Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On June 28, 2019, Harsco Corporation (the “Company” or “Harsco”) completed the previously announced private offering of $500 million aggregate principal amount of 5.75% Senior Notes due 2027 (the “Notes”).
Also on June 28, 2019, the Company completed the previously announced acquisition (the “Acquisition”) of all of the issued and outstanding common stock of CEHI Acquisition Corporation, a Delaware corporation, (“Clean Earth”), pursuant to the terms of a stock purchase agreement, dated as of May 8, 2019 (the “Acquisition Agreement”), with Clean Earth, the holders of stock and options in Clean Earth (“Sellers”) and Compass Group Diversified Holdings LLC (“Compass”), a Delaware limited liability company, in its capacity as representative of Sellers, for an aggregate purchase price of approximately $625 million, subject to certain adjustments set forth in the Acquisition Agreement. The Company used the net proceeds from the sale of the Notes to fund, together with borrowings under the Company’s Revolving Credit Facility, the purchase price of the Acquisition pursuant to the Acquisition Agreement.
Additionally, on July 1, 2019, the Company completed the previously announced sale (the “Asset Sale”) of the Company’s IndustrialAir-X-Changers business pursuant to the terms of an asset purchase agreement, dated May 8, 2019 (the “Asset Purchase Agreement”) with E&C FinFan, Inc., a Delaware corporation (the “Acquiror”), and, solely to guarantee the performance of the Acquiror’s obligations thereunder, Chart Industries, Inc., a Delaware corporation, for aggregate cash consideration of $592 million, plus the assumption by the Acquiror of the liabilities of theAir-X-Changers business specified in the Asset Purchase Agreement. A portion of the proceeds from the Asset Sale were used to repay a portion of the Company’s Term Loan Facility and Revolving Credit Facility.
The following unaudited pro forma condensed consolidated financial statements of the Company, including the explanatory notes (collectively the “pro forma financial statements”), give effect to the Notes offering and its borrowings under its Revolving Credit Facility, as well as the use of proceeds therefrom, including the consummation of each of the Acquisition and the Asset Sale and related transactions and the payment of associated transaction fees and expenses occurred at earlier dates. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2018 and for the three months ended March 31, 2019 give effect to the Acquisition, the Asset Sale and the issuance of the Notes (the “Transactions”) as if they had occurred on January 1, 2018, the first day of the year ended December 31, 2018. The unaudited pro forma condensed consolidated balance sheet as of March 31, 2019 combines the historical consolidated balance sheets giving effect to the Transactions as if they had occurred on March 31, 2019. In addition, the unaudited pro forma condensed consolidated statements of operations for the years ended December 31, 2017 and 2016 give effect to the Asset Sale as if it had occurred on January 1, 2016, the first day of the year ended December 31, 2016.
The historical consolidated financial information has been adjusted in the pro forma financial statements to give effect to pro forma events that are (i) directly attributable to the Transactions (ii) factually supportable, and (iii) with respect to the statements of operations, expected to have a continuing impact on the Company’s consolidated operating results. The unaudited pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The pro forma financial statements should be read in conjunction with the explanatory notes to the pro forma financial statements. In addition, the pro forma financial statements were based on, and should be read in conjunction with, the following historical consolidated financial statements and accompanying notes:
• | Audited historical consolidated financial statements of the Company, and the related notes included in the Company’s Annual Report on Form10-K for the year ended December 31, 2018, 2017 and 2016; |
• | Audited historical consolidated financial statements of Clean Earth as of, and for the year ended, December 31, 2018, and the related notes; |
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• | Unaudited historical condensed consolidated financial statements of the Company and the related notes included in the Company’s Quarterly Report on Form10-Q for the period ended March 31, 2019; and |
• | Unaudited historical condensed consolidated financial statements of Clean Earth as of and for the three months ended March 31, 2019 and the related notes. |
The pro forma financial statements and explanatory notes are presented for informational purposes only and do not purport to represent what the results of operations or financial condition would have been had the Transactions occurred on the dates indicated nor do they purport to project the results of operations of financial condition for any future period or as of any future date.
The accompanying pro forma financial statements of the Company have been prepared in accordance with Article 11 of SEC Regulation S-X. The Acquisition is considered a business combination and therefore will be accounted for under the acquisition method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 805 – Business Combinations. Additionally, the Asset Sale is considered to meet the requirements to be presented in accordance with discontinued operations guidance in FASB ASC 205 – Presentation of Financial Statements.
The pro forma financial statements do not reflect the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies or revenue synergies that may result from the Transactions. Additionally, the pro forma financial statements do not reflect the impact of the Senior Secured Credit Facility Amendment as the amendment is not directly attributable to the Transactions.
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HARSCO CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2019
Historical Harsco | Air-X Changers Sale Adjustments | Harsco Less Air-X Changers | Historical Clean Earth | Acquisition Adjustments | Financing Adjustments | Pro Forma | ||||||||||||||||||||||||||||||||||
(in thousands) | As reported | (Note 6) |
| (Note 3) | (Note 5) | (Note 7) |
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ASSETS | ||||||||||||||||||||||||||||||||||||||||
Current assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 84,743 | $ | 470,000 | (b | ) | $ | 554,743 | $ | 462 | $ | (639,318 | ) | (a | ) | $ | 169,318 | (a | ) | $ | 85,205 | |||||||||||||||||||
Restricted cash | 2,942 | — | 2,942 | — | — | — | 2,942 | |||||||||||||||||||||||||||||||||
Trade accounts receivable, net | 296,795 | (25,674 | ) | (a | ) | 271,121 | 58,025 | — | — | 329,146 | ||||||||||||||||||||||||||||||
Other receivables | 51,130 | (19 | ) | (a | ) | 51,111 | 1,745 | — | — | 52,856 | ||||||||||||||||||||||||||||||
