UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One) | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended |
or
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☐ | 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
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FERRO CORPORATION
(Exact name of registrant as specified in its charter)
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| Ohio (State or other jurisdiction of incorporation or organization) |
| 34-0217820 (I.R.S. Employer Identification No.) |
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| 6060 Parkland Boulevard Suite 250 Mayfield Heights, OH (Address of principal executive offices) |
| 44124 (Zip Code) |
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| 216-875-5600 (Registrant’s telephone number, including area code) |
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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):
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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 June 30, 2016,March 31, 2017, there were 83,228,35083,633,794 shares of Ferro Common Stock, par value $1.00, outstanding.
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3 | ||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. Quantitative and Qualitative Disclosures about Market Risk | ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||
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Exhibit 10.4 | ||
Exhibit 10.5 |
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Exhibit 31.1 |
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Exhibit 31.2 |
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Exhibit 32.1 |
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Exhibit 32.2 |
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2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
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| Three Months Ended |
| Six Months Ended |
| Three Months Ended | ||||||||||||
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| June 30, |
| June 30, |
| March 31, | ||||||||||||
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||||
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| (Dollars in thousands, except per share amounts) |
| (Dollars in thousands, except per share amounts) | ||||||||||||||
Net sales |
| $ | 297,977 |
| $ | 268,214 |
| $ | 575,428 |
| $ | 530,986 |
| $ | 320,555 |
| $ | 277,451 |
Cost of sales |
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| 199,604 |
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| 190,574 |
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| 392,826 |
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| 382,711 |
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| 221,761 |
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| 193,222 |
Gross profit |
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| 98,373 |
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| 77,640 |
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| 182,602 |
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| 148,275 |
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| 98,794 |
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| 84,229 |
Selling, general and administrative expenses |
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| 57,871 |
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| 52,695 |
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| 110,517 |
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| 102,151 |
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| 58,958 |
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| 52,646 |
Restructuring and impairment charges |
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| 787 |
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| 1,116 |
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| 1,668 |
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| 1,625 |
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| 3,018 |
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| 881 |
Other expense (income): |
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Interest expense |
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| 5,428 |
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| 3,110 |
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| 10,275 |
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| 6,260 |
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| 6,224 |
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| 4,847 |
Interest earned |
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| (115) |
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| (57) |
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| (200) |
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| (94) |
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| (180) |
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| (85) |
Foreign currency losses, net |
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| 389 |
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| 2,827 |
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| 2,000 |
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| 4,555 | ||||||
Miscellaneous expense (income), net |
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| 669 |
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| (161) |
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| (2,784) |
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| 238 | ||||||
Foreign currency (gains) losses, net |
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| (314) |
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| 1,611 | ||||||||||||
Loss on extinguishment of debt |
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| 3,905 |
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| — | ||||||||||||
Miscellaneous income, net |
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| (2,076) |
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| (3,453) | ||||||||||||
Income before income taxes |
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| 33,344 |
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| 18,110 |
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| 61,126 |
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| 33,540 |
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| 29,259 |
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| 27,782 |
Income tax expense |
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| 8,484 |
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| 5,679 |
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| 16,502 |
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| 8,138 |
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| 7,138 |
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| 8,018 |
Income from continuing operations |
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| 24,860 |
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| 12,431 |
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| 44,624 |
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| 25,402 |
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| 22,121 |
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| 19,764 |
(Loss) from discontinued operations, net of income taxes |
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| (5,748) |
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| (5,646) |
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| (35,242) |
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| (9,602) | ||||||
Net income |
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| 19,112 |
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| 6,785 |
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| 9,382 |
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| 15,800 | ||||||
Less: Net income (loss) attributable to noncontrolling interests |
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| 143 |
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| 186 |
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| 379 |
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| (1,769) | ||||||
Net income attributable to Ferro Corporation common shareholders |
| $ | 18,969 |
| $ | 6,599 |
| $ | 9,003 |
| $ | 17,569 | ||||||
Loss from discontinued operations, net of income taxes |
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| — |
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| (29,494) | ||||||||||||
Net income (loss) |
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| 22,121 |
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| (9,730) | ||||||||||||
Less: Net income attributable to noncontrolling interests |
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| 223 |
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| 236 | ||||||||||||
Net income (loss) attributable to Ferro Corporation common shareholders |
| $ | 21,898 |
| $ | (9,966) | ||||||||||||
Earnings (loss) per share attributable to Ferro Corporation common shareholders: |
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Basic earnings (loss): |
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Continuing operations |
| $ | 0.30 |
| $ | 0.14 |
| $ | 0.53 |
| $ | 0.31 |
| $ | 0.26 |
| $ | 0.23 |
Discontinued operations |
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| (0.07) |
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| (0.06) |
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| (0.42) |
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| (0.11) |
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| — |
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| (0.35) |
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| $ | 0.23 |
| $ | 0.08 |
| $ | 0.11 |
| $ | 0.20 |
| $ | 0.26 |
| $ | (0.12) |
Diluted earnings (loss): |
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Continuing operations |
| $ | 0.29 |
| $ | 0.14 |
| $ | 0.53 |
| $ | 0.31 |
| $ | 0.26 |
| $ | 0.23 |
Discontinued operations |
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| (0.07) |
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| (0.06) |
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| (0.42) |
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| (0.11) |
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| — |
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| (0.35) |
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| $ | 0.22 |
| $ | 0.08 |
| $ | 0.11 |
| $ | 0.20 |
| $ | 0.26 |
| $ | (0.12) |
See accompanying notes to condensed consolidated financial statements.
3
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
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| Three Months Ended |
| Six Months Ended | ||||||||
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| June 30, |
| June 30, | ||||||||
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| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
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| (Dollars in thousands) | ||||||||||
Net income |
| $ | 19,112 |
| $ | 6,785 |
| $ | 9,382 |
| $ | 15,800 |
Other comprehensive income (loss), net of income tax: |
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Foreign currency translation (loss) income |
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| (3,269) |
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| 9,407 |
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| (4,947) |
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| (28,389) |
Postretirement benefit liabilities gain (loss) |
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| 27 |
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| (18) |
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| 295 |
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| (2) |
Other comprehensive (loss) income, net of income tax |
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| (3,242) |
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| 9,389 |
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| (4,652) |
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| (28,391) |
Total comprehensive income (loss) |
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| 15,870 |
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| 16,174 |
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| 4,730 |
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| (12,591) |
Less: Comprehensive (loss) income attributable to noncontrolling interests |
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| (9) |
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| 185 |
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| 259 |
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| (2,908) |
Comprehensive income (loss) attributable to Ferro Corporation |
| $ | 15,879 |
| $ | 15,989 |
| $ | 4,471 |
| $ | (9,683) |
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| Three Months Ended | ||||
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| March 31, | ||||
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| 2017 |
| 2016 | ||
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| (Dollars in thousands) | ||||
Net income (loss) |
| $ | 22,121 |
| $ | (9,730) |
Other comprehensive income (loss), net of income tax: |
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Foreign currency translation income (loss) |
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| 7,211 |
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| (1,678) |
Postretirement benefit liabilities (loss) gain |
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| (4) |
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| 268 |
Other comprehensive income (loss), net of income tax |
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| 7,207 |
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| (1,410) |
Total comprehensive income (loss) |
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| 29,328 |
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| (11,140) |
Less: Comprehensive income attributable to noncontrolling interests |
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| 263 |
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| 268 |
Comprehensive income (loss) attributable to Ferro Corporation |
| $ | 29,065 |
| $ | (11,408) |
See accompanying notes to condensed consolidated financial statements.
4
Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
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| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
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| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
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| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
ASSETS | ASSETS | ASSETS | ||||||||||
Current assets |
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Cash and cash equivalents |
| $ | 49,416 |
| $ | 58,380 |
| $ | 92,829 |
| $ | 45,582 |
Accounts receivable, net |
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| 278,931 |
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| 231,970 |
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| 289,476 |
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| 259,687 |
Inventories |
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| 207,299 |
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| 184,854 |
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| 250,590 |
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| 229,847 |
Deferred income taxes |
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| — |
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| 12,088 | ||||||
Other receivables |
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| 32,008 |
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| 34,088 |
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| 38,280 |
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| 37,814 |
Other current assets |
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| 15,479 |
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| 15,695 |
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| 10,183 |
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| 9,087 |
Current assets held-for-sale |
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| 18,648 |
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| 16,215 | ||||||
Total current assets |
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| 601,781 |
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| 553,290 |
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| 681,358 |
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| 582,017 |
Other assets |
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Property, plant and equipment, net |
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| 252,548 |
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| 260,429 |
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| 257,993 |
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| 262,026 |
Goodwill |
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| 141,162 |
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| 145,669 |
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| 148,203 |
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| 148,296 |
Intangible assets, net |
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| 110,493 |
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| 106,633 |
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| 136,030 |
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| 137,850 |
Deferred income taxes |
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| 100,126 |
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| 87,385 |
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| 109,555 |
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| 106,454 |
Other non-current assets |
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| 48,206 |
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| 48,767 |
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| 51,094 |
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| 47,126 |
Non-current assets held-for-sale |
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| 370 |
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| 23,178 | ||||||
Total assets |
| $ | 1,254,686 |
| $ | 1,225,351 |
| $ | 1,384,233 |
| $ | 1,283,769 |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | ||||||||||
Current liabilities |
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Loans payable and current portion of long-term debt |
| $ | 10,451 |
| $ | 7,446 |
| $ | 16,632 |
| $ | 17,310 |
Accounts payable |
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| 129,946 |
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| 120,380 |
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| 139,880 |
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| 127,655 |
Accrued payrolls |
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| 28,713 |
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| 28,584 |
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| 29,858 |
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| 35,859 |
Accrued expenses and other current liabilities |
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| 60,525 |
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| 54,664 |
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| 70,433 |
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| 65,203 |
Current liabilities held-for-sale |
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| 4,165 |
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| 7,156 | ||||||
Total current liabilities |
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| 233,800 |
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| 218,230 |
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| 256,803 |
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| 246,027 |
Other liabilities |
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Long-term debt, less current portion |
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| 485,436 |
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| 466,108 |
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| 618,335 |
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| 557,175 |
Postretirement and pension liabilities |
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| 147,820 |
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| 148,249 |
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| 163,279 |
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| 162,941 |
Other non-current liabilities |
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| 65,080 |
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| 66,990 |
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| 59,489 |
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| 62,594 |
Non-current liabilities held-for-sale |
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| 1,643 |
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| 1,493 | ||||||
Total liabilities |
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| 933,779 |
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| 901,070 |
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| 1,097,906 |
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| 1,028,737 |
Equity |
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Ferro Corporation shareholders’ equity: |
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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 June 30, 2016, and December 31, 2015, respectively |
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| 93,436 |
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| 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 |
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| 93,436 |
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| 93,436 | ||||||
Paid-in capital |
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| 307,059 |
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| 314,854 |
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| 303,304 |
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| 306,566 |
Retained earnings |
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| 144,510 |
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| 135,507 |
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| 136,588 |
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| 114,690 |
Accumulated other comprehensive loss |
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| (65,850) |
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| (61,318) |
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| (99,476) |
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| (106,643) |
Common shares in treasury, at cost |
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| (166,329) |
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| (166,020) |
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| (155,707) |
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| (160,936) |
Total Ferro Corporation shareholders’ equity |
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| 312,826 |
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| 316,459 |
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| 278,145 |
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| 247,113 |
Noncontrolling interests |
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| 8,081 |
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| 7,822 |
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| 8,182 |
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| 7,919 |
Total equity |
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| 320,907 |
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| 324,281 |
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| 286,327 |
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| 255,032 |
Total liabilities and equity |
| $ | 1,254,686 |
| $ | 1,225,351 |
| $ | 1,384,233 |
| $ | 1,283,769 |
See accompanying notes to condensed consolidated financial statements.
