues would have been approximately 10% or $170 million higher and operating income would have been approximately 2% or $2 million greater if the average exchange rates for 2014 were utilized. In a similar comparison for 2014, revenues would have been approximately 1% or $20 million higher and operating income would have been approximately 3% or $2 million greater if the average exchange rates for 2013 were utilized.
Currency changes also result in assets and liabilities denominated in local currencies being translated into U.S. dollars at different amounts than at the prior period end. Generally, if the U.S. dollar weakens in relation to currencies in countries in which the Company does business, the translated amounts of the related assets, liabilities, and therefore stockholders' equity, would increase. Conversely, if the U.S. dollar strengthens in relation to currencies in countries in which the Company does business, the translated amounts of the related assets, liabilities, and therefore stockholders' equity, would decrease.
Although the Company engages in foreign currency exchange forward contracts and other hedging strategies to mitigate foreign exchange transactional risks, hedging strategies may not be successful or may fail to completely offset these risks. In addition, competitive conditions in the Company's manufacturing businesses may limit the Company's ability to increase product prices in the face of adverse currency movement. Sales of products manufactured in the U.S. for the domestic and export markets may be affected by the value of the U.S. dollar relative to other currencies. Any long-term strengthening of the U.S. dollar could depress demand for these products and reduce sales. Conversely, any long-term weakening of the U.S. dollar could improve demand for these products and increase sales.




9


The Company may lose customers or be required to reduce prices as a result of competition.
The industries in which the Company operates are highly competitive:
The Harsco Metals & Minerals Segment is sustained mainly through contract renewals and new contract signings. The Company may be unable to renew contracts at historical price levels or to obtain additional contracts at historical rates as a result of competition. If the Company is unable to renew its contracts at the historical rates or renewals are made at reduced prices, or if its customers terminate their contracts, revenue and results of operations may decline.
The Harsco Industrial and Harsco Rail Segments compete with companies that manufacture similar products both internationally and domestically. Certain international competitors export their products into the U.S. and sell them at lower prices, which can be the result of lower labor costs and government subsidies for exports. Such practices may limit the prices the Company can charge for its products and services. Additionally, unfavorable foreign exchange rates can adversely impact the Company's ability to match the prices charged by international competitors. If the Company is unable to match the prices charged by international competitors, it may lose customers.
Restrictions imposed by the Company's credit facility and other financing arrangements may limit the Company's operating and financial flexibility.
The agreements governing the Company's outstanding financing arrangements impose a number of restrictions. For example, the Company's Senior Secured Credit Facility and the indentures governing the 5.75% Senior Notes due 2018 contain certain restrictions and covenants which restrict the Company's ability to incur liens and/or debt or provide guarantees in respect of obligations of any subsidiary. Under the Company's Senior Secured Credit Facility, the Company must comply with certain financial covenants on a quarterly basis. The covenants also place limitations on dividends, acquisitions, investments in joint ventures, unrestricted subsidiaries, indebtedness and the imposition of liens on the Company's assets. In the event of a default, the Company's lenders and the counterparties to the Company's other financing arrangements could terminate their commitments to the Company and declare all amounts borrowed, together with accrued interests and fees, immediately due and payable. If this were to occur, the Company might not be able to pay these amounts, or the Company might be forced to seek an amendment to the Company's financing arrangements which could make the terms of these arrangements more onerous for the Company. In addition, this could also trigger an event of default under the cross-default provisions of the Company's other obligations. As a result, a default under one or more of the existing or future financing arrangements could have significant consequences for the Company.
The Company is exposed to counterparty risk in its derivative financial arrangements.
The Company uses derivative financial instruments, such as cross-currency interest rate swaps ("CCIRs") and foreign currency exchange forward contracts, for a variety of purposes. The Company uses CCIRs in conjunction with certain debt issuances in order to secure either a fixed or floating local currency interest rate. The Company uses foreign currency exchange forward contracts as part of a worldwide program to minimize foreign currency operating income and balance sheet exposure. In particular, the Company uses foreign currency exchange forward contracts to hedge commitments, such as foreign currency debt, firm purchase commitments and foreign currency cash flows for certain export sales transactions. The unsecured contracts for CCIRs and foreign currency exchange forward contracts outstanding at December 31, 2015 mature at various times through 2020 and are with major financial institutions. The Company may also enter into derivative contracts to hedge commodity exposures.
The failure of one or more counterparties to the Company's derivative financial instruments to fulfill their obligations could adversely affect the Company's results of operations, financial condition, liquidity and cash flows.
The Company’s variable rate indebtedness subjects it to interest rate risk, which could cause the Company's debt service obligations to increase significantly.
The Company's total debt at December 31, 2015 was $911.1 million. Of this amount, approximately 50% had variable rates of interest, and approximately 50% had fixed rates of interest. The weighted average interest rate of total debt was approximately 4.6%. At debt levels as of December 31, 2015, a one percentage point increase/decrease in variable interest rates would increase/decrease interest expense by $4.6 million per year. If the Company is unable to successfully manage its exposure to variable interest rates, its debt service obligations may increase even though the amount borrowed remains the same, and in turn, its results of operations and financial condition may be negatively impacted.
Additionally, whenever the Company refinances fixed rate debt, the new interest rates may negatively impact the Company's results of operations. The interest rates associated with new fixed rate debt are impacted by several factors including, but not limited to, market conditions, term of the borrowings and the financial results and currency.


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The Company is subject to taxes in numerous jurisdictions. Legislative, regulatory and legal developments involving income taxes could materially adversely affect the Company’s results of operations and cash flows and impact the Company’s ability to compete abroad.
The Company is subject to U.S. federal, U.S. state and international income, payroll, property, sales and use, value-added, fuel and other types of taxes in numerous jurisdictions. Significant judgment is required in determining the Company's worldwide provisions for income taxes. Changes in tax rates, enactments of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in substantially higher taxes, and therefore, could have a significant adverse effect on the Company's results of operations, financial condition and liquidity.
Currently, a majority of the Company's revenue is generated from customers located outside the U.S., and a substantial portion of the Company's assets and employees are located internationally. U.S. income tax and withholding taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries as such earnings are indefinitely reinvested in the operations of those subsidiaries. Any U.S. tax reform that reduces the Company's ability to defer U.S. taxes on earnings indefinitely reinvested outside of the U.S. could have a negative impact on the Company's ability to compete in the global marketplace.
The Company's defined benefit net periodic pension cost is directly affected by the equity and bond markets. A downward trend in those markets could adversely impact the Company's results of operations, financial condition and cash flows.
In addition to the economic issues that directly affect the Company's businesses, changes in the performance of equity and bond markets, particularly in the U.K. and the U.S., impact actuarial assumptions used in determining annual net periodic pension cost ("NPPC"), pension liabilities and the valuation of the assets in the Company's defined benefit pension plans. Financial market deterioration would most likely have a negative impact on the Company's NPPC and the pension assets and liabilities. This could result in a decrease to stockholders' equity and an increase in the Company's statutory funding requirements.
In addition to the Company's defined benefit pension plans, the Company also participates in several multiemployer pension plans ("MEPPs") throughout the world. Within the U.S., the Pension Protection Act of 2006 may require additional funding for MEPPs that could cause the Company to be subject to higher cash contributions in the future. Additionally, market conditions and the number of participating employers remaining in each plan may affect the funded status of MEPPs and consequently any Company withdrawal liability, if applicable.
A negative outcome on personal injury claims against the Company may adversely impact results of operations and financial condition.
The Company has been named as one of many defendants (approximately 90 or more in most cases) in legal actions 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 majority of the asbestos complaints pending against the Company have been filed in New York. Almost all of the New York complaints contain a standard claim for damages of $20 million or $25 million against the approximately 90 defendants, regardless of the individual plaintiff's alleged medical condition, and without specifically identifying any of the Company’s products as the source of plaintiff's asbestos exposure. If the Company is found to be liable in any of these actions and the liability exceeds the Company's insurance coverage, results of operations, cash flows and financial condition could be adversely affected.

The nature of the Company’s products creates the possibility of significant product liability and warranty claims, which could harm its business.
The Company’s customers use some of its products in potentially hazardous applications that can cause injury or loss of life and damage to property, equipment or the environment. In addition, the Company’s products are integral to the production process for some end-users and any failure of the Company’s products could result in a suspension of operations. Accidents may occur at a location where the Company’s equipment and services have been or are being used. Investigations into such accidents, even if the Company and its products are ultimately found not to be the cause of such accidents, require the Company to expend significant time, effort and resources. The Company cannot be certain that its products will be completely free from defects. The Company may be named as a defendant in product liability or other lawsuits asserting potentially large claims. In addition, the Company cannot guarantee that insurance will be available or adequate to cover any or all liabilities incurred. The Company also may not be able to maintain insurance in the future at levels it believes are necessary and at rates it considers reasonable.




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Higher than expected claims under insurance policies, under which the Company retains a portion of the risk, could adversely impact results of operations and cash flows.
The Company retains a significant portion of the risk for property, workers' compensation, U.K. employers' liability, automobile and general and product liability losses. Reserves have been recorded that 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 are higher than those projected by management, an increase to the Company's insurance reserves may be required and would be recorded as a charge to income in the period the need for the change was determined.
Increases or decreases in purchase prices (or selling prices) or availability of steel or other materials and commodities may affect the Company's profitability.
The profitability of the Company's manufactured products is affected by changing purchase prices of raw material, including steel and other materials and commodities. If raw material costs associated with the Company's manufactured products increase and the costs cannot be transferred to the Company's customers, results of operations would be adversely affected. Additionally, decreased availability of steel or other materials could affect the Company's ability to produce manufactured products in a timely manner. If the Company cannot obtain the necessary raw materials for its manufactured products, then revenues, results of operations and cash flows could be adversely affected.
Certain services performed by the Harsco Metals & Minerals Segment result in the recovery, processing and sale of recovered metals and minerals and other high-value metal by-products to its customers. The selling price of the by-products material is market-based and varies based upon the current fair value of its components. Therefore, the revenue amounts generated from the sale of such by-products material vary based upon the fair value of the commodity components being sold.
The success of the Company's strategic ventures depends on the satisfactory performance by strategic venture partners of their strategic venture obligations.
The Company enters into various strategic ventures as part of its strategic growth initiatives as well as to comply with local laws. Differences in opinions or views between strategic venture partners can result in delayed decision-making or failure to agree on material issues which could adversely affect the business and operations of the venture. From time to time in order to establish or preserve a relationship, or to better ensure venture success, the Company may accept risks or responsibilities for the strategic venture that are not necessarily proportionate with the reward it expects to receive. The success of these and other strategic ventures also depends, in large part, on the satisfactory performance by the Company's strategic venture partners of their strategic venture obligations, including their obligation to commit working capital, equity or credit support as required by the strategic venture and to support their indemnification and other contractual obligations.
If the Company's strategic venture partners fail to satisfactorily perform their strategic venture obligations as a result of financial or other difficulties, the strategic venture may be unable to adequately perform or deliver its contracted services. Under these circumstances, the Company may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, increased liabilities or significant losses for the Company with respect to the strategic venture. In addition, although the Company generally performs due diligence with regard to potential strategic partners or ventures, a failure by a strategic venture partner to comply with applicable laws, rules or regulations could negatively impact its business and, in the case of government contracts, could result in fines, penalties, suspension or even debarment. Unexpected strategic venture developments could have a material adverse effect on results of operations, financial condition and cash flows.
The Company is subject to various environmental laws, and the success of existing or future environmental claims against it could adversely impact the Company's results of operations and cash flows.
The Company's operations are subject to various federal, state, local and international laws, regulations and ordinances relating to the protection of health, safety and the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, the remediation of contaminated sites and the maintenance of a safe workplace. These laws impose penalties, fines and other sanctions for non-compliance and liability for response costs, property damages and personal injury resulting from past and current spills, disposals or other releases of, or exposure to, hazardous materials. The Company could incur substantial costs as a result of non-compliance with or liability for remediation or other costs or damages under these laws. The Company may be subject to more stringent environmental laws in the future, and compliance with more stringent environmental requirements may require the Company to make material expenditures or subject it to liabilities that the Company currently does not anticipate.