Inventories | 147,696 | (2,295 | ) | (a | ) | 145,401 | 505 | — | — | 145,906 | ||||||||||||||||||||||||||||||
Current portion of contract assets | 17,478 | (13,824 | ) | (a | ) | 3,654 | — | — | — | 3,654 | ||||||||||||||||||||||||||||||
Other current assets | 45,219 | (547 | ) | (a | ) | 44,672 | 7,362 | — | — | 52,034 | ||||||||||||||||||||||||||||||
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Total current assets | 646,003 | 427,641 | 1,073,644 | 68,099 | (639,318 | ) | 169,318 | 671,743 | ||||||||||||||||||||||||||||||||
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Property, plant and equipment, net | 483,448 | (16,794 | ) | (a | ) | 466,654 | 61,420 | 27,257 | (b | ) | — | 555,331 | ||||||||||||||||||||||||||||
Right-of-use assets, net | 49,584 | (11,414 | ) | (a | ) | 38,170 | 17,037 | — | — | 55,207 | ||||||||||||||||||||||||||||||
Goodwill | 412,449 | (6,839 | ) | (a | ) | 405,610 | 140,483 | 193,727 | (c | ) | — | 739,820 | ||||||||||||||||||||||||||||
Intangible assets, net | 78,753 | (10,205 | ) | (a | ) | 68,548 | 131,342 | 104,158 | (d | ) | — | 304,048 | ||||||||||||||||||||||||||||
Deferred income tax assets | 50,051 | — | 50,051 | — | (26,844 | ) | (e | ) | — | 23,207 | ||||||||||||||||||||||||||||||
Other assets | 17,273 | — | 17,273 | 3,903 | — | — | 21,176 | |||||||||||||||||||||||||||||||||
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Total assets | $ | 1,737,561 | $ | 382,389 | $ | 2,119,950 | $ | 422,284 | $ | (341,020 | ) | $ | 169,318 | $ | 2,370,532 | |||||||||||||||||||||||||
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LIABILITIES | ||||||||||||||||||||||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||||||||||||||||||||||
Short-term borrowings | $ | 6,426 | $ | — | $ | 6,426 | $ | — | $ | — | $ | — | $ | 6,426 | ||||||||||||||||||||||||||
Current maturities of long-term debt | 6,538 | — | 6,538 | 2,634 | (2,156 | ) | (f | ) | — | 7,016 | ||||||||||||||||||||||||||||||
Accounts payable | 159,037 | (11,420 | ) | (a | ) | 147,617 | 20,937 | (570 | ) | (g | ) | — | 167,984 | |||||||||||||||||||||||||||
Accrued compensation | 37,483 | (1,514 | ) | (a | ) | 35,969 | 2,505 | — | — | 38,474 | ||||||||||||||||||||||||||||||
Income taxes payable | 1,598 | — | 1,598 | — | — | — | 1,598 | |||||||||||||||||||||||||||||||||
Insurance liabilities | 40,830 | — | 40,830 | — | — | — | 40,830 | |||||||||||||||||||||||||||||||||
Current portion of advances on contracts | 37,014 | (3,385 | ) | (a | ) | 33,629 | — | — | — | 33,629 | ||||||||||||||||||||||||||||||
Current portion of operating lease liabilities | 12,936 | (1,261 | ) | (a | ) | 11,675 | 3,165 | — | — | 14,840 | ||||||||||||||||||||||||||||||
Other current liabilities | 122,721 | (4,451 | ) | (a | ) | 118,270 | 13,252 | (2,192 | ) | (h | ) | — | 129,330 | |||||||||||||||||||||||||||
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Total current liabilities | 424,583 | (22,031 | ) | 402,552 | 42,493 | (4,918 | ) | — | 440,127 | |||||||||||||||||||||||||||||||
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Long-term debt | 642,375 | — | 642,375 | 214,564 | (213,425 | ) | (f | ) | 181,545 | (b | ) | 825,059 | ||||||||||||||||||||||||||||
Insurance liabilities | 20,384 | — | 20,384 | — | — | — | 20,384 | |||||||||||||||||||||||||||||||||
Retirement plan liabilities | 201,572 | — | 201,572 | — | — | — | 201,572 | |||||||||||||||||||||||||||||||||
Advances on contracts | 27,478 | — | 27,478 | — | — | — | 27,478 | |||||||||||||||||||||||||||||||||
Operating lease liabilities | 37,037 | (10,281 | ) | (a | ) | 26,756 | 14,065 | — | — | 40,821 | ||||||||||||||||||||||||||||||
Other liabilities | 48,860 | 1,003 | (a | ) | 49,863 | 30,762 | 8,552 | (i | ) | — | 89,177 | |||||||||||||||||||||||||||||
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Total liabilities | 1,402,289 | (31,309 | ) | 1,370,980 | 301,884 | (209,791 | ) | 181,545 | 1,644,618 | |||||||||||||||||||||||||||||||
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COMMITMENTS AND CONTINGENCIES | ||||||||||||||||||||||||||||||||||||||||
HARSCO CORPORATION STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||
Preferred stock | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Common stock | 143,178 | — | 143,178 | 1 | (1 | ) | (j | ) | — | 143,178 | ||||||||||||||||||||||||||||||
Additionalpaid-in capital | 192,912 | — | 192,912 | 116,308 | (116,308 | ) | (j | ) | — | 192,912 | ||||||||||||||||||||||||||||||
Accumulated other comprehensive loss | (584,425 | ) | — | (584,425 | ) | — | — | — | (584,425 | ) | ||||||||||||||||||||||||||||||
Retained earnings | 1,340,878 | 413,698 | (c | ) | 1,754,576 | 4,091 | (14,920 | ) | (j | ) | (12,227 | ) | (b | ) | 1,731,520 | |||||||||||||||||||||||||
Treasury stock | (805,520 | ) | — | (805,520 | ) | — | — | — | (805,520 | ) | ||||||||||||||||||||||||||||||
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Total Harsco Corporation stockholders’ equity | 287,023 | 413,698 | 700,721 | 120,400 | (131,229 | ) | (12,227 | ) | 677,665 | |||||||||||||||||||||||||||||||
Noncontrolling interest | 48,249 | — | 48,249 | — | — | — | 48,249 | |||||||||||||||||||||||||||||||||
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Total equity | 335,272 | 413,698 | 748,970 | 120,400 | (131,229 | ) | (12,227 | ) | 725,914 | |||||||||||||||||||||||||||||||
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Total liabilities and equity | $ | 1,737,561 | $ | 382,389 | $ | 2,119,950 | $ | 422,284 | $ | (341,020 | ) | $ | 169,318 | $ | 2,370,532 | |||||||||||||||||||||||||
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See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
3
HARSCO CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2018
Historical Harsco | Air-X Changers Sale Adjustments | Harsco Less Air-X Changers | Historical Clean Earth | Acquisition Adjustments | Financing Adjustments | Pro Forma | ||||||||||||||||||||||||||||||||||
(in thousands, except per share | As reported | (Note 6) |
| (Note 3) | (Note 5) | (Note 7) |
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Revenues from continuing operations: | ||||||||||||||||||||||||||||||||||||||||
Service revenues | $ | 1,007,239 | $ | — | $ | 1,007,239 | $ | 266,916 | $ | — | $ | — | $ | 1,274,155 | ||||||||||||||||||||||||||
Product revenues | 715,141 | (207,153 | ) | (a | ) | 507,988 | — | — | — | 507,988 | ||||||||||||||||||||||||||||||
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Total revenues | 1,722,380 | (207,153 | ) | 1,515,227 | 266,916 | — | — | 1,782,143 | ||||||||||||||||||||||||||||||||
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Costs and expenses from continuing operations: | ||||||||||||||||||||||||||||||||||||||||
Cost of services sold | 780,930 | — | 780,930 | 205,660 | 663 | (b | ) (d) | — | 987,253 | |||||||||||||||||||||||||||||||
Cost of products sold | 507,807 | (145,905 | ) | (a | ) | 361,902 | — | — | — | 361,902 | ||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 238,690 | (17,793 | ) | (a | ) | 220,897 | 46,691 | (487 | ) | (b | ) (g) | — | 267,101 | |||||||||||||||||||||||||||