5
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
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| Ferro Corporation Shareholders |
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| Common Shares |
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| Accumulated |
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| Common |
| Paid-in |
| Retained |
| Comprehensive |
| controlling |
| Total | ||||||
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| Shares |
| Amount |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Interests |
| Equity | |||||||
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| (Dollars 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) |
| — |
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| — |
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| — |
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| — |
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| 17,569 |
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| — |
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| (1,769) |
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| 15,800 |
Other comprehensive (loss) |
| — |
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| — |
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| — |
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| — |
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| — |
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| (27,252) |
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| (1,139) |
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| (28,391) |
Stock-based compensation transactions |
| (280) |
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| 8,003 |
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| — |
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| (3,310) |
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| — |
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| — |
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| — |
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| 4,693 |
Balances at June 30, 2015 |
| 6,165 |
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| (128,055) |
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| 93,436 |
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| 314,094 |
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| 88,976 |
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| (49,057) |
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| 8,724 |
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| 328,118 |
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Balances at December 31, 2015 |
| 9,431 |
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| (166,020) |
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| 93,436 |
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| 314,854 |
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| 135,507 |
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| (61,318) |
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| 7,822 |
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| 324,281 |
Net income |
| — |
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| — |
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| — |
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| — |
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| 9,003 |
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| — |
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| 379 |
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| 9,382 |
Other comprehensive (loss) |
| — |
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| — |
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| — |
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| — |
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| — |
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| (4,532) |
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| (120) |
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| (4,652) |
Purchase of treasury stock |
| 1,175 |
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| (11,429) |
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| — |
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| — |
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| — |
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| — |
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| — |
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| (11,429) |
Stock-based compensation transactions |
| (399) |
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| 11,120 |
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| — |
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| (7,795) |
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| — |
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| — |
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| — |
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| 3,325 |
Balances at June 30, 2016 |
| 10,207 |
| $ | (166,329) |
| $ | 93,436 |
| $ | 307,059 |
| $ | 144,510 |
| $ | (65,850) |
| $ | 8,081 |
| $ | 320,907 |
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| Ferro Corporation Shareholders |
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| Common Shares |
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| Accumulated |
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| in Treasury |
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| Other |
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|
| Common |
| Paid-in |
| Retained |
| Comprehensive |
| controlling |
| Total | ||||||
|
| Shares |
| Amount |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Interests |
| Equity | |||||||
|
| (In thousands) | |||||||||||||||||||||
Balances at December 31, 2015 |
| 9,431 |
| $ | (166,020) |
| $ | 93,436 |
| $ | 314,854 |
| $ | 135,507 |
| $ | (61,318) |
| $ | 7,822 |
| $ | 324,281 |
Net (loss) income |
| — |
|
| — |
|
| — |
|
| — |
|
| (9,966) |
|
| — |
|
| 236 |
|
| (9,730) |
Other comprehensive (loss) income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,442) |
|
| 32 |
|
| (1,410) |
Purchase of treasury stock |
| 1,175 |
|
| (11,429) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (11,429) |
Stock-based compensation transactions |
| (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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| Three Months Ended | ||||||||
|
| June 30, |
| March 31, | ||||||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
| $ | (1,975) |
| $ | 3,934 | ||||||
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 |
|
| (14,044) |
|
| (26,554) |
|
| (6,766) |
|
| (7,365) |
Proceeds from sale of assets |
|
| 3,597 |
|
| 125 |
|
| 2 |
|
| 3,586 |
Business acquisitions, net of cash acquired |
|
| (6,639) |
|
| (5,479) |
|
| — |
|
| (7,909) |
Net cash (used in) investing activities |
|
| (17,086) |
|
| (31,908) | ||||||
Net cash used in investing activities |
|
| (6,764) |
|
| (11,688) | ||||||
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) under loans payable |
|
| 3,031 |
|
| (931) | ||||||
Proceeds from revolving credit facility |
|
| 163,516 |
|
| 105,000 | ||||||
Principal payments on revolving credit facility |
|
| (92,706) |
|
| — | ||||||
Principal payments on term loan facility |
|
| (51,500) |
|
| (1,500) | ||||||
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 |
|
| 211 |
|
| (181) |
|
| (390) |
|
| 497 |
Net cash provided by financing activities |
|
| 10,822 |
|
| 102,388 |
|
| 51,935 |
|
| 19,200 |
Effect of exchange rate changes on cash and cash equivalents |
|
| (725) |
|
| (3,501) |
|
| 446 |
|
| 134 |
(Decrease) increase in cash and cash equivalents |
|
| (8,964) |
|
| 70,913 | ||||||
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 |
| $ | 49,416 |
| $ | 211,413 |
| $ | 92,829 |
| $ | 55,865 |
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 9,283 |
| $ | 7,045 |
| $ | 6,535 |
| $ | 4,763 |
Income taxes |
| $ | 7,432 |
| $ | 9,482 |
| $ | 4,097 |
| $ | 2,669 |
See accompanying notes to condensed consolidated financial statements.
7
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 six months ended June 30, 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 and six months ended June 30, 2016,March 31, 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
Recently Adopted Accounting Standards Adopted in the period ended June 30, 2016
In November 2015,March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. During the second quarter of 2016, we elected to prospectively adopt ASU 2015-17, thus reclassifying current deferred tax assets to noncurrent on the accompanying condensed consolidated balance sheets as of June 30, 2016. The prior reporting period was not retrospectively adjusted. Other than this reclassification, the adoption of ASU 2015-17 did not have an impact on the Company’s condensed consolidated financial statements.
NewAccounting Standards
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Topic 718:(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 services 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
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 will 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 diversity in practice. This pronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those annual periods.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.
8
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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606(Topic 606). This ASU replaces nearly all 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. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The CompanyOur evaluation of ASU 2014-09 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.
9
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. We expect resolution with respect to these assets during the third quarter, which could result in additional impairment charges and other related expenses of $25 million to $30 million. Additional impairment of the asset group’s net working capital would be recognized upon disposition.three months ended March 31, 2016.
The table below summarizes results for the Europe-based Polymer Additives assets, for the three and six months ended June 30,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 |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
|
| (Dollars in thousands) | ||||||||||
Net sales |
| $ | 6,900 |
| $ | 7,837 |
| $ | 14,650 |
| $ | 19,736 |
Cost of sales |
|
| 10,789 |
|
| 11,903 |
|
| 22,819 |
|
| 26,458 |
Gross loss |
|
| (3,889) |
|
| (4,066) |
|
| (8,169) |
|
| (6,722) |
Selling, general and administrative expenses |
|
| 1,502 |
|
| 1,009 |
|
| 2,505 |
|
| 2,228 |
Restructuring and impairment charges |
|
| — |
|
| — |
|
| 24,059 |
|
| — |
Interest expense |
|
| 40 |
|
| 206 |
|
| 276 |
|
| 319 |
Miscellaneous expense (income) |
|
| 30 |
|
| 365 |
|
| (387) |
|
| 333 |
(Loss) from discontinued operations before income taxes |
|
| (5,461) |
|
| (5,646) |
|
| (34,622) |
|
| (9,602) |
Income tax expense |
|
| 287 |
|
| — |
|
| 620 |
|
| — |
(Loss) from discontinued operations, net of income taxes |
| $ | (5,748) |
| $ | (5,646) |
| $ | (35,242) |
| $ | (9,602) |
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) |
4. Acquisitions
Cappelle
On December 9, 2016, the Company acquired 100% of the share capital of Belgium-based Cappelle Pigments NV (“Cappelle”), a leader in specialty, high-performance inorganic and organic pigments used in coatings, inks and plastics, for €40.0 million (approximately $42.4 million). The acquired business contributed net sales of $19.0 million and net income attributable to Ferro Corporation of $0.6 million for the three months ended March 31, 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, 2017, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $28.6 million of net working capital, $24.1 million of personal and real property, $10.3 million of debt, $3.5 million of goodwill and $3.5 million of a deferred tax liability on the condensed consolidated balance sheet.
ESL
On October 31, 2016, the Company acquired 100% of the membership interest of Electro-Science Laboratories, Inc. (“ESL”), a 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 provides 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 of $0.8 million for the three months ended March 31, 2017. The Company
910
incurred acquisition costs for the three months ended March 31, 2017, of $0.3 million, which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations.
The following table summarizesinformation 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 are classified as held-for-sale at June 30, 2016,were determined with the assistance of third parties who performed independent valuations using discounted cash flow and Decembercomparative market approaches and estimates made by management. As of March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2016 |
| December 31, 2015 | ||
|
| (Dollars in thousands) | ||||
Accounts receivable, net |
| $ | 3,857 |
| $ | 4,028 |
Inventories |
|
| 11,066 |
|
| 9,733 |
Other current assets |
|
| 3,725 |
|
| 2,454 |
Current assets held-for-sale |
|
| 18,648 |
|
| 16,215 |
Property, plant and equipment, net |
|
| — |
|
| 22,973 |
Other non-current assets |
|
| 370 |
|
| 205 |
Total assets held-for-sale |
| $ | 19,018 |
| $ | 39,393 |
|
|
|
|
|
|
|
Accounts payable |
| $ | 3,514 |
| $ | 5,736 |
Accrued expenses and other current liabilities |
|
| 651 |
|
| 1,420 |
Current liabilities held-for-sale |
|
| 4,165 |
|
| 7,156 |
Other non-current liabilities |
|
| 1,643 |
|
| 1,493 |
Total liabilities held-for-sale |
| $ | 5,808 |
| $ | 8,649 |
Included within non-current2017, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $39.7 million of intangible assets, are$19.0 million of goodwill, $18.9 million of net working capital, $2.9 million of personal and real property and $2.0 million of a deferred tax liability related to the amortizable intangibles assets of $37.8 million at June 30, 2016, and $25.0 million at December 31, 2015, which are fully reserved for at both periods.on the condensed consolidated balance sheet.
4. AcquisitionsDelta Performance Products
On August 1, 2016, the Company acquired certain assets of Delta Performance Products, LLC, for a cash purchase price of $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 $3.2 million of amortizable intangible assets, $0.6 million of net working capital, $0.4 million of goodwill and $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 €16.2€16.5 million in cash (approximately $18.0$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 June 30, 2016,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 $8.5$8.8 million of amortizable intangible assets, $3.8$7.7 million of net working capital, $3.9 million of goodwill, $0.7 million of personal and real property, $2.6$2.7 million of a deferred tax liability related to the amortizable intangible assets, and $7.6$0.7 million of net working capitalpersonal 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, subject to customary working capital and other adjustments.cash. 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 June 30, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $4.5 million of goodwill, $3.3 million of amortizable intangible assets, $4.5$1.7 million of goodwill, $0.6 million of personal and real property,net working capital, $0.7 million of a deferred tax liability related to the amortizable intangible assets and $1.7 million of net working capital on the condensed consolidated balance sheet.
Al Salomi
On November 17, 2015, the Company acquired 100% of the equity of Egypt-based tile coatings manufacturer Al Salomi for Frits and Glazes (“Al Salomi”) for EGP 307 million (approximately $38.2 million), including the assumption of debt. The acquired business
10
contributed net sales of $6.4 million and $12.0 million for the three and six months ended June 30, 2016 and net income attributable to Ferro Corporation of $1.6 million and $2.2 million for the three and six months ended June 30, 2016.
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 June 30, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $15.0 million of amortizable intangible assets, $14.3 million of goodwill, $10.7$0.6 million of personal and real property $4.8 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
On July 7, 2015, the Company acquired the entire share capital of Corporación Química Vhem, S.L., Dibon USA, LLC and Ivory Corporation, S.A. (together with their direct and indirect subsidiaries, “Nubiola”) on a cash-free and debt-free basis for €167 million (approximately $184.2 million). The acquisition was funded with excess cash and borrowings under the Company’s existing revolving credit facility. See Note 8 for additional detail on the revolving credit facility. During the second quarter of 2016, the Company had a purchase price adjustment due to the settlement of an escrow that reduced the fair value of net assets acquired to $168.1 million. As a result of the purchase price adjustment, the carrying amount of goodwill decreased by $11.7 million, intangibles decreased $6.4 million and the related deferred tax liability decreased $1.9 million. The impact of the change on the condensed consolidated statements of operations was not material. Nubiola is a worldwide producer 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.
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 June 30, 2016, 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:
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The acquired business contributed net sales of $30.8 million and $64.2 million for the three and six months ended June 30, 2016 and net income attributable to Ferro Corporation of $9.0 million and $14.2 million for the three and six months ended June 30, 2016.
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 intangible assets subject to amortization of $21.1 million, which is comprised of $5.4 million of customer relationships and $15.7 million of technology/know-how, which will be amortized over 20 years and 15 years, respectively. The Company preliminarily recorded acquired indefinite-lived intangible assets of $5.6 million related to trade names and trademarks. Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the
11
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 the consolidated results of the Company as if the Nubiola acquisition occurred as of January 1, 2014:
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| |
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| Three months ended June 30, 2015 |
| Six months ended June 30, 2015 | ||
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| (unaudited) | ||||
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| (In thousands, except per share amounts) | ||||
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Net sales |
| $ | 326,905 |
| $ | 622,727 |
Net income attributable to Ferro Corporation common shareholders |
| $ | 14,666 |
| $ | 30,927 |
Net earnings per share attributable to Ferro Corporation common shareholders - Basic |
| $ | 0.17 |
| $ | 0.35 |
Net earnings per share attributable to Ferro Corporation common shareholders - Diluted |
| $ | 0.17 |
| $ | 0.35 |
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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Thermark
In February 2015, the Company acquired TherMark Holdings, Inc., a leader in laser marking technology, for a cash purchase price of $5.5 million. The Company recorded $4.6 million of amortizable intangible assets, $2.5 million of goodwill, $1.7 million of a deferred tax liability related to the amortizable intangible assets, and $0.1 million of net working capital on the condensed consolidated balance sheet.
5. Inventories
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| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
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| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
Raw materials |
| $ | 62,518 |
| $ | 56,291 |
| $ | 84,913 |
| $ | 72,943 |
Work in process |
|
| 34,890 |
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| 33,099 |
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| 43,267 |
|
| 38,859 |
Finished goods |
|
| 109,891 |
|
| 95,464 |
|
| 122,410 |
|
| 118,045 |
Total inventories |
| $ | 207,299 |
| $ | 184,854 |
| $ | 250,590 |
| $ | 229,847 |
1211
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 June 30, 2016March 31, 2017 and 2015, and were $0.4 million for the six months ended June 30, 2016 and 2015.2016. We had on-hand precious metals owned by participants in our precious metals consignment program of $26.6$31.9 million at June 30, 2016,March 31, 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 $437.0$452.2 million at June 30, 2016,March 31, 2017, and $421.3$439.4 million at December 31, 2015.2016. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $2.1$2.5 million at June 30, 2016,March 31, 2017, and $3.8$3.5 million at June 30, 2015. March 31, 2016.
We recorded a $3.9 million gain 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, 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 during the first quarter of 2016, resulting in an impairment charge of $24.1 million, during the six months ended June 30, 2016. The impairment charge of $24.1 million, representing the 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 sixthree months ended June 30,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 six months ended June 30, 2016, and for the year ended December 31, 2015. The table also indicates the level within 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) | |||||
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| (Dollars in thousands) | |||||||||||||
June 30, 2016 |
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Assets held for sale |
| $ | — |
| $ | — |
| $ | 13,210 |
| $ | 13,210 |
| $ | (24,059) |
December 31, 2015 |
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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.
13
7. Goodwill and Other Intangible Assets
Details and activity in the Company’s goodwill by segment follow:
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| Pigments, |
| Performance |
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| Performance |
| Powders and |
| Colors and |
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| Coatings |
| Oxides |
| Glass |
| Total | ||||
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| (Dollars in thousands) | ||||||||||
December 31, 2015 |
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Gross goodwill |
| $ | 88,753 |
| $ | 48,794 |
| $ | 53,391 |
| $ | 190,938 |
Accumulated impairment losses |
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| (45,269) |
|
| — |
|
| — |
|
| (45,269) |
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| 43,484 |
|
| 48,794 |
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| 53,391 |
|
| 145,669 |
Acquisitions |
|
| — |
|
| (11,653) | (3) |
| 8,286 | (1), (2) |
| (3,367) |
Foreign currency adjustments |
|
| (1,278) |
|
| 179 |
|
| (41) |
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| (1,140) |
June 30, 2016 |
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Gross goodwill |
|
| 87,475 |
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| 37,320 |
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| 61,636 |
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| 186,431 |
Accumulated impairment losses |
|
| (45,269) |
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| — |
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| — |
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| (45,269) |
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| $ | 42,206 |
| $ | 37,320 |
| $ | 61,636 |
| $ | 141,162 |
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| Performance |
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| Performance |
| Color |
| Colors and |
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| Coatings |
| Solutions |
| Glass |
| Total | ||||
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| (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 |
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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.
