NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include all accounts of Harsco Corporation (the "Company"), all entities in which the Company has a controlling voting interest and variable interest entities required to be consolidated in accordance with U.S. GAAP. Intercompany accounts and transactions have been eliminated among consolidated entities. The Company's management has evaluated all activity of the Company and concluded that subsequent events are properly reflected in the Company's consolidated financial statements and the accompanying notes as required by U.S. GAAP.
Liquidity
The Company's cash flow forecasts, combined with existing cash and cash equivalents and borrowings available under the Senior Secured Credit Facilities, indicate sufficient liquidity to fund the Company's operations for at least the next twelve months. As such, the Company's consolidated financial statements have been prepared on the basis that it will continue as a going concern for a period extending beyond twelve months from the date the consolidated financial statements are issued. This assessment includes the expected ability to meet required financial covenants and the continued ability to draw down on the Senior Secured Credit Facilities (see Note 8).
Reclassifications
Certain reclassifications have been made to prior year amounts to conform with current year classifications.
During the year ended December 31, 2022, the Company recognized $2.6 million in revenues as an out-of-period adjustment in the CE Segment. Such adjustment was not considered material to the Company's consolidated financial statements for the year ended December 31, 2022 or any of the financial statements for the previously filed annual periods.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term investments that are highly liquid in nature and have an original maturity of three months or less.
Restricted Cash
The Company had restricted cash of $3.8 million and $4.2 million at December 31, 2022 and 2021, respectively, and the restrictions are primarily related to collateral provided for certain guarantees of the Company’s performance.
Accounts Receivable
Accounts receivable are stated at net realizable value, which represents the face value of the receivable, less an allowance for expected credit losses. The allowance for expected credit losses is maintained for expected lifetime losses resulting from the inability or unwillingness of customers to make required payments.
The Company’s expected credit loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. When required, the Company adjusts the loss-rate methodology to account for current conditions and reasonable and supportable expectations of future economic and market conditions. The Company generally assesses future economic conditions for a period which corresponds with the contractual life of its accounts receivable. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default.
Accounts Receivable Securitization Facility
Under the AR Facility, the Company and its subsidiaries continuously sell their trade receivables as they are originated to the Company’s SPE. The Company controls and, therefore, consolidates the SPE in its consolidated financial statements. The SPE transfers ownership and control of qualifying receivables to the banking counterparty to the AR Facility up to the maximum purchase commitment. The Company and its related subsidiaries have no continuing involvement in the transferred accounts receivable, other than collection and administrative responsibilities, and, once sold, the receivables are no longer available to satisfy creditors of the Company or the related subsidiaries. The Company accounts for receivables sold to the banking counterparty as a sale of financial assets and derecognizes the trade receivables from the Company's Consolidated Balance Sheets.
Fees incurred for the AR Facility are deferred and are expensed over the term of the agreement. Unamortized costs are included in Other assets in the Company's Consolidated Balance Sheets and the related recognized expense is recorded in Facility fees and debt-related income (expense) on the Consolidated Statements of Operations.
Inventories
Inventories are accounted for using the average cost, first-in, first-out ("FIFO") or last-in, first-out ("LIFO") method. Inventory accounted for under the average cost and FIFO methods are stated at the lower of cost or net realizable value. Inventory accounted for under the LIFO method is stated at the lower of cost or market. See Note 5, Inventories for additional information.
Depreciation
Property, plant and equipment ("PP&E") is recorded at cost and depreciated over the estimated useful lives of the assets using, principally, the straight-line method. When PP&E is retired from service, the cost of the retirement is charged to the allowance for depreciation to the extent of the accumulated depreciation and the balance is charged to income. Long-lived assets to be disposed of by sale are not depreciated while they are classified as held-for-sale.
Leases
The Company leases certain property and equipment under noncancelable lease agreements. The Company determines if a contract or arrangement contains a lease at inception. All leases are evaluated and classified as either an operating or finance lease. A lease is classified as a finance lease if any of the following criteria are met: (i) ownership of the underlying asset transfers to the Company by the end of the lease term; (ii) the lease contains an option to purchase the underlying asset that the Company is reasonably expected to exercise; (iii) the lease term is for a major part of the remaining economic life of the underlying asset; (iv) the present value of the sum of lease payments and any residual value guaranteed by the Company equals or exceeds substantially all of the fair value of the underlying asset; or (v) the underlying asset is of a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. A lease that does not meet any of the finance lease classification criteria is classified as an operating lease.
Operating leases are included as Right-of-use assets, net, Current portion of operating lease liabilities, and Operating lease liabilities on the Consolidated Balance Sheets. ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. As most of the Company’s leases do not provide an implicit rate for use in determining the present value of future payments, the Company uses an incremental borrowing rate. This incremental borrowing rate reflects the creditworthiness of the Company for a lending period commensurate to the term of the lease, the standard lending practices related to such loans in the respective jurisdiction where the underlying assets are located and the local currency in which the lease is denominated. ROU assets also include any lease payments made prior to or at the lease commencement date and initial direct costs incurred, and may be reduced by any lease incentives received by the lessor. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, including rent abatement periods and rent holidays. Certain of the Company's leases are subject to annual changes in an index or are subject to adjustments for which the amounts are not readily determinable at lease inception. While lease liabilities are not remeasured as a result of changes to these costs, changes are treated as variable lease payments and recognized in the period in which the obligation for those payments were incurred.
Finance leases are included as PP&E, net; Current maturities of long-term debt and Long-term debt on the Consolidated Balance Sheets. Finance lease costs are split between depreciation expense related to the asset and interest expense on the lease liability, using the effective rate charged by the lessor.
The Company has lease agreements with both lease and non-lease components, which the Company has elected to account for as a single lease component. Additionally, the Company has elected not to record short-term leases, those with expected terms of twelve months or less, on the Consolidated Balance Sheets. See Note 8, Debt and Credit Agreements and Note 9, Leases for additional information on leases.
Business Combinations and Goodwill
The Company accounts for business combinations using the acquisition method of accounting, which requires that. once control is obtained, all assets acquired and liabilities assumed, including amounts attributable to noncontrolling interests, be recorded at their respective fair values at the date of acquisition. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. The determination of fair value of assets acquired and liabilities assumed requires numerous estimates and assumptions with respect to the timing and amounts of cash flow projections, revenue growth rates, customer attrition rates, discount rates and useful lives. Such estimates are based upon assumptions believed to be reasonable, and, when appropriate, include assistance from independent third-party valuation firms. During the measurement period, which is up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with corresponding offsets to 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.
In applying the goodwill impairment test, the Company has the option to perform a qualitative test or a quantitative test. Under the qualitative test, the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, the Company would perform a quantitative test.
The quantitative approach of testing for goodwill impairment involves comparing the current fair value of each reporting unit to the carrying value, including goodwill. The Company uses a discounted cash flow model (“DCF model”) to estimate the current fair value of reporting units, as the Company's 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 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 Company's determination of the current fair value, then an impairment charge would be recognized as the difference between the fair value and the carrying value. See Note 7, Goodwill and Other Intangible Assets for additional information. Long-Lived Assets Impairments (Other than Goodwill)
Long-lived assets or asset groups are reviewed for impairment when events and circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Long-lived assets or asset groups are reviewed for impairment when events and circumstances indicate the book value of an asset or asset group may be impaired. The Company's policy is to determine if an impairment loss exists when it is determined that the carrying amount of the asset or asset group exceeds the sum of the expected undiscounted future cash flows resulting from use of the asset or asset group and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value, normally as determined in either open market transactions or through the use of a DCF model. Long-lived assets or asset groups to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. See Note 7, Goodwill and Other Intangible Assets and Note 18, Other (Income) Expenses, Net for additional information.
Deferred Financing Costs
The Company has incurred debt issuance costs, which are recognized as a reduction of Long-term debt on the Consolidated Balance Sheets. Debt issuance costs are amortized and recognized over the contractual term of the related indebtedness or shorter period, if appropriate, based upon contractual terms in Interest expense on the Consolidated Statements of Operations. Whenever indebtedness is modified from its original terms, an evaluation is made whether an accounting modification or extinguishment has occurred in order to determine the accounting treatment for debt issuance costs related to the debt modification. If the evaluation results in a gain (loss) on extinguishment of debt, the amount would be included in Facility fees and debt-related income (expense) on the Consolidated Statements of Operations.
Revenue Recognition
The Company recognizes revenues to depict the transfer of promised services and products to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services or products. Revenues from continuing operations include service revenues from the Company's HE and CE Segments and product revenues from the Company's HE Segment. Revenue from the Rail business is included in Income (loss) from discontinued businesses.
Harsco Environmental - This Segment provides on-site services, under long-term contracts, for material logistics; product quality improvement and resource recovery from iron, steel and metals manufacturing; manufactures and sells industrial abrasives and roofing granule products; and manufactures aluminum dross and scrap processing systems.
•Service revenues are recognized over time as the customer simultaneously receives the benefits provided by the Company's performance. The Company utilizes an output method based on work performed (liquid steel tons processed, weight of material handled, etc.) to measure progress, which is deemed to best depict the transfer of value to the customer and revenue earned by the Company. Transaction prices are based on contractual terms, which may include both fixed and variable portions. The fixed portion is recognized as earned (normally monthly) over the contractual period. The variable portion is recognized as services are performed and differs based on the volume of services performed. Given the long-term nature of these arrangements, most contracts permit periodic adjustment of either the variable or both the fixed and variable portions based on the changes in macroeconomic indicators, including changes in commodity prices. Transaction prices, when the standalone selling price is not directly observable, are allocated to performance obligations utilizing an expected cost plus a margin approach. Amounts are typically billed and payable on a monthly basis as services are performed.
•Product revenues are recognized at the point when control transfers to the customer. Control generally transfers at the point of shipment for domestic orders and in accordance with the international commercial terms included in contracts for export sales. Transaction prices are based on contractual terms, which are generally fixed and when the standalone selling price is not directly observable, allocated to performance obligations utilizing an adjusted market assessment approach. Amounts are billed and payable upon completion of each transaction.
•Product revenues in the aluminum dross and scrap process systems business are generally recognized over time as control is transferred to the customer. Control transfers over time because aluminum dross and scrap systems are customized, have no alternate use and the Company has an enforceable right to payment. The Company utilizes an input method based on costs incurred ("cost-to-cost method") to measure progress, which is deemed to best depict the transfer of value to the customer and revenue earned by the Company. Transaction prices are based on contractual terms, which are generally fixed, and when the standalone selling price is not directly observable, allocated to performance obligations utilizing an adjusted market assessment approach. The Company may receive periodic payments associated with key milestones with any remaining consideration billed and payable upon completion of the transaction.
Harsco Clean Earth - This Segment provides specialty waste processing and beneficial reuse solutions for hazardous wastes, and soil and dredged materials.
•Revenues are recognized over time as the customer simultaneously receives the benefits provided by the Company's performance. The Company utilizes an output method based on the amount of materials received for processing to measure progress, which is deemed to best depict the transfer of value to the customer and revenue earned by the Company. Transaction prices are based on contractual terms, which are principally variable based on volume and recognized as services are performed. Transaction prices, when the standalone selling price is not directly observable, are allocated to performance obligations utilizing an expected cost plus a margin approach. Amounts are typically billed and payable on a monthly basis.
Harsco Rail - This business sells railway track maintenance equipment, after-market parts, Protran/safety equipment and provides railway track maintenance services.
•For standard railway track maintenance equipment sales, revenue is recognized at the point when control transfers to the customer. Control generally transfers at the point of shipment for domestic orders and in accordance with the international commercial terms included in contracts for export sales. In certain railway track maintenance equipment sales, revenue is recognized over time because such equipment is highly customized, has no alternate use and the Company has an enforceable right to payment. Rail uses the cost-to-cost method to measure progress because it is the measure that best depicts the transfer of control to the customer, which occurs as costs are incurred under the contracts. Under the cost-to-cost method, the extent of progress towards completion is based on the ratio of costs incurred to total estimated costs at completion, which includes both actual costs already incurred and the estimated costs to complete. Accounting for contracts with customers using the cost-to-cost method requires significant judgment relative to assessing risks; estimating contract revenues (including estimates of variable consideration, if applicable, as well as estimating any liquidating damages or penalties related to performance); estimating contract costs (including estimating engineering costs to design the machine and the material, labor and overhead manufacturing costs to build the machine); making assumptions for schedule and technical items; properly executing the engineering and design phases consistent with customer expectations; the availability and costs of labor and material resources; productivity; and evaluating whether a significant financing component is present. Due to the number of years it may take to complete certain contracts and the scope and nature of the work required to be performed on those contracts, estimating total revenues and costs at completion is inherently complicated and subject to many variables. Transaction prices are based on contracted terms, which are generally fixed, and when the standalone selling price is not directly observable, allocated to performance obligations utilizing either the adjusted market assessment or expected cost plus a margin approach. For certain transactions, the Company receives periodic payments associated with key milestones. In limited instances, those payments are intended to provide financing, with such transactions being treated as including a significant financing component. Any remaining consideration is billed and payable upon completion of the transaction. Railway track maintenance equipment revenue of approximately $$50 million was recognized using the cost-to-cost method in 2022, the net profit or loss of which is included in Income (loss) from discontinued businesses in the Consolidated Statements of Operations.