Research and development expenses | 5,548 | (40 | ) | (a | ) | 5,508 | — | — | — | 5,508 | ||||||||||||||||||||||||||||||
Other expenses, net | (1,522 | ) | (48 | ) | (a | ) | (1,570 | ) | 552 | — | — | (1,018 | ) | |||||||||||||||||||||||||||
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Total costs and expenses | 1,531,453 | (163,786 | ) | 1,367,667 | 252,903 | 176 | — | 1,620,746 | ||||||||||||||||||||||||||||||||
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Operating income from continuing operations | 190,927 | (43,367 | ) | 147,560 | 14,013 | (176 | ) | — | 161,397 | |||||||||||||||||||||||||||||||
Interest income | 2,155 | — | 2,155 | 34 | — | — | 2,189 | |||||||||||||||||||||||||||||||||
Interest expense | (38,148 | ) | 55 | (a | ) | (38,093 | ) | (17,359 | ) | 17,348 | (f | ) | (14,156 | ) | (c | ) | (52,260 | ) | ||||||||||||||||||||||
Defined benefit pension income | 3,447 | — | 3,447 | — | — | — | 3,447 | |||||||||||||||||||||||||||||||||
Loss on early extinguishment of debt | (1,127 | ) | — | (1,127 | ) | — | — | — | (1,127 | ) | ||||||||||||||||||||||||||||||
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Income (loss) from continuing operations before income taxes and equity income | 157,254 | (43,312 | ) | 113,942 | (3,312 | ) | 17,172 | (14,156 | ) | 113,646 | ||||||||||||||||||||||||||||||
Income tax (expense) benefit | (12,899 | ) | 10,780 | (d | ) | (2,119 | ) | 2,458 | (4,208 | ) | (k | ) | 3,469 | (d | ) | (400 | ) | |||||||||||||||||||||||
Equity income of unconsolidated entities, net | 384 | — | 384 | — | — | — | 384 | |||||||||||||||||||||||||||||||||
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Income from continuing operations | 144,739 | (32,532 | ) | 112,207 | (854 | ) | 12,964 | (10,687 | ) | 113,630 | ||||||||||||||||||||||||||||||
Less: Income from continuing operations attributable to noncontrolling interests | (7,956 | ) | — | (7,956 | ) | — | — | — | (7,956 | ) | ||||||||||||||||||||||||||||||
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Income from continuing operations attributable to Harsco Corporation | $ | 136,783 | $ | (32,532 | ) | $ | 104,251 | $ | (854 | ) | $ | 12,964 | $ | (10,687 | ) | $ | 105,674 | |||||||||||||||||||||||
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Basic earnings from continuing operations per common share attributable to Harsco Corporation common stockholders | $ | 1.69 | 1.31 | |||||||||||||||||||||||||||||||||||||
Average number of shares outstanding used in basic earnings per share computation | 80,716 | 80,716 | ||||||||||||||||||||||||||||||||||||||
Diluted earnings from continuing operations per common share attributable to Harsco Corporation common stockholders | $ | 1.64 | 1.26 | |||||||||||||||||||||||||||||||||||||
Average number of shares outstanding used in basic earnings per share computation | 83,595 | 83,595 |
See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
4
HARSCO CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
Historical Harsco | Air-X Changers Sale Adjustments | Harsco Less Air-X Changers | Historical Clean Earth | Acquisition Adjustments | Financing Adjustments | Pro Forma | ||||||||||||||||||||||||||||||||||
(in thousands, except per share amounts) | As reported | (Note 6) |
| (Note 3) | (Note 5) | (Note 7) |
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Revenues from continuing operations: | ||||||||||||||||||||||||||||||||||||||||
Service revenues | $ | 229,520 | $ | — | $ | 229,520 | $ | 63,632 | $ | — | $ | — | $ | 293,152 | ||||||||||||||||||||||||||
Product revenues | 217,768 | (76,195 | ) | (a | ) | 141,573 | — | — | — | 141,573 | ||||||||||||||||||||||||||||||
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Total revenues | 447,288 | (76,195 | ) | 371,093 | 63,632 | — | — | 434,725 | ||||||||||||||||||||||||||||||||
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Costs and expenses from continuing operations: | ||||||||||||||||||||||||||||||||||||||||
Cost of services sold | 181,871 | — | 181,871 | 50,583 | 109 | (b | ) (d) | — | 232,563 | |||||||||||||||||||||||||||||||
Cost of products sold | 157,004 | (55,132 | ) | (a | ) | 101,872 | — | — | — | 101,872 | ||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 67,029 | (6,151 | ) | (a | ) | 60,878 | 11,927 | (952 | ) | (b | ) (g) | — | 71,853 | |||||||||||||||||||||||||||
Research and development expenses | 1,262 | (13 | ) | (a | ) | 1,249 | — | — | — | 1,249 | ||||||||||||||||||||||||||||||
Other expenses, net | 1,876 | — | 1,876 | 1 | — | — | 1,877 | |||||||||||||||||||||||||||||||||
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Total costs and expenses | 409,042 | (61,296 | ) | 347,746 | 62,511 | (843 | ) | — | 409,414 | |||||||||||||||||||||||||||||||
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Operating income from continuing operations | 38,246 | (14,899 | ) | 23,347 | 1,121 | 843 | — | 25,311 | ||||||||||||||||||||||||||||||||
Interest income | 534 | — | 534 | 12 | — | — | 546 | |||||||||||||||||||||||||||||||||
Interest expense | (9,739 | ) | — | (9,739 | ) | (4,864 | ) | 4,864 | (f | ) | (3,466 | ) | (c | ) | (13,205 | ) | ||||||||||||||||||||||||
Defined benefit pension expense | (1,337 | ) | — | (1,337 | ) | — | — | — | (1,337 | ) | ||||||||||||||||||||||||||||||
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Income (loss) from continuing operations before income taxes and equity income | 27,704 | (14,899 | ) | 12,805 | (3,731 | ) | 5,707 | (3,466 | ) | 11,315 | ||||||||||||||||||||||||||||||
Income tax (expense) benefit | (4,855 | ) | 3,708 | (d | ) | (1,147 | ) | 1,021 | (1,399 | ) | (k | ) | 849 | (d | ) | (676 | ) | |||||||||||||||||||||||
Equity income of unconsolidated entities, net | 20 | — | 20 | — | — | — | 20 | |||||||||||||||||||||||||||||||||
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Income from continuing operations | 22,869 | (11,191 | ) | 11,678 | (2,710 | ) | 4,308 | (2,617 | ) | 10,659 | ||||||||||||||||||||||||||||||
Less: Income from continuing operations attributable to noncontrolling interests | (1,840 | ) | — | (1,840 | ) | — | — | — | (1,840 | ) | ||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Income from continuing operations attributable to Harsco Corporation | $ | 21,029 | $ | (11,191 | ) | $ | 9,838 | $ | (2,710 | ) | $ | 4,308 | $ | (2,617 | ) | $ | 8,819 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
Basic earnings from continuing operations per common share attributable to Harsco Corporation common stockholders | $ | 0.26 | 0.11 | |||||||||||||||||||||||||||||||||||||
Average number of shares outstanding used in basic earnings per share computation | 79,907 | 79,907 | ||||||||||||||||||||||||||||||||||||||
Diluted earnings from continuing operations per common share attributable to Harsco Corporation common stockholders | $ | 0.26 | 0.11 | |||||||||||||||||||||||||||||||||||||
Average number of shares outstanding used in basic earnings per share computation | 81,653 | 81,653 |
See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
