UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended |
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________ |
Commission File Number 1-584
FERRO CORPORATION
(Exact name of registrant as specified in its charter)
OH (State or other jurisdiction of incorporation or organization) | 34-0217820 (I.R.S. Employer Identification No.) | |||
6060 Parkland Boulevard Suite 250 Mayfield Heights, OH (Address of principal executive offices) | 44124 (Zip Code) | |||
216-875-5600 (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | x | Accelerated Filer | o | |
Non-accelerated Filer | o | Smaller Reporting Company | o | |
Emerging Growth Company | o |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $1.00 | FOE | NYSE |
At SeptemberJune 30, 2020,2021, there were 82,290,61782,704,290 shares of Ferro Common Stock, par value $1.00, outstanding.
TABLE OF CONTENTS
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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Exhibit 31.1 | ||
Exhibit 31.2 | ||
Exhibit 32.1 | ||
Exhibit 32.2 |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||
(Dollars in thousands, except per share amounts) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Net sales | $ | 241,877 | $ | 245,339 | $ | 699,004 | $ | 769,679 | $ | 294,331 | $ | 204,801 | $ | 582,689 | $ | 457,127 | ||||||||
Cost of sales | 171,711 | 169,277 | 484,356 | 536,628 | 199,496 | 141,057 | 392,751 | 312,645 | ||||||||||||||||
Gross profit | 70,166 | 76,062 | 214,648 | 233,051 | 94,835 | 63,744 | 189,938 | 144,482 | ||||||||||||||||
Selling, general and administrative expenses | 47,820 | 47,543 | 154,407 | 157,723 | 59,026 | 50,541 | 112,864 | 106,587 | ||||||||||||||||
Restructuring and impairment charges | 2,447 | 2,065 | 12,231 | 7,862 | 1,970 | 8,619 | 7,154 | 9,784 | ||||||||||||||||
Other expense (income): | ||||||||||||||||||||||||
Interest expense | 4,767 | 6,002 | 16,474 | 18,578 | 5,006 | 6,177 | 14,443 | 11,707 | ||||||||||||||||
Interest earned | (474) | (813) | (1,035) | (2,456) | (52) | (307) | (649) | (561) | ||||||||||||||||
Foreign currency losses, net | 1,450 | 3,655 | 1,278 | 7,662 | ||||||||||||||||||||
Miscellaneous expense (income), net | (438) | (2,467) | (2,604) | (2,103) | ||||||||||||||||||||
Income before income taxes | 14,594 | 20,077 | 33,897 | 45,785 | ||||||||||||||||||||
Foreign currency losses (gains), net | 3,209 | 1,143 | 4,367 | (172) | ||||||||||||||||||||
Loss on extinguishment of debt | — | — | 1,981 | — | ||||||||||||||||||||
Miscellaneous income, net | (253) | (703) | (2,353) | (2,166) | ||||||||||||||||||||
Income (loss) before income taxes | 25,929 | (1,726) | 52,131 | 19,303 | ||||||||||||||||||||
Income tax expense | 5,047 | 3,347 | 10,364 | 8,893 | 8,502 | 200 | 16,146 | 5,317 | ||||||||||||||||
Income from continuing operations | 9,547 | 16,730 | 23,533 | 36,892 | ||||||||||||||||||||
Income (loss) from continuing operations | 17,427 | (1,926) | 35,985 | 13,986 | ||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | 5,367 | (3,520) | 2,350 | 1,305 | (1,536) | (3,238) | 88,306 | (3,017) | ||||||||||||||||
Net income | 14,914 | 13,210 | 25,883 | 38,197 | ||||||||||||||||||||
Net income (loss) | 15,891 | (5,164) | 124,291 | 10,969 | ||||||||||||||||||||
Less: Net income attributable to noncontrolling interests | 440 | 390 | 826 | 902 | 382 | 376 | 819 | 386 | ||||||||||||||||
Net income attributable to Ferro Corporation common shareholders | $ | 14,474 | $ | 12,820 | $ | 25,057 | $ | 37,295 | ||||||||||||||||
Net income (loss) attributable to Ferro Corporation common shareholders | $ | 15,509 | $ | (5,540) | $ | 123,472 | $ | 10,583 | ||||||||||||||||
Earnings (loss) per share attributable to Ferro Corporation common shareholders: | ||||||||||||||||||||||||
Basic earnings (loss): | ||||||||||||||||||||||||
Basic earnings: | ||||||||||||||||||||||||
Continuing operations | $ | 0.11 | $ | 0.20 | $ | 0.28 | $ | 0.44 | $ | 0.21 | $ | (0.03) | $ | 0.43 | $ | 0.17 | ||||||||
Discontinued operations | 0.07 | (0.04) | 0.03 | 0.01 | (0.02) | (0.04) | 1.07 | (0.04) | ||||||||||||||||
$ | 0.18 | $ | 0.16 | $ | 0.31 | $ | 0.45 | $ | 0.19 | $ | (0.07) | $ | 1.50 | $ | 0.13 | |||||||||
Diluted earnings (loss): | ||||||||||||||||||||||||
Diluted earnings: | ||||||||||||||||||||||||
Continuing operations | $ | 0.11 | $ | 0.20 | $ | 0.27 | $ | 0.44 | $ | 0.20 | $ | (0.03) | $ | 0.42 | $ | 0.16 | ||||||||
Discontinued operations | 0.06 | (0.04) | 0.03 | 0.01 | (0.02) | (0.04) | 1.06 | (0.04) | ||||||||||||||||
$ | 0.17 | $ | 0.16 | $ | 0.30 | $ | 0.45 | $ | 0.18 | $ | (0.07) | $ | 1.48 | $ | 0.12 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||
Net income | $ | 14,914 | $ | 13,210 | $ | 25,883 | $ | 38,197 | ||||
Other comprehensive income (loss), net of income tax: | ||||||||||||
Foreign currency translation income (loss) | 13,831 | (10,966) | (678) | (3,585) | ||||||||
Cash flow hedging instruments, unrealized income (loss) | 269 | (1,644) | (10,331) | (13,307) | ||||||||
Other comprehensive income (loss), net of income tax | 14,100 | (12,610) | (11,009) | (16,892) | ||||||||
Total comprehensive income | 29,014 | 600 | 14,874 | 21,305 | ||||||||
Less: Comprehensive income attributable to noncontrolling interests | 197 | 146 | 453 | 648 | ||||||||
Comprehensive income attributable to Ferro Corporation | $ | 28,817 | $ | 454 | $ | 14,421 | $ | 20,657 |
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||
Net income (loss) | $ | 15,891 | $ | (5,164) | $ | 124,291 | $ | 10,969 | ||||
Other comprehensive income (loss), net of income tax: | ||||||||||||
Foreign currency translation gain (loss) | 687 | 3,857 | (60,414) | (14,509) | ||||||||
Cash flow hedging instruments, unrealized income (loss) | 1,283 | (1,560) | 8,069 | (10,600) | ||||||||
Postretirement benefit liabilities income | (1) | — | 129 | — | ||||||||
Other comprehensive income (loss), net of income tax | 1,969 | 2,297 | (52,216) | (25,109) | ||||||||
Total comprehensive income (loss) | 17,860 | (2,867) | 72,075 | (14,140) | ||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | (157) | 340 | 206 | 256 | ||||||||
Comprehensive income (loss) attributable to Ferro Corporation | $ | 18,017 | $ | (3,207) | $ | 71,869 | $ | (14,396) |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, | December 31, | June 30, | December 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
ASSETS | ASSETS | ASSETS | ||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | $ | 64,495 | $ | 96,202 | $ | 143,717 | $ | 174,077 | ||||
Accounts receivable, net | 148,050 | 139,333 | 162,375 | 137,008 | ||||||||
Inventories | 272,797 | 264,476 | 260,237 | 260,332 | ||||||||
Other receivables | 69,933 | 69,365 | 64,240 | 72,272 | ||||||||
Other current assets | 15,724 | 22,373 | 20,988 | 18,261 | ||||||||
Current assets held-for-sale | 285,229 | 291,420 | — | 307,854 | ||||||||
Total current assets | 856,228 | 883,169 | 651,557 | 969,804 | ||||||||
Other assets | ||||||||||||
Property, plant and equipment, net | 303,291 | 302,672 | 332,197 | 330,045 | ||||||||
Goodwill | 173,241 | 172,209 | 174,005 | 175,351 | ||||||||
Intangible assets, net | 120,658 | 127,815 | 112,545 | 119,500 | ||||||||
Deferred income taxes | 103,380 | 98,714 | 110,735 | 115,962 | ||||||||
Operating leased assets | 14,246 | 20,088 | 13,817 | 15,446 | ||||||||
Other non-current assets | 88,361 | 72,023 | 25,825 | 80,618 | ||||||||
Non-current assets held-for-sale | 163,103 | 157,931 | — | 154,207 | ||||||||
Total assets | $ | 1,822,508 | $ | 1,834,621 | $ | 1,420,681 | $ | 1,960,933 | ||||
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | ||||||||||
Current liabilities | ||||||||||||
Loans payable and current portion of long-term debt | $ | 8,764 | $ | 8,703 | $ | 8,871 | $ | 8,839 | ||||
Accounts payable | 92,702 | 138,799 | 136,303 | 135,296 | ||||||||
Accrued payrolls | 30,232 | 27,447 | 28,366 | 27,166 | ||||||||
Accrued expenses and other current liabilities | 103,344 | 73,016 | 150,463 | 124,770 | ||||||||
Current liabilities held-for-sale | 89,481 | 133,780 | — | 107,545 | ||||||||
Total current liabilities | 324,523 | 381,745 | 324,003 | 403,616 | ||||||||
Other liabilities | ||||||||||||
Long-term debt, less current portion | 798,775 | 798,862 | 354,729 | 791,509 | ||||||||
Postretirement and pension liabilities | 170,467 | 174,021 | 165,951 | 181,610 | ||||||||
Operating leased non-current liabilities | 9,000 | 14,474 | 8,588 | 10,064 | ||||||||
Other non-current liabilities | 59,300 | 56,976 | 55,118 | 62,050 | ||||||||
Non-current liabilities held-for-sale | 69,535 | 38,341 | — | 71,149 | ||||||||
Total liabilities | 1,431,600 | 1,464,419 | 908,389 | 1,519,998 | ||||||||
Equity | ||||||||||||
Ferro Corporation shareholders’ equity: | ||||||||||||
Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 82.3 million and 82.0 million shares outstanding at September 30, 2020, and December 31, 2019, respectively | 93,436 | 93,436 | ||||||||||
Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 82.7 million and 82.4 million shares outstanding at June 30, 2021, and December 31, 2020, respectively | 93,436 | 93,436 | ||||||||||
Paid-in capital | 294,077 | 294,543 | 289,285 | 293,682 | ||||||||
Retained earnings | 287,073 | 262,016 | 428,287 | 304,815 | ||||||||
Accumulated other comprehensive loss | (120,012) | (109,376) | (141,313) | (89,710) | ||||||||
Common shares in treasury, at cost | (173,945) | (180,243) | (165,689) | (172,256) | ||||||||
Total Ferro Corporation shareholders’ equity | 380,629 | 360,376 | 504,006 | 429,967 | ||||||||
Noncontrolling interests | 10,279 | 9,826 | 8,286 | 10,968 | ||||||||
Total equity | 390,908 | 370,202 | 512,292 | 440,935 | ||||||||
Total liabilities and equity | $ | 1,822,508 | $ | 1,834,621 | $ | 1,420,681 | $ | 1,960,933 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
Ferro Corporation Shareholders | Ferro Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||
Common Shares | Accumulated | Common Shares | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
in Treasury | Other | Non- | in Treasury | Other | Non- | |||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | controlling | Total | Common | Paid-in | Retained | Comprehensive | controlling | Total | |||||||||||||||||||||||||||||||||||
(In thousands) | Shares | Amount | Stock | Capital | Earnings | Loss | Interests | Equity | Shares | Amount | Stock | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||||
Balances at December 31, 2019 | 11,431 | $ | (180,243) | $ | 93,436 | $ | 294,543 | $ | 262,016 | $ | (109,376) | $ | 9,826 | $ | 370,202 | |||||||||||||||||||||||||||||||
Balances at December 31, 2020 | 11,065 | $ | (172,256) | $ | 93,436 | $ | 293,682 | $ | 304,815 | $ | (89,710) | $ | 10,968 | $ | 440,935 | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 107,963 | — | 437 | 108,400 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (54,111) | (74) | (54,185) | ||||||||||||||||||||||||||||||||||||||
Change in ownership interest | — | — | — | (2,530) | — | — | (2,888) | (5,418) | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation transactions | (255) | 5,154 | — | (2,614) | — | — | — | 2,540 | ||||||||||||||||||||||||||||||||||||||
Balances at March 31, 2021 | 10,810 | $ | (167,102) | $ | 93,436 | $ | 288,538 | $ | 412,778 | $ | (143,821) | $ | 8,443 | $ | 492,272 | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 16,123 | — | 10 | 16,133 | — | — | — | — | 15,509 | — | 382 | 15,891 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (27,312) | (94) | (27,406) | — | — | — | — | — | 2,508 | (539) | 1,969 | ||||||||||||||||||||||||||||||
Stock-based compensation transactions | (238) | 5,332 | — | (2,723) | — | — | — | 2,609 | (79) | 1,413 | — | 747 | — | — | — | 2,160 | ||||||||||||||||||||||||||||||
Balances at March 31, 2020 | 11,193 | (174,911) | 93,436 | 291,820 | 278,139 | (136,688) | 9,742 | 361,538 | ||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (5,540) | — | 376 | (5,164) | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | 2,333 | (36) | 2,297 | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation transactions | (8) | 159 | — | 1,825 | — | — | — | 1,984 | ||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2020 | 11,185 | (174,752) | 93,436 | 293,645 | 272,599 | (134,355) | 10,082 | 360,655 | ||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 14,474 | — | 440 | 14,914 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | 14,343 | (243) | 14,100 | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation transactions | (40) | 807 | — | 432 | — | — | — | 1,239 | ||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2020 | 11,145 | $ | (173,945) | $ | 93,436 | $ | 294,077 | $ | 287,073 | $ | (120,012) | $ | 10,279 | $ | 390,908 | |||||||||||||||||||||||||||||||
Balances at June 30, 2021 | 10,731 | $ | (165,689) | $ | 93,436 | $ | 289,285 | $ | 428,287 | $ | (141,313) | $ | 8,286 | $ | 512,292 |
Ferro Corporation Shareholders | Ferro Corporation Shareholders | |||||||||||||||||||||||||||||||||||||||||||||
Common Shares | Accumulated | Common Shares | Accumulated | |||||||||||||||||||||||||||||||||||||||||||
in Treasury | Other | Non- | in Treasury | Other | Non- | |||||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | controlling | Total | Common | Paid-in | Retained | Comprehensive | controlling | Total | |||||||||||||||||||||||||||||||||||
(In thousands) | Shares | Amount | Stock | Capital | Earnings | Loss | Interests | Equity | Shares | Amount | Stock | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||||||||||
Balances at December 31, 2018 | 10,433 | $ | (165,545) | $ | 93,436 | $ | 298,123 | $ | 255,978 | $ | (105,361) | $ | 9,218 | $ | 385,849 | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 13,604 | — | 274 | 13,878 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (912) | 106 | (806) | ||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | 1,441 | (25,000) | — | — | — | — | — | (25,000) | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation transactions | (370) | 8,422 | — | (6,446) | — | — | — | 1,976 | ||||||||||||||||||||||||||||||||||||||
Balances at March 31, 2019 | 11,504 | (182,123) | 93,436 | 291,677 | 269,582 | (106,273) | 9,598 | 375,897 | ||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2019 | 11,431 | $ | (180,243) | $ | 93,436 | $ | 294,543 | $ | 262,016 | $ | (109,376) | $ | 9,826 | $ | 370,202 | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | 10,871 | — | 238 | 11,109 | — | — | — | — | 16,123 | — | 10 | 16,133 | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (3,360) | (116) | (3,476) | — | — | — | — | — | (27,312) | (94) | (27,406) | ||||||||||||||||||||||||||||||
Stock-based compensation transactions | (1) | 37 | — | 2,181 | — | — | — | 2,218 | (238) | 5,332 | — | (2,723) | — | — | — | 2,609 | ||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (654) | (654) | ||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2019 | 11,503 | $ | (182,086) | $ | 93,436 | $ | 293,858 | $ | 280,453 | $ | (109,633) | $ | 9,066 | $ | 385,094 | |||||||||||||||||||||||||||||||
Net income | — | — | — | — | 12,820 | — | 390 | 13,210 | ||||||||||||||||||||||||||||||||||||||
Balances at March 31, 2020 | 11,193 | $ | (174,911) | $ | 93,436 | $ | 291,820 | $ | 278,139 | $ | (136,688) | $ | 9,742 | $ | 361,538 | |||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | (5,540) | — | 376 | (5,164) | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (12,366) | (244) | (12,610) | — | — | — | — | — | 2,333 | (36) | 2,297 | ||||||||||||||||||||||||||||||
Stock-based compensation transactions | (36) | 992 | — | 112 | — | — | — | 1,104 | (8) | 159 | — | 1,825 | — | — | — | 1,984 | ||||||||||||||||||||||||||||||
Balances at September 30, 2019 | 11,467 | $ | (181,094) | $ | 93,436 | $ | 293,970 | $ | 293,273 | $ | (121,999) | $ | 9,212 | $ | 386,798 | |||||||||||||||||||||||||||||||
Balances at June 30, 2020 | 11,185 | $ | (174,752) | $ | 93,436 | $ | 293,645 | $ | 272,599 | $ | (134,355) | $ | 10,082 | $ | 360,655 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Nine Months Ended | Six Months Ended | |||||||||||
September 30, | June 30, | |||||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Cash flows from operating activities | ||||||||||||
Net cash used in operating activities | $ | (106,481) | $ | (67,240) | $ | (46,410) | $ | (104,561) | ||||
Cash flows from investing activities | ||||||||||||
Capital expenditures for property, plant and equipment and other long-lived assets | (21,681) | (40,820) | (20,574) | (14,982) | ||||||||
Collections of financing receivables | 97,299 | 60,904 | 59,326 | 62,580 | ||||||||
Proceeds from sale of businesses, net | 415,230 | — | ||||||||||
Business acquisitions, net of cash acquired | — | (251) | (2,200) | — | ||||||||
Other investing activities | 803 | 1,930 | 236 | 778 | ||||||||
Net cash provided by investing activities | 76,421 | 21,763 | 452,018 | 48,376 | ||||||||
Cash flows from financing activities | ||||||||||||
Net borrowings under loans payable | (683) | 8,220 | ||||||||||
Net borrowings (payments) under loans payable | (112) | 11,420 | ||||||||||
Principal payments on term loan facility - Amended Credit Facility | (6,150) | (6,150) | (439,100) | (4,100) | ||||||||
Proceeds from revolving credit facility - Amended Credit Facility | 398,336 | 216,066 | 50,000 | 360,000 | ||||||||
Principal payments on revolving credit facility - Amended Credit Facility | (392,596) | (193,595) | (50,000) | (343,383) | ||||||||
Acquisition-related contingent consideration payment | — | (5,200) | ||||||||||
Purchase of treasury stock | — | (25,000) | ||||||||||
Other financing activities | (728) | (757) | (3,551) | (1,418) | ||||||||
Net cash used in financing activities | (1,821) | (6,416) | ||||||||||
Net cash provided by (used in) financing activities | (442,763) | 22,519 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | 174 | (667) | (1,405) | (505) | ||||||||
Decrease in cash and cash equivalents | (31,707) | (52,560) | (38,560) | (34,171) | ||||||||
Cash and cash equivalents at beginning of period | 104,402 | 104,301 | 182,277 | 104,402 | ||||||||
Cash and cash equivalents at end of period | 72,695 | 51,741 | 143,717 | 70,231 | ||||||||
Less: Cash and cash equivalents of discontinued operations at end of period | 8,200 | 8,200 | — | 8,200 | ||||||||
Cash and cash equivalents of continuing operations at end of period | $ | 64,495 | $ | 43,541 | $ | 143,717 | $ | 62,031 | ||||
Cash paid during the period for: | ||||||||||||
Interest | $ | 20,176 | $ | 25,475 | $ | 16,438 | $ | 16,736 | ||||
Income taxes | $ | 13,005 | $ | 12,845 | $ | 12,751 | $ | 7,722 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
We produce our products primarily in the Europe, Middle East and Africa (“EMEA”) region, the United States (“U.S.”),Americas region and the Asia Pacific region, and Latin America.region.