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The Company is currently 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 under the federal "Superfund" law. At several sites, the Company is currently conducting environmental remediation, and it is probable that the Company will agree to make payments toward funding certain other of these remediation activities. It also is possible that some of these matters will be decided unfavorably to the Company and that other sites requiring remediation will be identified. Each of these matters is subject to various uncertainties, and 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’s ongoing operations are subject to extensive laws, regulations, rules and ordinances relating to safety, health and environmental matters that impose significant costs and liabilities on the Company, and future laws and governmental standards could increase these costs and liabilities.
The Company is subject to a variety of international, federal, state and local laws and governmental regulations, rules and ordinances regulating the use of certain materials contained in its products and/or used in its manufacturing processes. Many of these laws and governmental standards provide for extensive obligations that require the Company to incur significant compliance costs, and impose substantial monetary fines and/or criminal sanctions for violations.
Furthermore, such laws and standards are subject to change and may become more stringent. For example, the U.S. Occupational Safety and Health Administration is reviewing its worker safety standards related to exposure to beryllium, which is a trace component of BLACK BEAUTY® abrasives sold by Harsco Metals & Minerals Segment. Although it is not possible to predict changes in laws or other governmental standards, the development, proposal or adoption of more stringent laws or governmental standards may require the Company to change its manufacturing processes, for example by reducing or eliminating use of the regulated component or material in its manufacturing process. The Company may not be able to develop a new manufacturing process to comply with such legal and regulatory changes without investing significant time and resources, if at all. In addition, such legal and regulatory changes may also affect buying decisions by the users of the Company’s products that contain regulated materials or that involve the use of such materials in the manufacturing process. If applicable laws and governmental standards become more stringent, the Company’s results of operations, liquidity and financial condition could be materially adversely affected.
The Company maintains a workforce based upon current and anticipated workload. If the Company does not receive future contract awards or if these awards are delayed, significant cost may result that could have a material adverse effect on results of operations, financial condition, liquidity and cash flows.
The Company's estimates of future performance depend on, among other matters, whether and when the Company will receive certain new contract awards, including the extent to which the Company utilizes its workforce. The rate at which the Company utilizes its workforce is impacted by a variety of factors, including:
the ability to manage attrition;
the ability to forecast the need for services, which allows the Company to maintain an appropriately sized workforce;
the ability to transition employees from completed projects to new projects or between segments; and
the need to devote resources to non-revenue generating activities such as training or business development.
While the Company's estimates are based upon its good faith judgment, these estimates can be unreliable and may frequently change based on newly available information. In the case of large-scale domestic and international projects where timing is often uncertain, it is particularly difficult to predict whether and when the Company will receive a contract award. The uncertainty of contract award timing can present difficulties in matching the Company's workforce size with contract needs. If an expected contract award is delayed or not received, the Company could incur cost resulting from reductions in staff or redundancy of facilities or equipment that could have a material adverse effect on results of operations, financial condition, liquidity and cash flows.
Increased information technology security threats and more sophisticated computer crime pose a risk to the Company's systems, networks, products and services.
The Company relies upon information technology systems and networks in connection with a variety of business activities, some of which are managed by third parties. Additionally, the Company collects and stores data that is of a sensitive nature. The secure operation of these information technology systems and networks, and the processing and maintenance of this data is critical to the Company's business operations and strategy. Information technology security threats - from user error to attacks designed to gain unauthorized access to the Company's systems, networks and data - are increasing in frequency and sophistication. Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer

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crime and advanced persistent threats. These threats pose a risk to the security of the Company's systems and networks and the confidentiality, availability and integrity of the Company's data. Should an attack on the Company's information technology systems and networks succeed, it could expose the Company and the Company's employees, customers, dealers and suppliers to misuse of information or systems, the compromising of confidential information, manipulation and destruction of data, production downtimes and operations disruptions. The occurrence of any of these events could adversely affect the Company's reputation, competitive position, business, results of operations and cash flows. In addition, such breaches in security could result in litigation, regulatory action, potential liability and the costs and operational consequences of implementing further data protection measures.
The Company's intellectual property portfolio may not prevent competitors from independently developing similar or duplicative products and services.
The Company's patents and other intellectual property may not prevent competitors from independently developing or selling similar or duplicative products and services, and there can be no assurance that the resources invested by the Company to protect the Company's intellectual property will be sufficient or that the Company's intellectual property portfolio will adequately deter misappropriation or improper use of the Company's technology. The Company could also face competition in some countries where the Company has not invested in an intellectual property portfolio. The Company may also face attempts to gain unauthorized access to the Company's information technology systems or products for the purpose of improperly acquiring trade secrets or confidential business information. The theft or unauthorized use or publication of the Company's trade secrets and other confidential business information as a result of such an incident could adversely affect the Company's competitive position and the value of the Company's investment in research and development. The Company may be unable to secure or retain ownership or rights to use data in certain software analytics or services offerings. In addition, the Company may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming. If the Company is found to infringe any third-party rights, the Company could be required to pay substantial damages or could be enjoined from offering some of the Company's products and services. Also, there can be no assurances that the Company will be able to obtain or renew from third parties the licenses needed in the future, and there is no assurance that such licenses can be obtained on reasonable terms.
Union disputes or other labor matters could adversely affect the Company's operations and financial results.
A significant portion of the Company's employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. There can be no assurance that any current or future issues with the Company's employees will be resolved or that the Company will not encounter future strikes, work stoppages or other types of conflicts with labor unions or the Company's employees. The Company may not be able to satisfactorily renegotiate collective bargaining agreements in the U.S. and other countries when they expire. If the Company fails to renegotiate existing collective bargaining agreements, the Company could encounter strikes or work stoppages or other types of conflicts with labor unions. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at the Company's facilities in the future. The Company may also be subject to general country strikes or work stoppages unrelated to the Company's business or collective bargaining agreements. A work stoppage or other limitations on production at the Company's facilities for any reason could have an adverse effect on the Company's business, results of operations, financial condition and cash flows. In addition, many of the Company's customers and suppliers have unionized work forces. Strikes or work stoppages experienced by the Company's customers or suppliers could have an adverse effect on the Company's business, results of operations and financial condition.
If the Company cannot generate future cash flows at a level sufficient to recover the net book value of any reporting units, the Company may be required to record an impairment charge to earnings.
As a result of the Company's goodwill impairment testing, the Company may be required to record future impairment charges to the extent it cannot generate future cash flows at a level sufficient to recover the net book value of any of the Company's reporting units. The Company's estimates of fair value are based on assumptions about the future operating cash flows and growth rates of each reporting unit and discount rates applied to these cash flows. Based on the uncertainty of future growth rates, restructuring savings and other assumptions used to estimate goodwill recoverability, future reductions in the Company's expected cash flows could cause a material non-cash goodwill impairment charge, which could have a material adverse effect on the Company's results of operations and financial condition.


Item 1B.    Unresolved Staff Comments.
None.



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Item 2.    Properties.
Operations of Harsco Corporation and its subsidiaries are conducted at both owned and leased properties in domestic and international locations. The Company's executive offices are located at 350 Poplar Church Road, Camp Hill, Pennsylvania 17011 and are owned. The following table describes the location and principal use of the Company's more significant properties.
Location
 
Principal Products
 
Interest
Harsco Metals & Minerals Segment
 
 
 
 
Coronel Fabriciano, Brazil
 
Minerals and Resource Recovery Technologies
 
Owned
East Chicago, Indiana, U.S.
 
Minerals and Resource Recovery Technologies
 
Owned
Sarver, Pennsylvania, U.S.
 
Minerals and Resource Recovery Technologies
 
Owned
Sorel—Tracy, Canada
 
Minerals and Resource Recovery Technologies
 
Leased
Taiyuan City, China
 
Minerals and Resource Recovery Technologies
 
Owned and Leased
Warren, Ohio, U.S.
 
Minerals and Resource Recovery Technologies
 
Owned
Drakesboro, Kentucky, U.S.
 
Roofing Granules/Abrasives
 
Owned
Gary, Indiana, U.S.
 
Roofing Granules/Abrasives
 
Owned
Fairless Hills, Pennsylvania, U.S.
 
Roofing Granules/Abrasives
 
Owned
     Moundsville, West Virginia, U.S.
 
Roofing Granules/Abrasives
 
Leased
Harsco Rail Segment
 
 
 
 
Brendale, Australia
 
Rail Maintenance Equipment
 
Owned
Ludington, Michigan, U.S.
 
Rail Maintenance Equipment
 
Owned
West Columbia, South Carolina, U.S.
 
Rail Maintenance Equipment
 
Owned
Harsco Industrial Segment
 
 
 
 
Broken Arrow, Oklahoma, U.S.
 
Heat Exchangers
 
Leased
East Stroudsburg, Pennsylvania, U.S.
 
Heat Transfer Products
 
Owned
Channelview, Texas, U.S.
 
Industrial Grating Products
 
Owned
Garrett, Indiana, U.S.
 
Industrial Grating Products
 
Leased
Leeds, Alabama, U.S.
 
Industrial Grating Products
 
Owned
Queretaro, Mexico
 
Industrial Grating Products
 
Owned
The Harsco Metals business, which is part of the Harsco Metals & Minerals Segment, principally operates on customer-owned sites and has administrative offices in Camp Hill, Pennsylvania, and Leatherhead, U.K.
The above table includes the principal properties owned or leased by the Company. The Company also operates from a number of other smaller plants, warehouses and offices in addition to the above. The Company considers all of its properties at which operations are currently performed to be in satisfactory condition and suitable for their intended use.


Item 3.    Legal Proceedings.
Information regarding legal proceedings is included in Note 12, Commitments and Contingencies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."


Item 4.    Mine Safety Disclosures.
Not applicable.


15


Supplementary Item.    Executive Officers of the Registrant
Set forth below, at February 26, 2016, are the executive officers of the Company and certain information with respect to each of them. There are no family relationships among any of the executive officers.
Name
 
Age
 
Position with the Company
Executive Officers:
 
 
 
 
F. Nicholas Grasberger, III
 
52

 
President and Chief Executive Officer
Peter F. Minan
 
54

 
Senior Vice President and Chief Financial Officer
Russell C. Hochman
 
51

 
Senior Vice President and General Counsel, Chief Compliance Officer & Corporate Secretary
Scott H. Gerson
 
45

 
Senior Vice President and Group President–Harsco Industrial
Scott W. Jacoby
 
49

 
Senior Vice President and Group President–Harsco Rail
Tracey L. McKenzie
 
48

 
Senior Vice President and Chief Human Resources Officer

F. Nicholas Grasberger, III
President and Chief Executive Officer since August 1, 2014, and became a member of the Board of Directors on April 29, 2014. Served as Senior Vice President and Chief Financial Officer from April 22, 2013 to November 11, 2014, and President and Chief Operating Officer from April 8, 2014 to August 1, 2014. Prior to joining the Company, Mr. Grasberger was Managing Director of Fenner Plc’s Precision Polymer division from March 2011 to April 2013. From April 1, 2009 to November 9, 2009 he served as Executive Vice President and Chief Executive Officer of Armstrong Building Products. From January 2005 to March 31, 2009 he served as Senior Vice President and Chief Financial Officer of Armstrong World Industries, Inc. Prior to his employment with Armstrong, Mr. Grasberger served as Vice President and Chief Financial Officer of Kennametal Inc. from 2000 to 2004.

Peter F. Minan
Senior Vice President and Chief Financial Officer since November 11, 2014. Mr. Minan has an extensive background in global financial management acquired through a nearly 30-year career with KPMG from 1983 to 2012. He became a partner at KPMG in 1993 and served as global lead partner for several multi-national Fortune 500 industrial and consumer audits. His roles included National Managing Partner, U.S. Audit practice, and Partner in Charge, Washington/Baltimore Audit practice. His most recent role was with Computer Sciences Corporation, where he served as Vice President of Enterprise Risk Management and Internal Audit from 2012 to 2013.

Russell C. Hochman
Senior Vice President and General Counsel, Chief Compliance Officer and Corporate Secretary. Prior to joining the Company in 2013 he served in senior legal roles with Pitney Bowes Inc. and leading law firms based in New York. He holds a J.D. from Albany Law School of Union University and a B.A. from Cornell University.

Scott H. Gerson
Senior Vice President and Group President–Harsco Industrial since January 25, 2011. Served as Vice President and Group President– Harsco Industrial and Chief Information Officer from July 6, 2010 to January 24, 2011. Served as Chief Information Officer from April 4, 2005 to July 6, 2010. Prior to joining the Company on April 4, 2005, Mr. Gerson was with Kulicke & Soffa Industries, Inc., where he served as IT director of their worldwide application services. He has also served in IT management capacities with Compaq Computers and TRW Inc.

Scott W. Jacoby
Senior Vice President and Group President–Harsco Rail since July 6, 2010. Served as President of Harsco Rail from April 2009 to July 2010. Served as Vice President and General Manager of Harsco Track Technologies from August 2007 to April 2009. Served as Vice President and General Manager of Air- X-Changers from April 2005 to August 2007. Prior to that, Mr. Jacoby held senior management positions in the Harsco Industrial business group. Prior to joining the Company in 1995, Mr. Jacoby began his career with Mack Trucks.

Tracey L. McKenzie
Senior Vice President and Chief Human Resources Officer since September 2014. Prior to joining Harsco in September 2014, Ms. McKenzie served as Global HR Vice President for JLG Industries, a leader in the manufacturing sector for advanced aerial lift systems.  Ms. McKenzie previously held executive level HR positions in her native Australia, and at Pacific Scientific Aerospace (a division of Danaher).  