5
HARSCO CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2017
Historical Harsco | Air-X Changers Sale Adjustments | Pro Forma | ||||||||||||||
(in thousands, except per share amounts) | As reported | (Note 6) |
| |||||||||||||
Revenues from continuing operations: | ||||||||||||||||
Service revenues | $ | 981,672 | $ | — | $ | 981,672 | ||||||||||
Product revenues | 625,390 | (144,923 | ) | (a | ) | 480,467 | ||||||||||
|
|
|
|
|
| |||||||||||
Total revenues | 1,607,062 | (144,923 | ) | 1,462,139 | ||||||||||||
|
|
|
|
|
| |||||||||||
Costs and expenses from continuing operations: | ||||||||||||||||
Cost of services sold | 770,268 | — | 770,268 | |||||||||||||
Cost of products sold | 452,740 | (102,274 | ) | (a | ) | 350,466 | ||||||||||
Selling, general and administrative expenses | 229,792 | (15,341 | ) | (a | ) | 214,451 | ||||||||||
Research and development expenses | 4,227 | (22 | ) | (a | ) | 4,205 | ||||||||||
Other (income) expenses, net | 4,641 | — | 4,641 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total costs and expenses | 1,461,668 | (117,637 | ) | 1,344,031 | ||||||||||||
|
|
|
|
|
| |||||||||||
Operating income from continuing operations | 145,394 | (27,286 | ) | 118,108 | ||||||||||||
Interest income | 2,469 | (1 | ) | (a | ) | 2,468 | ||||||||||
Interest expense | (47,552 | ) | 103 | (a | ) | (47,449 | ) | |||||||||
Defined benefit pension income (expense) | (2,595 | ) | — | (2,595 | ) | |||||||||||
Loss on early extinguishment of debt | (2,265 | ) | — | (2,265 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Income from continuing operations before income taxes and equity income | 95,451 | (27,184 | ) | 68,267 | ||||||||||||
Income tax expense | (83,803 | ) | 10,416 | (d | ) | (73,387 | ) | |||||||||
|
|
|
|
|
| |||||||||||
Income (loss) from continuing operations | 11,648 | (16,768 | ) | (5,120 | ) | |||||||||||
Less: Income from continuing operations attributable to noncontrolling interests | (4,022 | ) | — | (4,022 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Income (loss) from continuing operations attributable to Harsco Corporation | $ | 7,626 | $ | (16,768 | ) | $ | (9,142 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Basic earnings (loss) from continuing operations per common share attributable to Harsco Corporation common shareholders | $ | 0.09 | $ | (0.11 | ) | |||||||||||
Average number of shares outstanding used in basic earnings per share computation | 80,553 | 80,553 | ||||||||||||||
Diluted earnings (loss) from continuing operations per common share attributable to Harsco Corporation common shareholders | $ | 0.09 | $ | (0.11 | ) | |||||||||||
Average number of shares outstanding used in diluted earnings per share computation | 82,840 | 80,553 |
See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
6
HARSCO CORPORATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
Historical Harsco | Air-X Changers Sale Adjustments | Pro Forma | ||||||||||||||
(in thousands, except per share amounts) | As reported | (Note 6) |
| |||||||||||||
Revenues from continuing operations: | ||||||||||||||||
Service revenues | $ | 939,129 | $ | — | $ | 939,129 | ||||||||||
Product revenues | 512,094 | (93,585 | ) | (a | ) | 418,509 | ||||||||||
|
|
|
|
|
| |||||||||||
Total revenues | 1,451,223 | (93,585 | ) | 1,357,638 | ||||||||||||
|
|
|
|
|
| |||||||||||
Costs and expenses from continuing operations: | — | |||||||||||||||
Cost of services sold | 762,431 | — | 762,431 | |||||||||||||
Cost of products sold | 410,138 | (72,932 | ) | (a | ) | 337,206 | ||||||||||
Selling, general and administrative expenses | 196,871 | (9,285 | ) | (a | ) | 187,586 | ||||||||||
Research and development expenses | 4,280 | (17 | ) | (a | ) | 4,263 | ||||||||||
Other (income) expenses, net | 12,620 | (334 | ) | (a | ) | 12,286 | ||||||||||
|
|
|
|
|
| |||||||||||
Total costs and expenses | 1,386,340 | (82,568 | ) | 1,303,772 | ||||||||||||
|
|
|
|
|
| |||||||||||
Operating income from continuing operations | 64,883 | (11,017 | ) | 53,866 | ||||||||||||
Interest income | 2,475 | — | 2,475 | |||||||||||||
Interest expense | (51,584 | ) | — | (51,584 | ) | |||||||||||
Defined benefit pension income (expense) | (1,414 | ) | — | (1,414 | ) | |||||||||||
Loss on early extinguishment of debt | (35,337 | ) | — | (35,337 | ) | |||||||||||
Change in fair value to the unit adjustment liability and loss on dilution and sale of equity method investment | (58,494 | ) | — | (58,494 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Income (loss) from continuing operations before income taxes and equity income | (79,471 | ) | (11,017 | ) | (90,488 | ) | ||||||||||
Income tax expense | (6,637 | ) | 4,238 | (d | ) | (2,399 | ) | |||||||||
Equity income of unconsolidated entities, net | 5,686 | — | 5,686 | |||||||||||||
|
|
|
|
|
| |||||||||||
Income (loss) from continuing operations | (80,422 | ) | (6,779 | ) | (87,201 | ) | ||||||||||
Less: Income from continuing operations attributable to noncontrolling interests | (5,914 | ) | — | (5,914 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Income (loss) from continuing operations attributable to Harsco Corporation | $ | (86,336 | ) | $ | (6,779 | ) | (93,115 | ) | ||||||||
|
|
|
|
|
| |||||||||||
Basic earnings (loss) from continuing operations per common share attributable to Harsco Corporation common shareholders | $ | (1.07 | ) | $ | (1.16 | ) | ||||||||||
Average number of shares outstanding used in basic earnings per share computation | 80,333 | 80,333 | ||||||||||||||
Diluted earnings (loss) from continuing operations per common share attributable to Harsco Corporation common shareholders | $ | (1.07 | ) | $ | (1.16 | ) | ||||||||||
Average number of shares outstanding used in diluted earnings per share computation | 80,333 | 80,333 |
See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements
7
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF THE TRANSACTIONS
On June 28, 2019, Harsco Corporation (the “Company” or “Harsco”) completed the previously announced private offering of $500 million aggregate principal amount of 5.75% Senior Notes due 2027 (the “Notes”).
Also on June 28, 2019, the Company completed the previously announced acquisition (the “Acquisition”) of all of the issued and outstanding common stock of CEHI Acquisition Corporation, a Delaware corporation, (“Clean Earth”), pursuant to the terms of a stock purchase agreement, dated as of May 8, 2019 (the “Acquisition Agreement”), with Clean Earth, the holders of stock and options in Clean Earth (“Sellers”) and Compass Group Diversified Holdings LLC (“Compass”), a Delaware limited liability company, in its capacity as representative of Sellers, for an aggregate purchase price of approximately $625 million, subject to certain adjustments set forth in the Acquisition Agreement. The Company used the net proceeds from the sale of the Notes to fund, together with borrowings under the Company’s Revolving Credit Facility, the purchase price of the Acquisition pursuant to the Acquisition Agreement.
