ENVIRI CORPORATION The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as well as the audited consolidated financial statements of the Company, including the notes thereto, included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 which includes additional information about the Company's critical accounting policies, contractual obligations, practices and the transactions that support the financial results, and provides a more comprehensive summary of the Company's outlook, trends and strategies for 2020 and beyond. Certain amounts included in Item 2 of this Quarterly Report on Form 10-Q are rounded in millions and all percentages are calculated based on actual amounts. As a result, minor differences may exist due to rounding. Forward-Looking Statements The nature of the Company's business, together with the number of countries in which it operates, subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In accordance with the "safe harbor" provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, the Company provides the following cautionary remarks regarding important factors that, among others, could cause future results to differ materially from the results contemplated by forward-looking statements, including the expectations and assumptions expressed or implied herein. Forward-looking statements contained herein could include, among other things, statements about management's confidence in and strategies for performance; expectations for new and existing products, technologies and opportunities; and expectations regarding growth, sales, cash flows, and earnings. Forward-looking statements can be identified by the use of such terms as "may," "could," "expect," "anticipate," "intend," "believe," "likely," "estimate," "plan" or other comparable terms. Factors that could cause actual results to differ, perhaps materially, from those implied by forward-looking statements include, but are not limited to: (1) changes in the worldwide business environment in which the Company operates, including changes in general economic conditions or changes due to COVID-19 and governmental and market reactions to COVID-19; (2) changes in currency exchange rates, interest rates, commodity and fuel costs and capital costs; (3) changes in the performance of equity and bond markets that could affect, among other things, the valuation of the assets in the Company's pension plans and the accounting for pension assets, liabilities and expenses; (4) changes in governmental laws and regulations, including environmental, occupational health and safety, tax and import tariff standards and amounts; (5) market and competitive changes, including pricing pressures, market demand and acceptance for new products, services and technologies; (6) the Company's inability or failure to protect its intellectual property rights from infringement in one or more of the many countries in which the Company operates; (7) failure to effectively prevent, detect or recover from breaches in the Company's cybersecurity infrastructure; (8) unforeseen business disruptions in one or more of the many countries in which the Company operates due to political instability, civil disobedience, armed hostilities, public health issues or other calamities; (9) disruptions associated with labor disputes and increased operating costs associated with union organization; (10) the seasonal nature of the Company's business; (11) the Company's ability to successfully enter into new contracts and complete new acquisitions or strategic ventures in the time-frame contemplated, or at all; (12) the integration of the Company's strategic acquisitions; (13) potential severe volatility in the capital markets; (14) failure to retain key management and employees; (15) the amount and timing of repurchases of the Company's common stock, if any; (16) the outcome of any disputes with customers, contractors and subcontractors; (17) the financial condition of the Company's customers, including the ability of customers (especially those that may be highly leveraged, have inadequate liquidity or whose business is significantly impacted by COVID-19) to maintain their credit availability; (18) implementation of environmental remediation matters; (19) risk and uncertainty associated with intangible assets and (20) other risk factors listed from time to time in the Company'sSEC reports. A further discussion of these, along with other potential risk factors, can be found in Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , and Part II, Item 1A, Risk Factors herein. The Company cautions that these factors may not be exhaustive and that many of these factors are beyond the Company's ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty to update forward-looking statements except as may be required by law. 36 -------------------------------------------------------------------------------- Table of Contents Executive Overview The Company is a market-leading, global provider of environmental solutions for industrial, retail and medical waste streams, and innovative equipment and technology for the rail sector. The Company's operations consist of three