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EX-32 - EXHIBIT 32 - HARSCO CORPhsc-ex32_2016q4.htm
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EX-21 - EXHIBIT 21 - HARSCO CORPhsc-ex21_2016q4.htm
EX-12 - EXHIBIT 12 - HARSCO CORPhsc-ex12_2016q4.htm
EX-10.L(II) - EXHIBIT 10.L(II) - HARSCO CORPhsc-ex10lii_2016q4.htm
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EX-10.II - EXHIBIT 10.II - HARSCO CORPhsc-ex10ii_2016q4.htm
EX-10.HH - EXHIBIT 10.HH - HARSCO CORPhsc-ex10hh_2016q4.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, 2016
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. 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 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, 2016 was $532,362,000
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 31, 2017
Common stock, par value $1.25 per share
 
80,182,217
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the 2017 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 consist of 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 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 equity interest in the Infrastructure strategic venture was accounted for under the equity method of accounting as prescribed by generally accepted accounting principles in the U.S.
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 for material logistics, product quality improvement and resource recovery from 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 and high-security fencing products
 
l
Industrial plant and warehouse construction and expansion
 
 
 
l
Off-shore drilling and new rig construction
 
 
 
l
High-security fencing requirements to protect major facilities and infrastructure
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 2016, 2015 and 2014, sales in the U.S. contributed total revenues of $0.6 billion, $0.8 billion and $0.9 billion, equal to approximately 42%, 44% and 43% of total revenues, respectively. The Company's sales in euro-currency countries contributed total revenues of $0.3 billion, $0.3 billion and $0.4 billion in 2016, 2015 and 2014, equal to approximately 18%, 16% and 17% of total revenues, respectively. Sales in the U.K. contributed total revenues of $0.2 billion, $0.2 billion and $0.3 billion in 2016, 2015 and 2014, equal to approximately 11%, 13% 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, in 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—67% of consolidated revenues for 2016
The Harsco Metals & Minerals Segment is one of the world's largest providers of on-site services for material logistics, product quality improvement and resource recovery from iron, steel and metals manufacturing.
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 2016 and 2015, this Segment's revenues were generated in the following regions:
 
 
Percentage of Revenues
Region
 
2016
 
2015
Western Europe
 
40
%
 
41
%
North America
 
26
%
 
24
%
Latin America (a)
 
14
%
 
14
%
Asia-Pacific
 
12
%
 
12
%
Middle East and Africa
 
5
%
 
5
%
Eastern Europe
 
3
%
 
4
%
(a)
Including Mexico.
For 2016, 2015 and 2014, the Harsco Metals & Minerals Segment's percentage of the Company's consolidated revenues were 67%, 64% and 67%, 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.
Harsco Industrial Segment—17% of consolidated revenues for 2016
The Harsco Industrial Segment includes the Harsco Industrial Air-X-Changers, Harsco Industrial IKG and Harsco Industrial Patterson-Kelley businesses. Approximately 87% 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.


2


Harsco Industrial IKG manufactures a varied line of industrial grating and high-security fencing 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 also produces 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 2016, 2015 and 2014, this Segment's percentage of the Company's consolidated revenues were 17%, 21% and 20%, respectively.
Harsco Rail Segment—16% of consolidated revenues for 2016
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 2016, 2015 and 2014, export product sales from the U.S. for the Harsco Rail Segment were $67.9 million, $67.1 million and $104.9 million, respectively.
For 2016, 2015 and 2014, the Harsco Rail Segment's percentage of the Company's consolidated revenues were 16%, 15% and 13%, 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, in 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
 
2016
 
2015
 
2014
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
 
67
%
 
64
%
 
67
%
Railway track maintenance services and equipment
 
16
%
 
15
%
 
13
%
Air-cooled heat exchangers
 
6
%
 
11
%
 
11
%
(1)(ii)  New products and services are added from time to time; however, in 2016, 2015 and 2014 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.
(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.
 
 
 
 
 
 
 
 
 
 
 



3


(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 2016, the Harsco Metals & Minerals Segment had one customer, and in 2015 and 2014 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.
The Harsco Industrial Segment had no customers in 2016, two customers in 2015 and one customer 2014 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 one customer in 2016, two customers in 2015 and one customer in 2014 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, 2016, the Company's metals services contracts had estimated future revenues of $2.7 billion at expected production levels, compared with $3.2 billion at December 31, 2015. This provides the Company with a substantial base of long-term revenues. The decrease is primarily due to the timing of contract expiration and renewals; 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. Approximately 24% of these revenues are expected to be recognized by December 31, 2017; approximately 43% of these revenues are expected to be recognized between January 1, 2018 and December 31, 2020; approximately 14% of these revenues are expected to be recognized between January 1, 2021 and December 31, 2023; and the remaining revenues are expected to be recognized thereafter. 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.
At December 31, 2016, the Company had an estimated order backlog of $54.4 million in its Harsco Industrial Segment, compared with $72.9 million at December 31, 2015. This decrease is primarily due to continued 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, 2016, the Harsco Rail Segment had an estimated order backlog of $273.0 million, compared with $292.1 million at December 31, 2015. This decrease is primarily due to shipments which were not replaced due to decreased demand, primarily in the U.S., during 2016. At December 31, 2016, $140.6 million or 43% of the Company's manufactured products order backlog is not expected to be filled in 2017. The remainder of this backlog is expected to be filled in 2018 and 2019. 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, 2016, 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.

4


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.
(1)(xi)  The Company's expense for research and development activities was $4.3 million, $4.5 million and $5.5 million in 2016, 2015 and 2014, 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 Research and Development, in 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, in Part II, Item 8, "Financial Statements and Supplementary Data."
(1)(xiii)  At December 31, 2016, the Company had approximately 9,400 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, in Part II, Item 8, "Financial Statements and Supplementary Data," which information is incorporated herein by reference. Export sales from the U.S. totaled $86.5 million, $80.8 million and $134.0 million in 2016, 2015 and 2014, respectively.
(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 Harsco Corporation's (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.

5


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, bankruptcy or receivership of steel producers and changes in outsourcing practices 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;
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, 2016, the Company’s top five customers in the Harsco Metals & Minerals Segment accounted for approximately 34% of revenues in that segment and 23% 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, 2016. 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 58% of its revenues outside of the U.S. (based on location of the facility generating the revenue) for the year ended December 31, 2016. In addition, as of December 31, 2016, approximately 75% of the Company’s property, plant and equipment are located outside of the U.S. The Company's global

6


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;
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, including, 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 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 (the "Board") has determined to explore strategic options for the separation of the Company’s Metals & Minerals Segment; however 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.
During 2015, the Company announced that the Board 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. 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 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

7


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.
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, 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.
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 Union ("EU"), 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 2015, the average value of major currencies changed as follows in relation to the U.S. dollar during the full-year 2016, impacting the Company's revenues and income:
British pound sterling weakened by 12%
euro weakened by less than 1%
Brazilian real weakened by 4%
Compared with exchange rates at December 31, 2015, the value of major currencies at December 31, 2016 changed as follows:
British pound sterling weakened by 16%
euro weakened by 3%
Brazilian real strengthened by 22%
To illustrate the effect of foreign exchange rate changes in certain key markets of the Company, in 2016 revenues would have been approximately 4% or $51 million higher and operating income would have been approximately 5% or $3 million lower if the average exchange rates for 2015 were utilized. In a similar comparison for 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.
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.


8


Economic conditions and regulatory changes following the United Kingdom’s referendum on withdrawal from the EU could impact on our business and results of operations.
In June 2016, a majority of voters in the U.K. approved a withdrawal from the EU in a national referendum (often referred to as Brexit). The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the U.K. formally initiates a withdrawal process. Nevertheless, the referendum resulted in significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which the Company conducts business. The referendum has created significant uncertainty about the future relationship between the U.K. and the EU, including with respect to the laws and regulations that will apply as the U.K. determines which EU laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other EU member states to consider withdrawal.

Our business, particularly the Company's Harsco Metals & Minerals Segment, whose headquarters is in the U.K., could be adversely impacted by the likely exit of the U.K. from the EU. Adverse consequences such as deterioration in economic conditions and volatility in currency exchange rates could have a negative impact on our operations, financial condition and results of operations. In addition, incremental regulatory controls and regulations governing trade between the U.K. and the rest of the EU could have adverse consequences on the steel industry in the U.K. and/or the EU, and could negatively impact our operations and financial condition.
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. In addition, certain competitors may from time to time sell their products below their cost of production in an attempt to increase their market share. Such practices may limit the prices the Company can charge for its products and services. Unfavorable foreign exchange rates can also 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 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. 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 interest rate swaps and foreign currency exchange forward contracts, for a variety of purposes. The Company uses interest rate swaps in conjunction with certain debt issuances in order to secure either a fixed or floating 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 foreign currency exchange forward contracts outstanding at December 31, 2016 mature at various times through 2018 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.