Operating results for the three and ninesix months ended SeptemberJune 30, 2020,2021, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2020.2021.
During the fourth quarter of 2019, substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets. As further discussed in Note 4, we entered into a definitive agreement to sell our Tile Coatings business, which has historically been included in the Performance Coatings reportable segment. Therefore, the associated operating results, net of income tax, have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Throughout this Quarterly Report on Form 10-Q, with the exception of the statements of cash flows and unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
Subsequent toOn February 25, 2021, we completed the treatmentsale of theour Tile Coatings business as discontinued operations,to Pigments Spain, S.L., a company of the remaining businesses within Performance Coatings were included within the Performance Colors and Glass reportable segment,Esmalglass-Itaca-Fritta group, which asis a portfolio company of January 1, 2020, was renamed Functional Coatings.certain Lone Star Funds.
Certain reclassifications have been made to the prior year financial statements to conform to current year classifications. The reclassification relates to the balance sheet presentation of assets and liabilities as held for sale and statement of operations presentation of results classified as discontinued operations in relation to the Tile Coatings business transaction.Additional reclassification relates to the disclosure of revenue disaggregation by geographic regions. As of January 1, 2021, the United States and Latin America regions were combined into the Americas region.
Pending Merger
On May 11, 2021, Ferro, PMHC II Inc., a Delaware corporation (“Prince”) and PMHC Fortune Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Prince (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, on the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Ferro (the “Merger”), with Ferro continuing as the surviving corporation in the Merger and as a direct or indirect wholly owned subsidiary of Prince. The board of directors of Ferro has approved the Merger Agreement.
On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), and as a result of the Merger, each share of common stock of Ferro (“Ferro Common Stock”) that is issued and outstanding immediately prior to the Effective Time (other than (i) shares of Ferro Common Stock held by Ferro as treasury stock or held directly by Prince or any subsidiary of Prince (including Merger Sub) immediately prior to the Effective Time (which will be canceled without payment of any consideration), (ii) shares of Ferro Common Stock for which dissenters rights have been properly exercised and perfected and not withdrawn and (iii) shares of restricted stock) will be converted into the right to receive $22.00 in cash, without interest (the “Merger Consideration”).
Pursuant to the Merger Agreement, as of the Effective Time, each option to acquire shares of Ferro Common Stock, whether vested or unvested, that is outstanding immediately prior to the Effective Time will be converted into the right to receive an amount in cash (less any applicable withholding taxes) equal to (A) the number of shares of Ferro Common Stock subject to such option, multiplied by (B) the excess, if any, of the Merger Consideration over the applicable per share exercise price of such option.
In addition, pursuant to the Merger Agreement, as of the Effective Time, (i) each outstanding share of Ferro restricted stock, each restricted share unit (other than performance share units), deferred share unit, phantom share unit or similar stock right, whether vested or unvested, that is outstanding immediately prior to the Effective Time will be converted into the right to receive an amount in cash (less any applicable withholding taxes) equal to (A) the number of shares of Ferro Common Stock subject to such right, multiplied by (B) the Merger Consideration, and (ii) each Ferro performance-based share unit, whether vested or unvested, that is outstanding immediately prior to the Effective Time will be converted into the right to receive an amount in cash (less any applicable withholding taxes) equal to (A) the number of shares of Ferro Common Stock subject to such performance-based share unit, calculated based on the greater of (x) actual performance achieved in accordance with the terms of such performance-based share unit and the Merger Agreement and (y) target level performance over the entire performance period applicable with respect to such performance-based share unit, multiplied by (B) the Merger Consideration.
Ferro and Prince have agreed to use their respective reasonable best efforts to consummate the Merger, including making filings with and seeking approvals from certain governmental entities necessary in connection with the Merger, including under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). In furtherance thereof, Prince has agreed to accept certain divestitures or restrictions on the assets of Prince, Ferro and their respective subsidiaries, if and to the extent necessary to obtain such approvals, subject to certain specified limitations set forth in the Merger Agreement.
Consummation of the Merger is subject to certain customary conditions, including (i) the adoption of the Merger Agreement by the holders of two-thirds of the outstanding shares of Ferro Common Stock, (ii) the absence of any law prohibiting or order preventing the consummation of the Merger, (iii) the receipt of certain regulatory approvals, including expiration or termination of any applicable waiting period under the HSR Act, (iv) the absence of a material adverse effect with respect to Ferro, and (v) compliance in all material respects on the part of each of Ferro and Prince with such party’s covenants under the Merger Agreement. The obligation of each party to consummate the Merger is also conditioned upon the other party’s representations and warranties being true and correct, subject to certain materiality exceptions.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
This section provides a description of new accounting pronouncements ("Accounting Standard Update" or "ASU") issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company.
New Accounting Standards Not Yet Adopted
We are currently evaluating the impact on our financial statements of the following ASUs:
Standard | Description | |
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, issued March, 2020 | Provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU are effective for all entities through December 31, 2022. | |
|
|
No other new accounting pronouncements issued had, or are expected to have, a material impact on the Company’s consolidated financial statements.
3. Revenue
Revenues disaggregated by geography and reportable segment for the three months ended SeptemberJune 30, 2020,2021, follow:
(Dollars in thousands) | EMEA | United States | Asia Pacific | Latin America | Total | EMEA | Americas | Asia Pacific | Total | ||||||||||||||||||
Functional Coatings | $ | 65,081 | $ | 49,580 | $ | 26,779 | $ | 12,778 | $ | 154,218 | $ | 92,569 | $ | 72,046 | $ | 30,294 | $ | 194,909 | |||||||||
Color Solutions | 30,472 | 36,705 | 10,766 | 9,716 | 87,659 | 37,958 | 50,014 | 11,450 | 99,422 | ||||||||||||||||||
Total net sales | $ | 95,553 | $ | 86,285 | $ | 37,545 | $ | 22,494 | $ | 241,877 | $ | 130,527 | $ | 122,060 | $ | 41,744 | $ | 294,331 |
Revenues disaggregated by geography and reportable segment for the three months ended SeptemberJune 30, 2019,2020, follow:
(Dollars in thousands) | EMEA | United States | Asia Pacific | Latin America | Total | EMEA | Americas | Asia Pacific | Total | ||||||||||||||||||
Functional Coatings | $ | 70,048 | $ | 46,657 | $ | 26,364 | $ | 11,675 | $ | 154,744 | $ | 51,071 | $ | 58,868 | $ | 21,733 | $ | 131,672 | |||||||||
Color Solutions | 33,349 | 38,758 | 10,412 | 8,076 | 90,595 | 27,874 | 36,145 | 9,110 | 73,129 | ||||||||||||||||||
Total net sales | $ | 103,397 | $ | 85,415 | $ | 36,776 | $ | 19,751 | $ | 245,339 | $ | 78,945 | $ | 95,013 | $ | 30,843 | $ | 204,801 |
Revenues disaggregated by geography and reportable segment for the ninesix months ended SeptemberJune 30, 2020,2021, follow:
(Dollars in thousands) | EMEA | United States | Asia Pacific | Latin America | Total | EMEA | Americas | Asia Pacific | Total | ||||||||||||||||||
Functional Coatings | $ | 192,009 | $ | 148,468 | $ | 70,268 | $ | 30,580 | $ | 441,325 | $ | 179,941 | $ | 139,964 | $ | 59,826 | $ | 379,731 | |||||||||
Color Solutions | 96,235 | 108,384 | 29,172 | 23,888 | 257,679 | 77,000 | 103,868 | 22,090 | 202,958 | ||||||||||||||||||
Total net sales | $ | 288,244 | $ | 256,852 | $ | 99,440 | $ | 54,468 | $ | 699,004 | $ | 256,941 | $ | 243,832 | $ | 81,916 | $ | 582,689 |
Revenues disaggregated by geography and reportable segment for the ninesix months ended SeptemberJune 30, 2019,2020, follow:
(Dollars in thousands) | EMEA | United States | Asia Pacific | Latin America | Total | EMEA | Americas | Asia Pacific | Total | ||||||||||||||||||
Functional Coatings | $ | 223,310 | $ | 149,574 | $ | 73,962 | $ | 38,616 | $ | 485,462 | $ | 126,928 | $ | 116,690 | $ | 43,489 | $ | 287,107 | |||||||||
Color Solutions | 105,960 | 125,499 | 28,248 | 24,510 | 284,217 | 65,763 | 85,851 | 18,406 | 170,020 | ||||||||||||||||||
Total net sales | $ | 329,270 | $ | 275,073 | $ | 102,210 | $ | 63,126 | $ | 769,679 | $ | 192,691 | $ | 202,541 | $ | 61,895 | $ | 457,127 |
4. Discontinued Operations
During the fourth quarter of 2019, substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets. We entered into a definitive agreement to sell our Tile Coatings business, which has historically been a part of our Performance Coatings reportable segment. Therefore, the associated operating results, net of income tax, have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented.
On February 25, 2021, we completed the sale of our Tile Coatings business to Pigments Spain, S.L., a company of the Esmalglass-Itaca-Fritta group (the “Buyer”), which is a portfolio company of certain Lone Star Funds, for $460.0 million in cash, subject to post-closing adjustments. The transaction resulted in net proceeds of approximately $415.2 million after expenses and a gain of $100.1 million, which is recorded within Income from discontinued operations, net of income taxes in our consolidated statement of operations for the quarter ended March 31, 2021. We entered into a Transition Services Agreement (“TSA”) with the Buyer, which is designed to facilitate an orderly transfer of business operations. The services provided under the TSA will terminate at various points in times between six to twelve months from the completion of the sale. Except for customary post-closing adjustments and transition services, we have no continuing involvement with the Buyer subsequent to the completion of the sale.
The table below summarizes results for the Tile Coatings business for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, which are reflected in our consolidated statements of operations as discontinued operations.operations, net of income taxes. Interest expense has been allocated to the discontinued operations based on the ratio of net assets of the business to consolidated net assets excluding debt.
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Net sales | $ | 120,163 | $ | 120,389 | $ | 310,167 | $ | 377,499 | $ | — | $ | 75,254 | $ | 83,579 | $ | 190,004 | ||||||||
Cost of sales | 89,120 | 96,160 | 235,095 | 300,145 | — | 59,073 | 60,634 | 145,975 | ||||||||||||||||
Gross profit | 31,043 | 24,229 | 75,072 | 77,354 | — | 16,181 | 22,945 | 44,029 | ||||||||||||||||
Selling, general and administrative expenses | 18,549 | 20,180 | 52,899 | 53,725 | — | 15,542 | 20,327 | 34,350 | ||||||||||||||||
Restructuring and impairment charges | 269 | 4,161 | 2,306 | 10,751 | — | 1,758 | 303 | 2,037 | ||||||||||||||||
Interest expense | 2,950 | 2,880 | 7,698 | 8,838 | — | 2,517 | 1,682 | 4,748 | ||||||||||||||||
Interest earned | (21) | (24) | (174) | (91) | — | (129) | (189) | (153) | ||||||||||||||||
Foreign currency losses (gains), net | 113 | (158) | 5,074 | (2,047) | — | (804) | 363 | 4,961 | ||||||||||||||||
Gain on sale of business, net | — | — | (100,057) | — | ||||||||||||||||||||
Miscellaneous expense, net | 173 | 328 | 1,420 | 598 | — | 705 | 251 | 1,247 | ||||||||||||||||
Income (loss) from discontinued operations before income taxes | 9,010 | (3,138) | 5,849 | 5,580 | — | (3,408) | 100,265 | (3,161) | ||||||||||||||||
Income tax expense | 3,643 | 382 | 3,499 | 4,275 | ||||||||||||||||||||
Income tax expense (benefit) | 1,536 | (170) | 11,959 | (144) | ||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | 5,367 | (3,520) | 2,350 | 1,305 | (1,536) | (3,238) | 88,306 | (3,017) | ||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interests | (11) | 92 | 33 | 242 | ||||||||||||||||||||
Less: Net income attributable to noncontrolling interests | — | 67 | 64 | 44 | ||||||||||||||||||||
Net income (loss) attributable to Tile Coatings business | $ | 5,378 | $ | (3,612) | $ | 2,317 | $ | 1,063 | $ | (1,536) | $ | (3,305) | $ | 88,242 | $ | (3,061) |
The following table summarizes the assets and liabilities which are classified as held-for-sale at September 30, 2020 and December 31, 2019:2020:
September 30, | December 31, | |||||
(Dollars in thousands) | 2020 | 2019 | ||||
Cash and cash equivalents | $ | 8,200 | $ | 8,200 | ||
Accounts receivable, net | 186,457 | 156,645 | ||||
Inventories | 84,422 | 101,127 | ||||
Other receivables | 3,331 | 22,442 | ||||
Other current assets | 2,819 | 3,006 | ||||
Current assets held-for-sale | 285,229 | 291,420 | ||||
Property, plant and equipment, net | 100,944 | 96,762 | ||||
Goodwill | 3 | 3 | ||||
Amortizable intangible assets, net | 40,947 | 39,692 | ||||
Deferred income taxes | 14,695 | 14,425 | ||||
Other non-current assets | 6,514 | 7,049 | ||||
Non-current assets held-for-sale | 163,103 | 157,931 | ||||
Total assets held-for-sale | $ | 448,332 | $ | 449,351 | ||
| ||||||
Loans payable and current portion of long-term debt | $ | 3,759 | $ | 3,678 | ||
Accounts payable | 66,082 | 96,998 | ||||
Accrued payrolls | 7,597 | 4,838 | ||||
Accrued expenses and other current liabilities | 12,043 | 28,266 | ||||
Current liabilities held-for-sale | 89,481 | 133,780 | ||||
Long-term debt, less current portion | 54,755 | 25,805 | ||||
Postretirement and pension liabilities | 8,378 | 7,473 | ||||
Other non-current liabilities | 6,402 | 5,063 | ||||
Non-current liabilities held-for-sale | 69,535 | 38,341 | ||||
Total liabilities held-for-sale | $ | 159,016 | $ | 172,121 |
December 31, | |||
(Dollars in thousands) | 2020 | ||
Cash and cash equivalents | $ | 8,200 | |
Accounts receivable, net | 211,548 | ||
Inventories | 84,239 | ||
Other receivables | 1,630 | ||
Other current assets | 2,237 | ||
Current assets held-for-sale | 307,854 | ||
Property, plant and equipment, net | 93,430 | ||
Intangible assets, net | 42,126 | ||
Deferred income taxes | 12,267 | ||
Other non-current assets | 6,384 | ||
Non-current assets held-for-sale | 154,207 | ||
Total assets held-for-sale | $ | 462,061 | |
Loans payable and current portion of long-term debt | $ | 3,927 | |
Accounts payable | 85,308 | ||
Accrued payrolls | 5,946 | ||
Accrued expenses and other current liabilities | 12,364 | ||
Current liabilities held-for-sale | 107,545 | ||
Long-term debt, less current portion | 56,359 | ||
Postretirement and pension liabilities | 8,119 | ||
Other non-current liabilities | 6,671 | ||
Non-current liabilities held-for-sale | 71,149 | ||
Total liabilities held-for-sale | $ | 178,694 |
The following table summarizes cash flow data relating to discontinued operations for the ninesix months ended SeptemberJune 30, 20202021 and 2019:2020:
Nine Months Ended | Six Months Ended | |||||||||||
September 30, | June 30, | |||||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Depreciation | $ | — | $ | 8,702 | ||||||||
Amortization of intangible assets | — | 2,388 | ||||||||||
Capital expenditures | (3,048) | (9,114) | $ | (1,074) | $ | (1,909) | ||||||
Non-cash operating activities - goodwill impairment | — | 9,100 | ||||||||||
Gain on sale of discontinued operations | (100,057) | — | ||||||||||
Non-cash operating activities - restructuring and impairment charges | 1,091 | 127 | — | 1,070 | ||||||||
Non-cash investing activities - capital expenditures, consisting of unpaid capital expenditure liabilities at period end | 683 | 738 | — | 507 |
5. Inventories
September 30, | December 31, | June 30, | December 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Raw materials | $ | 84,417 | $ | 80,176 | $ | 75,348 | $ | 81,344 | ||||
Work in process | 50,548 | 49,717 | 45,566 | 48,770 | ||||||||
Finished goods | 137,832 | 134,583 | 139,323 | 130,218 | ||||||||
Total inventories | $ | 272,797 | $ | 264,476 | $ | 260,237 | $ | 260,332 |
In the production of some of our products, we use precious metals, which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $0.6$0.8 million and $0.5$0.6 million for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, and were $2.3$1.4 million and $2.2$1.7 million for the ninesix months ended SeptemberJune 30, 2021 and 2020, and 2019.respectively. We had on-hand precious metals owned by participants in our precious metals consignment program of $87.5$100.7 million at SeptemberJune 30, 2020,2021, and $66.2$87.2 million at December 31, 2019,2020, measured at fair value based on market prices for identical assets.
6. Property, Plant and Equipment
Property, plant and equipment is reported net of accumulated depreciation of $430.8$452.4 million at SeptemberJune 30, 20202021 and $413.9$456.3 million at December 31, 2019.2020. As discussed in Note 4, the assets of our Tile Coatings business were classified as held-for-sale under ASC Topic 360; Property, Plant, and Equipment. As such, additional accumulated depreciation of $141.4 million at September 30, 2020 and $136.7$135.3 million at December 31, 2019 were2020 was classified as Non-current assets held for sale.
Unpaid capital expenditure liabilities, which are non-cash investing activities, were $2.9$1.1 million at SeptemberJune 30, 20202021 and $3.3$0.3 million at SeptemberJune 30, 2019.2020.
7. Goodwill and Other Intangible Assets
Details and activity in the Company’s goodwill by segment follow:
Functional | Color | Functional | Color | |||||||||||||||
(Dollars in thousands) | Coatings | Solutions | Total | Coatings | Solutions | Total | ||||||||||||
Goodwill, net at December 31, 2019 | $ | 121,902 | $ | 50,307 | $ | 172,209 | ||||||||||||
Goodwill, net at December 31, 2020 | $ | 123,570 | $ | 51,781 | $ | 175,351 | ||||||||||||
Foreign currency adjustments | 335 | 697 | 1,032 | (1,061) | (285) | (1,346) | ||||||||||||
Goodwill, net at September 30, 2020 | $ | 122,237 | $ | 51,004 | $ | 173,241 | ||||||||||||
Goodwill, net at June 30, 2021 | $ | 122,509 | $ | 51,496 | $ | 174,005 |
September 30, | December 31, | June 30, | December 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Goodwill, gross | $ | 231,708 | $ | 230,676 | $ | 232,472 | $ | 233,818 | ||||
Accumulated impairment | (58,467) | (58,467) | (58,467) | (58,467) | ||||||||
Goodwill, net | $ | 173,241 | $ | 172,209 | $ | 174,005 | $ | 175,351 |
Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying value. As of SeptemberJune 30, 2020,2021, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.