reportable segments: Harsco Environmental, Harsco Clean Earth andHarsco Rail ; and the Company is working towards transformingHarsco into a single-thesis environmental solutions company that is a global leader in the markets we serve. The Harsco Environmental Segment operates primarily under long-term contracts, providing critical environmental services and material processing to the global steel and metals industries including zero waste solutions for manufacturing byproducts within the metals industry. The Harsco Clean Earth Segment provides waste management services including transportation, specialty waste processing, recycling and beneficial reuse solutions for hazardous wastes, contaminated materials and dredged volumes. The Harsco Rail Segment is a provider of highly engineered maintenance equipment, after-market parts and safety and diagnostic systems which support railroad and transit customers worldwide. The Company has locations in approximately 30 countries, including theU.S. The Company was incorporated in 1956. InApril 2020 the Company completed the previously announced acquisition of ESOL, from Stericycle, Inc., for$438.8 million in cash, subject to post-closing adjustments. ESOL is an established waste transportation, processing and services provider with a comprehensive portfolio of disposal solutions for customers primarily across the industrial, retail and healthcare markets. ESOL's network includes thirteen permitted TSDF facilities and forty-eight 10-day transfer facilities serving more than ninety-thousand customer locations utilizing a fleet of more than seven-hundred vehicles. The acquisition of ESOL furthersHarsco's transformation into a global, market-leading, single-thesis environmental solutions platform. The results of ESOL are reflected as part of the Harsco Clean Earth Segment. InMarch 2020 the Company raised$280 million pursuant to the New Term Loan as a new tranche under its existing Senior Secured Credit Facilities. The New Term Loan was fully drawn onApril 6, 2020 to partially fund the ESOL acquisition. Borrowings under the New Term Loan bear interest at a rate per annum ranging from 150 to 225 basis points over adjusted LIBOR (as defined in the Credit Agreement). The New Term Loan will mature onJune 28, 2024 . The Company capitalized$1.9 million of fees related to the issuance of the New Term Loan, principally all of which have been paid as ofJune 30, 2020 . In bothMarch 2020 andJune 2020 , the Company amended the Senior Secured Credit Facilities to increase the net debt to consolidated adjusted EBITDA ratio covenant. As a result of these amendments, the net debt to consolidated adjusted EBITDA ratio covenant has been increased to 5.25 forJune 30, 2020 , 5.75 throughMarch 2021 and then decreasing quarterly until reaching 4.75 inDecember 2021 . There is no change to the previously agreed interest rates as long as the Company's total leverage ratio does not equal or exceed 4.50 at which time it would increase by 25 basis points. During the three and six months endedJune 30, 2020 , the Company recognized$1.4 million and$1.9 million , respectively, of fees and expenses related to the amended Senior Secured Credit Facilities in the caption Unused debt commitment and amendment fees on the Condensed Consolidated Statement of Operations. InJanuary 2020 the Company sold IKG for$85 million , including a note receivable with a face value of$40.0 million (initial fair value$34.3 million ) and recognized a gain on sale of$18.4 million pre-tax (or approximately$9 million after-tax). This disposal, along with the disposals of AXC and PK in 2019, represent a strategic shift and accelerate the transformation of the Company's portfolio of businesses into a global, market-leading, single-thesis environmental solutions platform. Beginning inMarch 2020 overall global economic conditions were significantly impacted by COVID-19. The continuing impact of COVID-19 on the Company varies by end market as well as local conditions (including applicable government mandates). The ultimate duration and impact of COVID-19 on the Company and its customers' operations is presently unclear, though the Company expects impacts to continue for at least the remainder for 2020. The Company continues to operate as a provider of certain essential services in theU.S. and most other countries. In addition, the Company continues to take significant and proactive actions to protect all stakeholders and to minimize the operational and financial impacts of COVID-19 where possible. Work safety and flexibility measures have been implemented as the Company strives to keep facilities operational. In addition, the Company is also focused on actions to adjust its cost structure, reduce capital and operating expenditures, and to preserve its financial flexibility and liquidity position. Please refer to the below discussion of business outlook and Part II, Item 1A, "Risk Factors" for additional information related to the potential impacts of COVID-19 on the Company. 37