Additionally, on July 1, 2019, the Company completed the previously announced sale (the “Asset Sale”) of the Company’s IndustrialAir-X-Changers business pursuant to the terms of an asset purchase agreement, dated May 8, 2019 (the “Asset Purchase Agreement”) with E&C FinFan, Inc., a Delaware corporation (the “Acquiror”), and, solely to guarantee the performance of the Acquiror’s obligations thereunder, Chart Industries, Inc., a Delaware corporation, for aggregate cash consideration of $592 million, plus the assumption by the Acquiror of the liabilities of theAir-X-Changers business specified in the Asset Purchase Agreement. A portion of the proceeds from the Asset Sale were used to repay a portion of the Company’s Term Loan Facility and Revolving Credit Facility.
NOTE 2 – BASIS OF PRESENTATION
The unaudited pro forma condensed consolidated financial statements of Harsco, including the explanatory notes (collectively the “pro forma financial statements”), present the unaudited pro forma condensed consolidated financial position and results of operations of Harsco based upon the historical financial statements of Harsco and Clean Earth. The pro forma financial statements give effect to the Acquisition, the Asset Sale, and the related financing activities (collectively, the “Transactions”).
The Acquisition is a business combination and therefore will be accounted for under the acquisition method of accounting under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 805 –Business Combinations. Under the acquisition method of accounting, the total estimated purchase price of an acquisition is allocated to the net tangible and intangible assets based on their estimated fair values. Such valuations are based on available information and certain assumptions that management of Harsco and Clean Earth believe are reasonable. The preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed is based on various preliminary estimates. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing these pro forma financial statements. Differences between these preliminary estimates and the final acquisition accounting, which will be based on the actual net tangible and identifiable intangible assets, may occur and these differences could be material. The differences, if any, could have a material impact on the pro forma financial statements and Harsco’s future results of operations and financial position.
The pro forma financial statements include certain reclassifications to align the historical presentation of Clean Earth with the presentation utilized by Harsco. SeeNote 3 – Reclassificationsherein for additional information on the reclassifications.
The unaudited pro forma condensed consolidated statements of operations (“pro forma statements of operations”) do not reflect thenon-recurring expenses expected to be incurred in connection with the Transactions, including fees to be paid to attorneys, accountants and other professional advisors,the write-off of deferred financing costs, fess for the Bridge Loan Commitment and other transaction-related costs that will not be capitalized. However, the impact of such expenses are reflected in the unaudited pro forma condensed consolidated balance sheet (“pro forma balance sheet”) as a decrease to retained earnings and a corresponding decrease to cash and cash equivalents.
8
Further, the pro forma financial statements do not reflect the costs of any integration activities or benefits that may result from the realization of future costs savings from operating efficiencies or revenue synergies that may result from the Transactions. As no assurance can be made that the costs will be incurred, or the cost or growth synergies will be achieved, no adjustment has been made. Additionally, the pro forma financial statements do not reflect the impact of the amendment to Harsco’s Senior Secured Credit Facility as the amendment is not directly attributable to the Transactions.
NOTE 3 – RECLASSIFICATIONS
Certain adjustments and reclassifications have been made to the historical presentation of Clean Earth’s financial statements to conform to the presentation used by Harsco within the pro forma financial statements.
Balance Sheet Reclassifications: The following table summarizes the reclassifications made to Clean Earth’s historical balance sheet to conform to Harsco’s financial statement presentation.
As of March 31, 2019:
(in thousands) | Before Reclassification | Reclassification | After Reclassification | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 462 | $ | — | $ | 462 | ||||||||||
Trade accounts receivable, net | 58,025 | — | 58,025 | |||||||||||||
Other receivables | — | 1,745 | (a | ) | 1,745 | |||||||||||
Inventories | — | 505 | (b | ) | 505 | |||||||||||
Prepaid income taxes | 1,848 | (1,848 | ) | (c | ) | — | ||||||||||
Other current assets | 7,764 | (402 | ) | (a | )(b)(c) | 7,362 | ||||||||||
|
|
|
|
|
| |||||||||||
Total current assets | 68,099 | — | 68,099 | |||||||||||||
|
|
|
|
|
| |||||||||||
Property, plant and equipment | 61,420 | — | 61,420 | |||||||||||||
Right-of-use assets, net | 17,037 | — | 17,037 | |||||||||||||
Goodwill | 140,483 | — | 140,483 | |||||||||||||
Intangible assets, net | 131,342 | — | 131,342 | |||||||||||||
Other assets | 3,903 | — | 3,903 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total assets | $ | 422,284 | $ | — | $ | 422,284 | ||||||||||
|
|
|
|
|
| |||||||||||
LIABILITIES | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current maturities of long-term debt | $ | 2,634 | $ | — | $ | 2,634 | ||||||||||
Accounts payable | 20,845 | 92 | (d | ) | 20,937 | |||||||||||
Accrued compensation | — | 2,505 | (e | ) | 2,505 | |||||||||||
Current portion of operating lease liabilities | 3,165 | — | 3,165 | |||||||||||||
Other current liabilities | 15,849 | (2,597 | ) | (d | )(e) | 13,252 | ||||||||||
|
|
|
|
|
| |||||||||||
Total current liabilities | 42,493 | — | 42,493 | |||||||||||||
|
|
|
|
|
| |||||||||||
Long-term debt | 214,564 | — | 214,564 | |||||||||||||
Operating lease liabilities | 14,065 | — | 14,065 | |||||||||||||
Deferred income tax liabilities | 28,704 | (28,704 | ) | (f | ) | — | ||||||||||
Other liabilities | 2,058 | 28,704 | (f | ) | 30,762 | |||||||||||
|
|
|
|
|
| |||||||||||
Total liabilities | 301,884 | — | 301,884 | |||||||||||||
|
|
|
|
|
| |||||||||||
EQUITY | ||||||||||||||||
Common stock | 1 | — | 1 | |||||||||||||
Additionalpaid-in capital | 116,308 | — | 116,308 | |||||||||||||
Retained earnings | 4,091 | — | 4,091 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total equity | 120,400 | — | 120,400 | |||||||||||||
|
|
|
|
|
| |||||||||||
Total liabilities and equity | $ | 422,284 | $ | — | $ | 422,284 | ||||||||||
|
|
|
|
|
|
(a) | Reclassification of other receivables from other current assets to conform to Harsco’s balance sheet presentation of similar receivables. |
9
(b) | Reclassification of inventories from other current assets to conform to Harsco’s balance sheet presentation of inventories. |
(c) | Reclassification of prepaid income taxes to conform to Harsco’s balance sheet presentation within other current assets. |
(d) | Reclassification of payroll related accounts payable from other current liabilities to conform to Harsco’s balance sheet presentation. |
(e) | Reclassification of accrued compensation from other current liabilities to conform to Harsco’s balance sheet presentation. |
(f) | Reclassification of deferred income tax liabilities to conform to Harsco’s balance sheet presentation, which includes similar liabilities within other liabilities. |
Statement of Operations Reclassifications: The following tables summarize certain reclassifications made to Clean Earth’s historical statement of operations to conform to Harsco’s financial statement presentation.