Amortizable intangible assets consisted of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Gross amortizable intangible assets: | ||||||||||||
Patents | $ | 5,504 | $ | 5,434 | $ | 5,540 | $ | 5,589 | ||||
Land rights | 3,053 | 2,900 | 3,209 | 3,173 | ||||||||
Technology/know-how and other | 115,270 | 112,940 | 116,455 | 116,015 | ||||||||
Customer relationships | 66,815 | 66,454 | 66,944 | 68,142 | ||||||||
Total gross amortizable intangible assets | 190,642 | 187,728 | 192,148 | 192,919 | ||||||||
Accumulated amortization: | ||||||||||||
Patents | (5,482) | (5,413) | (5,518) | (5,566) | ||||||||
Land rights | (1,549) | (1,378) | (1,693) | (1,630) | ||||||||
Technology/know-how and other | (58,973) | (50,973) | (66,116) | (61,104) | ||||||||
Customer relationships | (16,923) | (14,831) | (19,290) | (18,317) | ||||||||
Total accumulated amortization | (82,927) | (72,595) | (92,617) | (86,617) | ||||||||
Amortizable intangible assets, net | $ | 107,715 | $ | 115,133 | $ | 99,531 | $ | 106,302 |
Indefinite-lived intangible assets consisted of the following:
Z
September 30, | December 31, | June 30, | December 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Indefinite-lived intangibles assets: | ||||||||||||
Trade names and trademarks | $ | 12,943 | $ | 12,682 | $ | 13,014 | $ | 13,198 |
8. Debt
Loans payable and current portion of long-term debt consisted of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Loans payable | $ | — | $ | — | ||||||||
Current portion of long-term debt | 8,764 | 8,703 | $ | 8,871 | $ | 8,839 | ||||||
Current portion of long-term debt | $ | 8,764 | $ | 8,703 | ||||||||
Loans payable and current portion of long-term debt | $ | 8,871 | $ | 8,839 |
Long-term debt consisted of the following:
September 30, | December 31, | June 30, | December 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Term loan facility, net of unamortized issuance costs, maturing 2024(1) | $ | 795,483 | $ | 801,764 | $ | 356,978 | $ | 793,731 | ||||
Revolving credit facility | 5,740 | — | ||||||||||
Finance lease obligations | 2,610 | 2,305 | 2,733 | 2,911 | ||||||||
Other notes | 3,706 | 3,496 | 3,889 | 3,706 | ||||||||
Total long-term debt | 807,539 | 807,565 | 363,600 | 800,348 | ||||||||
Current portion of long-term debt | (8,764) | (8,703) | (8,871) | (8,839) | ||||||||
Long-term debt, less current portion | $ | 798,775 | $ | 798,862 | $ | 354,729 | $ | 791,509 |
(1)The carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs of $4.0$1.4 million at SeptemberJune 30, 20202021 and $3.9$3.7 million at December 31, 2019.
2020.
Amended Credit Facility
On April 25, 2018, the Company entered into an amendment (the “Amended Credit Facility”) to its existing credit facility (the “Credit Facility”), which Amended Credit Facility (a) provided a new revolving facility (the “2018 Revolving Facility”), which replaced the Company’s existing revolving facility, (b) repriced the (“Tranche B-1 Loans”), and (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars. On May 4, 2020, the Company entered into an amendment (Third Amendment to Credit Agreement) to the Amended Credit Facility, which added an approval to Section 7.2.8 Permitted Dispositions for the Tile Coatings Business Disposition. The Amended Credit Facility will be used for ongoing working capital requirements and general corporate purposes. The Tranche B-2 Loans are borrowed by the Company and the Tranche B-3 Loans are borrowed on a joint and several basis by Ferro GmbH and Ferro Europe Holdings LLC.
The Amended Credit Facility consists of a $500 million secured revolving line of credit with a maturity of February 14, 2023, a $355 million secured term loan facility with a maturity of February 14, 2024, a $235 million secured term loan facility with a maturity of February 14, 2024 and a $230 million secured term loan facility with a maturity of February 14, 2024. The term loans are payable in equal quarterly installments in an amount equal to 0.25% of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof. In addition, the Company is required, on an annual basis, to make a prepayment in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Amended Credit Facility, which prepayment will be applied first to the term loans until they are paid in full, and then to the revolving loans.
Subject to the satisfaction of certain conditions, the Company can request additional commitments under the revolving line of credit or term loans in the aggregate principal amount of up to $250 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans. The Company can also raise certain additional debt or credit facilities subject to satisfaction of certain covenant levels.
Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Amended Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of certain of the Company’s U.S. subsidiaries and 65% of the stock of certain of the Company’s direct foreign subsidiaries. The Tranche B-3 Loans are guaranteed by the Company, the U.S. subsidiary guarantors and a cross-guaranty by the borrowers of the Tranche B-3 Loans and are secured by the collateral securing the revolving loans and the other term loans, in addition to a pledge of the equity interests of Ferro GmbH.
Interest Rate – Term Loans: The interest rates applicable to the term loans will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable margin.
The base rate for term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans is 1.25%.
The LIBOR rate for term loans shall not be less than 0.0% and the applicable margin for LIBOR rate term loans is 2.25%.
For LIBOR rate term loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
At SeptemberJune 30, 2020,2021, the Company had borrowed $346.1$155.1 million under the Tranche B-1 Loans at an interest rate of 2.47%2.40%, $229.1$102.7 million under the Tranche B-2 Loans at an interest rate of 2.47%2.40%, and $224.3$100.5 million under the Tranche B-3 Loans at an interest rate of 2.47%2.40%. At SeptemberJune 30, 2020,2021, there were 0 additional borrowings available under the Tranche B-1 Loans, Tranche B-2 Loans, or Tranche B-3 Loans. In connection with these borrowings, we entered into swap agreements in the second quarter of 2018. At SeptemberJune 30, 2020,2021, the effective interest rate for all tranches of the Tranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans, after adjusting for the interest rate swap,term loan facility, inclusive of hedging activities, was 4.93%, 2.05%, and 2.48%, respectively.4.83%.
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the 2018 Revolving Credit Facility will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding (as defined in the Amended Credit Agreement) at such time to (b) the Company’s consolidated EBITDA (as defined in the Amended Credit Agreement) computed for the period of four consecutive fiscal quarters most recently ended.
The base rate for revolving loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans will vary between 0.50% to 1.50%.
The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.50% and 2.50%.
For LIBOR rate revolving loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
At SeptemberJune 30, 2020,2021, there were $5.7 million of0 borrowings under the 2018 Revolving Credit Facility. After reductions for outstanding letters of credit secured by these facilities, we had $490.0$495.8 million of additional borrowings available under the revolving credit facilities at SeptemberJune 30, 2020.2021.
The Amended Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Amended Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.
Specific to the 2018 Revolving Facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Amended Credit Facility agreement may be accelerated and become immediately due and payable. At SeptemberJune 30, 2020,2021, we were in compliance with the covenants of the Amended Credit Facility.
Credit Facility
OnAs noted in Note 4, on February 14, 2017,25, 2021, we completed the Company entered intosale of our Tile Coatings business. Proceeds from the Credit Facility with a groupclose of lendersthe transaction, in addition to refinance its then outstanding credit facility debt andcurrent cash balances, were used to provide liquidity for ongoing working capital requirements and general corporate purposes. The Credit Facility consisted of a $400 million secured revolving line of credit with a term of five years, a $357.5 million securedpay down our term loan facility with a termin the amount of seven years and a €250$435.0 million secured Euro term loan facility with a term of seven years. For further discussionon February 25, 2021. The debt pay-down reduced outstanding amounts of the Company’s Credit Facility, refer to Note 9Tranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans, by $188.3 million, $124.7 million and $122.0 million, respectively. In conjunction with the prepayment of debt, we recorded a charge of $2.0 million in connection with the Company’s Annual Reportwrite-off of unamortized issuance costs, which is recorded within Loss on Form 10-Kextinguishment of debt in our consolidated statement of operations for the yearsix months ended December 31, 2019.June 30, 2021.
Receivable Sales Programs
We have several international programs to sell without recourse trade accounts receivable to financial institutions. During the third quarter of 2020, these programs were amended to include a domestic program. These transactions are treated as a sale and are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. The Company continues to service the receivables sold in exchange for a fee. The servicing fee for the three and ninesix months ended SeptemberJune 30, 2020,2021, was immaterial. The program, whose maximum capacity is €85 million, is scheduled to expire on December 31, 2023. Generally, at the transfer date, the Company receives cash equal to approximately 85%80% of the value of the sold receivable. Cash proceeds at the transfer date from these arrangements are reflected in operating activities in our consolidated statement of cash flows. The proceeds from the deferred purchase price are reflected in investing activities.
The outstanding principal amount of receivables sold under this program, which has not yet been collected from the customer, was $20.3$45.1 million at SeptemberJune 30, 20202021 and $19.3$24.5 million at December 31, 2019.2020. The carrying amount of deferred purchase price was $11.6$9.9 million at SeptemberJune 30, 20202021 and $6.6$9.8 million at December 31, 20192020 and is recorded in Other receivables. Trade accounts receivable collected from customers to be remitted to financial institutions were $33.1$44.5 million at SeptemberJune 30, 20202021 and $12.8$36.0 million at December 31, 2019 and is2020 recorded in Accrued expenses and other current liabilities. As discussed in Note 4, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business. As such, our Tile Coatings business was classified as held-for-sale. At December 31, 2019, $52.6 million of the outstanding gross principal amount of receivables sold under this program, pertained to the Tile Coatings business, and, at September 30, 2020, 0 amount remained. The carrying amount of the deferred purchase price at December 31, 2019 was $20.5 million, and, at September 30, 2020, 0 amount remained. Both are recorded in Current assets held-for-sale in our consolidated balance sheets.
Activity from these programs for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 is detailed below:
Nine Months Ended | Six Months Ended | |||||||||||
September 30, | June 30, | |||||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Trade accounts receivable sold to financial institutions | $ | 206,104 | $ | 29,432 | $ | 312,676 | $ | 91,048 | ||||
Cash proceeds from financial institutions (1) | 139,549 | 18,293 | 250,927 | 58,794 |
(1)Excluded from the table above, in the ninesix months ended SeptemberJune 30, 2020, and 2019, our Tile Coatings business received cash proceeds from financial institutions of $47.3 million and $100.4 million, respectively.million. Refer to Note 4 for additional discussion of the Tile Coatings business and its classification as discontinued operations.
Other Financing Arrangements
We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $25.0 million and $28.1 million at SeptemberJune 30, 20202021 and December 31, 2019.2020, respectively. The unused portions of these lines provided additional liquidity of $25.0 million at SeptemberJune 30, 20202021 and December 31, 2019.2020.
9. Financial Instruments
The following financial instrument assets (liabilities) are presented at their respective carrying amount, fair value and classification within the fair value hierarchy:
September 30, 2020 | June 30, 2021 | |||||||||||||||||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Total | Level 1 | Level 2 | Level 3 | Amount | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Cash and cash equivalents | $ | 64,495 | $ | 64,495 | $ | 64,495 | $ | — | $ | — | $ | 143,717 | $ | 143,717 | $ | 143,717 | $ | — | $ | — | ||||||||||
Term loan facility - Amended Credit Facility (1) | (795,483) | (781,721) | — | (781,721) | — | (356,978) | (356,149) | — | (356,149) | — | ||||||||||||||||||||
Revolving credit facility | (5,740) | (6,046) | — | (6,046) | — | |||||||||||||||||||||||||
Other long-term notes payable | (3,706) | (3,186) | — | (3,186) | — | (3,889) | (2,342) | — | (2,342) | — | ||||||||||||||||||||
Cross currency swaps | 6,962 | 6,962 | — | 6,962 | — | 495 | 495 | — | 495 | — | ||||||||||||||||||||
Interest rate swaps | (26,380) | (26,380) | — | (26,380) | — | (19,385) | (19,385) | — | (19,385) | — | ||||||||||||||||||||
Foreign currency forward contracts, net | 128 | 128 | — | 128 | — | (3,454) | (3,454) | — | (3,454) | — |
December 31, 2019 | December 31, 2020 | |||||||||||||||||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | |||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Total | Level 1 | Level 2 | Level 3 | Amount | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
Cash and cash equivalents | $ | 96,202 | $ | 96,202 | $ | 96,202 | $ | — | $ | — | $ | 174,077 | $ | 174,077 | $ | 174,077 | $ | — | $ | — | ||||||||||
Term loan facility - Amended Credit Facility (1) | (801,764) | (799,750) | — | (799,750) | — | (793,731) | (783,143) | — | (783,143) | — | ||||||||||||||||||||
Other long-term notes payable | (3,496) | (1,557) | — | (1,557) | — | (3,706) | (1,887) | — | (1,887) | — | ||||||||||||||||||||
Cross currency swaps | 22,111 | 22,111 | — | 22,111 | — | (5,162) | (5,162) | — | (5,162) | — | ||||||||||||||||||||
Interest rate swaps | (14,698) | (14,698) | — | (14,698) | — | (24,694) | (24,694) | — | (24,694) | — | ||||||||||||||||||||
Foreign currency forward contracts, net | 601 | 601 | — | 601 | — | 2,019 | 2,019 | — | 2,019 | — |
(1)The carrying value of the term loan facility is net of unamortized debt issuance costs of $4.0$1.4 million and $3.9$3.7 million for the period ended SeptemberJune 30, 2020,2021, and December 31, 2019,2020, respectively.
The fair value of cash and cash equivalents are based on the fair values of identical assets. The fair value of loans payable is based on the present value of expected future cash flows and approximate their carrying amounts due to the short periods to maturity. The fair value of the term loan facility is based on market price information and is measured using the last available bid price of the instrument on a secondary market. The fair value of revolving credit facility and other long-term notes payable are based on the present value of expected future cash flows and interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities adjusted for the Company's performance risk. The fair values of our interest rate swaps and cross currency swaps are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair value of the foreign currency forward contracts are based on market prices for comparable contracts.
Derivative Instruments
The Company may use derivative instruments to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investments in certain foreign subsidiaries and on certain existing assets and liabilities. However, the Company may choose not to hedge in countries where it is not economically feasible to enter into hedging arrangements or where hedging inefficiencies exist, such as timing of transactions.
Derivatives Designated as Hedging Instruments
Cash Flow Hedges. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is recorded as a component of Accumulated other comprehensive loss (“AOCL”) and reclassified into earnings in the same period during which the hedged transaction affects earnings.
The Company utilizes interest rate swaps to limit exposure to market fluctuations on floating-rate debt.
During the second quarter of 2018, the Company entered into variable to fixed interest rate swaps with a maturity date of February 14, 2024. The notional amount is $312.0$309.6 million at SeptemberJune 30, 2020.2021. These swaps are hedging risk associated with the Tranche B-1, B-2 and B-3 Loans. These interest rate swaps are designated as cash flow hedges. As of SeptemberJune 30, 2020,2021, the Company expects it will reclassify net losses of approximately $8.4 million, currently recorded in AOCL, into interest expense in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
The Company has converted a U.S. dollar denominated, variable rate debt obligation into a Euro fixed rate obligation using receive-float, pay-fixed cross currency swaps in the second quarter of 2018. These swaps are hedging currency and interest rate risk associated with the Tranche B-3 Loans.Loan. These cross-currency swaps are designated as cash flow hedges. In conjunction with the pay-down of debt discussed in Note 8, we terminated all cross-currency swaps, except for one, which we de-designated and re-designated to hedge the remaining Tranche B-3 Loan after the interest rate swaps. Due to the original designation layering, the other comprehensive loss from the cross-currency swap at re-designation and the other comprehensive loss from the terminated cross-currency swaps were written-off as the interest payments were deemed remote. The Company paid counterparties $3.5 million to settle the terminated derivatives, resulting in a net $4.5 million being reclassified from AOCL to Interest expense as a result of this remote transaction. The remaining notional amount is $224.3$38.7 million at SeptemberJune 30, 2020,2021, with a maturity date of February 14, 2024. As of SeptemberJune 30, 2020,2021, the Company expects it will reclassify net gainslosses of approximately $0.3$0.1 million, currently recorded in AOCL, into interest expense in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.this derivative.
The amount of lossgain (loss) recognized in AOCL and the amount of loss (gain) reclassified into earnings for the three months ended SeptemberJune 30, 20202021 and 2019,2020, follow:
Amount of Loss (Gain) | Amount of Loss (Gain) | |||||||||||||||||||||||||||
Amount of Gain (Loss) | Reclassified from | Location of Gain (Loss) | Amount of Gain (Loss) | Reclassified from | Location of Gain (Loss) | |||||||||||||||||||||||
Recognized in AOCL | AOCL into Income | Reclassified from | Recognized in AOCL | AOCL into Income | Reclassified from | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | AOCL into Income | 2021 | 2020 | 2021 | 2020 | AOCL into Income | ||||||||||||||||||
Interest rate swaps | $ | (975) | $ | (2,328) | $ | (1,648) | $ | (363) | Interest expense | $ | (385) | $ | (1,934) | $ | (1,841) | $ | (824) | Interest expense | ||||||||||
Cross currency swaps | (10,286) | 10,750 | 116 | 1,419 | Interest expense | (388) | (3,902) | (113) | 851 | Interest expense | ||||||||||||||||||
$ | (1,532) | $ | 1,056 | Total Interest expense | $ | (1,954) | $ | 27 | Total Interest expense | |||||||||||||||||||
Cross currency swaps | (9,825) | 9,497 | Foreign currency losses, net | (433) | (4,204) | Foreign currency losses (gains), net | ||||||||||||||||||||||
$ | (9,825) | $ | 9,497 | Total Foreign currency losses, net | $ | (433) | $ | (4,204) | Total Foreign currency losses (gains), net |
The amount of gain (loss) recognized in AOCL and the amount of loss (gain) reclassified into earnings for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, follow:
Amount of Loss (Gain) | Amount of Loss (Gain) | |||||||||||||||||||||||||||
Amount of Gain (Loss) | Reclassified from | Location of Gain (Loss) | Amount of Gain (Loss) | Reclassified from | Location of Gain (Loss) | |||||||||||||||||||||||
Recognized in AOCL | AOCL into Income | Reclassified from | Recognized in AOCL | AOCL into Income | Reclassified from | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | AOCL into Income | 2021 | 2020 | 2021 | 2020 | AOCL into Income | ||||||||||||||||||
Interest rate swaps | $ | (15,783) | $ | (13,248) | $ | (2,970) | $ | (149) | Interest expense | $ | 1,053 | $ | (14,808) | $ | (3,613) | $ | (1,322) | Interest expense | ||||||||||
Cross currency swaps | (8,930) | 11,122 | 2,135 | 4,579 | Interest expense | 2,308 | 1,356 | (123) | 2,019 | Interest expense | ||||||||||||||||||
$ | (835) | $ | 4,430 | Total Interest expense | $ | (3,736) | $ | 697 | Total Interest expense | |||||||||||||||||||
Cross currency swap | (10,407) | 11,275 | Foreign currency losses, net | |||||||||||||||||||||||||
Cross currency swaps | 2,494 | (582) | Foreign currency losses (gains), net | |||||||||||||||||||||||||
$ | (10,407) | $ | 11,275 | Total Foreign currency losses, net | $ | 2,494 | $ | (582) | Total Foreign currency losses (gains), net |
The total amounts of expense and the respective line items in which the effect of cash flow hedges is presented in the condensed consolidated statement of operations for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, are as follows:
Three months ended | Nine Months Ended | Three months ended | Six Months Ended | |||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Interest expense | $ | 4,767 | $ | 6,002 | $ | 16,474 | $ | 18,578 | $ | 5,006 | $ | 6,177 | $ | 14,443 | $ | 11,707 | ||||||||
Foreign currency losses, net | 1,450 | 3,655 | 1,278 | 7,662 | ||||||||||||||||||||
Foreign currency losses (gains), net | 3,209 | 1,143 | 4,367 | (172) |
Net Investment Hedges. For derivatives that are designated and qualify as net investment hedges, the gain or loss on the derivative is reported as a component of the currency translation adjustment in AOCL. These cross-currency swaps are designated as hedges of our net investment in European operations. Time value is excluded from the assessment of effectiveness and the amount of interest paid or received on the swaps will be recognized as an adjustment to interest expense in earnings over the life of the swaps.