-------------------------------------------------------------------------------- Table of Contents Highlights from the second quarter and six months endedJune 30, 2020 include (refer to the discussion of segment and consolidated results included within Results of Operations below, as well as Liquidity and Capital Resources, for additional information pertaining to the key drivers impacting these highlights): •Revenues for the second quarter and six months endedJune 30, 2020 increased approximately 27% and 24%, respectively, compared with the second quarter and six months endedJune 30, 2019 . The primary drivers for these increases were the acquisitions of Clean Earth and ESOL as well as increased revenue related to maintenance-of-way equipment sales in the Harsco Rail Segment, partially offset by lower customer production in the Harsco Environmental Segment, inclusive of the impacts from COVID-19, and the impact of foreign currency translation. •Operating income from continuing operations for the second quarter and six months endedJune 30, 2020 decreased approximately 90% and 87%, respectively, compared with the second quarter and six months endedJune 30, 2019 . The primary drivers for these decreases were decreased customer production levels in the Harsco Environmental Segment, inclusive of the impacts of COVID-19, incremental acquisition and integration costs primarily related to the ESOL acquisition, the timing and mix of sales in the Harsco Rail Segment and severance costs, primarily incurred during the first quarter of 2020, of approximately$6 million in the Harsco Environmental Segment. These decreases were partially offset by the inclusion of operating results for both Clean Earth and ESOL as well as lower selling, general and administrative expenses in Harsco Environmental and Harsco Rail Segments as well as Corporate (exclusive of the aforementioned incremental acquisition and integration costs). •Diluted loss per common share from continuing operations attributable toHarsco Corporation for the second quarter endedJune 30, 2020 was$0.14 , an increase compared with the Diluted loss per common share from continuing operations of$0.04 during second quarter endedJune 30, 2019 . Diluted loss per common share from continuing operations attributable toHarsco Corporation for the six months endedJune 30, 2020 was$0.25 compared with the Diluted earnings per common share from continuing operations of$0.09 during six months endedJune 30, 2019 . In addition to the factors noted above for revenue and operating income from continuing operations, the primary driver of this decrease was increased interest expense partially offset by a decrease in debt-related transaction expenses and the effect of income taxes. •Cash flows from operating activities for the six months endedJune 30, 2020 were$21.5 million , an increase of$16.1 million compared with the Cash flows from operating activities for the six months endedJune 30, 2019 . The primary driver for this increase were changes in net working capital, primarily additional customer advances in the Harsco Rail Segment and favorable timing of accounts receivable collections, partially offset by lower net income (excluding the impacts of the IKG sale), including the incremental acquisition and integration costs principally related to the ESOL acquisition. This increase also reflects the Company's deferral of certain payroll tax payments and pension contributions, as allowed by various legislation. •Capital expenditures for purchases of property, plant and equipment for the six months endedJune 30, 2020 were$51.2 million , a decrease of$40.0 million or 43.8% compared with the first six months of 2010. The decrease was the result of the Company's goal of maintaining financial flexibility and cash flow during COVID-19. Looking forward, the Company expects a positive long-term outlook across all businesses, however results will be negatively impacted by COVID-19 for at least the remainder of 2020. The Company's view for the remainder of 2020 and beyond is supported by the below factors, which should be considered in the context of other risks, trends and strategies in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 together with those described in Part II, Item 1A, "Risk Factors": •As a result of the continuing and evolving impact of COVID-19 on the global economy, the Company anticipates slow-downs in customer demand and business disruption to continue for the foreseeable future. The ultimate extent and duration of such impacts on the Company's businesses is not presently known, though the Company expects impacts to continue for at least the remainder of 2020. The Company is continuing to work diligently and safely to provide customers with services and products. •The Harsco Environmental Segment continues to operate in most countries throughout the world in which it has a presence to support critical metal production, although the Company has been impacted by an overall decline in global steel production. Several customer mill locations where production was temporary idled during March andApril 2020 , as a result of COVID-19, have restarted though overall production remains below normalized levels and will remain so until underlying demand recovers. Estimated customer mill utilization decreased by 22% and 14% for the second quarter and six months endedJune 30, 2020 , respectively, compared with the same periods in the prior year. Over the longer-term the Company expects that the Harsco Environmental Segment's return to growth will be driven by investments, innovation and economic growth that supports higher customer steel production. 38