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| March 31, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
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| (Dollars in thousands) | ||||
Goodwill, gross |
| $ | 206,670 |
| $ | 206,763 |
Accumulated impairment losses |
|
| (58,467) |
|
| (58,467) |
Goodwill, net |
| $ | 148,203 |
| $ | 148,296 |
12
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 June 30, 2016,March 31, 2017, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.
Amortizable intangible assets consisted of the following:
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| June 30, |
| December 31, |
| March 31, |
| December 31, | |||||
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| 2016 |
| 2015 |
| 2017 |
| 2016 | |||||
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| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
Gross amortizable intangible assets: |
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Patents |
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| $ | 5,238 |
| $ | 5,229 |
| $ | 5,170 |
| $ | 5,147 |
Land rights |
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| 4,875 |
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| 4,947 |
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| 4,770 |
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| 4,746 |
Technology/know-how and other |
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| 82,387 |
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| 66,558 |
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| 86,028 |
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| 84,837 |
Customer relationships |
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| 51,842 |
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| 46,320 |
|
| 80,505 |
|
| 80,153 |
Total gross amortizable intangible assets |
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| 144,342 |
|
| 123,054 |
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| 176,473 |
|
| 174,883 |
Accumulated amortization: |
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Patents |
|
|
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|
| (4,986) |
|
| (4,880) |
|
| (5,023) |
|
| (4,981) |
Land rights |
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|
| (2,697) |
|
| (2,671) |
|
| (2,733) |
|
| (2,698) |
Technology/know-how and other |
|
|
|
|
| (32,166) |
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| (16,473) |
|
| (37,051) |
|
| (34,775) |
Customer relationships |
|
|
|
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| (3,480) |
|
| (2,234) |
|
| (6,479) |
|
| (5,311) |
Total accumulated amortization |
|
|
|
|
| (43,329) |
|
| (26,258) |
|
| (51,286) |
|
| (47,765) |
Amortizable intangible assets, net |
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| $ | 101,013 |
| $ | 96,796 |
| $ | 125,187 |
| $ | 127,118 |
14
Indefinite-lived intangible assets consisted of the following:
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| June 30, |
| December 31, |
|
| March 31, |
| December 31, | ||||
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| 2016 |
| 2015 |
|
| 2017 |
| 2016 | |||||
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| (Dollars in thousands) |
| (Dollars in thousands) | |||||||||
Indefinite-lived intangibles assets: |
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Trade names and trademarks |
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|
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| $ | 9,480 |
| $ | 9,837 |
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| $ | 10,843 |
| $ | 10,732 |
8. Debt
Loans payable and current portion of long-term debt consisted of the following:
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|
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| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
Loans payable |
| $ | 5,819 |
| $ | 2,749 |
| $ | 8,029 |
| $ | 11,452 |
Current portion of long-term debt |
|
| 4,632 |
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| 4,697 |
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| 8,603 |
|
| 5,858 |
Loans payable and current portion of long-term debt |
| $ | 10,451 |
| $ | 7,446 |
| $ | 16,632 |
| $ | 17,310 |
13
Long-term debt consisted of the following:
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|
|
| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
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Term loan facility, net of unamortized issuance costs |
| $ | 240,598 |
| $ | 291,717 | ||||||
Revolving credit facility |
|
| 240,810 |
|
| 170,000 | ||||||
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 |
|
| 3,945 |
|
| 4,478 |
|
| 3,562 |
|
| 3,720 |
Other notes |
|
| 4,715 |
|
| 4,610 |
|
| 7,782 |
|
| 8,228 |
Total long-term debt |
|
| 490,068 |
|
| 470,805 |
|
| 626,938 |
|
| 563,033 |
Current portion of long-term debt |
|
| (4,632) |
|
| (4,697) |
|
| (8,603) |
|
| (5,858) |
Long-term debt, less current portion |
| $ | 485,436 |
| $ | 466,108 |
| $ | 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 June 30, 2016, after taking into account all prior quarterly payments and the $50 million prepayment that was made in January 2016,date thereof. In addition, the Company had borrowed $244.8 million under the term loan facility 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
15
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.
14
· | The base rate for U.S. term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) syndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%. |
| The applicable margin for base rate loans is |
· | The LIBOR rate |
· | The EURIBOR rate for Euro term loans shall not be less than 0% and the applicable margin for |
· | 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) syndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%. |
| The applicable margin for base rate loans will vary between |
· | The LIBOR rate |
|
|
· | 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 June 30, 2016, the Company had borrowed $240.8 millionMarch 31, 2017, there were no borrowings under the revolving credit facilities at an annual weighted average interest rate of 3.6%. The borrowing on the revolving credit facilities was used to fund the acquisitions, the share repurchase programs, and for other general business purposes.line. After reductions for outstanding letters of credit secured by these facilities, we had $54.8$395.6 million of additional borrowings available under the revolving credit facilities at June 30, 2016.March 31, 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 Facility may be accelerated and become immediately due and payable. At June 30, 2016,March 31, 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 $7.6$33.1 million and $8.0$7.3 million at June 30, 2016,March 31, 2017, and December 31, 2015,2016, respectively. The unused portions of these lines provided additional liquidity of $6.1$32.0 million at June 30, 2016,March 31, 2017, and $7.3$6.7 million at December 31, 2015.2016.
1615
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:
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| June 30, 2016 |
| March 31, 2017 | ||||||||||||||||||||||||||
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| Carrying |
| Fair Value |
| Carrying |
| Fair Value | ||||||||||||||||||||||
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| Amount |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Amount |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||
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| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||||||||||||||||||||
Cash and cash equivalents |
| $ | 49,416 |
| $ | 49,416 |
| $ | 49,416 |
| $ | — |
| $ | — |
| $ | 92,829 |
| $ | 92,829 |
| $ | 92,829 |
| $ | — |
| $ | — |
Loans payable |
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| (5,819) |
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| (5,819) |
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| — |
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| (5,819) |
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| — |
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| (8,029) |
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| (8,029) |
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| — |
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| (8,029) |
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| — |
Term loan facility(1) |
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| (240,598) |
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| (241,186) |
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| — |
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| (241,186) |
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| — | |||||||||||||||
Revolving credit facility |
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| (240,810) |
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| (238,355) |
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| — |
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| (238,355) |
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| — | |||||||||||||||
Term loan facility, maturing 2024(1) |
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| (615,594) |
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| (618,318) |
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| — |
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| (618,318) |
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| — | |||||||||||||||
Other long-term notes payable |
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| (4,715) |
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| (4,046) |
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| — |
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| (4,046) |
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| — |
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| (7,782) |
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| (6,918) |
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| — |
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| (6,918) |
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| — |
Foreign currency forward contracts, net |
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| 2,336 |
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| 2,336 |
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| — |
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| 2,336 |
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| — |
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| 237 |
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| 237 |
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| — |
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| 237 |
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| — |
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| December 31, 2015 |
| December 31, 2016 | ||||||||||||||||||||||||||
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| Carrying |
| Fair Value |
| Carrying |
| Fair Value | ||||||||||||||||||||||
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| Amount |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Amount |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||||
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| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||||||||||||||||||||
Cash and cash equivalents |
| $ | 58,380 |
| $ | 58,380 |
| $ | 58,380 |
| $ | — |
| $ | — |
| $ | 45,582 |
| $ | 45,582 |
| $ | 45,582 |
| $ | — |
| $ | — |
Loans payable |
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| (2,749) |
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| (2,749) |
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| — |
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| (2,749) |
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| — |
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| (11,452) |
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| (11,452) |
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| — |
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| (11,452) |
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| — |
Term loan facility(1) |
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| (291,717) |
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| (297,552) |
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| — |
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| (297,552) |
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| — | |||||||||||||||
Revolving credit facility |
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| (170,000) |
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| (169,019) |
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| — |
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| (169,019) |
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| — | |||||||||||||||
Term loan facility, maturing 2021(1) |
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| (239,530) |
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| (252,052) |
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| — |
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| (252,052) |
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| — | |||||||||||||||
Revolving credit facility, maturing 2019 |
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| (311,555) |
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| (318,389) |
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| — |
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| (318,389) |
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| — | |||||||||||||||
Other long-term notes payable |
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| (4,610) |
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| (3,956) |
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| — |
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| (3,956) |
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| — |
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| (8,228) |
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| (7,315) |
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| — |
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| (7,315) |
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| — |
Foreign currency forward contracts, net |
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| (1,207) |
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| (1,207) |
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| — |
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| (1,207) |
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| — |
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| 350 |
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| 350 |
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| — |
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| 350 |
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| — |
(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
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 $0.4 million and $2.0$0.3 million in the three and six months ended June 30, 2016, respectively,March 31, 2017, and net foreign currency losses of $2.8 million and $4.6$1.6 million in the three and six months ended June 30, 2015, respectively,March 31, 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 $5.9$0.2 million in the three months ended March 31, 2017, and net losses of $4.7$10.6 million in the three and six months ended June 30,March 31, 2016, respectively, and net losses of $0.3 million and net gains of $1.3 million in the three and six months ended June 30, 2015, respectively, 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 $278.0$188.2 million at June 30, 2016,March 31, 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 and six months ended June 30,March 31, 2017 and 2016, and 2015, respectively, of our foreign currency forward contracts:
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| Amount of Gain (Loss) |
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| Recognized in Earnings |
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| Three Months Ended |
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| June 30, |
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| 2016 |
| 2015 |
| Location of Gain (Loss) in Earnings | ||
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| (Dollars in thousands) |
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Foreign currency forward contracts |
| $ | 5,884 |
| $ | (317) |
| Foreign currency losses, net |
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| Amount of Gain (Loss) |
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| Recognized in Earnings |
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| Three Months Ended |
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| March 31, |
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| 2017 |
| 2016 |
| Location of Gain (Loss) in Earnings | ||
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| (Dollars in thousands) |
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Foreign currency forward contracts |
| $ | 243 |
| $ | (10,569) |
| Foreign currency (gains) losses, net |
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| Amount of (Loss) Gain |
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| Recognized in Earnings |
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| Six Months Ended |
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| June 30, |
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| 2016 |
| 2015 |
| Location of (Loss) Gain in Earnings | ||
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| (Dollars in thousands) |
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Foreign currency forward contracts |
| $ | (4,684) |
| $ | 1,328 |
| Foreign currency losses, net |
The following table presents the fair values on our condensed consolidated balance sheets of foreign currency forward contracts:
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| June 30, |
| December 31, |
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| March 31, |
| December 31, |
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| 2016 |
| 2015 |
| Balance Sheet Location |
| 2017 |
| 2016 |
| Balance Sheet Location | ||||
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Asset derivatives: |
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Foreign currency forward contracts |
| $ | 2,722 |
| $ | 913 |
| Other current assets |
| $ | 512 |
| $ | 1,854 |
| Other current assets |
Liability derivatives: |
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Foreign currency forward contracts |
| $ | (386) |
| $ | (2,120) |
| Accrued expenses and other current liabilities |
| $ | (275) |
| $ | (1,504) |
| Accrued expenses and other current liabilities |
10. Income Taxes
During the first half of 2016, incomeIncome tax expense for the three months ended March 31, 2017, was $16.5$7.1 million, or 27.0%24.4% of pre-tax income. In the first half of 2015, income, tax expense was $8.1compared with $8.0 million, or 24.3%28.9% of pre-tax income.income in the prior-year same period. The tax expense in the first halfquarter 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 half of 2015 tax expense was further lowered as a result of the amount of pre-tax losses in jurisdictions for which no tax benefit is recognized in proportion to the amount of pre-tax income in jurisdictions with no tax expense due to the utilization of fully valued tax attributes. Additionally, the first half of 2015 tax expense was benefited by certain discrete items, which had a favorable impact on the rate of approximately 5%, taking it from approximately 29.0% to 24.3%.
11. Contingent Liabilities
We have recorded environmental liabilities of $7.9$7.3 million at June 30, 2016,March 31, 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 liability at June 30, 2016,March 31, 2017, and December 31, 2015,2016, was primarily 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.
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 an $8.7 million liability December 31, 2016. During the first quarter of 2017, the Company participated in a $8.3newly available tax regime, resulting in the reduction of interest on these outstanding tax liabilities of $4.5 million. The liability recorded at March 31, 2017, is $4.6 million, and will be paid down over a $7.8 million liability at June 30, 2016, and December 31, 2015, respectively.five-year term.