•For after-market parts sales and Protran/safety equipment, revenue is recognized at the point when control transfers to the customer. Control generally transfers to the customer at the point of shipment for domestic orders and in accordance with the international commercial terms included in contracts for export sales. Transaction prices are based on contracted terms, which are generally fixed, and when the standalone selling price is not directly observable, allocated to performance obligations utilizing an adjusted market assessment approach. Amounts are billed and payable upon completion of each contract.
•For railway track maintenance services, revenue is recognized over time as the customer simultaneously receives the benefits provided by the Company's performance. The Company utilizes an appropriate output method based on work performed (feet, miles, shifts worked, etc.) to measure progress, which is deemed to best depict the transfer of value to the customer and revenue earned by the Company. Transaction prices are based on contracted terms, which are generally variable. The variable portion is recognized as services are performed and differs based on the value of services. Given the long-term nature of these arrangements, most contracts permit periodic adjustment based on the changes in macroeconomic indicators. Transaction prices, when the standalone selling price is not directly observable, are allocated to performance obligations utilizing an expected cost plus a margin approach. Amounts are typically billed and payable on a monthly basis as services are performed.
The Company has elected to utilize the following practical expedients on an ongoing basis:
•The Company has not adjusted the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers the promised good or services to the customer and when the customer pays for that good or service would be one year or less; and
•The Company has elected to exclude disclosures related to unsatisfied performance obligations where the related contract has a duration of one year or less; or where the consideration is entirely variable. Accordingly, the Company's disclosure related to unsatisfied performance obligations is limited to the fixed portion of fees related to metals services in HE.
Taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Additionally, in certain contracts, the Company facilitates shipping and handling activities after control has transferred to the customer. The Company has elected to record all shipping and handling activities as costs to fulfill a contract. In situations where the shipping and handling costs have not been incurred at the time revenue is recognized, the respective shipping and handling costs are accrued.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records deferred tax assets to the extent that the Company believes that these assets will more likely than not be realized. In making such determinations, the Company considers all available positive and negative evidence, including future reversals of existing deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial results. If the Company determines that it will not be able to realize deferred income tax assets in the future, a valuation allowance is recorded. If sufficient positive evidence arises in the future indicating that all or a portion of the deferred tax assets meet the more likely than not standard for realization, the valuation allowance would be reduced accordingly in the period that such a conclusion is reached.
The Company prepares and files tax returns based on interpretation of tax laws and regulations and records its provision for income taxes based on these interpretations. Uncertainties may exist in estimating the Company's tax provisions and in filing tax returns in the many jurisdictions in which the Company operates, and as a result these interpretations may give rise to an uncertain tax position. The tax benefit from an uncertain tax position is 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. Each subsequent period, the Company determines if existing or new uncertain tax positions meet a more likely than not recognition threshold and adjusts accordingly.
The Company recognizes interest and penalties related to unrecognized tax benefits within Income tax expense in the accompanying Consolidated Statements of Operations. Liabilities for uncertain tax positions are included in Other liabilities on the Consolidated Balance Sheets.
The significant assumptions and estimates described in the preceding paragraphs are important contributors to the effective tax rate each year.
Accrued Insurance and Loss Reserves
The Company retains a significant portion of the risk for certain U.S. workers' compensation, U.K. employers' liability, automobile, general and product liability losses. Insurance reserves have been recorded that reflect the undiscounted estimated liabilities including claims incurred but not reported. When a recognized liability is covered by third-party insurance, the Company records an insurance claim receivable to reflect the covered liability. Changes in the estimates of the reserves are included in net income (loss) in the period determined. During 2022, 2021 and 2020, the Company recorded insurance reserve adjustments that decreased pre-tax insurance expense from continuing operations for self-insured programs by $1.0 million, $0.2 million and $1.3 million, respectively. At December 31, 2022 and 2021, the Company has recorded liabilities of $32.4 million and $28.3 million, respectively, related to both asserted as well as unasserted insurance claims. Included in the balances at December 31, 2022 and 2021 were $4.0 million and $4.1 million, respectively, of recognized liabilities covered by insurance carriers. Amounts estimated to be paid within one year have been included in Other current liabilities, with the remainder included in Other liabilities, on the Consolidated Balance Sheets.
Foreign Currency Translation
The financial statements of the Company's subsidiaries outside the U.S., except for those subsidiaries located in highly inflationary economies and those entities for which the U.S. dollar is the currency of the primary economic environment in which the entity operates, are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates at the balance sheet date. Resulting translation adjustments are recorded in the cumulative translation adjustment account, a separate component of AOCI, on the Consolidated Balance Sheets. Income and expense items are translated at average monthly exchange rates. Gains and losses from foreign currency transactions are included in Operating income from continuing operations. For subsidiaries operating in highly inflationary economies, and those entities for which the U.S. dollar is the currency of the primary economic environment in which the entity operates, gains and losses on foreign currency transactions and balance sheet translation adjustments are included in Operating income from continuing operations.
Financial Instruments and Hedging
The Company has operations throughout the world that are exposed to fluctuations in related foreign currencies in the normal course of business. The Company seeks to reduce exposure to foreign currency fluctuations through the use of forward exchange contracts. The Company does not hold or issue financial instruments for trading purposes, and it is the Company's policy to prohibit the use of derivatives for speculative purposes. The Company has a Foreign Currency Risk Management Committee that meets periodically to monitor foreign currency risks.
The Company executes foreign currency exchange forward contracts to hedge transactions for firm purchase commitments, to hedge variable cash flows of forecasted transactions and for export sales denominated in foreign currencies. These contracts are generally for 90 days or less; however, where appropriate, longer-term contracts may be utilized. For those contracts that are designated as qualified cash flow hedges, gains or losses are recorded in AOCI on the Consolidated Balance Sheets.
The Company uses interest rate swaps in conjunction with certain debt issuances in order to secure a fixed interest rate. The interest rate swaps are recorded on the Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps’ interest spread and changes in the credit worthiness of the counter-parties recorded in AOCI.
Amounts recorded in AOCI on the Consolidated Balance Sheets are reclassified into income in the same period or periods during which the hedged forecasted transaction affects income. The cash flows from these contracts are classified consistent with the cash flows from the transaction being hedged (e.g., the cash flows related to contracts to hedge the purchase of fixed assets are included in cash flows from investing activities, etc.). The Company also enters into certain forward exchange contracts that are not designated as hedges. Gains and losses on these contracts are recognized in operations based on changes in fair market value. For fair value hedges of a firm commitment, the gain or loss on the derivative and the offsetting gain or loss on the hedged firm commitment are recognized currently in operations.
Earnings Per Share
Basic earnings per share are calculated using the weighted-average shares of common stock outstanding, while diluted earnings per share reflect the dilutive effects of stock-based compensation. Dilutive securities are not included in the computation of loss per share when the Company reports a net loss from continuing operations, as the impact would be anti-dilutive. All share and per share amounts are restated for any stock splits and stock dividends that occur prior to the issuance of the financial statements. See Note 13, Capital Stock, for additional information.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.
2. Recently Adopted and Recently Issued Accounting Standards
The following accounting standards were adopted in 2022:
On January 1, 2022, the Company adopted changes issued by the FASB which improved the transparency of government assistance received by entities. The adoption of these changes did not have a material impact on the Company's consolidated financial statements.
As of December 31, 2022, the Company adopted changes issued by the FASB which provided companies with optional guidance to ease the potential accounting burden associated with transitioning from reference rates that are expected to be discontinued, particularly the cessation of LIBOR. The adoption of these changes did not have a material impact on the Company's consolidated financial statements.
The following accounting standards have been issued and become effective for the Company at a future date:
In October 2021, the FASB issued changes clarifying that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with accounting standards governing revenue from contracts with customers. Prior guidance required acquired contract assets and contract liabilities to be measured at fair value on the acquisition date. The changes become effective January 1, 2023. The adoption of these changes does not have an immediate impact on the Company's consolidated financial statements, but will be applied prospectively to any future business combinations.
In September 2022, the FASB issued changes that require a buyer in a supplier finance program, also referred to as reverse factoring, payables finance, or structured payables arrangements, to disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude, by disclosing qualitative and quantitative information about the program. The changes become effective January 1, 2023, generally with retrospective application to each period in which a balance sheet is presented. Other than potential required expanded disclosures, the adoption of these changes will not have a material impact on the Company's consolidated financial statements.
3. Discontinued Operations
Harsco Rail Segment
The Company is in the process of selling the Rail business with a sale expected to occur in 2023. The intention to sell the business was first announced in the fourth quarter of 2021. The sales process was delayed in 2022 due to certain macroeconomic conditions, including rising interest rates. The former Harsco Rail Segment has historically been a separate reportable segment with primary operations in the United States, Europe and Asia Pacific.
The former Harsco Rail Segment's balance sheet positions as of December 31, 2022 and 2021 are presented as Assets held-for-sale and Liabilities of assets held-for-sale in the Consolidated Balance Sheets and are summarized as follows:
| | | | | | | | | | | | | | |
| (in thousands) | | December 31
2022 | | December 31
2021 |
| Trade accounts receivable, net | | $ | 41,049 | | | $ | 33,689 | |
| Other receivables | | 4,037 | | | 4,740 | |
| Inventories | | 105,256 | | | 103,560 | |
| Current portion of contract assets | | 84,848 | | | 94,597 | |
| Other current assets | | 30,950 | | | 25,442 | |
| Property, plant and equipment, net | | 41,004 | | | 39,524 | |
| Right-of-use assets, net | | 5,635 | | | 3,108 | |
| Goodwill | | 13,026 | | | 13,026 | |
| Intangible assets, net | | 2,746 | | | 3,081 | |
| Deferred income tax assets | | 6,887 | | | 6,064 | |
| Other assets | | 807 | | | 6,432 | |
| Total Rail assets included in Assets held-for-sale | | $ | 336,245 | | | $ | 333,263 | |
| | | | |
| Accounts payable | | $ | 49,083 | | | $ | 46,076 | |
| Accrued compensation | | 1,211 | | | 2,171 | |
| Current portion of operating lease liabilities | | 2,635 | | | 1,619 | |
| Current portion of advances on contracts | | 45,037 | | | 62,401 | |
| Other current liabilities | | 61,039 | | | 49,732 | |
| | | | |
| Operating lease liabilities | | 3,121 | | | 1,775 | |
| Deferred tax liabilities | | 5,480 | | | 5,736 | |
| Other liabilities | | 861 | | | 981 | |
| Total Rail liabilities included in Liabilities of assets held-for-sale | | $ | 168,467 | | | $ | 170,491 | |
The results of the former Harsco Rail Segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the years ended December 31, 2022, 2021, and 2020. Certain key selected financial information included in Income (loss) from discontinued operations, net of tax, for the former Harsco Rail Segment is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31 |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Amounts directly attributable to the former Harsco Rail Segment: | | |
| Service revenues | | $ | 29,331 | | | $ | 32,425 | | | $ | 31,642 | |
Product revenues (a) | | 215,585 | | | 266,221 | | | 298,189 | |
| Cost of services sold | | 21,034 | | | 17,272 | | | 23,480 | |
| Cost of products sold | | 225,769 | | | 251,897 | | | 235,040 | |
| Income (loss) from discontinued businesses | | (40,898) | | | (19,967) | | | 23,096 | |
| Additional amounts allocated to the former Harsco Rail Segment: | | |
Selling, general and administrative expenses (b) | | $ | 4,039 | | | $ | 178 | | | $ | — | |
| | | | | | |
(a) The decrease in product revenues for 2022, as compared to 2021 and 2020, is due in part to liquidated damages and penalties on certain long-term contracts, as discussed below.
(b) The Company includes costs to sell the Rail business in the caption Income (loss) from discontinued businesses in the Consolidated Statements of Operations.
The Company has retained corporate overhead expenses previously allocated to the former Harsco Rail Segment of $4.2 million for each of the years ended December 31, 2022, 2021, and 2020 as part of Selling, general and administrative expenses on the Consolidated Statements of Operations.
The Company's former Harsco Rail segment is currently manufacturing highly-engineered equipment under large long-term fixed-price contracts with Network Rail, Deutsche Bahn and SBB. As previously disclosed, in the fourth quarter of 2021 the Company recognized an estimated forward loss provision of $33.4 million related to these contracts. In 2022, the Company encountered continued supply chain related delays and additional costs in building the machines.
For the Network Rail contracts, the Company encountered supply chain delays in the build of the initial machine, and there were further changes to the production schedule based on the manufacturing experience gained from assembling the first unit during the first quarter of 2022, which had a cascading effect on the delivery schedule of remaining machines. During 2022, the Company recorded additional forward loss provisions of $29.1 million, principally for additional estimated contractual liquidated damages as a reduction of revenue, of which $24.2 million was recorded in the first quarter of 2022, $0.3 million was recorded in the second quarter of 2022 and $4.6 million was recorded in the fourth quarter of 2022. The Company continues to negotiate with Network Rail regarding a reduction to these liquidated damages, which could result in additional favorable or unfavorable adjustments in future periods.