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•The Harsco Clean Earth Segment locations are currently operating as an essential services provider throughout theU.S. , enabling the business to continue to perform critical environmental services. However, in the near term it is likely that recent decreases in construction and industrial related activity, resulting from COVID-19, will impact the contaminated materials and hazardous waste lines of business. Contaminated soil volumes are down approximately 10% during the six months endedJune 30, 2020 when compared to the same period in prior year. The immediate impact of COVID-19 on the hazardous waste line of business, including the recently completed ESOL acquisition, will vary by end market with certain end-markets such as medical waste and retail, being somewhat more resilient though the Company may experience lower volumes in the near term. In addition, the dredged materials line of business is expected to be less impacted by COVID-19 and has seen an increase in volumes for the first six months of 2020 when compared to the same period in prior year. Over the longer-term the Company expects growth opportunities, including the recently completed ESOL transaction, positive market trends, operational synergy opportunities and the less cyclical and recurring nature of this business to provide favorable returns on the Company's recent investments. •The Harsco Rail Segment continues to fulfill orders critical to global transportation and is on track to increase capacity during the remainder of 2020 through the implementation of its Supply Chain Operation Recovery program allowing the business to deliver on its backlog. In the near term, theHarsco Rail Segment has begun to be impacted by a decrease in certain short-cycle and equipment sales as a result of COVID-19, primarily in theU.S. , which is likely to continue in the second half of 2020. Overall, the Harsco Rail Segment is supported by record backlog, which grew during the second quarter of 2020, and the longer-term outlook for this business remains strong. •The Company has announced plans to lower 2020 capital expenditures by approximately$75 million from an originally expected range of$170 million to$180 million , exclusive of the ESOL acquisition, with the goal of preserving positive free cash flow (cash flows from operations; deduct capital expenditures; add back proceeds from asset sales; add back transaction-related expenditures) for the year. •The Company anticipates corporate cost reductions during 2020 to partially offset the impact of COVID-19. Additionally, the Company has developed a tiered approach to potential supplemental cost mitigation efforts should the impacts of COVID-19 on the Company's businesses become more severe or prolonged in nature. •Interest expense for 2020 is expected to increase due to higher average debt balances during 2020 and the impact of a higher weighted-average interest rate resulting from the issuance of the 5.75% Notes in 2019 and the New Term Loan. •Net periodic pension cost will decrease by approximately$12 million during 2020 which will primarily be reflected in the caption Defined benefit pension (income) expense on the Condensed Consolidated Statement of Operations. The decrease is primarily the result of higher plan asset values atDecember 31, 2019 . Results of Operations Segment Results Three Months Ended Six Months Ended June 30 Jun 30 (In millions, except percentages) 2020 2019 2020 2019 Revenues: Harsco Environmental$ 204.0 $ 269.3 $ 445.6 $ 530.7 Harsco Clean Earth 161.6 - 240.4 - Harsco Rail 81.7 81.6 160.2 150.2 Total Revenues$ 447.3 $ 350.9 $ 846.1 $ 680.8 Operating Income (Loss): Harsco Environmental$ 13.6 $ 27.6 $ 24.1 $ 52.1 Harsco Clean Earth (0.2) - 4.0 - Harsco Rail 8.6 9.4 15.1 14.8 Corporate (20.1) (19.2) (38.5) (29.3) Total Operating Income:$ 1.9 $ 17.8 $ 4.7 $ 37.6 Operating Margins: Harsco Environmental 6.6 % 10.2 % 5.4 % 9.8 % Harsco Clean Earth (0.1) - 1.7 - Harsco Rail 10.6 11.6 % 9.4 9.9 % Consolidated Operating Margin 0.4 % 5.1 % 0.6 % 5.5 % 39
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Harsco Environmental Segment:
June 30, 2020
Three Months
Significant Effects on Revenues (In millions) Ended Six Months Ended
Revenues - 2019 $
269.3
(45.6) (48.0)
Impact of foreign currency translation (12.9) (23.5)
Net impact of new and lost contracts (5.9) (12.7)
Other (0.9) (0.9)
Revenues - 2020 $ 204.0 $ 445.6
Factors Positively Affecting Operating Income:
•Lower selling, general and administrative expenses, exclusive of provisions for
doubtful accounts, improved operating income by $4.7 million and $7.5 million
during the second quarter and six months ended June 30, 2020 , respectively,
compared to the same periods in the prior year.
