Table of Contents

8Mag

Mag

 

 

 

 

 





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549









FORM 10-Q













 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 20162017



or





 

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)













 

 

 

 



Ohio

(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 ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):





 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

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.   ☐



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒

At March 31, 2016,2017, there were 83,181,35083,633,794 shares of Ferro Common Stock, par value $1.00, outstanding.





 

 

 

 





 


 

Table of Contents

TABLE OF CONTENTS





 



Page

PART I

Item 1. Financial Statements (Unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

32 

Item 4. Controls and Procedures

33 

PART II

Item 1. Legal Proceedings

34 

Item 1A. Risk Factors

34 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

34 

Item 3. Defaults Upon Senior Securities

34 

Item 4. Mine Safety Disclosures

34 

Item 5. Other Information

34 

Item 6. Exhibits

34 



 

Exhibit 10.4

Exhibit 10.5

Exhibit 31.1

 

Exhibit 31.2

 

Exhibit 32.1

 

Exhibit 32.2

 





 

2


 

Table of Contents

PART I — FINANCIAL INFORMATION



Item 1.  Financial Statements (Unaudited)



Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Operations





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

March 31,

 

March 31,

 

2016

 

2015

 

2017

 

2016

 

(Dollars in thousands, except per share amounts)

 

(Dollars in thousands, except per share amounts)

Net sales

 

$

277,451 

 

$

262,772 

 

$

320,555 

 

$

277,451 

Cost of sales

 

 

193,222 

 

 

192,137 

 

 

221,761 

 

 

193,222 

Gross profit

 

 

84,229 

 

 

70,635 

 

 

98,794 

 

 

84,229 

Selling, general and administrative expenses

 

 

52,646 

 

 

49,456 

 

 

58,958 

 

 

52,646 

Restructuring and impairment charges

 

 

881 

 

 

509 

 

 

3,018 

 

 

881 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

4,847 

 

 

3,150 

 

 

6,224 

 

 

4,847 

Interest earned

 

 

(85)

 

 

(37)

 

 

(180)

 

 

(85)

Foreign currency losses, net

 

 

1,611 

 

 

1,728 

Miscellaneous (income) expense, net

 

 

(3,453)

 

 

399 

Foreign currency (gains) losses, net

 

 

(314)

 

 

1,611 

Loss on extinguishment of debt

 

 

3,905 

 

 

 —

Miscellaneous income, net

 

 

(2,076)

 

 

(3,453)

Income before income taxes

 

 

27,782 

 

 

15,430 

 

 

29,259 

 

 

27,782 

Income tax expense

 

 

8,018 

 

 

2,459 

 

 

7,138 

 

 

8,018 

Income from continuing operations

 

 

19,764 

 

 

12,971 

 

 

22,121 

 

 

19,764 

Loss from discontinued operations, net of income taxes

 

 

(29,494)

 

 

(3,956)

 

 

 —

 

 

(29,494)

Net (loss) income

 

 

(9,730)

 

 

9,015 

Less: Net income (loss) attributable to noncontrolling interests

 

 

236 

 

 

(1,955)

Net (loss) income attributable to Ferro Corporation common shareholders

 

$

(9,966)

 

$

10,970 

Net income (loss)

 

 

22,121 

 

 

(9,730)

Less: Net income attributable to noncontrolling interests

 

 

223 

 

 

236 

Net income (loss) attributable to Ferro Corporation common shareholders

 

$

21,898 

 

$

(9,966)

Earnings (loss) per share attributable to Ferro Corporation common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.23 

 

$

0.17 

 

$

0.26 

 

$

0.23 

Discontinued operations

 

 

(0.35)

 

 

(0.05)

 

 

 —

 

 

(0.35)

 

$

(0.12)

 

$

0.12 

 

$

0.26 

 

$

(0.12)

Diluted earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.23 

 

$

0.17 

 

$

0.26 

 

$

0.23 

Discontinued operations

 

 

(0.35)

 

 

(0.04)

 

 

 —

 

 

(0.35)

 

$

(0.12)

 

$

0.13 

 

$

0.26 

 

$

(0.12)











See accompanying notes to condensed consolidated financial statements.



 

3


 

Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015



 

(Dollars in thousands)

Net (loss) income

 

$

(9,730)

 

$

9,015 

Other comprehensive loss, net of income tax:

 

 

 

 

 

 

Foreign currency translation (loss)

 

 

(1,678)

 

 

(37,796)

Postretirement benefit liabilities gain

 

 

268 

 

 

16 

Other comprehensive (loss), net of income tax

 

 

(1,410)

 

 

(37,780)

Total comprehensive (loss)

 

 

(11,140)

 

 

(28,765)

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

268 

 

 

(3,093)

Comprehensive (loss) attributable to Ferro Corporation

 

$

(11,408)

 

$

(25,672)



 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2017

 

2016



 

(Dollars in thousands)

Net income (loss)

 

$

22,121 

 

$

(9,730)

Other comprehensive income (loss), net of income tax:

 

 

 

 

 

 

Foreign currency translation income (loss)

 

 

7,211 

 

 

(1,678)

Postretirement benefit liabilities (loss) gain

 

 

(4)

 

 

268 

Other comprehensive income (loss), net of income tax

 

 

7,207 

 

 

(1,410)

Total comprehensive income (loss)

 

 

29,328 

 

 

(11,140)

Less: Comprehensive income attributable to noncontrolling interests

 

 

263 

 

 

268 

Comprehensive income (loss) attributable to Ferro Corporation

 

$

29,065 

 

$

(11,408)



See accompanying notes to condensed consolidated financial statements.



 

4


 

Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

2016

 

2015

 

2017

 

2016

 

(Dollars in thousands)

 

(Dollars in thousands)

ASSETS

ASSETS

ASSETS

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,865 

 

$

58,380 

 

$

92,829 

 

$

45,582 

Accounts receivable, net

 

 

261,435 

 

 

231,970 

 

 

289,476 

 

 

259,687 

Inventories

 

 

195,416 

 

 

184,854 

 

 

250,590 

 

 

229,847 

Deferred income taxes

 

 

11,964 

 

 

12,088 

Other receivables

 

 

33,247 

 

 

34,088 

 

 

38,280 

 

 

37,814 

Other current assets

 

 

10,613 

 

 

15,695 

 

 

10,183 

 

 

9,087 

Current assets held-for-sale

 

 

19,973 

 

 

16,215 

Total current assets

 

 

588,513 

 

 

553,290 

 

 

681,358 

 

 

582,017 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

258,752 

 

 

260,429 

 

 

257,993 

 

 

262,026 

Goodwill

 

 

150,564 

 

 

145,669 

 

 

148,203 

 

 

148,296 

Intangible assets, net

 

 

111,429 

 

 

106,633 

 

 

136,030 

 

 

137,850 

Deferred income taxes

 

 

88,995 

 

 

87,385 

 

 

109,555 

 

 

106,454 

Other non-current assets

 

 

48,298 

 

 

48,767 

 

 

51,094 

 

 

47,126 

Non-current assets held-for-sale

 

 

226 

 

 

23,178 

Total assets

 

$

1,246,777 

 

$

1,225,351 

 

$

1,384,233 

 

$

1,283,769 

LIABILITIES AND EQUITY

LIABILITIES AND EQUITY

LIABILITIES AND EQUITY

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Loans payable and current portion of long-term debt

 

$

11,148 

 

$

7,446 

 

$

16,632 

 

$

17,310 

Accounts payable

 

 

130,444 

 

 

120,380 

 

 

139,880 

 

 

127,655 

Accrued payrolls

 

 

24,922 

 

 

28,584 

 

 

29,858 

 

 

35,859 

Accrued expenses and other current liabilities

 

 

59,917 

 

 

54,664 

 

 

70,433 

 

 

65,203 

Current liabilities held-for-sale

 

 

6,968 

 

 

7,156 

Total current liabilities

 

 

233,399 

 

 

218,230 

 

 

256,803 

 

 

246,027 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

493,212 

 

 

466,108 

 

 

618,335 

 

 

557,175 

Postretirement and pension liabilities

 

 

150,123 

 

 

148,249 

 

 

163,279 

 

 

162,941 

Other non-current liabilities

 

 

64,911 

 

 

66,990 

 

 

59,489 

 

 

62,594 

Non-current liabilities held-for-sale

 

 

1,592 

 

 

1,493 

Total liabilities

 

 

943,237 

 

 

901,070 

 

 

1,097,906 

 

 

1,028,737 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Ferro Corporation shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 83.2 million and 84.0 million shares outstanding at March 31, 2016, and December 31, 2015, respectively

 

 

93,436 

 

 

93,436 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 83.6 million and 83.4 million shares outstanding at March 31, 2017, and December 31, 2016, respectively

 

 

93,436 

 

 

93,436 

Paid-in capital

 

 

306,824 

 

 

314,854 

 

 

303,304 

 

 

306,566 

Retained earnings

 

 

125,541 

 

 

135,507 

 

 

136,588 

 

 

114,690 

Accumulated other comprehensive loss

 

 

(62,760)

 

 

(61,318)

 

 

(99,476)

 

 

(106,643)

Common shares in treasury, at cost

 

 

(167,591)

 

 

(166,020)

 

 

(155,707)

 

 

(160,936)

Total Ferro Corporation shareholders’ equity

 

 

295,450 

 

 

316,459 

 

 

278,145 

 

 

247,113 

Noncontrolling interests

 

 

8,090 

 

 

7,822 

 

 

8,182 

 

 

7,919 

Total equity

 

 

303,540 

 

 

324,281 

 

 

286,327 

 

 

255,032 

Total liabilities and equity

 

$

1,246,777 

 

$

1,225,351 

 

$

1,384,233 

 

$

1,283,769 



See accompanying notes to condensed consolidated financial statements.



 

5


 

Table of Contents

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

 

Shares

 

Amount

 

Stock

 

Capital

 

Earnings

 

(Loss)

 

Interests

 

Equity

 

Shares

 

Amount

 

Stock

 

Capital

 

Earnings

 

(Loss)

 

Interests

 

Equity

 

(Dollars in thousands)

 

(In thousands)

Balances at December 31, 2014

 

6,445 

 

$

(136,058)

 

$

93,436 

 

$

317,404 

 

$

71,407 

 

$

(21,805)

 

$

11,632 

 

$

336,016 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,970 

 

 

 —

 

 

(1,955)

 

 

9,015 

Other comprehensive (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(36,642)

 

 

(1,138)

 

 

(37,780)

Stock-based compensation transactions

 

(269)

 

 

7,559 

 

 

 —

 

 

(5,516)

 

 

 —

 

 

 —

 

 

 —

 

 

2,043 

Balances at March 31, 2015

 

6,176 

 

 

(128,499)

 

 

93,436 

 

 

311,888 

 

 

82,377 

 

 

(58,447)

 

 

8,539 

 

 

309,294 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

 

9,431 

 

 

(166,020)

 

 

93,436 

 

 

314,854 

 

 

135,507 

 

 

(61,318)

 

 

7,822 

 

 

324,281 

 

9,431 

 

$

(166,020)

 

$

93,436 

 

$

314,854 

 

$

135,507 

 

$

(61,318)

 

$

7,822 

 

$

324,281 

Net (loss) income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,966)

 

 

 —

 

 

236 

 

 

(9,730)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,966)

 

 

 —

 

 

236 

 

 

(9,730)

Other comprehensive (loss) income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,442)

 

 

32 

 

 

(1,410)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,442)

 

 

32 

 

 

(1,410)

Purchase of treasury stock

 

1,175 

 

 

(11,429)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,429)

 

1,175 

 

 

(11,429)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,429)

Stock-based compensation transactions

 

(352)

 

 

9,858 

 

 

 —

 

 

(8,030)

 

 

 —

 

 

 —

 

 

 —

 

 

1,828 

 

(352)

 

 

9,858 

 

 

 —

 

 

(8,030)

 

 

 —

 

 

 —

 

 

 —

 

 

1,828 

Balances at March 31, 2016

 

10,254 

 

$

(167,591)

 

$

93,436 

 

$

306,824 

 

$

125,541 

 

$

(62,760)

 

$

8,090 

 

$

303,540 

 

10,254 

 

 

(167,591)

 

 

93,436 

 

 

306,824 

 

 

125,541 

 

 

(62,760)

 

 

8,090 

 

 

303,540 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

9,996 

 

 

(160,936)

 

 

93,436 

 

 

306,566 

 

 

114,690 

 

 

(106,643)

 

 

7,919 

 

 

255,032 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

21,898 

 

 

 —

 

 

223 

 

 

22,121 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,167 

 

 

40 

 

 

7,207 

Stock-based compensation transactions

 

(195)

 

 

5,229 

 

 

 —

 

 

(3,262)

 

 

 —

 

 

 —

 

 

 —

 

 

1,967 

Balances at March 31, 2017

 

9,801 

 

$

(155,707)

 

$

93,436 

 

$

303,304 

 

$

136,588 

 

$

(99,476)

 

$

8,182 

 

$

286,327 



See accompanying notes to condensed consolidated financial statements.



 

6


 

Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

March 31,

 

March 31,

 

2016

 

2015

 

2017

 

2016

 

(Dollars in thousands)

 

(Dollars in thousands)

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

$

(10,161)

 

$

(10,269)

Net cash provided by (used in) operating activities

 

$

1,630 

 

$

(10,161)

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for property, plant and equipment and other long lived assets

 

 

(7,365)

 

 

(14,879)

 

 

(6,766)

 

 

(7,365)

Proceeds from sale of assets

 

 

3,586 

 

 

91 

 

 

 

 

3,586 

Business acquisitions, net of cash acquired

 

 

(7,909)

 

 

(5,479)

 

 

 —

 

 

(7,909)

Net cash used in investing activities

 

 

(11,688)

 

 

(20,267)

 

 

(6,764)

 

 

(11,688)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Net borrowings (repayments) under loans payable

 

 

3,561 

 

 

(2,567)

Proceeds from revolving credit facility

 

 

117,834 

 

 

 —

Principal payments on revolving credit facility

 

 

(40,212)

 

 

 —

Principal payments on term loan facility

 

 

(50,750)

 

 

(750)

Net (repayments) borrowings under loans payable

 

 

(3,985)

 

 

3,561 

Proceeds from revolving credit facility, maturing 2019

 

 

15,628 

 

 

117,834 

Principal payments on revolving credit facility, maturing 2019

 

 

(327,183)

 

 

(40,212)

Proceeds from term loan facility, maturing 2024

 

 

623,827 

 

 

 —

Principal payments on term loan facility, maturing 2021

 

 

(243,250)

 

 

(50,750)

Payment of debt issuance costs

 

 

(301)

 

 

 —

 

 

(12,712)

 

 

(301)

Purchase of treasury stock

 

 

(11,429)

 

 

 —

 

 

 —

 

 

(11,429)

Other financing activities

 

 

497 

 

 

769 

 

 

(390)

 

 

497 

Net cash provided by (used in) financing activities

 

 

19,200 

 

 

(2,548)

Net cash provided by financing activities

 

 

51,935 

 

 

19,200 

Effect of exchange rate changes on cash and cash equivalents

 

 

134 

 

 

(2,241)

 

 

446 

 

 

134 

Decrease in cash and cash equivalents

 

 

(2,515)

 

 

(35,325)

Increase (decrease) in cash and cash equivalents

 

 

47,247 

 

 

(2,515)

Cash and cash equivalents at beginning of period

 

 

58,380 

 

 

140,500 

 

 

45,582 

 

 

58,380 

Cash and cash equivalents at end of period

 

$

55,865 

 

$

105,175 

 

$

92,829 

 

$

55,865 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

4,763 

 

$

3,409 

 

$

6,535 

 

$

4,763 

Income taxes

 

$

2,669 

 

$

6,141 

 

$

4,097 

 

$

2,669 



 

See accompanying notes to condensed consolidated financial statements.