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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 June 30,March 31, 2017 and 2016, and 2015, respectively, follow:
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| U.S. Pension Plans |
| Non-U.S. Pension Plans |
| Other Benefit Plans |
| U.S. Pension Plans |
| Non-U.S. Pension Plans |
| Other Benefit Plans | ||||||||||||||||||||||||
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| Three Months Ended June 30, |
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||||||
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| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
Service cost |
| $ | 4 |
| $ | 5 |
| $ | 371 |
| $ | 383 |
| $ | — |
| $ | — |
| $ | 4 |
| $ | 4 |
| $ | 404 |
| $ | 363 |
| $ | — |
| $ | — |
Interest cost |
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| 3,937 |
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| 4,697 |
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| 954 |
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| 915 |
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| 236 |
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| 242 |
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| 3,666 |
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| 3,937 |
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| 573 |
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| 939 |
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| 211 |
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| 236 |
Expected return on plan assets |
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| (4,935) |
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| (7,291) |
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| (525) |
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| (674) |
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| — |
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| — |
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| (4,740) |
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| (4,935) |
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| (210) |
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| (520) |
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| — |
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| — |
Amortization of prior service cost |
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| 3 |
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| 3 |
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| 11 |
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| 15 |
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| — |
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| — |
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| 2 |
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| 3 |
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| 10 |
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| 11 |
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| — |
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| — |
Net periodic benefit (credit) cost |
| $ | (991) |
| $ | (2,586) |
| $ | 811 |
| $ | 639 |
| $ | 236 |
| $ | 242 |
| $ | (1,068) |
| $ | (991) |
| $ | 777 |
| $ | 793 |
| $ | 211 |
| $ | 236 |
Net periodic benefit (credit) cost for the six months ended June 30, 2016 and 2015, respectively, follow:
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| U.S. Pension Plans |
| Non-U.S. Pension Plans |
| Other Benefit Plans | ||||||||||||
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| Six Months Ended June 30, | ||||||||||||||||
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||||
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| (Dollars in thousands) | ||||||||||||||||
Service cost |
| $ | 9 |
| $ | 9 |
| $ | 734 |
| $ | 774 |
| $ | — |
| $ | — |
Interest cost |
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| 7,875 |
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| 9,395 |
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| 1,893 |
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| 1,838 |
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| 472 |
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| 485 |
Expected return on plan assets |
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| (9,870) |
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| (14,583) |
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| (1,045) |
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| (1,349) |
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| — |
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| — |
Amortization of prior service cost |
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| 6 |
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| 6 |
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| 22 |
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| 30 |
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| — |
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| — |
Net periodic benefit (credit) cost |
| $ | (1,980) |
| $ | (5,173) |
| $ | 1,604 |
| $ | 1,293 |
| $ | 472 |
| $ | 485 |
Net periodic benefit (credit) for our U.S. pension plans for the six months ended June 30, 2016 decreased from the prior year due to reduced plan assets as a result of executing our terminated-vested buyout program in the fourth quarter of 2015. 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 halfquarter of 2016,2017, our Board of Directors granted 0.30.2 million stock options, 0.30.2 million performance share units and 0.30.2 million deferredrestricted stock units under the Plan.
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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 sixthree months ended June 30, 2016:March 31, 2017:
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| Stock Options | ||
Weighted-average grant-date fair value |
| $ |
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Expected life, in years |
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| 6.0 |
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Risk-free interest rate |
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| % | |
Expected volatility |
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| % |
The weighted average grant date fair value of our performance share units granted in the sixthree months ended June 30, 2016,March 31, 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 sixthree months ended June 30, 2016,March 31, 2017, was $10.43.$14.27.
We recognized stock-based compensation expense of $2.2$2.7 million for the sixthree months ended June 30, 2016,March 31, 2017, and $8.0$1.6 million for the sixthree months ended June 30, 2015.March 31, 2016. At June 30, 2016,March 31, 2017, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $10.5$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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14. Restructuring and Cost Reduction Programs
In 2013, we initiated a Global Cost Reduction Program that was designed to address three 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 relates to 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 and six months ended June 30, 2016, primarily consists of implementing this strategy for our recently acquired acquisitions. The cumulative charges incurred to date associated with this Program are $51.3 million. Total costs related to the Program expected to be incurred, as of June 30, 2016, are approximately $51.3 million. Total restructuring and impairment charges were $0.8approximately $3.0 million and $1.7$0.9 million for the three and six months ended June 30,March 31, 2017, and March 31, 2016, respectively, and $1.1 million and $1.5 million for the three and six months ended June 30, 2015, 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:
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| Employee |
| Other |
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| Employee |
| Other |
| Asset |
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| Severance |
| Costs |
| Total |
| Severance |
| Costs |
| Impairment |
| Total | |||||||
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| (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 |
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| 1,141 |
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| 527 |
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| 1,668 |
|
| 980 |
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| 862 |
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| 1,176 |
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| 3,018 |
Cash payments |
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| (1,144) |
|
| (932) |
|
| (2,076) |
|
| (81) |
|
| (109) |
|
| — |
|
| (190) |
Non-cash items |
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| 19 |
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| 36 |
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| 55 |
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| — |
|
| (522) |
|
| (1,176) |
|
| (1,698) |
Balances at June 30, 2016 |
| $ | 709 |
| $ | 1,708 |
| $ | 2,417 | ||||||||||||
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.
20
15. Earnings Per Share
Details of the calculation of basic and diluted earnings per share are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| June 30, |
| March 31, | ||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||||
|
| (Dollars in thousands, except per share amounts) |
| (Dollars in thousands, except per share amounts) | ||||||||||||||
Basic earnings per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Ferro Corporation common shareholders |
| $ | 18,969 |
| $ | 6,599 |
| $ | 9,003 |
| $ | 17,569 | ||||||
Net income (loss) attributable to Ferro Corporation common shareholders |
| $ | 21,898 |
| $ | (9,966) | ||||||||||||
Adjustment for loss from discontinued operations |
|
| 5,748 |
|
| 5,646 |
|
| 35,242 |
|
| 9,602 |
|
| — |
|
| 29,494 |
Total |
| $ | 24,717 |
| $ | 12,245 |
| $ | 44,245 |
| $ | 27,171 |
| $ | 21,898 |
| $ | 19,528 |
Weighted-average common shares outstanding |
|
| 83,209 |
|
| 87,264 |
|
| 83,260 |
|
| 87,189 |
|
| 83,530 |
|
| 83,311 |
Basic earnings per share from continuing operations attributable to Ferro Corporation common shareholders |
| $ | 0.30 |
| $ | 0.14 |
| $ | 0.53 |
| $ | 0.31 |
| $ | 0.26 |
| $ | 0.23 |
Diluted earnings per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Ferro Corporation common shareholders |
| $ | 18,969 |
| $ | 6,599 |
| $ | 9,003 |
| $ | 17,569 | ||||||
Net income (loss) attributable to Ferro Corporation common shareholders |
| $ | 21,898 |
| $ | (9,966) | ||||||||||||
Adjustment for loss from discontinued operations |
|
| 5,748 |
|
| 5,646 |
|
| 35,242 |
|
| 9,602 |
|
| — |
|
| 29,494 |
Total |
| $ | 24,717 |
| $ | 12,245 |
| $ | 44,245 |
| $ | 27,171 |
| $ | 21,898 |
| $ | 19,528 |
Weighted-average common shares outstanding |
|
| 83,209 |
|
| 87,264 |
|
| 83,260 |
|
| 87,189 |
|
| 83,530 |
|
| 83,311 |
Assumed exercise of stock options |
|
| 551 |
|
| 552 |
|
| 462 |
|
| 547 |
|
| 516 |
|
| 370 |
Assumed exercise of deferred stock unit conditions |
|
| 80 |
|
| 108 |
|
| — |
|
| 87 | ||||||
Assumed satisfaction of restricted stock unit conditions |
|
| 473 |
|
| 300 |
|
| 419 |
|
| 264 |
|
| 574 |
|
| 385 |
Assumed satisfaction of performance stock unit conditions |
|
| 111 |
|
| 576 |
|
| 58 |
|
| 569 |
|
| 268 |
|
| 224 |
Weighted-average diluted shares outstanding |
|
| 84,424 |
|
| 88,800 |
|
| 84,199 |
|
| 88,656 |
|
| 84,888 |
|
| 84,290 |
Diluted earnings per share from continuing operations attributable to Ferro Corporation common shareholders |
| $ | 0.29 |
| $ | 0.14 |
| $ | 0.53 |
| $ | 0.31 |
| $ | 0.26 |
| $ | 0.23 |
The number of anti-dilutive or unearned shares was 2.52.1 million for the three months ended March 31, 2017, and 2.8 million for the three and six months ended June 30, 2016, respectively, and 2.0 million and 2.1 million for the three and six months ended June 30, 2015.March 31, 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 February 18, 2016, and October 16, 2015, the Company’s Board
19
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 programs do not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.
For the sixthree months ended June 30,March 31, 2016, the Company repurchased 1,175,437 shares of common stock at an average price of $9.72 per share for a total cost of $11.4 million. Under the total share repurchase programs, the Company repurchased 4,458,345 shares of common stock, at an average price of $11.21 per share, for a total cost of $50.0 million. As of June 30, 2016, $25.0March 31, 2017, $50.0 million may still be purchased under the programs.
21
17. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, | |||||||||||
|
| Postretirement |
|
|
|
|
|
|
|
|
| |
|
| Benefit Liability |
| Translation |
| Other |
|
|
| |||
|
| Adjustments |
| Adjustments |
| Adjustments |
| Total | ||||
|
| (Dollars in thousands) | ||||||||||
Balances at March 31, 2015 |
| $ | 904 |
| $ | (59,281) |
| $ | (70) |
| $ | (58,447) |
Other comprehensive income (loss) before reclassifications |
|
| — |
|
| 9,408 |
|
| — |
|
| 9,408 |
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| (18) |
|
| — |
|
| — |
|
| (18) |
Net current period other comprehensive (loss) income |
|
| (18) |
|
| 9,408 |
|
| — |
|
| 9,390 |
Balances at June 30, 2015 |
| $ | 886 |
| $ | (49,873) |
| $ | (70) |
| $ | (49,057) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2016 |
|
| 1,079 |
|
| (63,769) |
|
| (70) |
|
| (62,760) |
Other comprehensive income (loss) before reclassifications |
|
| — |
|
| (3,117) |
|
| — |
|
| (3,117) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| 27 |
|
| — |
|
| — |
|
| 27 |
Net current period other comprehensive income (loss) |
|
| 27 |
|
| (3,117) |
|
| — |
|
| (3,090) |
Balances at June 30, 2016 |
| $ | 1,106 |
| $ | (66,886) |
| $ | (70) |
| $ | (65,850) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, | |||||||||||
|
| 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 |
|
| — |
|
| (27,250) |
|
| — |
|
| (27,250) |
Amounts reclassified from accumulated other comprehensive (loss) income |
|
| (2) |
|
| — |
|
| — |
|
| (2) |
Net current period other comprehensive (loss) income |
|
| (2) |
|
| (27,250) |
|
| — |
|
| (27,252) |
Balances at June 30, 2015 |
|
| 886 |
|
| (49,873) |
|
| (70) |
|
| (49,057) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2015 |
|
| 811 |
|
| (62,059) |
|
| (70) |
|
| (61,318) |
Other comprehensive income (loss) before reclassifications |
|
| — |
|
| (4,827) |
|
| — |
|
| (4,827) |
Amounts reclassified from accumulated other comprehensive income (loss) |
|
| 295 |
|
| — |
|
| — |
|
| 295 |
Net current period other comprehensive income (loss) |
|
| 295 |
|
| (4,827) |
|
| — |
|
| (4,532) |
Balances at June 30, 2016 |
| $ | 1,106 |
| $ | (66,886) |
| $ | (70) |
| $ | (65,850) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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) |
22
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 |
| Six Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| June 30, |
| March 31, | ||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||||||||
Performance Coatings |
| $ | 140,589 |
| $ | 139,460 |
| $ | 268,713 |
| $ | 276,246 |
| $ | 126,565 |
| $ | 128,124 |
Performance Colors and Glass |
|
| 95,933 |
|
| 98,729 |
|
| 184,103 |
|
| 198,193 |
|
| 103,518 |
|
| 88,170 |
Pigments, Powders and Oxides |
|
| 61,455 |
|
| 30,025 |
|
| 122,612 |
|
| 56,547 | ||||||
Color Solutions |
|
| 90,472 |
|
| 61,157 | ||||||||||||
Total net sales |
| $ | 297,977 |
| $ | 268,214 |
| $ | 575,428 |
| $ | 530,986 |
| $ | 320,555 |
| $ | 277,451 |
Each segment’s gross profit and reconciliations to income before income taxes are presented in the table below:
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| June 30, |
| March 31, | ||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||||||||
Performance Coatings |
| $ | 39,234 |
| $ | 35,144 |
| $ | 71,349 |
| $ | 64,019 |
| $ | 33,489 |
| $ | 32,115 |
Performance Colors and Glass |
|
| 36,705 |
|
| 33,389 |
|
| 68,543 |
|
| 67,878 |
|
| 37,418 |
|
| 31,838 |
Pigments, Powders and Oxides |
|
| 22,404 |
|
| 9,292 |
|
| 42,690 |
|
| 17,146 | ||||||
Color Solutions |
|
| 28,182 |
|
| 20,286 | ||||||||||||
Other cost of sales |
|
| 30 |
|
| (185) |
|
| 20 |
|
| (768) |
|
| (295) |
|
| (10) |
Total gross profit |
|
| 98,373 |
|
| 77,640 |
|
| 182,602 |
|
| 148,275 |
|
| 98,794 |
|
| 84,229 |
Selling, general and administrative expenses |
|
| 57,871 |
|
| 52,695 |
|
| 110,517 |
|
| 102,151 |
|
| 58,958 |
|
| 52,646 |
Restructuring and impairment charges |
|
| 787 |
|
| 1,116 |
|
| 1,668 |
|
| 1,625 |
|
| 3,018 |
|
| 881 |
Other expense, net |
|
| 6,371 |
|
| 5,719 |
|
| 9,291 |
|
| 10,959 |
|
| 7,559 |
|
| 2,920 |
Income before income taxes |
| $ | 33,344 |
| $ | 18,110 |
| $ | 61,126 |
| $ | 33,540 |
| $ | 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.
2321
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net sales for the three months ended June 30, 2016,March 31, 2017, increased by $29.8$43.1 million, or 11.1%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 $30.8$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 June 30, 2016,March 31, 2017, gross profit increased $20.7$14.6 million, or 26.7%17.3%, compared with the prior-year same period; and, as a percentage of net sales, it increased approximately 41040 basis points to 33.0%30.8%. The increase was driven by higherin gross profit was attributable to Pigments, Powders and Oxides, Performance Coatings, andincreases across all of our segments, with increases in Color Solutions, Performance Colors and Glass and Performance Coatings of $13.1$7.9 million, $4.1$5.6 million and $3.3$1.4 million, respectively.
For the three months ended June 30, 2016,March 31, 2017, selling, general and administrative (“SG&A”) expenses increased $5.2$6.3 million, or 9.8%12.0%, compared with the prior-year same period. The increase was primarily driven by higher SG&A$4.8 million of expenses related to Nubiola of $2.9 million and an increase in pension and other postretirement benefits of $1.8 million which is a result ofacquisitions completed within the effect of a lower expected return on plan assets in the current year as a result of executing our terminated-vested buyout program in the fourth quarter of 2015.last year.