In the second quarter of 2018, the Company entered into cross currency swap agreements under which we pay variable rate interest in Euros and receive variable rate interest in U.S. dollars. The notional amount is €95.5 million at September 30, 2020, with a maturity datenet investment hedge was terminated in the fourth quarter of February 14, 20242020. . These swaps arewere hedging risk associated with the net investment in Euro denominated operations due to fluctuating exchange rates and arewere designated as net investment hedges. The changes in the fair value of these designated cross-currency swaps will bewere recognized in AOCL.
The amount of lossgain (loss) on net investment hedges recognized in AOCL the amount reclassified into earnings and the amount of gain recognized in income on derivative (amount excluded from effectiveness testing) for the three months ended SeptemberJune 30, 20202021 and 2019,2020, follow:
Amount of Gain | Amount of Gain | |||||||||||||||||||||||||||||||||
Amount of Gain | Recognized in Income on | Recognized in Income on | ||||||||||||||||||||||||||||||||
Amount of Gain (Loss) | Reclassified from | Derivative (Amount Excluded | Location of Gain | Amount of Gain (Loss) | Derivative (Amount Excluded | Location of Gain | ||||||||||||||||||||||||||||
Recognized in AOCL | AOCL into Income | from Effectiveness Testing) | in Earnings | Recognized in AOCL | from Effectiveness Testing) | in Earnings | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||
Cross currency swaps | $ | (4,285) | $ | 5,977 | $ | — | $ | — | $ | 259 | $ | 897 | Interest expense | $ | — | $ | (1,569) | $ | — | $ | 612 | Interest expense |
The amount of lossgain on net investment hedges recognized in AOCL the amount reclassified into earnings and the amount of gain recognized in income on derivative (amount excluded from effectiveness testing) for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, follow:
Amount of Gain | Amount of Gain | |||||||||||||||||||||||||||||||||
Amount of Gain | Recognized in Income on | Recognized in Income on | ||||||||||||||||||||||||||||||||
Amount of Gain (Loss) | Reclassified from | Derivative (Amount Excluded | Location of Gain | Amount of Gain (Loss) | Derivative (Amount Excluded | Location of Gain | ||||||||||||||||||||||||||||
Recognized in AOCL | AOCL into Income | from Effectiveness Testing) | in Earnings | Recognized in AOCL | from Effectiveness Testing) | in Earnings | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||
Cross currency swaps | $ | (3,195) | $ | 8,454 | $ | — | $ | — | $ | 1,651 | $ | 2,847 | Interest expense | $ | — | $ | 1,090 | $ | — | $ | 1,392 | Interest expense |
Derivatives Not Designated as Hedging Instruments
Foreign Currency Forward Contracts. We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges. Gains and losses on these foreign currency forward contracts are netted with gains and losses from currency fluctuations on transactions arising from international trade and reported as Foreign currency losses (gains), net in the condensed consolidated statements of operations. We recognized net gains of $3.6$0.2 million and $4.0net losses of $6.1 million in the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, and net lossesgains of $1.6$0.1 million and $0.4 million in the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, arising from the change in fair value of our financial instruments, which partially offset the related net gains and losses on international trade transactions. The notional amount of foreign currency forward contracts was $554.6776.7 million at SeptemberJune 30, 20202021 and $625.9$494.2 million at December 31, 2019.
2020.
The following table presents the effect on our condensed consolidated statements of operations for the three and ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, of our foreign currency forward contracts:
Amount of Gain (Loss) | Amount of Gain | Amount of Gain (Loss) | Amount of Gain (Loss) | |||||||||||||||||||||||||
Recognized in Earnings | Recognized in Earnings | Recognized in Earnings | Recognized in Earnings | |||||||||||||||||||||||||
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
September 30, | September 30, | Location of Gain (Loss) in Earnings | June 30, | June 30, | Location of Gain (Loss) in Earnings | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
Foreign currency forward contracts | $ | 3,586 | $ | (1,642) | $ | 3,996 | $ | (1,615) | Foreign currency losses, net | $ | (1,280) | $ | 142 | $ | (7,546) | $ | 410 | Foreign currency losses (gains), net |
Location and Fair Value Amount of Derivative Instruments
The following table presents the fair values of our derivative instruments on our condensed consolidated balance sheets. All derivatives are reported on a gross basis.
September 30, | December 31, | June 30, | December 31, | |||||||||||||
(Dollars in thousands) | 2020 | 2019 | Balance Sheet Location | 2021 | 2020 | Balance Sheet Location | ||||||||||
Asset derivatives: | ||||||||||||||||
Cross currency swaps | $ | 1,331 | $ | 6,711 | Other current assets | $ | 9 | $ | 9 | Other current assets | ||||||
Cross currency swaps | 5,631 | 15,400 | Other non-current assets | 486 | — | Other non-current assets | ||||||||||
Foreign currency forward contracts | 2,107 | 1,474 | Other current assets | 1,118 | 2,649 | Other current assets | ||||||||||
Liability derivatives: | ||||||||||||||||
Interest rate swaps | $ | (8,369) | $ | (3,723) | Accrued expenses and other current liabilities | $ | (8,415) | $ | (8,436) | Accrued expenses and other current liabilities | ||||||
Interest rate swaps | (18,011) | (10,975) | Other non-current liabilities | (10,970) | (16,258) | Other non-current liabilities | ||||||||||
Cross currency swaps | — | (67) | Accrued expenses and other current liabilities | |||||||||||||
Cross currency swaps | — | (5,104) | Other non-current liabilities | |||||||||||||
Foreign currency forward contracts | (1,979) | (873) | Accrued expenses and other current liabilities | (4,572) | (630) | Accrued expenses and other current liabilities |
10. Income Taxes
Income tax expense for the ninesix months ended SeptemberJune 30, 20202021 was $10.4$16.1 million, or 30.6%31.0% of pre-tax income. Income tax expense for the ninesix months ended SeptemberJune 30, 20192020 was $8.9$5.3 million, or 19.4%27.5% of pre-tax income. The tax expense during the ninesix months ended SeptemberJune 30, 2021 and June 30, 2020, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences and U.S. taxation of foreign earnings. The tax expense during the nine months ended September 30, 2019, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 21% primarily as a result of tax credits.differences.
11. Contingent Liabilities
We have recorded environmental liabilities of $5.8$5.7 million at SeptemberJune 30, 20202021 and $7.2 million at December 31, 2019,2020, for costs associated with the remediation of certain of our current or former properties that have been contaminated. The balance at SeptemberJune 30, 20202021 and December 31, 2019,2020, were primarily comprised of liabilities related to a non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product line in 2013. These costs include, but are not limited to, legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring, and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring, the ultimate cost of required remediation, and other circumstances.
In November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane. The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages. The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to liability for the plaintiff’s claims, and is vigorously defending this proceeding. Since December 2018, additional complaints were filed in the same court by 25 other New York municipal water suppliers and in New York State Supreme Court by one water supplier against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.
In addition to the proceedings described above, the Company and its consolidated subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses. The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.
12. Retirement Benefits
Net periodic benefit cost (credit) of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the three months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, follow:
U.S. Pension Plans | Non-U.S. Pension Plans | Other Benefit Plans | U.S. Pension Plans | Non-U.S. Pension Plans | Other Benefit Plans | |||||||||||||||||||||||||||||||
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||
Service cost | $ | 3 | $ | 3 | $ | 325 | $ | 266 | $ | 1 | $ | 1 | $ | — | $ | 3 | $ | 333 | $ | 294 | $ | — | $ | — | ||||||||||||
Interest cost | 2,387 | 2,963 | 379 | 405 | 132 | 175 | 1,881 | 2,388 | 343 | 343 | 68 | 133 | ||||||||||||||||||||||||
Expected return on plan assets | (3,708) | (3,153) | (128) | (144) | — | — | (3,824) | (3,708) | (116) | (116) | — | — | ||||||||||||||||||||||||
Amortization of prior service cost | — | — | (5) | (6) | — | — | — | — | (21) | (4) | — | — | ||||||||||||||||||||||||
Net periodic benefit (credit) cost | $ | (1,318) | $ | (187) | $ | 571 | $ | 521 | $ | 133 | $ | 176 | $ | (1,943) | $ | (1,317) | $ | 539 | $ | 517 | $ | 68 | $ | 133 |
Net periodic benefit cost (credit) costof our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively, follow:
U.S. Pension Plans | Non-U.S. Pension Plans | Other Benefit Plans | U.S. Pension Plans | Non-U.S. Pension Plans | Other Benefit Plans | |||||||||||||||||||||||||||||||
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||
Service cost | $ | 9 | $ | 8 | $ | 904 | $ | 877 | $ | 2 | $ | 2 | $ | — | $ | 6 | $ | 672 | $ | 579 | $ | — | $ | 1 | ||||||||||||
Interest cost | 7,162 | 8,889 | 1,052 | 1,353 | 397 | 526 | 3,761 | 4,775 | 678 | 673 | 136 | 265 | ||||||||||||||||||||||||
Expected return on plan assets | (11,124) | (9,458) | (356) | (480) | — | — | (7,648) | (7,416) | (230) | (228) | — | — | ||||||||||||||||||||||||
Amortization of prior service cost | — | — | (14) | (15) | — | — | — | — | (41) | (9) | — | — | ||||||||||||||||||||||||
Net periodic benefit (credit) cost | $ | (3,953) | $ | (561) | $ | 1,586 | $ | 1,735 | $ | 399 | $ | 528 | $ | (3,887) | $ | (2,635) | $ | 1,079 | $ | 1,015 | $ | 136 | $ | 266 |
Interest cost, expected return on plan assets and amortization of prior service cost are recorded in Miscellaneous expense (income),income, net on the condensed consolidated statement of operations.
13. Stock-Based Compensation
On May 3, 2018, our shareholders approved the 2018 Omnibus Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 22, 2018. The Plan’s purpose is to promote the Company’s long-term financial interests and growth by attracting, retaining and motivating high-quality key employees and directors, motivating such employees and directors to achieve the Company’s short- and long-range performance goals and objectives, and thereby align their interests with those of the Company’s shareholders. The Plan reserves 4,500,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restricted awards, performance awards, other common stock-based awards, and dividend equivalent rights.
The Plan replaced the 2013 Omnibus Incentive Plan (the “Previous Plan”), and no future grants may be made under the Previous Plan. However, any outstanding awards or grants made under the Previous Plan will continue until the end of their specified terms.
In the first nine monthshalf of 2020,2021, our Board of Directors granted 0.3 million stock options, 0.2 million performance share units, and 0.2 million restricted stockshare units under the Plan.
We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. The following table details the weighted-average grant-date fair values and the assumptions used for estimating the fair values of stock option grants made during the ninesix months ended SeptemberJune 30, 2020:2021:
Stock Options | ||||
Weighted-average grant-date fair value | $ |
| ||
Expected life, in years |
| |||
Risk-free interest rate |
| % | ||
Expected volatility |
| % |
The weighted averageweighted-average grant date fair value of our performance share units granted in the ninesix months ended SeptemberJune 30, 2020,2021, was $14.64.$16.00. We measure the fair value of performance share units based on the closing market price of our common stock on the date of the grant. These shares are evaluated each reporting period for respective attainment rates against the performance criteria.
The weighted-average grant date fair value of our restricted share units granted in the ninesix months ended SeptemberJune 30, 2020,2021, was $14.64.$15.07. We measure the fair value of restricted share units based on the closing market price of our common stock on the date of the grant. The restricted share units vest over three years.
We recognized stock-based compensation expense of $1.6$2.7 million and $7.1$5.1 million for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, and $0.3$2.7 million and $5.9$5.5 million and for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively. At SeptemberJune 30, 2020,2021, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $9.9$11.9 million and is expected to be recognized over the remaining vesting period of the respective grants, through the secondfirst quarter of 2023.2024.
14. Restructuring and Optimization Programs
Total restructuring charges were $2.4$2.0 million and $12.2$7.2 million for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, and $2.1$8.6 million and $7.9$9.8 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively. As discussed in Note 4, our Tile Coatings business was classified as held-for-sale during the fourth quarter of 2019. As such, there were additional restructuring charges of $0.3 million for the six months ended June 30, 2021 and $2.3$1.7 million and $2.0 million for the three and ninesix months ended SeptemberJune 30, 2020, respectively, and $4.2 million and $10.8 million for the three and nine months ended September 30, 2019, respectively, classified as Net income from discontinued operations, net of income taxes.
Organizational Optimization Plan
In conjunction with the pending sale of the Tile Coatings business, discussed in Note 4, we developed our Organizational Optimization Plan and initiated a program across the organization with the objective of realigning the business and lowering our cost structure in anticipation of the pending sale.structure. As a result of these actions, the Company expects to incur total charges of approximately $1.55.7 million, substantially all of which will be for anticipated severance costs. The remaining activities of the program are expected to be recognized throughout the remainder of 2020 and 2021. Charges associated with the program were$1.2 $1.0 million and $3.1 million for the three and ninesix months ended SeptemberJune 30, 2020.
2021, respectively.
Americas Manufacturing Optimization Plan
In the second quarter of 2019, we developed our Americas Manufacturing Optimization Plan and initiated a program across the organization with the objective of realigning the business and lowering our cost structure. The Americas Manufacturing Optimization Plan is focused on the construction of a new manufacturing center of excellence located in Villagran, Mexico. We are in the process of consolidating two plants located in the United States and two sites in Latin America into the expanded Villagran location. As a result of these actions, the Company expects to incur total charges of approximately $8.7$9.5 million, substantially all of which will be for anticipated severance costs. The remaining activities of the program are expected to be recognized within the next 12 months. Charges associated with the program were $1.1 million for the nine months ended September 30, 2020, and $1.9$0.7 million and $5.8$2.4 million for the three and ninesix months ended SeptemberJune 30, 2019,2021, respectively, and $0.8 million and $1.0 million for the three and six months ended June 30, 2020, respectively.
Global Optimization Plan
The program involves our global operations and certain functions and initiatives to increase operational efficiencies, some of which is associated with integration of our recent acquisitions. Actions associated with the Global Optimization Plan were substantially completed, during 2020, and as such, we do not anticipate material charges related to this plan for the remainder of 2020.2021. Charges associated with the program were $1.2$0.3 million and $9.9$1.7 million for the three and ninesix months ended SeptemberJune 30, 2020,2021, respectively, and $0.2$7.8 million and $2.1$8.8 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively.
The charges associated with these programs are further summarized below.
Employee | Other | Employee | Other | |||||||||||||||
(Dollars in thousands) | Severance | Costs | Total | Severance | Costs | Total | ||||||||||||
Balances at December 31, 2019 | $ | 747 | $ | 1,492 | $ | 2,239 | ||||||||||||
Balances at December 31, 2020 | $ | 5,510 | $ | 4,460 | $ | 9,970 | ||||||||||||
Restructuring charges | 9,792 | 2,439 | 12,231 | 5,439 | 1,715 | 7,154 | ||||||||||||
Cash payments | (4,236) | (736) | (4,972) | (6,005) | (1,025) | (7,030) | ||||||||||||
Non-cash items | 280 | 98 | 378 | |||||||||||||||
Balances at September 30, 2020 | $ | 6,583 | $ | 3,293 | $ | 9,876 | ||||||||||||
Balances at June 30, 2021 | $ | 4,944 | $ | 5,150 | $ | 10,094 |
We expect to make cash payments to settle the remaining liability for employee severance benefits and other costs over the next twelve months, except where legal or contractual obligations would require it to extend beyond that period.
15. Leases
The Company has leases for equipment, office space, plant sites and distribution centers. Certain of these leases include options to extend the lease and some include options to terminate the lease early. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
There are no leases that have not yet commenced that create significant rights and obligations for the Company.
The components of lease cost are shown below:
Three Months Ended | Nine Months Ended | |||||||||||||
September 30, | September 30, | |||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | Income Statement Location | |||||||||
Operating lease cost(1) | $ | 1,143 | $ | 1,239 | $ | 3,606 | $ | 3,885 | Selling, general and administrative expenses | |||||
Operating lease cost(2) | 1,871 | 2,161 | 5,608 | 6,687 | Cost of sales | |||||||||
Finance lease cost | ||||||||||||||
Amortization of right-of-use assets | 81 | 45 | 217 | 158 | Cost of sales | |||||||||
Interest of lease liabilities | 10 | 4 | 24 | 10 | Interest expense | |||||||||
Net lease cost | $ | 3,105 | $ | 3,449 | $ | 9,455 | $ | 10,740 |
(1)Included in operating lease cost is $0.3 million and $0.7 million of short-term lease costs for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2019 and $0.1 million and $0.3 million of variable lease costs for the three and nine months ended September 30, 2020, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively.
(2)Included in operating lease cost is $0.7 million and $2.0 million of short-term lease costs for the three and nine months ended September 30, 2020, respectively, and $0.5 and $1.8 million of short-term lease costs for the three and nine months ended September 30, 2019 and $0.1 million and $0.5 million of variable lease costs for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.7 million of variable lease costs for the three and nine months ended September 30, 2019, respectively.
Supplemental balance sheet information related to leases is shown below:
September 30, | December 31, | |||||||
(Dollars in thousands) | 2020 | 2019 | Balance Sheet Location | |||||
Assets | ||||||||
Operating leased assets | $ | 14,246 | $ | 20,088 | Operating leased assets | |||
Finance leased assets (1) | 1,189 | 859 | Property, plant and equipment, net | |||||
Total leased assets | $ | 15,435 | $ | 20,947 | ||||
Liabilities | ||||||||
Current | ||||||||
Operating | $ | 5,262 | $ | 6,515 | Accrued expenses and other current liabilities | |||
Finance | 564 | 438 | Loans payable and current portion of long-term debt | |||||
Noncurrent | ||||||||
Operating | 9,000 | 14,474 | Operating lease non-current liabilities | |||||
Finance | 2,046 | 1,867 | Long-term debt, less current portion | |||||
Total lease liabilities | $ | 16,872 | $ | 23,294 |
(1)Finance leases are net of accumulated depreciation of $3.4 million and $3.4 million for September 30, 2020 and December 31, 2019, respectively.