For the Deutsche Bahn contract, in March 2022 a European-based supplier of critical components to the project, indicated it would be significantly late on the delivery of these components to the project, which has the impact of delaying the overall delivery schedule for the project. Additionally, this supplier filed for bankruptcy during the second quarter of 2022, although it continues to operate. Delays impacting the project, along with rising costs, resulted in an additional estimated forward loss provision of $7.5 million in the first quarter of 2022 and $4.0 million recorded in the fourth quarter of 2022 for a total loss provision of $11.5 million in 2022, of which $3.1 million is due to the estimated contractual penalties that would be triggered by the delay and thus recorded as a reduction of revenue. Should this supplier cease operations, the Company may incur further losses if there are additional costs to change suppliers or if there is an inability to recover the value of prepayments made to the supplier, as well as incur additional penalties and damages under the contract with Deutsche Bahn in the event of further production delays.
For the second SBB contract, the Company recorded an additional $3.5 million forward estimated loss provision in the first quarter of 2022 due to additional supply chain delays and cost overruns.
The estimated forward loss provisions represent the Company's best estimate based on currently available information. It is possible that the Company's overall estimate of liquidated damages, penalties and costs to complete these contracts may change, which could result in an additional estimated forward loss provision at such time.
The first contract with SBB is complete, and the second contract is 83% complete as of December 31, 2022. The contracts with Network Rail and Deutsche Bahn are 50% and 32% complete, respectively, as of December 31, 2022.
The following is selected financial information included on the Consolidated Statements of Cash Flows attributable to the Rail Segment:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31 |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Non-cash operating items | | | | | | |
| Depreciation and amortization | | $ | — | | | $ | 4,329 | | | $ | 5,450 | |
| Cash flows from investing activities | | | | | | |
| Purchases of property, plant and equipment | | 1,618 | | | 1,406 | | | 7,962 | |
4. Accounts Receivable and Note Receivable
Accounts receivable consist of the following:
| | | | | | | | | | | | | | |
| | |
| (In thousands) | | December 31
2022 | | December 31 2021 (a) |
| Trade accounts receivable | | $ | 272,775 | | | $ | 389,535 | |
Less: Allowance for expected credit losses (b) | | (8,347) | | | (11,654) | |
| Trade accounts receivable, net | | $ | 264,428 | | | $ | 377,881 | |
Other receivables (c) | | $ | 25,379 | | | $ | 33,059 | |
(a)The December 31, 2021 amounts for trade accounts receivable and allowance for expected credit losses have been revised from the presentation in the Company's 2021 Form 10-K. This revision did not impact trade accounts receivable, net.
(b)The decrease in the allowance for expected credit losses is principally due to the write-off of previously reserved trade accounts receivable balances.
(c)Other receivables include employee receivables, insurance receivable, tax claims and refunds and other miscellaneous receivables not included in Trade accounts receivable, net.
The provision for expected credit losses related to trade accounts receivable was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31 |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Provision for expected credit losses related to trade accounts receivable | | $ | 403 | | | $ | 589 | | | $ | 1,961 | |
At December 31, 2022, $11.1 million of the Company's trade accounts receivable were past due by twelve months or more, with $3.9 million of this amount reserved. There has been a recent increase in aged receivables for certain international customers within the Harsco Environmental Segment. Collection of the remaining balance is still ultimately expected.
Accounts Receivable Securitization Facility
In June 2022, the Company and its SPE entered into an AR Facility with PNC Bank, National Association ("PNC") to accelerate cash flows from trade accounts receivable. The AR Facility has a three-year term. The maximum purchase commitment by PNC is $150.0 million.
The total outstanding balance of trade receivables that have been sold and derecognized by the SPE is $145.0 million as of December 31, 2022. The SPE owned $69.7 million of trade receivables as of December 31, 2022, which are included in the caption Trade accounts receivable, net, on the Consolidated Balance Sheets.
In 2022, the Company capitalized fees of $1.8 million related to the AR Facility. See Note 8, Debt and Credit Agreements, for facility expenses incurred.
The following table reflects proceeds the Company received from the AR Facility, which are included in cash from operating activities in the Consolidated Statements of Cash Flows:
| | | | | | | | |
| | Year Ended December 31 |
| (In millions) | | 2022 |
| Upon execution in June 2022 | | $ | 120.0 | |
| Additional proceeds | | 25.0 | |
| Total received | | $ | 145.0 | |
Factoring Arrangements
The Company maintains factoring arrangements with a financial institution to sell certain accounts receivable that are also accounted for as a sale of financial assets. The following table reflects balances for net amounts sold and program capacities for the arrangements:
| | | | | | | | | | | | | | |
| (In millions) | | December 31
2022 | | December 31
2021 |
| Net amounts sold under factoring arrangements | | $ | 17.3 | | | $ | 12.9 | |
| Program capacities | | 31.4 | | 16.5 |
Note Receivable
In January 2020, the Company sold IKG for $85.0 million including cash and a note receivable, subject to post-closing adjustments. The note receivable from the buyer has a face value of $40.0 million, bearing interest at 2.50%, that is paid in kind and matures on January 31, 2027. Any unpaid principal, along with any accrued but unpaid interest is payable at maturity. Prepayment is required in case of a change in control or as a percentage of excess cash flow, as defined in the note receivable agreement. Because there are no scheduled payments under the terms of the note receivable, the balance is not classified as current and is included in the caption Other assets on the Consolidated Balance Sheets. The initial fair value of the note receivable was $34.3 million which was calculated using an average of various discounted cash flow scenarios based on anticipated timing of repayments (Fair Value Level 3 asset) and was a non-cash transaction. The note receivable is subsequently measured at amortized cost. Key inputs into the valuation model include: projected timing and amount of cash flows, pro forma debt rating, option-adjusted spread and U.S. Treasury spot rate. The Company received payments of $8.6 million and $6.4 million during 2022 and 2021, respectively, related to excess cash flow.
The following table reflects the note receivable at amortized cost and at fair value:
| | | | | | | | | | | | | | |
| (In millions) | | December 31
2022 | | December 31
2021 |
| Note receivable, at amortized cost | | $ | 23.9 | | | $ | 31.0 | |
| Note receivable, at fair value | | $ | 23.8 | | | $ | 32.3 | |
5. Inventories
Inventories consist of the following: | | | | | | | | | | | | | | |
| | |
| (In thousands) | | December 31
2022 | | December 31
2021 |
| Finished goods | | $ | 11,809 | | | $ | 8,323 | |
| Work-in-process | | 4,241 | | | 5,393 | |
| Raw materials and purchased parts | | 25,735 | | | 21,188 | |
| Stores and supplies | | 39,590 | | | 35,589 | |
| Total inventories | | $ | 81,375 | | | $ | 70,493 | |
| Valued at lower of cost or market: | | | | |
| LIFO basis | | $ | 15,473 | | | $ | 14,133 | |
| FIFO basis | | 8,826 | | | 7,567 | |
| Average cost basis | | 57,076 | | | 48,793 | |
| Total inventories | | $ | 81,375 | | | $ | 70,493 | |
Inventories valued on the LIFO basis at both December 31, 2022 and December 31, 2021 were approximately $14 million less than the amounts of such inventories valued at current costs. There was no significant impact on net income as a result of reducing certain inventory quantities valued on a LIFO basis during 2022, 2021 or 2020.
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Estimated
Useful Lives | | December 31
2022 | | December 31
2021 |
| Land | | — | | $ | 72,020 | | | $ | 73,067 | |
| Land improvements | | 5-20 years | | 16,750 | | | 16,970 | |
Buildings and improvements (a) | | 10-30 years | | 217,926 | | | 221,236 | |
Machinery and equipment (b) | | 3-20 years | | 1,513,238 | | | 1,507,214 | |
| Uncompleted construction | | — | | 84,472 | | | 63,816 | |
| Gross property, plant and equipment | | | | 1,904,406 | | | 1,882,303 | |
| Less: Accumulated depreciation | | | | (1,247,531) | | | (1,228,390) | |
| Property, plant and equipment, net | | | | $ | 656,875 | | | $ | 653,913 | |
(a) Buildings and improvements include leasehold improvements that are amortized over the shorter of their useful lives or the initial term of the lease.(b) Includes information technology hardware and software.
In the third quarter of 2020, a customer of HE in China ceased steel making operations at its steel mill site in order to relocate the operations to a new site, as a result of a government mandate to improve environmental conditions of the area. The Company continues to provide services to the same customer at the new site. The net book value of HE's idled equipment associated with the previous location is approximately $18 million. The customer has entered into an agreement with the government where it will receive compensation for the losses the customer has incurred as a result of the forced shutdown. The Company has continued discussions with the customer regarding compensation, which are expected to be protracted. While the customer has initially indicated that they will not provide compensation, the Company and the customer continue to discuss. In addition, there may be other avenues of pursuing recovery, including seeking relief directly from the local government. At this point, considering the ongoing discussions with the customer, and other avenues, the Company believes it will recover the book value of the equipment and thus does not believe it has an asset impairment as of December 31, 2022. However, the Company will continue to evaluate changes in facts and circumstances and record any impairment charge when and if indicated.
7. Goodwill and Other Intangible Assets
Goodwill by Segment
The following table reflects the changes in carrying amounts of goodwill by segment for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Harsco Environmental
Segment | | Harsco
Clean Earth
Segment | | Consolidated
Totals |
| Balance at December 31, 2020 | | $ | 406,401 | | | $ | 482,647 | | | $ | 889,048 | |
| Changes to goodwill | | — | | | 1,232 | | | 1,232 | |
| | | | | | |
| Foreign currency translation | | (7,171) | | | — | | | (7,171) | |
| Balance at December 31, 2021 | | 399,230 | | | 483,879 | | | 883,109 | |
| | | | | | |
| Goodwill impairment | | — | | | (104,580) | | | (104,580) | |
| Foreign currency translation | | (19,276) | | | — | | | (19,276) | |
| Balance at December 31, 2022 | | $ | 379,954 | | | $ | 379,299 | | | $ | 759,253 | |
The Company's methodology for determining reporting unit fair value is described in Note 1, Summary of Significant Accounting Policies. The Company tests for goodwill impairment annually as of October 1, or more frequently if indicators of impairment exist, or a decision is made to dispose of a business.
As of June 30, 2022, the Company determined that an interim test of goodwill was required. The triggering event was principally due to lower earnings expectations due to the impacts of inflation. The Company used a discounted cash flow model (“DCF model”) to estimate the current fair value of the Clean Earth reporting unit (Level 3), which is defined as the Clean Earth Segment. A number of significant assumptions and estimates are involved in the preparation of DCF models including future revenues, operating margin growth, the weighted-average cost of capital (“WACC”), tax rates, capital spending, pension funding, the impact of business initiatives and working capital projections. The DCF model is based on approved forecasts for the early years and historical relationships and projections for later years. The WACC rate is 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. As a result of this testing, the Company recorded a goodwill impairment charge of $104.6 million for the Clean Earth reporting unit in the second quarter of 2022, which is included in Goodwill and other intangible asset impairment charges on the Consolidated Statement of Operations for the year-ended December 31, 2022. This charge had no impact on the Company's cash flows or compliance with debt covenants.
The performance of the Company's 2022 annual impairment tests did not result in any impairment of the Company's goodwill.
Intangible Assets
Net intangible assets totaled $352.2 million at December 31, 2022 and $402.8 million at December 31, 2021. The following table reflects these intangible assets by major category:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| (In thousands) | | Gross Carrying
Amount | | Accumulated
Amortization | | Gross Carrying
Amount | | Accumulated
Amortization |
| Customer related | | $ | 95,573 | | | $ | 54,482 | | | $ | 104,322 | | | $ | 54,057 | |
| Permits | | 309,177 | | | 50,703 | | | 309,069 | | | 34,822 | |
| Technology related | | 20,800 | | | 15,491 | | | 39,886 | | | 13,415 | |
| Trade names | | 30,212 | | | 9,198 | | | 30,738 | | | 6,842 | |
| Air rights | | 26,139 | | | 2,411 | | | 26,139 | | | 1,675 | |
| Patents | | 189 | | | 155 | | | 179 | | | 138 | |
| Non-compete agreement | | 2,500 | | | 1,718 | | | 2,500 | | | 1,094 | |
| Other | | 3,147 | | | 1,419 | | | 3,407 | | | 1,396 | |
| Total | | $ | 487,737 | | | $ | 135,577 | | | $ | 516,240 | | | $ | 113,439 | |
Based on the current economic conditions, to include inflation and higher energy prices, the Company lowered its long-range projections for the Altek Group of the Harsco Environmental Segment. Due to the lower revenue projections, the Company tested the recoverability of Altek's asset group in the fourth quarter of 2022. The asset group primarily consists of technology and customer-related intangible assets. Undiscounted estimated cash flows of the Altek asset group were lower than the carrying value, therefore, the Company used a DCF model to estimate the current fair value of the Altek asset group (Level 3). A number of significant assumptions and estimates are involved in the preparation of DCF models including future revenues and operating margin growth, the WACC, capital spending, and the impact of business initiatives and working capital projections. The DCF model is based on approved forecasts for the early years and historical relationships and projections for later years. The WACC rate is based on the Company's WACC, adjusted for market participant assumptions. As a result of this testing, an impairment charge of $15.0 million was recorded, which is included in Goodwill and other intangible asset impairment charges on the Consolidated Statements of Operations for the year-ended December 31, 2022. The carrying value of the intangible assets, after the impairment charge, is $15.3 million at December 31, 2022.