16


PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Harsco Corporation common stock is listed on the New York Stock Exchange. At December 31, 2015, there were 80,094,365 shares outstanding. In 2015, the Company's common stock traded in a range of $7.69 to $19.12 and closed at $7.88 at year-end. At December 31, 2015, there were approximately 18,500 stockholders. The Company's Senior Secured Credit Facilities contain limitations on the payment of dividends. For additional information regarding Harsco Corporation's common stock market price and dividends declared, see Dividend Action under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Common Stock Price and Dividend Information under Part II, Item 8, "Financial Statements and Supplementary Data." For additional information on the Company's equity compensation plans see Part III, Item 11, "Executive Compensation." For additional information on the Company's limitations on the payment of dividends, see Liquidity and Capital Resources under Part II, Item 7, "Management's Discussion and analysis of Financial Condition and Results of Operations" and Note 8, Debt and Credit Agreements, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
Stock Performance Graph
 
12/10
12/11
12/12
12/13
12/14
12/15
Harsco Corporation
100.00
74.73
88.74
109.42
76.38
33.78
S&P Midcap 400
100.00
98.27
115.84
154.64
169.75
166.05
Dow Jones US Diversified Industrials
100.00
100.80
121.77
173.08
174.90
197.36

17


Item 6.    Selected Financial Data.
Five-Year Statistical Summary
(In thousands, except per share, employee information and percentages)
 
2015
 
2014
 
2013 (a)
 
2012
 
2011
 
Statement of operations information
 
Revenues from continuing operations
 
$
1,723,092

 
$
2,066,288

 
$
2,895,970

 
$
3,046,018

 
$
3,305,235

 
Amounts attributable to Harsco Corporation common stockholders
 
Income (loss) from continuing operations
 
$
7,168

 
$
(22,281
)
 
$
(231,356
)
 
$
(258,889
)
 
$
(8,379
)
 
Income (loss) from discontinued operations
 
(980
)
 
110

 
(1,492
)
 
(919
)
 
(2,063
)
 
Net income (loss)
 
6,188

 
(22,171
)
 
(232,848
)
 
(259,808
)
 
(10,442
)
 
Financial position and cash flow information
 
Working capital
 
$
158,399

 
$
117,919

 
$
229,599

 
$
431,594

 
$
376,874

 
Total assets
 
2,071,327

 
2,269,227

 
2,446,517

 
2,979,538

 
3,337,213

 
Long-term debt
 
855,751

 
829,709

 
783,158

 
957,428

 
853,800

 
Total debt
 
911,064

 
871,645

 
810,904

 
969,266

 
908,772

 
Depreciation and amortization
 
156,475

 
176,326

 
237,041

 
272,117

 
310,441

 
Capital expenditures
 
(123,552
)
 
(208,859
)
 
(245,551
)
 
(264,738
)
 
(313,101
)
 
Cash provided by operating activities
 
121,507

 
226,727

 
187,659

 
198,594

 
298,776

 
Cash provided (used) by investing activities
 
(130,373
)
 
(229,561
)
 
63,281

 
(218,983
)
 
(255,822
)
 
Cash provided (used) by financing activities
 
22,454

 
(21,794
)
 
(248,664
)
 
(4,546
)
 
(39,554
)
 
Ratios
 
 
 
 
 
 
 
 
 
 
 
Return on average equity (b)
 
2.3
%
 
(4.0
)%
 
(30.0
)%
 
(22.2
)%
 
(0.6
)%
 
Current ratio (c)
 
1.3
:1
 
1.2
:1
 
1.4
:1
 
1.7:1

 
1.5
:1
 
Per share information attributable to Harsco Corporation common stockholders
 
Basic—Income (loss) from continuing operations
 
$
0.09

 
$
(0.28
)
 
$
(2.86
)
 
$
(3.21
)
 
$
(0.10
)
 
Loss from discontinued operations
 
(0.01
)
 

 
(0.02
)
 
(0.01
)
 
(0.03
)
 
Net income (loss)
 
$
0.08

 
$
(0.27
)
(d)
$
(2.88
)
 
$
(3.22
)
 
$
(0.13
)
 
Diluted—Income (loss) from continuing operations
 
$
0.09

 
$
(0.28
)
 
$
(2.86
)
 
$
(3.21
)
 
$
(0.10
)
 
Loss from discontinued operations
 
(0.01
)
 

 
(0.02
)
 
(0.01
)
 
(0.03
)
 
Net income (loss)
 
$
0.08

 
$
(0.27
)
(d)
$
(2.88
)
 
$
(3.22
)
 
$
(0.13
)
 
Other information
 
 

 
 

 
 
 
 

 
 

 
Book value per share (e)
 
$
3.88

 
$
4.36

 
$
7.41

 
$
10.64

 
$
15.17

 
Cash dividends declared per share
 
0.666

 
0.820

 
0.820

 
0.820

 
0.820

 
Diluted weighted-average number of shares outstanding
 
80,365

 
80,884

 
80,755

 
80,632

 
80,736

 
Number of employees
 
10,800

 
12,200

 
12,300

 
18,500

 
19,650

 
(a)
Includes impacts of the Infrastructure Transaction consummated on November 26, 2013.
(b)
Return on average equity is calculated by dividing income (loss) from continuing operations by average Harsco Corporation stockholders' equity throughout the year.
(c)
Current ratio is calculated by dividing total current assets by total current liabilities.
(d)
Does not total due to rounding.
(e)
Book value per share is calculated by dividing total equity by shares outstanding.

18


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the Consolidated Financial Statements of Harsco Corporation (the "Company") provided under Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.
Amounts included in this Item 7 of this Annual Report on Form 10-K are rounded in millions and all percentages are calculated based on actual amounts. As a result, minor differences may exist due to rounding.
Forward-Looking Statements

The nature of the Company's business and the many countries in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In accordance with the "safe harbor" provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, the Company provides the following cautionary remarks regarding important factors that, among others, could cause future results to differ materially from the results contemplated by forward-looking statements, including the expectations and assumptions expressed or implied herein. Forward-looking statements contained herein could include, among other things, statements about management's confidence in and strategies for performance; expectations for new and existing products, technologies and opportunities; and expectations regarding growth, sales, cash flows, and earnings. Forward-looking statements can be identified by the use of such terms as "may," "could," "expect," "anticipate," "intend," "believe," "likely," "estimate," "plan" or other comparable terms.
Factors that could cause actual results to differ, perhaps materially, from those implied by forward-looking statements include, but are not limited to: (1) changes in the worldwide business environment in which the Company operates, including general economic conditions; (2) changes in currency exchange rates, interest rates, commodity and fuel costs and capital costs; (3) changes in the performance of equity and bond markets that could affect, among other things, the valuation of the assets in the Company's pension plans and the accounting for pension assets, liabilities and expenses; (4) changes in governmental laws and regulations, including environmental, occupational health and safety, tax and import tariff standards; (5) market and competitive changes, including pricing pressures, market demand and acceptance for new products, services and technologies; (6) the Company's inability or failure to protect its intellectual property rights from infringement in one or more of the many countries in which the Company operates; (7) failure to effectively prevent, detect or recover from breaches in the Company's cybersecurity infrastructure; (8) unforeseen business disruptions in one or more of the many countries in which the Company operates due to political instability, civil disobedience, armed hostilities, public health issues or other calamities; (9) disruptions associated with labor disputes and increased operating costs associated with union organization; (10) the seasonal nature of the Company's business; (11) the Company's ability to successfully enter into new contracts and complete new acquisitions or strategic ventures in the time-frame contemplated, or at all; (12) the integration of the Company's strategic acquisitions;     (13) the amount and timing of repurchases of the Company's common stock, if any; (14) the prolonged recovery in global financial and credit markets and economic conditions generally, which could result in the Company's customers curtailing development projects, construction, production and capital expenditures which, in turn, could reduce the demand for the Company's products and services and, accordingly, the Company's revenues, margins and profitability; (15) the outcome of any disputes with customers, contractors and subcontractors; (16) the financial condition of the Company's customers, including the ability of customers (especially those that may be highly leveraged and those with inadequate liquidity) to maintain their credit availability; (17) the Company's ability to successfully implement and receive the expected benefits of cost-reduction and restructuring initiatives, including the achievement of expected cost savings in the expected time frame; (18) the ability to successfully implement the Company's strategic initiatives and portfolio optimization and the impact of such initiatives, such as the Harsco Metals & Minerals Segment's Improvement Plan ("Project Orion"); (19) the amount ultimately realized from the Company's exit from the strategic venture between the Company and Clayton, Dubilier & Rice and the timing of such exit; (20) implementation of environmental remediation matters; (21) risk and uncertainty associated with intangible assets; (22) the impact of a transaction, if any, resulting from the Company's determination to explore strategic options for the separation of the Harsco Metals & Minerals Segment; and (23) other risk factors listed from time to time in the Company's SEC reports. A further discussion of these, along with other potential risk factors, can be found in Part I, Item 1A, "Risk Factors," of this Annual Report on Form 10-K. The Company cautions that these factors may not be exhaustive and that many of these factors are beyond the Company's ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty to update forward-looking statements except as may be required by law.

19


Executive Overview
The Harsco Metals & Minerals Segment has been negatively impacted by lower customer steel production, weaker commodity prices and demand, site exits and the impact of foreign currency translation. These impacts have been partially offset by the savings and benefits achieved as part of the initial phases of Project Orion which has helped to transform the Harsco Metals & Minerals Segment into a leaner and more disciplined business. The Company remains focused on achieving additional cost reductions and operational improvements to enhance returns for the Harsco Metals & Minerals Segment.

The Company began executing Project Orion in the Harsco Metals & Minerals Segment during 2014, after conducting an analysis of the business to identify opportunities to improve its core processes and simplify its organizational structure. The goals of Project Orion are to improve financial returns and provide higher and more consistent levels of value added services to customers. Project Orion's primary elements include improving the bid and contract management process, improving underperforming contracts, implementing standardized operating practices and simplifying operational structures. As a result of actions undertaken during the initial phases of Project Orion, the Company achieved annualized savings of approximately $36 million. During the fourth quarter of 2015, Project Orion was expanded with additional targeted workforce and operational savings of $20 million to $25 million; the majority of these benefits are expected to be realized in 2016. The Company incurred $5.1 million in severance and related charges associated with the expansion of Project Orion during the fourth quarter of 2015. Please see Note 19, Restructuring Programs, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.
The Company has announced its intention to pursue strategic options for the separation of the Harsco Metals & Minerals Segment from the rest of the Company. A separation of the Harsco Metals & Minerals Segment would allow each of the Company's businesses to benefit from dedicated capital structures, execute tailored and flexible strategic priorities and optimize capital return policies consistent with each business's unique priorities. There is no specific timetable related to this initiative and there can be no assurance that a sale, spin-off or any other transaction will take place. The Company incurred $9.9 million of expenses during 2015 related to the separation which are included as part of the Corporate caption in the Company's segment results.
As the Company has previously disclosed, one of the Company's steel mill customers in Europe ceased operations and began the formal process of liquidation in late 2015. The Company previously recorded bad debt reserves of approximately $3 million related to this customer and as a result of these events recorded an additional bad debt reserve related to the remaining receivables balance of $9.9 million during 2015. Also during 2015, the Company recorded an additional charge of $3.9 million related principally to severance costs and non-cash long-lived asset impairments. This action reduced the carrying value of assets used at the customer's site to fair value based upon the expected future realizable cash flows, including anticipated selling expenses.

As the Company has previously disclosed, over the past several years the Company has been in discussions with officials at the Supreme Council for Environment in Bahrain ("Bahrain Council") with regard to a processing by-product ("salt cakes") located at Hafeera. During 2015, the Company completed the assessment of options available for processing or removing the salt cakes. As a result, the Company has entered into a service agreement with a third party for processing the salt cakes and recorded a charge of $7.0 million, payable over five to seven years, related to the estimated cost of processing and disposal. The Company's Bahrain operations are operated under a strategic venture for which its strategic venture partner has a 35% minority interest. Accordingly, the net impact of the charge to the Company's Net income (loss) attributable to Harsco Corporation was $4.6 million. The Company is awaiting final approval from the Bahrain Council regarding the proposed processing and disposal method. If the Bahrain Council does not approve the proposed method or mandates alternative solutions, the estimated liability could change, and such change could be material in any one period.
As the Company has previously disclosed, a subcontractor at the site of a large customer in the Harsco Metals & Minerals Segment had filed arbitration against the Company, claiming that it was owed monetary damages from the Company in connection with its processing certain materials. Additionally, related to this matter, the Company has brought suit against its customer which the Company believed had responsibility for any damages. During 2015, all parties involved reached a binding settlement agreement. The Company recorded a charge of $4.2 million related to its obligations under the settlement agreement.
The Harsco Industrial Segment has been impacted by low oil prices and the related impacts on capital spending by customers in the oil and natural gas industries. During 2015, the Company's air-cooled heat exchangers business completed the consolidation of five operating facilities into a single site which improves operational efficiency, increases capacity and accelerates the production cycle. Additionally, the new site allows for future growth into adjacent markets.