Supplemental cash flow information related to leases are shown below:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||
Operating cash flows from finance leases | $ | 10 | $ | 4 | $ | 24 | $ | 10 | ||||
Operating cash flows from operating leases | 1,922 | 1,941 | 5,749 | 6,610 | ||||||||
Financing cash flows from finance leases | 97 | 49 | 239 | 151 | ||||||||
Leased assets obtained in exchange for new finance lease liabilities | 379 | 419 | 534 | 637 | ||||||||
Leased assets obtained in exchange for new operating lease liabilities | 1,580 | 1,107 | 4,142 | 25,326 |
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Maturities of lease liabilities are shown below as of September 30, 2020:
Finance | Operating | |||||
(Dollars in thousands) | Leases | Leases | ||||
Remaining in 2020 | $ | 201 | $ | 1,788 | ||
2021 | 748 | 5,834 | ||||
2022 | 728 | 3,607 | ||||
2023 | 658 | 1,842 | ||||
2024 | 549 | 872 | ||||
2025 | 443 | 697 | ||||
Thereafter | 455 | 1,689 | ||||
Net minimum lease payments | $ | 3,782 | $ | 16,329 | ||
Less: interest | 1,172 | 2,068 | ||||
Present value of lease liabilities | $ | 2,610 | $ | 14,261 |
16.15. Earnings Per Share
Details of the calculation of basic and diluted earnings per share are shown below:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||
(Dollars in thousands, except per share amounts) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Basic earnings per share computation: | ||||||||||||||||||||||||
Income from continuing operations | $ | 9,547 | $ | 16,730 | $ | 23,533 | $ | 36,892 | ||||||||||||||||
Income (loss) from continuing operations | $ | 17,427 | $ | (1,926) | $ | 35,985 | $ | 13,986 | ||||||||||||||||
Less: Net income attributable to noncontrolling interests from continuing operations | 451 | 298 | 793 | 660 | 382 | 309 | 755 | 342 | ||||||||||||||||
Net income attributable to Ferro Corporation from continuing operations | 9,096 | 16,432 | 22,740 | 36,232 | ||||||||||||||||||||
Net income (loss) attributable to Ferro Corporation from continuing operations | 17,045 | (2,235) | 35,230 | 13,644 | ||||||||||||||||||||
Income (loss) from discontinued operations, net of income taxes | 5,367 | (3,520) | 2,350 | 1,305 | (1,536) | (3,238) | 88,306 | (3,017) | ||||||||||||||||
Less: Net income attributable to noncontrolling interests from discontinued operations | (11) | 92 | 33 | 242 | — | 67 | 64 | 44 | ||||||||||||||||
Net income (loss) attributable to Ferro Corporation from discontinued operations | 5,378 | (3,612) | 2,317 | 1,063 | (1,536) | (3,305) | 88,242 | (3,061) | ||||||||||||||||
Total | $ | 14,474 | $ | 12,820 | $ | 25,057 | $ | 37,295 | $ | 15,509 | $ | (5,540) | $ | 123,472 | $ | 10,583 | ||||||||
Weighted-average common shares outstanding | 82,261 | 81,942 | 82,201 | 82,118 | 82,665 | 82,246 | 82,581 | 82,171 | ||||||||||||||||
Basic earnings per share from continuing operations attributable to Ferro Corporation common shareholders | $ | 0.11 | $ | 0.20 | $ | 0.28 | $ | 0.44 | ||||||||||||||||
Basic earnings (loss) per share from continuing operations attributable to Ferro Corporation common shareholders | $ | 0.21 | $ | (0.03) | $ | 0.43 | $ | 0.17 | ||||||||||||||||
Diluted earnings per share computation: | ||||||||||||||||||||||||
Net income attributable to Ferro Corporation from continuing operations | $ | 9,096 | $ | 16,432 | $ | 22,740 | $ | 36,232 | ||||||||||||||||
Net income (loss) attributable to Ferro Corporation from continuing operations | $ | 17,045 | $ | (2,235) | $ | 35,230 | $ | 13,644 | ||||||||||||||||
Net income (loss) attributable to Ferro Corporation from discontinued operations | 5,378 | (3,612) | 2,317 | 1,063 | (1,536) | (3,305) | 88,242 | (3,061) | ||||||||||||||||
Total | $ | 14,474 | $ | 12,820 | $ | 25,057 | $ | 37,295 | $ | 15,509 | $ | (5,540) | $ | 123,472 | $ | 10,583 | ||||||||
Weighted-average common shares outstanding | 82,261 | 81,942 | 82,201 | 82,118 | 82,665 | 82,246 | 82,581 | 82,171 | ||||||||||||||||
Assumed exercise of stock options | 272 | 319 | 260 | 470 | 562 | 543 | 478 | 799 | ||||||||||||||||
Assumed satisfaction of restricted stock unit conditions | 157 | 143 | 300 | 232 | 123 | 93 | 169 | 109 | ||||||||||||||||
Assumed satisfaction of performance share unit conditions | 81 | 91 | 130 | 136 | 159 | 45 | 128 | 200 | ||||||||||||||||
Weighted-average diluted shares outstanding | 82,771 | 82,495 | 82,891 | 82,956 | 83,509 | 82,927 | 83,356 | 83,279 | ||||||||||||||||
Diluted earnings per share from continuing operations attributable to Ferro Corporation common shareholders | $ | 0.11 | $ | 0.20 | $ | 0.27 | $ | 0.44 | ||||||||||||||||
Diluted earnings (loss) per share from continuing operations attributable to Ferro Corporation common shareholders | $ | 0.20 | $ | (0.03) | $ | 0.42 | $ | 0.16 |
The number of anti-dilutive shares were 2.8 million and 2.7 million for the three and nine months ended September 30, 2020, respectively, and 2.52.1 million and 2.2 million for the three and ninesix months ended SeptemberJune 30, 2019,2021, respectively, and 2.7 million and 2.3 million for the three and six months ended June 30, 2020, respectively. These shares are excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.
17.16. Share Repurchase ProgramPrograms
The Company’s Board of Directors has approved a share repurchase programprograms under which the Company is authorized to repurchase up to $150 million of the Company’s outstanding shares of common stock on the open market, including through a Rule 10b5-1 plan, or in privately negotiated transactions.
The timing and amount of shares to be repurchased will be determined by the Company, based on evaluation of market and business conditions, share price, and other factors.factors, including limitations contained in the Merger Agreement with Prince. The share repurchase programs do not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.
As of SeptemberJune 30, 2020,2021, $46.2 million remains authorized under the programprograms for the repurchase of common stock.
18.17. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows:
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||||||||||
Postretirement | Foreign | Net Gain (Loss) | Postretirement | Foreign | Net Gain (Loss) | |||||||||||||||||||
Benefit Liability | Currency | on Cash Flow | Benefit Liability | Currency | on Cash Flow | |||||||||||||||||||
(Dollars in thousands) | Adjustments | Items | Hedges | Total | Adjustments | Items | Hedges | Total | ||||||||||||||||
Balances at June 30, 2019 | $ | 1,126 | $ | (95,799) | $ | (14,960) | $ | (109,633) | ||||||||||||||||
Balances at March 31, 2020 | $ | 1,206 | $ | (115,847) | $ | (22,047) | $ | (136,688) | ||||||||||||||||
Other comprehensive income (loss) before reclassifications, before tax | — | (9,547) | 8,422 | (1,125) | — | 3,388 | (5,836) | (2,448) | ||||||||||||||||
Reclassification to earnings: | ||||||||||||||||||||||||
Cash flow hedge income (loss), before tax | — | — | (10,553) | (10,553) | — | — | 4,177 | 4,177 | ||||||||||||||||
Current period other comprehensive income (loss), before tax | — | (9,547) | (2,131) | (11,678) | — | 3,388 | (1,659) | 1,729 | ||||||||||||||||
Tax effect | — | 1,175 | (487) | 688 | — | (505) | (99) | (604) | ||||||||||||||||
Current period other comprehensive income (loss), net of tax | — | (10,722) | (1,644) | (12,366) | — | 3,893 | (1,560) | 2,333 | ||||||||||||||||
Balances at September 30, 2019 | $ | 1,126 | $ | (106,521) | $ | (16,604) | $ | (121,999) | ||||||||||||||||
Balances at June 30, 2020 | $ | 1,206 | $ | (111,954) | $ | (23,607) | $ | (134,355) | ||||||||||||||||
Balances at June 30, 2020 | $ | 1,206 | $ | (111,954) | $ | (23,607) | $ | (134,355) | ||||||||||||||||
Balances at March 31, 2021 | $ | 3,329 | $ | (131,509) | $ | (15,641) | $ | (143,821) | ||||||||||||||||
Other comprehensive income (loss) before reclassifications, before tax | — | 13,022 | (11,261) | 1,761 | — | 1,564 | (773) | 791 | ||||||||||||||||
Reclassification to earnings: | ||||||||||||||||||||||||
Postretirement benefit liabilities income (loss), before tax | (1) | — | — | (1) | ||||||||||||||||||||
Cash flow hedge income (loss), before tax | — | — | 11,357 | 11,357 | — | — | 2,387 | 2,387 | ||||||||||||||||
Current period other comprehensive income (loss), before tax | — | 13,022 | 96 | 13,118 | (1) | 1,564 | 1,614 | 3,177 | ||||||||||||||||
Tax effect | — | (1,052) | (173) | (1,225) | — | 338 | 331 | 669 | ||||||||||||||||
Current period other comprehensive income (loss), net of tax | — | 14,074 | 269 | 14,343 | (1) | 1,226 | 1,283 | 2,508 | ||||||||||||||||
Balances at September 30, 2020 | $ | 1,206 | $ | (97,880) | $ | (23,338) | $ | (120,012) | ||||||||||||||||
Balances at June 30, 2021 | $ | 3,328 | $ | (130,283) | $ | (14,358) | $ | (141,313) |
Nine Months Ended September 30, | ||||||||||||
Postretirement | Foreign | Net Loss | ||||||||||
Benefit Liability | Currency | on Cash | ||||||||||
(Dollars in thousands) | Adjustments | Items | Flow Hedges | Total | ||||||||
Balances at December 31, 2018 | $ | 1,126 | $ | (103,190) | $ | (3,297) | $ | (105,361) | ||||
Other comprehensive income (loss) before reclassifications, before tax | — | (2,033) | (2,126) | (4,159) | ||||||||
Reclassification to earnings: | ||||||||||||
Cash flow hedge income (loss), before tax | — | — | (15,705) | (15,705) | ||||||||
Current period other comprehensive income (loss), before tax | — | (2,033) | (17,831) | (19,864) | ||||||||
Tax effect | — | 1,298 | (4,524) | (3,226) | ||||||||
Current period other comprehensive income (loss), net of tax | — | (3,331) | (13,307) | (16,638) | ||||||||
Balances at September 30, 2019 | $ | 1,126 | $ | (106,521) | $ | (16,604) | $ | (121,999) | ||||
Balances at December 31, 2019 | $ | 1,206 | $ | (97,575) | $ | (13,007) | $ | (109,376) | ||||
Other comprehensive income (loss) before reclassifications, before tax | — | (1,427) | (24,713) | (26,140) | ||||||||
Reclassification to earnings: | ||||||||||||
Cash flow hedge income (loss), before tax | — | — | 11,242 | 11,242 | ||||||||
Current period other comprehensive income (loss), before tax | — | (1,427) | (13,471) | (14,898) | ||||||||
Tax effect | — | (1,122) | (3,140) | (4,262) | ||||||||
Current period other comprehensive income (loss), net of tax | — | (305) | (10,331) | (10,636) | ||||||||
Balances at September 30, 2020 | $ | 1,206 | $ | (97,880) | $ | (23,338) | $ | (120,012) |
19. Reporting for Segments
As discussed in Note 4, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business which has historically been the majority of our Performance Coatings reportable segment. Substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets and results are included within discontinued operations in the consolidated statement of operations for all periods presented. The retained assets, liabilities and operations of the Performance Coatings reportable segment are reflected within our Functional Coatings reportable segment.
Six Months Ended June 30, | ||||||||||||
Postretirement | Foreign | Net Gain (Loss) | ||||||||||
Benefit Liability | Currency | on Cash Flow | ||||||||||
(Dollars in thousands) | Adjustments | Items | Hedges | Total | ||||||||
Balances at December 31, 2019 | $ | 1,206 | $ | (97,575) | $ | (13,007) | $ | (109,376) | ||||
Other comprehensive income (loss) before reclassifications, before tax | — | (14,449) | (13,452) | (27,901) | ||||||||
Reclassification to earnings: | ||||||||||||
Cash flow hedge income (loss), before tax | — | — | (115) | (115) | ||||||||
Current period other comprehensive income (loss), before tax | — | (14,449) | (13,567) | (28,016) | ||||||||
Tax effect | — | (70) | (2,967) | (3,037) | ||||||||
Current period other comprehensive income (loss), net of tax | — | (14,379) | (10,600) | (24,979) | ||||||||
Balances at June 30, 2020 | $ | 1,206 | $ | (111,954) | $ | (23,607) | $ | (134,355) | ||||
Balances at December 31, 2020 | $ | 3,199 | $ | (70,482) | $ | (22,427) | $ | (89,710) | ||||
Other comprehensive income (loss) before reclassifications, before tax | — | (76,466) | 3,361 | (73,105) | ||||||||
Reclassification to earnings: | ||||||||||||
Postretirement benefit liabilities income (loss), before tax | 129 | — | — | 129 | ||||||||
Currency translation reclassification to income on divestiture | — | 17,305 | — | 17,305 | ||||||||
Amount reclassification to income (remote transaction) | — | — | 4,509 | 4,509 | ||||||||
Cash flow hedge income (loss), before tax | — | — | 1,242 | 1,242 | ||||||||
Current period other comprehensive income (loss), before tax | 129 | (59,161) | 9,112 | (49,920) | ||||||||
Tax effect | — | 640 | 1,043 | 1,683 | ||||||||
Current period other comprehensive income (loss), net of tax | 129 | (59,801) | 8,069 | (51,603) | ||||||||
Balances at June 30, 2021 | $ | 3,328 | $ | (130,283) | $ | (14,358) | $ | (141,313) |
18. Reporting for Segments
Net sales to external customers by segment are presented in the table below. Sales between segments were not material.
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Functional Coatings | $ | 154,218 | $ | 154,744 | $ | 441,325 | $ | 485,462 | $ | 194,909 | $ | 131,672 | $ | 379,731 | $ | 287,107 | ||||||||
Color Solutions | 87,659 | 90,595 | 257,679 | 284,217 | 99,422 | 73,129 | 202,958 | 170,020 | ||||||||||||||||
Total net sales | $ | 241,877 | $ | 245,339 | $ | 699,004 | $ | 769,679 | $ | 294,331 | $ | 204,801 | $ | 582,689 | $ | 457,127 |
Each segment’s gross profit and reconciliation to income before income taxes are presented in the table below:
Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||
September 30, | September 30, | June 30, | June 30, | |||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Functional Coatings | $ | 41,906 | $ | 47,275 | $ | 125,842 | $ | 144,812 | $ | 59,521 | $ | 36,119 | $ | 121,397 | $ | 83,936 | ||||||||
Color Solutions | 28,450 | 29,122 | 89,222 | 87,220 | 36,692 | 26,985 | 70,360 | 60,772 | ||||||||||||||||
Other cost of sales | (190) | (335) | (416) | 1,019 | (1,378) | 640 | (1,819) | (226) | ||||||||||||||||
Total gross profit | 70,166 | 76,062 | 214,648 | 233,051 | 94,835 | 63,744 | 189,938 | 144,482 | ||||||||||||||||
Selling, general and administrative expenses | 47,820 | 47,543 | 154,407 | 157,723 | 59,026 | 50,541 | 112,864 | 106,587 | ||||||||||||||||
Restructuring and impairment charges | 2,447 | 2,065 | 12,231 | 7,862 | 1,970 | 8,619 | 7,154 | 9,784 | ||||||||||||||||
Other expense, net | 5,305 | 6,377 | 14,113 | 21,681 | 7,910 | 6,310 | 17,789 | 8,808 | ||||||||||||||||
Income before income taxes | $ | 14,594 | $ | 20,077 | $ | 33,897 | $ | 45,785 | ||||||||||||||||
Income (loss) before income taxes | $ | 25,929 | $ | (1,726) | $ | 52,131 | $ | 19,303 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net sales for the three months ended SeptemberJune 30, 2020, decreased2021, increased by $3.4$89.5 million, or 1.4%43.7%, compared with the prior-year same period. Net sales decreasedincreased by $2.9$63.2 million in Functional Coatings and $26.3 million in Color Solutions and $0.5 million in Functional Coatings.Solutions. During the three months ended SeptemberJune 30, 2020,2021, gross profit decreased $5.9increased $31.1 million, or 7.8%48.8%, compared with the prior-year same period; as a percentage of net sales, it decreasedincreased approximately 200110 basis points to 29.0%32.2%. Our total gross profit for the thirdsecond quarter of 20202021 was $70.2$94.8 million, compared with $76.1$63.7 million for the three months ended SeptemberJune 30, 2019.2020. The decreaseincrease in gross profit was attributable to lowerhigher gross profit in Functional Coatings of $5.4$23.4 million and in Color Solutions of $0.7$9.7 million.
For the three months ended SeptemberJune 30, 2020,2021, selling, general and administrative (“SG&A”) expenses increased $0.3$8.5 million, or 0.6%16.8%, compared with the prior-year same period. As a percentage of net sales, it increaseddecreased approximately 40460 basis points to 19.8%20.1%.
For the three months ended SeptemberJune 30, 2020,2021, net income was $14.9$15.9 million, compared with $13.2net loss of $5.2 million for the prior-year same period, and net income attributable to common shareholders was $14.5$15.5 million, compared with $12.8net loss attributable to common shareholders of $5.5 million for the prior-year same period. Income from continuing operations was $9.5$17.4 million for the three months ended SeptemberJune 30, 2020,2021, compared with $16.7loss from continuing operations of $1.9 million in 2019.for the prior-year same period.
Outlook
The improvingFerro continued to experience higher demand for Ferro’s products that beganacross all business segments in the latter partquarter as customer markets recover. The impact of the COVID pandemic through the remainder of 2021 is unknown, even with the rollout of vaccines. Ferro expects to continue to benefit from strategic actions taken prior to and during the pandemic to optimize our business, invest in technology platforms, align with macrotrends, and focus on higher-margin, higher-growth markets, all of which contributed to gross margin expansion in the second quarter continued in the third quarter, despite the continued impact of the novel coronavirus (“COVID-19”) pandemic on macroeconomic conditions around the globe.2021.
Ferro has market leadership positions in a diverse portfolio ofprovides products and many ofservices that are essential to our customers as they innovate to address trends in their markets and develop next generation products. We sell our products and services support nichein multiple markets in “critical”and geographies around the world, which limits exposure to any one industry or “essential”region. In addition, we serve a diverse set of industries, such asincluding automotive, construction, appliances, healthcare, food and beverage, energy, information technology, energy and defense, which generallydefense. COVID-related behavior changes have continued to operate during the pandemic. We believe these characteristics, together with improved economic activity more broadlyaccelerated demand for certain products, especially those in the markets we serve, should continue to provide certain end market demandindustries supporting mobility, entertainment and margin tailwinds for the balance of the year.personal technology, smart appliances, construction, and sustainable product packaging.
Along with managing through the COVID-19 pandemic, Ferro continues to execute its strategic priorities, which include advancingmaintain protocols for the safety and well-being of our optimization initiatives, preparing for and completingpersonnel. We monitor the saleimpact of the Tile Coatings business and continuing to develop innovative products for our customers.
We recognize the potential continued uncertainty in macroeconomic conditions going forward. This uncertainty may result in volatility in demand in our end markets, foreign exchange rates and in interest rates, which could impact our reported results through the remainder of 2020 and into 2021.