Amortization expense for intangible assets was $31.1 million, $32.2 million and $30.6 million for 2022, 2021 and 2020, respectively. The following table shows the estimated amortization expense for the next five fiscal years based on current intangible assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
Estimated amortization expense (b) | | $ | 28,200 | | | $ | 27,700 | | | $ | 27,500 | | | $ | 25,700 | | | $ | 24,400 | |
(b) These estimated amortization expense amounts do not reflect the potential effect of future foreign currency exchange rate fluctuations.
8. Debt and Credit Agreements
The Company's long-term debt consists of the following:
| | | | | | | | | | | | | | |
| | |
| (In thousands) | | December 31
2022 | | December 31
2021 |
Senior Secured Credit Facilities (a): | | | | |
New Term Loan with an interest rate of 6.69% and 2.75% at December 31, 2022 and 2021, respectively | | $ | 492,500 | | | $ | 497,500 | |
| | | | |
| | | | |
Revolving Credit Facility with an average interest rate of 7.19% and 2.45% at December 31, 2022 and 2021, respectively | | 370,000 | | | 362,000 | |
5.75% Senior Notes | | 475,000 | | | 500,000 | |
Other financing payable (including capital leases) in varying amounts due principally through 2026 with a weighted-average interest rate of 5.00% and 4.73% at December 31, 2022 and 2021, respectively | | 26,661 | | | 28,389 | |
| Total debt obligations | | 1,364,161 | | | 1,387,889 | |
| Less: deferred financing costs | | (15,172) | | | (18,217) | |
| Total debt obligations, net of deferred financing costs | | 1,348,989 | | | 1,369,672 | |
| Less: current maturities of long-term debt | | (11,994) | | | (10,226) | |
| Long-term debt | | $ | 1,336,995 | | | $ | 1,359,446 | |
(a) The current portion of long-term debt related to the Senior Secured Credit Facilities was $5.0 million with the remainder reflected as Long-term debt at December 31, 2022 and 2021.
The maturities of long-term debt for the four years following December 31, 2023 are as follows:
| | | | | | | | |
| (In thousands) | | |
| 2024 | | $ | 11,293 | |
| 2025 | | 9,635 | |
| 2026 | | 378,542 | |
| 2027 | | 481,983 | |
Cash payments for interest on debt were $73.4 million, $60.9 million and $59.5 million in 2022, 2021 and 2020, respectively.
In February 2022, the Company amended its Credit Agreement to reset the levels of its net debt to Consolidated Adjusted EBITDA ratio covenant. As a result of this amendment, the total net debt to Consolidated Adjusted EBITDA ratio covenant was set at 5.50x for the quarter ending June 30, 2022, and decreases quarterly by 0.25x until reaching 4.00x for the quarter ending December 31, 2023 and thereafter. In addition, upon closing on the divestiture of the former Harsco Rail Segment, the total net debt to Consolidated Adjusted EBITDA ratio covenant will decrease by an additional 0.25x, provided, however, it will not go below 4.00x and a minimum Consolidated Adjusted EBITDA to consolidated interest charges ratio covenant, which is not to be less than 3.0x will be maintained.
In June 2022, the Company repurchased $25.0 million of its 5.75% Senior Notes on the open market at a discount for $22.4 million. The Company recognized a gain on the extinguishment of debt of $2.3 million, net of the write-off of $0.3 million of previously recorded deferred financing costs, in the caption Facility fees and debt-related income (expense) on the Consolidated Statement of Operations.
In connection with entering into its AR Facility in June 2022, the Company amended its Senior Secured Credit Facilities to increase the permitted maximum outstanding amount of a securitization facility to $150 million. Certain other covenants and definitions were also modified to facilitate the AR Facility.
In August 2022, the Company amended its Revolving Credit Facility under its Credit Agreement to increase certain levels in the total net leverage covenant, temporarily reduce the ratio under the interest coverage covenant and add a new pricing level applicable to revolving credit loans. Revolving credit loans bear interest at a rate, depending on total net leverage, ranging from $50 to $175 basis points over base rate or $150 to $275 basis points over LIBOR, subject to a zero floor. The Company’s total net leverage is capped at 5.50x of Consolidated Adjusted EBITDA through the end of 2023; the maximum total net leverage ratio decreases quarterly thereafter, reaching 4.00x for the last quarter in 2024 and thereafter. The total net leverage ratio covenant applicable to the third quarter of 2024 and earlier is subject to a 0.50x decrease upon closing of the divestiture of the former Harsco Rail Segment. The Company’s required coverage of consolidated interest charges is set at a minimum of 2.75x of Consolidated Adjusted EBITDA through the end of 2024 (subject to an increase to 3.0x upon closing of the divestiture of the former Harsco Rail Segment), and leveling at 3.0x for the first quarter in 2025 and thereafter. Any principal amount outstanding under the Revolving Credit Facility remains due and payable on its maturity on March 10, 2026.
In December 2022, the Company amended its Senior Secured Credit Facilities to, among other things, change the base rate used in determining loan interest rates from LIBOR to SOFR. This change was in anticipation of the expected cessation of LIBOR in 2023 and in compliance with FASB guidance. In addition, a one-month benchmark adjustment of 11.4 basis points was added to the applicable margins for the Revolving Credit Facility and the New Term Loan, which modified them to 61.4 to 286.4 basis points over term SOFR for the Revolving Credit Facility and 236.4 basis points over term SOFR for the New Term Loan. The change did not have a material effect on the Company's consolidated financial statements.
At December 31, 2022, the Company was in compliance with all covenants for its Senior Secured Credit Facilities, as amended in August 2022, as the total net debt to Consolidated Adjusted EBITDA ratio was 5.35x and the total interest coverage ratio was 3.14x.
The Company believes it will continue to maintain compliance with all covenants over the next twelve months based on its current outlook. However, the Company’s estimates of compliance with these covenants could change in the future with a continued deterioration in economic conditions, higher than forecasted interest rate increases, or an inability to successfully execute its plans by quarter to realize increased pricing and to implement cost reduction initiatives that substantially mitigate the impacts of inflation and other factors adversely impacting its realized operating margins.
The Company's Credit Agreement imposes certain restrictions including, but not limited to, restrictions as to types and amounts of debt of liens that may be incurred by the Company; limitations on increases in dividend payments; limitations on repurchases of the Company's stock and limitations on certain acquisitions by the Company.
With respect to the Senior Secured Credit Facilities, the obligations of the Company are guaranteed by substantially all of the Company’s current and future wholly-owned domestic subsidiaries (“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.
The Credit Agreement requires certain mandatory prepayments of the New Term Loan, subject to certain exceptions, based on net cash proceeds of certain sales or distributions of assets, as well as certain casualty and condemnation events, in some cases subject to reinvestment rights and certain other exceptions; net cash proceeds of any issuance of debt, excluding permitted debt issuances; and a percentage of excess cash flow, as defined by the Credit Agreement, during a fiscal year.
Facility Fees and Debt-Related Income (Expense)
The components of the Consolidated Statements of Operations caption Facility fees and debt-related income (expense) were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31 |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Gain (loss) on extinguishment of debt | | $ | 2,254 | | | $ | (2,668) | | | $ | — | |
| Unused debt commitment and amendment fees | | (1,696) | | | (2,838) | | | (1,920) | |
| Securitization and factoring fees | | (3,514) | | | — | | | — | |
| Facility fees and debt-related income (expense) | | $ | (2,956) | | | $ | (5,506) | | | $ | (1,920) | |
Revolving Credit Facility
Borrowings under the U.S.-based Revolving Credit Facility bear interest at a rate per annum ranging from 50 to 175 basis points over base rate or 161.4 to 286.4 basis points over term SOFR, which includes a one-month SOFR adjustment of 11.4 basis points, subject to a 0% floor. Any principal amount outstanding under the Revolving Credit Facility is due and payable on its maturity on March 10, 2026.
The following table shows the amount outstanding under the Revolving Credit Facility and available credit at December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | December 31, 2022 |
| (In thousands) | | Facility
Limit | | Outstanding
Balance | | Outstanding Letters of Credit | | Available
Credit |
| Revolving Credit Facility | | $ | 700,000 | | | $ | 370,000 | | | $ | 27,318 | | | $ | 302,682 | |
| | | | | | | | |
| | | | | | | | |
Other
Short-term borrowings totaled $7.8 million and $7.7 million at December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, Short-term borrowings consisted primarily of bank overdrafts and other third-party debt. The weighted-average interest rate for short-term borrowings at December 31, 2022 and 2021 was 4.65% and 3.26%, respectively.
9. Leases
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Finance leases: | | | | | | |
| Amortization expense | | $ | 3,938 | | | $ | 2,510 | | | $ | 1,523 | |
| Interest on lease liabilities | | 784 | | | 495 | | | 184 | |
| Operating leases | | 33,773 | | | 32,544 | | | 28,537 | |
| Variable and short-term leases | | 49,811 | | | 47,780 | | | 40,953 | |
| Sublease income | | (6) | | | (53) | | | (202) | |
| Total lease expense from continuing operations | | $ | 88,300 | | | $ | 83,276 | | | $ | 70,995 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Cash flows used by operating activities - Operating leases (a) | | $ | 34,420 | | | $ | 33,645 | | | $ | 28,057 | |
| Cash flows used by operating activities - Finance leases | | 798 | | | 517 | | | 184 | |
| Cash flows used by financing activities - Finance leases | | 3,975 | | | 2,330 | | | 1,183 | |
| ROU assets obtained in exchange for lease obligations: | | | | | | |
Operating leases (b) | | $ | 32,817 | | | $ | 42,442 | | | $ | 69,044 | |
| Finance leases | | 11,175 | | | 11,495 | | | 6,220 | |
(a) Cash flows include cash paid for operating leases of discontinued operations.
(b) Cash flows include ROU assets of approximately $56 million that were recorded upon the acquisition of ESOL in 2020.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | |
| Operating Leases (c): | | | | | | |
| Operating lease ROU assets | | $ | 101,253 | | | $ | 101,576 | | | |
| Current portion of operating lease liabilities | | 25,521 | | | 25,590 | | | |
| Operating lease liabilities | | 75,246 | | | 74,571 | | | |
| | | | | | |
| Finance Leases: | | | | | | |
| | | | | | |
| | | | | | |
| Property, plant and equipment, net | | $ | 23,671 | | | $ | 17,185 | | | |
| Current maturities of long-term debt | | 5,562 | | | 3,756 | | | |
| Long-term debt | | 18,832 | | | 13,736 | | | |
| | | | | | |
(c) The 2021 operating lease ROU assets and operating lease liabilities include a $15 million adjustment to record certain leases for ESOL. These leases have been incorrectly treated as short term leases versus operating leases since ESOL's acquisition on April 6, 2020.
Supplemental additional information related to leases was as follows:
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
| Other information: | | | | |
| Weighted average remaining lease term - Operating leases (in years) | | 7.42 | | 7.14 |
| Weighted average remaining lease term - Finance leases (in years) | | 5.35 | | 5.88 |
| Weighted average discount rate - Operating leases | | 6.0 | % | | 5.9 | % |
| Weighted average discount rate - Finance leases | | 5.2 | % | | 4.6 | % |
Maturities of lease liabilities were as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | Operating Leases | | Finance
Leases |
| Year Ending December 31: | | | | |
| 2023 | | $ | 30,274 | | | $ | 6,663 | |
| 2024 | | 24,099 | | | 6,284 | |
| 2025 | | 17,928 | | | 5,237 | |
| 2026 | | 13,416 | | | 3,923 | |
| 2027 | | 8,545 | | | 2,240 | |
| After 2027 | | 34,233 | | | 3,868 | |
| Total lease payments | | 128,495 | | | 28,215 | |
| Less: Imputed interest | | (27,728) | | | (3,821) | |
| Total lease liabilities | | $ | 100,767 | | | $ | 24,394 | |
The Company's leases, excluding short-term leases, have remaining terms of less than one year to 28 years, some of which include options to extend for up to 10 years, and some of which include options to terminate within one year. As of December 31, 2022, the Company has additional operating leases for property and equipment that have not yet commenced, with estimated ROU assets and lease liabilities of approximately $11 million to be recognized upon anticipated lease commencements in the first and second quarters of 2023. There are no material residual value guarantees or material restrictive covenants in any of the Company's leases.
10. Employee Benefit Plans
Pension Benefits
The Company has defined benefit pension plans covering a certain number of employees. The defined benefits for salaried employees generally are based on years of service and the employee's level of compensation during specified periods of employment. Defined benefit pension plans covering hourly employees generally provide benefits of stated amounts for each year of service. MEPPs in which the Company participates provide benefits to certain unionized employees. The Company's funding policy for qualified plans is consistent with statutory requirements. Periodic voluntary contributions are made, as recommended, by the Company's Pension Committee.
Accrued service is no longer granted to the U.S. defined benefit pension plans and a majority of international defined benefit pension plans. In place of these plans, the Company has established defined contribution plans providing for the Company to contribute a specified matching amount for participating employees' contributions to the plan. For U.S. employees, this match is made on employee contributions up to 4% of eligible compensation. Additionally, the Company may provide a discretionary contribution for eligible employees. There have been no discretionary contributions provided for the years 2022, 2021 and 2020. For non-U.S. employees, this match is up to 6% of eligible compensation with an additional 2% going towards insurance and administrative costs.
NPPC from continuing operations for U.S. and international plans for 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
| (In thousands) | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Net Periodic Pension Cost (Income): | | | | | | | | | | |
| Defined benefit pension plans: | | | | | | | | | | |
| Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | 1,867 | | | $ | 1,805 | | | $ | 1,642 | |
| Interest cost | | 5,716 | | | 4,813 | | | 7,381 | | | 16,500 | | | 12,652 | | | 17,599 | |
| Expected return on plan assets | | (10,795) | | | (12,199) | | | (11,368) | | | (38,891) | | | (45,018) | | | (41,013) | |
| Recognized prior service costs | | — | | | — | | | — | | | 534 | | | 582 | | | 512 | |
| Recognized losses | | 4,732 | | | 5,538 | | | 5,100 | | | 13,060 | | | 18,119 | | | 14,723 | |
| | | | | | | | | | | | |
| Settlement/curtailment loss (gain) | | — | | | — | | | — | | | (33) | | | (6) | | | 18 | |
| Defined benefit pension plan cost (income) | | (347) | | | (1,848) | | | 1,113 | | | (6,963) | | | (11,866) | | | (6,519) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
| (In thousands) | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Multiemployer pension plans | | 642 | | | 640 | | | 620 | | | 1,114 | | | 1,035 | | | 969 | |
| Defined contribution plans | | 5,401 | | | 5,660 | | | 4,769 | | | 4,122 | | | 4,196 | | | 3,994 | |
| Net periodic pension cost (income) | | $ | 5,696 | | | $ | 4,452 | | | $ | 6,502 | | | $ | (1,727) | | | $ | (6,635) | | | $ | (1,556) | |
The change in the financial status of the defined benefit pension plans and amounts recognized on the Consolidated Balance Sheets at December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Change in benefit obligation: | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 277,007 | | | $ | 296,660 | | | $ | 1,022,198 | | | $ | 1,119,552 | |
| Service cost | | — | | | — | | | 1,867 | | | 1,805 | |
| Interest cost | | 5,716 | | | 4,813 | | | 16,500 | | | 12,652 | |
| Plan participants' contributions | | — | | | — | | | 14 | | | 15 | |
| | | | | | | | |
| Actuarial (gain) loss | | (57,841) | | | (8,063) | | | (299,841) | | | (58,567) | |
| Settlements/curtailments | | — | | | — | | | (132) | | | (269) | |
| Benefits paid | | (15,700) | | | (16,403) | | | (37,135) | | | (39,831) | |
| Effect of foreign currency | | — | | | — | | | (106,281) | | | (13,159) | |
| | | | | | | | |
| | | | | | | | |
| Benefit obligation at end of year | | $ | 209,182 | | | $ | 277,007 | | | $ | 597,190 | | | $ | 1,022,198 | |
| Change in plan assets: | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 232,947 | | | $ | 226,125 | | | $ | 973,252 | | | $ | 957,177 | |
| Actual return on plan assets | | (41,909) | | | 19,005 | | | (250,002) | | | 40,382 | |
| Employer contributions | | 1,706 | | | 4,219 | | | 22,614 | | | 25,077 | |
| Plan participants' contributions | | — | | | — | | | 14 | | | 15 | |
| Settlements/curtailments | | — | | | — | | | (132) | | | (269) | |
| Benefits paid | | (15,700) | | | (16,402) | | | (37,135) | | | (39,220) | |
| Effect of foreign currency | | — | | | — | | | (101,377) | | | (9,910) | |
| | | | | | | | |
| | | | | | | | |
| Fair value of plan assets at end of year | | $ | 177,044 | | | $ | 232,947 | | | $ | 607,234 | | | $ | 973,252 | |
| | | | | | | | |
| Funded status at end of year | | $ | (32,138) | | | $ | (44,060) | | | $ | 10,044 | | | $ | (48,946) | |
Significant items impacting actuarial gains and losses for 2022 for U.S. plans were improvement in the funded position due to an increase in the discount rate used to measure the benefit obligation compared with the prior year, partially offset by a decrease in the funded position due to the actual return on the fair value of plan assets since the prior measurement date being less than assumed, due to market losses.
Similarly, significant items impacting actuarial gains and losses for 2022 for international plans, principally the U.K. plan, were improvement in the funded position due to an increase in the discount rate used to measure the benefit obligation compared with the prior year, partially offset by a decrease in the funded position due to the actual return on the fair value of plan assets since the prior measurement date being less than assumed, due to market losses.
Amounts recognized on the Consolidated Balance Sheets for defined benefit pension plans consist of the following at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
| | December 31 | | December 31 |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Noncurrent assets | | $ | — | | | $ | — | | | $ | 26,033 | | | $ | 2,046 | |
| Current liabilities | | 1,851 | | | 1,999 | | | 924 | | | 967 | |
| Noncurrent liabilities | | 30,287 | | | 42,061 | | | 15,065 | | | 50,025 | |
| | | | | | | | |
| | | | | | | | |
| AOCI | | 105,005 | | | 114,874 | | | 346,068 | | | 410,114 | |
Amounts recognized in AOCI for defined benefit pension plans consist of the following at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Plans | | International Plans |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net actuarial loss | | $ | 105,005 | | | $ | 114,874 | | | $ | 337,849 | | | $ | 400,497 | |
| Prior service cost | | — | | | — | | | 8,219 | | | 9,617 | |
| | | | | | | | |
| Total | | $ | 105,005 | | | $ | 114,874 | | | $ | 346,068 | | | $ | 410,114 | |
The Company's estimate of expected contributions to be paid in 2023 for the U.S. and international defined benefit plans total $1.9 million and $23.3 million, respectively.
Future Benefit Payments
Expected benefit payments for defined benefit pension plans over the next ten years are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028-2032 |
| U.S. Plans | | $ | 26.3 | | | $ | 16.4 | | | $ | 16.4 | | | $ | 16.2 | | | $ | 16.1 | | | $ | 76.6 | |
| International Plans | | 38.1 | | | 38.8 | | | 40.2 | | | 41.3 | | | 42.7 | | | 225.4 | |
Net Periodic Pension Cost and Defined Benefit Pension Obligation Assumptions
The weighted-average actuarial assumptions used to determine the defined benefit pension plan NPPC for 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans
December 31 | | International Plans
December 31 | | Global Weighted-Average
December 31 |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Discount rates | | 2.7 | % | | 2.4 | % | | 3.2 | % | | 1.9 | % | | 1.4 | % | | 2.1 | % | | 2.1 | % | | 1.6 | % | | 2.4 | % |
| Expected long-term rates of return on plan assets | | 6.3 | % | | 6.8 | % | | 7.0 | % | | 4.4 | % | | 4.7 | % | | 5.2 | % | | 4.7 | % | | 5.1 | % | | 5.6 | % |
The expected long-term rates of return on defined benefit pension plan assets for the 2023 NPPC are 7.0% for the U.S. plans and 5.1% for the international plans. The expected global long-term rate of return on assets for 2023 is 5.5%.
The weighted-average actuarial assumptions used to determine the defined benefit pension plan obligations at December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans | | Global Weighted-Average |
| | December 31 | | December 31 | | December 31 |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Discount rates | | 5.3 | % | | 2.7 | % | | 5.1 | % | | 1.9 | % | | 5.1 | % | | 2.1 | % |
Since accrued service is no longer granted to the U.S. defined benefit plans and the majority of the international defined benefit pension plans, the rate of compensation increase did not have a significant impact on the defined benefit pension obligation at December 31, 2022 and 2021 or the defined benefit pension plan NPPC for the years ended 2022, 2021 and 2020.
The U.S. discount rate was determined using a yield curve that was produced from a universe containing approximately 1,100 U.S. dollar-denominated, AA-graded corporate bonds, all of which were noncallable (or callable with make-whole provisions) and excluding the 10% of the bonds with the highest deviation from the expected yield and the 10% with the lowest deviation from the expected yield within each duration group. The discount rate was then developed as the level-equivalent rate that would produce the same present value as that using spot rates to discount the projected benefit payments. For international plans, the discount rate is aligned to corporate bond yields in the local markets, normally AA-rated corporations. The process and selection seek to approximate the cash inflows with the timing and amounts of the expected benefit payments.
Accumulated Benefit Obligation
The accumulated benefit obligation for all defined benefit pension plans at December 31, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
| | December 31 | | December 31 |
| (In millions) | | 2022 | | 2021 | | 2022 | | 2021 |
| Accumulated benefit obligation | | $ | 209.2 | | | $ | 277.0 | | | $ | 593.4 | | | $ | 1,016.1 | |
Defined Benefit Pension Plans with Accumulated Benefit Obligation in Excess of Plan Assets
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for defined benefit pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Plans | | International Plans |
| | December 31 | | December 31 |
| (In millions) | | 2022 | | 2021 | | 2022 | | 2021 |
| Projected benefit obligation | | $ | 209.2 | | | $ | 277.0 | | | $ | 25.3 | | | $ | 988.6 | |
| Accumulated benefit obligation | | 209.2 | | | 277.0 | | | 22.6 | | | 984.7 | |
| Fair value of plan assets | | 177.0 | | | 232.9 | | | 9.4 | | | 939.3 | |
The asset allocations attributable to the Company's U.S. defined benefit pension plans at December 31, 2022 and 2021, and the long-term target allocation of plan assets, by asset category, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Target Long-Term
Allocation | | Percentage of Plan Assets
December 31 |
| U.S. Plans Asset Category | | | 2022 | | 2021 |
| Domestic equity securities | | 18%-28% | | 21.0 | % | | 22.8 | % |
| International equity securities | | 17%-27% | | 22.2 | % | | 22.5 | % |
| Fixed income securities | | 41%-51% | | 44.6 | % | | 45.9 | % |
| Cash and cash equivalents | | Less than 5% | | 1.0 | % | | — | % |
Other (a) | | 4%-14% | | 11.2 | % | | 8.8 | % |
(a) Investments within this caption include diversified global asset allocation funds and credit collection funds.
Defined benefit pension plan assets are allocated among various categories of equities, fixed income securities and cash and cash equivalents with professional investment managers whose performance is actively monitored. The primary investment objective is long-term growth of assets in order to meet present and future benefit obligations. The Company periodically conducts an asset/liability modeling study and accordingly adjusts investments among and within asset categories to ensure the long-term investment strategy is aligned with the profile of benefit obligations.
The Company reviews the long-term expected return on asset assumption on a periodic basis considering a variety of factors including historical investment returns achieved over a long-term period, the targeted allocation of plan assets and future expectations based on a model of asset returns for an actively managed portfolio. The model simulates 1,000 different capital market results over 20 years. The expected return-on-asset assumption for U.S. defined benefit pension plans for 2023 and 2022 are 7.0% and 6.3%, respectively.
The U.S. defined benefit pension plans' assets include 310,000 shares at December 31, 2022 and 310,000 shares at December 31, 2021 of the Company's common stock, valued at $2.0 million and $5.2 million, respectively. These shares represented 1.1% and 2.2% of total U.S. plan assets at December 31, 2022 and 2021, respectively.
The asset allocations attributable to the Company's international defined benefit pension plans at December 31, 2022 and 2021 and the long-term target allocation of plan assets, by asset category, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| International Plans Asset Category | | Target Long-Term
Allocation | | Percentage of Plan Assets
December 31 |
| | 2022 | | 2021 |
| Equity securities | | 26.5 | % | | 24.8 | % | | 27.9 | % |
| Fixed income securities | | 65.5 | % | | 65.5 | % | | 63.6 | % |
| Cash and cash equivalents | | — | | | 1.5 | % | | 0.7 | % |
Other (b) | | 8.0 | % | | 8.2 | % | | 7.8 | % |
(b) Investments within this caption include diversified growth funds and real estate funds.
International defined benefit pension plan assets at December 31, 2022 in the U.K. defined benefit pension plan totaled approximately 94% of the international defined benefit pension plan assets. The U.K. plan assets are allocated among various categories of equities, fixed income securities and cash and cash equivalents with professional investment managers whose performance is actively monitored. The primary investment objective is long-term growth of assets in order to meet present and future benefit obligations. The Company periodically conducts asset/liability modeling studies and accordingly adjusts investment amounts within asset categories to ensure the long-term investment strategy is aligned with the profile of benefit obligations.