Year ended December 31, 2018:
(in thousands) | Before Reclassification | Reclassification | After Reclassification | |||||||||||||
Revenues | ||||||||||||||||
Service revenues | $ | 266,916 | $ | — | $ | 266,916 | ||||||||||
Costs of expenses | ||||||||||||||||
Cost of services sold | 201,711 | 3,949 | (a | )(b)(e) | 205,660 | |||||||||||
Selling, general and administrative expenses | 50,262 | (3,571 | ) | (a | )(c)(e) | 46,691 | ||||||||||
Management fee | 500 | (500 | ) | (c | ) | — | ||||||||||
Other expenses, net | — | 552 | (a | ) | 552 | |||||||||||
|
|
|
|
|
| |||||||||||
Total costs and expenses | 252,473 | 430 | 252,903 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating income | 14,443 | (430 | ) | 14,013 | ||||||||||||
Interest income | — | 34 | (d | ) | 34 | |||||||||||
Interest expense | (17,359 | ) | — | (17,359 | ) | |||||||||||
Other income (loss) | (396 | ) | 396 | (b | )(d) | — | ||||||||||
|
|
|
|
|
| |||||||||||
Loss before income taxes | (3,312 | ) | — | (3,312 | ) | |||||||||||
Income tax benefit | 2,458 | — | 2,458 | |||||||||||||
|
|
|
|
|
| |||||||||||
Net loss | $ | (854 | ) | $ | — | $ | (854 | ) | ||||||||
|
|
|
|
|
|
10
Three months ended March 31, 2019:
(in thousands) | Before Reclassification | Reclassification | After Reclassification | |||||||||||||
Revenues | ||||||||||||||||
Service revenues | $ | 63,632 | $ | — | $ | 63,632 | ||||||||||
Costs of expenses | ||||||||||||||||
Cost of services sold | 49,476 | 1,107 | (a | )(b)(e) | 50,583 | |||||||||||
Selling, general and administrative expenses | 12,774 | (847 | ) | (c | )(e) | 11,927 | ||||||||||
Management fee | 125 | (125 | ) | (c | ) | — | ||||||||||
Other expenses, net | — | 1 | (a | ) | 1 | |||||||||||
|
|
|
|
|
| |||||||||||
Total costs and expenses | 62,375 | 136 | 62,511 | |||||||||||||
|
|
|
|
|
| |||||||||||
Operating income | 1,257 | (136 | ) | 1,121 | ||||||||||||
Interest income | — | 12 | (d | ) | 12 | |||||||||||
Interest expense | (4,864 | ) | — | (4,864 | ) | |||||||||||
Other income (loss) | (124 | ) | 124 | (b | )(d) | — | ||||||||||
|
|
|
|
|
| |||||||||||
Loss before income taxes | (3,731 | ) | — | (3,731 | ) | |||||||||||
Income tax benefit | 1,021 | — | 1,021 | |||||||||||||
|
|
|
|
|
| |||||||||||
Net loss | $ | (2,710 | ) | $ | — | $ | (2,710 | ) | ||||||||
|
|
|
|
|
|
(a) | Reclassification of severance expenses out of cost of services sold and selling, general and administrative expenses to conform to Harsco’s statement of operations presentation within other expenses, net. |
(b) | Reclassification of gains and/or losses on fixed assets to conform to Harsco’s statement of operations presentation and include within cost of services sold. |
(c) | Reclassification of management fees to conform to Harsco’s statement of operations presentation for similar costs and include within selling, general and administrative expenses. |
(d) | Reclassification of interest income out of other income (loss) to conform to Harsco’s statement of operations presentation. |
(e) | Reclassification of certain intangible amortization expenses from selling, general and administrative expenses to cost of services sold to conform to Harsco’s statement of operations presentation. |
NOTE 4 – ESTIMATED PURCHASE PRICE AND PRELIMINARY PURCHASE PRICE ALLOCATION
The pro forma financial statements include a preliminary allocation of the estimated purchase price of Clean Earth to the estimated fair values of assets acquired and liabilities assumed at the acquisition date, assuming the Acquisition occurred on March 31, 2019. The final allocation of the purchase price could differ materially from the preliminary allocation as additional information is obtained, estimates are refined, etc.
Estimated purchase price
The following is a summary of the estimated purchase price giving effect to the Acquisition as if it had been consummated on March 31, 2019:
(in thousands) | As of March 31, 2019 | |||
Estimated purchase price paid in cash at time of the Acquisition | $ | 627,918 | ||
Plus: Estimated gross contingent payment for tax benefits | 11,900 | |||
|
| |||
Estimated purchase price | $ | 639,818 | ||
|
|
11
Preliminary purchase price allocation
The following is a summary of the preliminary purchase price allocation giving effect to the Acquisition as if it had been consummated on March 31, 2019:
(in thousands) | As of March 31, 2019 | |||
ASSETS | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 462 | ||
Trade accounts receivable, net | 58,025 | |||
Other receivables | 1,745 | |||
Inventories | 505 | |||
Other current assets | 7,362 | |||
|
| |||
Total current assets | 68,099 | |||
|
| |||
Property, plant and equipment | 88,677 | |||
Right-of-use assets, net | 17,037 | |||
Goodwill | 334,210 | |||
Intangible assets, net | 235,500 | |||
Other assets | 3,903 | |||
|
| |||
Total assets acquired | $ | 747,426 | ||
|
| |||
LIABILITIES | ||||
Current liabilities: | ||||
Current maturities of long-term debt | 478 | |||
Accounts payable | 20,937 | |||
Accrued compensation | 2,505 | |||
Current portion of operating lease liabilities | 3,165 | |||
Other current liabilities | 11,060 | |||
|
| |||
Total current liabilities | 38,145 | |||
|
| |||
Long-term debt | 1,139 | |||
Operating lease liabilities | 14,065 | |||
Other liabilities | 54,259 | |||
|
| |||
Total liabilities assumed | 107,608 | |||
|
| |||
Net assets acquired | $ | 639,818 | ||
|
|
NOTE 5 – ACQUISITION RELATED PRO FORMA ADJUSTMENTS
The pro forma financial statements reflect the following adjustments related to the Acquisition:
(a) | Cash and cash equivalents |
Adjustment to cash and cash equivalents for the following:
(in thousands) | As of March 31, 2019 | |||
Cash paid for the Acquisition (1) | $ | (627,918 | ) | |
Cash paid for transaction costs related to the Acquisition (2) | (11,400 | ) | ||
|
| |||
Adjustment to cash | $ | (639,318 | ) | |
|
|
(1) | Represents the estimated purchase price of the Acquisition as if it had been consummated on March 31, 2019 to account for certain purchase price adjustments. |
(2) | Represents professional fees paid in connection with the Acquisition. Any amounts not recorded in the historical financial statements of Harsco through March 31, 2019 were adjusted through the pro forma balance sheet and recorded against retained earnings solely for the purposes of this presentation. As there is no continuing impact of these transaction costs on Harsco’s results, the fees are not included in the pro forma statements of operations. |
12
(b) Property, plant and equipment, net and depreciation expense
Adjustment to the carrying value of Clean Earth’s property, plant and equipment from its recorded net book value to its preliminary estimated fair value. The estimated fair value is expected to be depreciated over the estimated useful lives, on a straight-line basis. The following table is a summary of information related to property, plant and equipment (PP&E), including information used to calculate the pro forma change in depreciation expense:
Depreciation Expense | ||||||||||||||
(in thousands) | Estimated Useful Life | Fair Value as of March 31, 2019 | Year ended December 31, 2018 | Three months ended March 31, 2019 | ||||||||||
Land | N/A | $ | 33,790 | $ | — | $ | — | |||||||
Buildings and improvements | 6 –17 years (1) | 15,322 | 1,140 | 285 | ||||||||||
Machinery and equipment | 1–9 year(s) | 37,808 | 5,500 | 1,375 | ||||||||||
Uncompleted construction | N/A | 1,757 | — | — | ||||||||||
|
|
|
|
|
| |||||||||
Total fair value of acquired PP&E | $ | 88,677 | $ | 6,640 | $ | 1,660 | ||||||||
Less: Clean Earth’s historical PP&E | 61,420 | 9,832 | 2,585 | |||||||||||
|
|
|
|
|
| |||||||||
Pro forma adjustment to PP&E | $ | 27,257 | $ | (3,192 | ) | $ | (925 | ) | ||||||
|
|
|
|
|
|
(1) | Leasehold improvements are amortized over 6 years. |
Corresponding adjustments were made to depreciation expense in the pro forma statements of operations as a result of the fair value adjustments to property, plant and equipment as well as changes in useful lives.