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 on our business, including how it may impact our customers, employees, supply chain and distribution network and take action, as appropriate, to be a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has spread through Asia, Europe, the Middle East and North and South America, all regions in which we have operations. In response, government authorities have issued an evolving set of mandates, including requirements to shelter-in-place, curtail business operations, restrict travel, and avoid physical interaction. These mandates and the continued spread of COVID-19 have disrupted normal business activities in many segments of the global economy, resulting in weakened economic conditions.address these circumstances. In some areas around the world, government mandates have been lifted by certain public authorities and economic conditions have improved in certain sectors of the economy relative to early in the second quarter. Meanwhile,2020. Recently, some regions have experienced increasing numbers of COVID-19 cases, and if this continues and if public authorities intensify efforts to contain the spread of COVID-19, normal business activity may be further disrupted, and economic conditions could weaken.
We continue to monitorIn 2021, following the impactcompletion of the outbreaksale of COVID-19 on our Tile Coatings Business, we are transitioning to a smaller, more agile and more streamlined global business including howwith a more coherent and focused portfolio aligned with evolving megatrends. On May 11, 2021, Ferro announced that it may impact our customers, employees, supply chain and distribution network andhas entered into a definitive agreement to take action, as appropriate,be acquired by Prince International Corporation, a portfolio company of American Securities LLC. The transaction is expected to address these circumstances.
Our manufacturing facilities generally have continued to operate since the pandemic was declaredclose in early March 2020, with most sites experiencing only relatively brief or no suspensions of activity. While COVID-19 did not have a significant effect on our reported results for the first quarter of 2020, it had a more pronounced effect on our business during the second quarter, primarily as a result of reduced demand in certain of our end markets, such as the automotive sector. During the third quarter, the favorable momentum in our business that we experienced in the latter part of the second quarter continued, with improving demand from many of our customers across multiple product lines. Nevertheless, if certain regions of the world experience increasing numbers of COVID-19 cases, we may be required to take further actions to comply with mandates of national, state or local authorities, and we may take additional actions that we determine to be in the best interests of our employees, customers, suppliers and other stakeholders, which could disrupt or restrict our ability to operate our facilities and travel to our domestic and international sites. The extent to which our operations may be impacted by COVID-19 in the remainder of 2020 depends on a variety of factors, including the duration, severity, and scope of the pandemic, which remain uncertain.2022.
We believe we are well positioned from a liquidity perspective to manage through the effects of the COVID-19 pandemic. As of September 30, 2020, we had liquidity of approximately $562.7 million, consisting of cash and availability under our various credit facilities, primarily our revolving credit facility. We are in compliance with the covenants under our various credit facilities and expect to remain in compliance. We will continue to evaluaterefine our manufacturing footprint, optimize logistics and take actionstreamline sourcing and procurement in our operations around the world.
Foreign currency rates may continue to preserve liquiditybe volatile through 2021 and generatechanges in interest rates could adversely impact reported results. We continue to expect cash flow during the crisis, including by limiting capital expenditures and discretionary spending, as appropriate and where possible.from operating activities to be positive for 2021.
Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of the Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Results of Operations - Consolidated
Comparison of the three months ended SeptemberJune 30, 20202021 and 20192020
For the three months ended SeptemberJune 30, 2020,2021, net income from continuing operations was $9.5$17.4 million, compared with $16.7net loss of $1.9 million for the three months ended SeptemberJune 30, 2019.2020. For the three months ended SeptemberJune 30, 2020,2021, net income attributable to common shareholders was $14.5$15.5 million, or earnings per share of $0.18,$0.19, compared with net income attributable to common shareholdersloss of $12.8$5.5 million, or earningsloss per share of $0.16,$0.07, for the three months ended SeptemberJune 30, 2019.2020.
Net Sales
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
Net sales | $ | 241,877 | $ | 245,339 | $ | (3,462) | (1.4) | % | $ | 294,331 | $ | 204,801 | $ | 89,530 | 43.7 | % | ||||||||||||
Cost of sales | 171,711 | 169,277 | 2,434 | 1.4 | % | 199,496 | 141,057 | 58,439 | 41.4 | % | ||||||||||||||||||
Gross profit | $ | 70,166 | $ | 76,062 | $ | (5,896) | (7.8) | % | $ | 94,835 | $ | 63,744 | $ | 31,091 | 48.8 | % | ||||||||||||
Gross profit as a % of net sales | 29.0 | % | 31.0 | % | 32.2 | % | 31.1 | % |
Net sales decreasedincreased by $3.4$89.5 million, or 1.4%43.7%, for the three months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period, driven by lowerhigher sales in Functional Coatings and Color Solutions and Functional Coatings of $2.9$63.2 million and $0.5$26.3 million, respectively. The decreaseincrease in net sales was driven by lowerfavorable volume and mix of $6.6$78.0 million, partially mitigated by favorable foreign currency impacts of $1.7$9.5 million and higher product pricing of $1.5$2.0 million.
Gross Profit
Gross profit decreased $5.9increased $31.1 million, or 7.8%48.8%, for the three months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period. As a percentage of net sales, gross profit decreased 200increased approximately 110 basis points to 29.0%32.2%. The decreaseincrease in gross profit was primarily attributable to lower gross profitan increase in Functional Coatings and Color Solutions of $5.4$23.4 million and $0.7$9.7 million, respectively. The decreaseincrease in gross profit was primarily driven by lowerfavorable sales volumesvolume and mix of $6.7$20.1 million, and higherfavorable manufacturing costs of $4.4$4.2 million, partially mitigated byfavorable foreign currency impacts of $3.6 million, higher product pricing of $2.0 million and lower raw material costs of $3.4 million, favorable product pricing of $1.5 million and favorable foreign currency impacts of $0.3$1.2 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Geographic Revenues on a sales origination basis | ||||||||||||||||||||||||
EMEA | $ | 95,553 | $ | 103,397 | $ | (7,844) | (7.6) | % | $ | 130,527 | $ | 78,945 | $ | 51,582 | 65.3 | % | ||||||||
United States | 86,285 | 85,415 | 870 | 1.0 | % | 122,060 | 95,013 | 27,047 | 28.5 | % | ||||||||||||||
Asia Pacific | 37,545 | 36,776 | 769 | 2.1 | % | 41,744 | 30,843 | 10,901 | 35.3 | % | ||||||||||||||
Latin America | 22,494 | 19,751 | 2,743 | 13.9 | % | |||||||||||||||||||
Net sales | $ | 241,877 | $ | 245,339 | $ | (3,462) | (1.4) | % | $ | 294,331 | $ | 204,801 | $ | 89,530 | 43.7 | % |
The declineincrease in net sales of $3.4$89.5 million, compared with the prior-year same period, was driven by a decreaseincreases in sales from EMEA, partially mitigated by higher sales in Latin America, United States and Asia Pacificall regions. The decreaseincrease in sales from EMEA was attributable to lowerhigher sales in Functional Coatings and Color Solutions of $5.0$41.5 million and $2.8$10.1 million, respectively. The increase in sales from Latin Americathe Americas was attributable to higher sales in Color Solutions and Functional Coatings of $1.6$13.9 million and $1.1$13.1 million, respectively. The increase in sales from the United States was attributable to higher sales in Functional Coatings of $2.9 million, partially offset by a decrease in Color Solutions of $2.0 million. The increase in sales from Asia Pacific was attributable to higher sales in Functional Coatings and Color Solutions of $0.4$8.6 million and $0.4$2.3 million, respectively.
Selling, General and Administrative (“SG&A”) Expenses
The following table includes SG&A components with significantcomponent changes between 20202021 and 2019.2020.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Personnel expenses (excluding R&D personnel expenses) | $ | 19,827 | $ | 21,867 | (2,040) | (9.3) | % | $ | 22,266 | $ | 19,779 | 2,487 | 12.6 | % | ||||||||||
Research and development expenses | 8,488 | 9,903 | (1,415) | (14.3) | % | 7,932 | 8,331 | (399) | (4.8) | % | ||||||||||||||
Business development | 3,113 | 666 | 2,447 | 367.4 | % | 7,599 | 5,303 | 2,296 | 43.3 | % | ||||||||||||||
Incentive compensation | 2,018 | 356 | 1,662 | 466.9 | % | 1,883 | 1,971 | (88) | (4.5) | % | ||||||||||||||
Stock-based compensation | 1,608 | 300 | 1,308 | 436.0 | % | 2,085 | 2,183 | (98) | (4.5) | % | ||||||||||||||
Intangible asset amortization | 1,504 | 2,053 | (549) | (26.7) | % | 1,712 | 1,411 | 301 | 21.3 | % | ||||||||||||||
Pension and other postretirement benefits | 213 | 256 | (43) | (16.8) | % | 333 | 183 | 150 | 82.0 | % | ||||||||||||||
Bad debt | 62 | 5 | 57 | NM | % | 13 | (40) | 53 | NM | % | ||||||||||||||
All other expenses | 10,987 | 12,137 | (1,150) | (9.5) | % | 15,203 | 11,420 | 3,783 | 33.1 | % | ||||||||||||||
Selling, general and administrative expenses | $ | 47,820 | $ | 47,543 | $ | 277 | 0.6 | % | $ | 59,026 | $ | 50,541 | $ | 8,485 | 16.8 | % |
SG&A expenses were $0.3$8.5 million higher in the three months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period. The higher SG&A expenses compared to the prior-year same period are primarily driven by other expense, primarily associated with consulting and professional fees, higher personnel expenses and business development costs, incentive and stock-based compensation expense, partially offset by lower personnel costs and research and development expenses.costs.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Strategic services | $ | 22,363 | $ | 25,254 | $ | (2,891) | (11.4) | % | $ | 23,674 | $ | 21,495 | $ | 2,179 | 10.1 | % | ||||||||
Functional services | 21,831 | 21,633 | 198 | 0.9 | % | 31,384 | 24,892 | 6,492 | 26.1 | % | ||||||||||||||
Incentive compensation | 2,018 | 356 | 1,662 | NM | % | 1,883 | 1,971 | (88) | (4.5) | % | ||||||||||||||
Stock-based compensation | 1,608 | 300 | 1,308 | 436.0 | % | 2,085 | 2,183 | (98) | (4.5) | % | ||||||||||||||
Selling, general and administrative expenses | $ | 47,820 | $ | 47,543 | $ | 277 | 0.6 | % | $ | 59,026 | $ | 50,541 | $ | 8,485 | 16.8 | % |
Restructuring and Impairment Charges
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Employee severance | $ | 1,960 | $ | 1,906 | $ | 54 | 2.8 | % | $ | 1,590 | $ | 7,174 | $ | (5,584) | (77.8) | % | ||||||||
Other restructuring costs | 487 | 159 | 328 | 206.3 | % | 380 | 1,445 | (1,065) | (73.7) | % | ||||||||||||||
Restructuring and impairment charges | $ | 2,447 | $ | 2,065 | $ | 382 | 18.5 | % | $ | 1,970 | $ | 8,619 | $ | (6,649) | (77.1) | % |
Restructuring and impairment charges increaseddecreased in the third quarter of 2020three months ended June 30, 2021, compared with the prior-year same period. The increasedecrease primarily relates to previously disclosed plans being substantially completed with any remaining costs associated with our Global Optimization and Organizational Optimization Plans, compared withexpected to be recognized within the prior-year same period.next 12 months. Refer to Note 14 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of our optimization plans and related costs.
Interest Expense
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Interest expense | $ | 4,810 | $ | 6,260 | $ | (1,450) | (23.2) | % | $ | 5,397 | $ | 6,383 | $ | (986) | (15.4) | % | ||||||||
Amortization of bank fees | 1,071 | 968 | 103 | 10.6 | % | 498 | 866 | (368) | (42.5) | % | ||||||||||||||
Interest swap amortization | (315) | (315) | — | — | % | (316) | (316) | — | — | % | ||||||||||||||
Interest capitalization | (799) | (911) | 112 | (12.3) | % | (573) | (756) | 183 | (24.2) | % | ||||||||||||||
Interest expense | $ | 4,767 | $ | 6,002 | $ | (1,235) | (20.6) | % | $ | 5,006 | $ | 6,177 | $ | (1,171) | (19.0) | % |
Interest expense decreased in the third quarter of 2020three months ended June 30, 2021, compared with the prior-year same period. The decrease in interest expense was primarily due to a decrease in the average interest rate and the average long-term debt balance, partially offset by higher average interest rate during the third quarter of 2020three months ended June 30, 2021, compared with the prior-year same period.
Income Tax Expense
Income tax expense for the three months ended SeptemberJune 30, 20202021 was $5.0$8.5 million, or 34.6%32.8% of pre-tax inome.income. Income tax expense for the three months ended SeptemberJune 30, 20192020 was $3.3$0.2 million, or 16.7%(11.6%) of pre-tax income.loss. The tax expense duringfor the three months ended SeptemberJune 30, 2020,2021, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences and U.S. taxation of foreign earnings. differences. The tax expense during the three months ended September June 30, 2019,2020, as a percentage of pre-tax income,loss, is lower than the U.S. federal statutory income tax rate of 21% primarily as a result of tax credits.rate changes enacted during 2020.
Results of Operations - Segment Information
Comparison of the three months ended SeptemberJune 30, 20202021 and 20192020
Functional Coatings
Three Months Ended | Change due to | Three Months Ended | Change due to | |||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Volume / | June 30, | Volume / | |||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | Price | Mix | Currency | Other | 2021 | 2020 | $ Change | % Change | Price | Mix | Currency | Other | ||||||||||||||||||||||||||||||||||||
Segment net sales | $ | 154,218 | $ | 154,744 | $ | (526) | (0.3) | % | $ | 1,804 | $ | (3,026) | $ | 696 | $ | — | $ | 194,909 | $ | 131,672 | $ | 63,237 | 48.0 | % | $ | 1,403 | $ | 55,739 | $ | 6,095 | $ | — | ||||||||||||||||||||
Segment gross profit | 41,906 | 47,275 | (5,369) | (11.4) | % | 1,804 | (4,897) | 146 | (2,422) | 59,521 | 36,119 | 23,402 | 64.8 | % | 1,403 | 12,128 | 2,054 | 7,817 | ||||||||||||||||||||||||||||||||||
Gross profit as a % of segment net sales | 27.2 | % | 30.6 | % | 30.5 | % | 27.4 | % |
Net sales decreasedincreased compared with the prior-year same period, primarily driven by lowerhigher sales in porcelain enamel, decoration, automotive, industrial, and industrialelectronics products of $3.1$17.1 million, $2.0$16.9 million, $13.0 million, $8.8 million and $1.2$7.4 million, respectively, partially mitigated by increased sales in electronic products.respectively. The decreaseincrease in net sales was driven by unfavorablefavorable volume and mix of $3.0$55.7 million, partially mitigated by higher product pricing of $1.8 million and favorable foreign currency impacts of $0.7$6.1 million and increased product pricing of $1.4 million. Gross profit decreasedincreased from the prior-year same period primarily due to unfavorable manufacturing costs of $4.5 million and unfavorablefavorable volume and mix of $4.9$12.1 million, partially mitigated byfavorable manufacturing costs of $6.1 million, favorable foreign currency impacts of $2.1 million, favorable raw material costs of $2.1$1.7 million higherand increased product pricing of $1.8 million and favorable foreign currency impacts of $0.1$1.4 million.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Segment net sales by Region | ||||||||||||||||||||||||
EMEA | $ | 65,081 | $ | 70,048 | $ | (4,967) | (7.1) | % | $ | 92,569 | $ | 51,071 | $ | 41,498 | 81.3 | % | ||||||||
United States | 49,580 | 46,657 | 2,923 | 6.3 | % | |||||||||||||||||||
Americas | 72,046 | 58,868 | 13,178 | 22.4 | % | |||||||||||||||||||
Asia Pacific | 26,779 | 26,364 | 415 | 1.6 | % | 30,294 | 21,733 | 8,561 | 39.4 | % | ||||||||||||||
Latin America | 12,778 | 11,675 | 1,103 | 9.4 | % | |||||||||||||||||||
Total | $ | 154,218 | $ | 154,744 | $ | (526) | (0.3) | % | $ | 194,909 | $ | 131,672 | $ | 63,237 | 48.0 | % |
The net sales decreaseincrease of $0.5$63.2 million was primarily driven by lower sales from EMEA, partially mitigated by higher sales from the United States, Latin America and Asia Pacific.all regions. The decreaseincrease in sales from EMEA was primarily attributable to lowerhigher sales of decoration, industrial, porcelain enamel, automotive and decorationelectronics products of $2.7$11.9 million, $9.4 million, $8.2 million, $6.7 million and $2.0$5.3 million, respectively. The increase in sales from the United States was primarily attributable to an increase in sales of electronic products of $4.7 million, partially offset by lower sales of porcelain enamel and automotive products of $1.3 million and $0.6 million, respectively. The increase in sales from Latin AmericaAmericas was primarily attributable to higher sales of porcelain enamel, automotive, electronics and decoration products of $0.8$7.0 million, $3.5 million, $1.4 million and $0.4$1.3 million, respectively. The increase in sales from Asia Pacific was primarily attributable to increasedhigher sales of industrial anddecoration, automotive, porcelain enamel and electronics products of $1.6$3.7 million, $2.8 million, $1.9 million and $1.1$0.7 million, respectively, partially offset by lower sales in decoration and automotiveof industrial products of $1.9 million and $0.4 million, respectively.$0.5 million.
Color Solutions
Three Months Ended | Change due to | |||||||||||||||||||||||||
June 30, | Volume / | |||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | $ Change | % Change | Price | Mix | Currency | Other | ||||||||||||||||||
Segment net sales | $ | 99,422 | $ | 73,129 | $ | 26,293 | 36.0 | % | $ | 589 | $ | 22,281 | $ | 3,423 | $ | — | ||||||||||
Segment gross profit | 36,692 | 26,985 | 9,707 | 36.0 | % | 589 | 7,926 | 1,568 | (376) | |||||||||||||||||
Gross profit as a % of segment net sales | 36.9 | % | 36.9 | % |
Color Solutions
Three Months Ended | Change due to | |||||||||||||||||||||||||
September 30, | Volume / | |||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | Price | Mix | Currency | Other | ||||||||||||||||||
Segment net sales | $ | 87,659 | $ | 90,595 | $ | (2,936) | (3.2) | % | $ | (313) | $ | (3,576) | $ | 953 | $ | — | ||||||||||
Segment gross profit | 28,450 | 29,122 | (672) | (2.3) | % | (313) | (1,964) | 150 | 1,455 | |||||||||||||||||
Gross profit as a % of segment net sales | 32.5 | % | 32.1 | % |
Net sales decreasedincreased compared with the prior-year same period, primarily due to lower sales of pigment products of $3.5 million, partially mitigateddriven by higher sales of pigment, surface technology and dispersions and colorants products of $0.4$19.8 million, $4.3 million and $0.2$2.2 million, respectively. The decreaseincrease in net sales was driven by unfavorable salesfavorable volume and mix of $3.6$22.3 million, and lower product pricing of $0.3 million, partially mitigated by favorable foreign currency impacts of $1.0$3.4 million and increased product pricing of $0.6 million. Gross profit decreasedincreased from the prior-year same period, primarily due to unfavorablefavorable sales volume and mix of $2.0$7.9 million, favorable foreign currency impacts of $1.6 million, increased product pricing of $0.6 million and favorable manufacturing costs of $0.1 million, partially mitigatedoffset by lowerunfavorable raw material costs of $1.3$0.5 million.