For the three months ended June 30, 2016,March 31, 2017, net income was $19.1$22.1 million, compared with net incomeloss of $6.8$9.7 million for the prior-year same period, and net income attributable to common shareholders was $19.0$21.9 million, compared with net incomeloss attributable to common shareholders of $6.6$10.0 million for the prior-year same period. Income from continuing operations was $24.9$22.1 million for the three months ended June 30, 2016,March 31, 2017, compared with income from continuing operations of $12.4$19.8 million for the three months ended June 30, 2015.March 31, 2016. Our total gross profit for the secondfirst quarter of 20162017 was $98.4$98.8 million, compared with $77.6$84.2 million for the three months ended June 30, 2015.March 31, 2016.
Outlook
The Company delivered strong performance in the second quarter of 2016, despite challenging economic conditions in Latin America and Asia. Sales increased 11% due to recent acquisitions. In addition,For 2017, we expect that gross profit, as a percentage of net sales, increased to 33.0% from 28.9%. Partially offsetting the higher gross profit were increased SG&A costs, primarily driven by recent acquisitions and a reduction in pension and postretirement benefits income. Our effective tax rate for the second quarter of 2016 was 25.4%, compared with 31.4% in the second 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 North Africa, and Southern Europe will continue to stabilize and rebound, providing growth. 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 rates will adversely impact reported results.
We remain focused on the integration of Vetriceramici, Nubiola, Al Salomi, Ferer, and Pinturasour 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 to be positive for the year, providing additional liquidity.
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.
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.
2422
Results of Operations - Consolidated
Comparison of the three months ended June 30,March 31, 2017 and 2016 and 2015
For the three months ended June 30, 2016,March 31, 2017, income from continuing operations was $24.9$22.1 million, compared with $12.4$19.8 million income from continuing operations for the three months ended June 30, 2015.March 31, 2016. Net income was $19.1$22.1 million, compared with net incomeloss of $6.8$9.7 million for the three months ended June 30, 2015.March 31, 2016. For the three months ended June 30, 2016,March 31, 2017, net income attributable to common shareholders was $19.0$21.9 million, or earnings per share of $0.23,$0.26, compared with net incomeloss attributable to common shareholders of $6.6$10.0 million, or earningsloss per share of $0.08,$0.12, for the three months ended June 30, 2015.March 31, 2016.
Net Sales
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
|
|
|
| Three Months Ended |
|
|
|
|
|
| ||||||||||||
|
| June 30, |
|
|
|
|
|
|
| March 31, |
|
|
|
|
|
| ||||||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||||||
|
| (Dollars in thousands) |
|
|
|
| (Dollars in thousands) |
|
|
| ||||||||||||||||||
Net sales |
|
| 297,977 |
|
|
| 268,214 |
|
|
| 29,763 |
| 11.1 | % |
|
| 320,555 |
|
|
| 277,451 |
|
|
| 43,104 |
| 15.5 | % |
Cost of sales |
|
| 199,604 |
|
|
| 190,574 |
|
|
| 9,030 |
| 4.7 | % |
|
| 221,761 |
|
|
| 193,222 |
|
|
| 28,539 |
| 14.8 | % |
Gross profit |
| $ | 98,373 |
|
| $ | 77,640 |
|
| $ | 20,733 |
| 26.7 | % |
| $ | 98,794 |
|
| $ | 84,229 |
|
| $ | 14,565 |
| 17.3 | % |
Gross profit as a % of net sales |
|
| 33.0 | % |
|
| 28.9 | % |
|
|
|
|
|
|
|
| 30.8 | % |
|
| 30.4 | % |
|
|
|
|
|
|
Net sales increased by $29.8$43.1 million, or 11.1%15.5%, in the three months ended June 30, 2016,March 31, 2017, compared with the prior-year same period, driven by higher sales in Pigments, Powders and OxidesColor Solutions and Performance CoatingsColors and Glass of $31.4$29.3 million and $1.1$15.3 million, respectively, partially offset by lower sales in Performance Colors and GlassCoatings of $2.8$1.6 million. The increase in net sales was primarily driven by the sales from NubiolaCappelle of $30.8$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 $20.7$14.6 million, or 26.7%17.3%, in the three months ended June 30, 2016,March 31, 2017, compared towith the prior-year same period, and as a percentage of net sales, it increased 41040 basis points to 33.0%30.8%. The increase was driven by an increase in gross profit was attributable to Pigments, Powders and Oxides, Performance Coatings, andincreases across all of our segments, with increases in Color Solutions, Performance Colors and Glass and Performance Coatings of $13.1$7.9 million, $4.1$5.6 million and $3.3$1.4 million, respectively. The increase in gross 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 $12.6$5.7 million, lowerpartially offset by higher raw material costs of $7.9$2.8 million, and lower manufacturing costs of $7.2 million, partially offset by unfavorable product pricing of $5.5$2.4 million and unfavorable foreign currency impacts of $1.7$2.2 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
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| Three Months Ended |
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| Three Months Ended |
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| June 30, |
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| March 31, |
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||
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| (Dollars in thousands) |
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| (Dollars in thousands) |
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| ||||||||||||||
Geographic Revenues on a sales origination basis |
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Europe |
| $ | 138,888 |
| $ | 121,018 |
| $ | 17,870 |
| 14.8 | % |
| $ | 148,923 |
| $ | 128,700 |
| $ | 20,223 |
| 15.7 | % |
United States |
|
| 76,853 |
|
| 72,875 |
|
| 3,978 |
| 5.5 | % |
|
| 88,380 |
|
| 70,171 |
|
| 18,209 |
| 25.9 | % |
Asia Pacific |
|
| 44,887 |
|
| 38,252 |
|
| 6,635 |
| 17.3 | % |
|
| 44,208 |
|
| 42,939 |
|
| 1,269 |
| 3.0 | % |
Latin America |
|
| 37,349 |
|
| 36,069 |
|
| 1,280 |
| 3.5 | % |
|
| 39,044 |
|
| 35,641 |
|
| 3,403 |
| 9.5 | % |
Net sales |
| $ | 297,977 |
| $ | 268,214 |
| $ | 29,763 |
| 11.1 | % |
| $ | 320,555 |
| $ | 277,451 |
| $ | 43,104 |
| 15.5 | % |
The increase in net sales of $29.8$43.1 million, compared with the prior-year same period, was driven by an increase in sales acrossfrom all regions. The increase in sales from Europe was primarily attributable to higher sales from recent acquisitions, including Nubiola salesin Color Solutions and Performance Colors and Glass of $12.1 million, Al Salomi sales of $6.5$17.6 million and Ferer sales of $1.6$5.5 million, respectively, partially offset by a decrease in electronic products sales of $4.3 million. The increase in sales in Asia Pacific was primarily attributable to Nubiola sales of $4.3 million, which was acquired in the third quarter of 2015 and an increase in sales in Performance Coatings of $1.8$2.9 million. The increase in sales in the United States was
2523
The increase in sales from the United States was attributable to Nubiolahigher sales of $8.2 million, partially offset by lower sales in Color Solutions and Performance Colors and Glass of $5.5$10.1 million and $8.6 million. The increase in sales infrom Latin America was attributable to Nubiolahigher sales of $6.1 million, partially offset by loweracross all segments. The increase in sales from Asia Pacific was primarily attributable to increased sales in Performance Coatings of $4.3 million.Color Solutions.
The following table presents our sales on the basis of where sold products were shipped.
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| Three Months Ended |
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| Three Months Ended |
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| June 30, |
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| March 31, |
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||
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| (Dollars in thousands) |
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| (Dollars in thousands) |
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Geographic Revenues on a shipped-to basis |
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Europe |
| $ | 136,454 |
| $ | 119,032 |
| $ | 17,422 |
| 14.6 | % |
| $ | 140,539 |
| $ | 128,336 |
| $ | 12,203 |
| 9.5 | % |
United States |
|
| 60,590 |
|
| 52,422 |
|
| 8,168 |
| 15.6 | % |
|
| 66,918 |
|
| 59,628 |
|
| 7,290 |
| 12.2 | % |
Asia Pacific |
|
| 60,152 |
|
| 55,274 |
|
| 4,878 |
| 8.8 | % |
|
| 70,121 |
|
| 54,528 |
|
| 15,593 |
| 28.6 | % |
Latin America |
|
| 40,781 |
|
| 41,486 |
|
| (705) |
| (1.7) | % |
|
| 42,977 |
|
| 34,959 |
|
| 8,018 |
| 22.9 | % |
Net sales |
| $ | 297,977 |
| $ | 268,214 |
| $ | 29,763 |
| 11.1 | % |
| $ | 320,555 |
| $ | 277,451 |
| $ | 43,104 |
| 15.5 | % |
Selling, General and Administrative Expenses
The following table includes significant components of SG&A and their respective changes between 2016 and 2015:
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| Three Months Ended |
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| June 30, |
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| ||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
| |||||||
Personnel expenses |
| $ | 28,751 |
| $ | 27,832 |
| $ | 919 |
| 3.3 | % |
Incentive compensation |
|
| 3,161 |
|
| 72 |
|
| 3,089 |
| 4,290.3 | % |
Stock-based compensation |
|
| 2,211 |
|
| 5,866 |
|
| (3,655) |
| (62.3) | % |
Pension and other postretirement benefits |
|
| 104 |
|
| (1,705) |
|
| 1,809 |
| (106.1) | % |
Bad debt |
|
| 345 |
|
| 140 |
|
| 205 |
| 146.4 | % |
Business development |
|
| 3,855 |
|
| 3,021 |
|
| 834 |
| 27.6 | % |
All other expenses |
|
| 19,444 |
|
| 17,469 |
|
| 1,975 |
| 11.3 | % |
Selling, general and administrative expenses |
| $ | 57,871 |
| $ | 52,695 |
| $ | 5,176 |
| 9.8 | % |
SG&A expenses were $5.2 million higher in the three months ended June 30, 2016, compared with the prior-year same period. Included in SG&A expenses were $2.9 million and $0.4 million of expenses attributable to Nubiola and Ferer, which were acquired in the third quarter of 2015 and the first quarter of 2016, respectively. The increase in incentive compensation expense of $3.1 million is a result of the Company’s performance relative to targets for certain awards compared with the prior year. The increase in pension and other postretirement benefits of $1.8 million is a result of the effect of a lower expected return on plan assets in the current year as a result of executing our terminated-vested buyout program in the fourth quarter of 2015. These increases were partially mitigated by lower stock-based compensation expense of $3.7 million.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
26
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| Three Months Ended |
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| June 30, |
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| 2016 |
| 2015 |
| $ Change |
| % Change | ||||
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| (Dollars in thousands) |
|
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| |||||||
Strategic services |
| $ | 29,012 |
| $ | 26,261 |
| $ | 2,751 |
| 10.5 | % |
Functional services |
|
| 23,487 |
|
| 20,496 |
|
| 2,991 |
| 14.6 | % |
Incentive compensation |
|
| 3,161 |
|
| 72 |
|
| 3,089 |
| 4,290.3 | % |
Stock-based compensation |
|
| 2,211 |
|
| 5,866 |
|
| (3,655) |
| (62.3) | % |
Selling, general and administrative expenses |
| $ | 57,871 |
| $ | 52,695 |
| $ | 5,176 |
| 9.8 | % |
SG&A expenses were $5.2 million higher in the three months ended June 30, 2016, compared with the prior-year same period. The increase in strategic and functional services was driven by an increase in expenses from recently acquired acquisitions of $2.5 million and $1.1 million, respectively. The increase in functional services was also driven by the increase in pension and other postretirement benefits of $1.8 million.
Restructuring and Impairment Charges
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| Three Months Ended |
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| June 30, |
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| ||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
| |||||||
Employee severance |
| $ | 609 |
| $ | 1,019 |
| $ | (410) |
| (40.2) | % |
Other restructuring costs |
|
| 178 |
|
| 97 |
|
| 81 |
| 83.5 | % |
Restructuring and impairment charges |
| $ | 787 |
| $ | 1,116 |
| $ | (329) |
| (29.5) | % |
Restructuring and impairment charges decreased in the second quarter of 2016 compared with the prior-year same period. The decrease was primarily due to less costs associated with employee severance during the three months ended June 30, 2016, compared with the prior-year same period.
Interest Expense
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| Three Months Ended |
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| June 30, |
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| ||||
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| 2016 |
| 2015 |
| $ Change |
| % Change | ||||
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| (Dollars in thousands) |
|
|
| |||||||
Interest expense |
| $ | 5,118 |
| $ | 3,325 |
| $ | 1,793 |
| 53.9 | % |
Amortization of bank fees |
|
| 329 |
|
| 289 |
|
| 40 |
| 13.8 | % |
Interest capitalization |
|
| (19) |
|
| (504) |
|
| 485 |
| (96.2) | % |
Interest expense |
| $ | 5,428 |
| $ | 3,110 |
| $ | 2,318 |
| 74.5 | % |
Interest expense increased the second quarter of 2016 compared with the prior-year same period. The increase in interest expense was due to an increase in the average long-term debt balance during the three months ended June 30, 2016, compared with the prior-year same period, as well as less interest capitalization associated with long-term capital projects.
Income Tax Expense
During the second quarter of 2016, income tax expense was $8.5 million, or 25.4% of pre-tax income. In the second quarter of 2015, we recorded tax expense of $5.7 million, or 31.4% of pre-tax income. The tax expense in the second quarter of 2016 and 2015, 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. Second quarter 2015 tax expense was further lowered as a result of pre-tax losses in jurisdictions for which no tax benefit was recognized net against the benefit of pre-tax income in jurisdictions with no tax expense due to the utilization of fully valued tax attributes.