 

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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, 2015.2016.



The Company owned 51% of an operating affiliateAs discussed in Venezuela that was a consolidated subsidiary of Ferro.  DuringNote 3, in the fourththird quarter of 2015,2016, we sold our interest incompleted the operating affiliate in Venezuela for a cash purchase price of $0.5 million. During the first quarter of 2015, the Ministry of Economy, Finance, and Public Banking, and the Central Bank of Venezuela published a new exchange rate, the Foreign Exchange Marginal System (“SIMADI”). We concluded in March 2015 that SIMADI was the most relevant exchange mechanism available, and began using SIMADI to translate the local currency financial statements.  As a result of the revaluation, we recognized a $1.9 million foreign currency loss and a $2.6 million loss due to lower of cost or market charges against our inventory, prior to the adjustment for losses allocated to our noncontrolling interest partner, which is recorded within Foreign currency losses, net and Cost of sales, respectively, within our condensed consolidated statement of operations for the three months ended March 31, 2015.

During the second quarter of 2014, substantially all of the assets and liabilitiesdisposition of the Europe-based Polymer Additives business were classified as held-for-sale.  As further discussed in Note 3, we have classified the assets and liabilities as held-for-sale in the accompanying condensed consolidated balance sheets and have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.the three months ended March 31, 2016.

During the first quarter of 2017, the Company renamed the Pigments, Powders and Oxides segment “Color Solutions” to align with our go-to-market strategy.



Operating results for the three months ended March 31, 2016,2017, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2016.2017.  





2.    Recent Accounting Pronouncements

NewRecently Adopted Accounting Standards

In May 2014,March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09,2016-09, RevenueCompensation – Stock Compensation: (Topic 718): Improvements to Employee Share-Based Payment Accounting.  ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This new guidance requires all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled. Cash flow related to excess tax benefits will no longer be classified as a financing activity on the statement of cash flows but will be presented with all other income tax cash flows as an operating activity. The new guidance also provides an accounting policy election to account for forfeitures as they occur.  Finally, the updated standard also allows the Company to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and clarifies that all cash tax payments made on an employee’s behalf for withheld shares should be presented as financing activities on the statement of cash flows.

The Company adopted ASU 2016-09, in the first quarter of 2017.  As a result of the adoption, tax benefits of $0.3 million were recorded in income tax expense. The Company has elected to account for forfeitures as they occur.  In addition, the Company elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively.  The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact on the statements of cash flows since the Company has historically presented such payments as financing activities. 

NewAccounting Standards

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits: (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.  ASU 2017-07 requires that an employer report the service cost component in the same line item as other compensation costs arising from Contracts with Customers: Topic 606services rendered during the period. The other components of net benefit costs are to be presented in the income statement separately from the service costs component and outside a

8


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subtotal of income from operations.  Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement.  This pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company is in the process of assessing the impact that the adoption of this ASU replaces nearly allwill have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: (Topic 350): Simplifying the Test for Goodwill Impairment.  ASU 2017-04 is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This pronouncement is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations: (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. This pronouncement is effective for the annual periods beginning after December 15, 2017, including interim periods within those fiscal years.  The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, Income Taxes: (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.  ASU 2016-16 is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory and requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This pronouncement is effective for the annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted.  The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow: (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  ASU 2016-15 is intended to address eight specific cash flow issues with the objective of reducing the existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment.diversity in practice.  This standardpronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, beginning after December 15, 2017.years. Early adoption is permitted.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.



In November 2015, the FASB issued ASU 2015-17, Income Taxes: Topic 740: Balance Sheet Classification of Deferred Taxes.  ASU 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position.  This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted.  ASU 2015-17 may be applied either on a retrospective or prospective basis.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.

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In February 2016, the FASB issued ASU 2016-02, Leases: Topic 842.(Topic 842).  ASU 2016-02 requires companies to recognize a lease liability and asset on the balance sheet for operating leases with a term greater than one year.  This pronouncement is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.



In March 2016,May 2014, the FASB issued ASU 2016-09,2014-09, Compensation – Stock Compensation: Topic 718: Improvements to Employee Share-Based Payment Accounting.Revenue from Contracts with Customers: (Topic 606). This ASU 2016-09 is intended to simplify several aspectsreplaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.which will require significant judgment. This pronouncementstandard is effective for annual periods beginning after December 15, 2016,fiscal years, and interim periods within those annual periods.  Early adoptionfiscal years, beginning after December 15, 2017.  Our evaluation of ASU 2014-09 is permitted.  The Company is in the process of assessing the impact the adoption of thisongoing.  While we anticipate some changes to revenue recognition for certain customer contracts, we do not currently believe ASU 2014-09 will have a material effect on our condensed consolidated financial statements.



No other new accounting pronouncements issued or with effective dates during fiscal 20162017 had or are expected to have a material impact of the Company’s condensed consolidated financial statements.



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3.    Discontinued Operations



During the second quarter of 2014, we commenced a process to market for sale all of the assets within our Europe-based Polymer Additives business, including the Antwerp, Belgium dibenzoates manufacturing assets, and related Polymer Additives European headquarters and lab facilities.business.  We determined that the criteria to classify these assets as held-for-sale under ASC Topic 360, Property, Plant and Equipment, have beenwere met. On August 22, 2016, we completed the disposition of the Europe-based Polymer Additives business to Plahoma Two AG, an affiliate of the LIVIA Group.  We have classified the Europe-based Polymer Additives assets and liabilities as held-for-sale in the accompanying condensed consolidated balance sheets and have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented. Though the sale process of these assets has taken longer than initially expected, we continue to believe that it is probable that we will sell the Europe-based Polymer Additives assets within a year.three months ended March 31, 2016.  



The table below summarizes results for the Europe-based Polymer Additives assets, for the three months ended March 31, 2016, and 2015, which are reflected in our condensed consolidated statements of operations as discontinued operations.  Interest expense has been allocated to the discontinued operations based on the ratio of net assets of each business to consolidated net assets excluding debt.







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2016

 

2015



 

(Dollars in thousands)

Net sales

 

$

7,750 

 

$

11,899 

Cost of sales

 

 

12,030 

 

 

14,555 

Gross loss

 

 

(4,280)

 

 

(2,656)

Selling, general and administrative expenses

 

 

1,003 

 

 

1,219 

Restructuring and impairment charges

 

 

24,059 

 

 

 —

Interest expense

 

 

237 

 

 

113 

Gain on sale of business

 

 

(539)

 

 

 —

Miscellaneous expense (income), net

 

 

121 

 

 

(32)

(Loss) from discontinued operations before income taxes

 

 

(29,161)

 

 

(3,956)

Income tax expense

 

 

333 

 

 

 —

(Loss) from discontinued operations, net of income taxes

 

$

(29,494)

 

$

(3,956)

Three Months Ended

March 31, 2016

(Dollars in thousands)

Net sales

$

7,750 

Cost of sales

12,030 

Gross loss

(4,280)

Selling, general and administrative expenses

1,003 

Restructuring and impairment charges

24,059 

Interest expense

237 

Miscellaneous income

(418)

Loss from discontinued operations before income taxes

(29,161)

Income tax expense

333 

Loss from discontinued operations, net of income taxes

$

(29,494)





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The following table summarizes the assets and liabilities which are classified as held-for-sale at March 31, 2016, and December 31, 2015:





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31, 2016

 

December 31, 2015



 

(Dollars in thousands)

Accounts receivable, net

 

$

4,352 

 

$

4,028 

Inventories

 

 

11,199 

 

 

9,733 

Other current assets

 

 

4,422 

 

 

2,454 

Current assets held-for-sale

 

 

19,973 

 

 

16,215 

Property, plant and equipment, net

 

 

 —

 

 

22,973 

Other non-current assets

 

 

226 

 

 

205 

Total assets held-for-sale

 

$

20,199 

 

$

39,393 



 

 

 

 

 

 

Accounts payable

 

$

6,339 

 

$

5,736 

Accrued expenses and other current liabilities

 

 

629 

 

 

1,420 

Current liabilities held-for-sale

 

 

6,968 

 

 

7,156 

Other non-current liabilities

 

 

1,592 

 

 

1,493 

Total liabilities held-for-sale

 

$

8,560 

 

$

8,649 



Included within non-current assets is a deferred tax asset of $36.6 million at March 31, 2016, and $25.0 million at December 31, 2015, which were fully reserved for at both periods.



4.    Acquisitions

Ferer

Cappelle

On January 5,December 9, 2016, the Company completed the purchase of 100% of the equity of privately held Istanbul-based Ferer Dis Ticaret Ve Kimyasallar Anonim Sirketi A.S. (“Ferer”) on a cash-free and debt-free basis for approximately $9.4 million in cash, subject to customary working capital and other adjustments. The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of March 31, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $3.2 million of amortizable intangible assets, $4.3 million of goodwill, $0.6 million of personal and real property, $0.6 million of a deferred tax liability related to the amortizable intangible assets, and $1.9 million of net working capital on the condensed consolidated balance sheet. 

Al Salomi

On November 17, 2015, the Company acquired 100% of the equityshare capital of Egypt-based tileBelgium-based Cappelle Pigments NV (“Cappelle”), a leader in specialty, high-performance inorganic and organic pigments used in coatings, manufacturer Al Salomiinks and plastics, for Frits and Glazes (“Al Salomi”) for EGP 307€40.0 million (approximately $38.2$42.4 million), including the assumption of debt..  The acquired business contributed net sales of $5.6$19.0 million and net income attributable to Ferro Corporation of $0.6 million for the three months ended March 31, 2016.2017.  

The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of March 31, 2016,2017, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $15.0$28.6 million of amortizable intangible assets, $14.3 million of goodwill, $10.7net working capital, $24.1 million of personal and real property, $4.8$10.3 million of debt,  $3.5 million of goodwill and $3.5 million of a deferred tax liability related to the amortizable intangible assets, and $3.0 million of net working capital on the condensed consolidated balance sheet.

Nubiola

ESL

On July 7, 2015,October 31, 2016, the Company acquired 100% of the entire share capitalmembership interest of Corporación Química Vhem, S.L.Electro-Science Laboratories, Inc. (“ESL”), Dibon USA, LLCa leader in electronic packaging materials, for $78.5 million.  ESL is headquartered in King of Prussia, Pennsylvania.  The acquisition of ESL enhances the Company’s position in the electronic packaging materials space with complementary products, and Ivoryprovides a platform for growth in our Performance Colors and Glass segment.  ESL produces thick-film pastes and ceramics tape systems that enable important functionality in a wide variety of industrial and consumer applications.  The acquired business contributed net sales of $10.8 million and net income attributable to Ferro Corporation S.A. (together with their direct and indirect subsidiaries, “Nubiola”) on a cash-free and debt-free basisof $0.8 million for €167 millionthe three months ended March 31, 2017. The Company

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(approximately $184.2 million).  Theincurred acquisition was funded with excess cashcosts for the three months ended March 31, 2017, of $0.3 million, which is included in Selling, general and borrowings under the Company’s existing revolving credit facility.  See Note 8 for additional detail on the revolving credit facility.  Nubiola is a worldwide produceradministrative expenses in our condensed consolidated statements of specialty inorganic pigments and the world’s largest producer of Ultramarine Blue. Nubiola also produces specialty Iron Oxides, Chrome Oxide Greens and Corrosion Inhibitors. Nubiola has production facilities in Spain, Colombia, Romania, and India and a joint venture in China.operations.



The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of March 31, 2016,2017, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company.

The following table summarizes the preliminary purchase price allocations:

July 7, 2015

(Dollars in thousands)

Net working capital (1)

$

46,642 

Cash and equivalents

19,966 

Personal property

39,444 

Real property

28,510 

Intangible assets

33,152 

Other assets and liabilities

(22,660)

Goodwill

39,151 

Net assets acquired

$

184,205 

(1)

Net working capital is defined as current assets, less cash, less current liabilities, and includes an estimate of potential transactional adjustments.

The acquired business contributed net sales of $33.4 million and net income attributable to Ferro Corporation of $5.2 million for the three months ended March 31, 2016.  The Company incurred acquisition related costs of $0.2 million for the three months ended March 31, 2016, which is recorded within Selling, general and administrative expenses, within our condensed consolidated statements of operations. 

The estimated fair value of the receivables acquired is $24.5 million, with a gross contractual amount of $25.2 million. The Company preliminarily recorded acquired$39.7 million of intangible assets, subject to amortization of $27.0 million, which is comprised of $10.3$19.0 million of customer relationships and $16.7goodwill, $18.9 million of technology/know-how, which will be amortized over 20 yearsnet working capital, $2.9 million of personal and 15 years, respectively.  The Company preliminarily recorded acquired indefinite-lived intangible assetsreal property and $2.0 million of $6.2 milliona deferred tax liability related to trade names and trademarks.  Goodwill is calculated as the excess ofamortizable intangibles assets on the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition and is a result of anticipated synergies.  Goodwill is not expected to be deductible for tax purposes.    

The following unaudited pro froma information represents thecondensed consolidated results of the Company as if the Nubiola acquisition occurred as of January 1, 2014:balance sheet.



Delta Performance Products

Three months ended March 31, 2015

(unaudited)

(In thousands, except per share amounts)

Net sales

$

295,822 

Net income attributable to Ferro Corporation common shareholders

$

16,184 

Net earnings per share attributable to Ferro Corporation common shareholders - Basic

$

0.19 

Net earnings per share attributable to Ferro Corporation common shareholders - Diluted

$

0.18 



The unaudited pro forma information has been adjusted with the respect to certain aspects of the acquisition to reflect the following:

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·

Additional depreciation and amortization expenses that would have been recognized assuming fair value adjustments to the existing Nubiola assets acquired, including intangible assets and fixed assets.

·

Elimination of revenue and costs of goods sold for sales from Nubiola to the Company, which would be eliminated as intercompany transactions for Nubiola and the Company on a consolidated basis.

·

Increased interest expense due to additional borrowings to fund the acquisition.

