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EX-32 - EXHIBIT 32 - HARSCO CORPhsc-ex32_2016q2.htm
EX-31.2 - EXHIBIT 31.2 - HARSCO CORPhsc-ex312_2016q2.htm
EX-31.1 - EXHIBIT 31.1 - HARSCO CORPhsc-ex311_2016q2.htm
EX-10.3 - EXHIBIT 10.3 - HARSCO CORPhsc-ex103_2016q2.htm
EX-10.2 - EXHIBIT 10.2 - HARSCO CORPhsc-ex102_2016q2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to          
Commission File Number  001-03970
HARSCO CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware
23-1483991
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification number)
 
 
350 Poplar Church Road, Camp Hill, Pennsylvania
17011
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code  717-763-7064 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ý  NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   YES ý  NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý
Accelerated filer  o
 
 
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO ý
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at July 29, 2016
Common stock, par value $1.25 per share
 
80,174,963




HARSCO CORPORATION
FORM 10-Q
INDEX
 
 
 
Page
 
 
 
 
3 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I — FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

HARSCO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
 
June 30
2016
 
December 31
2015
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
69,238

 
$
79,756

Trade accounts receivable, net
 
265,241

 
254,877

Other receivables
 
16,875

 
30,395

Inventories
 
208,243

 
216,967

Other current assets
 
80,503

 
82,527

Total current assets
 
640,100

 
664,522

Investments
 
236,112

 
252,609

Property, plant and equipment, net
 
531,292

 
564,035

Goodwill
 
394,423

 
400,367

Intangible assets, net
 
47,078

 
53,043

Other assets
 
110,016

 
126,621

Total assets
 
$
1,959,021

 
$
2,061,197

LIABILITIES
 
 

 
 

Current liabilities:
 
 

 
 

Short-term borrowings
 
$
10,129

 
$
30,229

Current maturities of long-term debt
 
35,588

 
25,084

Accounts payable
 
113,532

 
136,018

Accrued compensation
 
40,736

 
38,899

Income taxes payable
 
7,192

 
4,408

Dividends payable
 

 
4,105

Insurance liabilities
 
11,927

 
11,420

Advances on contracts and other customer advances
 
107,912

 
107,250

Due to unconsolidated affiliate
 
7,715

 
7,733

Unit adjustment liability
 
11,681

 
22,320

Other current liabilities
 
121,536

 
118,657

Total current liabilities
 
467,948

 
506,123

Long-term debt
 
832,339

 
845,621

Deferred income taxes
 
15,364

 
12,095

Insurance liabilities
 
25,078

 
30,400

Retirement plan liabilities
 
210,482

 
241,972

Due to unconsolidated affiliate
 
14,138

 
13,674

Unit adjustment liability
 
52,510

 
57,614

Other liabilities
 
40,213

 
42,895

Total liabilities
 
1,658,072

 
1,750,394

COMMITMENTS AND CONTINGENCIES
 


 


HARSCO CORPORATION STOCKHOLDERS’ EQUITY
 
 

 
 

Preferred stock
 

 

Common stock
 
140,622

 
140,503

Additional paid-in capital
 
169,048

 
170,699

Accumulated other comprehensive loss
 
(488,302
)
 
(515,688
)
Retained earnings
 
1,199,313

 
1,236,355

Treasury stock
 
(760,391
)
 
(760,299
)
Total Harsco Corporation stockholders’ equity
 
260,290

 
271,570

Noncontrolling interests
 
40,659

 
39,233

Total equity
 
300,949

 
310,803

Total liabilities and equity
 
$
1,959,021

 
$
2,061,197


See accompanying notes to unaudited condensed consolidated financial statements.

3


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
(In thousands, except per share amounts)
 
2016
 
2015
 
2016
 
2015
Revenues from continuing operations:
 
 

 
 

 
 
 
 
Service revenues
 
$
249,626

 
$
292,209

 
$
475,120

 
$
579,637

Product revenues
 
120,307

 
163,538

 
248,094

 
327,689

Total revenues
 
369,933

 
455,747

 
723,214

 
907,326

Costs and expenses from continuing operations:
 
 

 
 

 
 
 
 
Cost of services sold
 
191,508

 
243,838

 
381,325

 
489,699

Cost of products sold
 
125,388

 
116,561

 
218,632

 
231,782

Selling, general and administrative expenses
 
49,520

 
58,463

 
100,304

 
122,365

Research and development expenses
 
956

 
1,514

 
1,838

 
2,433

Other (income) expenses
 
1,247

 
(358
)
 
10,370

 
(13,563
)
Total costs and expenses
 
368,619

 
420,018

 
712,469

 
832,716

Operating income from continuing operations
 
1,314

 
35,729

 
10,745

 
74,610

Interest income
 
552

 
431

 
1,087

 
687

Interest expense
 
(13,805
)
 
(11,818
)
 
(26,168
)
 
(23,702
)
Change in fair value to the unit adjustment liability and loss on dilution of equity method investment
 
(1,489
)
 
(2,164
)
 
(13,706
)
 
(4,409
)
Income (loss) from continuing operations before income taxes and equity income (loss)
 
(13,428
)
 
22,178

 
(28,042
)
 
47,186

Income tax expense
 
(12,000
)
 
(7,105
)
 
(9,834
)
 
(19,960
)
Equity in income (loss) of unconsolidated entities, net
 
(694
)
 
(7,584
)
 
2,481

 
(3,501
)
Income (loss) from continuing operations
 
(26,122
)
 
7,489

 
(35,395
)
 
23,725

Discontinued operations:
 
 

 
 

 
 
 
 
Income (loss) on disposal of discontinued business
 
2,886

 
434

 
2,380

 
(212
)
Income tax benefit (expense) related to discontinued business
 
(1,065
)
 
(161
)
 
(878
)
 
78

Income (loss) from discontinued operations
 
1,821

 
273

 
1,502

 
(134
)
Net income (loss)
 
(24,301
)
 
7,762

 
(33,893
)
 
23,591

Less: Net income attributable to noncontrolling interests
 
(1,872
)
 
(1,187
)
 
(3,149
)
 
(1,752
)
Net income (loss) attributable to Harsco Corporation
 
$
(26,173
)
 
$
6,575

 
$
(37,042
)
 
$
21,839

Amounts attributable to Harsco Corporation common stockholders:
Income (loss) from continuing operations, net of tax
 
$
(27,994
)
 
$
6,302

 
$
(38,544
)
 
$
21,973

Income (loss) from discontinued operations, net of tax
 
1,821

 
273

 
1,502

 
(134
)
Net income (loss) attributable to Harsco Corporation common stockholders
 
$
(26,173
)
 
$
6,575

 
$
(37,042
)
 
$
21,839

 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding
 
80,337

 
80,221

 
80,288

 
80,230

Basic earnings (loss) per common share attributable to Harsco Corporation common stockholders:
Continuing operations
 
$
(0.35
)
 
$
0.08

 
$
(0.48
)
 
$
0.27

Discontinued operations
 
0.02

 

 
0.02

 

Basic earnings (loss) per share attributable to Harsco Corporation common stockholders
 
$
(0.33
)
 
$
0.08


$
(0.46
)
 
$
0.27

 
 
 
 
 
 
 
 
 
Diluted weighted-average shares of common stock outstanding
 
80,337

 
80,418

 
80,288

 
80,385

Diluted earnings (loss) per common share attributable to Harsco Corporation common stockholders:
Continuing operations
 
$
(0.35
)
 
$
0.08

 
$
(0.48
)
 
$
0.27

Discontinued operations
 
0.02

 

 
0.02

 

Diluted earnings (loss) per share attributable to Harsco Corporation common stockholders
 
$
(0.33
)
 
$
0.08


$
(0.46
)
 
$
0.27

 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
 
$

 
$
0.205

 
$

 
$
0.410



See accompanying notes to unaudited condensed consolidated financial statements.

4


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
 
 
 
 
 
 
 
Three Months Ended
 
 
June 30
(In thousands)
 
2016
 
2015
Net income (loss)
 
$
(24,301
)
 
$
7,762

Other comprehensive income (loss):
 
 

 
 

Foreign currency translation adjustments, net of deferred income taxes of $(4,977) and $4,542 in 2016 and 2015, respectively
 
(14,394
)
 
(8,975
)
Net loss on cash flow hedging instruments, net of deferred income taxes of $401 and $984 in 2016 and 2015, respectively
 
(144
)
 
(1,693
)
Pension liability adjustments, net of deferred income taxes of $(517) and $(469) in 2016 and 2015, respectively
 
21,855

 
(17,077
)
Unrealized gain on marketable securities, net of deferred income taxes of $(2) and $(1) in 2016 and 2015, respectively
 
4

 
4

Total other comprehensive income (loss)
 
7,321

 
(27,741
)
Total comprehensive loss
 
(16,980
)
 
(19,979
)
Less: Comprehensive income attributable to noncontrolling interests
 
(1,183
)
 
(846
)
Comprehensive loss attributable to Harsco Corporation
 
$
(18,163
)
 
$
(20,825
)
 
 
 
 
 
 
 
Six Months Ended
 
 
June 30
(In thousands)
 
2016
 
2015
Net income (loss)
 
$
(33,893
)
 
$
23,591

Other comprehensive income (loss):
 
 

 
 

Foreign currency translation adjustments, net of deferred income taxes of $(8,554) and $2,892 in 2016 and 2015, respectively
 
(2,773
)
 
(37,817
)
Net gain (loss) on cash flow hedging instruments, net of deferred income taxes of $415 and $(538) in 2016 and 2015, respectively
 
(2,551
)
 
5,881

Pension liability adjustments, net of deferred income taxes of $(1,034) and $(939) in 2016 and 2015, respectively
 
32,295

 
8,216

Unrealized loss on marketable securities, net of deferred income taxes of $2 and $3 in 2016 and 2015, respectively
 
(3
)
 
(4
)
Total other comprehensive income (loss)
 
26,968

 
(23,724
)
Total comprehensive loss
 
(6,925
)
 
(133
)
Less: Comprehensive income attributable to noncontrolling interests
 
(2,731
)
 
(647
)
Comprehensive loss attributable to Harsco Corporation
 
$
(9,656
)
 
$
(780
)

See accompanying notes to unaudited condensed consolidated financial statements.

5


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
Six Months Ended
 
 
June 30
(In thousands)
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net income (loss)
 
$
(33,893
)
 
$
23,591

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Depreciation
 
65,736

 
73,507

Amortization
 
5,926

 
6,073

Change in fair value to the unit adjustment liability and loss on dilution of equity method investment
 
13,706

 
4,409

Deferred income tax expense (benefit)
 
(2,857
)
 
2,355

Equity in (income) loss of unconsolidated entities, net
 
(2,481
)
 
3,501

Dividends from unconsolidated entities
 
16

 

Contract loss provision for Harsco Rail Segment
 
40,050

 

Other, net
 
4,257

 
(17,473
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable
 
3,011

 
(10,698
)
Inventories
 
(23,791
)
 
(31,192
)
Accounts payable
 
(16,399
)
 
11,437

Accrued interest payable
 
(36
)
 
(163
)
Accrued compensation
 
1,237

 
(6,870
)
Advances on contracts and other customer advances
 
(1,109
)
 
8,246

Harsco 2011/2012 Restructuring Program accrual
 

 
(101
)
Other assets and liabilities
 
(24,791
)
 
(21,404
)
Net cash provided by operating activities
 
28,582

 
45,218

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(32,176
)
 
(63,246
)
Proceeds from sales of assets
 
5,115

 
13,351

Purchases of businesses, net of cash acquired
 
(26
)
 
(7,757
)
Payment of unit adjustment liability
 

 
(11,160
)
Other investing activities, net
 
(616
)
 
(4,783
)
Net cash used by investing activities
 
(27,703
)
 
(73,595
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Short-term borrowings, net
 
1,949

 
(3,046
)
Current maturities and long-term debt:
 
 

 
 

Additions
 
50,019

 
92,980

Reductions
 
(75,608
)
 
(16,152
)
Cash dividends paid on common stock
 
(4,105
)
 
(32,891
)
Dividends paid to noncontrolling interests
 
(1,702
)
 
(1,559
)
Purchase of noncontrolling interests
 
(4,731
)
 

Common stock acquired for treasury
 

 
(12,143
)
Proceeds from cross-currency interest rate swap termination
 
16,625

 

Other financing activities, net
 
(895
)
 
(2,192
)
Net cash provided (used) by financing activities
 
(18,448
)
 
24,997

 
 
 
 
 
Effect of exchange rate changes on cash
 
7,051

 
7,685

Net increase (decrease) in cash and cash equivalents
 
(10,518
)
 
4,305

Cash and cash equivalents at beginning of period
 
79,756

 
62,843

Cash and cash equivalents at end of period
 
$
69,238

 
$
67,148

 
See accompanying notes to unaudited condensed consolidated financial statements.

6


HARSCO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)
 
 
Harsco Corporation Stockholders’ Equity
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
 
(In thousands, except share 
amounts)
 
Issued
 
Treasury
 
 
 
 
 
Total
Balances, January 1, 2015
 
$
140,444

 
$
(749,815
)
 
$
165,666

 
$
1,283,549

 
$
(532,256
)
 
$
44,322

 
$
351,910

Net income
 
 

 
 

 
 

 
21,839

 
 

 
1,752

 
23,591

Cash dividends declared:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Common @ $0.41 per share
 
 

 
 

 
 

 
(32,797
)
 
 

 
 

 
(32,797
)
   Noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
(1,559
)
 
(1,559
)
Total other comprehensive loss, net of deferred income taxes of $1,418
 
 
 
 
 
 
 
 
 
(22,619
)
 
(1,105
)
 
(23,724
)
Contributions from noncontrolling interests
 
 

 
 

 
 

 
 

 
 

 
2,100

 
2,100

Sale of investment in consolidated subsidiary
 
 
 
 
 
 
 
 
 
 
 
200

 
200

Vesting of restricted stock units and other stock grants, net 30,705 shares
 
58

 
(259
)
 
(97
)
 
 

 
 

 
 

 
(298
)
Treasury shares repurchased, 596,632 shares
 
 
 
(10,220
)
 
 
 
 
 
 
 
 
 
(10,220
)
Amortization of unearned portion of stock-based compensation, net of forfeitures
 
 

 
 

 
2,255

 
 

 
 

 
 

 
2,255

Balances, June 30, 2015
 
$
140,502

 
$
(760,294
)
 
$
167,824

 
$
1,272,591

 
$
(554,875
)
 
$
45,710

 
$
311,458

 
 
Harsco Corporation Stockholders’ Equity
 
 
 
 
(In thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
 
 
Issued
 
Treasury
 
 
 
 
 
Total
Balances, January 1, 2016
 
$
140,503

 
$
(760,299
)
 
$
170,699

 
$
1,236,355

 
$
(515,688
)
 
$
39,233

 
$
310,803

Net income (loss)
 
 

 
 

 
 

 
(37,042
)
 
 

 
3,149

 
(33,893
)
Cash dividends declared:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Noncontrolling interests
 
 

 
 

 
 

 
 

 
 

 
(1,702
)
 
(1,702
)
Total other comprehensive income (loss), net of deferred income taxes of $(9,171)
 
 
 
 
 
 
 
 
 
27,386

 
(418
)
 
26,968

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

 
(4,731
)
Vesting of restricted stock units and other stock grants, net 80,598 shares
 
119

 
(92
)
 
(595
)
 
 

 
 

 
 

 
(568
)
Amortization of unearned portion of stock-based compensation, net of forfeitures
 
 

 
 

 
4,072

 
 

 
 

 
 

 
4,072

Balances, June 30, 2016
 
$
140,622

 
$
(760,391
)
 
$
169,048

 
$
1,199,313

 
$
(488,302
)
 
$
40,659

 
$
300,949

 
See accompanying notes to unaudited condensed consolidated financial statements.

7


HARSCO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.     Basis of Presentation
Harsco Corporation (the “Company”) has prepared these unaudited condensed consolidated financial statements based on Securities and Exchange Commission rules that permit reduced disclosure for interim periods.  In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements.  The December 31, 2015 Condensed Consolidated Balance Sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2015 audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. (“U.S. GAAP”) for an annual report.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Operating results and cash flows for the three and six months ended June 30, 2016 are not indicative of the results that may be expected for the year ending December 31, 2016.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.

Significant Accounting Policies - Revenue Recognition
Product revenues are recognized when they are realized or realizable and when earned. Revenue is realized or realizable and earned when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Company's price to the buyer is fixed or determinable and collectability is reasonably assured. Product revenues include the Harsco Industrial Segment and the product revenues of the Harsco Metals & Minerals and Harsco Rail Segments.

Certain contracts within the Harsco Rail Segment, which meet specific criteria established in U.S. GAAP, are accounted for as long-term contracts. The Company recognizes revenues on two contracts from the federal railway system of Switzerland ("SBB") based on the percentage of completion (units-of-delivery) method of accounting, whereby revenues and estimated average costs of the units to be produced under the contracts are recognized as deliveries are made or accepted. Contract revenues and cost estimates are reviewed and revised, at a minimum quarterly, and adjustments are reflected in the accounting period as such amounts are determined.

Change in Estimates
Accounting for contracts using the percentage-of-completion method requires judgment relative to assessing risks, estimating contract revenues and costs (including estimating any liquidating damages or penalties related to performance) and making assumptions for schedule and technical items. Due to the number of years it may take to complete these contracts and the scope and nature of the work required to be performed on those contracts, estimating total sales and costs at completion is inherently complicated and subject to many variables and, accordingly estimates are subject to change. When adjustments in estimated total contract sales or estimated total costs are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes. When estimates of total costs to be incurred on a contract, using the percentage-of-completion method, exceed estimates of total sales to be earned, a provision for the entire loss on the contract is recorded in the period in which the loss is determined.

During the second quarter of 2016, as a result of increased vendor costs, ongoing discussions with the customer, and increased estimates for commissioning, certification and testing costs, as well as expected settlements with respect to the customer, the Company has concluded it will have a loss on the contracts with SBB. The majority of the equipment deliveries and related revenue recognition under these contracts are expected in 2017 through 2020. The Company recognized an estimated loss provision related to the SBB contracts of $40.1 million at June 30, 2016 in the caption Costs of products sold in the Condensed Consolidated Statements of Operations. There was no loss provision at December 31, 2015. See Note 3, Accounts Receivable and Inventories, for additional information related to the SBB contracts.







8


2.     Recently Adopted and Recently Issued Accounting Standards
The following accounting standards have been adopted in 2016:
On January 1, 2016, the Company adopted changes issued by the Financial Accounting Standards Board ("FASB") related to reporting extraordinary and unusual items. The changes simplified income statement presentation by eliminating the concept of extraordinary items. The changes became effective for the Company on January 1, 2016. The adoption of these changes did not have an impact on the Company's condensed consolidated financial statements.
On January 1, 2016, the Company adopted changes issued by the FASB related to consolidation. The changes updated consolidation analysis and affected reporting entities that are required to evaluate whether they should consolidate certain legal entities. The changes became effective for the Company on January 1, 2016. The adoption of these changes did not have a material impact on the Company's condensed consolidated financial statements.
On January 1, 2016, the Company adopted changes issued by the FASB related to simplifying the presentation of debt issuance costs. The changes required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability. In August 2015, the FASB added guidance about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The changes became effective for the Company on January 1, 2016. The adoption of these changes resulted in the reclassification of approximately $10 million in deferred financing costs from Other assets to Long-term debt on the Company's Condensed Consolidated Balance Sheets for all periods presented.
On January 1, 2016, the Company adopted changes issued by the FASB related to the determination of whether a cloud computing arrangement includes a software license. If a cloud computing arrangement is determined to include a software license, then the customer accounts for the software license element consistent with the acquisition of other software licenses. If the arrangement is determined not to contain a software license, the customer should account for the arrangement as a service contract. The changes became effective for the Company on January 1, 2016. The adoption of these changes did not have a material impact on the Company's condensed consolidated financial statements.
On January 1, 2016, the Company adopted changes issued by the FASB simplifying the accounting for measurement period adjustments for business combinations. The changes resulted in an acquirer no longer being required to retrospectively reflect adjustments to provisional amounts during the measurement period as if they were recognized as of the acquisition date. Instead the acquirer would record the effect of the change to the provisional amounts during the measurement period in which the adjustment is identified. The changes also required additional disclosure related to such measurement period adjustments. The changes became effective for the Company on January 1, 2016. The adoption of these changes did not have an impact on the Company's condensed consolidated financial statements; however in the future will have an effect on how the Company reports adjustments to provisional amounts during the measurement period.
The following accounting standards have been issued and become effective for the Company at a future date:
In May 2014, the FASB issued changes related to the recognition of revenue from contracts with customers. The changes clarify the principles for recognizing revenue and develop a common revenue standard. The core principle of the changes is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The changes also require additional disclosures related to revenue recognition. In July 2015, the FASB deferred the effective date of these changes by one year, but will permit entities to adopt one year earlier. During 2016, the FASB clarified the implementation guidance for principal versus agent considerations, identifying performance obligations, accounting for intellectual property licenses, collectability, non-cash consideration and the presentation of sales and other similar taxes, as well as introduced practical expedients related to disclosures of remaining performance obligations. These changes become effective for the Company on January 1, 2018. Management is currently evaluating these changes.
In August 2014, the FASB issued changes related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The changes become effective for the Company for the annual period ending December 31, 2016 and interim periods thereafter. Management has evaluated these changes and does not expect these changes will have a material impact on the Company's condensed consolidated financial statements.



9


In July 2015, the FASB issued changes related to the simplification of the measurement of inventory. The changes require entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The changes do not apply to inventories that are measured using either the last-in, first-out method or the retail inventory method. The changes become effective for the Company on January 1, 2017. Management has determined that these changes will not have a material impact on the Company's condensed consolidated financial statements.
In November 2015, the FASB issued changes that require deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position. The changes apply to all entities that present a classified statement of financial position. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected. The changes become effective for the Company on January 1, 2017. Had these changes been adopted, the Company's working capital would have decreased by approximately $34 million and $38 million at June 30, 2016 and December 31, 2015, respectively.
In February 2016, the FASB issued changes in accounting for leases. The changes introduce a lessee model that brings most leases on the balance sheet. The changes also align many of the underlying principles of the new lessor model with those in the FASB’s new revenue recognition standard. Furthermore, the changes address other concerns related to the current leases model such as eliminating the requirement in current guidance for an entity to use bright-line tests in determining lease classification. The changes also require lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The changes become effective for the Company on January 1, 2019. The Company is currently evaluating the impact of these changes on its condensed consolidated financial statements.

In March 2016, the FASB issued changes related to the simplification of several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The changes become effective for the Company on January 1, 2017. The Company is currently evaluating the impact of these changes on its condensed consolidated financial statements.


3.    Accounts Receivable and Inventories
Accounts receivable consist of the following:
(In thousands)
 
June 30
2016
 
December 31
2015
Trade accounts receivable
 
$
278,424

 
$
280,526

Less: Allowance for doubtful accounts
 
(13,183
)
 
(25,649
)
Trade accounts receivable, net
 
$
265,241

 
$
254,877

 
 
 
 
 
Other receivables (a)
 
$
16,875

 
$
30,395

(a) Other receivables include insurance claim receivables, employee receivables, tax claim receivables, receivables from affiliates and other miscellaneous receivables not included in Trade accounts receivable, net. 
The decrease in Allowance for doubtful accounts in 2016 is due to the write-off of previously reserved accounts receivable balances.
The provision for doubtful accounts related to trade accounts receivable was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
(In thousands)
 
2016
 
2015
 
2016
 
2015
Provision for doubtful accounts related to trade accounts receivable
 
$
323

 
$
414

 
$
177

 
$
610







10


Inventories consist of the following:
(In thousands)
 
June 30
2016
 
December 31
2015
Finished goods
 
$
38,207

 
$
32,586

Work-in-process
 
29,349

 
30,959

Contracts-in-process
 
44,335

 
55,786

Raw materials and purchased parts
 
69,975

 
70,755

Stores and supplies
 
26,377

 
26,881

Inventories
 
$
208,243

 
$
216,967


Contracts-in-process consist of the following:
(In thousands)
 
June 30
2016
 
December 31
2015
Contract costs accumulated to date
 
78,922

 
55,786

Estimated loss provisions for contracts-in-process (a)
 
(34,587
)
 

Contracts-in-process
 
44,335

 
55,786

(a)
To the extent that the estimated loss provision exceeds accumulated contract costs it is included in the caption Other current liabilities on the Condensed Consolidated Balance Sheets. At June 30, 2016 this amount totaled $5.5 million.

At June 30, 2016 and December 31, 2015, the Company has $84.7 million and $82.7 million, of customer advances related to contracts-in-process. These amounts are included in the caption Advances on contracts and other customer advances on the Condensed Consolidated Balance Sheets.


4. Equity Method Investments

In November 2013, the Company sold the Company's Harsco Infrastructure Segment into a strategic venture with Clayton, Dubilier & Rice ("CD&R") as part of a transaction that combined the Harsco Infrastructure Segment with Brand Energy & Infrastructure Services, Inc., which CD&R simultaneously acquired (the "Infrastructure Transaction"). As a result of the Infrastructure Transaction, the Company retained an equity interest in Brand Energy & Infrastructure Service, Inc. and Subsidiaries ("Brand" or the "Infrastructure strategic venture") which is accounted for as an equity method investment in accordance with U.S. GAAP. The Company's equity interest in Brand at June 30, 2016 and December 31, 2015 was approximately 26% and approximately 29%, respectively.

As part of the Infrastructure Transaction, the Company is required to make a quarterly payment to the Company's partner in the Infrastructure strategic venture, either (at the Company's election) (i) in cash, with total payments to equal approximately $22 million per year on a pre-tax basis (approximately $15 million per year after-tax), or (ii) in kind, through the transfer of approximately 3% of the Company's ownership interest in the Infrastructure strategic venture on an annual basis (the "unit adjustment liability"). The Company will recognize the change in fair value to the unit adjustment liability each period until the Company is no longer required to make these payments or chooses not to make these payments. The change in fair value to the unit adjustment liability is a non-cash expense.

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








11


For the three and six months ended June 30, 2016, the Company recognized $1.5 million and $3.4 million, respectively, of change in fair value to the unit adjustment liability, exclusive of the fair value adjustment resulting from the decision not to make the quarterly payments in 2016, in the Condensed Consolidated Statement of Operations caption Change in fair value to the unit adjustment liability and loss on dilution of equity method investment. This compared to $2.2 million and $4.4 million for the three and six months ended June 30, 2015, respectively. The Condensed Consolidated Balance Sheets as of
June 30, 2016 and December 31, 2015 include balances related to the unit adjustment liability of $64.2 million and
$79.9 million, respectively, in the current and non-current captions, Unit adjustment liability. A reconciliation of beginning and ending balances related to the unit adjustment liability is included in Note 11, Derivative Instruments, Hedging Activities and Fair Value.

The Company will continue to evaluate whether to make payments in cash or in kind in 2017 and beyond based upon performance of the Infrastructure strategic venture and the Company's liquidity and capital resources. Should the Company decide not to make additional cash payments in 2017 and beyond, the value of both the equity method investment in Brand and the related unit adjustment liability may be further impacted, and the change may be reflected in earnings in that period.

The book value of the Company's equity method investment in Brand at June 30, 2016 and December 31, 2015 was
$233.9 million and $250.1 million, respectively. The Company's proportionate share of Brand's net income or loss is recorded one quarter in arrears.

Brand's results of operations are summarized as follows:
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
(In thousands)
 
2016
 
2015
 
2016
 
2015
Net revenues
 
$
750,394

 
$
677,527

 
$
1,551,146

 
$
1,481,726

Gross profit
 
148,972

 
134,705

 
329,549

 
331,946

Net income (loss) attributable to Brand Energy & Infrastructure Services, Inc. and Subsidiaries
 
(2,682
)
 
(26,418
)
 
8,378

 
(12,201
)
 
 
 
 
 
 
 
 
 
Harsco's equity in income (loss) of Brand
 
(694
)
 
(7,584
)
 
2,481

 
(3,501
)

Balances related to transactions between the Company and Brand are as follows:
(In thousands)
 
June 30
2016
 
December 31
2015
Balances due from Brand
 
$
1,101

 
$
1,557

Balances due to Brand
 
21,853

 
21,407


The remaining balances between the Company and Brand, at June 30, 2016, relate primarily to transition services and the funding of certain transferred defined benefit pension plan obligations through 2018. There is not expected to be any significant level of revenue or expense between the Company and Brand on an ongoing basis.


5.     Property, Plant and Equipment
Property, plant and equipment consists of the following:
(In thousands)
 
June 30
2016
 
December 31
2015
Land
 
$
11,006

 
$
10,932

Land improvements
 
15,216

 
15,277

Buildings and improvements
 
189,376

 
191,356

Machinery and equipment
 
1,649,620

 
1,661,914

Construction in progress
 
25,877

 
36,990

Gross property, plant and equipment
 
1,891,095

 
1,916,469

Less: Accumulated depreciation
 
(1,359,803
)
 
(1,352,434
)
Property, plant and equipment, net
 
$
531,292

 
$
564,035




12


6.     Goodwill and Other Intangible Assets
The following table reflects the changes in carrying amounts of goodwill by segment for the six months ended June 30, 2016:
(In thousands)
 
Harsco Metals  & Minerals Segment
 
Harsco Industrial Segment
 
Harsco Rail
Segment
 
Consolidated
Totals
Balance at December 31, 2015
 
$
380,761

 
$
6,806

 
$
12,800

 
$
400,367

Changes to goodwill
 

 
33

 
226

 
259

Foreign currency translation
 
(6,203
)
 

 

 
(6,203
)
Balance at June 30, 2016
 
$
374,558

 
$
6,839

 
$
13,026

 
$
394,423

The Company’s 2015 annual goodwill impairment testing did not result in any impairment of the Company’s goodwill. The fair value of the Harsco Metals & Minerals Segment exceeded the carrying value by approximately 15%.  The Company tests for goodwill impairment annually or more frequently if indicators of impairment exist, or if a decision is made to dispose of a business.  The Company performs the annual goodwill impairment test as of October 1 and monitors for triggering events on an ongoing basis.  The Company determined that, as of June 30, 2016, no interim goodwill impairment testing was necessary.  There can be no assurance that the Company’s annual goodwill impairment testing will not result in a charge to earnings. Should the Company’s analysis indicate further degradation in the overall markets served by the Harsco Metals & Minerals Segment, impairment losses for associated assets could be required. Any impairment could result in the write-down of the carrying value of goodwill to its implied fair value.
Intangible assets included in the captions, Other current assets and Intangible assets, net, on the Condensed Consolidated Balance Sheets consist of the following:
 
 
June 30, 2016
 
December 31, 2015
(In thousands)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Customer related
 
$
150,916

 
$
112,933

 
$
153,287

 
$
111,227

Non-compete agreements
 
1,095

 
1,095

 
1,092

 
1,092

Patents
 
5,827

 
5,519

 
5,882

 
5,495

Technology related
 
25,892

 
24,727

 
25,559

 
23,089

Trade names
 
8,310

 
4,379

 
8,303

 
4,194

Other
 
8,690

 
4,999

 
8,701

 
4,669

Total
 
$
200,730

 
$
153,652

 
$
202,824

 
$
149,766


Amortization expense for intangible assets was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
(In thousands)
 
2016
 
2015
 
2016
 
2015
Amortization expense for intangible assets
 
$
2,050

 
$
2,179

 
$
4,155

 
$
4,316


The estimated amortization expense for the next five fiscal years based on current intangible assets is as follows:
(In thousands)
 
2016
 
2017
 
2018
 
2019
 
2020
Estimated amortization expense (a)
 
$
8,000

 
$
5,500

 
$
5,250

 
$
4,750

 
$
4,500

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















13


7.  Employee Benefit Plans
 
 
Three Months Ended
 
 
June 30
Defined Benefit Pension Plans Net Periodic Pension Cost
 
U.S. Plans
 
International Plans
(In thousands)
 
2016
 
2015
 
2016
 
2015
Service cost
 
$
946

 
$
722

 
$
405

 
$
453

Interest cost
 
2,545

 
3,089

 
6,984

 
9,140

Expected return on plan assets
 
(3,601
)
 
(4,203
)
 
(11,219
)
 
(12,611
)
Recognized prior service costs
 
15

 
20

 
45

 
48

Recognized loss
 
1,372

 
1,230

 
3,142

 
4,223

Defined benefit pension plans net periodic pension cost (income)
 
$
1,277

 
$
858

 
$
(643
)
 
$
1,253

 
 
Six Months Ended
 
 
June 30
Defined Benefit Pension Plans Net Periodic Pension Cost
 
U.S. Plans
 
International Plans
(In thousands)
 
2016
 
2015
 
2016
 
2015
Service costs
 
$
1,892

 
$
1,444

 
$
809

 
$
892

Interest cost
 
5,090

 
6,179

 
14,107

 
18,329

Expected return on plan assets
 
(7,202
)
 
(8,406
)
 
(22,682
)
 
(25,285
)
Recognized prior service costs
 
31

 
40

 
89

 
97

Recognized loss
 
2,744

 
2,459

 
6,360

 
8,457

Defined benefit pension plans net periodic pension cost (income)
 
$
2,555

 
$
1,716

 
$
(1,317
)
 
$
2,490


The Company has changed the method utilized to estimate the 2016 service cost and interest cost components of net periodic pension cost ("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 represented a change in accounting estimate and has been accounted for in the period of change. This change in method decreased the Company's NPPC by approximately
$2 million and approximately $4 million for the three and six months ended June 30, 2016, respectively, compared to what NPPC would have been under the prior method.
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
Company Contributions
 
June 30
 
June 30
(In thousands)
 
2016
 
2015
 
2016
 
2015
Defined benefit pension plans (U.S.)
 
$
470

 
$
592

 
$
940

 
$
1,274

Defined benefit pension plans (International)
 
3,254

 
4,165

 
13,052

 
20,231

Multiemployer pension plans
 
505

 
741

 
1,026

 
1,306

Defined contribution pension plans
 
2,476

 
2,817

 
5,302

 
6,265

The Company's estimate of expected contributions to be paid during the remainder of 2016 for the U.S. and international defined benefit plans are $1.1 million and $5.3 million, respectively.

8.     Income Taxes 

The income tax expense related to continuing operations for the three and six months ended June 30, 2016 was $12.0 million and $9.8 million, respectively, compared with $7.1 million and $20.0 million for the three and six months ended June 30, 2015, respectively.

An income tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, based on technical merits, including resolutions of any related appeals or litigation processes. The unrecognized income tax benefit at June 30, 2016 was $6.7 million, including interest and penalties.  Within the next twelve months, it is reasonably possible that no unrecognized income tax benefits will be recognized upon settlement of tax examinations and the expiration of various statutes of limitations.



14


9.   Commitments and Contingencies

Environmental        
The Company is involved in a number of environmental remediation investigations and cleanups and, along with other companies, has been identified as a “potentially responsible party” for certain waste disposal sites.  While each of these matters is subject to various uncertainties, it is probable that the Company will agree to make payments toward funding certain of these activities and it is possible that some of these matters will be decided unfavorably to the Company.  The Company has evaluated its potential liability, and its financial exposure is dependent upon such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the allocation of cost among potentially responsible parties, the years of remedial activity required and the remediation methods selected.  The Company did not have any material accruals or record any material expenses related to environmental matters during the periods presented.

The Company evaluates its liability for future environmental remediation costs on a quarterly basis. Although actual costs to be incurred at identified sites in future periods may vary from the estimates (given inherent uncertainties in evaluating environmental exposures), the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with environmental matters in excess of the amounts accrued would have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Brazilian Tax Disputes
The Company is involved in a number of tax disputes with federal, state and municipal tax authorities in Brazil. These disputes are at various stages of the legal process, including the administrative review phase and the collection action phase, and include assessments of fixed amounts of principal and penalties, plus interest charges that increase at statutorily determined amounts per month and are assessed on the aggregate amount of the principal and penalties. In addition, the losing party at the collection action or court of appeals phase could be subject to a charge to cover statutorily mandated legal fees, which are generally calculated as a percentage of the total assessed amounts due, inclusive of penalty and interest. A large number of the claims relate to value-added ("ICMS") services and social security ("INSS") tax disputes. The largest proportion of the assessed amounts relate to ICMS claims filed by the State Revenue Authorities from the State of São Paulo, Brazil (the "SPRA"), encompassing the period from January 2002 to May 2005.
In October 2009, the Company received notification of the SPRA’s final administrative decision regarding the levying of ICMS in the State of São Paulo in relation to services provided to a customer in the State between January 2004 and May 2005.  As of June 30, 2016, the principal amount of the tax assessment from the SPRA with regard to this case is approximately $2 million, with penalty, interest and fees assessed to date increasing such amount by an additional $23 million.  Any change in the aggregate amount since the Company’s last Annual Report on Form 10-K for the year ended December 31, 2015 is due to an increase in assessed interest and statutorily mandated legal fees for the period as well as foreign currency translation.
Another ICMS tax case involving the SPRA refers to the tax period from January 2002 to December 2003, and is still pending at the administrative phase. The aggregate amount assessed by the tax authorities in August 2005 was $7.8 million (the amounts with regard to this claim are valued as of the date of the assessment since it has not yet reached the collection phase), composed of a principal amount of $1.9 million, with penalty and interest assessed through that date increasing such amount by an additional $6.0 million.  All such amounts include the effect of foreign currency translation.
The Company continues to believe it is not probable that it will incur a loss for these assessments by the SPRA. The Company also continues to believe that sufficient coverage for these claims exists as a result of the Company’s customer’s indemnification obligations and such customer’s pledge of assets in connection with the October 2009 notice, as required by Brazilian procedure.
The Company intends to continue its practice of vigorously defending itself against these tax claims under various alternatives, including judicial appeal. The Company will continue to evaluate its potential liability with regard to these claims on a quarterly basis; however, it is not possible to predict the ultimate outcome of these tax-related disputes in Brazil. No loss provision has been recorded in the Company's condensed consolidated financial statements for the disputes described above because the loss contingency is not deemed probable, and the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with Brazilian tax disputes would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Brazilian Labor Disputes
The Company is subject to collective bargaining and individual labor claims in Brazil through the Harsco Metals & Minerals Segment which allege, among other things, the Company's failure to pay required amounts for overtime and vacation at certain sites. The Company is vigorously defending itself against these claims; however, litigation is inherently unpredictable, particularly in foreign jurisdictions. While the Company does not currently expect that the ultimate resolution of these claims

15


will have a material adverse effect on the Company’s financial condition, results of operations or cash flows, it is not possible to predict the ultimate outcome of these labor-related disputes.

The Company is continuing to review all known labor claims and as of June 30, 2016 and December 31, 2015, the Company has established reserves of $8.7 million and $6.9 million, respectively, on the Company's Condensed Consolidated Balance Sheets for amounts considered to be probable and estimable. As the Company continues to evaluate these claims and takes actions to address them, the amount of established reserves may be impacted.

Customer Disputes
The Company, through its Harsco Metals & Minerals Segment, may, in the normal course of business, become involved in commercial disputes with subcontractors or customers.

During the first quarter of 2015, a rail grinder manufactured by the Company's Harsco Rail Segment and operated by a subcontractor caught fire, causing a customer to incur monetary damages.  There is a legal action pending to determine the cause of the incident.  Depending on the cause of the fire and the extent of insurance coverage, the Company's results of operations and cash flows may be impacted in future periods.

Although results of operations and cash flows for a given period could be adversely affected by a negative outcome in these or other lawsuits, claims or proceedings, management believes that the ultimate outcome of these matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Lima Refinery Litigation
On April 8, 2016, Lima Refining Company filed a lawsuit against the Company in the District Court of Harris County, Texas related to a January 2015 explosion at an oil refinery operated by Lima Refining Company. The action seeks approximately $95 million in property damages and $250 million in lost profits and business interruption damages. The action alleges the explosion occurred because of a defect in a heat exchange cooler manufactured by Hammco Corporation ("Hammco") in 2009, prior to the Company’s acquisition of Hammco in 2014. The Company plans to vigorously contest the allegations against it both as to liability for the accident and the amount of the claimed damages. As a result, the Company believes the situation does not result in a probable loss. The Company has both an indemnity right from the sellers of Hammco and liability insurance coverage under various primary and excess policies that the Company believes will be available, if necessary, to cover substantially all of any such liability that might ultimately be incurred in the above action.

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

The Company believes that the claims against it are without merit. The Company has never been a producer, manufacturer or processor of asbestos fibers. Any asbestos-containing part of a Company product used in the past was purchased from a supplier and the asbestos encapsulated in other materials such that airborne exposure, if it occurred, was not harmful and is not associated with the types of injuries alleged in the pending actions.
At June 30, 2016, there were 17,096 pending asbestos personal injury actions filed against the Company.  Of those actions, 16,767 were filed in the New York Supreme Court (New York County), 125 were filed in other New York State Supreme Court Counties and 204 were filed in courts located in other states.
The complaints in most of those actions generally follow a form that contains a standard damages demand of $20 million or $25 million, regardless of the individual plaintiff’s alleged medical condition, and without identifying any specific Company product.
At June 30, 2016, 16,752 of the actions filed in New York Supreme Court (New York County) were on the Deferred/Inactive Docket created by the court in December 2002 for all pending and future asbestos actions filed by persons who cannot demonstrate that they have a malignant condition or discernible physical impairment. The remaining 15 cases in New York County are pending on the Active or In Extremis Docket created for plaintiffs who can demonstrate a malignant condition or physical impairment.


16


The Company has liability insurance coverage under various primary and excess policies that the Company believes will be available, if necessary, to substantially cover any liability that might ultimately be incurred in the asbestos actions referred to above. The Company believes that a substantial portion of the costs and expenses of the asbestos actions will be paid by the Company’s insurers.
In view of the persistence of asbestos litigation in the U.S., the Company expects to continue to receive additional claims in the future. The Company intends to continue its practice of vigorously defending these claims and cases. At June 30, 2016, the Company has obtained dismissal in 27,864 cases by stipulation or summary judgment prior to trial.
It is not possible to predict the ultimate outcome of asbestos-related actions in the U.S. due to the unpredictable nature of this litigation, and no loss provision has been recorded in the Company's condensed consolidated financial statements because a loss contingency is not deemed probable or estimable. Despite this uncertainty, and although results of operations and cash flows for a given period could be adversely affected by asbestos-related actions, the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with asbestos litigation would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
The Company is subject to various other claims and legal proceedings covering a wide range of matters that arose in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or by established reserves, and, if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
Insurance liabilities are recorded when it is probable that a liability has been incurred for a particular event and the amount of loss associated with the event can be reasonably estimated. Insurance reserves have been estimated based primarily upon actuarial calculations and reflect the undiscounted estimated liabilities for ultimate losses, including claims incurred but not reported. Inherent in these estimates are assumptions that are based on the Company's history of claims and losses, a detailed analysis of existing claims with respect to potential value, and current legal and legislative trends. If actual claims differ from those projected by management, changes (either increases or decreases) to insurance reserves may be required and would be recorded through income in the period the change was determined. When a recognized liability is covered by third-party insurance, the Company records an insurance claim receivable to reflect the covered liability. Insurance claim receivables are included in Other receivables on the Company's Condensed Consolidated Balance Sheets. See Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for additional information on Accrued insurance and loss reserves.

10.  Reconciliation of Basic and Diluted Shares
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
(In thousands, except per share amounts)
 
2016
 
2015
 
2016
 
2015
Income (loss) from continuing operations attributable to Harsco Corporation common stockholders
 
$
(27,994
)
 
$
6,302

 
$
(38,544
)
 
$
21,973

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
 
80,337

 
80,221

 
80,288

 
80,230

Dilutive effect of stock-based compensation
 

 
197

 

 
155

Weighted-average shares outstanding - diluted
 
$
80,337

 
$
80,418

 
$
80,288

 
$
80,385

 
 
 
 
 
 
 
 
 
Earnings (loss) from continuing operations per common share, attributable to Harsco Corporation common stockholders:
Basic
 
$
(0.35
)
 
$
0.08

 
$
(0.48
)
 
$
0.27

 
 
 
 
 
 
 
 
 
Diluted
 
$
(0.35
)
 
$
0.08

 
$
(0.48
)
 
$
0.27


The following average outstanding stock-based compensation units were not included in the computation of diluted earnings (loss) per share because the effect was antidilutive:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30
 
June 30
(In thousands)
 
2016
 
2015
 
2016
 
2015
Restricted stock units
 
957

 

 
694

 

Stock options
 
90

 
100

 
90

 
107

Stock appreciation rights
 
1,641

 
1,334

 
1,364

 
1,100

Performance share units
 
835

 
350

 
572

 
236



17


11.   Derivative Instruments, Hedging Activities and Fair Value

Derivative Instruments and Hedging Activities
The Company uses derivative instruments, including foreign currency exchange forward contracts and cross-currency interest rate swaps ("CCIRs"), to manage certain foreign currency and interest rate exposures.  Derivative instruments are viewed as risk management tools by the Company and are not used for trading or speculative purposes.
All derivative instruments are recorded on the Condensed Consolidated Balance Sheets at fair value.  Changes in the fair value of derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings, along with offsetting transaction gains and losses on the items being hedged.  Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases may be accounted for as cash flow hedges, as deemed appropriate, if the criteria for hedge accounting are met.  Gains and losses on derivatives designated as cash flow hedges are deferred as a separate component of equity and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions.  Generally, at June 30, 2016, deferred gains and losses related to asset purchases are reclassified to earnings over 10 to 15 years from the balance sheet date and those related to revenue are deferred until the revenue is recognized.  The ineffective portion of all hedges, if any, is recognized currently in earnings.
The fair value of outstanding derivative contracts recorded as assets and liabilities on the Condensed Consolidated Balance Sheets were as follows:
 
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
June 30, 2016
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
Foreign currency exchange forward contracts
 
Other current assets
 
$
92

 
Other current liabilities
 
$
31

Cross-currency interest rate swaps
 
Other assets
 
825

 

 

Total derivatives designated as hedging instruments
 
 
 
$
917

 
 
 
$
31

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
Foreign currency exchange forward contracts
 
Other current assets
 
$
8,982

 
Other current liabilities
 
$
4,108

 
 
Asset Derivatives
 
Liability Derivatives
(In thousands)
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
December 31, 2015
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
Foreign currency exchange forward contracts
 
Other current assets
 
$
1,640

 

 
$

Cross-currency interest rate swaps
 
Other assets
 
15,417

 

 

Total derivatives designated as hedging instruments
 
 
 
$
17,057

 
 
 
$

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
Foreign currency exchange forward contracts
 
Other current assets
 
$
4,188

 
Other current liabilities
 
$
1,738


All of the Company's derivatives are recorded in the Condensed Consolidated Balance Sheets at gross amounts and not offset. All of the Company's CCIRs and certain foreign currency exchange forward contracts are transacted under International Swaps and Derivatives Association ("ISDA") documentation. Each ISDA master agreement permits the net settlement of amounts owed in the event of default. The Company's derivative assets and liabilities subject to enforceable master netting arrangements did not result in a net asset or net liability at either June 30, 2016 or December 31, 2015.







18


The effect of derivative instruments on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Loss was as follows:
Derivatives Designated as Hedging Instruments (a)
(In thousands)
 
Amount of  Gain (Loss) Recognized in Other
Comprehensive
Income  (“OCI”)  on Derivative -
Effective  Portion
 
Location of Gain
Reclassified
from Accumulated
OCI into Income -
Effective Portion
 
Amount of
Gain
Reclassified  from
Accumulated OCI into  Income -
Effective  Portion
 
Location of Loss  Recognized  in Income on  Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
 
Amount of  Loss  Recognized  in Income  on Derivative - Ineffective  Portion and  Amount
Excluded from
Effectiveness  Testing
 
Three Months Ended June 30, 2016:
Foreign currency exchange forward contracts
 
$
(305
)
 
Cost of services and products sold
 
$
1

 
 
 
$

 
Cross-currency interest rate swaps
 
407

 
 
 

 
Cost of services and products sold
 
(42
)
(b)
 
 
$
102

 
 
 
$
1

 
 
 
$
(42
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2015:
Foreign currency exchange forward contracts
 
$
519

 
Cost of services and products sold
 
$
1

 

 
$

 
Cross-currency interest rate swaps
 
(2,536
)
 
 
 

 
Cost of services and products sold
 
(19,090
)
(b)
 
 
$
(2,017
)
 
 
 
$
1

 
 
 
$
(19,090
)
 
(In thousands)
 
Amount of  Gain (Loss)Recognized in  OCI  on Derivative -
Effective  Portion
 
Location of Gain
Reclassified
from Accumulated
OCI into Income -
Effective Portion
 
Amount of
Gain
Reclassified  from
Accumulated  OCI into  Income -
Effective  Portion
 
Location of Gain Recognized  in Income on  Derivative - Ineffective Portion
and Amount
Excluded from
Effectiveness Testing
 
Amount of  Gain   Recognized  in Income  on Derivative - Ineffective  Portion and  Amount
Excluded from
Effectiveness  Testing
 
Six Months Ended June 30, 2016:
Foreign currency forward exchange contracts
 
$
(630
)
 
Product revenues / Cost of services and products sold
 
$
409

 
 
 
$

 
Cross currency interest rate swaps
 
(2,084
)
 
 
 

 
Cost of services and products sold
 
4,219

(b)
 
 
$
(2,714
)
 
 
 
$
409

 
 
 
$
4,219

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015:
Foreign currency forward exchange contracts
 
$
1,600

 
Cost of services and products sold
 
$
2

 

 
$

 
Cross currency interest rate swaps
 
6,085

 
 
 

 
Cost of services and products sold
 
11,652

(b)
 
 
$
7,685

 
 
 
$
2

 
 
 
$
11,652

 
(a) Reflects only the activity of the Company and excludes derivative designated as hedging instruments held by the Company's equity method investments.
(b)  These gains offset foreign currency fluctuation effects on the debt principal.

Derivatives Not Designated as Hedging Instruments
 
 
Location of Gain
(Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative for the
Three Months Ended June 30 (c)
(In thousands)
 
 
2016
 
2015
Foreign currency exchange forward contracts
 
Cost of services and products sold
 
$
8,583

 
$
(11,989
)

19


 
 
Location of Gain
(Loss) Recognized in
Income on Derivative
 
Amount of Gain (Loss) Recognized in
Income on Derivative for the
Six Months Ended June 30 (c)
(In thousands)
 
 
2016
 
2015
Foreign currency forward exchange contracts
 
Cost of services and products sold
 
$
1,739

 
$
(7,234
)
(c)  These gains (losses) offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.

Foreign Currency Exchange Forward Contracts
The Company conducts business in multiple currencies and, accordingly, is subject to the inherent risks associated with foreign exchange rate movements.  The financial position and results of operations of substantially all of the Company’s foreign subsidiaries are measured using the local currency as the functional currency.  Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods.  The aggregate effects of translating the balance sheets of these subsidiaries are deferred and recorded in Accumulated other comprehensive loss, which is a separate component of equity.
The Company uses derivative instruments to hedge cash flows related to foreign currency fluctuations.  Foreign currency exchange forward contracts outstanding are part of a worldwide program to minimize foreign currency exchange operating income and balance sheet exposure by offsetting foreign currency exposures of certain future payments between the Company and various subsidiaries, suppliers or customers.  These unsecured contracts are with major financial institutions.  The Company may be exposed to credit loss in the event of non-performance by the contract counterparties.  The Company evaluates the creditworthiness of the counterparties and does not expect default by them.  Foreign currency exchange forward contracts are used to hedge commitments, such as foreign currency debt, firm purchase commitments and foreign currency cash flows for certain export sales transactions.
The following tables summarize, by major currency, the contractual amounts of the Company’s foreign currency exchange forward contracts in U.S. dollars.  The “Buy” amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the “Sell” amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies.  The recognized gains and losses offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.
Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at June 30, 2016:
(In thousands)
 
Type
 
U.S. Dollar
Equivalent
 
Maturity
 
Recognized
Gain (Loss)
British pounds sterling
 
Sell
 
$
41,995

 
July 2016
 
$
3,309

British pounds sterling
 
Buy
 
1,061

 
July 2016 through September 2016
 
(33
)
Euros
 
Sell
 
310,051

 
July 2016 through December 2016
 
(1,675
)
Euros
 
Buy
 
138,899

 
July 2016 through January 2018
 
3,511

Other currencies
 
Sell
 
35,952

 
July 2016 through March 2017