27
Results of Operations - Segment Information
Comparison of the three months ended June 30, 2016 and 2015
Performance Coatings
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| Three Months Ended |
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| Change due to | |||||||||||||||
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| June 30, |
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| Volume / |
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| |||||||
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Other | ||||||||||
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| (Dollars in thousands) |
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Segment net sales |
| $ | 140,589 |
|
| $ | 139,460 |
|
| $ | 1,129 |
| 0.8 | % |
| $ | (4,941) |
| $ | 13,647 |
| $ | (7,577) |
| $ | — |
Segment gross profit |
|
| 39,234 |
|
|
| 35,144 |
|
|
| 4,090 |
| 11.6 | % |
|
| (4,941) |
|
| 3,932 |
|
| (1,621) |
|
| 6,720 |
Gross profit as a % of segment net sales |
|
| 27.9 | % |
|
| 25.2 | % |
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|
Net sales increased in Performance Coatings compared with the prior-year same period, driven by an increase in sales from Al Salomi of $6.5 million, which was acquired in the fourth quarter of 2015, $0.8 million in porcelain enamel, and $0.2 million in other tile products, partially offset by decrease of $4.0 million in frits and glazes, $1.1 million in digital inks, $0.7 million in color products, and $0.6 million due to the sale of our interest in an operating affiliate in Venezuela (“Venezuela”) in the fourth quarter of 2015. The increase in net sales was driven by increased sales volume and mix of $13.6 million, partially offset by unfavorable foreign currency impacts of $7.6 million and lower product pricing of $4.9 million. Gross profit increased $4.1 million from the prior-year same period, primarily driven by higher sales volumes and mix of $3.9 million, lower manufacturing costs of $3.9 million, and lower raw materials of $2.8 million, partially offset by unfavorable product pricing impacts of $4.9 million and unfavorable foreign currency impacts of $1.6 million.
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| Three Months Ended |
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| ||||
|
| June 30, |
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| ||||
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| 2016 |
| 2015 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
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| |||||||
Segment net sales by Region |
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|
|
Europe |
| $ | 80,224 |
| $ | 76,395 |
| $ | 3,829 |
| 5.0 | % |
Latin America |
|
| 26,165 |
|
| 31,036 |
|
| (4,871) |
| (15.7) | % |
Asia Pacific |
|
| 22,502 |
|
| 20,751 |
|
| 1,751 |
| 8.4 | % |
United States |
|
| 11,698 |
|
| 11,278 |
|
| 420 |
| 3.7 | % |
Total |
| $ | 140,589 |
| $ | 139,460 |
| $ | 1,129 |
| 0.8 | % |
The net sales increase of $1.1 million was driven by increases in Europe, Asia Pacific and the United States, partially offset by a decrease in Latin America. The increase in sales in Europe was primary attributable to $6.5 million in sales from Al Salomi, which was acquired in the fourth quarter of 2015, partially offset by a decrease in sales in other tile product lines and color products of $1.3 million and $1.1 million, respectively. The sales increase in Asia Pacific was driven by higher sales in digital inks and frits and glazes of $1.0 million and $1.0 million, respectively, and the increase in sales in the United States was driven by higher sales in porcelain enamel of $0.4 million. The sales decrease in Latin America was primarily driven by lower sales in frits and glazes of $6.5 million, partially mitigated by increased sales in other tile product lines of $1.5 million.
28
Performance Colors and Glass
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| Three Months Ended |
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| Change due to | |||||||||||||||
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| June 30, |
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| Volume / |
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| |||||||
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Other | ||||||||||
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| (Dollars in thousands) |
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Segment net sales |
| $ | 95,933 |
|
| $ | 98,729 |
|
| $ | (2,796) |
| (2.8) | % |
| $ | (289) |
| $ | (1,922) |
| $ | (585) |
| $ | — |
Segment gross profit |
|
| 36,705 |
|
|
| 33,389 |
|
|
| 3,316 |
| 9.9 | % |
|
| (289) |
|
| (2,164) |
|
| (109) |
|
| 5,878 |
Gross profit as a % of segment net sales |
|
| 38.3 | % |
|
| 33.8 | % |
|
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|
|
Net sales decreased compared with the prior-year same period, primarily driven by lower sales of our electronics and decoration products of $4.2 million and $2.5 million, respectively, partially mitigated by higher sales of automotive products of $2.1 million and $1.2 million of sales attributable to Ferer, which was acquired in the first quarter of 2016. Net sales were impacted by unfavorable volume and mix of $1.9 million, unfavorable foreign currency impacts of $0.6 million, and lower product pricing of $0.3 million. Gross profit increased from the prior-year same period, primarily due to lower raw material costs of $3.6 million and favorable manufacturing costs of $2.2 million, partially offset by lower sales volumes and mix of $2.2 million, lower product pricing of $0.3 million and unfavorable foreign currency impacts of $0.1 million.
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| Three Months Ended |
|
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| ||||
|
| June 30, |
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|
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| ||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
| |||||||
Segment net sales by Region |
|
|
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|
|
|
|
Europe |
| $ | 41,960 |
| $ | 40,070 |
| $ | 1,890 |
| 4.7 | % |
United States |
|
| 34,420 |
|
| 39,883 |
|
| (5,463) |
| (13.7) | % |
Asia Pacific |
|
| 14,750 |
|
| 14,123 |
|
| 627 |
| 4.4 | % |
Latin America |
|
| 4,803 |
|
| 4,653 |
|
| 150 |
| 3.2 | % |
Total |
| $ | 95,933 |
| $ | 98,729 |
| $ | (2,796) |
| (2.8) | % |
The net sales decline of $2.8 million was driven by lower sales in the United States, partially mitigated by increased sales in Europe, Asia Pacific and Latin America. The decrease in sales in the United States was attributable to lower sales in electronics and decoration products of $4.3 million and $1.2 million, respectively. The increase in Europe was primarily attributable to $1.2 million and $0.6 million in sales from Ferer and Pinturas, which were acquired in the first quarter of 2016 and the second quarter of 2016, respectively. The increases in Asia Pacific and Latin America were primarily due to higher sales of automotive products of $1.0 million and $0.2 million, respectively.
Pigments, Powders and Oxides
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| 2015 |
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| Mix |
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Segment net sales |
| $ | 61,455 |
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| $ | 30,025 |
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| $ | 31,430 |
| 104.7 | % |
| $ | (288) |
| $ | 31,762 |
| $ | (44) |
| $ | — |
Segment gross profit |
|
| 22,404 |
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|
| 9,292 |
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|
| 13,112 |
| 141.1 | % |
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| (288) |
|
| 10,785 |
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| (5) |
|
| 2,620 |
Gross profit as a % of segment net sales |
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| 36.5 | % |
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| 30.9 | % |
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Net sales increased compared with the prior-year same period, primarily due to sales from Nubiola of $30.8 million, which was acquired in the third quarter of 2015. Net sales were positively impacted by higher volumes and mix, excluding the increase from Nubiola, of $1.0 million, partially offset by lower product pricing of $0.3 million. Gross profit increased from the prior-year same
29
period, primarily due to favorable sales volumes and mix of $10.8 million, favorable raw material costs of $1.5 million, and lower manufacturing costs of $1.1 million, partially offset by unfavorable product pricing of $0.3 million.
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| 2015 |
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Segment net sales by Region |
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United States |
| $ | 30,735 |
| $ | 21,714 |
| $ | 9,021 |
| 41.5 | % |
Europe |
|
| 16,704 |
|
| 4,553 |
|
| 12,151 |
| 266.9 | % |
Asia Pacific |
|
| 7,635 |
|
| 3,378 |
|
| 4,257 |
| 126.0 | % |
Latin America |
|
| 6,381 |
|
| 380 |
|
| 6,001 |
| 1,579.2 | % |
Total |
| $ | 61,455 |
| $ | 30,025 |
| $ | 31,430 |
| 104.7 | % |
Net sales increased $31.4 million, primarily driven by increased sales from Nubiola of $30.8 million, which was acquired in the third quarter of 2015, and contributed to the increased sales in all regions.
Comparison of the six months ended June 30, 2016 and 2015
For the six months ended June 30, 2016, income from continuing operations was $44.6 million, compared with $25.4 million income from continuing operations for the six months ended June 30, 2015. Net income was $9.4 million, which includes an impairment charge from discontinued operations of $24.1 million, for the six months ended June 30, 2016, compared with net income of $15.8 million for the six months ended June 30, 2015. For the six months ended months ended June 30, 2016, net income attributable to common shareholders was $9.0 million, or earnings per share of $0.11, compared with net income attributable to common shareholders of $17.6 million, or earnings per share of $0.20, for the six months ended June 30, 2015.
Net Sales
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| 2015 |
| $ Change |
| % Change | ||||||
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| (Dollars in thousands) |
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Net sales |
|
| 575,428 |
|
|
| 530,986 |
|
|
| 44,442 |
| 8.4 | % |
Cost of sales |
|
| 392,826 |
|
|
| 382,711 |
|
|
| 10,115 |
| 2.6 | % |
Gross profit |
| $ | 182,602 |
|
| $ | 148,275 |
|
| $ | 34,327 |
| 23.2 | % |
Gross profit as a % of net sales |
|
| 31.7 | % |
|
| 27.9 | % |
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|
Net sales increased by $44.4 million, or 8.4%, in the six months ended June 30, 2016, compared with the prior-year same period driven by higher sales in Pigments, Powders and Oxides of $66.1 million, partially offset by lower sales in Performance Colors and Glass and Performance Coatings of $14.1 million and $7.5 million, respectively. The increase in net sales was primarily driven by the sales from Nubiola of $64.2 million, which was acquired in the third quarter of 2015, partially offset by a decrease in electronic and decoration products of $10.0 million and $7.0 million, respectively.
Gross Profit
Gross profit increased $34.3 million, or 23.2%, in the six months ended June 30, 2016, compared with the prior-year same period, and as a percentage of net sales, it increased 380 basis points to 31.7%. The increase in gross profit was driven by increases in Pigments, Powders and Oxides, Performance Coatings and Performance Colors and Glass of $25.5 million, $7.3 million and $0.7 million, respectively. The increase was primarily due to higher sales volumes and mix of $21.6 million, lower raw material costs of $14.6 million and lower manufacturing costs of $12.8 million, partially offset by unfavorable product pricing of $10.7 million and unfavorable foreign currency impacts of $4.9 million.
30
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
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| 2015 |
| $ Change |
| % Change | ||||
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Geographic Revenues on a sales origination basis |
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Europe |
| $ | 267,591 |
| $ | 236,854 |
| $ | 30,737 |
| 13.0 | % |
United States |
|
| 147,023 |
|
| 141,686 |
|
| 5,337 |
| 3.8 | % |
Asia Pacific |
|
| 87,824 |
|
| 77,189 |
|
| 10,635 |
| 13.8 | % |
Latin America |
|
| 72,990 |
|
| 75,257 |
|
| (2,267) |
| (3.0) | % |
Net sales |
| $ | 575,428 |
| $ | 530,986 |
| $ | 44,442 |
| 8.4 | % |
The increase in net sales of $44.4 million, compared with the prior-year same period, was driven by increases in Europe, Asia Pacific and the United States of $30.7 million, $10.6 million and $5.3 million, respectively, partially offset by a decrease in Latin America of $2.3 million. The increases in Europe and Asia Pacific were primarily attributable to Nubiola sales of $25.0 million and $8.4 million, respectively, which was acquired in the third quarter of 2015. The increase in the United States was attributable to Nubiola sales of $17.0 million, partially offset by lower sales in Performance Colors and Glass of $12.4 million. The decrease in sales in Latin America was due to the sale of our interest in an operating affiliate in Venezuela in the fourth quarter of 2015, which accounted for $5.0 million of the decrease, partially offset by higher sales in Pigments, Powders and Oxides.
The following table presents our sales on the basis of where sold products were shipped.