20


The Harsco Rail Segment completed the acquisitions of Protran Technology ("Protran") and JK Rail Products, LLC ("JK Rail") during 2015.  Revenues decreased from prior year due to lower volumes of equipment sales and contract services.  Operating income increased from prior year due to a foreign currency gain of $10.9 million, primarily related to converting Swiss franc bank deposits to euros after the Swiss National Bank ended its policy of maintaining a stable Swiss franc exchange rate with the euro and a favorable mix of equipment sales, partially offset by an unfavorable mix of after-market parts sales and lower contract services volume. 
Revenues by Segment
(Dollars in millions)
 
2015
 
2014
 
Change
 
%
Harsco Metals & Minerals
 
$
1,106.2

 
$
1,378.1

 
$
(272.0
)
 
(19.7
)%
Harsco Industrial
 
357.3

 
412.5

 
(55.3
)
 
(13.4
)
Harsco Rail
 
259.7

 
275.6

 
(15.9
)
 
(5.8
)
Total Revenues
 
$
1,723.1

 
$
2,066.3

 
$
(343.2
)
 
(16.6
)%

Revenues by Region
(Dollars in millions)
 
2015
 
2014
 
Change
 
%
Western Europe
 
$
488.7

 
$
588.2

 
$
(99.5
)
 
(16.9
)%
North America
 
807.7

 
940.9

 
(133.2
)
 
(14.2
)
Latin America (a)
 
181.6

 
248.4

 
(66.8
)
 
(26.9
)
Asia-Pacific
 
153.7

 
157.5

 
(3.8
)
 
(2.4
)
Middle East and Africa
 
52.3

 
66.5

 
(14.2
)
 
(21.4
)
Eastern Europe
 
39.1

 
64.7

 
(25.6
)
 
(39.6
)
Total Revenues
 
$
1,723.1

 
$
2,066.3

 
$
(343.2
)
 
(16.6
)%
(a) Includes Mexico.
Revenues for the Company totaled $1.7 billion and $2.1 billion for 2015 and 2014, respectively. The change is primarily related to the impact of foreign currency translation, exited contracts in the Harsco Metals & Minerals Segment, and the impact of price and volume changes in all segments, primarily the Harsco Metals & Minerals and Harsco Industrial Segments. Foreign currency translation decreased revenues by $170.1 million for 2015 in comparison with the prior year.

Operating Income and Operating Margins by Segment
(Dollars in millions)
 
2015
 
2014
 
Change
 
%
Harsco Metals & Minerals
 
$
26.3

 
$
13.8

 
$
12.5

 
90.9
 %
Harsco Industrial
 
57.0

 
64.1

 
(7.1
)
 
(11.1
)
Harsco Rail
 
50.9

 
37.1

 
13.8

 
37.0

Corporate (b)
 
(45.7
)
 
(45.7
)
 
0.1

 
0.1

Total Operating Income
 
$
88.5

 
$
69.3

 
$
19.2

 
27.8
 %
 
 
2015
 
2014
Harsco Metals & Minerals
 
2.4
%
 
1.0
%
Harsco Industrial
 
16.0

 
15.5

Harsco Rail
 
19.6

 
13.5

Consolidated Operating Margin
 
5.1
%
 
3.4
%
(b) For the twelve months ended December 31, 2015, Corporate includes $9.9 million of expenses related to the potential Harsco Metals & Minerals Segment separation, $4.0 million of net period pension cost for defined benefit pension plans retained as part of the Infrastructure Transaction and a $1.0 million loss on disposal of the Harsco Infrastructure Segment. For the twelve months ended December 31, 2014, Corporate includes a $5.1 million loss on disposal of the Harsco Infrastructure Segment and transaction costs and $5.7 million of net periodic pension cost for defined benefit pension plans retained by the Company as part of the Infrastructure Transaction.

Operating income from continuing operations for 2015 was $88.5 million compared with operating income from continuing operations of $69.3 million in 2014.  Refer to the segment discussions below for information pertaining to factors positively affecting and negatively impacting operating income.

The increase in operating income from continuing operations was the primary driver of the diluted earnings per share from continuing operations for 2015 of $0.09 compared with a diluted loss per share of $0.28 for 2014.




21



Harsco Metals & Minerals Segment:
Significant Effects on Revenues (In millions)
 
 
Revenues—2014
 
$
1,378.1

Impact of foreign currency translation.
 
(161.6
)
Net impact of new contracts and lost contracts (including exited underperforming contracts).
 
(72.2
)
Net impacts of price/volume changes, primarily attributable to volume changes.
 
(38.1
)
Revenues—2015
 
$
1,106.2


Factors Positively Affecting Operating Income:
Costs incurred by the Harsco Metals & Minerals Segment during 2014 related to restructuring charges for Project Orion, site exits and non-cash long-lived asset impairment charges which declined during 2015, increased operating income by $47.5 million.
Project Orion restructuring benefits, related to compensation savings, of approximately $15 million during 2015.

Factors Negatively Impacting Operating Income:
Costs incurred by the Harsco Metals & Minerals Segment related to a steel mill customer liquidation, salt cake disposal costs, charges associated with a subcontractor settlement and additional site exit costs decreased operating income by $30.8 million during 2015.
Costs incurred by the Harsco Metals & Minerals Segment related to the expansion of Project Orion, focusing on selling, general and administrative savings, decreased operating income by $5.1 million during 2015.
Decreased global steel production and scrap metal prices.  Overall, steel production by customers under services contracts, including the impact of exited contracts, decreased by 8% during 2015 compared with the prior year.
Decreased income attributable to the impact of exited contracts and reduced nickel prices and demand. Nickel prices decreased 29% during 2015 compared with the prior year.
Foreign currency translation in 2015 negatively impacted operating income for this segment compared with the prior year.

Harsco Industrial Segment:
Significant Effects on Revenues (In millions)
 
 
Revenues—2014
 
$
412.5

Net impacts of price/volume changes, primarily attributable to volume changes.
 
(50.8
)
Impact of foreign currency translation.
 
(4.4
)
Revenues—2015
 
$
357.3


Factors Positively Affecting Operating Income:
Operating income was aided by lower selling, general and administrative costs in 2015 compared with the prior year coupled with higher gains from the sale of assets in 2015 of $1.5 million, compared with the prior year.

Factors Negatively Impacting Operating Income:
Lower volumes resulting in decreased income during 2015, primarily attributable to continued energy price declines which impacts capital spending by customers in the oil and natural gas industries served by the Company.
Costs associated with consolidating operating facilities for this segment's air cooled heat exchangers business.
Foreign currency translation decreased operating income for this segment during 2015 compared with the prior year.

Harsco Rail Segment:
Significant Impacts on Revenues (In millions)
 
 
Revenues—2014
 
$
275.6

Net impact of price/volume changes, primarily attributable to volume changes.
 
(16.7
)
Effect of Protran and JK Rail acquisitions.
 
4.9

Impact of foreign currency translation.
 
(4.1
)
Revenues—2015
 
$
259.7






22


Factors Positively Affecting Operating Income:
Foreign currency gain of $10.9 million during the first quarter of 2015, primarily related to converting Swiss franc bank deposits to euros after the Swiss National Bank ended its policy of maintaining a stable Swiss franc exchange rate with the euro.
Equipment sales increased operating income, despite lower volumes, in 2015 compared with the prior year.
Operating income was aided by lower selling and administrative costs in 2015 compared with the prior year.
The acquisitions of Protran and JK Rail, both of which occurred during 2015, increased operating income by $2.2 million.
Foreign currency translation increased operating income for this segment during 2015 compared with the prior year.

Factors Negatively Impacting Operating Income:
An unfavorable mix of after-market part sales decreased operating income in 2015. Additionally, lower contract service volumes impacted operating income for 2015 compared with the prior year.



Outlook, Trends and Strategies
Despite uncertainties in the global economy, along with the challenges of global steel production and related pricing, as well as low oil prices, the Company believes it is positioned to execute actions through a disciplined focus on return based capital allocations and business portfolio strategies that will enable it to generate returns above its cost of capital with a balanced business portfolio without endangering its financial profile with unreasonable leverage.
These business portfolio strategies will continue to focus on improving the performance of the Harsco Metals & Minerals Segment through executing Project Orion, which is aimed at driving operational efficiencies through simplifying its business model and standardizing operating practices; establishing necessary protocols to facilitate better contract outcomes; addressing underperforming sites; and improving the mix of its products and services. For the Harsco Rail and Industrial Segments, the Company will focus on disciplined growth organically and through acquisitions that improve these businesses' competitive positions in core markets or adjacent market spaces. The Company will continue to pursue cost-reduction and efficiency initiatives, including Continuous Improvement, which have significantly reduced, and are expected to continue to reduce, the Company's cost structure and further enhance its financial strength without diminishing its services and products capabilities. As part of these initiatives, the Company will continue to focus on developing an active, lean corporate center that optimizes corporate costs while continuing to develop value added activities to support the Company in its transformation.
The Company's expansion into targeted growth markets; its diversity of services and products in industries that are fundamental to global growth; its long-term mill services and minerals supply contracts; its differentiated technologies and innovations; its return based capital allocations and business portfolio strategies; its focus on executing cost reduction and efficiency initiatives; and the 29% equity interest in Brand, help mitigate the Company's overall long-term exposure to changes in the economic outlook in any single economy or industry. However, deterioration of global economies and industries could still have an adverse impact on the Company's results of operations, financial condition and cash flows.
The following significant items, risks, trends and strategies are expected to affect the Company in 2016 and beyond:
The Company will focus on the goal of providing returns above its cost of capital for its stockholders by balancing its portfolio of businesses, and by executing its strategic and operational practices with reasonable amounts of financial leverage.
The Company will continue to build and develop strong core capabilities and develop an active and lean corporate center that balances costs with value added services.
The Company will continue to assess capital needs in the context of operational trends and strategic initiatives. Management will continue to be selective and disciplined in allocating capital by rigorously analyzing projects and utilizing a return-based capital allocation process.
Management will target acquisitive growth that provides synergistic benefits to the Company, either through cost synergies from combined platforms or revenue synergies from expanded offerings and scalability.
The Company expects its operational effective income tax rate to approximate 49% to 51% in 2016, excluding the tax impact on equity income (loss) related to the Brand Energy & Infrastructure Services Inc. and Subsidiaries.






23


Harsco Metals & Minerals Segment:
The Company anticipates reduced steel production, weaker commodity prices and demand, the impact of site exits, customer production curtailments and the impact of foreign currency translation to negatively impact revenue and operating income in the near term in the Harsco Metals & Minerals Segment.  These impacts will be partially offset by savings and benefits achieved as part of Project Orion and other operational savings. 
The goals of Project Orion are to improve financial returns and provide higher and more consistent levels of value added services to customers. Project Orion's primary elements include improving the bid and contract management process, improving underperforming contracts, implementation of standardized operating practices and simplifying operational structures. As a result of actions undertaken during the initial phases of Project Orion, the Company achieved annualized savings of approximately $36 million. As a result of the success of the initial phases of Project Orion, further improvements are targeted to further strengthen the business. During the fourth quarter of 2015, Project Orion was expanded with additional targeted workforce and operational savings of $20 million to $25 million; the majority of these benefits are expected to be realized in 2016.
The Company will continue its focus on ensuring that forecasted profits and other requirements for contracts meet certain established standards and deliver returns above its cost of capital. Project Orion's focus is intended to enable the Company to address underperforming contracts more rapidly with targeted actions to improve the efficiencies of the business. These actions include central protocols to monitor activities, structures and systems that aid in decision making, and processes designed to identify the best operational and commercial actions available to address underperforming contracts and its overall contract portfolio. In connection with this focus, the possibility exists that the Company may take strategic actions that result in exit costs and non-cash asset impairment charges that may have an adverse effect on the Company's results of operations and liquidity.
During 2015, the Company has successfully negotiated and secured several contract renewals and add-on service expansions. Additionally, in February 2016, the Company announced a new 15-year contract with China's largest steel maker with revenues totaling $125 million over the life of the contract.
During 2014, the Company accrued approximately $5 million of costs related to disposing certain slag material accumulated as part of a customer operation in Latin America because it had not received the necessary permits from the local government to sell the slag. The Company has reengaged the local government to obtain the necessary permits, and if these permits are obtained, the accrued disposal costs may be either partially or fully recognized in income that period.

Harsco Industrial Segment:
The Company expects low oil prices to continue to impact capital expenditures and overall spending by customers in the natural gas, natural gas processing and petrochemical industries. Accordingly, these factors will negatively impact revenue and operating income in the near-term in the Harsco Industrial Segment.
The Company will continue to focus on product innovation and development to drive strategic growth in its businesses. The Company recently introduced GrateGuardTM, a new fencing solution for first-line physical security in the Industrial grating business.
The Company will focus on growing the Harsco Industrial Segment through disciplined organic expansion and acquisitions that improve competitive positioning in core markets or adjacent markets.

Harsco Rail Segment:
The global demand for railway maintenance-of-way equipment, parts and services continues to be generally positive, though North American markets may experience some short-term weakness, and the Company continues to pursue further growth opportunities.  In total, the Company anticipates modest organic growth in its after-market parts business and its expected deliveries of existing equipment orders.
During 2013 and 2014, the Company secured two contract awards with initial contract values worth approximately $200 million from the federal railway system of Switzerland ("SBB"). The Company's capabilities to compete and deliver on large projects provide increased opportunities to build out its pipeline further, and enables the Company to continue to pursue other large projects. The majority of deliveries under these contracts are anticipated to occur during 2017 through 2019.
The Company will focus on growing the Harsco Rail Segment through disciplined organic expansion and acquisitions that improve competitive positioning in core markets or adjacent markets.