For the international long-term rate of return assumption, the Company considered the current level of expected returns in risk-free investments (primarily government bonds), the historical level of the risk premium associated with other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class and plan expenses. The expected return for each asset class is then weighted based on the target asset allocation to develop the expected long-term rate of return on assets. The expected return on asset assumption for the U.K. defined benefit pension plan for 2023 and 2022 are 5.0% and 4.3%, respectively. The remaining international defined benefit pension plans, with plan assets representing approximately 6% of the international defined benefit pension plan assets, are under the guidance of professional investment managers and have similar investment objectives.
The fair values of the Company's U.S. defined benefit pension plans' assets at December 31, 2022 by asset class are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | | | Investments Valued at Net Asset Value (c) |
| Domestic equities: | | | | | | | | |
| Common stocks | | $ | 1,951 | | | $ | 1,951 | | | | | $ | — | |
| Mutual funds—equities | | 35,177 | | | 35,177 | | | | | — | |
| International equities: | | | | | | | | |
| | | | | | | | |
| Mutual funds—equities | | 39,287 | | | 39,287 | | | | | — | |
| Fixed income investments: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Mutual funds—bonds | | 78,943 | | | 78,943 | | | | | — | |
| Other—mutual funds | | 6,699 | | | 6,699 | | | | | — | |
| Cash and money market accounts | | 1,780 | | | 1,780 | | | | | — | |
| Other—partnerships/joint ventures | | 13,207 | | | — | | | | | 13,207 | |
| Total | | $ | 177,044 | | | $ | 163,837 | | | | | $ | 13,207 | |
(c) Certain investments that are measured at fair value using Net Asset Value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
The fair values of the Company's U.S. defined benefit pension plans' assets at December 31, 2021 by asset class are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | | | Investments Valued at Net Asset Value |
| Domestic equities: | | | | | | | | |
| Common stocks | | $ | 5,180 | | | $ | 5,180 | | | | | $ | — | |
| Mutual funds—equities | | 48,411 | | | 48,411 | | | | | — | |
| International equities: | | | | | | | | |
| | | | | | | | |
| Mutual funds—equities | | 50,783 | | | 50,783 | | | | | — | |
| Fixed income investments: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Mutual funds—bonds | | 105,114 | | | 105,114 | | | | | — | |
| Other—mutual funds | | 9,371 | | | 9,371 | | | | | — | |
| Cash and money market accounts | | 1,624 | | | 1,624 | | | | | — | |
| Other - partnerships/joint ventures | | 12,464 | | | — | | | | | 12,464 | |
| Total | | $ | 232,947 | | | $ | 220,483 | | | | | $ | 12,464 | |
The fair values of the Company's international defined benefit pension plans' assets at December 31, 2022 by asset class are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | | | |
| Equity securities: | | | | | | | | | | |
| Mutual funds—equities | | $ | 150,813 | | | $ | — | | | $ | 150,813 | | | | | |
| Fixed income investments: | | | | | | | | | | |
| Mutual funds—bonds | | 392,960 | | | — | | | 392,960 | | | | | |
| Insurance contracts | | 4,636 | | | — | | | 4,636 | | | | | |
| Other: | | | | | | | | | | |
| | | | | | | | | | |
| Other mutual funds | | 49,805 | | | — | | | 49,805 | | | | | |
| Cash and money market accounts | | 9,020 | | | 9,020 | | | — | | | | | |
| Total | | $ | 607,234 | | | $ | 9,020 | | | $ | 598,214 | | | | | |
The fair values of the Company's international defined benefit pension plans' assets at December 31, 2021 by asset class are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | | | |
| Equity securities: | | | | | | | | | | |
| Mutual funds—equities | | $ | 271,811 | | | $ | — | | | $ | 271,811 | | | | | |
| Fixed income investments: | | | | | | | | | | |
| | | | | | | | | | |
| Mutual funds—bonds | | 613,243 | | | — | | | 613,243 | | | | | |
| Insurance contracts | | 5,684 | | | — | | | 5,684 | | | | | |
| Other: | | | | | | | | | | |
| | | | | | | | | | |
| Other mutual funds | | 75,651 | | | — | | | 75,651 | | | | | |
| Cash and money market accounts | | 6,863 | | | 6,863 | | | — | | | | | |
| Total | | $ | 973,252 | | | $ | 6,863 | | | $ | 966,389 | | | | | |
Following is a description of the valuation methodologies used for the defined benefit pension plans' investments measured at fair value:
•Level 1 Fair Value Measurements—Investments in interest-bearing cash are stated at cost, which approximates fair value. The fair values of money market accounts and certain mutual funds are based on quoted net asset values of the shares held by the plan at year-end. The fair values of domestic and international stocks and corporate bonds, notes and convertible debentures are valued at the closing price reported in the active market on which the individual securities are traded.
•Level 2 Fair Value Measurements—The fair values of investments in mutual funds for which quoted net asset values in an active market are not available are valued by the investment advisor based on the current market values of the underlying assets of the mutual fund based on information reported by the investment consistent with audited financial statements of the mutual fund. Further information concerning these mutual funds may be obtained from their separate audited financial statements. Investments in U.S. Treasury notes and collateralized securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Multiemployer Pension Plans
The Company, through the Harsco Environmental Segment, contributes to several MEPPs under the terms of collective-bargaining agreements that cover union-represented employees, many of whom are temporary in nature. The Company's total contributions to MEPPs were $1.9 million, $1.7 million and $1.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.
11. Income Taxes
Current income tax expense or benefit represents the amounts expected to be reported on the Company's income tax returns, and deferred income tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted income tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered more likely than not to be realized.
Income (loss) from continuing operations before income taxes and equity income as reported on the Consolidated Statements of Operations consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| U.S. | | $ | (152,602) | | | $ | (34,462) | | | $ | (87,315) | |
| International | | 29,644 | | | 71,968 | | | 33,095 | |
| Total income (loss) from continuing operations before income taxes and equity income | | $ | (122,958) | | | $ | 37,506 | | | $ | (54,220) | |
Income tax expense (benefit) as reported on the Consolidated Statements of Operations consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Income tax expense (benefit): | | | | | | |
| Currently payable: | | | | | | |
| U.S. federal | | $ | — | | | $ | — | | | $ | (12,116) | |
| U.S. state | | 1,416 | | | 507 | | | 468 | |
| International | | 14,914 | | | 22,295 | | | 16,518 | |
| Total income taxes currently payable | | 16,330 | | | 22,802 | | | 4,870 | |
| Deferred U.S. federal | | (6,219) | | | (4,594) | | | (10,558) | |
| Deferred U.S. state | | (2,274) | | | (18) | | | (3,078) | |
| Deferred international | | 2,544 | | | (9,101) | | | 93 | |
| Total income tax expense (benefit) from continuing operations | | $ | 10,381 | | | $ | 9,089 | | | $ | (8,673) | |
Cash payments for income taxes were $20.9 million, $21.7 million and $34.9 million for 2022, 2021 and 2020, respectively. The cash payments for 2022 are relatively consistent with the payments for 2021. The decrease in cash payments for 2021 is principally due to payments associated with the gain on the sale of IKG in 2020 not recurring in 2021.
A reconciliation of the normal expected statutory U.S. federal income tax expense (benefit) to the actual Income tax expense (benefit) from continuing operations as reported on the Consolidated Statements of Operations is as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| U.S. federal income tax expense (benefit), at statutory tax rate of 21% | | $ | (25,821) | | | $ | 7,877 | | | $ | (11,386) | |
| U.S. state income taxes, net of federal income tax benefit | | (929) | | | (310) | | | (2,015) | |
| U.S. other domestic deductions and credits | | (594) | | | (415) | | | (1,312) | |
| Difference in effective tax rates on international earnings and remittances | | 8,929 | | | 4,488 | | | 7,872 | |
| Uncertain tax position contingencies and settlements | | (290) | | | 783 | | | 289 | |
| Changes in realization of deferred tax assets | | 8,263 | | | (5,035) | | | (1,501) | |
| U.S. non-deductible expenses | | 791 | | | 936 | | | 2,300 | |
| | | | | | |
| Nondeductible goodwill impairment | | 19,548 | | | — | | | — | |
| State deferred tax rate changes | | 154 | | | 592 | | | (40) | |
| Foreign derived intangible income deduction | | (938) | | | — | | | — | |
| Share-based compensation | | 1,268 | | | 173 | | | (184) | |
| Net operating loss carryback | | — | | | — | | | (2,696) | |
| Total income tax expense (benefit) from continuing operations | | $ | 10,381 | | | $ | 9,089 | | | $ | (8,673) | |
At December 31, 2022, 2021 and 2020, the Company's annual effective income tax rate on income (loss) from continuing operations was (8.4)%, 24.2% and 16.0%, respectively.
The Company’s international income from continuing operations before income taxes and equity income was $29.6 million and $72.0 million for 2022 and 2021, respectively. In 2021, the Company recorded $6.8 million income tax benefit arising from the recognition of deferred tax assets in HE Brazil. Brazil has 3 years of cumulative income and expects to utilize the deferred tax assets against future income. Also, in 2021, the Company recorded a $7.0 million nontaxable capital gain on the sale of U.K. assets not recurring in 2022. In 2022, the Company recorded a $15.0 million intangible assets impairment for the Altek business with no tax benefit. The Company's total international income tax expense increased from $13.2 million in 2021 to $17.4 million in 2022 primarily due to the Brazil income tax benefit in 2021 not recurring in 2022, partially offset by the change in mix of income.
The Company’s differences in income tax expense for 2022 and 2021 on international earnings and remittances was $10.3 million and $4.5 million, respectively, which included U.S income tax expense on international deemed remittances of $0.1 million and $0.1 million respectively. The increase is primarily due to no tax benefit recorded on the $15.0 million intangible assets impairment recorded for the Altek business and the change in mix of income.
The Company's U.S. loss from continuing operations before income taxes and equity income was $152.6 million and $34.5 million for 2022 and 2021, respectively. The Company's total U.S. income tax benefit increased from $4.1 million in 2021 to $7.1 million in 2022 primarily due to the reduced operational profit and a $3.0 million tax benefit recorded on the deductible portion of the goodwill impairment recorded for the Clean Earth business, offset by partially disallowed interest expense.
The income tax effects of the temporary differences giving rise to the Company's deferred tax assets and liabilities at December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 (a) | | 2021 (a) |
| (In thousands) | | Asset | | Liability | | Asset | | Liability |
| Depreciation and amortization | | $ | — | | | $ | 61,145 | | | $ | — | | | $ | 80,278 | |
| Right-of-use assets | | — | | | 24,826 | | | — | | | 25,130 | |
| Operating lease liabilities | | 25,024 | | | — | | | 24,802 | | | — | |
| Expense accruals | | 28,758 | | | — | | | 24,949 | | | — | |
| Inventories | | 4,011 | | | — | | | 3,400 | | | — | |
| Provision for receivables | | 2,781 | | | — | | | 3,997 | | | — | |
| Deferred revenue | | 4,484 | | | — | | | — | | | 2,750 | |
| Operating loss carryforwards | | 54,237 | | | — | | | 67,442 | | | — | |
| Tax credit carryforwards | | 21,443 | | | — | | | 18,608 | | | — | |
| | | | | | | | |
| Pensions | | 5,171 | | | — | | | 23,298 | | | — | |
| Currency adjustments | | — | | | 3,330 | | | 3,701 | | | — | |
| | | | | | | | |
| Section 163(j) disallowed interest expense | | 13,869 | | | — | | | 4,843 | | | — | |
| Research and development | | 2,795 | | | — | | | — | | | — | |
| Stock based compensation | | 6,580 | | | — | | | 7,396 | | | — | |
| Other | | — | | | 3,198 | | | 2,164 | | | — | |
| Subtotal | | 169,153 | | | 92,499 | | | 184,600 | | | 108,158 | |
| Valuation allowance | | (89,234) | | | — | | | (92,385) | | | — | |
| Total deferred income taxes | | $ | 79,919 | | | $ | 92,499 | | | $ | 92,215 | | | $ | 108,158 | |
(a) Does not include approximately $1.0 billion of statutory loss carryforwards within Luxembourg for which the Company considers the utilization of these attributes remote and as such no deferred tax asset or corresponding valuation allowance has been recorded.
At December 31, 2022, the tax-effected amount of NOLs totaled $54.2 million. Tax-effected NOLs from international operations are $40.6 million. Of that amount, $35.5 million can be carried forward indefinitely and $5.1 million will expire at various times between 2023 and 2042. Tax-effected U.S. state NOLs are $12.1 million. Of that amount, $1.8 million expire at various times between 2023 and 2027, $2.5 million expire at various times between 2028 and 2032, $3.6 million expire at various times between 2033 and 2037 and $4.2 million expire at various times between 2038 and 2042. At December 31, 2022, the tax-effected amount of U.S. Federal NOLs totaled $1.5 million. Of that amount, $1.5 million can be carried forward indefinitely.