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| ||||
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Geographic Revenues on a shipped-to basis |
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Europe |
| $ | 264,790 |
| $ | 233,915 |
| $ | 30,875 |
| 13.2 | % |
|
United States |
|
| 120,218 |
|
| 103,150 |
|
| 17,068 |
| 16.5 | % |
|
Asia Pacific |
|
| 114,680 |
|
| 107,023 |
|
| 7,657 |
| 7.2 | % |
|
Latin America |
|
| 75,740 |
|
| 86,898 |
|
| (11,158) |
| (12.8) | % |
|
Net sales |
| $ | 575,428 |
| $ | 530,986 |
| $ | 44,442 |
| 8.4 | % |
|
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 20162017 and 2015:
2016
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| March 31, |
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
|
| (Dollars in thousands) |
|
|
| ||||||||||||||
Personnel expenses |
| $ | 59,580 |
| $ | 56,865 |
| $ | 2,715 |
| 4.8 | % |
| $ | 32,904 |
| $ | 30,829 |
| $ | 2,075 |
| 6.7 | % |
Incentive compensation |
|
| 5,146 |
|
| 1,724 |
|
| 3,422 |
| 198.5 | % |
|
| 1,830 |
|
| 1,985 |
|
| (155) |
| (7.8) | % |
Stock-based compensation |
|
| 3,837 |
|
| 7,980 |
|
| (4,143) |
| (51.9) | % |
|
| 2,723 |
|
| 1,626 |
|
| 1,097 |
| 67.5 | % |
Pension and other postretirement benefits |
|
| 142 |
|
| (3,394) |
|
| 3,536 |
| (104.2) | % |
|
| (80) |
|
| 38 |
|
| (118) |
| (310.5) | % |
Bad debt |
|
| 223 |
|
| (150) |
|
| 373 |
| (248.7) | % |
|
| (241) |
|
| (122) |
|
| (119) |
| 97.5 | % |
Business development |
|
| 4,955 |
|
| 4,639 |
|
| 316 |
| 6.8 | % |
|
| 2,361 |
|
| 1,100 |
|
| 1,261 |
| 114.6 | % |
Intangible asset amortization |
|
| 2,051 |
|
| 1,500 |
|
| 551 |
| 36.7 | % | ||||||||||||
All other expenses |
|
| 36,634 |
|
| 34,487 |
|
| 2,147 |
| 6.2 | % |
|
| 17,410 |
|
| 15,690 |
|
| 1,720 |
| 11.0 | % |
Selling, general and administrative expenses |
| $ | 110,517 |
| $ | 102,151 |
| $ | 8,366 |
| 8.2 | % |
| $ | 58,958 |
| $ | 52,646 |
| $ | 6,312 |
| 12.0 | % |
31
SG&A expenses were $8.4$6.3 million higher in the sixthree months ended June 30, 2016,March 31, 2017, compared with the prior-year same period. Included in SG&A expenses were $6.4 million and $0.8$4.8 million of expenses attributablerelated to Nubiola and Ferer, which wereacquisitions acquired inwithin the third quarter of 2015 and the first quarter of 2016, respectively.last year. The increase in incentivestock-based compensation expense of $3.4$1.1 million wasis a result of the Company’s performance relative to targets for certain awards compared with the prior year.prior-year same period. The increase in pension and other postretirement benefits of $3.5 millionbusiness development expenses is a result of the effect of a lower expected return on plan assets in the current year as a result of executing our terminated-vested buyout program in the fourth quarter of 2015. These increases were offset by lower stock-based compensation expense of $4.1 million.higher professional fees.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
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| Six Months Ended |
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| Three Months Ended |
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||
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| (Dollars in thousands) |
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| (Dollars in thousands) |
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Strategic services |
| $ | 57,416 |
| $ | 51,982 |
| $ | 5,434 |
| 10.5 | % |
| $ | 31,693 |
| $ | 28,404 |
| $ | 3,289 |
| 11.6 | % |
Functional services |
|
| 44,118 |
|
| 40,465 |
|
| 3,653 |
| 9.0 | % |
|
| 22,712 |
|
| 20,631 |
|
| 2,081 |
| 10.1 | % |
Incentive compensation |
|
| 5,146 |
|
| 1,724 |
|
| 3,422 |
| 198.5 | % |
|
| 1,830 |
|
| 1,985 |
|
| (155) |
| (7.8) | % |
Stock-based compensation |
|
| 3,837 |
|
| 7,980 |
|
| (4,143) |
| (51.9) | % |
|
| 2,723 |
|
| 1,626 |
|
| 1,097 |
| 67.5 | % |
Selling, general and administrative expenses |
| $ | 110,517 |
| $ | 102,151 |
| $ | 8,366 |
| 8.2 | % |
| $ | 58,958 |
| $ | 52,646 |
| $ | 6,312 |
| 12.0 | % |
SG&A expenses were $8.4 million higher in the six months ended June 30, 2016, compared with the prior-year same period. The increase in strategic and functional services was driven by an increase in expenses from recently acquired businesses
24
Restructuring and Impairment Charges
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| 2015 |
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| March 31, |
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| 2016 |
| $ Change |
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| (Dollars in thousands) |
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| (Dollars in thousands) |
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| ||||||||||||||
Employee severance |
| $ | 1,141 |
| $ | 1,290 |
| $ | (149) |
| (11.6) | % |
| $ | 980 |
| $ | 532 |
| $ | 448 |
| 84.2 | % |
Asset impairment |
|
| 1,176 |
|
| — |
|
| 1,176 |
| NM |
| ||||||||||||
Other restructuring costs |
|
| 527 |
|
| 335 |
|
| 192 |
| 57.3 | % |
|
| 862 |
|
| 349 |
|
| 513 |
| 147.0 | % |
Restructuring and impairment charges |
| $ | 1,668 |
| $ | 1,625 |
| $ | 43 |
| 2.6 | % |
| $ | 3,018 |
| $ | 881 |
| $ | 2,137 |
| 242.6 | % |
Restructuring and impairment charges did not change significantlyincreased in the first six monthsquarter of 20162017 compared with the prior-year same period. The increase was primarily due to costs 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 associated with achieving our targeted synergies.
Interest Expense
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| 2015 |
| $ Change |
| % Change |
| March 31, |
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| 2017 |
| 2016 |
| $ Change |
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| (Dollars in thousands) |
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| (Dollars in thousands) |
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| ||||||||||||||
Interest expense |
| $ | 9,662 |
| $ | 6,603 |
| $ | 3,059 |
| 46.3 | % |
| $ | 5,748 |
| $ | 4,544 |
| $ | 1,204 |
| 26.5 | % |
Amortization of bank fees |
|
| 644 |
|
| 586 |
|
| 58 |
| 9.9 | % |
|
| 479 |
|
| 315 |
|
| 164 |
| 52.1 | % |
Interest capitalization |
|
| (31) |
|
| (929) |
|
| 898 |
| (96.7) | % |
|
| (3) |
|
| (12) |
|
| 9 |
| (75.0) | % |
Interest expense |
| $ | 10,275 |
| $ | 6,260 |
| $ | 4,015 |
| 64.1 | % |
| $ | 6,224 |
| $ | 4,847 |
| $ | 1,377 |
| 28.4 | % |
Interest expense increased in the first six monthsquarter 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 2016 period,three months ended March 31, 2017, compared with the prior-year same period, as well as less interest capitalization associated with long-term capital projects.period.
32
Income Tax Expense
During the first halfquarter of 2016,2017, income tax expense was $16.5$7.1 million, or 27.0%24.4% of pre-tax income. In the first halfquarter of 2015, income2016, we recorded tax expense was $8.1of $8.0 million, or 24.3%28.9% of pre-tax income. The tax expense in the first halfquarter 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 half of 2015 tax expense was further lowered as a result of the amount of pre-tax losses in jurisdictions for which no tax benefit is recognized in proportion to the amount of pre-tax income in jurisdictions with no tax expense due to the utilization of fully valued tax attributes. Additionally, the first half of 2015 tax expense was benefited by certain discrete items, which had a favorable impact on the rate of approximately 5%, taking it from approximately 29.0% to 24.3%.
Results of Operations - Segment Information
Comparison of the sixthree months ended June 30,March 31, 2017 and 2016 and 2015
Performance Coatings
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| Change due to | |||||||||||||||
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Other |
| March 31, |
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| Volume / |
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| 2017 |
| 2016 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Other | ||||||||||
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| (Dollars in thousands) |
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Segment net sales |
| $ | 268,713 |
|
| $ | 276,246 |
|
| $ | (7,533) |
| (2.7) | % |
| $ | (11,406) |
| $ | 22,392 |
| $ | (18,519) |
| $ | — |
| $ | 126,565 |
|
| $ | 128,124 |
|
| $ | (1,559) |
| (1.2) | % |
| $ | (3,591) |
| $ | 7,420 |
| $ | (5,388) |
| $ | — |
Segment gross profit |
|
| 71,349 |
|
|
| 64,019 |
|
|
| 7,330 |
| 11.4 | % |
|
| (11,406) |
|
| 8,877 |
|
| (3,732) |
|
| 13,591 |
|
| 33,489 |
|
|
| 32,115 |
|
|
| 1,374 |
| 4.3 | % |
|
| (3,591) |
|
| 2,623 |
|
| (1,467) |
|
| 3,809 |
Gross profit as a % of segment net sales |
|
| 26.6 | % |
|
| 23.2 | % |
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|
| 26.5 | % |
|
| 25.1 | % |
|
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|
|
|
25
Net sales declineddecreased in Performance Coatings compared with the prior-year same period, primarily driven by a decrease in sales of $11.5$1.6 million in frits and glazes, $5.0 million due to the sale of Venezuela, which was sold in the fourth quarter of 2015, and $2.5 million in porcelain enamel, partially mitigated by $12.0 million in sales from Al Salomi, which was acquired in the fourth quarter of 2015.color products. The decrease in net sales was driven by unfavorable foreign currency impacts of $18.5$5.4 million and lower product pricing of $11.4 million and unfavorable mix of $2.3$3.6 million, partially mitigated by increased sales volume and favorable mix of $24.7$7.4 million. Gross profit increased $7.3$1.4 million from the prior-year same period, primarily driven by lower manufacturing costs of $9.0$5.0 million and higher sales volumes and favorable mix of $8.9 million, and lower raw materials costs of $4.6$2.6 million, partially offset by unfavorable product pricing impacts of $11.4$3.6 million, and unfavorable foreign currency impacts of $3.7$1.5 million and higher raw material costs of $1.2 million.
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| Six Months Ended |
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| June 30, |
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| Three Months Ended |
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| ||||
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| March 31, |
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
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| (Dollars in thousands) |
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Segment net sales by Region |
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Europe |
| $ | 152,251 |
| $ | 144,106 |
| $ | 8,145 |
| 5.7 | % |
| $ | 69,160 |
| $ | 72,026 |
| $ | (2,866) |
| (4.0) | % |
Latin America |
|
| 49,410 |
|
| 64,710 |
|
| (15,300) |
| (23.6) | % |
|
| 25,330 |
|
| 23,245 |
|
| 2,085 |
| 9.0 | % |
Asia Pacific |
|
| 44,069 |
|
| 43,666 |
|
| 403 |
| 0.9 | % |
|
| 21,317 |
|
| 21,568 |
|
| (251) |
| (1.2) | % |
United States |
|
| 22,983 |
|
| 23,764 |
|
| (781) |
| (3.3) | % |
|
| 10,758 |
|
| 11,285 |
|
| (527) |
| (4.7) | % |
Total |
| $ | 268,713 |
| $ | 276,246 |
| $ | (7,533) |
| (2.7) | % |
| $ | 126,565 |
| $ | 128,124 |
| $ | (1,559) |
| (1.2) | % |
The net sales decrease of $7.5$1.6 million was driven by declinesdecreases in Latin America andsales from Europe, the United States and Asia Pacific, partially mitigated by an increase from Latin America. The decrease in Europe and Asia Pacific. The sales decline in Latin Americafrom Europe was primarily driven by lowerattributable to a decrease in sales from Venezuela of $5.0digital inks and colors of $1.6 million which was soldand $1.3 million, respectively. The decrease in the fourth quarter of 2015, and lower sales in frits and glazes of $13.4 million, partially mitigated by increased sales in other tile products of $2.8 million. The sales decline infrom the United States was fully attributable to lower sales inof porcelain enamel and the decrease from Asia Pacific was driven by lower sales of frits and glazes. The sales increase from Latin America was primarily driven by higher sales of digital inks of $1.1 million and higher sales of frits and glazes of $0.8 million. The
Performance Colors and Glass
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| Three Months Ended |
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| Change due to | ||||||||||||||||||
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| March 31, |
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| Volume / |
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| 2017 |
| 2016 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Acquisitions |
| Other | |||||||||||
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| (Dollars in thousands) |
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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 | % |
|
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|
Net sales increased compared with the prior-year same period, primarily driven by $10.8 million of sales attributable to ESL, $2.0 million of sales attributable to Pinturas, both acquisitions completed in 2016 after the first quarter, and $2.4 million from higher sales of electronics products (excluding ESL). Net sales were impacted by favorable volume and mix of $3.5 million, an increase in sales in Europe was primary attributable to $12.0from acquisitions of $12.8 million in sales from Al Salomi, which was acquired in the fourth quarterand higher product pricing of 2015,$0.6 million, partially offset by decreasedunfavorable foreign currency impacts of $1.6 million. Gross profit increased from the prior-year same period, primarily due to gross profit from acquisitions of $3.8 million, favorable manufacturing costs of $1.1 million, higher sales in digital inksvolumes and mix of $3.0$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. The increase in
3326
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| Three Months Ended |
|
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| ||||
|
| March 31, |
|
|
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|
|
| ||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
| |||||||
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
| $ | 44,586 |
| $ | 39,096 |
| $ | 5,490 |
| 14.0 | % |
United States |
|
| 39,104 |
|
| 30,489 |
|
| 8,615 |
| 28.3 | % |
Asia Pacific |
|
| 14,633 |
|
| 14,241 |
|
| 392 |
| 2.8 | % |
Latin America |
|
| 5,195 |
|
| 4,344 |
|
| 851 |
| 19.6 | % |
Total |
| $ | 103,518 |
| $ | 88,170 |
| $ | 15,348 |
| 17.4 | % |
The net sales increase of $15.3 million was driven by higher sales from all regions. The increase in sales from the United States was attributable to an increase in sales of electronics products of $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 increasedhigher sales in digital inks and frits and glazes of $1.8electronics products of $0.6 million and $0.5 million, partially offset by decreasedthe increase from Latin America was attributable to an increase in sales in porcelain enamel of $1.9decoration products of $0.9 million.
Performance Colors and GlassColor Solutions
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| Six Months Ended |
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| Change due to |
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| June 30, |
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| Volume / |
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| Three Months Ended |
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|
| Change due to | |||||||||||||||||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Other |
| March 31, |
|
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| Volume / |
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|
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Acquisitions |
| Other | |||||||||||
|
| (Dollars in thousands) |
|
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| (Dollars in thousands) |
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| ||||||||||||||||||
Segment net sales |
| $ | 184,103 |
|
| $ | 198,193 |
|
| $ | (14,090) |
| (7.1) | % |
| $ | 636 |
| $ | (11,373) |
| $ | (3,353) |
| $ | — |
| $ | 90,472 |
|
| $ | 61,157 |
|
| $ | 29,315 |
| 47.9 | % |
| $ | 603 |
| $ | 9,423 |
| $ | (629) |
| $ | 19,918 |
| $ | — |
Segment gross profit |
|
| 68,543 |
|
|
| 67,878 |
|
| 665 |
| 1.0 | % |
|
| 636 |
|
| (8,654) |
|
| (1,043) |
|
| 9,726 |
|
| 28,182 |
|
|
| 20,286 |
|
|
| 7,896 |
| 38.9 | % |
|
| 603 |
|
| 1,906 |
|
| (215) |
|
| 3,714 |
|
| 1,888 | |
Gross profit as a % of segment net sales |
|
| 37.2 | % |
|
| 34.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 31.1 | % |
|
| 33.2 | % |
|
|
|
|
|
|
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|
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|
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|
|
Net sales decreasedincreased compared with the prior-year same period, primarily driven by lowerdue to sales from Cappelle, and higher sales of our electronics, decorationsurface technology and industrialpigment products of $10.0$19.0 million, $7.0$3.7 million, and $1.7$5.6 million, respectively, partially mitigated by increased sales attributable to Ferer of $2.8 million, which was acquired in the first quarter of 2016, and automobile products of $1.8 million.respectively. Net sales were positively impacted by unfavorable volumehigher sales from acquisitions of $19.9 million, higher volumes and mix of $11.4$9.4 million and higher product pricing of $0.6 million, partially offset by unfavorable foreign currency impacts of $3.4 million, partially mitigated by higher product pricing of $0.6 million. Gross profit increased from the prior-year same period, primarily due to lower raw material costsgross profit from acquisitions of $7.3$3.7 million, lower manufacturing costs of $2.4$2.9 million, favorable sales volumes and mix of $1.9 million and higher product pricing of $0.6 million, partially offset by lower sales volumes and mixunfavorable raw material costs of $8.7$1.0 million and unfavorable foreign currency impacts of $1.0$0.2 million.