Pro forma adjustments related to depreciation expense had the following impacts on cost of services sold and selling, general and administrative expenses:
(in thousands) | Year ended December 31, 2018 | Three months ended March 31, 2019 | ||||||
Cost of services sold | $ | (2,771 | ) | $ | (762 | ) | ||
Selling, general and administrative expenses | (421 | ) | (163 | ) | ||||
|
|
|
| |||||
Total pro forma adjustment | $ | (3,192 | ) | $ | (925 | ) | ||
|
|
|
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The valuations above, including assignment of useful lives, are based on preliminary estimates. Final determination of fair value of property, plant and equipment, as well as estimated useful lives, remains subject to change. The finalization may have a material impact on the valuation of property, plant and equipment and the purchase price allocation, which is expected to be finalized subsequent to the Acquisition.
With other assumptions held constant, a 10% change to the fair value of the property, plant and equipment would result in an increase or decrease to depreciation expense of $0.7 million annually and $0.2 million for a three-month period.
(c) Goodwill
Adjustment to goodwill represents the excess of the purchase price over the preliminary fair value of the underlying net tangible and identifiable intangible assets net of liabilities, as shown inNote 4 – Estimated Purchase Price and Preliminary Purchase Price Allocation. The adjustment is the difference between the estimated goodwill acquired of $334.2 million and the amount recorded in Clean Earth’s historical financial statements of $140.5 million. The goodwill created in the Acquisition is not deductible for tax purposes.
The adjustment to goodwill is preliminary and subject to change based upon final determination of the fair value of underlying net tangible and identifiable intangible assets acquired net of liabilities assumed and finalization of the purchase price.
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(d) Intangible assets, net and amortization expense
Adjustment to the carrying value of Clean Earth’s intangible assets from recorded net book value to preliminary estimated fair value. The estimated fair value is expected to be amortized over the estimated useful lives, on a straight-line basis. The following table is a summary of information related to intangible assets, including information used to calculate the pro forma change in amortization expense:
Fair Value as of March 31, 2019 | Amortization Expense | |||||||||||||
(in thousands) | Estimated Useful Life | Year ended December 31, 2018 | Three months ended March 31, 2019 | |||||||||||
Tradenames and trademarks | 13 years | $ | 26,000 | $ | 2,000 | $ | 500 | |||||||
Customer relationships | 10 years | 39,000 | 3,900 | 975 | ||||||||||
Permits and rights | 21 years | 157,000 | 7,476 | 1,869 | ||||||||||
Favorable Leasehold Interest | 7 years | 3,100 | 443 | 111 | ||||||||||
Backlog | 3 years | 10,400 | 3,465 | 866 | ||||||||||
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Total fair value of acquired intangible assets | $ | 235,500 | $ | 17,284 | $ | 4,321 | ||||||||
Less: Clean Earth’s historical intangible assets | 131,342 | 13,850 | 3,450 | |||||||||||
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Pro forma adjustment to intangible assets, net | $ | 104,158 | $ | 3,434 | $ | 871 | ||||||||
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Corresponding adjustments were made to amortization expense in the pro forma statements of operations as a result of the fair value adjustments to intangible assets as well as changes in useful lives.
The valuations above, including assignment of useful lives, are preliminary and final determination of fair value of intangible assets, as well as estimated useful lives, remains subject to change. The finalization may have a material impact on the valuation of intangible assets and the purchase price allocation.
With other assumptions held constant, a 10% change to the fair value of the acquired finite live intangible assets would result in an increase or decrease to amortization expense of $1.7 million annually and $0.4 million for a three-month period.
(e) Deferred income tax assets
Adjustment to reclassify Harsco’s historical March 31, 2019 deferred tax asset to net against the pro forma deferred tax liability balance, as a result of acquired deferred tax liabilities from Clean Earth as well as an increase in deferred tax liabilities in certain jurisdictions resulting from purchase accounting (refer toNote 5(i)).
(f) Long-term debt, including current maturities, and interest expense
Adjustments to long-term debt resulted in total decreases of $2.2 million and $213.4 million for current andnon-current portions, respectively. These adjustments related to the extinguishment of Clean Earth’s historical debt obligations which were completed prior to the closing of the Acquisition. A corresponding adjustment was made to the pro forma statements of operations to eliminate historical interest expense related to the Clean Earth debt that was extinguished prior to the consummation of the Acquisition.
(g) Accounts payable
Adjustment to remove $0.6 million of transaction costs related to the Acquisition that were historically recorded by Harsco at March 31, 2019 but are being presented in the pro forma balance sheet as being paid in cash on March 31, 2019 (refer toNote 5(a)). A corresponding adjustment was made to the pro forma statement of operations to eliminateone-timenon-recurring transaction costs directly attributable to the Acquisition.
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(h) Other current liabilities and transaction costs
Adjustment to remove accrued interest totaling $2.2 million related to the long-term debt discussed inNote 5(f).
(i) Other liabilities
Adjustment to increase other liabilities by $8.6 million includes an increase in deferred income tax liabilities resulting from recognizing the deferred tax liability arising from the valuation of Clean Earth’s intangibles on the date the Acquisition Agreement was entered into of $35.4 million, partially offset by the reclassification of Harsco’s historical March 31, 2019 deferred tax assets of $26.8 million to net against the pro forma deferred tax liability balance (refer toNote 5 (e)).
Additionally, other liabilities were impacted by the recognition of an $11.9 million deferred tax asset related to net operating losses for certain transaction costs, which would appear within this caption due to jurisdiction netting of deferred tax positions. This was offset by the adjustment to record the estimated contingent payable to Compass of $11.9 million for those tax benefits, in accordance with the Acquisition Agreement (refer toNote 4).
(j) Stockholders’ equity
Adjustments to eliminate the historical stockholders’ equity of Clean Earth. Adjustment also includes $10.8 million of transaction costs that are presented on the pro forma balance sheet which were not historically recorded by Harsco through March 31, 2019. These costs are being presented in the pro forma balance sheet as being paid in cash on March 31, 2019 (refer toNote 5(a)). No corresponding adjustment was made to the pro forma statement of operations as these areone-timenon-recurring transaction costs which are directly attributable to the Acquisition.
(k) Tax expense
Adjustment to record the income tax impacts of the pro forma adjustments using a blended statutory tax rate of 24.5%. This rate does not reflect Harsco’s effective tax rate, which will include other items and may be significantly different than the rates assumed for purposes of preparing these statements.
NOTE 6 – ASSET SALE RELATED PRO FORMA ADJUSTMENTS
Harsco has determined that theAir-X-Changers business should be classified as a discontinued operation in accordance with FASB ASC 205 –Presentation of Financial Statements. Since the Asset Sale has not yet been reflected in the historical financial statements of Harsco, pro forma statements of operations have been provided for the years ended December 31, 2017 and 2016 in order to provide pro forma presentation of the Asset Sale for the three years presented in Harsco’s current report on Form10-K.
The pro forma financial statements reflect the following adjustments related to the Asset Sale:
(a) Historical results
Adjustment to remove the historical results of theAir-X-Changers business from the historical statements of operations of Harsco as if the Asset Sale had occurred on January 1, 2016 and to remove the historical assets and liabilities of theAir-X-Changers business from the historical balance sheet of Harsco as if the Asset Sale had occurred on March 31, 2019.
(b) Cash proceeds
Adjustment to cash represents the net cash received from the sale of theAir-X-Changers business. Amount was calculated as gross sales proceeds of $592.0 million less the expected income tax obligation and transaction costs of $114.0 million and $8.0 million, respectively. An adjustment was made to eliminate the estimated transaction costs related to the Asset Sale expected to be incurred through the consummation of the Transaction. These costs are recorded against retained earnings solely for the purpose of this presentation. As there is no continuing impact of these transaction costs on Harsco’s results, these fees are not included in the pro forma statements of operations.
(c) Retained earnings
Reflects the impact to Harsco’s retained earnings from the pro forma adjustments described above. Adjustment to retained earnings approximates the estimated gain on the Asset Sale, net of tax impact and transaction costs.
(d) Tax expense
Adjustment to record the income tax impacts of the pro forma adjustments using a blended statutory tax rate of 24.9% for the year ended December 31, 2018 and the three months ended March 31, 2019; and 38.3% and 38.5% for the years ended December 31, 2017 and 2016, respectively, forAir-X-Changers. This rate does not reflect Harsco’s effective tax rate, which will include other items and may be significantly different than the rates assumed for purposes of preparing these statements.
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NOTE 7 – FINANCING RELATED PRO FORMA ADJUSTMENTS
The pro forma financial statements reflect the following adjustments related to the financing transactions, including the financing transaction utilized to fund the Acquisition as well as financing activity resulting from the Asset Sale:
(a) Cash and cash equivalents
The following is a summary of the adjustment to cash and cash equivalents giving effect to the financing transactions as if they had been consummated on March 31, 2019:
(in thousands) | As of March 31, 2019 | |||
The Acquisition | ||||
Proceeds from the notes | $ | 500,000 | ||
Cash paid for fees related to the notes and the Bridge Loan Commitment | (15,373 | ) | ||
Proceeds from Harsco’s Revolving Credit Facility | 154,691 | |||
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Adjustment to cash related to the Acquisition | 639,318 | |||
The Asset Sale | ||||
Repayment on Harsco’s Revolving Credit Facility | (150,000 | ) | ||
Repayment on Harsco’s Term Loan Facility | (320,000 | ) | ||
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Adjustment to cash related to the Asset Sale | (470,000 | ) | ||
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Total adjustment to cash | $ | 169,318 | ||
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(b) Long-term debt, including deferred financing costs
Adjustment to long-term debt represents the following:
(in thousands) | As of March 31, 2019 | |||
THE ACQUISITION | ||||
Proceeds from the notes | $ | 500,000 | ||
Proceeds from Harsco’s Revolving Credit Facility | 154,691 | |||
Cash paid for fees related to the notes | (8,673 | ) | ||
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Adjustment to long-term debt related to the Acquisition | 646,018 | |||
THE ASSET SALE | ||||
Repayment on Harsco’s Revolving Credit Facility | (150,000 | ) | ||
Repayment on Harsco’s Term Loan Facility | (320,000 | ) | ||
Write-off historical financing fees related to the Term Loan Facility | 5,527 | |||
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Adjustment to long-term debt related to the Asset Sale | (464,473 | ) | ||
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Total adjustment to long-term debt | $ | 181,545 | ||
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Adjustment towrite-off historical financing fees of $5.5 million was recorded against retained earnings solely for the purposes of this presentation. As there is no continuing impact of thewrite-off of these costs on Harsco’s results, these fees are not included in the pro forma statements of operations. In addition, Bridge Loan Commitment fees of $6.7 million are recorded to retained earnings as the Bridge Loan was not utilized. There is no continuing impact of these fees on Harsco’s results of operations, and as such these costs are not included in the pro forma statements of operations.
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(c) Interest expense
Adjustment to interest expense consists of the following:
(in thousands) | Year ended December 31, 2018 | Three months ended March 31, 2019 | ||||||
The Acquisition | ||||||||
Record interest expense related to the notes (1) | $ | 28,750 | $ | 7,089 | ||||
Record interest expense on Revolving Credit Facility (2)(5) | 6,637 | 1,687 | ||||||
Record amortization of new deferred financing fees related to the notes (3) | 870 | 226 | ||||||
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Adjustment related to the Acquisition | 36,257 | 9,002 | ||||||
The Asset Sale | ||||||||
Eliminate historical term loan interest expense for payments on the Term Loan Facility and Revolving Credit Facility (4)(5) | (22,101 | ) | (5,536 | ) | ||||
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Adjustment related to the Asset Sale | (22,101 | ) | (5,536 | ) | ||||
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Total adjustment to increase interest expense | $ | 14,156 | $ | 3,466 | ||||
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(1) | The amount of interest expense for the notes is calculated using the interest rate of 5.75%. |
(2) | Impact to historical interest expense resulting from the changes in amounts outstanding under the existing Revolving Credit Facility related to the Acquisition. |
(3) | Deferred financing fees represent debt issuance costs for the notes and are amortized over the contractual term of the related indebtedness. |
(4) | Impact to interest expense resulting from payments on the Term Loan Facility and changes in amounts outstanding under the Revolving Credit Facility resulting from the Asset Sale. Interest expense is inclusive of changes to historical amortization of deferred financing costs for the Term Loan Facility. |
(5) | Based upon the balance of the Company’s Term Loan Facility and Revolving Credit Facility after the Transactions, a 0.125% change to the interest rate would result in an increase or decrease to interest expense of $0.4 million annually and $0.1 million for a three month period. |
(d) Tax expense
Adjustment to record the income tax impacts of the pro forma adjustments using a blended statutory tax rate of 24.5%. This rate does not reflect Harsco’s effective tax rate, which will include other items and may be significantly different than the rates assumed for purposes of preparing these statements.
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