Valuation allowances of $89.2 million and $92.4 million at December 31, 2022 and 2021, respectively, related principally to deferred tax assets for pension liabilities, NOLs, disallowed interest expense and foreign currency translation that are uncertain as to realizability. In 2022, the Company recorded a valuation allowance reduction of $7.1 million related to current year pension adjustment recorded through AOCI, a valuation allowance reduction of $6.4 million from the effects of foreign currency translation adjustments and a valuation allowance reduction of $4.3 million related to the tax rate reduction in certain jurisdiction in U.S, partially offset by a $5.2 million valuation allowance increase related to current year losses in certain foreign jurisdictions where the Company determined that it is more likely than not that these assets will not be realized, and a $8.9 million valuation allowance increase related to disallowed interest expense.
The Tax Act introduced a transition tax and a territorial tax system, which was effective beginning in 2018. The territorial tax system impacts the Company's overall global capital and legal entity structure, working capital, and repatriation plan on a go-forward basis. The Company asserts that all foreign earnings will be indefinitely reinvested to meet local cash needs. The Company therefore intends to limit distributions to earnings previously taxed in the U.S., or earnings that would qualify for the 100 percent dividends received deduction provided for in the Tax Act, and earnings that would not result in any significant foreign taxes. Therefore, the Company has not recognized a deferred tax liability on its investment in foreign subsidiaries.
The Company recognizes accrued interest and penalty expense related to unrecognized income tax benefits in income tax expense or benefit. The Company recognized an income tax benefit of $0.4 million, an income tax expense of $0.4 million and $0.2 million during 2022, 2021 and 2020, respectively, for interest and penalties. The Company has accrued $1.3 million, $1.7 million and $1.4 million for the payment of interest and penalties at December 31, 2022, 2021 and 2020, respectively.
A reconciliation of the change in the unrecognized income tax benefits balance from January 1, 2020 to December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Unrecognized
Income Tax
Benefits | | Deferred
Income Tax
Benefits | | Unrecognized
Income Tax
Benefits, Net of
Deferred Income
Tax Benefits |
| Balances, January 1, 2020 | | $ | 3,129 | | | $ | (22) | | | $ | 3,107 | |
| Additions for tax positions related to the current year (includes currency translation adjustment) | | 596 | | | (2) | | | 594 | |
| | | | | | |
| Other reductions for tax positions related to prior years | | (771) | | | — | | | (771) | |
| Statutes of limitation expirations | | (58) | | | 2 | | | (56) | |
| | | | | | |
| Balance at December 31, 2020 | | 2,896 | | | (22) | | | 2,874 | |
| Additions for tax positions related to the current year (includes currency translation adjustment) | | 316 | | | (1) | | | 315 | |
| Additions for tax positions related to prior years (includes currency translation adjustment) | | 500 | | | — | | | 500 | |
| | | | | | |
| Statutes of limitation expirations | | (585) | | | 1 | | | (584) | |
| | | | | | |
| Balance at December 31, 2021 | | 3,127 | | | (22) | | | 3,105 | |
| | | | | | |
| Additions for tax positions related to the current year (includes currency translation adjustment) | | 189 | | | (1) | | | 188 | |
| | | | | | |
| | | | | | |
| Statutes of limitation expirations | | (524) | | | 2 | | | (522) | |
| | | | | | |
| Total unrecognized income tax benefits that, if recognized, would impact the effective income tax rate at December 31, 2022 | | $ | 2,792 | | | $ | (21) | | | $ | 2,771 | |
Within the next twelve months, it is reasonably possible that up to $1.1 million of unrecognized income tax benefits will be recognized upon settlement of income tax examinations and the expiration of various statutes of limitations.
The Company files income tax returns as prescribed by the tax laws of the jurisdictions in which it operates. These tax returns are subject to examinations and possible challenge by the tax authorities. Positions challenged by the tax authorities may be settled or appealed by the Company.
The tax years that remain subject to examination for the Company's major tax jurisdictions as of December 31, 2022 are shown below:
| | | | | | | | |
| Jurisdiction | | Earliest Open Year |
| Brazil | | 2018 |
| China | | 2017 |
| France | | 2020 |
| United States: | | |
| Federal income tax | | 2014 |
| State income tax | | 2016 |
12. Commitments and Contingencies
Environmental
The Company is involved in a number of environmental remediation investigations and cleanups and, along with other companies, has been identified as a “potentially responsible party” for certain byproduct disposal sites. While each of these matters is subject to various uncertainties, it is probable that the Company will agree to make payments toward funding certain of these activities, and it is possible that some of these matters will be decided unfavorably to the Company. The Company has evaluated its potential liability and its financial exposure is dependent upon such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the allocation of cost among potentially responsible parties, the years of remedial activity required and the remediation methods selected.
The Company evaluates its liability for future environmental remediation costs on a quarterly basis. Although actual costs to be incurred at identified sites in future periods may vary from the estimates (given inherent uncertainties in evaluating environmental exposures), the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with environmental matters in excess of the amounts accrued would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
The following table summarizes information related to the location and undiscounted amount of the Company's environmental liabilities:
| | | | | | | | | | | | | | |
| (In thousands) | | December 31
2022 | | December 31
2021 |
Current portion of environmental liabilities (a) | | $ | 7,120 | | | $ | 7,338 | |
| Long-term environmental liabilities | | 26,880 | | | 28,435 | |
| Total environmental liabilities | | $ | 34,000 | | | $ | 35,773 | |
(a) The current portion of environmental liabilities is included in the caption Other current liabilities on the Consolidated Balance Sheets.
Legal Proceedings
In the ordinary course of business, the Company is a defendant or party to various claims and lawsuits, including those discussed below.
On March 28, 2018, the United States Environmental Protection Agency (the “EPA”) conducted an inspection of ESOL’s off-site waste management facility in Detroit, MI. On November 23, 2021, the EPA proposed a civil penalty of $390,092 as part of a proposed Administrative Consent Order for alleged improper air emissions at the site. The allegations in the proposed Administrative Consent Order and civil penalty relate exclusively to the period prior the Company’s purchase of the ESOL business. The Company is vigorously contesting the allegations. While it is the Company's position that any loss related to this issue will be recoverable under indemnity rights under the ESOL purchase agreement and representations and warranties insurance policies purchased by the Company, there can be no assurance that the Company's position will ultimately prevail. On August 31, 2022, the parties executed a Tolling Agreement, which excludes the period from March 1, 2022 through December 30, 2022, for the purposes of calculating the statute of limitations and other related defenses.
On January 27, 2020, the U.S. EPA issued a Notice of Potential Liability to the Company, along with several other companies, concerning the Newtown Creek Superfund Site located in Kings and Queens Counties in New York. The Notice alleges certain facilities formerly owned or operated by subsidiaries of the Company may have resulted in the discharge of hazardous substances into Newtown Creek or its Dutch Kills tributary. The site has been subject to CERCLA response activities since approximately 2011. The U.S. EPA expects to propose a sitewide cleanup plan no sooner than 2024 and announced, in July 2021, that it would defer its decision on a potential early action response for the lower two miles of the Creek until the sitewide studies are completed. The Company is one of approximately twenty (20) Potentially Responsible Parties ("PRPs") that have received notices, though it is believed other PRPs may exist. The Company vigorously contests the allegations of the Notice and currently does not believe that this matter will have a material effect on the Company’s financial position or results from operations.
On June 25 and 26, 2018, the DTSC conducted a compliance enforcement inspection of ESOL’s facility in Rancho Cordova, California, which was then owned by Stericycle, Inc. On February 14, 2020, the DTSC filed an action in the Superior Court for the State of California, Sacramento Division, alleging violations of California’s Hazardous Waste Control Law and the facility’s hazardous waste permit arising from the inspection. On August 27, 2020 the DTSC issued a Notice of Denial of Hazardous Waste Facility Permit Application, denying the renewal of the facility's hazardous waste permit. The Company has exhausted its legal challenges to the denial of the Hazardous Waste facility permit, and the hazardous waste facility is in the process of closing. The Company continues to utilize the site for non-hazardous waste and is evaluating additional potential alternate uses for the site. The DTSC investigation and compliance issues leading to the compliance tier assignment were ongoing well before the Company's acquisition of the ESOL business, and the Company was aware of the investigation and many of the issues raised in the investigation at the time of the purchase. Accordingly, the Company is indemnified for certain fines and other costs and expenses associated with this matter by Stericycle, Inc. The Company has not accrued any amounts in respect of these alleged violations and cannot estimate the reasonably possible loss or the range of reasonably possible losses that it may incur.
The Company has had ongoing meetings with the SCE over processing salt cakes, a processing byproduct, stored at the Al Hafeerah site. The Company’s Bahrain operations that produced the salt cakes has ceased operations. An Environmental Impact Assessment and Technical Feasibility Study for facilities to process the salt cakes was approved by the SCE during the first quarter of 2018. Commissioning of the facilities was completed during the third quarter of 2021 and the processing of the salt cakes has commenced. The Company's current reserve of $6.2 million at December 31, 2022 continues to represent the Company's best estimate of the ultimate costs to be incurred to resolve this matter. The Company continues to evaluate this reserve and any future change in estimated costs, which could be material to the Company’s results of operations in any one period.
On July 27, 2018 Brazil’s Federal and Rio de Janeiro State Public Prosecution Offices (MPF and MPE) filed a Civil Public Action against one of the Company's customers (CSN), the Company’s Brazilian subsidiary, the Municipality of Volta Redonda, Brazil, and the Instituto Estadual do Ambiente (local environmental protection agency) seeking the implementation of various measures to limit and reduce the accumulation of customer-owned slag at the site in Brazil. On August 6, 2018 the 3rd Federal Court in Volta Redonda granted the MPF and MPE an injunction against the same parties requiring, among other things, CSN and the Company’s Brazilian subsidiary to limit the volume of slag sent to the site. Because the customer owns the site and the slag located on the site, the Company believes that complying with this injunction is the steel producer’s responsibility. On March 18, 2019 the Court issued an order fining the Company 5,000 Brazilian reais per day (or approximately $1 thousand per day) and CSN 20,000 Brazilian reais per day (or approximately $4 thousand per day) until the requirements of the injunction are met. On November 1, 2019 the Court issued an additional order increasing the fines assessed to the Company to 25,000 Brazilian reais per day (or approximately $5 thousand per day) and raising the fines assessed to CSN to 100,000 Brazilian reais per day (or approximately $19 thousand per day). The Court also assessed an additional fine of 10,000,000 Brazilian reais (or approximately $2 million) against CSN and the Company jointly. The Company is appealing the fines and the underlying injunction. Both the Company and CSN continue to have discussions with the Prosecution Offices and governmental authorities on the injunction and the possible resolution of the underlying case. Beginning on March 25, 2022, the Courts entered a series of orders suspending the litigation proceedings, as well as the accrual of interest and penalties while the parties discuss a possible resolution of the matter. The Company does not believe that a loss relating to this matter is probable or estimable at this point.
On October 19, 2018 local environmental authorities issued an enforcement action against the Company concerning the Company’s operations at a customer site in Ijmuiden, Netherlands. The enforcement action alleged violations of the Company’s environmental permit at the site, which restricts the release of any visible dust emissions. On January 12, 2022, the Administrative Supreme Court upheld the Company’s challenge of these enforcement actions as they relate to the slag tipping area of the site. As a result, all fines asserted against the Company to date have been invalidated and all fines paid to date have been reimbursed. This order is not appealable. On or about October 14, 2021, the Company received a subpoena and two indictments on this matter before the Amsterdam District Court in the Netherlands. The Amsterdam Public Prosecutor’s Office issued the two indictments against the Company, alleging violations in connection with dust releases and/or events alleged to have occurred in 2018 through May 2020 at the site. The action cites provisions which permit fines for the alleged infractions and seeks €100,000 in fines with a smaller amount held in abeyance. On February 2, 2022, the prosecutor announced that they would further investigate residents’ claims related to this matter. On February 25, 2022, the Amsterdam District Court ruled that the Company was liable for only one alleged violation and that this alleged violation was unintentional. The court issued a fine of €5,000, to be held in abeyance. Both the Company and the Public Prosecutor’s Office have appealed this ruling. The Company is vigorously contesting all allegations against it and is also working with its customer to ensure the control of emissions. The Company has contractual indemnity rights from its customer that it believes will substantially cover any fines or penalties.
On November 5, 2020, a worker suffered a fatal injury at a site owned by the Company’s customer, Gerdau Ameristeel US, Inc., in Midlothian, TX. Although the Company was not directly involved in the accident, the worker was employed by a sub-contractor of a sub-contractor of the Company. The worker’s family filed suit in the 125th Judicial District Court of Harris County, TX against multiple parties including the Company. By a letter agreement dated December 1, 2022, the worker's family agreed to settle their claims against the Company and Gerdau. The parties are working to complete a formal settlement agreement. The Company has recorded a liability for its insurance deductible of $5 million and an indemnification receivable from its customer for the recovery of certain losses based upon the contractual indemnity rights. There can be no assurances that the Company's position will ultimately prevail; however, any financial statement impact is not expected to be material.