9


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, 2016 was $659.1 million. Of this amount, approximately 96% had variable rates of interest, and 4% had fixed rates of interest. The weighted average interest rate of total debt was approximately 5.9%. At debt levels as of December 31, 2016, a one percentage point increase in variable interest rates would increase interest expense by $5.5 million per year. If the Company is unable to successfully manage its exposure to variable interest rates, including through interest rates swaps that the Company has put into place, 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.
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.
The Executive Branch of the U.S. Government (the “Administration”) has expressed a desire to reform U.S. tax law to provide incentives for U.S. companies that expand the U.S. economy. These reforms include lowering the Corporate Tax Rate in an effort to stimulate the economy with significant GDP growth by creating new jobs in the U.S. The Administration has proposed significant changes on the taxation of imports and exports as well as the taxation of income earned outside the U.S. In addition, there would be a change from a worldwide based tax system to a territorial tax system. The Company continues to monitor legislation to be in position to fully understand the potential impact on the Company's operations and plan accordingly.
The Company's defined benefit net periodic pension cost ("NPPC") 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 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.

10


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.
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.


11


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.
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. 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.




12


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 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.

13


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.


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
 
 
 
 
Taiyuan City, China
 
Minerals and Resource Recovery Technologies
 
Leased
Tangshan, China
 
Minerals and Resource Recovery Technologies
 
Leased
Rotherham, UK
 
Minerals and Resource Recovery Technologies
 
Owned
Drakesboro, Kentucky, U.S.
 
Roofing Granules/Abrasives
 
Owned
Sarver, Pennsylvania, U.S.
 
Minerals and Resource Recovery Technologies
 
Owned
Harsco Rail Segment
 
 
 
 
Columbia, South Carolina, U.S.
 
Rail Maintenance Equipment
 
Owned
Ludington, Michigan, 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, in Part II, Item 8, "Financial Statements and Supplementary Data."


Item 4.    Mine Safety Disclosures.
Not applicable.


14


Supplementary Item.    Executive Officers of the Registrant
Set forth below, at February 24, 2017, 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
 
53

 
President and Chief Executive Officer
Peter F. Minan
 
55

 
Senior Vice President and Chief Financial Officer
Scott H. Gerson
 
46

 
Senior Vice President and Group President - Harsco Industrial
Jeswant Gill
 
54

 
Senior Vice President and Group President - Harsco Rail
Russell C. Hochman
 
52

 
Senior Vice President and General Counsel, Chief Compliance Officer & Corporate Secretary
Tracey L. McKenzie
 
49

 
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 2013 to November 2014, and President and Chief Operating Officer from April 2014 to August 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 2009 to November 2009 he served as Executive Vice President and Chief Executive Officer of Armstrong Building Products. From January 2005 to March 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. and before that as Corporate Treasurer and Director of the corporate planning process at H.J. Heinz Company. He started his career with USX Corporation.

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.

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 2010 to January 2011. Served as Chief Information Officer from April 2005 to July 2010. Prior to joining the Company in April 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.

Jeswant Gill - Senior Vice President and Group President - Harsco Rail since November 2016. Prior to joining the Company Mr. Gill served as Senior Executive/Managing Director, Global Solutions of The Arcadia Group International, LLC from October 2015 to November 2016. From June 2014 to September 2015 Mr. Gill served as Vice President and Executive Vice President, Industrial Segment of Kennametal, Inc. From January 2008 to May 2014 Mr. Gill worked for Ingersoll Rand Company Limited, acting as Vice President of Global Services, Industrial Technologies from January 2011 to May 2014, and as President of Security Technologies, Asia Pacific from January 2008 until December 2010. Prior to his employment with Ingersoll Rand Company Limited, Mr. Gill worked for Invensys, Johnson Controls Inc. and Schlumberger. Mr. Gill holds a B.S. in engineering physics and an MBA, both from Queen's University in Ontario, Canada.

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.

Tracey L. McKenzie - Senior Vice President and Chief Human Resources Officer. 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 worked at Pacific Scientific Aerospace (a division of Danaher). She moved to the U.S. in 2003, and holds an MBA from the University of New England and a bachelor's in business administration from Royal Melbourne Institute of Technology (RMIT).  


15


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, 2016, there were 80,174,963 shares outstanding. In 2016, the Company's common stock traded in a range of $3.55 to $15.25 and closed at $13.60 at year-end. At December 31, 2016, there were approximately 19,100 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, in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Common Stock Price and Dividend Information, in Part II, Item 8, "Financial Statements and Supplementary Data." For additional information regarding the Company's equity compensation plans see Note 14, Stock-Based Compensation, in Part II, Item 8, "Financial Statements and Supplementary Data," and Part III, Item 11, "Executive Compensation." For additional information regarding the Company's limitations on the payment of dividends, see Liquidity and Capital Resources, in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 8, Debt and Credit Agreements, in Part II, Item 8, "Financial Statements and Supplementary Data."

Stock Performance Graph
hsc-201610k_chartx07409.jpg
*$100 invested on 12/31/11 in stock or index, including reinvestment of dividends. Fiscal year ending December31.

Copyright© 2017 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2017 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
 
12/11

12/12

12/13

12/14

12/15

12/16

Harsco Corporation
100.00

118.75

146.42

102.21

45.21

78.67

S&P Midcap 400
100.00

117.88

157.37

172.74

168.98

204.03

Dow Jones U.S. Diversified Industrials
100.00

120.81

171.71

173.51

195.79

217.24


16


Item 6.    Selected Financial Data.
Five-Year Statistical Summary
(In thousands, except per share, employee information and percentages)
 
2016
 
2015
 
2014
 
2013 (a)
 
2012
 
Statement of operations information
 
Revenues from continuing operations
 
$
1,451,223

 
$
1,723,092

 
$
2,066,288

 
$
2,895,970

 
$
3,046,018

 
Amounts attributable to Harsco Corporation common stockholders
 
Income (loss) from continuing operations
 
$
(86,336
)
 
$
7,168

 
$
(22,281
)
 
$
(231,356
)
 
$
(258,889
)
 
Income (loss) from discontinued operations
 
669

 
(980
)
 
110

 
(1,492
)
 
(919
)
 
Net income (loss)
 
(85,667
)
 
6,188

 
(22,171
)
 
(232,848
)
 
(259,808
)
 
Financial position and cash flow information
 
Working capital
 
$
149,736

 
$
158,399

 
$
117,919

 
$
229,599

 
$
431,594

 
Total assets (b)
 
1,581,386

 
2,061,197

 
2,266,946

 
2,443,208

 
2,975,231

 
Long-term debt (b)
 
629,239

 
845,621

 
827,428

 
779,849

 
953,121

 
Total debt (b)
 
659,072

 
900,934

 
869,364

 
807,595

 
964,959

 
Depreciation and amortization
 
141,486

 
156,475

 
176,326

 
237,041

 
272,117

 
Capital expenditures
 
(69,340
)
 
(123,552
)
 
(208,859
)
 
(245,551
)
 
(264,738
)
 
Cash provided by operating activities
 
159,785

 
121,507

 
226,727

 
187,659

 
198,594

 
Cash provided (used) by investing activities
 
122,887

 
(130,373
)
 
(229,561
)
 
63,281

 
(218,983
)
 
Cash provided (used) by financing activities
 
(292,273
)
 
22,454

 
(21,794
)
 
(248,664
)
 
(4,546
)
 
Ratios
 
 
 
 
 
 
 
 
 
 
 
Return on average equity (c)
 
29.5
%
 
2.3
%
 
(4.0
)%
 
(30.0
)%
 
(22.2
)%
 
Current ratio (d)
 
1.3
:1
 
1.3
:1
 
1.2
:1
 
1.4
:1
 
1.7
:1
 
Per share information attributable to Harsco Corporation common stockholders
 
Basic—Income (loss) from continuing operations
 
$
(1.07
)
 
$
0.09

 
$
(0.28
)
 
$
(2.86
)
 
$
(3.21
)
 
Income (loss) from discontinued operations
 
0.01

 
(0.01
)
 

 
(0.02
)
 
(0.01
)
 
Net income (loss)
 
$
(1.07
)
(e)
$
0.08

 
$
(0.27
)
(e)
$
(2.88
)
 
$
(3.22
)
 
Diluted—Income (loss) from continuing operations
 
$
(1.07
)
 
$
0.09

 
$
(0.28
)
 
$
(2.86
)
 
$
(3.21
)
 
Income (loss) from discontinued operations
 
0.01

 
(0.01
)
 

 
(0.02
)
 
(0.01
)
 
Net income (loss)
 
$
(1.07
)
(e)
$
0.08

 
$
(0.27
)
(e)
$
(2.88
)
 
$
(3.22
)
 
Other information
 
 

 
 

 
 
 
 

 
 

 
Book value per share (f)
 
$
1.72

 
$
3.88

 
$
4.36

 
$
7.41

 
$
10.64

 
Cash dividends declared per share
 

 
0.666

 
0.820

 
0.820

 
0.820

 
Diluted weighted-average number of shares outstanding
 
80,333

 
80,365

 
80,884

 
80,755

 
80,632

 
Number of employees
 
9,400

 
10,800

 
12,200

 
12,300

 
18,500

 
(a)
Includes impacts of the Infrastructure Transaction consummated on November 26, 2013.
(b)
On January 1, 2016, the Company adopted changes issued by the Financial Accounting Standards Board 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. The Company reclassified debt issuance costs in the amount of $10.1 million, $2.3 million, $3.3 million and $4.3 million at December 31, 2015, 2014, 2013 and 2012, respectively.
(c)
Return on average equity is calculated by dividing income (loss) from continuing operations by average Harsco Corporation stockholders' equity throughout the year.
(d)
Current ratio is calculated by dividing total current assets by total current liabilities.
(e)
Does not total due to rounding.
(f)
Book value per share is calculated by dividing total equity by shares outstanding.