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Segment net sales by Region | ||||||||||||||||||||||||
United States | $ | 36,705 | $ | 38,758 | $ | (2,053) | (5.3) | % | ||||||||||||||||
EMEA | 30,472 | 33,349 | (2,877) | (8.6) | % | $ | 37,958 | $ | 27,874 | $ | 10,084 | 36.2 | % | |||||||||||
Americas | 50,014 | 36,145 | 13,869 | 38.4 | % | |||||||||||||||||||
Asia Pacific | 10,766 | 10,412 | 354 | 3.4 | % | 11,450 | 9,110 | 2,340 | 25.7 | % | ||||||||||||||
Latin America | 9,716 | 8,076 | 1,640 | 20.3 | % | |||||||||||||||||||
Total | $ | 87,659 | $ | 90,595 | $ | (2,936) | (3.2) | % | $ | 99,422 | $ | 73,129 | $ | 26,293 | 36.0 | % |
The net sales decreaseincrease of $2.9$26.3 million was driven by lower sales from EMEA and the United States, partially mitigated by higher sales from Latin America.all regions. The decreaseincrease in sales from the Americas was primarily driven by increased sales of pigment, surface technology and dispersions and colorants products of $7.6 million, $5.2 million and $1.1 million, respectively. The increase in sales from EMEA was primarily attributable to lowerhigher sales of pigment and dispersions and colorants products of $2.5$9.0 million and $0.3$1.1 million, respectively. The decreaseincrease in sales from the United StatesAsia Pacific was primarily driven by lowerattributable to increased sales of pigment products of $2.8 million. The increase in sales from Latin America was primarily attributable to higher$3.2 million, partially offset by lower sales of pigment productssurface technology of $1.5 million.$0.9 million, respectively.
Comparison of the ninesix months ended SeptemberJune 30, 20202021 and 20192020
For the ninesix months ended SeptemberJune 30, 2020,2021, net income from continuing operations was $23.5$36.0 million, compared with $36.9$14.0 million for the ninesix months ended SeptemberJune 30, 2019.2020. For the ninesix months ended SeptemberJune 30, 2020,2021, net income attributable to common shareholders was $25.1$123.5 million, or earnings per share of $0.31,$1.50, compared with net income attributable to common shareholders of $37.3$10.6 million, or earnings per share of $0.45,$0.13, for the ninesix months ended SeptemberJune 30, 2019.2020.
Net Sales
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||
Net sales | $ | 699,004 | $ | 769,679 | $ | (70,675) | (9.2) | % | $ | 582,689 | $ | 457,127 | $ | 125,562 | 27.5 | % | ||||||||||||
Cost of sales | 484,356 | 536,628 | (52,272) | (9.7) | % | 392,751 | 312,645 | 80,106 | 25.6 | % | ||||||||||||||||||
Gross profit | $ | 214,648 | $ | 233,051 | $ | (18,403) | (7.9) | % | $ | 189,938 | $ | 144,482 | $ | 45,456 | 31.5 | % | ||||||||||||
Gross profit as a % of net sales | 30.7 | % | 30.3 | % | 32.6 | % | 31.6 | % |
Net sales decreasedincreased by $70.7$125.6 million, or 9.2%27.5%, for the ninesix months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period, driven by lowerhigher sales in Functional Coatings and Color Solutions of $44.1$92.6 million and $26.5$33.0 million, respectively. The decreaseincrease in net sales was driven by unfavorablefavorable volume and mix of $63.2$102.6 million, and unfavorablefavorable foreign currency impacts of $9.8$18.8 million partially mitigated byand higher product pricing of $2.3$4.2 million.
Gross Profit
Gross profit decreased $18.4increased $45.5 million, or 7.9%31.5%, for the ninesix months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period. As a percentage of net sales, gross profit increased approximately 40100 basis points to 30.7%32.6%. The decreaseincrease in gross profit was primarily attributable to a decreasean increase in Functional Coatings of $19.0$37.5 million partially offset by an increaseand in Color Solutions of $2.0$9.6 million. The decreaseincrease in gross profit was primarily driven by unfavorablefavorable sales volume and mix of $32.7$29.7 million, and unfavorablefavorable foreign currency impacts of $2.7$6.5 million, partially mitigated byhigher product pricing of $4.2 million, lower raw material costs of $13.2 million, higher product pricing of $2.3$3.4 million and lowerfavorable manufacturing costs of $1.5$1.7 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Geographic Revenues on a sales origination basis | ||||||||||||||||||||||||
EMEA | $ | 288,244 | $ | 329,270 | $ | (41,026) | (12.5) | % | $ | 256,941 | $ | 192,691 | $ | 64,250 | 33.3 | % | ||||||||
United States | 256,852 | 275,073 | (18,221) | (6.6) | % | |||||||||||||||||||
Americas | 243,832 | 202,541 | 41,291 | 20.4 | % | |||||||||||||||||||
Asia Pacific | 99,440 | 102,210 | (2,770) | (2.7) | % | 81,916 | 61,895 | 20,021 | 32.3 | % | ||||||||||||||
Latin America | 54,468 | 63,126 | (8,658) | (13.7) | % | |||||||||||||||||||
Net sales | $ | 699,004 | $ | 769,679 | $ | (70,675) | (9.2) | % | $ | 582,689 | $ | 457,127 | $ | 125,562 | 27.5 | % |
The declineincrease in net sales of $70.7$125.6 million, compared with the prior-year same period, was driven by a decreaseincreases in sales from all regions. The decreaseincrease in sales from EMEA was attributable to lowerhigher sales in Functional Coatings and Color Solutions of $31.3$53.0 million and $9.7$11.3 million, respectively. The decreaseincrease in sales from the United StatesAmericas was attributable to lower sales in Color Solutions and Functional Coatings of $17.1 million and $1.1 million, respectively. The decrease in sales from Latin America was attributable to lowerhigher sales in Functional Coatings and Color Solutions of $8.0$23.3 million and $0.6$18.0 million, respectively. The decreaseincrease in sales from Asia Pacific was attributable to lowerhigher sales in Functional Coatings of $3.7 million, partially offset by higher sales inand Color Solutions of $0.9 million.$16.3 million and $3.7 million, respectively.
Selling, General and Administrative (“SG&A”) Expenses
The following table includes SG&A components with significantcomponent changes between 20202021 and 2019.2020.
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Personnel expenses (excluding R&D personnel expenses) | $ | 62,355 | $ | 70,878 | $ | (8,523) | (12.0) | % | $ | 44,612 | $ | 42,528 | $ | 2,084 | 4.9 | % | ||||||||
Research and development expenses | 26,906 | 31,079 | (4,173) | (13.4) | % | 17,115 | 18,418 | (1,303) | (7.1) | % | ||||||||||||||
Business development | 8,951 | 6,520 | 2,431 | 37.3 | % | 11,247 | 5,838 | 5,409 | 92.7 | % | ||||||||||||||
Incentive compensation | 6,109 | 1,559 | 4,550 | 291.9 | % | 4,000 | 4,091 | (91) | (2.2) | % | ||||||||||||||
Stock-based compensation | 6,550 | 5,945 | 605 | 10.2 | % | 4,715 | 4,942 | (227) | (4.6) | % | ||||||||||||||
Intangible asset amortization | 4,593 | 6,607 | (2,014) | (30.5) | % | 3,062 | 3,089 | (27) | (0.9) | % | ||||||||||||||
Pension and other postretirement benefits | 554 | 772 | (218) | (28.2) | % | 672 | 341 | 331 | 97.1 | % | ||||||||||||||
Bad debt | 158 | 259 | (101) | (39.0) | % | 42 | 96 | (54) | (56.3) | % | ||||||||||||||
All other expenses | 38,231 | 34,104 | 4,127 | 12.1 | % | 27,399 | 27,244 | 155 | 0.6 | % | ||||||||||||||
Selling, general and administrative expenses | $ | 154,407 | $ | 157,723 | $ | (3,316) | (2.1) | % | $ | 112,864 | $ | 106,587 | $ | 6,277 | 5.9 | % |
SG&A expenses were $3.3$6.3 million lowerhigher in the ninesix months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period. The lowerhigher SG&A expenses compared to the prior-year same period are primarily driven by lowerhigher business development costs and personnel expenses and research and development expenses, partially offset by higher incentive compensationlower research and business development costs.
expenses.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Strategic services | $ | 69,474 | $ | 80,101 | $ | (10,627) | (13.3) | % | $ | 48,128 | $ | 47,111 | $ | 1,017 | 2.2 | % | ||||||||
Functional services | 72,274 | 70,118 | 2,156 | 3.1 | % | 56,021 | 50,443 | 5,578 | 11.1 | % | ||||||||||||||
Incentive compensation | 6,109 | 1,559 | 4,550 | 291.9 | % | 4,000 | 4,091 | (91) | (2.2) | % | ||||||||||||||
Stock-based compensation | 6,550 | 5,945 | 605 | 10.2 | % | 4,715 | 4,942 | (227) | (4.6) | % | ||||||||||||||
Selling, general and administrative expenses | $ | 154,407 | $ | 157,723 | $ | (3,316) | (2.1) | % | $ | 112,864 | $ | 106,587 | $ | 6,277 | 5.9 | % |
Restructuring and Impairment Charges
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Employee severance | $ | 9,792 | $ | 5,748 | $ | 4,044 | 70.4 | % | $ | 5,439 | $ | 7,832 | $ | (2,393) | (30.6) | % | ||||||||
Other restructuring costs | 2,439 | 2,114 | 325 | 15.4 | % | 1,715 | 1,952 | (237) | (12.1) | % | ||||||||||||||
Restructuring and impairment charges | $ | 12,231 | $ | 7,862 | $ | 4,369 | 55.6 | % | $ | 7,154 | $ | 9,784 | $ | (2,630) | (26.9) | % |
Restructuring and impairment charges increaseddecreased in the ninesix months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period. The increasedecrease primarily relates to previously disclosed plans being substantially completed with any remaining costs associated with our Global Optimization Plan, compared withexpected to be recognized within the prior-year same period.next 12 months. Refer to Note 14 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of our optimization plans and related costs.
Interest Expense
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Interest expense | $ | 17,039 | $ | 19,004 | $ | (1,965) | (10.3) | % | $ | 15,122 | $ | 12,229 | $ | 2,893 | 23.7 | % | ||||||||
Amortization of bank fees | 2,866 | 2,780 | 86 | 3.1 | % | 1,102 | 1,795 | (693) | (38.6) | % | ||||||||||||||
Interest swap amortization | (947) | (947) | — | — | % | (632) | (632) | — | — | % | ||||||||||||||
Interest capitalization | (2,484) | (2,259) | (225) | 10.0 | % | (1,149) | (1,685) | 536 | (31.8) | % | ||||||||||||||
Interest expense | $ | 16,474 | $ | 18,578 | $ | (2,104) | (11.3) | % | $ | 14,443 | $ | 11,707 | $ | 2,736 | 23.4 | % |
Interest expense decreasedincreased in the ninesix months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period. The decreaseincrease in interest expense was primarily due to a decrease inincremental interest expense recognized associated with the termination of certain cross-currency swap instruments and higher average interest rate, partially offset by an increasea decrease in the average long-term debt balance during the ninesix months ended SeptemberJune 30, 2020,2021, compared with the prior-year same period.
Income Tax Expense
Income tax expense for the ninesix months ended SeptemberJune 30, 20202021 was $10.4$16.1 million, or 30.6%31.0% of pre-tax income. Income tax expense for the ninesix months ended SeptemberJune 30, 20192020 was $8.9$5.3 million, or 19.4%27.5% of pre-tax income. The tax expense for the ninesix months ended SeptemberJune 30, 2021 and June 30, 2020, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences and U.S. taxation of foreign earnings. The tax expense during the nine months ended September 30, 2019, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 21% primarily as a result of tax credits.
differences.
Results of Operations - Segment Information
Comparison of the ninesix months ended SeptemberJune 30, 20202021 and 20192020
Functional Coatings
Nine Months Ended | Change due to | Six Months Ended | Change due to | |||||||||||||||||||||||||||||||||||||||||||||||||
September 30, | Volume / | June 30, | Volume / | |||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | Price | Mix | Currency | Other | 2021 | 2020 | $ Change | % Change | Price | Mix | Currency | Other | ||||||||||||||||||||||||||||||||||||
Segment net sales | $ | 441,325 | $ | 485,462 | $ | (44,137) | (9.1) | % | $ | 2,371 | $ | (39,012) | $ | (7,496) | $ | — | $ | 379,731 | $ | 287,107 | $ | 92,624 | 32.3 | % | $ | 3,980 | $ | 76,756 | $ | 11,888 | $ | — | ||||||||||||||||||||
Segment gross profit | 125,842 | 144,812 | (18,970) | (13.1) | % | 2,371 | (17,331) | (2,277) | (1,733) | 121,397 | 83,936 | 37,461 | 44.6 | % | 3,980 | 22,691 | 3,984 | 6,806 | ||||||||||||||||||||||||||||||||||
Gross profit as a % of segment net sales | 28.5 | % | 29.8 | % | 32.0 | % | 29.2 | % |
Net sales decreasedincreased compared with the prior-year same period, primarily driven by lowerhigher sales in automotive, porcelain enamel, automotive, decoration, electronics and industrial products of $17.1$26.9 million, $15.8$19.8 million, $15.2$16.5 million, $14.8 million and $13.2$14.6 million, respectively, partially mitigated by higher sales in electronic products of $16.0 million.respectively. The decreaseincrease in net sales was driven by unfavorablefavorable volume and mix of $39.0$76.7 million, and foreign currency impacts of $7.5 million, partially mitigated by increased product pricing of $2.4 million. Gross profit decreased from the prior-year same period primarily due to unfavorable volume and mix of $17.3 million, unfavorable manufacturing costs of $9.1 million and unfavorable foreign currency impacts of $2.3 million, partially offset by favorable raw material costs of $7.3$11.9 million and increased product pricing of $2.4 million.
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||
Segment net sales by Region | ||||||||||||
EMEA | $ | 192,009 | $ | 223,310 | $ | (31,301) | (14.0) | % | ||||
United States | 148,468 | 149,574 | (1,106) | (0.7) | % | |||||||
Asia Pacific | 70,268 | 73,962 | (3,694) | (5.0) | % | |||||||
Latin America | 30,580 | 38,616 | (8,036) | (20.8) | % | |||||||
Total | $ | 441,325 | $ | 485,462 | $ | (44,137) | (9.1) | % |
The net sales decrease of $44.1 million was primarily driven by lower sales from all regions. The decrease in sales from EMEA was primarily attributable to lower sales of industrial, decoration and automotive products of $13.1 million, $9.6 million and $6.9 million. The decrease in sales from Latin America was primarily attributable to lower sales of porcelain enamel, automotive and industrial products of $5.7 million, $1.6 million and $0.6 million, respectively. The decrease in sales from Asia Pacific was primarily attributable to decreased sales of decoration and automotive products of $3.8 million and $2.9 million, respectively, partially mitigated by higher sales of industrial products of $3.2 million. The decrease in sales from the United States was primarily attributable to lower sales of automotive, porcelain enamel, industrial and decoration products of $5.7 million, $4.5 million, $2.7 million and $1.8 million, respectively, partially mitigated by higher sales of electronic products of $13.6 million.
Color Solutions
Nine Months Ended | Change due to | |||||||||||||||||||||||||
September 30, | Volume / | |||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | Price | Mix | Currency | Other | ||||||||||||||||||
Segment net sales | $ | 257,679 | $ | 284,217 | $ | (26,538) | (9.3) | % | $ | (53) | $ | (24,181) | $ | (2,304) | $ | — | ||||||||||
Segment gross profit | 89,222 | 87,220 | 2,002 | 2.3 | % | (53) | (13,973) | (400) | 16,428 | |||||||||||||||||
Gross profit as a % of segment net sales | 34.6 | % | 30.7 | % |
Net sales decreased compared with the prior-year same period, primarily driven by lower sales of surface technology, pigment and dispersions and colorants products of $13.7 million, $11.1 million and of $1.5 million, respectively. The decrease in net sales was driven by unfavorable volume and mix of $24.2 million and unfavorable foreign currency impacts of $2.3$4.0 million. Gross profit increased from the prior-year same period primarily due to favorable volume and mix of $22.7 million, favorable manufacturing costs of $10.5$4.3 million, increased product pricing of $4.0 million, favorable foreign currency impacts of $4.0 million and favorable raw material costs of $5.9 million, partially offset by unfavorable sales volume and mix of $14.0 million and unfavorable foreign currency impacts of $0.4$2.5 million.
Nine Months Ended | Six Months Ended | |||||||||||||||||||||||
September 30, | June 30, | |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | 2021 | 2020 | $ Change | % Change | ||||||||||||||||
Segment net sales by Region | ||||||||||||||||||||||||
United States | $ | 108,384 | $ | 125,499 | $ | (17,115) | (13.6) | % | ||||||||||||||||
EMEA | 96,235 | 105,960 | (9,725) | (9.2) | % | $ | 179,941 | $ | 126,928 | $ | 53,013 | 41.8 | % | |||||||||||
Americas | 139,964 | 116,690 | 23,274 | 19.9 | % | |||||||||||||||||||
Asia Pacific | 29,172 | 28,248 | 924 | 3.3 | % | 59,826 | 43,489 | 16,337 | 37.6 | % | ||||||||||||||
Latin America | 23,888 | 24,510 | (622) | (2.5) | % | |||||||||||||||||||
Total | $ | 257,679 | $ | 284,217 | $ | (26,538) | (9.3) | % | $ | 379,731 | $ | 287,107 | $ | 92,624 | 32.3 | % |
The net sales decreaseincrease of $26.5$92.6 million was primarily driven by lower sales from the United States, EMEA and Latin America, partially offset by higher sales from Asia Pacific.all regions. The decrease in sales from the United States was primarily driven by lower sales of surface technology, and pigment of $14.2 million and $3.1 million, respectively, partially mitigated by increased sales of dispersions and colorants products of $0.2 million. The decreaseincrease in sales from EMEA was primarily attributable to lowerhigher sales of porcelain enamel, industrial, decoration, automotive and electronics products of $12.2 million, $12.2 million, $11.1 million, $9.5 million and $8.0 million, respectively. The increase in sales from the Americas was primarily attributable to higher sales of porcelain enamel, electronics, automotive and decoration products of $10.8 million, $5.7 million, $5.5 million and $1.5 million, respectively. The increase in sales from Asia Pacific was primarily attributable to increased sales of automotive, decoration, porcelain enamel, industrial and electronics products of $4.8 million, $3.9 million, $3.9 million, $2.6 million and $1.1 million, respectively.
Color Solutions
Six Months Ended | Change due to | |||||||||||||||||||||||||
June 30, | Volume / | |||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | $ Change | % Change | Price | Mix | Currency | Other | ||||||||||||||||||
Segment net sales | $ | 202,958 | $ | 170,020 | $ | 32,938 | 19.4 | % | $ | 192 | $ | 25,839 | $ | 6,907 | $ | — | ||||||||||
Segment gross profit | 70,360 | 60,772 | 9,588 | 15.8 | % | 192 | 7,016 | 2,557 | (177) | |||||||||||||||||
Gross profit as a % of segment net sales | 34.7 | % | 35.7 | % |
Net sales increased compared with the prior-year same period, primarily driven by higher sales of pigment, surface technology and dispersions and colorants products of $23.6 million, $6.3 million and $3.0 million, respectively. The increase in net sales was driven by favorable volume and mix of $25.8 million, favorable foreign currency impacts of $6.9 million and increased product pricing of $0.2 million. Gross profit increased from the prior-year same period, primarily due to favorable sales volume and mix of $7.0 million, favorable foreign currency impacts of $2.6 million, favorable raw material costs of $0.9 million and increased product pricing of $0.2 million, partially offset by unfavorable manufacturing costs of $1.1 million.