On March 22, 2022, the U.S. EPA issued a Notice of Intent to File an Administrative Complaint (NOI) alleging violations of the federal Emergency Planning and Community Right-to-Know Act at the Company’s facilities in Tacoma, WA and Kent, WA. The NOI relates exclusively or almost exclusively to the period when Stericycle owned and operated the sites. The NOI proposes a penalty of $3,000,000. The Company is currently reviewing the veracity of the allegations and the corresponding proposed penalty amount and has recorded a liability of $600,000 as its best estimate to resolve this matter. While it is the Company’s position that it has recourse for some or all liabilities, if any, that arise from this matter under the ESOL purchase agreement and representations and warranties insurance policies purchased by the Company, there can be no assurances that the Company’s position will ultimately prevail.
On March 21, 2022, the Company received a draft penalty matrix from the PA DEP concerning alleged reporting, monitoring and related issues at the Company’s Hatfield, PA site prior to the time the Company acquired the site from Stericycle. The draft penalty matrix proposes a penalty of $1,000,000. On June 29, 2022, the PA DEP issued a draft Consent Assessment of Civil Penalty ("CACP") related to the alleged issues at the site. The Company and PA DEP have reached an agreement in principle to settle PA DEP's claims for $239,500, which has been recorded as a liability. The parties are working to draft a final CACP. While it is the Company’s position that it has recourse for some or all liabilities that arise from this matter under the ESOL purchase agreement and representations and warranties insurance policies purchased by the Company, there can be no assurances that the Company’s position will ultimately prevail.
DEA Investigation
Prior to the Company’s acquisition of ESOL, Stericycle, Inc., notified the Company that the DEA had served an administrative subpoena on Stericycle, Inc. and executed a search warrant at a facility in Rancho Cordova, California and an administrative inspection warrant at a facility in Indianapolis, Indiana. The Company has determined that the DEA and the DTSC have launched investigations involving, at least in part, the ESOL business of collecting, transporting, and destroying controlled substances from retail customers that transferred from Stericycle, Inc. to the Company. The Company is cooperating with these inquiries, which relate primarily to the period before the Company owned the ESOL business. Since the acquisition of the ESOL business, the Company has performed a vigorous review of ESOL’s compliance program related to controlled substances and has made material changes to the manner in which controlled substances are transported from retail customers to DEA-registered facilities for destruction. The Company has not accrued any amounts in respect of these investigations and cannot estimate the reasonably possible loss or the range of reasonably possible losses that it may incur, if any. Investigations of this type are, by their nature, uncertain and unpredictable. While it is the Company’s position that it has recourse for some or all liabilities, if any, that arise from these matters under the ESOL purchase agreement and representations and warranties insurance policies purchased by the Company, there can be no assurances that the Company’s position will ultimately prevail.
Brazilian Tax Disputes
The Company is involved in a number of tax disputes with federal, state and municipal tax authorities in Brazil. These disputes are at various stages of the legal process, including the administrative review phase and the collection action phase, and include assessments of fixed amounts of principal and penalties, plus interest charges that increase at statutorily determined amounts per month and are assessed on the aggregate amount of the principal and penalties. In addition, the losing party, at the collection action or court of appeals phase, could be subject to a charge to cover statutorily mandated legal fees, which are generally calculated as a percentage of the total assessed amounts due, inclusive of penalty and interest. Many of the claims relate to ICMS, services and social security tax disputes. The largest proportion of the assessed amounts relate to ICMS claims filed by the SPRA, encompassing the period from January 2002 to May 2005.
In October 2009 the Company received notification of the SPRA’s final administrative decision regarding the levying of ICMS in the State of São Paulo in relation to services provided to a customer in the State between January 2004 and May 2005. As of December 31, 2022, the principal amount of the tax assessment from the SPRA with regard to this case is approximately $1.1 million, with penalty, interest and fees assessed to date increasing such amount by an additional $16.9 million. On June 4, 2018, the Appellate Court of the State of Sao Paulo ruled in favor of the SPRA but ruled that the assessed penalty should be reduced to approximately $1.1 million. After calculating the interest accrued on the penalty, the Company estimates that this ruling reduces the current overall potential liability for this case to approximately $6.9 million. All such amounts include the effect of foreign currency translation. The Company has appealed the ruling in favor of the SPRA to the Superior Court of Justice. Due to multiple court precedents in the Company's favor, as well as the Company's ability to appeal, the Company does not believe a loss is probable.
Another ICMS tax case involving the SPRA refers to the tax period from January 2002 to December 2003. In December 2018, the administrative tribunal hearing the case upheld the Company's liability. The aggregate amount assessed by the tax authorities in August 2005 was $4.8 million (the amounts with regard to this claim are valued as of the date of the assessment since it has not yet reached the collection phase), composed of a principal amount of $1.1 million, with penalty and interest assessed through that date increasing such amount by an additional $3.6 million. On December 6, 2018, the administrative tribunal reduced the applicable penalties to $0.8 million. After calculating the interest accrued on the current penalty, the Company estimates that the current overall liability for this case to be approximately $5.3 million. All such amounts include the effect of foreign currency translation. The Company has appealed to the judicial phase at the Third Trial Court of the District of Cubatão, State of São Paulo. On October 14, 2022, the District Court issued a decision holding that the Company is not liable for the taxes at issue. Due to multiple court precedents in the Company's favor, the Company does not believe a loss is probable.
The Company continues to believe that sufficient coverage for these claims exists as a result of the indemnification obligations of the Company's customer and such customer’s pledge of assets in connection with the October 2009 notice, as required by Brazilian law.
On December 30, 2020, the Company received an assessment from the municipal authority in Ipatinga, Brazil alleging $2.0 million in unpaid service taxes from the period 2015 to 2020. After calculating the interest and penalties accrued, the Company estimates that the current overall potential liability for this case to be approximately $3.4 million. On January 18, 2021, the Company filed a challenge to the assessment. Due to the multiple defenses that are available, the Company does not believe a loss is probable.
The Company intends to continue its practice of vigorously defending itself against these tax claims under various alternatives, including judicial appeal. The Company will continue to evaluate its potential liability with regard to these claims on a quarterly basis; however, it is not possible to predict the ultimate outcome of these tax-related disputes in Brazil. No loss provision has been recorded in the Company's consolidated financial statements for the disputes described above because the loss contingency is not deemed probable, and the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with Brazilian tax disputes would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Other
The Company is named as one of many defendants (approximately 90 or more in most cases) in legal actions in the U.S. alleging personal injury from exposure to airborne asbestos over the past several decades. In their suits, the plaintiffs have named as defendants, among others, many manufacturers, distributors and installers of numerous types of equipment or products that allegedly contained asbestos.
The Company believes that the claims against it are without merit. The Company has never been a producer, manufacturer or processor of asbestos fibers. Any asbestos-containing part of a Company product used in the past was purchased from a supplier and the asbestos encapsulated in other materials such that airborne exposure, if it occurred, was not harmful and is not associated with the types of injuries alleged in the pending actions.
At December 31, 2022, there were 17,224 pending asbestos personal injury actions filed against the Company. Of those actions, 16,588 were filed in the New York Supreme Court (New York County), 115 were filed in other New York State Supreme Court Counties and 521 were filed in courts located in other states.
The complaints in most of those actions generally follow a form that contains a standard damages demand of $20 million or $25 million, regardless of the individual plaintiff's alleged medical condition, and without identifying any specific Company product.
At December 31, 2022, 16,549 of the actions filed in New York Supreme Court (New York County) were on the Deferred/Inactive Docket created by the court in December 2002 for all pending and future asbestos actions filed by persons who cannot demonstrate that they have a malignant condition or discernible physical impairment. The remaining 39 cases in New York County are pending on the Active or In Extremis Docket created for plaintiffs who can demonstrate a malignant condition or physical impairment.
The Company has liability insurance coverage under various primary and excess policies that the Company believes will be available, if necessary, to substantially cover any liability that might ultimately be incurred in the asbestos actions referred to above. The costs and expenses of the asbestos actions are being paid by the Company’s insurers.
In view of the persistence of asbestos litigation in the U.S., the Company expects to continue to receive additional claims in the future. The Company intends to continue its practice of vigorously defending these claims and cases. At December 31, 2022, the Company has obtained dismissal in 28,416 cases by stipulation or summary judgment prior to trial.
It is not possible to predict the ultimate outcome of asbestos-related actions in the U.S. due to the unpredictable nature of this litigation, and no loss provision has been recorded in the Company's consolidated financial statements because a loss contingency is not deemed probable or estimable. Despite this uncertainty, and although results of operations and cash flows for a given period could be adversely affected by asbestos-related actions, the Company does not expect that any costs that are reasonably possible to be incurred by the Company in connection with asbestos litigation would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
The Company is subject to various other claims and legal proceedings covering a wide range of matters that arose in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance or by established reserves, and, if not so covered, are without merit or are of such kind, or involve such amounts, as would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
Insurance liabilities are recorded when it is probable that a liability has been incurred for a particular event and the amount of loss associated with the event can be reasonably estimated. Insurance reserves have been estimated based primarily upon actuarial calculations and reflect the undiscounted estimated liabilities for ultimate losses, including claims incurred but not reported. Inherent in these estimates are assumptions that are based on the Company's history of claims and losses, a detailed analysis of existing claims with respect to potential value, and current legal and legislative trends. If actual claims differ from those projected by management, changes (either increases or decreases) to insurance reserves may be required and would be recorded through income in the period the change was determined. When a recognized liability has been determined to be covered by third-party insurance, the Company records an insurance claim receivable to reflect the covered liability. Insurance claim receivables are included in Other receivables on the Company's Consolidated Balance Sheets. See Note 1, Summary of Significant Accounting Policies for additional information on Accrued insurance and loss reserves.
13. Capital Stock
The authorized capital stock of the Company consists of 150,000,000 shares of common stock and 4,000,000 shares of preferred stock, both having a par value of $1.25 per share. The preferred stock is issuable in series with terms as fixed by the Board. No preferred stock has been issued. The following table summarizes the Company's common stock activity during the period from January 1, 2020 to December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | |
| | | Shares
Issued | | Treasury
Shares (a) | | Outstanding
Shares |
| Outstanding, January 1, 2020 | | 114,720,347 | | | 36,205,589 | | | 78,514,758 | |
| | | | | | |
| Shares issued for vested restricted stock units | | 229,413 | | | 91,188 | | | 138,225 | |
| Shares issued for vested performance stock units | | 471,412 | | | 206,261 | | | 265,151 | |
| Stock appreciation rights exercised | | 8,870 | | | 2,634 | | | 6,236 | |
| | | | | | |
| | | | | | |
| Outstanding, December 31, 2020 | | 115,430,042 | | | 36,505,672 | | | 78,924,370 | |
| | | | | | |
| Shares issued for vested restricted stock units | | 305,535 | | | 112,275 | | | 193,260 | |
| Shares issued for vested performance stock units | | 124,077 | | | 54,950 | | | 69,127 | |
| Stock appreciation rights exercised | | 46,739 | | | 17,950 | | | 28,789 | |
| | | | | | |
| | | | | | |
| Outstanding, December 31, 2021 | | 115,906,393 | | | 36,690,847 | | | 79,215,546 | |
| | | | | | |
| Shares issued for vested restricted stock units | | 341,051 | | | 131,089 | | | 209,962 | |
| | | | | | |
| Shares issued for vested restricted stock awards | | 87,765 | | | 40,304 | | | 47,461 | |
| Stock appreciation rights exercised | | 23,311 | | | 6,640 | | | 16,671 | |
| | | | | | |
| Outstanding, December 31, 2022 | | 116,358,520 | | | 36,868,880 | | | 79,489,640 | |
The following is a reconciliation of the average shares of common stock used to compute basic earnings per common share to the shares used to compute diluted earnings per common share as shown on the Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | 2022 | | 2021 | | 2020 |
| Income (loss) from continuing operations attributable to Harsco Corporation common stockholders | | $ | (137,155) | | | $ | 22,137 | | | $ | (49,727) | |
| | | | | | |
| Weighted-average shares outstanding—basic | | 79,493 | | | 79,234 | | | 78,939 | |
| Dilutive effect of stock-based compensation | | — | | | 1,055 | | | — | |
| Weighted-average shares outstanding—diluted | | 79,493 | | | 80,289 | | | 78,939 | |
| Income (loss) from continuing operations per common share, attributable to Harsco Corporation common stockholders: |
| Basic | | $ | (1.73) | | | $ | 0.28 | | | $ | (0.63) | |
| | | | | | |
| Diluted | | $ | (1.73) | | | $ | 0.28 | | | $ | (0.63) | |
The following average outstanding stock-based compensation units were not included in the computation of diluted earnings per share because the effect was antidilutive or the market conditions for the performance share units were not met:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2022 | | 2021 | | 2020 |
| Restricted stock units | | 672 | | | — | | | 714 | |
| | | | | | |
| Stock appreciation rights | | 2,092 | | | 826 | | | 2,474 | |
| Performance share units | | 1,040 | | | 865 | | | 887 | |
| | | | | | |