17


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) implementation of environmental remediation matters; (19) risk and uncertainty associated with intangible assets; (20) 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 (21) 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.

18


Executive Overview
In November 2016, the Company entered into a new senior secured credit facility (the “Senior Secured Credit Facility”), consisting of a $400 million Revolving Credit Facility and a $550 million term loan B facility (the "Term Loan Facility"). Upon closing of the Senior Secured Credit Facility, the Company amended and extended the existing Revolving Credit Facility, repaid the existing term loan A facility and redeemed, satisfied and discharged the 5.75% Senior Notes due 2018 (the “Notes”) in accordance with the indenture governing the Notes. As a result, a charge of $35.3 million was recorded during the fourth quarter of 2016 consisting principally of the cost of early extinguishment of the Notes and the write-off of unamortized deferred financing costs associated with the Company’s existing Financing Agreements and the Notes. See Note 8, Debt and Credit Agreements, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.
In September 2016, the Company sold its remaining approximate 26% equity interest in Brand Energy & Infrastructure Services ("Brand"). In exchange for the Company's interest, (i) the Company received $145 million in cash, net, and (ii) the requirement for the Company to fund certain obligations to Brand through 2018 were satisfied, the present value of which equaled $20.6 million. As a result of the sale, the Company’s obligation to make quarterly payments related to the unit adjustment liability under the terms of a limited partnership agreement that governed the operation of the strategic venture terminated. The Company recognized a loss on the sale of its equity interest in Brand in the amount of $43.5 million, which was recognized in Change in fair value to unit adjustment liability and loss on dilution and sale of equity method investment on the Consolidated Statement of Operations. See Note 5, Equity Method Investments, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.

Although steel markets have demonstrated some improvement, the Harsco Metals & Minerals Segment continued to be negatively impacted by lower customer steel production, weak commodity prices and site exits during 2016. These impacts have been offset by the savings and benefits achieved as part of the Harsco Metals & Minerals Segment's Improvement Plan ("Project Orion") including lower compensation costs and the impact of exited underperforming contracts. 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 were realized during 2016. See Note 19, Restructuring Programs, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information. Also, results for 2015 included costs incurred by the Harsco Metals & Minerals Segment related to a steel mill customer liquidation, salt cake disposal costs and charges associated with a subcontractor settlement which decreased operating income by $24.9 million. The Company remains focused on achieving additional cost reductions and operational improvements to enhance returns for the Harsco Metals & Minerals Segment.

The Harsco Rail Segment recorded estimated forward loss provision of $45.1 million during 2016 related to the Company's contracts with the federal railway system of Switzerland ("SBB"). The estimated forward loss provision resulted from increased vendor costs, ongoing discussions with SBB, and increased estimates for commissioning, certification and testing costs, as well as expected settlements with SBB. See Note 4, Accounts Receivable and Inventories, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information. Also, results for 2015 included a $10.9 million foreign exchange gain that was not repeated in 2016. Additionally, the Harsco Rail Segment continues to be impacted by continued weakness in the North American market.

While energy markets have demonstrated some fundamental improvement, the Harsco Industrial Segment’s air-cooled heat exchangers and industrial grating businesses will lag the market given the lead time for capital expenditures to formalize into new projects for customers in the upstream, midstream, and downstream oil and gas markets served by the Company to be constrained. Accordingly, these factors are expected to impact revenue and operating income during the first half of 2017 in the Harsco Industrial Segment.
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 $3.3 million and $9.9 million of expenses during 2016 and 2015, respectively, related to the separation, which are included as part of Corporate in the Company's segment results.







19


Revenues by Segment
(Dollars in millions)
 
2016
 
2015
 
Change
 
%
Harsco Metals & Minerals
 
$
965.5

 
$
1,106.2

 
$
(140.6
)
 
(12.7
)%
Harsco Industrial
 
247.5

 
357.3

 
(109.7
)
 
(30.7
)
Harsco Rail
 
238.1

 
259.7

 
(21.6
)
 
(8.3
)
Total Revenues
 
$
1,451.2

 
$
1,723.1

 
$
(271.9
)
 
(15.8
)%
Revenues by Region
(Dollars in millions)
 
2016
 
2015
 
Change
 
%
Western Europe
 
$
418.6

 
$
488.7

 
$
(70.0
)
 
(14.3
)%
North America
 
654.3

 
807.7

 
(153.3
)
 
(19.0
)
Latin America (a)
 
164.3

 
181.6

 
(17.3
)
 
(9.5
)
Asia-Pacific
 
136.9

 
153.7

 
(16.9
)
 
(11.0
)
Middle East and Africa
 
46.7

 
52.3

 
(5.6
)
 
(10.6
)
Eastern Europe
 
30.3

 
39.1

 
(8.8
)
 
(22.5
)
Total Revenues
 
$
1,451.2

 
$
1,723.1

 
$
(271.9
)
 
(15.8
)%
(a)
Includes Mexico.
Revenues for the Company totaled $1.5 billion and $1.7 billion for 2016 and 2015, respectively. The change is primarily related to the impact of price and volume changes across all segments; exited contracts in the Harsco Metals & Minerals Segment; and the impacts of foreign currency translation. Foreign currency translation decreased revenues by $51.0 million for 2016 in comparison with the prior year.

Operating Income and Operating Margins by Segment
(Dollars in millions)
 
2016
 
2015
 
Change
 
%
Harsco Metals & Minerals
 
$
81.6

 
$
26.3

 
$
55.3

 
210.5
 %
Harsco Industrial
 
23.2

 
57.0

 
(33.8
)
 
(59.3
)
Harsco Rail
 
(17.5
)
 
50.9

 
(68.4
)
 
(134.4
)
Corporate (b)
 
(23.8
)
 
(45.7
)
 
21.8

 
47.8

Total Operating Income
 
$
63.5

 
$
88.5

 
$
(25.1
)
 
(28.3
)%
 
 
2016
 
2015
Harsco Metals & Minerals
 
8.5
 %
 
2.4
%
Harsco Industrial
 
9.4

 
16.0

Harsco Rail
 
(7.4
)
 
19.6

Consolidated Operating Margin
 
4.4
 %
 
5.1
%
(b)
Corporate includes $3.3 million and $9.9 million of expenses related to the potential Harsco Metals & Minerals Segment separation for twelve months ended December 31, 2016 and 2015, respectively.

Operating income from continuing operations for 2016 was $63.5 million compared with operating income from continuing operations of $88.5 million in 2015.  Foreign currency translation increased Operating income by $3.4 million for 2016 in comparison to prior year. Refer to the segment discussions below for information pertaining to factors positively affecting and negatively impacting operating income.


Harsco Metals & Minerals Segment:
Significant Impacts on Revenues (In millions)
 
 
Revenues—2015
 
$
1,106.2

Net impact of new contracts and lost contracts (including exited underperforming contracts).
 
(67.2
)
Impact of foreign currency translation.
 
(43.4
)
Net impacts of price/volume changes, primarily attributable to volume changes.
 
(30.1
)
Revenues—2016
 
$
965.5


Factors Positively Affecting Operating Income:
Incremental Project Orion restructuring benefits related to compensation savings of approximately $15 million during 2016, associated with the last phase of Project Orion.
The effect of new contracts, exited underperforming contracts and lower maintenance, fuel and pension costs.

20


Increased volumes in the roofing granules and industrial abrasives business, due partly to favorable weather conditions during 2016.
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. These items decreased operating income by $30.8 million during 2015 and did not repeat in 2016.
Foreign currency translation in 2016 positively affected operating income for this segment compared with the prior year.

Factors Negatively Impacting Operating Income:
Decreased global steel production.  Overall, steel production by customers under services contracts, including the impact of exited contracts, decreased by 10% for 2016 compared with the prior year. Excluding the impact of exited contracts, steel production by customers under services contracts decreased by 2% for 2016 compared with the prior year.
Decreased income attributable to the impact of lost contracts and reduced nickel prices and demand. Nickel prices decreased 20% during 2016 compared with the prior year.
Severance costs resulting from a probable site exit decreased operating income by $5.1 million during 2016.

Harsco Industrial Segment:
Significant Impacts on Revenues (In millions)
 
 
Revenues—2015
 
$
357.3

Net impacts of price/volume changes, primarily attributable to volume changes.
 