·

Acquisition-related costs, which were included in the Company’s results.

·

Adjustments for the income tax effect of the pro forma adjustments related to the acquisition.

Thermark

In February 2015,On August 1, 2016, the Company acquired TherMark Holdings, Inc., a leader in laser marking technology,certain assets of Delta Performance Products, LLC, for a cash purchase price of $5.5$4.4 million. The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of March 31, 2017, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $4.6$3.2 million of amortizable intangible assets, $2.5$0.6 million of net working capital, $0.4 million of goodwill $1.7and $0.2 million of a deferred tax asset on the condensed consolidated balance sheet.

Pinturas

On June 1, 2016, the Company acquired 100% of the equity of privately held Pinturas Benicarló, S.L. (“Pinturas”) for €16.5 million in cash (approximately $18.4 million). The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of March 31, 2017, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $8.8 million of amortizable intangible assets, $7.7 million of net working capital, $3.9 million of goodwill, $2.7 million of a deferred tax liability related to the amortizable intangible assets, and $0.1$0.7 million of personal and real property on the condensed consolidated balance sheet. 

Ferer

On January 5, 2016, the Company completed the purchase of 100% of the equity of privately held Istanbul-based Ferer Dis Ticaret Ve Kimyasallar Anonim Sirketi A.S. (“Ferer”) on a cash-free and debt-free basis for approximately $9.4 million in cash. The information included herein has been prepared based on the allocation of the purchase price using the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. The Company recorded $4.5 million of goodwill, $3.3 million of amortizable intangible assets, $1.7 million of net working capital, $0.7 million of a deferred tax liability related to the amortizable intangible assets and $0.6 million of personal and real property on the condensed consolidated balance sheet. 





5.    Inventories





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

2016

 

2015

 

2017

 

2016

 

(Dollars in thousands)

 

(Dollars in thousands)

Raw materials

 

$

60,060 

 

$

56,291 

 

$

84,913 

 

$

72,943 

Work in process

 

 

35,921 

 

 

33,099 

 

 

43,267 

 

 

38,859 

Finished goods

 

 

99,435 

 

 

95,464 

 

 

122,410 

 

 

118,045 

Total inventories

 

$

195,416 

 

$

184,854 

 

$

250,590 

 

$

229,847 



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In the production of some of our products, we use precious metals, some of 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 $0.2 million for the three months ended March 31, 20162017 and 2015.2016. We had on-hand precious metals owned by participants in our precious metals consignment program of $23.5$31.9 million at March 31, 2016,2017, and $20.5$28.7 million at December 31, 2015,2016, measured at fair value based on market prices for identical assets and net of credits.



6.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $435.1$452.2 million at March 31, 2016,2017, and $421.3$439.4 million at December 31, 2015.2016. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $2.5 million at March 31, 2017, and $3.5 million at March 31, 2016, and $4.02016. 

We recorded a $3.9 million atgain on sale of a closed site in Australia which was recorded in Miscellaneous (income), net in our condensed consolidated statements of operations for the three months ended March 31, 2015. 2016.



As discussed in Note 3, - Discontinued Operations, during the second quarter of 2014, our Europe-based Polymer Additives assets werehad been classified as held-for-sale under ASC Topic 360, Property, Plant and Equipment.Equipment until the ultimate sale of the business in August 2016. As such, at each historical reporting date, these assets arewere tested for impairment comparing the fair value of the assets, less costs to sell, to the carrying value.  The fair value was determined using both the market approach and income approach, utilizing Level 3 measurements within the fair value hierarchy, which indicated the fair value, less costs to sell, was less than the carrying value.  As a resultvalue during the first quarter of the current quarter analysis, the assets had a carrying value that exceeded fair value,2016, resulting in an impairment charge of $24.1 million, duringrepresenting the three months ended March 31, 2016.remaining carrying value of long-lived assets at that reporting date.  The impairment charge of $24.1 million is included in Loss from discontinued operations, net of income taxes in our condensed consolidated statements of operations for the three months ended March 31, 2016.    



The following table presents information about the Company's impairment charges on assets that were measured on a fair value basis for the three months ended March 31, 2016, and for the year ended December 31, 2015.  The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine the fair value:

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Fair Value Measurements Using

 

Total

Description

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(Losses)



 

(Dollars in thousands)

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

11,639 

 

$

11,639 

 

$

(24,059)

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

33,711 

 

$

33,711 

 

$

(11,792)

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.



7.   Goodwill and Other Intangible Assets 

Details and activity in the Company’s goodwill by segment follow:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Pigments,

 

Performance

 

 



 

Performance

 

Powders and

 

Colors and

 

 



 

Coatings

 

Oxides

 

Glass

 

Total



 

(Dollars in thousands)

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

$

88,753 

 

$

48,794 

 

$

53,391 

 

$

190,938 

Accumulated impairment losses

 

 

(45,269)

 

 

 —

 

 

 —

 

 

(45,269)



 

 

43,484 

 

 

48,794 

 

 

53,391 

 

 

145,669 

Acquisitions

 

 

 —

 

 

 —

 

 

4,328 

(1)

 

4,328 

Foreign currency adjustments

 

 

(715)

 

 

656 

 

 

626 

 

 

567 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

 

88,038 

 

 

49,450 

 

 

58,345 

 

 

195,833 

Accumulated impairment losses

 

 

(45,269)

 

 

 —

 

 

 —

 

 

(45,269)



 

$

42,769 

 

$

49,450 

 

$

58,345 

 

$

150,564 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Performance

 

 



 

Performance

 

Color

 

Colors and

 

 



 

Coatings

 

Solutions

 

Glass

 

Total



 

(Dollars in thousands)

Goodwill, net at December 31, 2016

 

$

28,090 

 

$

40,421 

 

$

79,785 

 

$

148,296 

Acquisitions

 

 

 —

 

 

 —

 

 

(854)

1

 

(854)

Foreign currency adjustments

 

 

279 

 

 

211 

 

 

271 

 

 

761 

Goodwill, net at March 31, 2017

 

$

28,369 

 

$

40,632 

 

$

79,202 

 

$

148,203 

(1)

During the first quarter of 2017, the Company recorded a purchase price adjustment within the measurement period for goodwill related to the ESL acquisition.

 

(1) During the first quarter of 2016, the Company recorded goodwill related to the Ferer acquisition.  Refer to Note 4 for additional details.

Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition.



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

(Dollars in thousands)

Goodwill, gross

 

$

206,670 

 

$

206,763 

Accumulated impairment losses

 

 

(58,467)

 

 

(58,467)

Goodwill, net

 

$

148,203 

 

$

148,296 

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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 March 31, 2016,2017, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.

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Amortizable intangible assets consisted of the following:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

2017

 

2016

 

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

Gross amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

 

 

 

$

5,291 

 

$

5,229 

 

$

5,170 

 

$

5,147 

Land rights

 

 

 

 

 

4,967 

 

 

4,947 

 

 

4,770 

 

 

4,746 

Technology/know-how and other

 

 

 

 

 

69,150 

 

 

66,558 

 

 

86,028 

 

 

84,837 

Customer relationships

 

 

 

 

 

50,228 

 

 

46,320 

 

 

80,505 

 

 

80,153 

Total gross amortizable intangible assets

 

 

 

 

 

129,636 

 

 

123,054 

 

 

176,473 

 

 

174,883 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

 

 

 

 

(4,983)

 

 

(4,880)

 

 

(5,023)

 

 

(4,981)

Land rights

 

 

 

 

 

(2,705)

 

 

(2,671)

 

 

(2,733)

 

 

(2,698)

Technology/know-how and other

 

 

 

 

 

(17,497)

 

 

(16,473)

 

 

(37,051)

 

 

(34,775)

Customer relationships

 

 

 

 

 

(3,287)

 

 

(2,234)

 

 

(6,479)

 

 

(5,311)

Total accumulated amortization

 

 

 

 

 

(28,472)

 

 

(26,258)

 

 

(51,286)

 

 

(47,765)

Amortizable intangible assets, net

 

 

 

 

$

101,164 

 

$

96,796 

 

$

125,187 

 

$

127,118 



Indefinite-lived intangible assets consisted of the following:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

2017

 

2016

 

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

Indefinite-lived intangibles assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade names and trademarks

 

 

 

 

$

10,265 

 

$

9,837 

 

 

$

10,843 

 

$

10,732 

















8.    Debt

Loans payable and current portion of long-term debt consisted of the following:





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)

Loans payable

 

$

6,492 

 

$

2,749 

Current portion of long-term debt

 

 

4,656 

 

 

4,697 

Loans payable and current portion of long-term debt

 

$

11,148 

 

$

7,446 

Long-term debt consisted of the following:



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)



 

 

 

 

 

 

Term loan facility, net of unamortized issuance costs

 

$

241,171 

 

$

291,717 

Revolving credit facility

 

 

247,621 

 

 

170,000 

Capital lease obligations

 

 

4,100 

 

 

4,478 

Other notes

 

 

4,976 

 

 

4,610 

Total long-term debt

 

 

497,868 

 

 

470,805 

Current portion of long-term debt

 

 

(4,656)

 

 

(4,697)

Long-term debt, less current portion

 

$

493,212 

 

$

466,108 



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

(Dollars in thousands)

Loans payable

 

$

8,029 

 

$

11,452 

Current portion of long-term debt

 

 

8,603 

 

 

5,858 

Loans payable and current portion of long-term debt

 

$

16,632 

 

$

17,310 



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Long-term debt consisted of the following:



 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2017

 

2016



 

(Dollars in thousands)



 

 

 

 

 

 

Term loan facility, net of unamortized issuance costs, maturing 2021(1)

 

$

 —

 

$

239,530 

Term loan facility, net of unamortized issuance costs, maturing 2024(2)

 

 

615,594 

 

 

 —

Revolving credit facility, maturing 2019

 

 

 —

 

 

311,555 

Capital lease obligations

 

 

3,562 

 

 

3,720 

Other notes

 

 

7,782 

 

 

8,228 

Total long-term debt

 

 

626,938 

 

 

563,033 

Current portion of long-term debt

 

 

(8,603)

 

 

(5,858)

Long-term debt, less current portion

 

$

618,335 

 

$

557,175 

(1) The carrying value of the term loan facility, maturing 2021, is net of unamortized debt issuance costs of $3.7 million.

(2) The carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs of $8.2 million.

2014 Credit Facility

On July 31,In 2014, the Company entered into a credit facility (the “Credit Facility”) withthat was amended on January 25, 2016, and August 29, 2016, resulting in a  group of lenders to refinance the majority of its then outstanding debt.  The Credit Facility consisted of a $200$400 million secured revolving line of credit with a term of five years and a $300 million secured term loan facility with a term of seven years. On January 25, 2016,years from the Company amendedoriginal issuance date (the “Previous Credit Facility”) with a group of lenders that was replaced on February 14, 2017 by the Credit Facility by entering(as defined below).  For discussion of the Company’s Previous Credit Facility, refer to Note 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

In conjunction with the refinancing of the Previous Credit Facility, we recorded a charge of $3.9 million in connection with the write-off of unamortized issuance costs, which is recorded within Loss of extinguishment of debt in our condensed consolidated statement of operations for the three months ended March 31, 2017.

2017 Credit Facility

On February 14, 2017, the Company entered into the Incremental Assumption Agreementa new credit facility (the “Incremental Agreement”“Credit Facility”) with a group of lenders to increase therefinance its then outstanding credit facility debt and to provide liquidity for ongoing working capital requirements and general corporate purposes.

The Credit Facility consists of a $400 million secured revolving line of credit commitmentwith a term of five years, a $357.5 million secured term loan facility with a term of seven years and a €250 million secured euro term loan facility with a term of seven years. The term loans are payable in equal quarterly installments in an amount from $200 millionequal to $300 million.  The Company then used a portion0.25% of the increase in the revolving line of credit to repay $50 millionoriginal principal amount of the term loan facility. The Credit Facility was amended and a portion of the outstanding term loans, were repaid to increase the amount of total liquidity available under the Credit Facility and reduce the total cost of borrowings.

Principal payments on the term loan facility of $0.75 million quarterly, are payable commencing December 31, 2014, with the remaining balance due on the maturity date. At March 31, 2016,date thereof.  In addition, the Company had borrowed $245.5 million under the term loan facility,  taking into account all prior quarterly payments and the $50 million prepayment that was made in January 2016, atis required, on an annual ratebasis, to make a prepayment of 4.0%.  Thereterm loans until they are no additional borrowings available underfully paid and then to the term loan facility. revolving loans in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Credit Facility.

Subject to the satisfaction of certain conditions, the Company can request up to $100 million of additional commitments under the Credit Facility, though the lenders are not required to provide such additional commitments. In addition, up to $100 million of the revolving line of credit will be available to certain of the Company’s subsidiariesor term loans in the formaggregate principal amount of revolvingup to $250 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans denominated in Euros.and, certain additional debt subject to satisfaction of certain covenant levels.

Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the 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 mostcertain of the Company’s U.S. subsidiaries and 65% of most of the stock of certain of the Company’s first tierdirect foreign subsidiaries.

Interest Rate – Term Loan:Loans:  The interest rates applicable to the U.S. term loans will be, at the Company’s option, equal to either a base rate or a London Interbank Offered Rate (“LIBOR”)LIBOR rate plus, in both cases, an applicable margin.  The interest rates applicable to the Euro term loans will be a Euro Interbank Offered Rate (“EURIBOR”) rate plus an applicable margin.

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·

The base rate for U.S. term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) PNC’ssyndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%.  

·

The applicable margin for base rate loans is 2.25%1.50%.

·

The LIBOR rate will be set as quoted by Bloomberg andfor U.S. term loans shall not be less than 0.75% and the applicable margin for LIBOR rate U.S. term loans is 2.50%.

·

The EURIBOR rate for Euro term loans shall not be less than 0% and the applicable margin for LIBOREURIBOR rate loans is 3.25%2.75%.

·

For LIBOR rate term loans and EURIBOR 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 or EURIBOR rate, as applicable, for the corresponding duration.

At March 31, 2017, the Company had borrowed $357.5 million under the secured term loan facility at an interest rate of 3.54% and €250 million under the secured euro term loan facility at an interest rate of 2.75%. At March 31, 2017, there were no additional borrowings available under the term loan facilities.

Interest Rate – Revolving Credit Line:  The interest rates applicable to loans under the revolving credit line 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 at such time to (b) the Company’s consolidated EBITDA 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) PNC’ssyndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%.  

·

The applicable margin for base rate loans will vary between 1.50%0.75% and 2.00%1.75%.

·

The LIBOR rate willfor revolving loans shall not be set as quoted by Bloomberg for U.S. Dollars.

·

Theless than 0% and the applicable margin for LIBOR Rate Loansrate revolving loans will vary between 2.50%1.75% and 3.00%2.75%.

·

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 March 31, 2016, the Company had borrowed $247.6 million2017, there were no borrowings under the revolving credit facilities at an annual weighted average interest rate of 3.4%.    The borrowing on the revolving credit facilities was used to fund the acquisitions, the share repurchase program, and for other general business use.line. After reductions for outstanding letters of credit secured by these facilities, we had $48.0$395.6 million of additional borrowings available under the revolving credit facilities at March 31, 2016.2017.

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The 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 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 revolving credit facility, the Company is subject to a financial covenantscovenant regarding the Company’s outstanding net indebtedness and interest coverage ratios.

maximum leverage ratio.  If an event of default occurs, all amounts outstanding under the Credit Facility may be accelerated and become immediately due and payable.  At March 31, 2016,2017, we were in compliance with the covenants of the Credit Facility.

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 $7.9$33.1 million and $8.0$7.3 million at March 31, 20162017,  and December 31, 2015,2016, respectively. The unused portions of these lines provided additional liquidity of $6.6$32.0 million at March 31, 2016,2017, and $7.3$6.7 million at December 31, 2015.2016.





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Table of Contents

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:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

March 31, 2017

 

Carrying

 

Fair Value

 

Carrying

 

Fair Value

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

(Dollars in thousands)

 

(Dollars in thousands)

Cash and cash equivalents

 

$

55,865 

 

$

55,865 

 

$

55,865 

 

$

 —

 

$

 —

 

$

92,829 

 

$

92,829 

 

$

92,829 

 

$

 —

 

$

 —

Loans payable

 

 

(6,492)

 

 

(6,492)

 

 

 —

 

 

(6,492)

 

 

 —

 

 

(8,029)

 

 

(8,029)

 

 

 —

 

 

(8,029)

 

 

 —

Term loan facility(1)

 

 

(241,171)

 

 

(241,727)

 

 

 —

 

 

(241,727)

 

 

 —

Revolving credit facility

 

 

(247,621)

 

 

(247,132)

 

 

 —

 

 

(247,132)

 

 

 —

Term loan facility, maturing 2024(1)

 

 

(615,594)

 

 

(618,318)

 

 

 —

 

 

(618,318)

 

 

 —

Other long-term notes payable

 

 

(4,976)

 

 

(4,280)

 

 

 —

 

 

(4,280)

 

 

 —

 

 

(7,782)

 

 

(6,918)

 

 

 —

 

 

(6,918)

 

 

 —

Foreign currency forward contracts, net

 

 

(4,492)

 

 

(4,492)

 

 

 —

 

 

(4,492)

 

 

 —

 

 

237 

 

 

237 

 

 

 —

 

 

237 

 

 

 —





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

December 31, 2016

 

Carrying

 

Fair Value

 

Carrying

 

Fair Value

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

(Dollars in thousands)

 

(Dollars in thousands)

Cash and cash equivalents

 

$

58,380 

 

$

58,380 

 

$

58,380 

 

$

 —

 

$

 —

 

$

45,582 

 

$

45,582 

 

$

45,582 

 

$

 —

 

$

 —

Loans payable

 

 

(2,749)

 

 

(2,749)

 

 

 —

 

 

(2,749)

 

 

 —

 

 

(11,452)

 

 

(11,452)

 

 

 —

 

 

(11,452)

 

 

 —

Term loan facility(1)

 

 

(291,717)

 

 

(297,552)

 

 

 —

 

 

(297,552)

 

 

 —

Revolving credit facility

 

 

(170,000)

 

 

(169,019)

 

 

 —

 

 

(169,019)

 

 

 —

Term loan facility, maturing 2021(1)

 

 

(239,530)

 

 

(252,052)

 

 

 —

 

 

(252,052)

 

 

 —

Revolving credit facility, maturing 2019

 

 

(311,555)

 

 

(318,389)

 

 

 —

 

 

(318,389)

 

 

 —

Other long-term notes payable

 

 

(4,610)

 

 

(3,956)

 

 

 —

 

 

(3,956)

 

 

 —

 

 

(8,228)

 

 

(7,315)

 

 

 —

 

 

(7,315)

 

 

 —

Foreign currency forward contracts, net

 

 

(1,207)

 

 

(1,207)

 

 

 —

 

 

(1,207)

 

 

 —

 

 

350 

 

 

350 

 

 

 —

 

 

350 

 

 

 —



(1) The carrying value of the term loan facility is net of unamortized debt issuance costs.



The fair values of cash and cash equivalents are based on the fair values of identical assets. The fair values of loans payable are based on the present value of expected future cash flows and approximate their carrying amounts due to the short periods to maturity.  TheAt March 31, 2017, the fair valuesvalue 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 and at December 31, 2016, is 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 non-performance risk.  The 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 non-performance risk. 

Derivative Instruments

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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 (gains) losses, net in the condensed consolidated statements of operations. We recognized net foreign currency lossesgains of $1.6 million and $1.7$0.3 million in the three months ended March 31, 2016,2017, and net foreign currency losses of $1.6 million in the three months ended March 31, 2015, respectively,2016, which is primarily comprised of the foreign exchange impact on transactions in countries where it is not economically feasible for us to enter into hedging arrangements and hedging inefficiencies, such as timing of transactions. We recognized net gains of $0.2 million in the three months ended March 31, 2017, and net losses of $10.6 million in the three months ended March 31, 2016, and net gains of $1.6 million in the three months ended March 31, 2015,  arising from the change in fair value of our financial instruments, which offset the related net gains and losses on international trade transactions. The fair values of these contracts are based on market prices for comparable contracts. The notional amount of foreign currency forward contracts was $332.7$188.2 million at March 31, 2016,2017, and $338.4$338.2 million at December 31, 2015.2016.

The following table presents the effect on our condensed consolidated statements of operations for the three months ended March 31, 20162017 and 2015,2016, respectively, of our foreign currency forward contracts:



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Amount of (Loss) Gain

 

 



 

Recognized in Earnings

 

 



 

Three Months Ended

 

 



 

March 31,

 

 



 

2016

 

2015

 

Location of (Loss) Gain in Earnings



 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

(10,569)

 

$

1,645 

 

Foreign currency losses, net

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Amount of Gain (Loss)

 

 



 

Recognized in Earnings

 

 



 

Three Months Ended

 

 



 

March 31,

 

 



 

2017

 

2016

 

Location of Gain (Loss) in Earnings



 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

243 

 

$

(10,569)

 

Foreign currency (gains) losses, net











The following table presents the fair values on our condensed consolidated balance sheets of foreign currency forward contracts:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

Balance Sheet Location

 

2017

 

2016

 

Balance Sheet Location

 

(Dollars in thousands)

 

 

 

(Dollars in thousands)

 

 

Asset derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

583 

 

$

913 

 

Other current assets

 

$

512 

 

$

1,854 

 

Other current assets

Liability derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(5,075)

 

$

(2,120)

 

Accrued expenses and other current liabilities

 

$

(275)

 

$

(1,504)

 

Accrued expenses and other current liabilities

















10.    Income Taxes

During the first quarter of 2016, incomeIncome tax expense for the three months ended March 31, 2017, was $7.1 million, or 24.4% of pre-tax income, compared with $8.0 million, or 28.9% of pre-tax income.  Inincome in the first quarter of 2015, we recorded tax expense of $2.5 million, or 15.9% of pre-tax income.prior-year same period.  The tax expense in the first quarter of 20162017 and 2015,2016, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35% primarily as a result of foreign statutory rate differences.  The first quarter 2015 tax expense was further lowered as a result of a release of a portion of the net valuation allowance that was recorded against the net deferred tax assets as the consequence of accounting for an acquisition in that period.





11.    Contingent Liabilities

We have recorded environmental liabilities of $7.6$7.3  million at March 31, 2016,2017, and $7.4$7.2 million at December 31, 2015,2016, for costs associated with the remediation of certain of our properties that have been contaminated. The balanceliability at March 31, 2016,2017, and December 31, 2015,2016, was 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 lines in 2013. The costs include 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 and the ultimate cost of required remediation.

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Table of Contents

In the fourth quarter of 2013, the Supreme Court in Argentina ruled unfavorably related to certain export taxes associated with a divested operation.  As a result of this ruling, we have recorded a $8.0 million and a  $7.8an $8.7 million liability December 31, 2016. During the first quarter of 2017, the Company participated in a newly available tax regime, resulting in the reduction of interest on these outstanding tax liabilities of $4.5 million.  The liability recorded at March 31, 2016,2017, is $4.6 million, and December 31, 2015, respectively.will be paid down over a five-year term.

There are various lawsuits and claims pending against the Company and its consolidated subsidiaries. We do not currently expect the resolution of these lawsuits and claims to materially affect the consolidated financial position, results of operations, or cash flows of the Company.



12.    Retirement Benefits

Net periodic benefit (credit) cost 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 March 31, 20162017 and 2015,2016, respectively, follow:

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Table of Contents





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31,

 

Three Months Ended March 31,

 

2016

 

2015

 

2016

 

2015

 

2016

 

2015

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

(Dollars in thousands)

 

(Dollars in thousands)

Service cost

 

$

 

$

 

$

363 

 

$

391 

 

$

 —

 

$

 —

 

$

 

$

 

$

404 

 

$

363 

 

$

 —

 

$

 —

Interest cost

 

 

3,937 

 

 

4,697 

 

 

939 

 

 

923 

 

 

236 

 

 

242 

 

 

3,666 

 

 

3,937 

 

 

573 

 

 

939 

 

 

211 

 

 

236 

Expected return on plan assets

 

 

(4,935)

 

 

(7,291)

 

 

(520)

 

 

(674)

 

 

 —

 

 

 —

 

 

(4,740)

 

 

(4,935)

 

 

(210)

 

 

(520)

 

 

 —

 

 

 —

Amortization of prior service cost

 

 

 

 

 

 

11 

 

 

15 

 

 

 —

 

 

 —

 

 

 

 

 

 

10 

 

 

11 

 

 

 —

 

 

 —

Net periodic benefit (credit) cost

 

$

(991)

 

$

(2,586)

 

$

793 

 

$

655 

 

$

236 

 

$

242 

 

$

(1,068)

 

$

(991)

 

$

777 

 

$

793 

 

$

211 

 

$

236 









Net periodic benefit (credit) for our U.S. pension plans for the three months ended March 31, 2016, decreased from the effect of  a lower expected return on plan assets. Net periodic benefit cost for our non-U.S. pension plans and our postretirement health care and life insurance benefit plans did not change significantly compared with the prior-year same period. 

In 2015, the Company initiated and executed on a buyout of terminated vested participants in our U.S defined benefit pension plan.  In October 2015, the buyout was funded and reduced plan assets and liability by approximately $71 million.





13.    Stock-Based Compensation

On May 22, 2013, our shareholders approved the 2013 Omnibus Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 22, 2013, subject to shareholder approval. 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 4,400,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restricted shares, performance shares, other common stock basedstock-based awards, and dividend equivalent rights.

In the first quarter of 2016,2017, our Board of Directors granted 0.30.2 million stock options, 0.30.2 million performance share units and 0.2 million deferredrestricted stock units under the Plan.    

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Table of Contents

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 three months ended March 31, 2016:2017:







 

 

 

 



 

 

 

 



 

Stock Options

Weighted-average grant-date fair value

 

$

4.927.26 

 

Expected life, in years

 

 

6.0 

 

Risk-free interest rate

 

 

1.62.3 

%

Expected volatility

 

 

53.651.5 

%



The weighted average grant date fair value of our performance share units granted in the three months ended March 31, 2016,2017, was $10.02.$14.89. 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 likelihood of achieving the performance criteria.

We measure the fair value of deferredrestricted stock units based on the closing market price of our common stock on the date of the grant which is when the awards immediately vest.grant. The restricted stock units vest over three years. The weighted-average grant date fair value per unit for grants made during the three months ended March 31, 2016,2017, was $9.66.$14.27.

We recognized stock-based compensation expense of $2.7 million for the three months ended March 31, 2017, and $1.6 million for the three months ended March 31, 2016, and $2.1 million for the three months ended March 31, 2015.2016. At March 31, 2016,2017, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $11.4$10.4 million and is expected to be recognized over the remaining vesting period of the respective grants, through the first quarter of 2019.2020.





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Table of Contents

14.    Restructuring and Cost Reduction Programs

In 2013, we initiated a Global Cost Reduction Program that was designed to address 3 key areas of the company - (1) business realignment, (2) operational efficiency and (3) corporate and back office functions.  Business realignment was targeted at right-sizing our commercial management organizations globally.  The operational efficiency component of the program was designed to improve the efficiency of our plant operations and supply chain.  The corporate and back office initiative is principally comprised of work that we are doing with our strategic partners in the areas of finance and accounting and information technology outsourcing, and procurement. The restructuring charges for the three months ended March 31, 2016, primarily consists of implementing this strategy for our recently acquired acquisitions.  The cumulative charges incurred to date associated with these programs are $50.5 million. Total costs related to the program expected to be incurred, as of March 31, 2016, are approximately $50.5 million. Total restructuring and impairment charges were $0.9approximately $3.0 million and $0.4$0.9 million for the three months ended March 31, 2016,2017,  and March 31, 2015,2016, respectively.



The activities and accruals summarized below are primarily related to costs associated with integration of our restructuring and cost reduction programs are summarized below:recent acquisitions:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

 

Other

 

 

 

 

Employee

 

Other

 

Asset

 

 

 

 

Severance

 

Costs

 

Total

 

Severance

 

Costs

 

Impairment

 

Total

 

(Dollars in thousands)

 

(Dollars in thousands)

Balances at December 31, 2015

 

$

693 

 

$

2,077 

 

$

2,770 

Balances at December 31, 2016

 

$

239 

 

$

1,489 

 

$

 —

 

$

1,728 

Restructuring charges

 

 

532 

 

 

349 

 

 

881 

 

 

980 

 

 

862 

 

 

1,176 

 

 

3,018 

Cash payments

 

 

(369)

 

 

(436)

 

 

(805)

 

 

(81)

 

 

(109)

 

 

 —

 

 

(190)

Non-cash items

 

 

36 

 

 

75 

 

 

111 

 

 

 —

 

 

(522)

 

 

(1,176)

 

 

(1,698)

Balances at March 31, 2016

 

$

892 

 

$

2,065 

 

$

2,957 

Balances at March 31, 2017

 

$

1,138 

 

$

1,720 

 

$

 —

 

$

2,858 



We expect to make cash payments to settle the remaining liability for employee terminationseverance benefits and other costs primarily over the next twelve months where applicable, except where legal or contractual restrictions prevent us from doing so.obligations would require it to extend beyond that period.



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15.    Earnings Per Share

Details of the calculation of basic and diluted earnings per share are shown below:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

March 31,

 

March 31,

 

2016

 

2015

 

2017

 

2016

 

(Dollars in thousands, except per share amounts)

 

(Dollars in thousands, except per share amounts)

Basic earnings per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to Ferro Corporation common shareholders

 

$

(9,966)

 

$

10,970 

Net income (loss) attributable to Ferro Corporation common shareholders

 

$

21,898 

 

$

(9,966)

Adjustment for loss from discontinued operations

 

 

29,494 

 

 

3,956 

 

 

 —

 

 

29,494 

Total

 

$

19,528 

 

$

14,926 

 

$

21,898 

 

$

19,528 

Weighted-average common shares outstanding

 

 

83,311 

 

 

87,114 

 

 

83,530 

 

 

83,311 

Basic earnings per share from continuing operations attributable to Ferro Corporation common shareholders

 

$

0.23 

 

$

0.17 

 

$

0.26 

 

$

0.23 

Diluted earnings per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to Ferro Corporation common shareholders

 

$

(9,966)

 

$

10,970 

Net income (loss) attributable to Ferro Corporation common shareholders

 

$

21,898 

 

$

(9,966)

Adjustment for loss from discontinued operations

 

 

29,494 

 

 

3,956 

 

 

 —

 

 

29,494 

Total

 

$

19,528 

 

$

14,926 

 

$

21,898 

 

$

19,528 

Weighted-average common shares outstanding

 

 

83,311 

 

 

87,114 

 

 

83,530 

 

 

83,311 

Assumed exercise of stock options

 

 

370 

 

 

422 

 

 

516 

 

 

370 

Assumed satisfaction of restricted stock unit conditions

 

 

385 

 

 

236 

 

 

574 

 

 

385 

Assumed satisfaction of performance stock unit conditions

 

 

224 

 

 

526 

 

 

268 

 

 

224 

Weighted-average diluted shares outstanding

 

 

84,290 

 

 

88,298 

 

 

84,888 

 

 

84,290 

Diluted earnings per share from continuing operations attributable to Ferro Corporation common shareholders

 

$

0.23 

 

$

0.17 

 

$

0.26 

 

$

0.23 



The number of anti-dilutive or unearned shares was 2.1 million for the three months ended March 31, 2017, and 2.8 million for the three months ended March 31, 2016, and 1.5 million for the three months ended March 31, 2015.2016.  These shares were excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.



16.    Share Repurchase Program 

On July 29, 2015, theThe Company’s Board of Directors approved a share repurchase program,programs, under which the Company wasis authorized to repurchase up to $25$100 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. On October 16, 2015, and February 18, 2016, the Company’s Board

19


Table of Directors approved follow-on share repurchase programs, authorizing the Company to repurchase an additional $25 million of the Company’s outstanding shares of common stock under each program.Contents



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.  The share repurchase program doesprograms do not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.



TheFor the three months ended March 31, 2016, the Company repurchased 1,175,437 shares of common stock in the three months ended March 31, 2016, at an average price of $9.72 per share for a total cost of $11.4 million.  As of March 31, 2017,  $50.0 million may still be purchased under the programs.

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Table of Contents

17.    Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



 

Postretirement

 

 

 

 

 

 

 

 

 



 

Benefit Liability

 

Translation

 

Other

 

 

 



 

Adjustments

 

Adjustments

 

Adjustments

 

Total



 

(Dollars in thousands)

Balances at December 31, 2014

 

$

888 

 

$

(22,623)

 

$

(70)

 

$

(21,805)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

(36,658)

 

 

 —

 

 

(36,658)

Amounts reclassified from accumulated other comprehensive income  (loss)

 

 

16 

 

 

 —

 

 

 —

 

 

16 

Net current period other comprehensive income (loss)

 

 

16 

 

 

(36,658)

 

 

 —

 

 

(36,642)

Balances at March 31, 2015

 

$

904 

 

$

(59,281)

 

$

(70)

 

$

(58,447)



 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

 

 

811 

 

 

(62,059)

 

 

(70)

 

 

(61,318)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

(1,710)

 

 

 —

 

 

(1,710)

Amounts reclassified from accumulated other comprehensive income  (loss)

 

 

268 

 

 

 —

 

 

 —

 

 

268 

Net current period other comprehensive income (loss)

 

 

268 

 

 

(1,710)

 

 

 —

 

 

(1,442)

Balances at March 31, 2016

 

$

1,079 

 

$

(63,769)

 

$

(70)

 

$

(62,760)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,



 

Postretirement

 

 

 

 

 

 

 

 

 



 

Benefit Liability

 

Translation

 

Other

 

 

 



 

Adjustments

 

Adjustments

 

Adjustments

 

Total



 

(Dollars in thousands)

Balance at December 31, 2015

 

$

811 

 

$

(62,059)

 

$

(70)

 

$

(61,318)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

(1,710)

 

 

 —

 

 

(1,710)

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities income

 

 

268 

 

 

 —

 

 

 —

 

 

268 

Net current period other comprehensive income (loss)

 

 

268 

 

 

(1,710)

 

 

 —

 

 

(1,442)

Balance at March 31, 2016

 

$

1,079 

 

$

(63,769)

 

$

(70)

 

$

(62,760)



 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

1,141 

 

 

(107,714)

 

 

(70)

 

 

(106,643)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

7,171 

 

 

 —

 

 

7,171 

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities (loss)

 

 

(4)

 

 

 —

 

 

 —

 

 

(4)

Other 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net current period other comprehensive (loss) income

 

 

(4)

 

 

7,171 

 

 

 —

 

 

7,167 

Balance at March 31, 2017

 

$

1,137 

 

$

(100,543)

 

$

(70)

 

$

(99,476)





























18.    Reporting for Segments 

In the first quarter of 2017, the Company’s Pigments, Powders and Oxides segment was renamed Color Solutions.



Net sales to external customers by segment are presented in the table below. Sales between segments were not material.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

March 31,

 

March 31,

 

2016

 

2015

 

2017

 

2016

 

(Dollars in thousands)

 

(Dollars in thousands)

Performance Coatings

 

$

128,124 

 

$

136,786 

 

$

126,565 

 

$

128,124 

Performance Colors and Glass

 

 

88,170 

 

 

99,464 

 

 

103,518 

 

 

88,170 

Pigments, Powders and Oxides

 

 

61,157 

 

 

26,522 

Color Solutions

 

 

90,472 

 

 

61,157 

Total net sales

 

$

277,451 

 

$

262,772 

 

$

320,555 

 

$

277,451 



Each segment’s gross profit and reconciliations to income before income taxes are presented in the table below:

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Table of Contents





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

March 31,

 

March 31,

 

2016

 

2015

 

2017

 

2016

 

(Dollars in thousands)

 

(Dollars in thousands)

Performance Coatings

 

$

32,115 

 

$

28,875 

 

$

33,489 

 

$

32,115 

Performance Colors and Glass

 

 

31,838 

 

 

34,489 

 

 

37,418 

 

 

31,838 

Pigments, Powders and Oxides

 

 

20,286 

 

 

7,854 

Color Solutions

 

 

28,182 

 

 

20,286 

Other cost of sales

 

 

(10)

 

 

(583)

 

 

(295)

 

 

(10)

Total gross profit

 

 

84,229 

 

 

70,635 

 

 

98,794 

 

 

84,229 

Selling, general and administrative expenses

 

 

52,646 

 

 

49,456 

 

 

58,958 

 

 

52,646 

Restructuring and impairment charges

 

 

881 

 

 

509 

 

 

3,018 

 

 

881 

Other expense, net

 

 

2,920 

 

 

5,240 

 

 

7,559 

 

 

2,920 

Income before income taxes

 

$

27,782 

 

$

15,430 

 

$

29,259 

 

$

27,782 







19.    Subsequent Event

On April 24, 2017, the Company acquired 100% of the equity interests of S.P.C. Group s.r.l., a company duly organized under the laws of Italy, and 100% of the equity interests of Smalti per Ceramiche, s.r.l. (“SPC”), a company duly organized under the laws of Italy, for 19.8 million, subject to customary working capital adjustments. SPC is a high-end tile coatings manufacturer based in Italy that focuses on fast-growing specialty products. SPC products, strong technology, design capabilities, and customer-centric business model are complementary to our Performance Coatings segment, and position us for continued growth in the high-end tile markets.

The operating results will be included in the Company’s condensed consolidated financial statements commencing April 24, 2017, the date of the acquisition.

Due to the timing of the acquisition, the Company’s initial purchase price accounting was incomplete at the time these financial statements were issued.  As such, the Company cannot disclose the allocation of the acquisition price to acquired assets and liabilities and the related disclosures at this time.



































21


 

Table of Contents

22


Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

DuringNet sales for the three months ended March 31, 2016, net sales2017, increased by $14.7$43.1 million, or 5.6%15.5%, compared with the prior-year same period.    The increase in net sales was primarily driven by higher sales from Nubiolain Color Solutions (formerly Pigments, Powders and Oxides) and Performance Colors and Glass of $33.4$29.3 million which was acquiredand $15.3 million, respectively, partially offset by lower sales in the third quarterPerformance Coatings of 2015.$1.6 million.  During the three months ended March 31, 2016,2017, gross profit increased $13.6$14.6 million, or 19.2%17.3%, compared with the prior-year same period; and, as a percentage of net sales, it increased approximately 35040 basis points to 30.4%30.8%.  The increase was primarily driven by increasedin gross profit from Nubiolawas attributable to increases across all of $10.5 million.our segments, with increases in Color Solutions, Performance Colors and Glass and Performance Coatings of $7.9 million, $5.6 million and $1.4 million, respectively.    

For the three months ended March 31, 2016,2017, selling, general and administrative (“SG&A”) expenses increased $3.2$6.3 million, or 6.5%12.0%, compared with the prior-year same period.  The increase was primarily driven by increased SG&A$4.8 million of expenses from Nubiola of $3.5 million.related to acquisitions completed within the last year.

For the three months ended March 31, 2016,2017, net lossincome was $9.7$22.1 million, compared with net loss of $9.7 million for the prior-year same period, and net income of $9.0attributable to common shareholders was $21.9 million, in 2015, andcompared with net loss attributable to common shareholders wasof $10.0 million compared with net income attributable to common shareholders of $11.0 million in 2015.for the prior-year same period. Income from continuing operations was $22.1 million for the three months ended March 31, 2017, compared with income from continuing operations of $19.8 million for the three months ended March 31, 2016, compared with income from continuing operations of $13.0 million for the three months ended March 31, 2015.2016.  Our total gross profit for the first quarter of 20162017 was $84.2$98.8 million, compared with $70.6$84.2 million for the three months ended March 31, 2015.2016.



Outlook

During the first quarter of 2016, the Company delivered strong performance, despite challenging economic conditions in Latin America.  For the quarter, sales increased by 6% due to recent acquisitions.  In addition,2017, we expect that gross profit, as a percentage of net sales, increased to 30.4% from 26.9%.  Partially offsetting the higher gross profit were increased SG&A costs, primarily driven by the acquisitions. Our effective tax rate for the first quarter of 2016 was 28.9%, compared to 15.9% in the first quarter of 2015, driven by timing of the implementation of certain tax planning actions in 2016, and certain discrete items favorably impacting the first quarter of 2015.  Wemargin will continue to expect the full year 2016 tax rate to be in the range of 27% - 28%.

For the remainder of 2016, we anticipate benefitting fromgrow at a measured pace based on strategic actions taken to improve growth in our core businesses and will continue to benefitcontriubtions from recent acquisitions. We expect tile sales, particularly in Asia, the Middle East and Northern Africa, and Southern Europe will continue to stabilize and rebound, providing growth, in addition to recent acquisitions.  Certain economies where we, or our customers, participate, however,Raw material costs are expected to remain weak, including Argentinaincrease in 2017, however we expect to offset these cost increases through pricing actions, product reformulations and Brazil.  The net impact is expected to result in increased sales growth over the remainder of the year, before consideration ofoptimization actions. In addition, foreign currency impacts.  Gross profit as a percentage of net sales is expectedexchange rates continue to be greater than 2015 levels due to strong volumesvolatile, and a richer product mix,we anticipate that changes in part due to increased sales of tile coatings.rates will adversely impact reported results.

We remain focused on the integration of Vetriceramici, Nubiola, Al Salomi and Ferer,our recent acquisitions and continue to work toward achieving the identified synergies.  We will continue to focus on opportunities to optimize our cost structure and make our business processes and systems more efficient, and to leverage tax planning opportunities.  We continue to expect cash flow from operating activities willto be positive for the year, providing additional liquidity to fund acquisitive growth.

Further, we are continuing efforts to divest our Europe-based Polymer Additives assets, including the Antwerp, Belgium dibenzoates manufacturing assets, and related Polymer Additives European headquarters and lab facilities.  The assets associated with this facility are currently classified as held-for-sale on our condensed consolidated balance sheets.liquidity.

Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2015.

2016.

2322


 

Table of Contents

Results of Operations - Consolidated

Comparison of the three months ended March 31, 20162017 and 20152016 

For the three months ended March 31, 2016,2017,  income from continuing operations was $19.8$22.1  million, compared with $13.0$19.8 million income from continuing operations for the three months ended March 31, 2015.2016.  Net lossincome was $9.7$22.1 million, compared with net incomeloss of $9.0$9.7 million for the three months ended March 31, 2015.2016. For the three months ended March 31, 2016,2017, net income attributable to common shareholders was $21.9 million, or earnings per share of $0.26, compared with net loss attributable to common shareholders wasof $10.0 million, or loss per share of $0.12, compared with net income attributable to common shareholders of $11.0 million, or earnings per share of $0.12, for the three months ended March 31, 2015.2016.



Net Sales





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Net sales

 

 

277,451 

 

 

 

262,772 

 

 

 

14,679 

 

5.6 

%

 

 

320,555 

 

 

 

277,451 

 

 

 

43,104 

 

15.5 

%

Cost of sales

 

 

193,222 

 

 

 

192,137 

 

 

 

1,085 

 

0.6 

%

 

 

221,761 

 

 

 

193,222 

 

 

 

28,539 

 

14.8 

%

Gross profit

 

$

84,229 

 

 

$

70,635 

 

 

$

13,594 

 

19.2 

%

 

$

98,794 

 

 

$

84,229 

 

 

$

14,565 

 

17.3 

%

Gross profit as a % of net sales

 

 

30.4 

%

 

 

26.9 

%

 

 

 

 

 

 

 

 

30.8 

%

 

 

30.4 

%

 

 

 

 

 

 



Net sales increased by  $14.7$43.1 million, or 5.6%15.5%, in the three months ended March 31, 2016,2017,  compared with the prior-year same period, driven by higher sales in Pigments, PowdersColor Solutions and OxidesPerformance Colors and Glass of $34.6$29.3 million and $15.3 million, respectively, partially offset by lower sales in Performance Colors and Glass and Performance Coatings of $11.3 million and $8.7 million, respectively.$1.6 million.  The increase in net sales was primarily driven by the sales from NubiolaCappelle of $33.4$19.0 million, which was acquired inESL of $10.8 million, and Pinturas of $2.0 million, all acquisitions completed after the thirdfirst quarter of 2015. 2016, as well as strong growth in pigment products and surface technology products of $5.6 million and $3.7 million, respectively.



Gross Profit



Gross profit increased $13.6$14.6 million, or 19.2%17.3%, in the three months ended March 31, 2016,2017, compared towith the prior-year same period, and as a percentage of net sales, it increased 35040 basis points to  30.4%30.8%.  The increase in gross profit was driven by Pigments, Powdersattributable to increases across all of our segments, with increases in Color Solutions, Performance Colors and OxidesGlass and Performance Coatings of $12.4$7.9 million, $5.6 million and $3.2$1.4 million, respectively, partially offset by a decreaserespectively.  The increase in Performance Colors and Glass of $2.7 million.  The increasegross profit was primarily due to lower manufacturing costs of $9.0 million, increased gross profit from acquisitions of $7.5 million and higher sales volumes and mix of $9.0$5.7 million, lowerpartially offset by higher raw material costs of $6.6$2.8 million, and lower manufacturing costs of $5.6 million, partially offset by  unfavorable product pricing of $5.2$2.4 million and unfavorable foreign currency impacts of $3.1$2.2 million.    

24


Table of Contents

Geographic Revenues



The following table presents our sales on the basis of where sales originated.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Geographic Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Geographic Revenues on a sales origination basis

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

128,700 

 

$

115,837 

 

$

12,863 

 

11.1 

%

 

$

148,923 

 

$

128,700 

 

$

20,223 

 

15.7 

%

United States

 

 

70,171 

 

 

68,811 

 

 

1,360 

 

2.0 

%

 

 

88,380 

 

 

70,171 

 

 

18,209 

 

25.9 

%

Asia Pacific

 

 

42,939 

 

 

38,936 

 

 

4,003 

 

10.3 

%

 

 

44,208 

 

 

42,939 

 

 

1,269 

 

3.0 

%

Latin America

 

 

35,641 

 

 

39,188 

 

 

(3,547)

 

(9.1)

%

 

 

39,044 

 

 

35,641 

 

 

3,403 

 

9.5 

%

Net sales

 

$

277,451 

 

$

262,772 

 

$

14,679 

 

5.6 

%

 

$

320,555 

 

$

277,451 

 

$

43,104 

 

15.5 

%



The increase in net sales of $14.7$43.1 million, compared with the prior-year same period, was driven by increasesan increase in sales from all regions. The increase in sales from Europe Asia Pacificwas primarily attributable to higher sales in Color Solutions and the United StatesPerformance Colors and Glass of $12.9 million, $4.0$17.6 million and $1.4$5.5 million, respectively, partially offset by a decrease in Latin Americasales in Performance Coatings of $3.5$2.9 million. The increases in Europe and Asia Pacific were primarily attributable to Nubiola sales

23


Table of $12.9 million and $4.0 million, respectively, which was acquired in the third quarter of 2015. Contents

The increase in sales from the United States was attributable to Nubiolahigher sales of $8.8 million, partially offset by lower sales in Color Solutions and Performance Colors and Glass of $7.0$10.1 million and Performance Coatings of $1.2$8.6  million.  The decreaseincrease in sales from Latin America was dueattributable to the sale of our interesthigher sales across all segments.  The increase in an operating affiliatesales from Asia Pacific was primarily attributable to increased sales in Venezuela (“Venezuela”) in the fourth quarter of 2015, which contributed $4.5 million of the decrease.Color Solutions.   



The following table presents our sales on the basis of where sold products were shipped. 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Geographic Revenues on a shipped-to basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

128,336 

 

$

114,883 

 

$

13,453 

 

11.7 

%

 

$

140,539 

 

$

128,336 

 

$

12,203 

 

9.5 

%

United States

 

 

59,628 

 

 

50,728 

 

 

8,900 

 

17.5 

%

 

 

66,918 

 

 

59,628 

 

 

7,290 

 

12.2 

%

Asia Pacific

 

 

54,528 

 

 

51,749 

 

 

2,779 

 

5.4 

%

 

 

70,121 

 

 

54,528 

 

 

15,593 

 

28.6 

%

Latin America

 

 

34,959 

 

 

45,412 

 

 

(10,453)

 

(23.0)

%

 

 

42,977 

 

 

34,959 

 

 

8,018 

 

22.9 

%

Net sales

 

$

277,451 

 

$

262,772 

 

$

14,679 

 

5.6 

%

 

$

320,555 

 

$

277,451 

 

$

43,104 

 

15.5 

%





Selling, General and Administrative Expenses

The following table includes SG&A components with significant changes between 20162017 and 2015:2016





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Personnel expenses

 

$

30,829 

 

$

29,033 

 

$

1,796 

 

6.2 

%

 

$

32,904 

 

$

30,829 

 

$

2,075 

 

6.7 

%

Incentive compensation

 

 

1,985 

 

 

1,652 

 

 

333 

 

20.2 

%

 

 

1,830 

 

 

1,985 

 

 

(155)

 

(7.8)

%

Stock-based compensation

 

 

1,626 

 

 

2,114 

 

 

(488)

 

(23.1)

%

 

 

2,723 

 

 

1,626 

 

 

1,097 

 

67.5 

%

Pension and other postretirement benefits

 

 

38 

 

 

(1,689)

 

 

1,727 

 

(102.2)

%

 

 

(80)

 

 

38 

 

 

(118)

 

(310.5)

%

Bad debt

 

 

(122)

 

 

(290)

 

 

168 

 

(57.9)

%

 

 

(241)

 

 

(122)

 

 

(119)

 

97.5 

%

Business development

 

 

1,100 

 

 

1,618 

 

 

(518)

 

(32.0)

%

 

 

2,361 

 

 

1,100 

 

 

1,261 

 

114.6 

%

Intangible asset amortization

 

 

2,051 

 

 

1,500 

 

 

551 

 

36.7 

%

All other expenses

 

 

17,190 

 

 

17,018 

 

 

172 

 

1.0 

%

 

 

17,410 

 

 

15,690 

 

 

1,720 

 

11.0 

%

Selling, general and administrative expenses

 

$

52,646 

 

$

49,456 

 

$

3,190 

 

6.5 

%

 

$

58,958 

 

$

52,646 

 

$

6,312 

 

12.0 

%



25


Table of Contents

SG&A expenses were $3.2$6.3 million higher in the three months ended March 31, 2016,2017,  compared with the prior-year same period.  Included in SG&A expenses were $3.5 million and $0.2$4.8 million of expenses attributablerelated to Nubiola and Al Salomi, which wereacquisitions acquired inwithin the third quarter of 2015 and the fourth quarter of 2015, respectively.last year.  The increase in pension and other postretirement benefitsstock-based compensation expense of $1.7$1.1 million is a result of the effect of a lower expected return on plan assets. These increases were offset by lower stock-based compensation expense of $0.5 million and lowerCompany’s performance relative to targets for certain awards compared with the prior-year same period. The increase in business development expenses is a result of $0.5 million.higher professional fees.



The following table presents SG&A expenses attributable to sales, research and development and operations costs as Strategicstrategic services and other SG&A costs as Functionalfunctional services.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Strategic services

 

$

28,404 

 

$

25,721 

 

$

2,683 

 

10.4 

%

 

$

31,693 

 

$

28,404 

 

$

3,289 

 

11.6 

%

Functional services

 

 

20,631 

 

 

19,969 

 

 

662 

 

3.3 

%

 

 

22,712 

 

 

20,631 

 

 

2,081 

 

10.1 

%

Incentive compensation

 

 

1,985 

 

 

1,652 

 

 

333 

 

20.2 

%

 

 

1,830 

 

 

1,985 

 

 

(155)

 

(7.8)

%

Stock-based compensation

 

 

1,626 

 

 

2,114 

 

 

(488)

 

(23.1)

%

 

 

2,723 

 

 

1,626 

 

 

1,097 

 

67.5 

%

Selling, general and administrative expenses

 

$

52,646 

 

$

49,456 

 

$

3,190 

 

6.5 

%

 

$

58,958 

 

$

52,646 

 

$

6,312 

 

12.0 

%



SG&A expenses were $3.2 million higher in the three months ended March, 31, 2016, compared with the prior-year same period.  The increase in strategic and functional services was driven by increased expenses from Nubiola

24


Table of $2.3 million and $1.2 million, respectively, which was acquired in the third quarter of 2015. Contents



Restructuring and Impairment Charges





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Employee severance

 

$

532 

 

$

271 

 

$

261 

 

96.3 

%

 

$

980 

 

$

532 

 

$

448 

 

84.2 

%

Asset impairment

 

 

1,176 

 

 

 —

 

 

1,176 

 

NM

 

Other restructuring costs

 

 

349 

 

 

238 

 

 

111 

 

46.6 

%

 

 

862 

 

 

349 

 

 

513 

 

147.0 

%

Restructuring and impairment charges

 

$

881 

 

$

509 

 

$

372 

 

73.1 

%

 

$

3,018 

 

$

881 

 

$

2,137 

 

242.6 

%



Restructuring and impairment charges increased in the first quarter of 20162017 compared with the prior-year same period. The increase was primarily due to restructuring activitiescosts associated with a restructuring plan in Italy, which includes $1.2 million of asset impairment associated with assets that have been taken out of service, as well as actions taken at our recent acquisitions.acquisitions associated with achieving our targeted synergies.  



Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Interest expense

 

$

4,544 

 

$

3,278 

 

$

1,266 

 

38.6 

%

 

$

5,748 

 

$

4,544 

 

$

1,204 

 

26.5 

%

Amortization of bank fees

 

 

315 

 

 

297 

 

 

18 

 

6.1 

%

 

 

479 

 

 

315 

 

 

164 

 

52.1 

%

Interest capitalization

 

 

(12)

 

 

(425)

 

 

413 

 

(97.2)

%

 

 

(3)

 

 

(12)

 

 

 

(75.0)

%

Interest expense

 

$

4,847 

 

$

3,150 

 

$

1,697 

 

53.9 

%

 

$

6,224 

 

$

4,847 

 

$

1,377 

 

28.4 

%



Interest expense increased in the first quarter of 20162017 compared with the prior-year same period.  As discussed in Note 8, the Company refinanced its debt in the first quarter of 2017, which resulted in a lower interest rate. The increase in interest expense was due to an increase in the average long-term debt balance forduring the three months ended March 31, 2016,2017, compared with the prior-year same period.



Income Tax Expense



26


Table of Contents

During the first quarter of 2016,2017, income tax expense was $8.0$7.1 million, or 28.9%24.4%  of pre-tax income.  In the first quarter of 2015,2016, we recorded tax expense of $2.5$8.0 million, or 15.9%28.9% of pre-tax income. The tax expense in the first quarter of 20162017 and 2015,2016, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35%, primarily as a result of foreign statutory rate differences. The first quarter 2015 tax expense was further lowered as a result of a release of a portion of the net valuation allowance that was recorded against the net deferred tax assets as the consequence of accounting for an acquisition in that period.



Results of Operations - Segment Information

Comparison of the three months ended March 31, 20162017 and 20152016 

Performance Coatings





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to

 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to

 

March 31,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Other

 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Other

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

128,124 

 

 

$

136,786 

 

 

$

(8,662)

 

(6.3)

%

 

$

(6,465)

 

$

8,745 

 

$

(10,942)

 

$

 —

 

$

126,565 

 

 

$

128,124 

 

 

$

(1,559)

 

(1.2)

%

 

$

(3,591)

 

$

7,420 

 

$

(5,388)

 

$

 —

Segment gross profit

 

 

32,115 

 

 

 

28,875 

 

 

 

3,240 

 

11.2 

%

 

 

(6,465)

 

 

4,945 

 

 

(2,111)

 

 

6,871 

 

 

33,489 

 

 

 

32,115 

 

 

 

1,374 

 

4.3 

%

 

 

(3,591)

 

 

2,623 

 

 

(1,467)

 

 

3,809 

Gross profit as a % of segment net sales

 

 

25.1 

%

 

 

21.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26.5 

%

 

 

25.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





25


Table of Contents

       Net sales declineddecreased in Performance Coatings compared with the prior-year same period, primarily driven by a decrease in sales of $10.4$1.6 million in frits and glazes, $3.3 million in porcelain enamel and $1.4 million in other tile product lines, partially mitigated by an increase of $0.8 million in color products and $5.6 million in sales from Al Salomi, which was acquired in the fourth quarter of 2015.products.    The decrease in net sales was driven by unfavorable foreign currency impacts of $10.9$5.4 million and lower product pricing of $6.5$3.6 million, partially mitigated by increased sales volume and favorable mix of $8.7$7.4 million. Gross profit increased $3.2$1.4 million from the prior-year same period, primarily driven by lower manufacturing costs of $5.0 million and higher sales volumes and favorable mix of $5.0 million, and lower raw materials of $1.8$2.6 million, partially mitigatedoffset by unfavorable product pricing impacts of $6.5$3.6 million, and unfavorable foreign currency impacts of $2.1$1.5 million and higher raw material costs of $1.2 million.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

72,026 

 

$

67,711 

 

$

4,315 

 

6.4 

%

 

$

69,160 

 

$

72,026 

 

$

(2,866)

 

(4.0)

%

Latin America

 

 

23,245 

 

 

33,674 

 

 

(10,429)

 

(31.0)

%

 

 

25,330 

 

 

23,245 

 

 

2,085 

 

9.0 

%

Asia Pacific

 

 

21,568 

 

 

22,915 

 

 

(1,347)

 

(5.9)

%

 

 

21,317 

 

 

21,568 

 

 

(251)

 

(1.2)

%

United States

 

 

11,285 

 

 

12,486 

 

 

(1,201)

 

(9.6)

%

 

 

10,758 

 

 

11,285 

 

 

(527)

 

(4.7)

%

Total

 

$

128,124 

 

$

136,786 

 

$

(8,662)

 

(6.3)

%

 

$

126,565 

 

$

128,124 

 

$

(1,559)

 

(1.2)

%





The net sales decrease of $8.7$1.6 million was driven by declinesdecreases in Latin America, Asia Pacific andsales from Europe, the United States and Asia Pacific, partially mitigated  by an increase from Latin America. The decrease in Europe.sales from Europe was primarily attributable to a  decrease in sales of digital inks and colors of $1.6 million and $1.3 million, respectively.  The decrease in sales from the United States was fully attributable to lower sales of porcelain enamel and the decrease from  Asia Pacific was driven by lower sales of frits and glazes. The sales decline inincrease from Latin America was primarily driven by lowerhigher sales from Venezuela of $4.5digital inks of $1.1 million which was sold in the fourth quarterand higher sales of 2015, and lower sales in frits and glazes of $6.9$0.8 million.    The

Performance Colors and Glass



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to



 

March 31,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other



 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

103,518 

 

 

$

88,170 

 

 

$

15,348 

 

17.4 

%

 

$

621 

 

$

3,514 

 

$

(1,595)

 

$

12,808 

 

$

 —

Segment gross profit

 

 

37,418 

 

 

 

31,838 

 

 

 

5,580 

 

17.5 

%

 

 

621 

 

 

1,214 

 

 

(550)

 

 

3,820 

 

 

475 

Gross profit as a % of segment net sales

 

 

36.1 

%

 

 

36.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Net sales decline in Asia Pacific andincreased compared with the United States wasprior-year same period, primarily driven by lower$10.8 million of sales attributable to ESL, $2.0 million of sales attributable to Pinturas, both acquisitions completed in porcelain enamel2016 after the first quarter, and $2.4 million from higher sales of $1.6electronics products (excluding ESL).  Net sales were impacted by favorable volume and mix of $3.5 million, and $1.2 million, respectively. Thean increase in sales in Europe was primary attributablefrom acquisitions of $12.8 million and higher product pricing of $0.6 million, partially offset by unfavorable foreign currency impacts of $1.6 million. Gross profit increased from the prior-year same period, primarily due to $5.6gross profit from acquisitions of $3.8 million,  infavorable manufacturing costs of $1.1 million,  higher sales from Al Salomi, which was acquired in the fourth quartervolumes and mix of 2015. $1.2 million and higher product pricing of $0.6 million, partially offset by unfavorable raw material costs of $0.6 million and unfavorable foreign currency impacts of $0.6 million.

2726


 

Table of Contents

Performance Colors and Glass







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to



 

March 31,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 



 

2016

 

2015

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Other



 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

88,170 

 

 

$

99,464 

 

 

$

(11,294)

 

(11.4)

%

 

$

925 

 

$

(9,451)

 

$

(2,768)

 

$

 —

Segment gross profit

 

 

31,838 

 

 

 

34,489 

 

 

 

(2,651)

 

(7.7)

%

 

 

925 

 

 

(6,490)

 

 

(934)

 

 

3,848 

Gross profit as a % of segment net sales

 

 

36.1 

%

 

 

34.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Net sales decreased compared with the prior-year same period, primarily driven by lower sales of our electronics, decoration and industrial products of $5.9 million, $4.4 million and $1.7 million, respectively.  Net sales were impacted by unfavorable volume and mix of $9.5 million and unfavorable foreign currency impacts of $2.8 million, partially mitigated by higher product pricing of $0.9 million. Gross profit decreased from the prior-year same period, primarily due to lower sales volumes and mix of $6.5 million and unfavorable foreign currency impacts of $0.9 million, partially mitigated by lower raw material costs of $3.6 million, higher product pricing of $0.9 million and lower manufacturing costs of $0.2 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

2017

 

2016

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

39,096 

 

$

43,447 

 

$

(4,351)

 

(10.0)

%

 

$

44,586 

 

$

39,096 

 

$

5,490 

 

14.0 

%

United States

 

 

30,489 

 

 

37,448 

 

 

(6,959)

 

(18.6)

%

 

 

39,104 

 

 

30,489 

 

 

8,615 

 

28.3 

%

Asia Pacific

 

 

14,241 

 

 

13,474 

 

 

767 

 

5.7 

%

 

 

14,633 

 

 

14,241 

 

 

392 

 

2.8 

%

Latin America

 

 

4,344 

 

 

5,095 

 

 

(751)

 

(14.7)

%

 

 

5,195 

 

 

4,344 

 

 

851 

 

19.6 

%

Total

 

$

88,170 

 

$

99,464 

 

$

(11,294)

 

(11.4)

%

 

$

103,518 

 

$

88,170 

 

$

15,348 

 

17.4 

%



The net sales declineincrease of $11.3$15.3 million was driven by lowerhigher sales from all regions.  The increase in sales from the United States Europe, and Latin America, partially mitigated by increased sales in Asia Pacific. The decrease in sales in the United States and Europe was attributable to lower sales across all product lines, and the declinean increase in sales in Latin America was primarily due to lower sales of decorationelectronics products of $0.9$8.9 million. The increase in sales from Europe was primarily attributable to $3.8 million and $2.0 million in sales from ESL and Pinturas, respectively. The increase from Asia Pacific was primarily due to higher sales of automotiveelectronics products of $0.6 million and the increase from Latin America was attributable to an increase in sales of decoration products of $1.0 million and $0.3 million, respectively, partially mitigated by lower sales in electronics and industrial products of $0.3 million and $0.2 million, respectively.$0.9  million.

Pigments, Powders and OxidesColor Solutions





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to

 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to

 

March 31,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Other

 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

61,157 

 

 

$

26,522 

 

 

$

34,635 

 

130.6 

%

 

$

389 

 

$

34,593 

 

$

(347)

 

$

 —

 

$

90,472 

 

 

$

61,157 

 

 

$

29,315 

 

47.9 

%

 

$

603 

 

$

9,423 

 

$

(629)

 

$

19,918 

 

$

 —

Segment gross profit

 

 

20,286 

 

 

 

7,854 

 

 

 

12,432 

 

158.3 

%

 

 

389 

 

 

10,621 

 

 

(102)

 

 

1,524 

 

 

28,182 

 

 

 

20,286 

 

 

 

7,896 

 

38.9 

%

 

 

603 

 

 

1,906 

 

 

(215)

 

 

3,714 

 

 

1,888 

Gross profit as a % of segment net sales

 

 

33.2 

%

 

 

29.6 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1 

%

 

 

33.2 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



       Net sales increased compared with the prior-year same period, primarily due to sales from Cappelle,  and higher sales from Nubiola of $33.4surface technology and pigment products of $19.0 million, which was acquired in the third quarter of 2015.$3.7 million, and $5.6 million, respectively.  Net sales were positively impacted by higher sales from acquisitions of $19.9 million, higher volumes and mix of $34.6$9.4 million and favorablehigher product pricing of $0.4$0.6 million, partially offset by unfavorable foreign currency impacts of $0.3$0.6 million.  Gross profit increased from the prior-year same period, primarily due to highergross profit from acquisitions of $3.7 million,  lower manufacturing costs of $2.9 million,  favorable sales volumes and mix of $10.6$1.9 million favorableand higher product pricing of $0.6 million, partially offset by unfavorable raw material costs of $1.0 million and unfavorable foreign currency impacts of $0.2 million. 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

 

 

 

 



 

March 31,

 

 

 

 

 

 



 

2017

 

2016

 

$ Change

 

% Change



 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

38,518 

 

$

28,397 

 

$

10,121 

 

35.6 

%

Europe

 

 

35,177 

 

 

17,578 

 

 

17,599 

 

100.1 

%

Asia Pacific

 

 

8,258 

 

 

7,130 

 

 

1,128 

 

15.8 

%

Latin America

 

 

8,519 

 

 

8,052 

 

 

467 

 

5.8 

%

Total

 

$

90,472 

 

$

61,157 

 

$

29,315 

 

47.9 

%

The net sales increase of $29.3 million was driven by increased sales from all regions.  The increased sales from Europe was primarily driven by sales from Cappelle of $15.9 million.   The increase in sales from the United States was driven by sales from Cappelle of $3.1 million, surface technology products of $3.7 million and pigments of $2.4 million.  The increase in sales from Asia Pacific was attributable to higher sales for all products. 

2827


 

Table of Contents

costs of $1.2 million, lower manufacturing costs of $0.3 million and favorable product pricing of $0.4 million, partially offset by unfavorable foreign currency impacts of $0.1 million.



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

 

 

 

 



 

March 31,

 

 

 

 

 

 



 

2016

 

2015

 

$ Change

 

% Change



 

(Dollars in thousands)

 

 

 

Segment net sales  by Region

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

28,397 

 

$

18,877 

 

$

9,520 

 

50.4 

%

Europe

 

 

17,578 

 

 

4,679 

 

 

12,899 

 

275.7 

%

Asia Pacific

 

 

7,130 

 

 

2,547 

 

 

4,583 

 

179.9 

%

Latin America

 

 

8,052 

 

 

419 

 

 

7,633 

 

1,821.7 

%

Total

 

$

61,157 

 

$

26,522 

 

$

34,635 

 

130.6 

%

Net sales increased $34.7 million, primarily driven by increased sales from Nubiola of $33.4 million, which was acquired in the third quarter of 2015 and contributed sales in all regions. 



Summary of Cash Flows for the three months ended March 20162017 and 20152016 







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

 



 

March 31,

 

 

 



 

2016

 

2015

 

$ Change



 

(Dollars in thousands)

Net cash (used in) operating activities

 

$

(10,161)

 

$

(10,269)

 

$

108 

Net cash (used in) investing activities

 

 

(11,688)

 

 

(20,267)

 

 

8,579 

Net cash provided by (used in) financing activities

 

 

19,200 

 

 

(2,548)

 

 

21,748 

Effect of exchange rate changes on cash and cash equivalents

 

 

134 

 

 

(2,241)

 

 

2,375 

(Decrease) in cash and cash equivalents

 

$

(2,515)

 

$

(35,325)

 

$

32,810 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

 

 



 

March 31,

 

 

 



 

2017

 

2016

 

$ Change



 

(Dollars in thousands)

Net cash provided by (used in) operating activities

 

$

1,630 

 

$

(10,161)

 

$

11,791 

Net cash used in investing activities

 

 

(6,764)

 

 

(11,688)

 

 

4,924 

Net cash provided by financing activities

 

 

51,935 

 

 

19,200 

 

 

32,735 

Effect of exchange rate changes on cash and cash equivalents

 

 

446 

 

 

134 

 

 

312 

Increase (decrease) in cash and cash equivalents

 

$

47,247 

 

$

(2,515)

 

$

49,762 



DetailsThe following table includes details of net cash provided by operating activities were as follows:activities.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

 

 

 

March 31,

 

 

 

 

2016

 

2015

 

$ Change

 

2017

 

2016

 

$ Change

 

(Dollars in thousands)

 

(Dollars in thousands)

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(9,730)

 

$

9,015 

 

$

(18,745)

(Gain) loss on sale of assets and business

 

 

(4,083)

 

 

294 

 

 

(4,377)

Net income (loss)

 

$

22,121 

 

$

(9,730)

 

$

31,851 

Loss (gain) on sale of assets and business

 

 

419 

 

 

(4,083)

 

 

4,502 

Depreciation and amortization

 

 

10,672 

 

 

7,814 

 

 

2,858 

 

 

11,375 

 

 

10,672 

 

 

703 

Interest amortization

 

 

315 

 

 

297 

 

 

18 

 

 

479 

 

 

315 

 

 

164 

Restructuring and impairment

 

 

24,164 

 

 

(807)

 

 

24,971 

 

 

2,828 

 

 

24,164 

 

 

(21,336)

Devaluation of Venezuela

 

 

 —

 

 

3,343 

 

 

(3,343)

Loss on extinguishment of debt

 

 

3,905 

 

 

 —

 

 

3,905 

Accounts receivable

 

 

(23,582)

 

 

(11,845)

 

 

(11,737)

 

 

(26,619)

 

 

(23,582)

 

 

(3,037)

Inventories

 

 

(7,706)

 

 

1,427 

 

 

(9,133)

 

 

(17,114)

 

 

(7,706)

 

 

(9,408)

Accounts payable

 

 

5,555 

 

 

921 

 

 

4,634 

 

 

8,188 

 

 

5,555 

 

 

2,633 

Other current assets and liabilities, net

 

 

1,876 

 

 

(23,626)

 

 

25,502 

 

 

(3,265)

 

 

1,876 

 

 

(5,141)

Other adjustments, net

 

 

(7,642)

 

 

2,898 

 

 

(10,540)

 

 

(687)

 

 

(7,642)

 

 

6,955 

Net cash (used in) operating activities

 

$

(10,161)

 

$

(10,269)

 

$

108 

Net cash provided by (used in) operating activities

 

$

1,630 

 

$

(10,161)

 

$

11,791 



Cash flows from operating activities. Cash flows fromprovided by operating activities increased $11.8 million in the first three months of 20162017 compared with the prior-year same period.  The increase was due to a noncash impairment chargehigher earnings after consideration of $24.1 million associated with the Europe-based Polymer Additives assets that are classified as discontinued operations,non-cash items, partially offset by a decrease inhigher cash outflows for net income. Also, driving the increase were decreased payments associated with incentive compensation, income taxes and retirement benefits in the three months ended March 31, 2016 compared with the prior-year same period, offset by lower cash flow from working capital.capital of $9.8 million.



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Cash flows from investing activities. Cash flows used in investing activities decreased $8.6$4.9 million in the first three months of 20162017 compared with the prior-year same period. The decrease was primarily due to lower capital expenditurescash outflows for business acquisitions of $7.5$7.9 million, and waspartially offset by lower sales proceeds of $3.6 million,  which primarily driven byconsisted of the lower costs incurred forproceeds from a closed site in Australia during the Antwerp, Belgium facility which was substantially completed in the fourth quarter of 2015.three months ended March 31, 2016. 



Cash flows from financing activities. Cash flows provided by financing activities increased $21.7$32.7 million in the first three months of 20162017 compared with the prior-year same period, primarily as a resultperiod.  As further discussed in Note 8, during the three months ended March 31, 2017, we paid off our Previous Credit Facility and entered into our Credit Facility, consisting of a $400 million secured revolving line of credit, a $357.5 million secured term loan facility and a €250 million secured euro term loan facility.  This transaction resulted in additional borrowings in the first quarter of $42.1 million compared to the prior-year same period. Further, compared to the prior-year same period, net borrowing increaserepayments under loans payable was $7.5 million higher.  Additionally, during the first quarter of $33.82017, we paid $12.7 million in debt issuance costs related to the Credit Facility entered into during the period, partially offset by the purchaselower purchases of treasury stock during the first quarter of $11.4 million.2017.    





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Capital Resources and Liquidity

2017 Credit Facility

On July 31, 2014,February 14, 2017, the Company entered into a new credit facility (the “Credit Facility”) with a group of lenders to refinance the majority of its then outstanding debt.  credit facility debt and to provide liquidity for ongoing working capital requirements and general corporate purposes.

The Credit Facility consistedconsists of a $200$400 million secured revolving line of credit with a term of five years, and a $300$357.5 million secured term loan facility with a term of seven years and a €250 million secured euro term loan facility with a term of seven years. On January 25, 2016, the Company amended the Credit Facility by entering into the Incremental Assumption Agreement (the “Incremental Agreement”)The term loans are payable in equal quarterly installments in an amount equal to increase the revolving line of credit commitment amount from $200 million to $300 million.  The Company then used a portion0.25% of the increase in the revolving line of credit to repay $50 millionoriginal principal amount of the term loan facility. The Credit Facility was amended and a portion of the outstanding term loans, were repaid to increase the amount of total liquidity available under the Credit Facility and reduce the total cost of borrowings.

Principal payments on the term loan facility of $0.75 million quarterly, are payable commencing December 31, 2014, with the remaining balance due on the maturity date. At March 31, 2016,date thereof.  In addition, the Company had borrowed $245.5 million under the term loan facility,  taking into account all prior quarterly payments and the $50 million prepayment that was made in January 2016, atis required, on an annual ratebasis, to make a prepayment of 4.0%.  Thereterm loans until they are no additional borrowings available underfully paid and then to the term loan facility. revolving loans in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Credit Facility.