24


Results of Operations for 2015, 2014 and 2013
(In millions, except per share information and percentages)
 
2015
 
2014
 
2013
Revenues from continuing operations
 
$
1,723.1

 
$
2,066.3

 
$
2,896.0

Cost of services and products sold
 
1,356.4

 
1,643.9

 
2,238.9

Selling, general and administrative expenses
 
242.1

 
284.7

 
482.1

Research and development expenses
 
4.5

 
5.5

 
10.2

Loss on disposal of the Harsco Infrastructure Segment and transaction costs
 
1.0

 
5.1

 
292.3

Other expenses
 
30.6

 
57.8

 
15.1

Operating income (loss) from continuing operations
 
88.5

 
69.3

 
(142.6
)
Interest income
 
1.6

 
1.7

 
2.1

Interest expense
 
(46.8
)
 
(47.1
)
 
(49.7
)
Change in fair value to the unit adjustment liability
 
(8.5
)
 
(9.7
)
 
(1.0
)
Income tax expense from continuing operations
 
(27.7
)
 
(30.4
)
 
(32.0
)
Equity in income (loss) of unconsolidated entities, net
 
0.2

 
(1.6
)
 
1.5

Income (loss) from continuing operations
 
7.3

 
(17.8
)
 
(221.6
)
Diluted income (loss) per common share from continuing operations attributable to Harsco Corporation common stockholders
 
0.09

 
(0.28
)
 
(2.86
)
Effective income tax rate for continuing operations
 
79.5
%
 
214.8
%
 
(16.7
)%
Comparative Analysis of Consolidated Results
Revenues
Revenues for 2015 decreased $343.2 million or 17% from 2014. This decrease was attributable to the following significant items:
Changes in Revenues - 2015 vs. 2014
 
(In millions)
Impact of foreign currency translation.
 
$
(170.1
)
Net impact of new contracts and lost contracts (including exited underperforming contracts) in the Harsco Metals & Minerals Segment.
 
(72.2
)
Net impacts of price/volume changes in the Harsco Metals & Minerals Segment, primarily attributable to volume changes.
 
(38.1
)
Net impacts of price/volume changes in the Harsco Industrial Segment, primarily attributable to volume changes.
 
(50.8
)
Net impacts of price/volume changes, primarily attributable to volume changes in the Harsco Rail Segment, including the effect of the Protran and JK Rail acquisitions.
 
(11.8
)
Other.
 
(0.2
)
Total change in revenues - 2015 vs. 2014
 
$
(343.2
)

Revenues for 2014 decreased $829.7 million or 29% from 2013. This decrease was attributable to the following significant items:
Changes in Revenues - 2014 vs. 2013
 
(In millions)
Revenue decrease following the Infrastructure Transaction.
 
$
(885.4
)
Net impact of new contracts and lost contracts (including exited underperforming contracts) in the Harsco Metals & Minerals Segment.
 
(40.1
)
Impact of foreign currency translation.
 
(20.0
)
Net change in revenues in the Harsco Rail Segment, primarily attributable to the completion of the large China contract with CRC.
 
(12.4
)
Net effects of price/volume changes in the Harsco Metals & Minerals Segment, primarily attributable to volume changes.
 
79.6

Net increased revenues in the Harsco Industrial Segment, primarily attributable to the effects of its business acquisition.
 
48.6

Total change in revenues - 2014 vs. 2013
 
$
(829.7
)





25


Cost of Services and Products Sold
Cost of services and products sold for 2015 decreased $287.5 million or 17% from 2014. This decrease was attributable to the following significant items:
Change in Cost of Services and Products Sold - 2015 vs. 2014
 
(In millions)
Impact of foreign currency translation.
 
$
(151.5
)
Decreased costs due to changes in revenues (exclusive of the effects of foreign currency translation and fluctuations in commodity costs included in selling prices).
 
(124.4
)
Other.
 
(11.6
)
Total Change in Cost of Services and Products Sold 2015 vs. 2014
 
$
(287.5
)

Cost of services and products sold for 2014 decreased $595.0 million or 27% from 2013. This decrease was attributable to the following significant items:
Change in Cost of Services and Products Sold - 2014 vs. 2013
 
(In millions)
Impact of timing of Infrastructure Transaction.
 
$
(636.6
)
Impact of foreign currency translation.
 
(21.9
)
Increased costs due to changes in revenues (exclusive of the effect of foreign currency translation, the effects of the timing of the Infrastructure Transaction, and the impact of fluctuations in commodity costs included in selling prices).
 
52.3

Other.
 
11.2

Total Change in Cost of Services and Products Sold 2014 vs. 2013
 
$
(595.0
)

Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2015 decreased $42.6 million or 15% from 2014. This decrease was primarily related to the impact of lower compensation costs associated with Project Orion in the Harsco Metals & Minerals Segment, foreign currency translation, lower professional fees, and decreased agent and broker commissions in the Harsco Rail and Industrial Segments, partially offset by increased bad debt expense due principally to the Harsco Metals & Minerals Segment's steel mill customer liquidation.

Selling, general and administrative expenses for 2014 decreased $197.4 million or 41% from 2013. This decrease was primarily related to the impact and timing of the Infrastructure Transaction; partially offset by increased compensation expense due to inflation, incentive and retained pension costs from the Infrastructure Transaction; increased bad debt expense; increased commission expense; and increased professional fees.

Loss on Disposal of the Harsco Infrastructure Segment and Transaction Costs
The Company recorded a loss on disposal of the Harsco Infrastructure Segment and related transaction costs of $1.0 million, $5.1 million and $292.3 million during 2015, 2014 and 2013, respectively. Please see Note 3, Acquisitions and Dispositions, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data" for additional information on the Infrastructure Transaction.

Other Expenses
This income statement classification includes: certain foreign currency gains, net gains on disposal of non-core assets, employee termination benefit costs and costs to exit activities. The most significant change in Other expenses during 2015 related to costs incurred in the Harsco Metals & Minerals Segment related to a steel mill customer liquidation; salt cake disposal costs; charges associated with a subcontractor settlement during 2015; and additional site exit costs. Additionally, Other expenses includes the foreign currency gain of $10.9 million primarily related to converting Swiss franc bank deposits to euros associated with advances received for the Harsco Rail Segment's two contracts with SBB and costs incurred at Corporate related to the potential Harsco Metals & Minerals Segment separation transaction. The most significant change in Other expenses during 2014 related to restructuring program costs associated with Project Orion and non-cash impaired asset write-downs. Additional information on Other expenses is included in Note 17, Other Expenses, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data."









26


During 2015, 2014 and 2013, the Company recorded pre-tax Other expenses of $30.6 million, $57.8 million and $15.1 million, respectively. The major components of this income statement caption are as follows:
 
 
Other (Income) Expenses
(In thousands)
 
2015
 
2014
 
2013
Net gains
 
$
(10,613
)
 
$
(6,718
)
 
$
(4,657
)
Employee termination benefits costs
 
14,914

 
19,120

 
3,928

Other costs to exit activities
 
13,451

 
4,908

 
5,382

Impaired asset write-downs
 
8,170

 
39,455

 
9,688

Foreign currency gains related to Harsco Rail Segment advances on contracts
 
(10,940
)
 

 

Harsco Metals & Minerals Segment Separation Costs
 
9,922

 

 

Subcontractor settlement
 
4,220

 

 

Other expense
 
1,449

 
1,059

 
769

Total
 
$
30,573

 
$
57,824

 
$
15,110

Interest Expense
2015 vs. 2014
Interest expense in 2015 was $46.8 million, a decrease of $0.3 million or 1% compared with 2014. There were no individually significant items related to the change in this Statement of Operations caption.

2014 vs. 2013
Interest expense in 2014 was $47.1 million, a decrease of $2.5 million or 5% compared with 2013. The decrease primarily reflects higher average borrowings prior to the Infrastructure Transaction in 2013.

Income Tax Expense from Continuing Operations

2015 vs. 2014
Income tax expense from continuing operations in 2015 was $27.7 million, a decrease of $2.7 million compared with 2014 and the effective income tax rate relating to continued operations for 2015 was 79.5% versus 214.8% for 2014. The decrease in income tax expense and the change in the effective income tax rate related to continuing operations was primarily due to a reduction in restructuring and asset impairment charges in the Harsco Metals & Minerals Segment for which no tax benefit was recorded.
2014 vs. 2013
Income tax expense from continuing operations in 2014 was $30.4 million, a decrease of $1.6 million compared with 2013. This decrease was principally due to the tax effects of the Infrastructure Transaction, which had included valuation allowances recorded against deferred tax assets within certain foreign jurisdictions in which Infrastructure operated and additional tax costs of cash repatriation from the Infrastructure Transaction in 2013 that was not repeated in 2014. This decrease was partially offset by restructuring and asset impairment charges from Harsco Metals and Minerals for which no tax benefit was recorded. The effective income tax rate relating to continued operations for 2014 was 214.8% versus (16.7) % for 2013. The effective income tax rate changed between 2013 and 2014 primarily due to the tax effects of the Infrastructure Transaction, which had included valuation allowances recorded against deferred tax assets within certain foreign jurisdictions in which Infrastructure operated and additional tax costs of cash repatriation from the Infrastructure Transaction in 2013 that was not repeated in 2014. This was partially offset by restructuring and asset impairment charges from Harsco Metals and Minerals for which no tax benefit was recorded.
For additional detail, see Note 11, Income Taxes, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data."








27


Liquidity and Capital Resources
Overview
On October 15, 2015, the Company repaid the 2.7% notes due October 15, 2015 by utilizing borrowings under its Amended and Restated Five Year Credit Agreement (the "Initial Credit Agreement").  There was no change to the Company's overall debt position as a result of the repayment.

On December 2, 2015, the Company, entered into (i) an amendment and restatement agreement (the “Amendment Agreement”) and (ii) a second amended and restated credit agreement (the “Credit Agreement” and, together with the Amendment Agreement, the “Financing Agreements”). The Financing Agreements increased the Company's overall borrowing capacity from $500 million to $600 million by (i) amending and restating the Company’s existing credit agreement, (ii) establishing a term loan facility in an initial aggregate principal amount of $250 million, by converting a portion of the outstanding balance under the Initial Credit Agreement on a dollar-for-dollar basis (such facility, the “Term Loan Facility”) and (iii) reducing the revolving credit facility limit to $350 million (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Senior Secured Credit Facilities”).

In November 2015, the Company reduced the quarterly dividend to $0.05 per share for the first quarter 2016 dividend payment in February 2016.  The decision was made in light of present industry macroeconomic factors with a goal to preserve capital for operations and strategic initiatives, and maintain a strong capital structure, while at the same time enabling the Company to continue the longstanding practice of returning capital to shareholders.  The Company intends to redirect these funds to reduce debt and enhance financial flexibility. 

The Company continues to have adequate financial liquidity and borrowing capacity.  The Company currently expects operational and business needs to be met by cash provided by operations supplemented with borrowings from time to time due to historical patterns of seasonal cash flow and for the funding of various projects. The Company continues to assess its capital needs in the context of operational trends and strategic initiatives.
The Company continues to implement and perform capital efficiency initiatives to enhance liquidity.  These initiatives have included: prudent allocation of capital spending to those projects where the highest results can be achieved; optimization of worldwide cash positions; reductions in discretionary spending; and frequent evaluation of customer and business-partner credit risk. 
The Company continues to focus on improving working capital efficiency. The Company's Continuous Improvement initiatives include improving the effective and efficient use of working capital, particularly in accounts receivable and inventories.
During 2015, the Company generated $121.5 million in operating cash flow, a decrease from the $226.7 million generated in 2014. In 2015, the Company invested $123.6 million in capital expenditures, mostly for the Harsco Metals & Minerals Segment, compared with $208.9 million invested in 2014. In 2015, the Company received proceeds from the termination of a cross-currency interest rate swap ("CCIR") of $75.1 million. The Company paid approximately $66 million in dividends to stockholders in both 2015 and 2014. The Company generated $26.0 million in cash flow from asset sales in 2015 compared with $15.0 million in 2014. Asset sales have been a normal part of the Company's business model, primarily for the Harsco Metals & Minerals Segment.
The Company's net cash borrowings increased by $47.3 million in 2015 principally due to increased credit facility borrowings related to capital expenditures, mostly for the Harsco Metals & Minerals Segment; dividend payments; treasury share purchases under the Company's share purchase program then in effect; and for the Protran and JK Rail acquisitions; partially offset by the receipt of cash proceeds from the termination of a cross-currency swap and cash flow provided by operations. The Company’s consolidated net debt to consolidated EBITDA ratio was 2.8 to 1.0 at December 31, 2015.











28


Cash Requirements
The following summarizes the Company's expected future payments related to contractual obligations and commercial commitments at December 31, 2015:
Contractual Obligations and Commercial Commitments at December 31, 2015 (a)
 
 
 
 
Payments Due by Period
(In millions)
 
Total
 
Less than
1 year
 
1-3
years
 
3-5
years
 
After 5
years
Short-term borrowings
 
$
30.2

 
$
30.2

 
$

 
$

 
$

Long-term debt (including current maturities and capital leases)
 
880.8

 
25.1

 
524.3

 
331.4

 

Projected interest payments on long-term debt (b)
 
104.0

 
40.0

 
59.7

 
4.3

 

Pension obligations (c)
 
46.7

 
31.3

 
15.4

 

 

Operating leases (non-cancellable)
 
59.7

 
12.9

 
16.0

 
10.2

 
20.6

Purchase obligations (d)
 
105.7

 
94.7

 
11.0

 

 

Cross-currency interest rate swaps (e)
 

 

 

 

 

Foreign currency exchange forward contracts (f)
 

 

 

 

 

Unit adjustment liability (g)
 
99.0

 
22.3

 
44.6

 
32.1

 

Total contractual obligations (h)
 
$
1,326.1

 
$
256.5

 
$
671.0

 
$
378.0

 
$
20.6

(a)
See Note 5, Equity Method Investments; Note 8, Debt and Credit Agreements; Note 9, Operating Leases; Note 10, Employee Benefit Plans; Note 11, Income Taxes; and Note 15, Financial Instruments, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional disclosures on the unit adjustment liability; short-term borrowings and long-term debt (including capital leases); operating leases; pensions; income taxes; CCIRs and foreign currency exchange forward contracts, respectively.
(b)
The total projected interest payments on long-term debt are based upon borrowings, interest rates and foreign currency exchange rates at December 31, 2015. The interest rates on variable-rate debt and the foreign currency exchange rates are subject to changes beyond the Company's control and may result in actual interest expense and payments differing from the amounts projected above.
(c)
Amounts represent expected employer contributions to the defined benefit pension plans for the next year and the underfunded pension liability associated with the Infrastructure Transaction. The Company expects to make a minimum of $23.7 million in cash contributions to its defined benefit pension plans during 2016.
(d)
Purchase obligations represent legally binding obligations to purchase property, plant and equipment, inventory and other commitments made in the normal course of business to meet operations requirements. The decrease in the Company's purchase obligations is related to decreases in commitments to purchase raw materials in its Rail Segment and decreases in capital commitments in its Metals & Minerals and Industrial Segments.
(e)
Due to the nature of these CCIRs, based on December 31, 2015 fair values there would be net cash received of approximately $19 million comprised of cash payments of approximately $262 million and cash receipts of approximately $281 million. Accordingly, no amounts are included in the above table. The CCIRs are recorded on the Consolidated Balance Sheets at fair value.
(f)
Amounts represent the notional value of the foreign currency exchange contracts outstanding at December 31, 2015. Due to the nature of these contracts, based on fair values at December 31, 2016 there will be net cash received of $4.1 million comprised of cash payments of $592.4 million and cash receipts of $596.5 million. Accordingly, no amounts are included in the above table. The difference is recognized as a gain or loss in the Consolidated Statements of Operations.
(g)
Amounts represent expected payments, at the Company's discretion, related to the unit adjustment liability that resulted from the Infrastructure Transaction. See Note 5, Equity Method Investments, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional information on the unit adjustment liability.
(h)
At December 31, 2015, in addition to the above contractual obligations, the Company had $8.0 million of potential long-term tax liabilities, including interest and penalties, related to uncertain tax positions. Because of the high degree of uncertainty regarding the future cash flows associated with these potential long-term tax liabilities, the Company is unable to estimate the years in which settlement will occur with the respective taxing authorities.


















29


Off-Balance Sheet Arrangements
The following table summarizes the Company's contingent commercial commitments at December 31, 2015. These amounts are not included on the Consolidated Balance Sheets since there are no current circumstances known to management indicating that the Company will be required to make payments on these contingent commercial commitments.
Commercial Commitments at December 31, 2015
 
 
 
 
Amount of Commercial Commitment Expiration Per Period
(In millions)
 
Total
 
Less than
1 Year
 
1-3
Years
 
3-5
Years
 
Over 5
Years
 
Indefinite
Expiration
Standby letters of credit
 
$
83.7

 
$
76.9

 
$
5.7

 
$
1.1

 
$

 
$

Guarantees
 
53.5

 
9.3

 

 
2.9

 
0.2

 
41.1

Performance bonds
 
101.3

 
99.7

 

 

 

 
1.6

Other commercial commitments
 
11.1

 

 

 

 

 
11.1

Total commercial commitments
 
$
249.6

 
$
185.9

 
$
5.7

 
$
4.0

 
$
0.2

 
$
53.8

Certain commercial commitments that are of a continuous nature do not have an expiration date and are therefore considered to be indefinite in nature. Please refer to Note 15, Financial Instruments, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional disclosures related to off-balance sheet agreements.
Sources and Uses of Cash
The Company’s principal sources of liquidity are cash provided by operations and borrowings under its Credit Agreement, augmented by cash proceeds from asset sales.  The primary drivers of the Company’s cash flow from operations are the Company’s revenues and income.  Cash returns on capital investments made in the prior years, for which limited cash is currently required, are a significant source of cash provided by operations.  Depreciation expense related to these investments is a non-cash charge. 

In August 2015, the Company terminated its fixed euro CCIR.  Proceeds from the transaction were $75.1 million and used to reduce debt. Euro denominated foreign currency exchange forward contracts were entered into later in 2015 that provide similar protection from changes in foreign exchange rates to the terminated CCIR contract. Please see Note 15, Financial Instruments, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.
Major uses of operating cash flows and borrowed funds include: capital investments, principally in the Harsco Metals & Minerals Segment; payroll costs and related benefits; dividend payments; pension funding payments; inventory purchases for the Harsco Rail and Harsco Industrial Segments; income tax payments; debt principal and interest payments; insurance premiums and payments of self-insured casualty losses; payment of the unit adjustment liability; and machinery, equipment, automobile and facility lease payments.
The Company plans to redeploy discretionary cash for debt reduction, disciplined organic growth and international or market segment diversification; for growth in long-term, higher-return service contracts for the Harsco Metals & Minerals Segment, principally in targeted growth markets or for customer diversification; and for strategic investments or possible acquisitions in the Harsco Rail and Harsco Industrial Segments.
Resources Available for Cash Requirements for Operational and Growth Initiatives
In addition to utilizing cash provided by operations and cash proceeds from asset sales, the Company has bank credit facilities available throughout the world.  The Company also utilizes capital leases to finance the acquisition of certain equipment when appropriate, which allows the Company to minimize capital expenditures. The Company expects to continue to utilize all these sources to meet future cash requirements for operations and growth initiatives.

In March 2012, the Company entered into the Initial Credit Agreement providing for $525 million of borrowing capacity through a syndicate of 14 banks.

On September 12, 2013, the Company entered into Amendment No.1 ("Amendment No. 1") to the Initial Credit Agreement. In addition to certain administrative and conforming modifications, Amendment No. 1 replaced the total consolidated debt to total consolidated capital ratio debt covenant. On December 20, 2013, the Company entered into Amendment No. 2 ("Amendment No. 2") to the Credit Agreement.  Amendment No. 2 modified certain defined terms to reflect the impact of the Infrastructure Transaction.
  

30


On March 27, 2015, the Company entered into Amendment No. 3 ("Amendment No. 3") to the Initial Credit Agreement.  Amendment No. 3 provided for (i) decreased borrowing capacity; (ii) contingency extension of the termination date; (iii) modified certain debt covenants; and (iv) modified certain defined terms.  During the three months ended March 31, 2015, the Company expensed $0.6 million fees associated with Amendment No. 3.

On December 2, 2015, the Company, entered into (i) an Amendment Agreement and (ii) a Credit Agreement. The Financing Agreements increased the Company's overall borrowing capacity from $500 million to $600 million by (i) amending and restating the Company’s Initial Credit Agreement, (ii) establishing the Term Loan Facility in an initial aggregate principal amount of $250 million by converting a portion of the outstanding balance under the Initial Credit Agreement on a dollar-for-dollar basis and (iii) reducing the Revolving Credit Facility to $350 million.

Borrowings under the Senior Secured Credit Facilities bear interest at a rate per annum ranging from 87.5 to 200 basis points over the Base Rate or 187.5 to 300 basis points over the Adjusted LIBOR Rate (for borrowings in US dollars or Sterling) or the Adjusted EURIBOR Rate (for borrowing in Euro), each as defined in the Credit Agreement.

The Senior Secured Credit Facilities impose certain restrictions including, but not limited to, restrictions as to types and amounts of debt or liens that may be incurred by the Company; limitations on increases in dividend payments and limitations on certain acquisitions by the Company.

The Senior Secured Credit Facilities mature on June 2, 2019, provided that if the notes issued by the Company on May 15, 2008 have not been tendered, repurchased, redeemed, discharged or refinanced in full prior to February 13, 2018, the Senior Secured Credit Facilities become due on such date.

The Term Loan Facility requires scheduled quarterly payments, each equal to (i) with respect to quarterly payments made in 2016, 1.25% of the original principal amount of the loans under the Term Loan Facility made at closing and (ii) with respect to quarterly payments made in any year thereafter, 2.50% of the original principal amount of the loans under the Term Loan Facility made at closing. These payments are reduced by the application of any prepayments, and any remaining balance is due at maturity. The Credit Agreement requires certain mandatory prepayments of outstanding loans under the Term Loan Facility, subject to certain exceptions, based on the net cash proceeds of certain asset sales and casualty and condemnation events, in some cases subject to reinvestment rights and certain other exceptions, and the net cash proceeds of any issuance of debt, excluding permitted debt issuances.

With respect to the Senior Secured Credit Facilities, the obligations of the Company are guaranteed by substantially all of the Company’s current and future wholly-owned domestic subsidiaries (the “Guarantors”). All obligations under the Senior Secured Credit Facilities, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the parent company’s assets and the assets of the Guarantors.

The following table illustrates available credit at December 31, 2015:
(In millions)
 
Facility Limit
 
Outstanding
Balance
 
Outstanding Letters of Credit
 
Available
Credit
Multi-year revolving credit facility
 
$
350.0

 
$
165.0

 
$
44.4

 
$
140.6

At December 31, 2015, the Company had $415.0 million of borrowings under the Senior Secured Credit Facilities consisting of $250.0 million under the Term Loan Facility and $165.0 million under the Revolving Credit Facility. At December 31, 2015, of this balance, $380.5 million was classified as long-term debt, $22.0 million was classified as short-term borrowings and $12.5 million was classified as current maturities of long-term debt in the Consolidated Balance Sheets. At December 31, 2014, the Company had $98.5 million of borrowings under the Initial Credit Agreement and all such balances were classified as long-term debt in the 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 or current maturities of long-term debt.
On October 15, 2015, the Company repaid the 2.7% notes due October 15, 2015 by utilizing borrowings under the Initial Credit Agreement.  There was no change to the Company's overall debt position as a result of the repayment.
See Note 8, Debt and Credit Agreements, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for more information on the Company's Credit Agreement.


31


Working Capital Position
Changes in the Company's working capital are reflected in the following table:
(Dollars in millions)
 
December 31
2015
 
December 31
2014
 
Increase
(Decrease)
Current Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
79.8

 
$
62.8

 
$
16.9

Trade accounts receivable, net
 
254.9

 
325.1

 
(70.2
)
Other receivables, net
 
30.4

 
28.1

 
2.3

Inventories
 
217.0

 
178.9

 
38.0

Other current assets
 
82.5

 
88.5

 
(5.9
)
Total current assets
 
664.5

 
683.5

 
(19.0
)
Current Liabilities
 
 
 
 
 
 
Short-term borrowings and current maturities
 
55.3

 
41.9

 
13.4

Accounts payable
 
136.0

 
146.5

 
(10.5
)
Accrued compensation
 
38.9

 
53.8

 
(14.9
)
Income taxes payable
 
4.4

 
2.0

 
2.4

Advances on contracts
 
107.3

 
117.4

 
(10.1
)
Due to unconsolidated affiliate
 
7.7

 
8.1

 
(0.4
)
Unit adjustment liability
 
22.3

 
22.3

 

Other current liabilities
 
134.2

 
173.5

 
(39.3
)
Total current liabilities
 
506.1

 
565.6

 
(59.4
)
Working Capital
 
$
158.4

 
$
117.9

 
$
40.5

Current Ratio (a)
 
1.3
:1
 
1.2
:1
 
 

(a)
Calculated as Current assets / Current liabilities
Working capital increased $40.5 million or 34.3% in 2015 due primarily to the following factors:
Working capital was positively affected by a decrease in Other current liabilities of $39.3 million primarily due to a decrease in dividends payable related to the reduction in the dividend rate, foreign currency translation and timing of other accruals;
Working capital was positively affected by an increase in Inventories of $38.0 million primarily due to inventory purchases related to the SBB project;
Working capital was positively affected by a decrease in Accrued compensation of $14.9 million primarily due to decreases in accrued bonus across all the Company's segments; and
Working capital was positively affected by a decrease in Accounts payable of $10.5 million and Advances on contracts of $10.1 million, both primarily due to foreign currency translation.