Six Months Ended | ||||||||||||
June 30, | ||||||||||||
(Dollars in thousands) | 2021 | 2020 | $ Change | % Change | ||||||||
Segment net sales by Region | ||||||||||||
EMEA | $ | 77,000 | $ | 65,763 | $ | 11,237 | 17.1 | % | ||||
Americas | 103,868 | 85,851 | 18,017 | 21.0 | % | |||||||
Asia Pacific | 22,090 | 18,406 | 3,684 | 20.0 | % | |||||||
Total | $ | 202,958 | $ | 170,020 | $ | 32,938 | 19.4 | % |
The net sales increase of $32.9 million was driven by higher sales from all regions. The increase in sales from the Americas was primarily driven by increased sales of pigment, surface technology and dispersions and colorants products of $8.4 million, $8.0 million and $1.6 million, respectively. The increase in sales from EMEA was primarily attributable to higher sales of pigment and dispersions and colorants products of $7.9$9.8 million and $1.6$1.4 million, respectively. The decrease in sales from Latin America was attributable to lower sales of pigment products. The increase in sales from Asia Pacific was attributable to increased sales of pigment andproducts of $5.4 million, partially offset by lower sales of surface technology products of $0.5 million and $0.4 million, respectively.$1.7 million.
Summary of Cash Flows for the ninesix months ended SeptemberJune 30, 20202021 and 20192020
Nine Months Ended | Six Months Ended | |||||||||||||||||
September 30, | June 30, | |||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | 2021 | 2020 | $ Change | ||||||||||||
Net cash used in operating activities | $ | (106,481) | $ | (67,240) | $ | (39,241) | $ | (46,410) | $ | (104,561) | $ | 58,151 | ||||||
Net cash provided by investing activities | 76,421 | 21,763 | 54,658 | 452,018 | 48,376 | 403,642 | ||||||||||||
Net cash used in financing activities | (1,821) | (6,416) | 4,595 | |||||||||||||||
Net cash provided by (used in) financing activities | (442,763) | 22,519 | (465,282) | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 174 | (667) | 841 | (1,405) | (505) | (900) | ||||||||||||
Decrease in cash and cash equivalents | $ | (31,707) | $ | (52,560) | $ | 20,853 | $ | (38,560) | $ | (34,171) | $ | (4,389) |
The following table includes details of net cash provided by operating activities.
Nine Months Ended | Six Months Ended | |||||||||||||||||
September 30, | June 30, | |||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | 2021 | 2020 | $ Change | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||||
Net income | $ | 25,883 | $ | 38,197 | $ | (12,314) | $ | 124,291 | $ | 10,969 | $ | 113,322 | ||||||
Loss (gain) on sale of assets | 78 | (947) | 1,025 | (98,746) | 506 | (99,252) | ||||||||||||
Depreciation and amortization | 30,653 | 42,041 | (11,388) | 19,817 | 20,854 | (1,037) | ||||||||||||
Interest amortization | 2,866 | 2,780 | 86 | 1,102 | 1,795 | (693) | ||||||||||||
Restructuring and impairment | 6,944 | 9,837 | (2,893) | 124 | 6,916 | (6,792) | ||||||||||||
Loss on extinguishment of debt | 1,981 | — | 1,981 | |||||||||||||||
Accounts receivable | (107,551) | (78,082) | (29,469) | (96,052) | (51,017) | (45,035) | ||||||||||||
Inventories | 10,022 | (9,182) | 19,204 | (9,183) | (34,771) | 25,588 | ||||||||||||
Accounts payable | (78,576) | (63,452) | (15,124) | 7,696 | (45,089) | 52,785 | ||||||||||||
Other current asset, liabilities and adjustments, net | 3,200 | (8,432) | 11,632 | 2,560 | (14,724) | 17,284 | ||||||||||||
Net cash used in operating activities | $ | (106,481) | $ | (67,240) | $ | (39,241) | $ | (46,410) | $ | (104,561) | $ | 58,151 |
Cash flows from operating activities. Cash flows from operating activities decreased $39.2increased $58.2 million during the ninesix months ended SeptemberJune 30, 20202021 compared with the prior-year same period. The decreaseincrease in cash from operating activities was primarily due to higherlower cash outflows for net working capital of $25.4$33.3 million and a decreasean increase in net income, net of $12.3 million.the gain on the sale of the Tile Coatings business.
Cash flows used in investing activities. Cash flows from investing activities increased $54.7$403.6 million during the ninesix months ended SeptemberJune 30, 20202021 compared with the prior-year same period. The increase in cash from investing activities was primarily due to higher collections of financing receivablesthe proceeds from the receivable sales program (Note 8)sale of $36.4the Tile Coatings business of $415.2 million, and lowerpartially offset by higher cash outflows for capital expenditures of $19.1$5.6 million and lower collection of financing receivables of $3.3 million in the ninesix months ended SeptemberJune 30, 2020,2021, compared to the prior-year same period.
Cash flows from financing activities. Cash flows from financing activities increased $4.6decreased $465.3 million during the ninesix months ended SeptemberJune 30, 20202021 compared with the prior-year same period. ComparedThe decrease in cash from financing activities was primarily due to increased principal payments on the prior-year same period, cash outflows for the purchaseAmended Credit Facility of treasury stock were lower by $25.0$435.0 million, and cash outflows for acquisition-related contingency payments were lower by $5.2 million, partially offset by lowerdecreased net proceeds from the revolving credit facilityfacilities of $16.7$16.6 million and decreased net borrowingsproceeds from loans payable increased by $8.9 million.of $11.5 million compared to the prior-year same period.
Capital Resources and Liquidity
Refer to Note 8 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of major debt instruments that were outstanding during 2020.2021.
Off Balance Sheet Arrangements
Consignment and Customer Arrangements for Precious Metals. We use precious metals, primarily silver, in the production of some of our products. We obtain precious metals from financial institutions under consignment agreements. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign and the period of consignment. These fees were $0.6$0.8 million and $0.5 $0.6 million for the three months ended SeptemberJune 30, 2021 and 2020, respectively, and 2019, respectively and were $2.3$1.4 million and $2.21.7 million for the ninesix months ended SeptemberJune 30, 20202021 and 2019,2020, respectively. We had on hand precious metals owned by participants in our precious metals program of $87.5$100.7 million at SeptemberJune 30, 2020,2021, and $66.2$87.2 million at December 31, 2019,2020, measured at fair value based on market prices for identical assets.
The consignment agreements under our precious metals program involve short-term commitments that typically mature within 30 to 90 days of each transaction and are typically renewed on an ongoing basis. As a result, the Company relies on the continued willingness of financial institutions to participate in these arrangements to maintain this source of liquidity. On occasion, we have been required to deliver cash collateral. While no deposits were outstanding at SeptemberJune 30, 20202021, or December 31, 2019,2020, we may be required to furnish cash collateral in the future based on the quantity and market value of the precious metals under consignment and the amount of collateral-free lines provided by the financial institutions. The amount of cash collateral required is subject to review by the financial institutions and can be changed at any time at their discretion, based in part on their assessment of our creditworthiness.
Bank Guarantees and Standby Letters of Credit.Credit
At SeptemberJune 30, 2020,2021, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $5.04.8 million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.
Liquidity Requirements
Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under the revolving credit facility, and cash flows from operating activities. As of SeptemberJune 30, 2020,2021, we had $72.7$143.7 million of cash and cash equivalents. The majority of our cash and cash equivalents were held by foreign subsidiaries. Cash generated in the U.S. is generally used to pay down amounts outstanding under our revolving credit facility and for general corporate purposes, including acquisitions. If needed, we could repatriate the majority of cash held by foreign subsidiaries without the need to accrue and pay U.S. income taxes. We do not anticipate a liquidity need requiring such repatriation of these funds to the U.S.
DuringOn February 25, 2021, we completed the fourth quartersale of 2019, we entered into a definitive agreement to sell our Tile Coatings business to Pigments Spain, S.L., a company of the Esmalglass-Itaca-Fritta group (the “Buyer”), which has historically beenis a partportfolio company of our Performance Coatings reportable segment. We expectcertain Lone Star Funds, for $460.0 million in cash, subject to use thepost-closing adjustments. The transaction resulted in net proceeds of approximately $415.2 million after expenses. Proceeds from the saleclose of the transaction, in addition to settle long-term obligations.current cash balances, were used to pay down our term loan facility in the amount of $435.0 million on February 25, 2021. The debt pay-down reduced outstanding amounts of the Tranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans, by $188.3 million, $124.7 million and $122.0 million, respectively. In conjunction with the prepayment of debt, we recorded a charge of $2.0 million in connection with the write-off of unamortized issuance costs, which is recorded within Loss on extinguishment of debt in our consolidated statement of operations for the six months ended June 30, 2021.
Our liquidity requirements and uses primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures, acquisition costs, capital investments, strategic optimization plans, precious metals cash collateral requirements, and postretirement obligations. We expect to meet these requirements in the long term through cash provided by operating activities and availability under existing credit facilities or other financing arrangements. Cash flows provided by operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. As of SeptemberJune 30, 2020,2021, we had liquidity of approximately $562.7$664.5 million, consisting of cash and availability under our various credit facilities, primarily our revolving credit facility.
The 2018 Revolving Facility subjects us to a customary financial covenant regarding the Company’s maximum leverage ratio. This covenant under our Amended Credit Facility restricts the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.
As of SeptemberJune 30, 2020,2021, we were in compliance with our maximum leverage ratio covenant of 4.00x as our actual ratio was 3.08,1.38, providing $57.7$149.3 million of EBITDA cushion on the leverage ratio, as defined within the Amended Credit Facility. To the extent that economic conditions in key markets deteriorate or we are unable to meet our business projections and EBITDA, as defined within the Amended Credit Facility, falls below approximately $192$78 million for the most recently ended trailing four quarters, based on reasonably consistent net debt levels with those as of SeptemberJune 30, 2020,2021, we could become unable to maintain compliance with our leverage ratio covenant. In such case, our lenders could demand immediate payment of outstanding amounts and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all.
Difficulties experienced in global capital markets could affect the ability or willingness of counterparties to perform under our various lines of credit, forward contracts, and precious metals program. These counterparties are major, reputable, multinational institutions, all having investment-grade credit ratings. Accordingly, we do not anticipate counterparty default. However, an interruption in access to external financing could adversely affect our business prospects and financial condition.
We assess on an ongoing basis our portfolio of businesses, as well as our financial and capital structure, to ensure that we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate the possible divestiture of businesses that are not critical to our core strategic objectives and, where appropriate, pursue the sale of such businesses and assets. We also evaluate and pursue acquisition opportunities that we believe will enhance our strategic position. Generally, we publicly announce divestiture and acquisition transactions only when we have entered into a material definitive agreement or closed on those transactions.
Critical Accounting Policies and Their Application
There were no material changes to our critical accounting policies described in “Critical Accounting Policies” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Impact of Newly Issued Accounting Pronouncements
Refer to Note 2 to the condensed consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of accounting standards we recently adopted or will be required to adopt.
Risk Factors
Certain statements contained here and in future filings with the SEC reflect the Company’s expectations with respect to future performance and constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Company’s operations and business environment, which are difficult to predict and are beyond the control of the Company. Factors that could adversely affect our future financial performance include those described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to instruments that are sensitive to fluctuations in interest rates and foreign currency exchange rates.
Our exposure to interest rate risk arises from our debt portfolio. We manage this risk by controlling the mix of fixed-rate versus variable-rate debt after considering the interest rate environment and expected future cash flows. To reduce our exposure to interest rate changes on variable-rate debt, we have entered into interest rate swap agreements. These swaps effectively convert a portion of our variable-rate debt to a fixed rate. Our objective is to limit variability in earnings, cash flows and overall borrowing costs caused by changes in interest rates, while preserving operating flexibility.
We operate internationally and enter into transactions denominated in foreign currencies. These transactions expose us to gains and losses arising from exchange rate movements between the dates foreign currencies are recorded and the dates they are settled. We manage this risk by entering into forward currency contracts in an effort to substantially offset these gains and losses.
The notional amounts, carrying amounts of assets (liabilities), and fair values associated with our exposure to these market risks and sensitivity analysis about potential gains (losses) resulting from hypothetical changes in market rates are presented in the table below.
September 30, | December 31, | June 30, | December 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | 2021 | 2020 | ||||||||
Variable-rate debt: | ||||||||||||
Carrying amount(1) | $ | 801,223 | $ | 801,764 | $ | 356,978 | $ | 793,731 | ||||
Fair value | 787,767 | 799,750 | 356,149 | 783,143 | ||||||||
Increase in annual interest expense from 1% increase in interest rates | 2,690 | 2,656 | 100 | 2,626 | ||||||||
Decrease in annual interest expense from 1% decrease in interest rates | (2,690) | (2,656) | (100) | (2,626) | ||||||||
Fixed-rate debt: | ||||||||||||
Carrying amount | 3,706 | 3,496 | 3,889 | 3,706 | ||||||||
Fair value | 3,186 | 1,557 | 2,342 | 1,887 | ||||||||
Change in fair value from 1% increase in interest rates | NM | NM | NM | NM | ||||||||
Change in fair value from 1% decrease in interest rates | NM | NM | NM | NM | ||||||||
Interest rate swaps: | ||||||||||||
Notional amount | 312,018 | 314,412 | 309,624 | 311,220 | ||||||||
Carrying amount and fair value | (26,380) | (14,698) | (19,385) | (24,694) | ||||||||
Change in fair value from 1% increase in interest rates | 8,947 | 11,399 | 7,074 | 8,407 | ||||||||
Change in fair value from 1% decrease in interest rates | (3,723) | (10,676) | (4,074) | (3,131) | ||||||||
Cross currency swaps: | ||||||||||||
Notional amount | 338,813 | 341,419 | 38,700 | 223,675 | ||||||||
Carrying amount and fair value | 6,962 | 22,111 | 495 | (5,162) | ||||||||
Change in fair value from 10% appreciation of U.S. dollar | (35,730) | (34,795) | (4,048) | (24,475) | ||||||||
Change in fair value from 10% depreciation of U.S. dollar | 35,730 | 34,795 | 4,048 | 24,475 | ||||||||
Foreign currency forward contracts: | ||||||||||||
Notional amount | 554,586 | 625,908 | 776,659 | 494,187 | ||||||||
Carrying amount and fair value | 128 | 601 | (3,454) | 2,019 | ||||||||
Change in fair value from 10% appreciation of U.S. dollar | (4,875) | 3,540 | (6,885) | (2,810) | ||||||||
Change in fair value from 10% depreciation of U.S. dollar | 5,959 | (4,144) | 8,415 | 3,435 |
(1)The carrying value of the term loan facility is net of unamortized debt issuance costs of $4.0$1.4 million and $3.9$3.7 million for the period ended SeptemberJune 30, 20202021 and December 31, 2019,2020, respectively.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Ferro is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) of the Exchange Act, Ferro has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of SeptemberJune 30, 2020,2021, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the disclosure controls and procedures were effective as of SeptemberJune 30, 2020.2021.
Changes in Internal Control over Financial Reporting
During the thirdsecond quarter of 2020,2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not observed any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
In November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane. The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages. The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to liability for the plaintiff’s claims, and is vigorously defending this proceeding. Since December 2018, additional complaints were filed in the same court by 25 other New York water suppliers against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. An additional complaint also was filed by the Hicksville Water District against the Company and others in New York State Supreme Court making substantially similar allegations and seeking damages of $900 million. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.
In addition to the proceedings described above, the Company and its consolidated subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses. The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.
Item 1A. Risk Factors
Reference is madeThere have been no material changes in our risk factors from those disclosed in Part I, Item 1A to Part 1, Item 1A. “Risk Factors” included in the Company’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The risk factor set forth below updates, and should be read together with, such risk factors. Furthermore, the impact of the novel coronavirus (“COVID-19”) may exacerbate the risks discussed therein, any of which could have a material effect on the Company.
COVID-19 has spread around the world, including in Asia, Europe, the Middle East, and North and South America, all of which are regions in which Ferro has operations. The spread of COVID-19 has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. The measures taken by the authorities have impacted and may further impact certain of our workforce and operations, the operations of our customers, and those of our vendors and suppliers. Although certain jurisdictions have begun to ease restrictions, there still is considerable uncertainty regarding measures that authorities may implement in the future, which may restrict our operations and those of our suppliers and customers and disrupt logistics and other supply and distribution service providers. The spread of COVID-19 has caused us to modify certain of our business practices with respect to certain products (including site operations, employee workplace practices, travel, and participation in meetings, events, and conferences), and we may take further actions as required or recommended by authorities or deemed to be in the best interests of our employees and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely affected. These circumstances could negatively impact our business, results of operations, financial condition and cash flows.
The degree to which COVID-19 will impact our results depends on many factors, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, actions to contain the virus or limit its impact, and the speed and extent to which normal economic and operating conditions resume. Even after the COVID-19 outbreak has subsided, we may experience material adverse impacts to our business as a result of the economic impact and any recession or other macroeconomic weakness that may occur.
2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Board of Directors hashave not declared any dividends on common stock during 20202021 or 2019.2020. The Company’s Amended Credit Facility restricts the amount of dividends we can pay on our common stock. Any future dividends declared would be at the discretion of our Board of Directors and would depend on our financial condition, results of operations, cash flows, contractual obligations, the terms our financing agreements at the time a dividend is considered, and other relevant factors.
The following table summarizes purchases of our common stock by the Company and affiliated purchasers during the three months ended SeptemberJune 30, 2020:2021:
Total Amount of | Maximum Dollar | ||||||||||
Shares Purchased | Amount that May | ||||||||||
Total Number | as Part of Publicly | Yet Be Purchased | |||||||||
of Shares | Average Price | Announced Plans | Under the Plans | ||||||||
(Dollars in thousands, except for per share amounts) | Purchased | Paid per Share | or Programs | or Programs | |||||||
July 1, 2020 to July 31, 2020 | — | $ | — | $ | — | $ | 46,192,535 | ||||
August 1, 2020 to August 31, 2020 | — | $ | — | $ | — | $ | 46,192,535 | ||||
September 1, 2020 to September 30, 2020 | — | $ | — | $ | — | $ | 46,192,535 | ||||
Total | — | $ | — |
Total Amount of | Maximum Dollar | ||||||||||
Shares Purchased | Amount that May | ||||||||||
Total Number | as Part of Publicly | Yet Be Purchased | |||||||||
of Shares | Average Price | Announced Plans | Under the Plans | ||||||||
(Dollars in thousands, except for per share amounts) | Purchased | Paid per Share | or Programs | or Programs | |||||||
April 1, 2021 to April 30, 2021 | — | $ | — | $ | — | $ | 46,192,535 | ||||
May 1, 2021 to May 31, 2021 | — | $ | — | $ | — | $ | 46,192,535 | ||||
June 1, 2021 to June 30, 2021 | — | $ | — | $ | — | $ | 46,192,535 | ||||
Total | — | $ | — |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The exhibits listed in the attached Exhibit Index are the exhibits required by Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FERRO CORPORATION (Registrant) | ||
Date: |
| |
/s/ Peter T. Thomas | ||
Peter T. Thomas | ||
Chairman, President and Chief Executive Officer (Principal Executive Officer) | ||
Date: |
| |
/s/ Benjamin J. Schlater | ||
Benjamin J. Schlater | ||
Group Vice President and Chief Financial Officer (Principal Financial Officer) |
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated here by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934.
Exhibit:
2 | Plan of acquisition, reorganization, arrangement or successor: | |
2.1 | ||
3 | Articles of incorporation and by-laws: | |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
31 | Certifications: | |
31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). | |
31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). | |
32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350. | |
32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350. | |
101 | Inline XBRL Documents: | |
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Schema Document | |
101.CAL | Inline XBRL Calculation Linkbase Document | |
101.LAB | Inline XBRL Labels Linkbase Document | |
101.PRE | Inline XBRL Presentation Linkbase Document | |
101.DEF | Inline XBRL Definition Linkbase Document | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended |