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, 2020 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 2021 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 or commodity markets; (14) failure to retain key management and employees; (15) the outcome of any disputes with customers, contractors and subcontractors; (16) the financial condition of the Company's customers, including the ability of customers (especially those that may be highly leveraged, have inadequate liquidity or whose business is significantly impacted by COVID-19) to maintain their credit availability; (17) implementation of environmental remediation matters; (18) risk and uncertainty associated with intangible assets and (19) 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, 2020 . 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. 33 -------------------------------------------------------------------------------- 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 . The Company is working towards transforming into a single-thesis environmental solutions company that is a global leader in the markets the Company serves. 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 waste, 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. OnMarch 10, 2021 , the Company amended its Senior Secured Credit Facilities to, among other things, extend the maturity date of the Revolving Credit Facility toMarch 10, 2026 , and to increase certain levels set forth in the total net leverage ratio covenant. In addition, the Company issued New Term Loans, using the proceeds to repay in full the outstanding Term Loan A and Term Loan B. The New Term Loans mature onMarch 10, 2028 , or earlier, on the date that is 91 days prior to the maturity date of the Company's 5.75% Senior Notes due 2027 if such Senior Notes are outstanding or have not been refinanced at such time. See Note 9, Debt, in Part I, Item 1, "Financial Statements," for additional details. Beginning inMarch 2020 overall global economic conditions were significantly impacted by COVID-19. The Company operated as a provider of certain essential services since the onset of the pandemic, and it took steps to protect all stakeholders and to minimize the operational and financial impacts of COVID-19. Looking forward the impact of COVID-19 on the Company is unclear, however business conditions have steadily improved since the second quarter of 2020 and the Company anticipates that business fundamentals will strengthen further in 2021. Please refer to the below discussion of business outlook and Part II, Item 1A, "Risk Factors" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for additional information related to the potential impacts of COVID-19 on the Company. Highlights from the second quarter and six months endedJune 30, 2021 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, 2021 increased approximately 27% and 30%, respectively, compared with the second quarter and six months endedJune 30, 2020 . The primary drivers for these increases were the acquisition of ESOL for the six months endedJune 30, 2021 ; and for the second quarter and six months endedJune 30, 2021 increased volumes in theHarsco Environmental Segment and Harsco Clean Earth Segment as well as increased equipment sales in the Harsco Rail Segment and the impact of foreign currency translation. •Operating income from continuing operations for the second quarter and six months endedJune 30, 2021 increased$34.4 million and$56.3 million , respectively, compared with the second quarter and six months endedJune 30, 2020 . The primary drivers for these increases were increased volumes in the Harsco Environmental Segment and the Clean Earth Segment; the acquisition of ESOL; acquisition and integration costs primarily related to the ESOL acquisition, which were incurred during the first six months of 2020 and not repeated; and asset sale gains during the second quarter of 2021 and termination benefit costs of$5.2 million which were incurred in the first six months of 2020 in the Harsco Environmental Segment. •Diluted earnings per common share from continuing operations attributable toHarsco Corporation for the second quarter endedJune 30, 2021 were$0.18 , an increase compared with the diluted loss per common share from continuing operations of$0.14 during second quarter endedJune 30, 2020 . Diluted earnings per common share from continuing operations attributable toHarsco Corporation for the six months endedJune 30, 2021 was$0.20 , an increase compared with the diluted loss per common share from continuing operations of$0.25 during the six months endedJune 30, 2020 . The primary drivers of this increase are those noted above for revenue and operating income from continuing operations, partially offset by increased interest expense due to higher debt levels, debt-related transaction expenses and the effect of income taxes. •Cash flows provided by operating activities for the six months endedJune 30, 2021 were$13.5 million , a decrease of$8.0 million compared with the Cash flows provided by operating activities for the six months endedJune 30, 2020 . The primary driver for this decrease was an unfavorable change in working capital partially offset by higher cash net income. The primary drivers of the unfavorable changes in working capital were due to lower customer advances in 34 -------------------------------------------------------------------------------- Table of Contents the Harsco Rail Segment and the timing of sales and collections of accounts receivable in all segments, partially offset by a favorable decrease in inventory in the Harsco Rail Segment. •Capital expenditures for purchases of property, plant and equipment for the six months endedJune 30, 2021 were$68.6 million , an increase of$17.4 million or 34.0% compared with the six months endedJune 30, 2020 . The Company maintains a positive outlook across all businesses supported by favorable underlying growth characteristics in its businesses and investments by the Company to further supplement growth. Financial results have been impacted by the global COVID-19 pandemic that began in 2020. This business pressure was most significant during the second and third quarters of 2020, and while the pace of the recovery varies by end market, economic conditions in the Company's businesses have improved meaningfully since mid-2020. As a result, the Company expects financial performance to continue to improve during 2021. The Company's view for the remainder of 2021 and beyond is supported by the following 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, 2020 together with those described at the beginning of this section: •The Harsco Environmental Segment operates throughout the world to support critical metal production. In 2021, financial performance of this segment is expected to strengthen versus 2020 as a result of improved demand for environmental services and applied products as well as increased commodity prices and positive contributions from new contracts or growth investments. Over the longer-term the Company expects that the Harsco Environmental Segment's growth will be driven by economic growth that supports higher global steel consumption as well as investments and innovation that support the environmental solutions needs of customers. •The Harsco Clean Earth Segment locations operate throughout theU.S. as an essential services provider, by performing critical environmental services. The segment's hazardous waste line of business is economically resilient as proven by its recovery from the pandemic, while its contaminated materials business has lagged in its recovery due to constraints on non-residential construction activity in certain geographies and governmental constraints on project spending. With that said, financial results for Clean Earth are expected to improve in 2021 as a result of organic growth within its hazardous waste processing business and the inclusion of ESOL for an additional quarter as well as the improvement benefits anticipated from the integration of ESOL. Beyond 2021, the Company expects this segment to benefit from positive underlying market trends, further growth opportunities and operational synergy opportunities as well as from the less cyclical and recurring nature of this business. These dynamics are expected to provide favorable returns on the Company's investments over time. •The Harsco Rail Segment manufacturers products critical to global transportation, supported by recent actions to strengthen and increase its manufacturing capabilities and capacity. These operational investments position the business to deliver on its backlog in the coming years. Through 2020, the Harsco Rail Segment was impacted by a decrease in certain short-cycle sales as a result of COVID-19. These pressures however appear to be easing, and the Company now expects that increased global demand for rail maintenance equipment and technology products as well as increased contract services demand will support improved financial performance in 2021 compared with the prior year. More broadly, the Harsco Rail Segment is supported by a record backlog and the longer-term outlook for this business remains strong, supported by future infrastructure investments, economic development in emerging economies, rail electrification in certain geographies, safety awareness and automation. •The Company undertook significant actions to reduce corporate costs and capital spending in 2020 as a result of the pandemic. A portion of these costs and expenditures will return in the current year, however the Company's disciplined approach to overall costs and free cash flow remains in place. •Interest expense for 2021 is expected to increase due to higher average debt balances following the purchase of ESOL. •Net periodic pension income will increase by approximately$8 million during 2021 which will primarily be reflected in the caption Defined benefit pension (income) expense on the Consolidated Statement of Operations. The increase is primarily the result of higher plan asset values atDecember 31, 2020 . •The long-lived assets of theAltek Group within the Harsco Environmental Segment primarily consist of intangible assets which have a carrying value of$41.7 million atJune 30, 2021 . The Company tested the recoverability of Altek's long-lived asset group in the fourth quarter of 2020, and no impairment was recorded. The Company has not identified any triggering events for the Altek asset group in the second quarter of 2021. However, if actual results prove inconsistent with the Company's assumptions and judgments of the projected cash flows, it could result in impairment of the Altek intangible assets in future periods. •The Company is currently manufacturing seven multipurpose Stoneblower machines for theU.K. -based customer Network Rail under a long-term contract. Delivery of these machines have been delayed due to several factors, including customer expectations and requirements and COVID-19, and the Company's estimated delivery schedule would trigger liquidated damages. However, based on the nature of these delays and negotiations with the customer, the Company expects that it will get relief from the customer for most of these liquidated damages, and as such the 35 -------------------------------------------------------------------------------- Table of Contents Company's current estimate of contract revenues has not been reduced. However, if the Company is not granted relief, any adjustment to the estimate of these liquidated damages in the future could have a material impact on the Company's results of operations in that period. Results of Operations Segment Results Three Months Ended Six Months Ended June 30 June 30 (In millions, except percentages) 2021 2020 2021 2020 Revenues: Harsco Environmental$ 272.5 $ 204.0 $ 530.5 $ 445.6 Harsco Clean Earth 196.1 161.6 385.4 240.4 Harsco Rail 101.1 81.7 182.7 160.2 Total Revenues$ 569.8 $ 447.3 $ 1,098.7 $ 846.1 Operating Income (Loss): Harsco Environmental$ 30.2 $ 13.6 $ 56.2 $ 24.1 Harsco Clean Earth 7.4 (0.2) 10.6 4.0 Harsco Rail 8.9 8.6 13.6 15.1 Corporate (10.3) (20.1) (19.3) (38.5) Total Operating Income$ 36.2 $ 1.9 $ 61.0 $ 4.7 Operating Margins: Harsco Environmental 11.1 % 6.6 % 10.6 % 5.4 % Harsco Clean Earth 3.8 % (0.1) % 2.7 1.7 % Harsco Rail 8.8 % 10.6 % 7.4 9.4 % Consolidated Operating Margin 6.4 % 0.4 % 5.6 % 0.6 % Harsco Environmental Segment: June 30, 2021 Three Months Six Months Significant Effects on Revenues (In millions) Ended Ended Revenues - 2020 $
204.0
53.7 61.3
Impact of foreign currency translation 13.8 21.0
Net impact of new and lost contracts 0.1 1.4
Other 0.9 1.2
Revenues - 2021 $ 272.5 $ 530.5
Factors Positively Affecting Operating Income:
•Operating income was positively affected by improved overall steel production
by customers under environmental services contracts for the second quarter and
six months ended June 30, 2021 .
•Higher asset sale gains of $4.1 million in the second quarter of 2021 compared
with the same period in the prior year.
•Operating income was positively affected by higher contributions from applied
products during the second quarter and six months ended June 30, 2021 compared
with the same period in the prior year.
•Operating results for the six months ended June 30, 2020 were negatively
impacted by $5.2 million of employee termination benefit costs.
•Foreign currency translation did not significantly impact operating income in
the second quarter and six months ended June 30, 2021 .
Factors Negatively Impacting Operating Income:
•Higher compensation costs during the second quarter and six months ended June
30, 2021 .
•Impact of exited contracts occurring during the second quarter and six months
ended June 30, 2021 .
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Table of Contents Harsco Clean Earth Segment:
The Company acquired ESOL on
Three Months Six Months
Significant Effects on Revenues (In millions) Ended Ended
Revenues-2020 $ 161.6 $ 240.4
Impact of ESOL acquisition (a) - 134.2
Net effects of price/volume changes, primarily attributable to
volume changes 33.4 9.9
Other 1.1 0.9
Revenues-2021 $ 196.1 $ 385.4 (a) Reflects net revenue of ESOL for the three months ended
The following factors contributed to the changes in operating income in second
quarter and six months ended
Factors Positively Affecting Operating Income: •Favorable volume and mix for the hazardous waste business for the second quarter and six months endedJune 30, 2021 . •The ESOL acquisition contributed$7.0 million to operating income during the first quarter of 2021. Factors Negatively Impacting Operating Income: •Increases in selling, general and administrative expenses of$4.6 million and$6.9 million for the second quarter and six months endedJune 30, 2021 , respectively, primarily to support the expanded business as well as incentive compensation. Approximately$1.6 million is not expected to recur in 2021. •Decrease in contaminated material and dredging volume due principally to the impacts of COVID-19 during the six months endedJune 30, 2021 . Operating Income includes intangible asset amortization expense for the second quarter and six months endedJune 30, 2021 of$6.1 million and$12.1 million , respectively, and for the second quarter and six months endedJune 30, 2020 of$6.3 million and$10.2 million , respectively. Harsco Rail Segment: June 30, 2021 Three Months Six Months Significant Effects on Revenues (In millions) Ended Ended Revenues - 2020$ 81.7 $ 160.2 Impact of foreign currency translation 2.5 4.5 Net effect of price/volume changes, primarily attributable to volume changes 16.9 18.0 Revenues - 2021$ 101.1 $ 182.7 Factors Positively Affecting Operating Income: •Favorable volume of equipment sales increased operating income during the second quarter and six months endedJune 30, 2021 . Factors Negatively Impacting Operating Income: •The unfavorable mix and decrease in after-market parts sales during the second quarter and six months endedJune 30, 2021 compared with the same periods in the prior year as a result of lower end market demand. 37
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