These working capital increases were partially offset by the following:

Working capital was negatively impacted by a decrease in Trade accounts receivable, net of $70.2 million primarily due to decreased sales and increased provision for doubtful accounts, primarily in the Harsco Metals & Minerals Segment; and timing of invoicing and collections and foreign currency translation; and
Working capital was negatively impacted by an increase in Short-term borrowings and current maturities of $13.4 million primarily due to the timing of expected debt repayments.

Certainty of Cash Flows
The certainty of the Company's future cash flows is underpinned by the long-term nature of the Company's metals services contracts, the order backlog for the Company's railway track maintenance services and equipment, and overall discretionary cash flows (operating cash flows plus cash from asset sales in excess of the amounts necessary for capital expenditures to maintain current revenue levels) generated by the Company. Historically, the Company has utilized these discretionary cash flows for growth-related capital expenditures, strategic acquisitions, debt repayment and dividend payments.
At December 31, 2015, the Company's metals services contracts had estimated future revenues of $3.2 billion at expected production levels, compared with $4.5 billion at December 31, 2014. This decrease is primarily due to exit activities associated with strategic actions from Project Orion's focus on underperforming contracts of various customers and impact of foreign currency translation during 2015. There are no significant metals services contracts for which the costs to complete the contract are currently estimated to exceed the revenue to be realized included in the above estimated future revenues.


32


At December 31, 2015, the Company's railway track maintenance services and equipment business had estimated future revenues of $292.1 million compared with $348.8 million at December 31, 2014. This decrease is primarily due to shipments which were not replaced. The railway track maintenance services and equipment business includes items with long lead times necessary to build certain equipment.
In addition, at December 31, 2015, the Company had an order backlog of $72.9 million in the Harsco Industrial Segment. This compares with $146.9 million at December 31, 2014. This decrease is primarily due to low oil prices impacting capital expenditures and overall spending by customers in the natural gas, natural gas processing and petrochemical industries.
Order backlogs for roofing granules and slag abrasives, and for the reclamation and recycling services of high-value content from steelmaking slag, are excluded from the above amounts. These amounts are generally not quantifiable due to the short order lead times for certain services and the nature and timing of the products and services provided.
The types of products and services that the Company provides are not subject to rapid technological change, which increases the stability of related cash flows. Additionally, the Company believes each business in its portfolio is a leader in the industries and major markets the Company serves. Due to these factors, the Company is confident in the Company's future ability to generate positive cash flows from operations.
Cash Flow Summary
The Company's cash flows from operating, investing and financing activities, as reflected on the Consolidated Statements of Cash Flows, are summarized in the following table:
(In millions)
 
2015
 
2014
 
2013
Net cash provided (used) by:
 
 
 
 
 
 
Operating activities
 
$
121.5

 
$
226.7

 
$
187.7

Investing activities
 
(130.4
)
 
(229.6
)
 
63.3

Financing activities
 
22.5

 
(21.8
)
 
(248.7
)
Impact of exchange rate changes on cash
 
3.3

 
(6.1
)
 
(3.9
)
Net change in cash and cash equivalents
 
$
16.9

 
$
(30.8
)
 
$
(1.6
)
Cash provided by operating activities Net cash provided by operating activities in 2015 was $121.5 million, a decrease of $105.2 million from 2014. The decrease is primarily attributable to lower customer advances, and an increase in inventory primarily related to the SBB contracts in the Harsco Rail Segment, partially offset by the timing of accounts receivable invoicing and collections. Net cash provided by operating activities in 2014 was $226.7 million, an increase of $39.1 million from 2013. The increase is primarily attributable to increased customer advances and decreased incentive bonus payments, partially offset by the timing of accounts receivable invoicing and collections, the timing of accounts payable disbursements, and an increase of inventories.
Included in the Cash flows from operating activities section of the Consolidated Statement of Cash Flows is the caption, Other, net. In 2015, this caption consisted principally of the Harsco Rail Segment foreign exchange gain which is reflected in the Effect of exchange rate changes on cash caption, partially offset by the impact of non-cash impaired asset write-downs related to the Harsco Metals & Minerals Segment. In 2014, this caption consisted of principally the impact of non-cash impaired asset write-downs related to the Harsco Metals & Minerals Segment. In 2013, there were no individually significant components of this caption.
Also included in the Cash flows from operating activities section of the Consolidated Statements of Cash Flows is the caption, Other assets and liabilities. For the years ended December 31, 2015, 2014 and 2013 the decreases in this caption were $30.6 million, $44.9 million and $18.5 million, respectively. A summary of the major components of this caption for the periods presented is as follows:
(In millions)
 
2015
 
2014
 
2013
Net cash provided by (used in):
 
 
 
 
 
 
  Change in net defined benefit pension liabilities
 
$
(24.6
)
 
$
(27.8
)
 
$
(16.1
)
  Change in prepaid expenses
 

 
(15.8
)
 
(2.7
)
  Other
 
(6.0
)
 
(1.3
)
 
0.3

  Total
 
$
(30.6
)
 
$
(44.9
)
 
$
(18.5
)




33


Cash provided (used) by investing activities — Net cash used by investing activities in 2015 was $130.4 million, a decrease of $99.2 million from 2014. The net decrease was primarily due to a lower level of capital expenditures, primarily in the Harsco Metals & Minerals Segment; a net decrease in purchases of businesses which consisted of Protran and JK Rail in the Harsco Rail Segment in 2015 and Hammco in the Harsco Industrial Segment in 2014; and an increase in proceeds from sales of assets, partially offset by the final working capital adjustment related to the Infrastructure transaction which was received in 2014. Capital investments decreased $85.3 million compared with 2014. In 2014, net cash used by investing activities was $229.6 million, an increase of $292.8 million from 2013. The net increase was primarily due to net proceeds from the Infrastructure Transaction of $303.0 million received in 2013 and the acquisition of Hammco and payment of the unit adjustment liability in 2014. Partially offsetting this increase were a lower level of capital expenditures, primarily related to no longer having capital expenditures for the Infrastructure Segment. Capital investments decreased $36.7 million compared with 2013.
Cash provided (used) by financing activities — Net cash provided by financing activities in 2015 was $22.5 million, an increase of $44.2 million from 2014.  The change was primarily due to proceeds of $75.1 million from the termination of a CCIR, partially offset by an increase in the treasury shares purchased under the Company's share repurchase program then in effect and a decrease in year-over-year net cash borrowings. In 2014, net cash used in financing activities was $21.8 million, a decrease of $226.9 million from 2013. The change was primarily due to use of cash proceeds from the Infrastructure Transaction to repay outstanding borrowings in 2013 and to increased credit facility borrowings related to the Hammco acquisition and payment of the unit adjustment liability in 2014.
Debt Covenants
The Credit Agreement contains a consolidated net debt to consolidated EBITDA ratio covenant, which is not to exceed 4.0 to 1.0, and a minimum consolidated EBITDA to consolidated interest charges ratio covenant, which is not to be less than 3.0 to 1.0. The consolidated net debt to consolidated EBITDA ratio covenant is reduced to 3.75 to 1.0 after December 31, 2016 and to 3.5 to 1.0 after June 30, 2017. The Company’s 5.75% notes include covenants that require the Company to offer to repurchase the notes at 101% of par in the event of a change of control of the Company or disposition of substantially all of the Company’s assets in combination with a downgrade in the Company’s credit rating to non-investment grade.  At December 31, 2015, the Company was in compliance with these covenants as the consolidated net debt to consolidated EBITDA ratio was 2.8 to 1.0 and total consolidated EBITDA to consolidated interest charges was 6.4 to 1.0. Based on balances and covenants in effect at December 31, 2015, the Company could increase net debt by $360.5 million and still be in compliance with these debt covenants.  Alternatively, keeping all other factors constant, the Company's EBITDA could decrease by $90.2 million and the Company would still be within these debt covenants. The Company expects to continue to be in compliance with these debt covenants for at least the next twelve months.

Additionally, upon the completion of the potential separation of the Harsco Metals & Minerals Segment, the Company would be required to repay the Term Loan Facility and the consolidated net debt to consolidated EBITDA ratio would be reduced to 3.0 to 1.0 for the Credit Agreement.

Cash Management
The Company has various cash management systems throughout the world that centralize cash in various bank accounts where it is economically justifiable and legally permissible to do so. These centralized cash balances are then redeployed to other operations to reduce short-term borrowings and to finance working capital needs or capital expenditures. Due to the transitory nature of cash balances, they are normally invested in bank deposits that can be withdrawn at will or in very liquid short-term bank time deposits and government obligations. The Company's policy is to use the largest banks in the various countries in which the Company operates. The Company monitors the creditworthiness of banks and when appropriate will adjust banking operations to reduce or eliminate exposure to less credit worthy banks. The Company plans to continue the strategy of targeted, prudent investing for strategic purposes for the foreseeable future and to make more efficient use of existing investments.

At December 31, 2015, the Company's consolidated cash and cash equivalents included $78.3 million held by non-U.S. subsidiaries. At December 31, 2015, less than 10% of the Company's consolidated cash and cash equivalents had regulatory restrictions that would preclude the transfer of funds with and among subsidiaries. The cash and cash equivalents held by non-U.S. subsidiaries also included $26.2 million held in consolidated strategic ventures. The strategic venture agreements may require strategic venture partner approval to transfer funds with and among subsidiaries. While the Company's remaining non-U.S. cash and cash equivalents can be transferred with and among subsidiaries, the majority of these non-U.S. cash balances will be used to support the on-going working capital needs and continued growth of the Company's non-U.S. operations.
In February 2016, the Company paid a quarterly cash dividend.
The Company's financial position and debt capacity should enable it to meet current and future requirements. The Company continues to assess its capital needs in the context of operational trends and strategic initiatives.

34


Application of Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the U.S. ("U.S. GAAP"). The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. On an ongoing basis, the Company evaluates the estimates, including those related to defined benefit pension benefits, notes and accounts receivable, goodwill, long-lived asset impairment, inventories, insurance reserves, legal and other contingencies and income taxes. The impact of changes in these estimates, as necessary, is reflected in the respective segment's results of operations in the period of the change. The Company bases estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different outcomes, assumptions or conditions.
The Company believes the following critical accounting policies are affected by the Company's more significant judgments and estimates used in the preparation of the consolidated financial statements. Management has discussed the development and selection of the critical accounting estimates described below with the Audit Committee of the Board of Directors (the "Board") and they have reviewed the Company's disclosures relating to these estimates in this Management's Discussion and Analysis of Financial Condition and Results of Operations. These items should be read in conjunction with Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
Defined Benefit Pension Benefits
The Company has defined benefit pension plans in several countries. The largest of these plans are in the U.K. and the U.S. The Company's funding policy for these plans is to contribute amounts sufficient to meet the minimum funding pursuant to U.K. and U.S. statutory requirements, plus any additional amounts that the Company may determine to be appropriate.
Changes in the discount rate assumption and the actual performance of plan assets compared with the expected long-term rate of return on plan assets are the primary drivers in the change in funded status of the Company's defined benefit pension plans. These factors are components of actuarial loss (gain) and impact the amount recognized in Other comprehensive income (loss), as such actuarial changes are not reflected directly in the Consolidated Statements of Operations, but amortized over time in accordance with U.S. GAAP.

Critical Estimate—Defined Benefit Pension Benefits
Accounting for defined benefit pension plans requires the use of actuarial assumptions. The principal assumptions used include the discount rate and the expected long-term rate of return on plan assets. Each assumption is reviewed annually and represents management's best estimate at that time. The assumptions are selected to represent the average expected experience over time and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of unfunded benefit obligation and the expense recognized.
The discount rates used in calculating the Company's projected benefit obligations at the December 31, 2015 measurement date for the U.K. and U.S. defined benefit pension plans were 3.8% and 4.2%, respectively, and the global weighted-average discount rate was 3.9%. The discount rates selected represent level-equivalent rates using the yield curve spot rates on a year-by-year expected cash flow basis, using yield curves of high-quality corporate bonds. Annual NPPC is determined using the discount rates at the beginning of the year. The discount rates for 2015 expense were 3.6% for the U.K. plan, 3.9% for the U.S. plans and 3.7% for the global weighted-average of plans. NPPC and the projected benefit obligation generally increase as the selected discount rate decreases.
The expected long-term rate of return on plan assets is determined by evaluating the asset return expectations with the Company's advisors as well as actual, long term, historical results of asset returns for the pension plans. Generally the NPPC increases as the expected long term rate of return on assets decreases. For 2016 and 2015, the global weighted-average expected long-term rate of return on asset assumption is 6.7% and 7.0%, respectively. This rate was determined based on a model of expected asset returns for an actively managed portfolio.





35


Changes in NPPC may occur in the future due to changes in actuarial assumptions and due to changes in returns on plan assets resulting from financial market conditions. Holding all other assumptions constant, using December 31, 2015 plan data, a one-half percent increase or decrease in the discount rate and the expected long-term rate of return on plan assets would increase or decrease annual 2015 pre-tax defined benefit NPPC as follows:
Approximate Changes in Pre-tax Defined Benefit Net Periodic Pension Cost
 
 
U.S. Plans
 
U.K. Plan
Discount rate
 
 
 
 
One-half percent increase
 
Increase of $0.1 million
 
Decrease of $1.0 million
One-half percent decrease
 
Decrease of $0.2 million
 
Increase of $1.1 million
Expected long-term rate of return on plan assets
 
 
 
 
One-half percent increase
 
Decrease of $1.0 million
 
Decrease of $3.6 million
One-half percent decrease
 
Increase of $1.0 million
 
Increase of $3.6 million
Increases or decreases to the net pension obligations may be required should circumstances that affect these estimates change. Additionally, certain events could result in the pension obligation changing at a time other than the annual measurement date. This would occur when a benefit plan is amended or when plan curtailments or settlements occur.
The Company has changed the method utilized to estimate the 2016 service cost and interest cost components of NPPC for defined benefit pension plans. The more precise application of discount rates for measuring both service costs and interest costs employs yield curve spot rates on a year-by-year expected cash flow basis, using the same yield curves that the Company has previously used. This change in method represents a change in accounting estimate and will have the impact of reducing 2016 NPPC by approximately $7 million when compared to what NPPC would have been under the prior method.

See Note 10, Employee Benefit Plans, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional disclosures related to these items.

Notes and Accounts Receivable
Notes and accounts receivable are stated at net realizable value through the use of an allowance for doubtful accounts. The allowance is maintained for estimated losses resulting from the inability or unwillingness of customers to make required payments. The Company has policies and procedures in place requiring customers to be evaluated for creditworthiness prior to the execution of new service contracts or shipments of products. These reviews are structured to minimize the Company's risk related to realizability of receivables. Despite these policies and procedures, the Company may at times still experience collection problems and potential bad debts due to economic conditions within certain industries (e.g., steel industry), countries or regions in which the Company operates. At December 31, 2015 and 2014, trade accounts receivable of $254.9 million and $325.1 million, respectively, were net of reserves of $25.6 million and $15.1 million, respectively. The increase in Allowance for doubtful accounts since December 31, 2014, relates primarily to a large steel mill customer in Europe. As the Company has previously disclosed, this customer ceased operations and began the formal process of liquidation in late 2015. The Company previously recorded bad debt reserves of approximately $3 million related to this customer and as a result of these events recorded an additional bad debt reserve related to the remaining receivables balance of $9.9 million during 2015.

Critical Estimate—Notes and Accounts Receivable
A considerable amount of judgment is required to assess the realizability of receivables, including the current creditworthiness of each customer, related aging of past due balances and the facts and circumstances surrounding any non-payment. The Company's provisions for bad debts during 2015, 2014 and 2013 were $13.0 million, $9.9 million and $10.2 million, respectively.
On a monthly basis, customer accounts are analyzed for collectability. Reserves are established based upon a specific-identification method as well as historical collection experience, as appropriate. The Company also evaluates specific accounts when it becomes aware of a situation in which a customer may not be able to meet its financial obligations due to a deterioration in financial condition, credit ratings, bankruptcy or receivership. The reserves are based on the facts available to the Company and are re-evaluated and adjusted as additional information becomes available. Reserves are also determined by using percentages (based upon experience) applied to certain aged receivable categories. Specific issues are discussed with corporate management, and any significant changes in reserve amounts or the write-off of balances must be approved by specifically designated corporate personnel. All approved items are monitored to ensure they are recorded in the proper period. Additionally, any significant changes in reserve balances are reviewed to ensure the proper corporate approval has occurred.
If the financial condition of the Company's customers were to deteriorate, resulting in their inability to make payments, additional allowances may be required. Conversely, an improvement in a customer's ability to make payments could result in a

36


decrease of the allowance for doubtful accounts. Changes in the allowance for doubtful accounts related to both of these situations would be recorded through Operating income (loss) from continuing operations in the period the change was determined. As previously disclosed, during the fourth quarter of 2013, the Company recorded a bad debt reserve of $2.6 million on receivables with a large steel mill customer who filed for protection under the Marzano Law. During the second quarter of 2014, the customer terminated its contract with the Company under the provisions of the Marzano Law. As a result, during the second quarter of 2014, the Company recorded an additional bad debt reserve of $3.9 million on the remaining pre-receivership receivables with this customer. During 2014, the Company recorded a bad debt reserve of $2.6 million for one of its Canadian steel mill customers that filed for receivership protection during the course of the year as the Company has previously disclosed.  The amount of the bad debt reserve for this customer represents the full pre-receivership balance.
The Company has not materially changed the methodology for calculating allowances for doubtful accounts for the years presented. See Note 4, Accounts Receivable and Inventories, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional disclosures related to these items.
Goodwill
The Company's goodwill balances were $400.4 million and $416.2 million at December 31, 2015 and 2014, respectively. The Company performs the annual goodwill impairment test as of October 1. The Company has five reporting units (only three of which have goodwill associated with them as of December 31, 2015). The Company's reporting units with goodwill are the Harsco Metals & Minerals Segment, the Harsco Rail Segment and the air-cooled heat exchanger business of the Harsco Industrial Segment. Almost all of the Company's goodwill is allocated to the Harsco Metals & Minerals Segment.

Critical Estimate—Goodwill
In accordance with U.S. GAAP, goodwill is not amortized and is tested for impairment at least annually or more frequently if indicators of impairment exist or if a decision is made to dispose of a business. Goodwill is allocated among and evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment for which discrete financial information is available. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include declining cash flows or operating losses at the reporting unit level, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, or a more likely than not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, among others.

The evaluation of potential goodwill impairment involves comparing the current fair value of each reporting unit to the net book value, including goodwill. The Company uses a discounted cash flow model (“DCF model”) to estimate the current fair value of reporting units, as management believes forecasted operating cash flows are the best indicator of current fair value. A number of significant assumptions and estimates are involved in the preparation of DCF models including future revenues and operating margin growth, the weighted-average cost of capital (“WACC”), tax rates, capital spending, pension funding, the impact of strategic business initiatives, and working capital projections. These assumptions and estimates may vary significantly between reporting units. DCF models are based on approved long-range plans for the early years and historical relationships and projections for later years. WACC rates are derived from internal and external factors including, but not limited to, the average market price of the Company's stock, shares outstanding, book value of the Company's debt, the long-term risk free interest rate, and both market and size-specific risk premiums. Due to the many variables noted above and the relative size of the Company's goodwill, differences in assumptions may have a material impact on the results of the Company's annual goodwill impairment testing. If the net book value of a reporting unit were to exceed the current fair value, the second step of the goodwill impairment test would be required to determine if an impairment existed and the amount of goodwill impairment to record, if any. The second step of the goodwill impairment test compares the net book value of a reporting unit's goodwill with the implied fair value of that goodwill. The implied fair value of goodwill represents the excess of fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of the reporting unit if it were to be acquired in a hypothetical business combination and the current fair value of the reporting unit represented the purchase price. The second step of the goodwill impairment test requires the utilization of valuation experts.

The performance of the Company’s 2015 annual impairment tests did not result in any impairment of the Company’s goodwill.
For the Company's 2015 annual goodwill impairment test, the average annual revenue growth rates over the duration of the DCF models ranged from 2.5% to 5.3%. The average annual cash flow growth rates over the duration of the DCF models ranged from 5.0% to 12.5%. The WACCs used in the 2015 annual goodwill impairment test ranged from 9.25% to 10.25%.

The Harsco Metals & Minerals Segment reporting unit's fair value at October 1, 2015 was approximately 15% more than the net book value. The related DCF model for this reporting unit included several key assumptions related to Project Orion and the expected benefits to be realized by this business initiative. Significant assumptions utilized in the DCF model include a WACC of 10.25%, an average annual revenue growth rate of 2.5% and average annual cash flow growth rate of 5.0%.

37


Additionally, should the expected benefits associated with Project Orion not materialize as anticipated or there is continued degradation in the overall markets served by the Harsco Metals & Minerals Segment, it may result in an impairment of the Harsco Metal & Minerals Segment goodwill.

It is important to note that fair values that could be realized in an actual transaction could differ materially from those used to evaluate the annual goodwill impairment test. The Company has not materially changed its methodology for goodwill impairment testing for the years presented. See Note 1, Summary of Significant Accounting Policies and Note 7, Goodwill and Other Intangible Assets, to the Consolidated Financial Statements under Part II, Item 8, “Financial Statements and Supplementary Data,” for additional disclosure related to these items.

Long-lived Asset Impairment
Long-lived assets are reviewed for impairment when events and circumstances indicate that the book value of an asset may be impaired. During 2013, the Company recorded a $272.3 million loss on disposal of the Harsco Infrastructure Segment related to the Infrastructure Transaction. Additionally, the amounts charged against pre-tax income from continuing operations related to impaired long-lived assets included in the caption, Other expenses, on the Consolidated Statements of Operations were $8.2 million, $39.5 million and $9.7 million in 2015, 2014 and 2013 respectively. The decrease in long-lived asset impairments in 2015 was due primarily to higher long-lived asset impairments in 2014 in the Harsco Metals & Minerals Segment as part of Project Orion.

Critical Estimate—Asset Impairment
The determination of a long-lived asset impairment involves significant judgments based upon short-term and long-term projections of future asset performance. If the undiscounted cash flows associated with an asset (or asset group) do not exceed the asset's book value, impairment loss estimates would be based upon the difference between the book value and fair value of the asset. The fair value is generally based upon the Company's estimate of the amount that the assets could be bought or sold for in a transaction between willing parties. If quoted market prices for the asset or similar assets are unavailable, the fair value estimate is generally calculated using a DCF model. Should circumstances change that affect these estimates, additional impairment charges may be required and would be recorded through income in the period the change was determined.
As a result of the Infrastructure Transaction, the Company recorded an estimated non-cash long-lived asset impairment charge of $241.3 million during the third quarter of 2013. The Company recorded an additional loss on disposal of the Harsco Infrastructure Segment of $30.9 million during the fourth quarter of 2013 related to the Infrastructure Transaction. The increased loss on disposal of the Harsco Infrastructure Segment from September 30, 2013 was due principally to the final valuation of the equity interest in the Infrastructure strategic venture and changes in working capital and other adjustments.  
The Company has not materially changed the methodology for calculating long-lived asset impairments for the years presented. U.S. GAAP requires consideration of all valuation techniques for which market participant inputs can be obtained without undue cost and effort. The use of a DCF model continues to be an appropriate method for determining fair value, however, methodologies such as quoted market prices must also be evaluated. See Note 17, Other Expenses, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional disclosure related to these items.
Inventories
Inventories are stated at the lower of cost or market. Inventory balances are adjusted for estimated obsolete or unmarketable inventory equal to the difference between the cost of inventory and its estimated market value. At December 31, 2015 and 2014, inventories of $217.0 million and $178.9 million, respectively, are net of lower of cost or market reserves and obsolescence reserves of $10.8 million and $10.0 million, respectively.

Critical Estimate—Inventories
In assessing the realization of inventory balances, the Company is required to make judgments as to future demand and compare these with current or committed inventory levels. If actual market conditions are determined to be less favorable than those projected by management, additional inventory write-downs may be required and would be recorded through Operating income (loss) from continuing operations in the period the determination is made. Additionally, the Company records reserves to adjust a substantial portion of its U.S. inventory balances to the last-in, first-out ("LIFO") method of inventory valuation. In adjusting these reserves throughout the year, the Company estimates its year-end inventory costs and quantities. At December 31 of each year, the reserves are adjusted to reflect actual year-end inventory costs and quantities. During periods of inflation, LIFO expense usually increases and during periods of deflation it decreases. These year-end adjustments resulted in pre-tax expense of $0.1 million in 2015, pre-tax expense of $1.4 million in 2014 and pre-tax income of $1.8 million in 2013.
The Company has not materially changed the methodology for calculating inventory reserves for the years presented. See Note 4, Accounts Receivable and Inventories, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," for additional disclosures related to these items.

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Insurance Reserves
The Company retains a significant portion of the risk for U.S. workers' compensation, U.K. employers' liability, automobile, general and product liability losses. At December 31, 2015 and 2014, the Company recorded liabilities of $41.8 million and $47.9 million, respectively, related to both asserted and unasserted insurance claims. At December 31, 2015 and 2014, $3.4 million and $3.8 million, respectively, was included in insurance liabilities related to claims covered by insurance carriers for which a corresponding receivable has been recorded.

Critical Estimate—Insurance Reserves
Insurance reserves have been recorded based upon actuarial calculations that 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 Operating income (loss) from continuing operations in the period the change was determined. During 2015, 2014 and 2013, the Company recorded a retrospective insurance reserve adjustment that decreased pre-tax insurance expense from continuing operations for self-insured programs by $8.5 million, $7.0 million and $4.9 million, respectively. The Company has programs in place to improve claims experience, such as disciplined claim and insurance litigation management and a focused approach to workplace safety.
The Company has not materially changed the methodology for calculating insurance reserves for the years presented. There are currently no known trends, demands, commitments, events or uncertainties that are reasonably likely to occur that would materially affect the methodology