Subject to the satisfaction of certain conditions, the Company can request up to $100 million of additional commitments under the Credit Facility, though the lenders are not required to provide such additional commitments. In addition, up to $100 million of the revolving line of credit will be available to certain of the Company’s subsidiariesor term loans in the formaggregate principal amount of revolvingup to $250 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans denominated in Euros.and, certain additional debt subject to satisfaction of certain covenant levels.

Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the 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 mostcertain of the Company’s U.S. subsidiaries and 65% of most of the stock of certain of the Company’s first tierdirect foreign subsidiaries.

Interest Rate – Term Loan:Loans:  The interest rates applicable to the U.S. term loans will be, at the Company’s option, equal to either a base rate or a London Interbank Offered Rate (“LIBOR”)LIBOR rate plus, in both cases, an applicable margin.  The interest rates applicable to the Euro term loans will be a Euro Interbank Offered Rate (“EURIBOR”) rate plus an applicable margin.

·

The base rate for U.S. term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) PNC’ssyndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%.  

·

The applicable margin for base rate loans is 2.25%1.50%.

·

The LIBOR rate will be set as quoted by Bloomberg andfor U.S. term loans shall not be less than 0.75% and the applicable margin for LIBOR rate U.S. term loans is 2.50%.

·

The EURIBOR rate for Euro term loans shall not be less than 0% and the applicable margin for LIBOREURIBOR rate loans is 3.25%2.75%.

·

For LIBOR rate term loans and EURIBOR 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 or EURIBOR rate, as applicable, for the corresponding duration.

At March 31, 2017, the Company had borrowed $357.5 million under the secured term loan facility at an interest rate of 3.54% and €250 million under the secured euro term loan facility at an interest rate of 2.75%. At March 31, 2017, there were no additional borrowings available under the term loan facilities.

Interest Rate – Revolving Credit Line:  The interest rates applicable to loans under the revolving credit line 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 at such time to (b) the Company’s consolidated EBITDA 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) PNC’ssyndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%.  The applicable margin for base rate loans will vary between 0.75% and 1.75%.

·

The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for baseLIBOR rate revolving loans will vary between 1.50%1.75% and 2.00%.

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·

The LIBOR rate will be set as quoted by Bloomberg for U.S. Dollars.

·

The applicable margin for LIBOR Rate Loans will vary between 2.50% and 3.00%2.75%.

·

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.

29


Table of Contents

At March 31, 2016,  the Company had borrowed $247.6 million2017, there were no borrowings under the revolving credit facilities at a weighted average interest rate of 3.4%.  The borrowing on the revolving credit facility was used to fund the acquisitions, the share repurchase program, and for other general business use.line. After reductions for outstanding letters of credit secured by these facilities, we had $48.0$395.6 million of additional borrowings available under the revolving credit facilities at March 31, 2016.2017.

The 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 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 revolving credit facility, the Company is subject to a financial covenantscovenant regarding the Company’s outstanding net indebtedness and interest coverage ratios.

maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Credit FacilityAgreement may be accelerated and become immediately due and payable.  At March 31, 2016,2017, we were in compliance with the covenants of the Credit Facility.

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 most precious metals from financial institutions under consignment agreements (generally referred to as our precious metals consignment program).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 $0.2 million for the three months ended March 31, 20162017 and 2015.2016.  We had on hand precious metals owned by participants in our precious metals program of $23.5$31.9 million at March 31, 2016,2017, and $20.5$28.7 million at December 31, 2015,2016, measured at fair value based on market prices for identical assets and net of credits.

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 March 31, 2016,2017, or December 31, 2015,2016,  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. 

At March 31, 2016,2017, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $6.16.6 million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.

Other Financing Arrangements

We maintain other lines of credit to provide global flexibility for Ferro’s short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $7.9$33.1 million and $8.0$7.3 million at March 31, 20162017,  and December 31, 2015,2016, respectively. We had $6.6$32.0 million and $7.3$6.7 million of additional borrowings available under these lines at March 31, 20162017,  and December 31, 2015,2016, respectively.

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 March 31, 20162017,  we had $55.9$92.8 million of cash and cash equivalents. Substantially all of our cash and cash equivalents were held by foreign subsidiaries. Cash generated in the U.S. is generally used to

31


Table of Contents

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.

Our liquidity requirements and uses primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures, acquisition costs, capital investments, 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 from operating activities are primarily driven

30


Table of Contents

by earnings before noncashnon-cash charges and changes in working capital needs. We had additional borrowing capacity of $54.6$427.6 million at March 31, 2016,2017, and $32.9$112.0 million at December 31, 2015,2016, available under our various credit facilities, primarily our revolving credit facility. 

Our revolving credit facility subjects us to  a customary financial covenants, including acovenant regarding the Company’s maximum leverage ratio and an interest coverage ratio. These covenantsThis covenant under our credit facility restrictrestricts the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.

The most critical of these ratios is the leverage ratio for the revolving credit facility. As of March 31, 2016,2017, we were in compliance with our maximum leverage ratio covenant of 3.75x4.25x as our actual ratio was 3.23x,2.55x, providing $21.9$86.4 million of EBITDA cushion on the leverage ratio, as defined within the Credit Facility. To the extent that economic conditions in key markets deteriorate or we are unable to meet our business projections and EBITDA falls below approximately $130 million for rolling four quarters, based on reasonably consistent net debt levels with those as of DecemberMarch 31, 2015,2017, 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, except for one, which is not rated.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 definitive agreements relating toclosed 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, 2015.2016.

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

32


Table of Contents

described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2015.2016.





 

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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, foreign currency exchange rates, and costs of raw materials and energy.

Our exposure to interest rate risk arises from our debt portfolio. We manage this risk by controlling the mix of fixed versus variable-rate debt after considering the interest rate environment and expected future cash flows. 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 that 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 below:in the table below.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

2016

 

2015

 

2017

 

2016

 

(Dollars in thousands)

 

(Dollars in thousands)

Variable-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

488,792 

 

$

461,717 

 

$

615,594 

 

$

551,085 

Fair value

 

 

488,859 

 

 

466,571 

 

 

618,318 

 

 

570,441 

Change in annual interest expense from 1% change in interest rates

 

 

4,996 

 

 

4,690 

 

 

6,318 

 

 

5,611 

Fixed-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

Carrying amount

 

 

4,976 

 

 

4,610 

 

 

7,782 

 

 

8,228 

Fair value

 

 

4,280 

 

 

3,956 

 

 

6,918 

 

 

7,315 

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

Foreign currency forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount

 

 

332,700 

 

 

338,418 

 

 

188,234 

 

 

338,186 

Carrying amount and fair value

 

 

(4,492)

 

 

(1,207)

 

 

237 

 

 

350 

Change in fair value from 10% appreciation of U.S. dollar

 

 

22,283 

 

 

19,814 

 

 

2,469 

 

 

15,589 

Change in fair value from 10% depreciation of U.S. dollar

 

 

(27,242)

 

 

(24,217)

 

 

(3,018)

 

 

(19,054)































 

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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 March 31, 2016,2017, 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 March 31, 2016.2017.

Changes in Internal Control over Financial Reporting

During the first quarter of 2016,2017, 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.





 

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

There are various lawsuits and claims pending against the Company and its consolidated subsidiaries. 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

There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Our ability to pay common stock dividends is limited by certain covenants in our Credit Facility other than dividends payable solely in Capital Securities, as defined in the agreement.

The following table summarizes purchases of our common stock by the Company and affiliated purchasers during the three months ended March 31, 2016:2017:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Total Number 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



 

Purchased (1)

 

Paid per Share

 

or Programs

 

or Programs



 

(Dollars in thousands, except for per share amounts)

January 1, 2016 to January 31, 2016

 

1,118,463 

 

$

9.86 

 

1,118,463 

$

518,230 

February 1, 2016 to February 29, 2016

 

56,974 

 

$

9.10 

 

56,974 

$

25,000,000 

March 1, 2016 to March 31, 2016

 

 —

 

$

 —

 

 —

$

25,000,000 

Total

 

1,175,437 

 

 

 

 

1,175,437 

 

 

__________________________



(1)

On July 29, 2015,

Total Number 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 Company’s Board of Directors approved a stock repurchase program, authorizing the CompanyPlans

Purchased

Paid per Share

or Programs

or Programs

(Dollars in thousands, except for per share amounts)

January 1, 2017 to repurchase upJanuary 31, 2017

 —

$

 —

 —

$

50,000,000 

February 1, 2017 to $25 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. On October 16, 2015, the Company’s Board of Directors approved a follow-on share repurchase program for the repurchase of an additional $25 million of the Company’s outstanding shares of common stock on the open market, including through a Rule 10b5-1 plan, in privately negotiated transactions, or otherwise. On February 18, 2016, the Company’s Board of Directors approved an additional follow-on share repurchase program for the repurchase of an additional $25 million of the Company’s outstanding shares of common stock on the open market, including through a Rule 10b5-1 plan, in privately negotiated transactions, or otherwise.28, 2017

 —

$

 —

 —

$

50,000,000 

March 1, 2017 to March 31, 2017

 —

$

 —

 —

$

50,000,000 

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.

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SIGNATURES

Pursuant to the requirements of the Securities 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:

April 26, 201625, 2017

 



 

/s/ Peter T. Thomas



 

Peter T. Thomas



 

Chairman, President and Chief Executive Officer

(Principal Executive Officer)



 

 

Date:

April 26, 201625, 2017

 



 

/s/ Jeffrey L. RutherfordBenjamin J. Schlater



 

Jeffrey L. RutherfordBenjamin J. Schlater



 

Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)







 

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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, liquidation or succession

2.1

Sale and Purchase Agreement, dated April 29, 2015, by and among Ferro Corporation, the sellers party thereto, Corporación Química Vhem, S.L. and Dibon USA, LLC. (incorporated by reference to Exhibit 2.1 to Ferro Corporation’s Current Report on Form 8-K, filed July 9, 2015)**

2.2

Addendum to Sale and Purchase Agreement, dated July 7, 2015, by and among Ferro Corporation, Ferro Spain Management Company, S.L.U., the sellers party thereto, Corporación Química Vhem, S.L. and Dibon USA, LLC. (incorporated by reference to Exhibit 2.2 to Ferro Corporation’s Current Report on Form 8-K, filed July 9, 2015)**

3

Articles of incorporation and by-laws:

3.1

Eleventh Amended Articles of Incorporation of Ferro Corporation (incorporated by reference to Exhibit 4.1 to Ferro Corporation’s Registration Statement on Form S3, filed March 5, 2008).

3.2

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed December 29, 1994 (incorporated by reference to Exhibit 4.2 to Ferro Corporation’s Registration Statement on Form S3, filed March 5, 2008).

3.3

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed on June 23, 1998 (incorporated by reference to Exhibit 4.3 to Ferro Corporation’s Registration Statement on Form S3, filed March 5, 2008).

3.4

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed on October 14, 2011 (incorporated by reference to Exhibit 3.1 to Ferro Corporation’s Current Report on Form 8-K, filed October 17, 2011).

3.5

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed on April 25, 2014 (incorporated by reference to Exhibit 3.5 to Ferro’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2014).

3.6

Ferro Corporation Amended and Restated Code of Regulations (incorporated by reference to Exhibit 3.1 to Ferro Corporation's current Report on Form 8-K filed May 1, 2014.December 12, 2016.)

4

Instruments defining rights of security holders, including indentures:

4.1

Senior Indenture, dated as of March 5, 2008, by and between Ferro Corporation and U.S. Bank National Association (incorporated by reference to Exhibit 4.5 to Ferro Corporation’s Registration Statement on Form S3, filed March 5, 2008).

4.2

First Supplemental Indenture, dated August 19, 2008, by and between Ferro Corporation and U.S. Bank National Association (with Form of 6.50% Convertible Senior Note due 2013) (incorporated by reference to Exhibit 4.2 to Ferro Corporation’s Current Report on Form 8K, filed August 19, 2008).

4.3

Form of Indenture, by and between Ferro Corporation and Wilmington Trust FSB (incorporated by reference to Exhibit 4.1 to Ferro Corporation’s Registration Statement on Form S3ASR, filed July 27, 2010).

4.4

First Supplemental Indenture, dated August 24, 2010, by and between Ferro Corporation and Wilmington Trust FSB (with Form of 7.875% Senior Notes due 2018) (incorporated by reference to Exhibit 4.1 to Ferro Corporation’s Current Report on Form 8K, filed August 24, 2010).

4.5

Second Supplemental Indenture, dated July 31, 2014, by and between Ferro Corporation and Wilmington Trust, National Association (incorporated by reference to Exhibit 10.1 to Ferro Corporation’s current Report on Form 8-K, filed August 5, 2014).



The Company agrees, upon request, to furnish to the U.S. Securities and Exchange Commission a copy of any instrument authorizing long-term debt that does not authorize debt in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis.

10.1

Credit Agreement, dated as of February 14, 2017, among Ferro Corporation, the lenders party thereto, PNC Bank, National Association, as the administrative agent, collateral agent and a letter of credit issuer, Deutsche Bank AG New York Branch, as the syndication agent and as a letter of credit issuer, and the various financial institutions and other persons from time to time party thereto (incorporated by reference to Exhibit 10.1 to Ferro Corporation’s current Report on Form 8-K, filed February 17, 2017).

10.2

Second Incremental Assumption Agreement, dated January 25,August 29, 2016, by and among Ferro Corporation, PNC Bank, National Association, as the administrative agent, the collateral agent and as an issuer, JPMorgan Chase Bank, N.A., as an issuer, and various financial institutions as lenderslenders. (incorporated by reference to Exhibit 10.14.1 to Ferro Corporation’s Currentcurrent Report on Form 8-K,8K, filed August 30, 2016).

10.3

Retention Agreement, dated September 1, 2016, by and between Jeffrey L. Rutherford and Ferro Corporation (incorporated by reference to Exhibit 10.2 to Ferro Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016).*

10.4

Separation Agreement and Release, dated January 26, 2016.3, 2017, by and between Jeffrey L. Rutherford and Ferro Corporation.*

10.5

Change in Control Agreement, dated September 1, 2016, by and between Benjamin Schlater and Ferro Corporation.*

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Table of Contents

Exhibit:

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.

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Table of Contents

Exhibit:

101

XBRL Documents:

101.INS

XBRL Instance Document

101.SCH

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document

101.LAB

XBRL Labels Linkbase Document

101.PRE

XBRL Presentation Linkbase Document

101.DEF

XBRL Definition Linkbase Document

__________________________

*Indicates management contract or compensatory plan, contract or arrangement in which one or more Directors and/or executives of Ferro Corporation may be participants.

**   Certain exhibits and schedules have been omitted and the registrant agrees to furnish a copy of any omitted exhibits and schedules to the Securities and Exchange Commission





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