(106.4
)
Impact of foreign currency translation.
 
(3.4
)
Revenues—2016
 
$
247.5


Factors Positively Affecting Operating Income:
Operating income was aided by $9.1 million of lower selling, general and administrative costs in 2016 compared with the prior year.
The effect of delivering the Mexico City International Airport security fencing order in 2016.

Factors Negatively Impacting Operating Income:
Lower overall volumes in the air-cooled heat exchangers business, resulting in decreased operating income during 2016. These lower volumes are primarily attributable to lower energy prices which impacted capital spending by customers in the oil and natural gas industries served by the Company.
Lower volumes and higher material costs in the industrial grating products business.
2015 included gains from sales of assets of $3.6 million which did not repeat during 2016.

Harsco Rail Segment:
Significant Impacts on Revenues (In millions)
 
 
Revenues—2015
 
$
259.7

Net impact of price/volume changes, primarily attributable to volume changes.
 
(17.4
)
Impact of foreign currency translation.
 
(4.2
)
Revenues—2016
 
$
238.1


Factors Positively Affecting Operating Income (Loss):
Increased sales of international equipment, spare parts and safety equipment.
Operating income (loss) was aided by $1.4 million of lower selling, general and administrative costs in 2016 compared with the prior year.

Factors Negatively Impacting Operating Income (Loss):
During 2016, the Harsco Rail Segment recorded an estimated forward loss provision of $45.1 million related to the Company's contracts with SBB. See Note 4, Accounts Receivable and Inventories, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.
Foreign currency gain of $10.9 million recognized during 2015 which did not repeat in 2016.
Decreased volumes in North America and a less favorable mix of equipment sales decreased operating income (loss) during 2016 compared with the prior year.
Lower volumes and higher costs for contract services decreased operating income (loss) during 2016 compared with the prior year.

21


Outlook, Trends and Strategies
Despite uncertainties in the global economy, along with the persistent 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. The Company believes these actions 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 while pursuing select growth opportunities as global steel markets recover. For the Harsco Rail and Harsco Industrial Segments, the Company will focus on disciplined growth organically, and through acquisitions, that improve these businesses' competitive positions in core or adjacent markets. 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 maintaining an active, lean corporate center that optimizes corporate costs while continuing to develop value added activities to support the Company.
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; and its focus on executing cost reduction and efficiency initiatives, 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 2017 and beyond:
The Company will focus on 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 maintain an active and lean corporate center that balances costs with value added services.
The Company will assess capital needs in the context of operational trends and strategic initiatives. Management will be selective and disciplined in allocating capital by rigorously analyzing projects and utilizing a return-based capital allocation process.
The Company expects its operational effective income tax rate to approximate 39% to 41% in 2017.
The potential consequences related to uncertainty surrounding the United Kingdom's proposed exit from the European Union may have an impact on the Company results of operations, cash flows and asset valuations in any period particularly in the Harsco Metals & Minerals Segment. See Part I, Item 1A, Risk Factors for additional information.

Harsco Metals & Minerals Segment:
Steel markets demonstrated some pricing improvement during 2016 and the Company expects modest improvements in demand, the effect of new contracts, the continued benefits achieved as part of Project Orion and additional improvement initiatives to positively affect operating income in the near term in the Harsco Metals & Minerals Segment. These improvements will be partially offset by possible site exits and the anticipated impact of foreign currency translation.
In addition to the benefits and discipline that resulted from Project Orion, the Company will continue to focus on ensuring that forecasted profits and other requirements for contracts meet certain established standards and deliver returns above its cost of capital. 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.
In February 2016, the Company announced a new 15-year contract with China's largest steel maker with anticipated revenues totaling approximately $125 million over the life of the contract. In March 2016, the Company secured a contract extension for steel mill services in Belgium with projected revenues totaling more than $100 million. During the third quarter of 2016, the Company announced expanded services with Chile's largest steelmaker and a new contract in Egypt with projected revenues totaling more than $40 million and $35 million, respectively. In November 2016, the Company announced a multi-year expansion of steel mill services at a North American customer with projected revenues totaling more than $50 million. Additionally, the Company recently announced two multi-year contracts for steel mill services in China and Brazil with projected revenues totaling more than $100 million.




22


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 recorded a charge of $7.0 million, payable over five to seven years, related to the estimated cost of processing and disposal of the salt cakes. The Company's Bahrain operations are operated under a strategic venture for which its strategic venture partner has a 35% minority interest. 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 Company’s estimated liability could change, and such change could be material in any one period.
During 2016, one of the Company's customers announced its intention to conduct a strategic review of its steel making operations in Europe, including the possibility of strategic collaborations through a joint venture with another major steel maker.  Depending on the outcome of any potential transactions, there could be a material impact on the Company's results of operations, cash flows and asset valuations in any one period.
One of the Company's customers in Australia has begun the process of voluntary administration under Australian law, the purpose of which is to focus on long-term solvency. The customer is continuing its operations during the voluntary administration proceedings. The Company had approximately $5 million of receivables with the customer prior to the start of the voluntary administration and continues to believe that these amounts are collectible, because the Company is viewed as an important supplier, continues to provide services to the customer and continues to collect on post-administration invoices timely. However the administration process is uncertain in nature and length. No additional creditors' meeting is scheduled at this time. As such, a loss on the pre-administration receivables is reasonably possible, and if there was a change in the Company's view on collectability, there could be a charge against income in future periods. Moreover, if the site were to close, additional costs may be incurred and asset valuations may be impacted, which may be significant in any one period.

Harsco Industrial Segment:
While energy markets have demonstrated some fundamental improvement, the Harsco Industrial Segment’s air-cooled heat exchangers and industrial grating businesses will lag the market given the lead time for capital expenditures to formalize into new projects for customers in the upstream, midstream, and downstream oil and gas markets served by the Company to be constrained. Accordingly, these factors are expected to impact revenue and operating income during the first half of 2017 in the Harsco Industrial Segment.
The Company is committed to maintaining recent efficiency gains in the air-cooled heat exchangers and industrial grating products businesses and implementing additional improvements in response to the recent industry and economic challenges.
The Company will continue to focus on product innovation and development to drive strategic growth in its businesses. During 2016, the Company introduced GrateGuardTM, a new fencing solution for first-line physical security in the Industrial grating business. Additionally, the Company recently announced the launch of an all-new capability for remote indoor boiler monitoring that can be downloaded directly to wireless and desktop devices.
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 the North American market is experiencing weakness due to reduced capital and operating spending by Class I railways. 
During April 2016, the Company was awarded a multi-year rail grinding services contract extension in the U.K. with anticipated revenues of at least $38 million. During December 2016, the Company announced new sales of railway track grinders for use in contract rail grinding programs throughout North America. Additionally, during January 2017, the Company announced a new order to equip the entire Denver, Colorado regional railway fleet with enhanced safety systems.
In prior years, the Company secured two contract awards with initial contract values totaling approximately $200 million from SBB. The majority of deliveries under these contracts are anticipated to occur during 2017 through 2020. The Harsco Rail Segment recorded estimated forward loss provisions of $40.1 million and $5.0 million during the second and fourth quarters of 2016, respectively, which resulted from increased vendor costs, ongoing discussions with SBB, and increased estimates for commissioning, certification and testing costs, as well as expected settlements with SBB.  It is possible that the Company's overall estimate of costs to complete these contracts may increase which would result in an additional estimated forward loss provision at such time. See Note 1, Summary of Significant Accounting Policies - Revenue Recognition, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.
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.

23


Results of Operations
(In millions, except per share information and percentages)
 
2016
 
2015
 
2014
Total revenues
 
$
1,451.2

 
$
1,723.1

 
$
2,066.3

Cost of services and products sold
 
1,170.5

 
1,356.4

 
1,643.9

Selling, general and administrative expenses
 
200.4

 
242.1

 
284.7

Research and development expenses
 
4.3

 
4.5

 
5.5

Loss on disposal of the Harsco Infrastructure Segment and transaction costs
 

 
1.0

 
5.1

Other expenses
 
12.6

 
30.6

 
57.8

Operating income from continuing operations
 
63.5

 
88.5

 
69.3

Interest income
 
2.5

 
1.6

 
1.7

Interest expense
 
(51.6
)
 
(46.8
)
 
(47.1
)
Loss on early extinguishment of debt
 
(35.3
)
 

 

Change in fair value to the unit adjustment liability and loss on dilution and sale of equity method investment
 
(58.5
)
 
(8.5
)
 
(9.7
)
Income tax expense from continuing operations
 
(6.6
)
 
(27.7
)
 
(30.4
)
Equity in income (loss) of unconsolidated entities, net
 
5.7

 
0.2

 
(1.6
)
Income (loss) from continuing operations
 
(80.4
)
 
7.3

 
(17.8
)
Income (loss) from discontinued operations
 
0.7

 
(1.0
)
 
0.1

Net income (loss)
 
(79.8
)
 
6.3

 
(17.7
)
Total other comprehensive income (loss)
 
(93.6
)
 
13.9

 
(163.2
)
Total comprehensive income (loss)
 
(173.4
)
 
20.3

 
(180.9
)
Diluted income (loss) per common share from continuing operations attributable to Harsco Corporation common stockholders
 
(1.07
)
 
0.09

 
(0.28
)
Effective income tax rate for continuing operations
 
(8.4
)%
 
79.5
%
 
214.8
%
Comparative Analysis of Consolidated Results
Total Revenues
Revenues for 2016 decreased $271.9 million or 16% from 2015. This decrease was attributable to the following significant items:
Changes in Revenues - 2016 vs. 2015 (In millions)
 
 
Net impacts of price/volume changes in the Harsco Industrial Segment, primarily attributable to volume changes.
 
$
(106.4
)
Net impact of new contracts and lost contracts (including exited underperforming contracts) in the Harsco Metals & Minerals Segment.
 
(67.2
)
Impact of foreign currency translation.
 
(51.0
)
Net impacts of price/volume changes in the Harsco Metals & Minerals Segment, primarily attributable to volume changes.
 
(30.1
)
Net impacts of price/volume changes, primarily attributable to volume changes in the Harsco Rail Segment.
 
(17.4
)
Other.
 
0.2

Total change in revenues - 2016 vs. 2015
 
$
(271.9
)

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 Industrial Segment, primarily attributable to volume changes.
 
(50.8
)
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, 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
)


24


Cost of Services and Products Sold
Cost of services and products sold for 2016 decreased $185.9 million or 14% from 2015. This decrease was attributable to the following significant items:
Change in Cost of Services and Products Sold - 2016 vs. 2015 (In millions)
 
 
Decreased costs due to changes in revenues (exclusive of the effects of foreign currency translation and fluctuations in commodity costs included in selling prices).
 
$
(165.3
)
Impact of foreign currency translation.
 
(47.2
)
Other.
 
(18.5
)
Increased costs due to estimated forward loss provision in the Harsco Rail Segment (a).
 
45.1

Total Change in Cost of Services and Products Sold 2016 vs. 2015
 
$
(185.9
)
(a)
See Note 4, Accounts Receivable and Inventories, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.

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
)

Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2016 decreased $41.7 million or 17% from 2015. This decrease was primarily related to the impact of reduced bad debt expense in the Harsco Metals & Minerals Segment; decreased agent and broker commissions in the Harsco Industrial Segment due to lower volume; and foreign currency translation. Additionally, results for 2016 were also impacted by lower pension expense, professional fees and compensation costs associated with Project Orion in the Harsco Metals & Minerals Segment and travel costs.

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 a Harsco Metals & Minerals Segment's steel mill customer liquidation.

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 and $5.1 million during 2015 and 2014, respectively. See Note 3, Acquisitions, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.

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. Additional information on Other expenses is included in Note 17, Other Expenses, in Part II, Item 8, “Financial Statements and Supplementary Data." During 2016, 2015 and 2014, the Company recorded pre-tax Other expenses of $12.6 million, $30.6 million and $57.8 million, respectively. The major components of this income statement caption are as follows:
 
 
Other (Income) Expenses
(In thousands)
 
2016
 
2015
 
2014
Net gains
 
$
(1,764
)
 
$
(10,613
)
 
$
(6,718
)
Employee termination benefits costs
 
10,777

 
14,914

 
19,120

Other costs to exit activities
 
440

 
13,451

 
4,908

Impaired asset write-downs
 
399

 
8,170

 
39,455

Foreign currency gains related to Harsco Rail Segment advances on contracts
 

 
(10,940
)
 

Harsco Metals & Minerals Segment separation costs
 
3,235

 
9,922

 

Subcontractor settlement
 

 
4,220

 

Other expense
 
(467
)
 
1,449

 
1,059

Total
 
$
12,620

 
$
30,573

 
$
57,824


25


Interest Expense
2016 vs. 2015
Interest expense in 2016 was $51.6 million, an increase of $4.8 million or 10% compared with 2015. The increase primarily relates to $1.1 million of deferred financing costs expensed by the Company during the third quarter of 2016 related to payments for the Term Loan Facility and increased interest rates associated with the Company's borrowings, as well as other financing costs partially offset by lower debt levels. See Note 8, Debt and Credit Agreements, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.

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.

Loss on Early Extinguishment of Debt
In November 2016, the Company entered into a New Credit Facility, consisting of a $400 million revolving credit facility and a $550 million term loan B facility. Upon closing of the New Credit Facility, the Company has amended and extended the existing Revolving Credit Facility, repaid the existing Term Loan Facility and has redeemed, satisfied and discharged the Notes in accordance with the indenture governing the Notes. As a result, a charge of $35.3 million was recorded during the fourth quarter of 2016 consisting principally of the cost of early extinguishment of the Notes and the write-off of unamortized deferred financing costs associated with the Company's existing Senior Secured Credit Facilities and the Notes. See Note 8, Debt and Credit Agreements, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.

Change in Fair Value to the Unit Adjustment Liability and Loss on Dilution and Sale of Equity Method Investment
The Change in fair value to the unit adjustment liability and loss on dilution and sale of equity method investment during 2016 increased $50.0 million compared with 2015. The increase relates to the loss associated with Company's first quarter of 2016 election not to make the quarterly cash payments to the Company's partner in the Infrastructure strategic venture for the remainder of 2016 and the Company's third quarter of 2016 sale of its remaining equity interest in the Infrastructure strategic venture. See Note 5, Equity Method Investments and Note 15, Financial Instruments, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information.

Income Tax Expense from Continuing Operations

2016 vs. 2015
Income tax expense from continuing operations in 2016 was $6.6 million, a decrease of $21.0 million compared with 2015. The effective income tax rate relating to continued operations for 2016 was (8.4)% versus 79.5% for 2015. The decrease in income tax expense and the change in the effective income tax rate related to continuing operations was primarily due to the change in the mix in earnings between international jurisdictions and the non-recurring loss on early extinguishment of debt. Additionally, there was no income tax benefit realized from the loss on the sale of the Company's equity interest in Brand, as a valuation allowance of $16.1 million was established to offset the deferred tax assets on the resulting capital loss carryforward. There was also no income tax benefit realized from the estimated forward loss provisions related to the SBB contracts, as a valuation allowance of $13.5 million was established to offset the deferred tax assets on the resulting loss carryforward, because the Company determined that it is not more likely than not that these benefits will be realized in the future.
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.
See Note 11, Income Taxes, in Part II, Item 8, “Financial Statements and Supplementary Data" for additional information.









26


Total Other Comprehensive Income (Loss)

2016 vs. 2015
Total other comprehensive loss was $93.6 million in 2016, compared with total other comprehensive income of $13.9 million in 2015. The major drivers for this change were pension liability adjustments and foreign currency translation adjustments. The pension liability adjustments were the result of lower global weighted average discount rates, principally for the U.K. plan, which decreased from 3.9% to 3.1% during the year. This was partially offset by actual returns on plan assets that were higher than expected returns. Foreign currency translation adjustments were negatively impacted by the continued strengthening of the U.S. dollar.
2015 vs. 2014
Total other comprehensive income was $13.9 million in 2015, compared with total other comprehensive loss of $163.2 million in 2014. The major drivers for this change were pension liability adjustments, partially offset by foreign currency translation adjustments. The pension liability adjustments were the result of higher global weighted average discount rates that increased from 3.7% to 3.9% during the year, partially offset by actual returns on plan assets that were less than the expected returns. Foreign currency translation adjustments were negatively impacted by the strengthening of the U.S. dollar against most currencies.


Liquidity and Capital Resources
Overview
In November 2016, the Company entered into a Senior Secured Credit Facility, consisting of a $400 million Revolving Credit Facility and a $550 million Term Loan Facility. Upon closing of the Senior Secured Credit Facility, the Company amended and extended the existing Revolving Credit Facility, repaid the existing term loan A facility and redeemed, satisfied and discharged the Notes in accordance with the indenture governing the Notes. As a result, a charge of $35.3 million was recorded during the fourth quarter of 2016 consisting principally of the cost of early extinguishment of the Notes and the write-off of unamortized deferred financing costs associated with the Company’s existing Financing Agreements and the Notes, and is reflected in the financing activities section of the Consolidated Statements of Cash Flows as a reduction of long-term debt.
The Company has sufficient financial liquidity and borrowing capacity to support the strategies within each of our businesses.  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 and working capital efficiency.  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; frequent evaluation of customer and business-partner credit risk; and Continuous Improvement initiatives aimed at improving the effective and efficient use of working capital, particularly in accounts receivable and inventories.
During 2016, the Company generated $159.8 million in operating cash flow, an increase from the $121.5 million generated in 2015.

In 2016, the Company invested $69.3 million in capital expenditures, mostly for the Harsco Metals & Minerals Segment, compared with $123.6 million in 2015. The Company generated $9.3 million in cash flow from asset sales in 2016 compared with $26.0 million in 2015. Asset sales have been a normal part of the Company's business model, primarily for the Harsco Metals & Minerals Segment.

In September 2016, the Company received approximately $145 million in cash, net, from the sale of its remaining 26% equity interest in Brand. In 2016, the Company received proceeds from the termination of cross-currency interest rate swaps ("CCIRs") of $16.6 million compared with $75.1 million in 2015. The Company paid $4.1 million and $65.7 million in dividends to stockholders in 2016 and 2015, respectively. The Company has suspended the quarterly dividend to preserve financial flexibility. The Board of Directors (the "Board") will continue to evaluate the Company's dividend policy each quarter.
The Company's net cash borrowings decreased by $261.2 million in 2016 principally due to the utilization of operating cash flows, proceeds from the termination of CCIRs and proceeds from the sale of the Company's equity interest in Brand. The Company’s consolidated net debt to consolidated adjusted earnings before interest, tax, depreciation and amortization ("EBITDA") ratio, as defined by the Credit Agreement, was 2.3 to 1.0 at December 31, 2016.

27


Cash Requirements
The following summarizes the Company's expected future payments related to contractual obligations and commercial commitments at December 31, 2016:
Contractual Obligations and Commercial Commitments at December 31, 2016 (a)
 
 
 
 
Payments Due by Period
(In millions)
 
Total
 
Less than
1 year
 
1-3
years
 
3-5
years
 
After 5
years
Short-term borrowings
 
$
4.3

 
$
4.3

 
$

 
$

 
$

Long-term debt (including current maturities and capital leases)
 
673.4

 
25.6

 
16.1

 
109.2

 
522.5

Projected interest payments on long-term debt (b)
 
237.6

 
37.9

 
72.4

 
70.1

 
57.2

Pension obligations (c)
 
22.9

 
22.9

 

 

 

Operating leases (non-cancellable)
 
57.5

 
12.5

 
16.6

 
11.5

 
16.9

Purchase obligations (d)
 
123.1

 
93.9

 
23.6

 
5.6

 

Cross-currency interest rate swaps (e)
 

 

 

 

 

Foreign currency exchange forward contracts (f)
 

 

 

 

 

Total contractual obligations (g)
 
$
1,118.8

 
$
197.1

 
$
128.7

 
$
196.4

 
$
596.6

(a)
See Note 8, Debt and Credit Agreements; Note 9, Operating Leases; Note 10, Employee Benefit Plans; Note 11, Income Taxes; and Note 15, Financial Instruments, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information on short-term borrowings and long-term debt (including capital leases); operating leases; employee benefit plans; 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, 2016. 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 defined benefit pension plans for the next year.
(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.
(e)
Due to the nature of these CCIRs, based on December 31, 2016 fair values there would be net cash received of $0.4 million comprised of cash payments of $2.3 million and cash receipts of $2.7 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 fair value of the foreign currency exchange contracts outstanding at December 31, 2016. Due to the nature of these contracts, based on fair values at December 31, 2016 there will be net cash received of $1.4 million comprised of cash payments of $600.9 million and cash receipts of $602.3 million. Accordingly, no amounts are included in the above table. The foreign currency exchange contracts are recorded on the Consolidated Balance sheets at fair value.
(g)
At December 31, 2016, in addition to the above contractual obligations, the Company had $5.7 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.

Off-Balance Sheet Arrangements
The following table summarizes the Company's contingent commercial commitments at December 31, 2016. 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, 2016
 
 
 
 
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
 
$
92.2

 
$
89.8

 
$
2.4

 
$

 
$

 
$

Guarantees
 
60.1

 
3.8

 

 
6.6

 
8.6

 
41.1

Performance bonds
 
127.0

 
101.6

 
3.2

 
20.6

 

 
1.6

Other commercial commitments
 
11.1

 

 

 

 

 
11.1

Total commercial commitments
 
$
290.4

 
$
195.2

 
$
5.6

 
$
27.2

 
$
8.6

 
$
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. See Note 15, Financial Instruments, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information.



28


Sources and Uses of Cash
The Company’s principal sources of liquidity are cash provided by operations and borrowings under its Senior Secured Credit Facility, 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. 
 
The Company plans to redeploy discretionary cash for potential growth opportunities, such as disciplined organic growth and higher-return service contracts opportunities for the Harsco Metals & Minerals Segment, and strategic investments or possible acquisitions in the Harsco Rail and Harsco Industrial Segments that improve competitive positioning in core markets or adjacent markets.
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.

On December 2, 2015, the Company entered into (i) an amendment and restatement agreement and (ii) a second amended and restated credit agreement (together, 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 then existing credit agreement, (ii) establishing a term loan A facility in an initial aggregate principal amount of $250 million, by converting a portion of the outstanding balance under the then existing credit agreement on a dollar-for-dollar basis and (iii) reducing the Revolving Credit Facility limit to $350 million.

During September 2016, the Company received approximately $145 million in cash, net, from its sale of its remaining 26% equity interest in the Infrastructure strategic venture. The Company used these proceeds to repay $85.0 million on the term loan A facility and $60.0 million on the Revolving Credit Facility. Related to the repayment of the term loan A facility, the Company expensed $1.1 million of previously deferred financing costs.

In November 2016, the Company entered into the Senior Secured Credit Facility. Upon closing of the Senior Secured Credit Facility, the Company amended and extended the existing Revolving Credit Facility, repaid the existing term loan A facility and redeemed, satisfied and discharged the Notes in accordance with the indenture governing the Notes.
Borrowings under the Revolving Credit Facility 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 London Interbank Offered Rate ("LIBOR") as defined in the credit agreement governing the Senior Secured Credit Facility (the "Credit Agreement"). Any principal amount outstanding under the Revolving Credit Facility is due and payable on the maturity of the Revolving Credit Facility. The Revolving Credit Facility matures on November 2, 2021.
Borrowings under the Term Loan Facility bear interest at a rate per annum ranging from 375 to 400 basis points over the base rate or 475 to 500 basis points over the adjusted LIBOR rate, subject to a 1% floor, as defined in the Credit Agreement. The Term Loan Facility requires scheduled quarterly payments, beginning in March 2017, each equal to 0.25% of the original principal amount of the loans under the Term Loan Facility. These payments are reduced by the application of any prepayments, and any remaining balance is due and payable on the maturity of the Term Loan Facility. The Term Loan Facility matures on November 2, 2023.
The Senior Secured Credit Facility imposes certain restrictions including, but not limited to, restrictions as to types and amounts of debt and liens that may be incurred by the Company; limitations on increases in dividend payments and limitations on certain acquisitions by the Company.
The obligations of the Company are guaranteed by substantially all of the Company’s current and future wholly-owned domestic subsidiaries (“Guarantors”). All obligations under the Senior Credit Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Guarantors.

In January 2017, the Company entered into a series of fixed-floating interest rate swaps that cover the period from 2018 through 2021, and had the effect of converting $300 million of the Term Loan Facility from floating-rate to fixed-rate.   The fixed rates provided by the swaps replace the adjusted LIBOR rate in the interest calculation, range from 1.65% for 2018 to 2.71% for 2021.


29


The following table illustrates available credit at December 31, 2016:
(In millions)
 
Facility Limit
 
Outstanding
Balance
 
Outstanding Letters of Credit
 
Available
Credit
Multi-year revolving credit facility
 
$
400.0

 
$
98.0

 
$
43.5

 
$
258.5

At December 31, 2016, the Company had $648.0 million of borrowings under the Senior Secured Credit Facility consisting of $550.0 million under the Term Loan Facility and $98.0 million under the Revolving Credit Facility. At December 31, 2016, of this balance, $642.5 million was classified as long-term debt and $5.5 million was classified as current maturities of long-term debt on the Consolidated Balance Sheet. 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 A 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 on the Consolidated Balance Sheets. See Note 8, Debt and Credit Agreements, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information on the Company's Credit Agreement.
Working Capital Position
Changes in the Company's working capital are reflected in the following table:
(Dollars in millions)
 
December 31
2016
 
December 31
2015
 
Increase
(Decrease)
Current Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
71.9

 
$
79.8

 
$
(7.9
)
Trade accounts receivable, net
 
236.6

 
254.9

 
(18.3
)
Other receivables, net
 
21.1

 
30.4

 
(9.3
)
Inventories
 
187.7

 
217.0

 
(29.3
)
Other current assets
 
60.5

 
82.5

 
(22.0
)
Total current assets
 
577.7

 
664.5

 
(86.8
)
Current Liabilities
 
 
 
 
 
 
Short-term borrowings and current maturities
 
29.8

 
55.3

 
(25.5
)
Accounts payable
 
108.0

 
136.0

 
(28.1
)
Accrued compensation
 
46.7

 
38.9

 
7.8

Income taxes payable
 
4.3

 
4.4

 
(0.1
)
Advances on contracts and other customer advances
 
117.3

 
107.3

 
10.1

Due to unconsolidated affiliate
 

 
7.7

 
(7.7
)
Unit adjustment liability
 

 
22.3

 
(22.3
)
Other current liabilities
 
121.9

 
134.2

 
(12.3
)
Total current liabilities
 
428.0

 
506.1

 
(78.2
)
Working Capital
 
$
149.7

 
$
158.4

 
$
(8.7
)
Current Ratio (h)
 
1.3
:1
 
1.3
:1
 
 

(h)
Calculated as Current assets / Current liabilities
Working capital decreased $8.7 million or 5.5% in 2016 due primarily to the following factors:
Working capital was negatively impacted by a decrease in Inventory of $29.3 million, primarily due to the estimated forward loss provisions related to the Company's Harsco Rail Segment's contracts with SBB which is recorded as a reduction of Contracts-in-process, a component of Inventory, as well as the timing of inventory purchases in the Harsco Metals & Minerals Segment;
Working capital was negatively impacted by a decrease in Other current assets of $22.0 million, primarily due to the timing of current deferred tax assets and prepaid expenses;
Working capital was negatively impacted by a decrease in Trade accounts receivable, net, of $18.3 million, primarily due to timing of invoicing and collections in the Harsco Metals & Minerals Segment, foreign currency translation and decreased sales in the Harsco Industrial Segment; and
Working capital was negatively impacted by an increase in Advances on contracts and other customer advances of $10.1 million, primarily received in the Harsco Rail Segment.

These working capital decreases were partially offset by the following factors:
Working capital was positively affected by a decrease in Accounts payable of $28.1 million, primarily due to the timing of payments;
Working capital was positively affected by a decrease in Short-term borrowings and current maturities of long-term debt of $25.5 million, primarily due to the expected timing of debt payments;

30


Working capital was positively affected by a decrease in the Unit adjustment liability of $22.3 million due to the sale of the Company's equity interest in Brand. See Note 5, Equity Method Investments and Note 15, Financial Instruments, in Part II, Item 8, "Financial Statements and Supplementary Data" for additional information; and
Working capital was positively affected by a decrease in Other current liabilities of $12.3 million, primarily due to lower accrued commissions, lower accrued interest and the timing of other accruals.

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.
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.
The Company has historically generated the majority of its cash flows in the second half of the year.  Additionally, the Company’s cash flows have been negatively impacted in the near term by reduced steel production, weaker commodity prices and demand, the impact of site exits in the Harsco Metals & Minerals Segment and low oil prices impacting capital expenditures and overall spending by customers in the natural gas, natural gas processing and petrochemical industries.

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)
 
2016
 
2015
 
2014
Net cash provided (used) by:
 
 
 
 
 
 
Operating activities
 
$
159.8

 
$
121.5

 
$
226.7

Investing activities
 
122.9

 
(130.4
)
 
(229.6
)
Financing activities
 
(292.3
)
 
22.5

 
(21.8
)
Impact of exchange rate changes on cash
 
1.7

 
3.3

 
(6.1
)
Net change in cash and cash equivalents
 
$
(7.9
)
 
$
16.9

 
$
(30.8
)
Cash provided by operating activities Net cash provided by operating activities in 2016 was $159.8 million, an increase of $38.3 million from 2015. The increase is primarily attributable to timing in inventory purchases, increases in accrued compensation and increases on advances on contracts; partially offset by the timing of accounts receivable invoicing and collections and the timing of accounts payables. 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.
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 included the Harsco Rail Segment foreign exchange gain which is reflected in the Effect of exchange rate changes on cash. In 2014, this caption consisted of principally the impact of non-cash impaired asset write-downs related to the Harsco Metals & Minerals Segment.
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, 2016, 2015 and 2014, the decreases in this caption were
$12.8 million, $6.0 million and $17.1 million, respectively. A summary of the major components of this caption for the periods presented is as follows:
(In millions)
 
2016
 
2015
 
2014
Net cash provided by (used in):
 
 
 
 
 
 
  Change in prepaid expenses
 
$
6.7

 
$

 
$
(15.8
)
  Change in non-current insurance accruals
 
(5.0
)
 
(5.0
)
 
(6.1
)
  Other
 
(14.5
)
(i)
(1.0
)
 
4.8

  Total
 
$
(12.8
)
 
$
(6.0
)
 
$
(17.1
)
(i)
Other relates primarily to other accruals that are individually not significant.

31


Cash provided (used) by investing activities — Net cash provided by investing activities in 2016 was $122.9 million, an increase of $253.3 million from 2015. The increase is primarily due to the gross proceeds received from the sale of the Company's remaining 26% equity interest in Brand; a lower level of capital expenditures in the Harsco Metals & Minerals Segment, no payments for the unit adjustment liability; and an increase related to foreign currency hedge settlements reported as Other investing activities. In 2015, net cash used by investing activities 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.
Cash provided (used) by financing activities — Net cash used by financing activities in 2016 was $292.3 million, an increase of $314.7 million from 2015.  The change was primarily due to net cash payments on debt of $261.2 million in 2016 compared with $47.3 million in 2015; reduction in proceeds from the termination of CCIRs and a deferred pension underfunding payment related to the Company's equity interest in Brand; partially offset by lower dividends paid and no repurchases of the Company's common stock in 2016. In 2015, net cash provided by financing activities 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.
Debt Covenants
The Credit Agreement contains a consolidated net debt to consolidated adjusted EBITDA ratio covenant, which is not to exceed 4.0 to 1.0, and a minimum consolidated adjusted 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 adjusted EBITDA ratio covenant is reduced to 3.75 to1.0 after December 31, 2016 and to 3.5 to 1.0 after December 31, 2017. At December 31, 2016, the Company was in compliance with these covenants as the net leverage ratio was 2.3 to 1.0 and interest coverage ratio was 5.1 to 1.0. Based on balances and covenants in effect at December 31, 2016, the Company could increase net debt by $447.6 million (although the Company only has $258.5 million available credit remaining under the Revolving Credit Facility), and still be in compliance with these debt covenants.  Alternatively, keeping all other factors constant, the Company's adjusted EBITDA could decrease by $109.1 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.

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, 2016, the Company's consolidated cash and cash equivalents included $70.5 million held by non-U.S. subsidiaries. At December 31, 2016, 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 $26.7 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 ongoing working capital needs and continued growth of the Company's non-U.S. operations.
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.





32


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. 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, revenue recognition - long-term contracts, insurance reserves 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 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, in 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 on 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, 2016 measurement date for the U.K. and U.S. defined benefit pension plans were 2.7% and 4.0%, respectively, and the global weighted-average discount rate was 3.1%. 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 net periodic pension cost ("NPPC") is determined using the discount rates at the beginning of the year. The discount rates for 2016 expense were 3.8% for the U.K. plan, 4.2% for the U.S. plans and 3.9% for the global weighted-average of plans.
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 2017 and 2016, the global weighted-average expected long-term rate of return on asset assumption is 6.2% and 6.7%, respectively. This rate was determined based on a model of expected asset returns for an actively managed portfolio.






33


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, 2016 plan data, a one-quarter percent increase or decrease in the discount rate and the expected long-term rate of return on plan assets would increase or decrease annual 2016 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-quarter percent increase
 
Increase of $0.1 million
 
Decrease of $0.4 million
One-quarter percent decrease
 
Decrease of $0.1 million
 
Increase of $0.3 million
Expected long-term rate of return on plan assets
 
 
 
 
One-quarter percent increase
 
Decrease of $0.5 million
 
Decrease of $1.7 million
One-quarter percent decrease
 
Increase of $0.5 million
 
Increase of $1.7 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 service cost and interest cost components of NPPC for defined benefit pension plans for 2016 and later. 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 $7 million for 2016, compared to what NPPC would have been under the prior method.

See Note 10, Employee Benefit Plans, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information.

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 for doubtful accounts 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, 2016 and 2015, trade accounts receivable of $236.6 million and $254.9 million, respectively, were net of reserves of $11.8 million and $25.6 million, respectively.

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 did not make any significant provisions for bad debts during 2016. The Company's provisions for bad debts during 2015 and 2014 were $13.0 million and $9.9 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.



34


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 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. As previously disclosed during 2015, one of the Company's steel mill customers in Europe ceased operations and began a formal process of liquidation in late 2015. The Company had recorded bad debt reserves of approximately $13 million related to this customer during 2015.
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, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information.
Goodwill
The Company's goodwill balances were $382.3 million and $400.4 million at December 31, 2016 and 2015, 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, 2016). 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 among 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 currently 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 2016 annual impairment tests did not result in any impairment of the Company’s goodwill.
For the Company's 2016 annual goodwill impairment test, the average annual revenue growth rates over the duration of the DCF models ranged from 1.7% to 4.8%. The WACCs used in the 2016 annual goodwill impairment test ranged from 9.25% to 10.75%.

35


The Harsco Metals & Minerals Segment reporting unit's fair value at October 1, 2016 was approximately 12% more than the net book value. Significant assumptions utilized in the DCF model include a WACC of 10.75%, an average annual revenue growth rate of 1.7% and average annual cash flow growth rate of 0.6%. Should there be 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, including the Company's announced intention to pursue strategic options for the separation of the Harsco Metals & Minerals Segment from the rest of the Company, 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, in Part II, Item 8, “Financial Statements and Supplementary Data,” for additional information.

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. The amounts charged against pre-tax income from continuing operations related to impaired long-lived assets included in Other expenses on the Consolidated Statements of Operations were $0.4 million, $8.2 million and $39.5 million in 2016, 2015 and 2014 respectively. The decrease in long-lived asset impairments in 2016 was due primarily to a decreased number of site exits in the Harsco Metals & Minerals Segment upon substantial completion of actions associated with Project Orion. 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.
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, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information.
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, 2016 and 2015, inventories of $187.7 million and $217.0 million, respectively, are net of lower of cost or market reserves and obsolescence reserves of $10.6 million and $10.8 million, respectively.

Certain contracts within the Harsco Rail Segment, which meet specific criteria established in U.S. GAAP, are accounted for as long-term contracts. Inventories related to these contracts are considered Contracts-in-process and represent a separate component of Inventories. At December 31, 2016 and 2015, Contracts-in-process of $54.0 million and $55.8 million, respectively, were included in Inventories. Contracts-in-process at December 31, 2016 were net of estimated forward loss-provisions related to these contacts of $36.2 million. No estimated forward loss provision was made at December 31, 2015.

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 income of $1.2 million in 2016, pre-tax expense of $0.1 million in 2015 and pre-tax expense of $1.4 million in 2014.

36


The Company has not materially changed the methodology for calculating inventory reserves for the years presented. See Note 4, Accounts Receivable and Inventories, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information.
Revenue Recognition - Long-term Contracts
Certain contracts within the Harsco Rail Segment, which meet specific criteria established in U.S. GAAP, are accounted for as long-term contracts, under the percentage-of-completion (units-of-delivery) method of accounting.

Critical Estimate—Revenue Recognition - Long-term Contracts
Accounting for contracts using the percentage-of-completion method requires significant 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. Accordingly, estimates are subject to change as experience is gained, and as more information is obtained, even though the scope of the work under the contract may not have changed. 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 2016, as a result of increased vendor costs, ongoing discussions with SBB, and increased estimates for commissioning, certification and testing costs, as well as expected settlements with SBB, the Company concluded it will have a loss on the contracts with SBB. The Company recognized an estimated forward loss provision related to the SBB contracts of
$45.1 million for the year ended December 31, 2016 in Costs of products sold on the Consolidated Statements of Operations. There was no estimated forward loss provision at December 31, 2015 or 2014. The estimated forward loss provision represents the Company's best estimate based on currently available information. It is possible that the Company's overall estimate of costs to complete these contracts may change which would result in an adjustment to the estimated forward loss provision at such time, but the Company is unable to estimate any further possible loss or range of loss at December 31, 2016.

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, 2016 and 2015, the Company recorded liabilities of $37.1 million and $41.8 million, respectively, related to both asserted and unasserted insurance claims. At December 31, 2016 and 2015,
$3.5 million and $3.4 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 2016, 2015 and 2014, the Company recorded a retrospective insurance reserve adjustment that decreased pre-tax insurance expense from continuing operations for self-insured programs by $5.4 million,
$8.5 million and $7.0 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 or assumptions described above. See Note 1, Summary of Significant Accounting Policies, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information.








37


Income Taxes
The Company's income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions reflect management's best estimate of taxes to be paid. The Company is subject to various international, federal, state and local income taxes in jurisdictions where the Company operates. In determining income tax expense, the Company makes its best estimate of the annual effective income tax rate at the end of each quarter and applies that rate to year-to-date income (loss) before income taxes to arrive at the year-to-date income tax provision (exclusive of loss jurisdictions for which no tax benefit is realizable with any discrete tax items recorded separately). At December 31, 2016, 2015 and 2014, the Company's annual effective income tax rate on income from continuing operations was (8.4)%, 79.5% and 214.8%, respectively.

Critical Estimate—Income Taxes
Annual effective income tax rates are estimated by giving recognition to currently enacted tax rates, tax holidays, tax credits, capital losses, and tax deductions as well as certain exempt income and non-deductible expenses for all jurisdictions where the Company operates. Quarterly income tax provisions incorporate any change in the year-to-date provision from the previous quarterly periods.
The Company records deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determinations, the Company considers all available evidence, including future reversals of existing deferred tax liabilities, projected future taxable income, feasible and prudent tax planning strategies and recent financial operating results. In the event the Company was to determine that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be made that would reduce the provision for income taxes.
Valuation allowances of $146.1 million and $110.7 million at December 31, 2016 and 2015, respectively, related principally to deferred tax assets for U.K. pension liabilities, net operating loss carryforwards, capital losses, currency translation and foreign investment tax credits that are uncertain as to realizability. In 2016, the Company recorded a valuation allowance of
$16.1 million related to loss on sale of the Company's equity interest in Brand, $13.5 million related to estimated forward loss provisions related to the SBB contracts, and current year pension adjustments of $19.2 million recorded through Accumulated other comprehensive loss. This was partially offset by the reduction from the effects of foreign currency translation adjustments and the decrease related to U.K. and France tax rate changes. In 2015, the Company recorded a net decrease in the valuation allowance of $16.1 million related to current year pension adjustments recorded through Accumulated other comprehensive loss, the current year decrease from the currency translation in the amount of $11.5 million, and
$6.3 million decrease related to a U.K. tax rate change. This was offset by a net increase of $13.2 million related to losses in certain jurisdictions where the Company determined that it is more likely than not that these assets will not be realized.
A 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, including resolutions of any related appeals or litigation processes, based on its technical merits. The unrecognized tax benefits at December 31, 2016 and 2015 were $4.6 million and $5.1 million, respectively, excluding accrued interest and penalties. The unrecognized tax benefit may decrease as a result of the lapse of statute of limitations or as a result of final settlement and resolution of outstanding tax matters in various state and international jurisdictions.
The Company has not provided U.S. income taxes on certain non-U.S. subsidiaries' undistributed earnings, as such amounts are permanently reinvested outside the U.S. The Company evaluates future financial projections for its most significant subsidiaries, the need to reinvest earnings locally and the overall cash requirements of the Company. Based upon this evaluation, the Company determined that certain undistributed earnings from non-U.S. subsidiaries are indefinitely reinvested. The Company believes that it can generate sufficient cash flows to avoid the one-time tax costs associated with repatriation of undistributed earnings to the U.S. from prior periods. At December 31, 2016 and 2015, such earnings were approximately $528 million and $547 million, respectively. It is not practical to determine the deferred income tax liability on these earnings if, in the future, they are remitted to the U.S. because the income tax liability to be incurred, if any, is dependent on circumstances existing when remittance occurs.
The Company has not materially changed the methodology for calculating income tax expense, deferred tax assets and liabilities and reserves for uncertain tax positions for the years presented or for quarterly periods. See Note 11, Income Taxes, in Part II, Item 8, "Financial Statements and Supplementary Data," for additional information.







38


Research and Development

Internal funding for research and development was as follows:
 
 
Research and Development Expenses
(In millions)
 
2016
 
2015
 
2014
Harsco Metals & Minerals
 
$
0.9

 
$
0.9

 
$
1.4

Harsco Industrial
 
1.5

 
1.7

 
1.6

Harsco Rail
 
1.9

 
1.9

 
2.5

Total Research and Development
 
$
4.3

 
$
4.5

 
$
5.5

The amounts shown exclude technology development and engineering costs classified in cost of services sold; cost of products sold; or selling, general and administrative expenses.

Recently Adopted and Recently Issued Accounting Standards

Information on recently adopted and recently issued accounting standards is included in Note 2, Recently Adopted and Recently Issued Accounting Standards, in Part II, Item 8, "Financial Statements and Supplementary Data."


Dividend Action

The Board normally reviews the dividend policy and the dividend rate on a quarterly basis.

The Company paid one cash dividend of $0.05125 per share in 2016. This dividend was paid on February 16, 2016.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk.
See Part I, Item 1A, "Risk Factors," for quantitative and qualitative disclosures about market risk.

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Item 8.    Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements and Supplementary Data


40


Management's Report on Internal Control Over Financial Reporting
Management of Harsco Corporation, together with its consolidated subsidiaries (the "Company"), is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f) or 15d-15(e). The Company's internal control over financial reporting is a process designed under the supervision of the Company's principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.
The Company's internal control over financial reporting includes policies and procedures that:
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and the directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management has assessed the effectiveness of its internal control over financial reporting at December 31, 2016 based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company's internal control over financial reporting was effective at December 31, 2016.
The effectiveness of the Company's internal control over financial reporting at December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing in this Annual Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting at December 31, 2016.
/s/ F. NICHOLAS GRASBERGER, III
 
/s/ PETER F. MINAN
F. Nicholas Grasberger, III
President and Chief Executive Officer
 
Peter F. Minan
Senior Vice President and Chief Financial Officer
February 24, 2017
 
February 24, 2017

41


Report of Independent Registered Public Accounting Firm

To the Stockholders of Harsco Corporation:

In our opinion, the consolidated financial statements, listed in the accompanying index, present fairly, in all material respects, the financial position of Harsco Corporation at December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016