•The Company recorded a provision for doubtful accounts of $5.4 million related
to a U.K. customer that entered administration during the second quarter 2019
that did not repeat.
Factors Negatively Impacting Operating Income:
•Overall steel production by customers under environmental services contracts,
including the impact of new and exited contracts, decreased 24% and 14% for the
second quarter and six months ended June 30, 2020 , respectively, compared with
the same periods in the prior year. The decreased production was attributable to
the global economic impact of COVID-19.
•Operating results for the second quarter ended June 30, 2020 were impacted by
decreased demand for applied products and by-products. The decreased demand was
attributable to the global economic impact of COVID-19.
•Operating results for the six months ended June 30, 2020 were also negatively
impacted by $5.2 million of employee termination benefit costs incurred to
improve operational efficiency and support near-term financial performance.
•Foreign currency translation decreased operating income by $1.8 million and
$2.9 million during the second quarter and six months ended June 30, 2020 ,
respectively, compared with the same periods in the prior year.
•Operating income for the six months ended June 30, 2020 was negatively impacted
by a $2.3 million gain during the first quarter of 2019 related to the
recognition of a foreign currency cumulative translation adjustment resulting
from the substantial liquidation of a subsidiary that did not repeat.
•Incremental costs directly related to COVID-19 of $0.8 million for six months
ended June 30, 2020 decreased operating income compared with the same periods in
prior year.
•Operating results for the second quarter and the six months ended June 30, 2020
were negatively impacted by an approximate $4 million net positive contingent
consideration adjustment related to the Altek acquisition which did not repeat.
Harsco Clean Earth Segment:
The Company acquired ESOL on April 6, 2020 and Clean Earth on June 28, 2019 and
the operating results of both are reflected in the Harsco Clean Earth Segment,
which is a separate reportable segment of the Company. Revenues and operating
loss for second quarter of 2020 were $161.6 million and $0.2 million ,
respectively. Revenues and operating income for six months ended June 30, 2020
were $240.4 million and $4.0 million , respectively. Operating results for the
second quarter and six months ended June 30, 2020 included $6.3 million and
$10.2 million of intangible asset amortization expense, respectively.
Harsco Rail Segment:
June 30, 2020
Significant Effects on Revenues (In millions) Three Months Ended Six Months Ended
Revenues - 2019 $ 81.6 $ 150.2 Net effect of price/volume changes, primarily attributable to volume changes
0.7 11.4
Impact of foreign currency translation (0.6) (1.4)
Revenues - 2020 $ 81.7 $ 160.2
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Table of Contents Factors Positively Affecting Operating Income: •Increased railway contracting services, primarily related to the start of a new contract in theU.S. , increased operating income during the second quarter and six months endedJune 30, 2020 compared with the same periods in the prior year. •Results for the second quarter and six months endedJune 30, 2019 included$1.2 million and$3.8 million , respectively, of costs associated with the consolidation ofU.S. manufacturing and distribution into one facility that did not repeat during the second quarter and six months ended ofJune 30, 2020 . •Lower selling, general and administrative expenses improved operating income by$2.3 million and$2.8 million during the second quarter and six months endedJune 30, 2020 , respectively, compared to the same periods in the prior year. Factors Negatively Impacting Operating Income: •The mix of maintenance-of-way equipment sales, as well as the timing and mix of after-market parts sales, decreased operating income during the second quarter and six months endedJune 30, 2020 compared with the same periods in the prior year. •Incremental costs directly related to COVID-19 of$0.3 million for both the second quarter and six months endedJune 30, 2020 decreased operating income compared with the same periods in prior year. In addition to the factors highlighted above that positively affected or negatively impacted segment operating income, the Company's Corporate function was impacted by incremental acquisition and integration costs of approximately$5 million and$16 million during the three and six months endedJune 30, 2020 , primarily related to the acquisition of ESOL. These increased costs were partially offset by decreases in other selling, general and administrative costs including lower compensation expense and cost reduction actions due to COVID-19.
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