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| ||||||||||||
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| Six Months Ended |
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| ||||
|
| June 30, |
|
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| ||||
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| Three Months Ended |
|
|
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| ||||
|
| 2016 |
| 2015 |
| $ Change |
| % Change |
| March 31, |
|
|
|
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|
| ||||||||
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|
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
|
| (Dollars in thousands) |
|
|
| ||||||||||||||
Segment net sales by Region |
|
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|
|
United States |
| $ | 38,518 |
| $ | 28,397 |
| $ | 10,121 |
| 35.6 | % | ||||||||||||
Europe |
| $ | 81,057 |
| $ | 83,517 |
| $ | (2,460) |
| (2.9) | % |
|
| 35,177 |
|
| 17,578 |
|
| 17,599 |
| 100.1 | % |
United States |
|
| 64,909 |
|
| 77,331 |
|
| (12,422) |
| (16.1) | % | ||||||||||||
Asia Pacific |
|
| 28,990 |
|
| 27,597 |
|
| 1,393 |
| 5.0 | % |
|
| 8,258 |
|
| 7,130 |
|
| 1,128 |
| 15.8 | % |
Latin America |
|
| 9,147 |
|
| 9,748 |
|
| (601) |
| (6.2) | % |
|
| 8,519 |
|
| 8,052 |
|
| 467 |
| 5.8 | % |
Total |
| $ | 184,103 |
| $ | 198,193 |
| $ | (14,090) |
| (7.1) | % |
| $ | 90,472 |
| $ | 61,157 |
| $ | 29,315 |
| 47.9 | % |
The net sales declineincrease of $14.1$29.3 million was driven by lower sales in the United States, Europe, and Latin America, partially mitigated by increased sales in Asia Pacific.from all regions. The decreaseincreased sales from Europe was primarily driven by sales from Cappelle of $15.9 million. The increase in sales infrom the United States was attributable to lowerdriven by sales across all product lines, and the decline in sales in Europe and Latin America was primarily due to lower salesfrom Cappelle of decoration$3.1 million, surface technology products of $4.2$3.7 million and $0.8 million, respectively. The decreased sales in Europe was partially mitigated by increased sales attributable to Fererpigments of $2.8 million, which was acquired in the first quarter of 2016.$2.4 million. The increase in sales infrom Asia Pacific was primarily dueattributable to higher sales of automotive products of $1.9 million, partially offset by lower sales in industrial products of $0.4 million.for all products.
3427
Pigments, Powders and Oxides
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| Six Months Ended |
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| Change due to | |||||||||||||||
|
| June 30, |
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| Volume / |
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| 2016 |
| 2015 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Other | ||||||||||
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| (Dollars in thousands) |
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| |||||||||
Segment net sales |
| $ | 122,612 |
|
| $ | 56,547 |
|
| $ | 66,065 |
| 116.8 | % |
| $ | 101 |
| $ | 66,355 |
| $ | (391) |
| $ | — |
Segment gross profit |
|
| 42,690 |
|
|
| 17,146 |
|
|
| 25,544 |
| 149.0 | % |
|
| 101 |
|
| 21,406 |
|
| (107) |
|
| 4,144 |
Gross profit as a % of segment net sales |
|
| 34.8 | % |
|
| 30.3 | % |
|
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|
Net sales increased compared with the prior-year same period, primarily due to higher sales from Nubiola of $64.2 million, which was acquired in the third quarter of 2015. Net sales were positively impacted by higher volumes and mix of $66.4 million and favorable product pricing of $0.1 million, partially offset by unfavorable foreign currency impacts of $0.4 million. Gross profit increased from the prior-year same period, primarily due to higher sales volumes and mix of $21.4 million, favorable raw material costs of $2.7 million, lower manufacturing costs of $1.4 million and favorable product pricing of $0.1 million, partially offset by unfavorable foreign currency impacts of $0.1 million.
|
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| Six Months Ended |
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| ||||
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| June 30, |
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| ||||
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| 2016 |
| 2015 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
| |||||||
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 59,131 |
| $ | 40,591 |
| $ | 18,540 |
| 45.7 | % |
Europe |
|
| 34,283 |
|
| 9,231 |
|
| 25,052 |
| 271.4 | % |
Asia Pacific |
|
| 14,765 |
|
| 5,926 |
|
| 8,839 |
| 149.2 | % |
Latin America |
|
| 14,433 |
|
| 799 |
|
| 13,634 |
| 1,706.4 | % |
Total |
| $ | 122,612 |
| $ | 56,547 |
| $ | 66,065 |
| 116.8 | % |
Net sales increased $66.1 million, primarily driven by increased sales from Nubiola of $64.2 million, which was acquired in the third quarter of 2015, and contributed to the increased sales in all regions.
Summary of Cash Flows for the sixthree months ended JuneMarch 2017 and 2016 and 2015
|
|
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| Six Months Ended |
|
|
| ||||
|
| June 30, |
|
|
| ||||
|
| 2016 |
| 2015 |
| $ Change | |||
|
| (Dollars in thousands) | |||||||
Net cash (used in) provided by operating activities |
| $ | (1,975) |
| $ | 3,934 |
| $ | (5,909) |
Net cash (used in) investing activities |
|
| (17,086) |
|
| (31,908) |
|
| 14,822 |
Net cash provided by financing activities |
|
| 10,822 |
|
| 102,388 |
|
| (91,566) |
Effect of exchange rate changes on cash and cash equivalents |
|
| (725) |
|
| (3,501) |
|
| 2,776 |
(Decrease) increase in cash and cash equivalents |
| $ | (8,964) |
| $ | 70,913 |
| $ | (79,877) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
35
DetailsThe following table includes details of net cash provided by operating activities follows:activities.
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| Six Months Ended |
|
|
|
| Three Months Ended |
|
|
| ||||||||
|
| June 30, |
|
|
|
| March 31, |
|
|
| ||||||||
|
| 2016 |
| 2015 |
| $ Change |
| 2017 |
| 2016 |
| $ Change | ||||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 9,382 |
| $ | 15,800 |
| $ | (6,418) | |||||||||
(Gain) loss on sale of assets and business |
|
| (3,774) |
|
| 988 |
|
| (4,762) | |||||||||
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 |
|
| 21,929 |
|
| 16,146 |
|
| 5,783 |
|
| 11,375 |
|
| 10,672 |
|
| 703 |
Interest amortization |
|
| 644 |
|
| 586 |
|
| 58 |
|
| 479 |
|
| 315 |
|
| 164 |
Restructuring and impairment |
|
| 23,651 |
|
| (32) |
|
| 23,683 |
|
| 2,828 |
|
| 24,164 |
|
| (21,336) |
Devaluation of Venezuela |
|
| — |
|
| 3,343 |
|
| (3,343) | |||||||||
Loss on extinguishment of debt |
|
| 3,905 |
|
| — |
|
| 3,905 | |||||||||
Accounts receivable |
|
| (41,687) |
|
| (17,757) |
|
| (23,930) |
|
| (26,619) |
|
| (23,582) |
|
| (3,037) |
Inventories |
|
| (17,695) |
|
| 1,153 |
|
| (18,848) |
|
| (17,114) |
|
| (7,706) |
|
| (9,408) |
Accounts payable |
|
| 3,226 |
|
| (1,511) |
|
| 4,737 |
|
| 8,188 |
|
| 5,555 |
|
| 2,633 |
Other current assets and liabilities, net |
|
| 2,968 |
|
| (20,786) |
|
| 23,754 |
|
| (3,265) |
|
| 1,876 |
|
| (5,141) |
Other adjustments, net |
|
| (619) |
|
| 6,004 |
|
| (6,623) |
|
| (687) |
|
| (7,642) |
|
| 6,955 |
Net cash (used in) provided by operating activities |
| $ | (1,975) |
| $ | 3,934 |
| $ | (5,909) | |||||||||
Net cash provided by (used in) operating activities |
| $ | 1,630 |
| $ | (10,161) |
| $ | 11,791 |
Cash flows from operating activities. Cash flows provided by operating activities decreasedincreased $11.8 million in the first sixthree months of 20162017 compared with the prior-year same period. The decreaseincrease was due to higher cash outflows for working capital of $38.0 million, partially mitigated by lower cash outflows for other assets and liabilities and higher earnings after consideration of non-cash items.items, partially offset by higher cash outflows for net working capital of $9.8 million.
Cash flows from investing activities. Cash flows used in investing activities decreased $14.8$4.9 million in the first sixthree months of 20162017 compared with the prior-year same period. The decrease was primarily due to lower capital expenditurescash outflows for business acquisitions of $12.5$7.9 million, and was drivenpartially offset by lower spend forsales proceeds of $3.6 million, which primarily consisted of the Antwerp, Belgium facility, which was substantially completedproceeds from a closed site in Australia during the fourth quarter of 2015.three months ended March 31, 2016.
Cash flows from financing activities. Cash flows provided by financing activities decreased $91.6increased $32.7 million in the first sixthree months of 20162017 compared with the prior-year same period, driven byperiod. As further discussed in Note 8, during the $50.0three months ended March 31, 2017, we paid off our Previous Credit Facility and entered into our Credit Facility, consisting of a $400 million prepayment on thesecured revolving line of credit, a $357.5 million secured term loan facility thatand 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 repayments under loans payable was made$7.5 million higher. Additionally, during the first quarter of 2017, we paid $12.7 million in January 2016, a net borrowing decrease ondebt issuance costs related to the revolving credit facility of $34.2 million, andCredit Facility entered into during the purchaseperiod, partially offset by lower purchases of treasury stock during the first quarter of $11.4 million.2017.
28
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 June 30, 2016,date thereof. In addition, the Company had borrowed $244.8 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.
36
Tableand, certain additional debt subject to satisfaction of Contentscertain 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) syndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%. |
| The applicable margin for base rate loans is |
· | The LIBOR rate |
· | The EURIBOR rate for Euro term loans shall not be less than 0% and the applicable margin for |
· | 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) syndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%. |
| The applicable margin for base rate loans will vary between |
· | The LIBOR rate |
|
|
· | 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
At June 30, 2016, the Company had borrowed $240.8 millionMarch 31, 2017, there were no borrowings under the revolving credit facilities at an annual weighted average interest rate of 3.6%. The borrowing on the revolving credit facilities was used to fund the acquisitions, the share repurchase programs, and for other general business purposes.line. After reductions for outstanding letters of credit secured by these facilities, we had $54.8$395.6 million of additional borrowings available under the revolving credit facilities at at June 30, 2016.March 31, 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 June 30, 2016,March 31, 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 June 30, 2016March 31, 2017 and 2015, and were $0.4 million for the six months ended June 30, 2016 and 2015.2016. We had on hand precious metals owned by participants in our precious metals program of $26.6$31.9 million at June 30, 2016,March 31, 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.
37
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 June 30, 2016,March 31, 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 June 30, 2016,March 31, 2017, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $6.26.6 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 $7.6$33.1 million and $8.0$7.3 million at June 30, 2016March 31, 2017, and December 31, 2015,2016, respectively. We had $6.1$32.0 million and $7.3$6.7 million of additional borrowings available under these lines at June 30, 2016March 31, 2017, 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 June 30, 2016March 31, 2017, we had $49.4$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 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. In disposing of our Europe-based Polymer Additives business, we could be expected to incur cash charges of $10 million to $15 million. 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
by earnings before non-cash charges and changes in working capital needs. We had additional borrowing capacity of $61.0$427.6 million at June 30, 2016,March 31, 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 June 30, 2016,March 31, 2017, we were in compliance with our maximum leverage ratio covenant of 3.75x4.25x as our actual ratio was 2.93x,2.55x, providing $36.9$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
38
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 closed on those transactions.
Critical Accounting Policies and Their Application
There were no material changes to our critical accounting policies described in “Critical Accounting Policies” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 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 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.
3931
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2017 |
| 2016 | ||||
|
| (Dollars in thousands) |
| (Dollars in thousands) | ||||||||
Variable-rate debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount |
| $ | 481,408 |
| $ | 461,717 |
| $ | 615,594 |
| $ | 551,085 |
Fair value |
|
| 479,541 |
|
| 466,571 |
|
| 618,318 |
|
| 570,441 |
Change in annual interest expense from 1% change in interest rates |
|
| 4,914 |
|
| 4,690 |
|
| 6,318 |
|
| 5,611 |
Fixed-rate debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount |
|
| 4,715 |
|
| 4,610 |
|
| 7,782 |
|
| 8,228 |
Fair value |
|
| 4,046 |
|
| 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 |
|
| 278,015 |
|
| 338,418 |
|
| 188,234 |
|
| 338,186 |
Carrying amount and fair value |
|
| 2,336 |
|
| (1,207) |
|
| 237 |
|
| 350 |
Change in fair value from 10% appreciation of U.S. dollar |
|
| 11,313 |
|
| 19,814 |
|
| 2,469 |
|
| 15,589 |
Change in fair value from 10% depreciation of U.S. dollar |
|
| (13,827) |
|
| (24,217) |
|
| (3,018) |
|
| (19,054) |
4032
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 June 30, 2016,March 31, 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 June 30, 2016.March 31, 2017.
Changes in Internal Control over Financial Reporting
During the secondfirst 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.
4133
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.
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 June 30, 2016:March 31, 2017:
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|
|
|
|
|
|
|
|
|
|
|
| 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 |
| Paid per Share |
| or Programs |
| or Programs | |
|
| (Dollars in thousands, except for per share amounts) | |||||||
|
| — |
| $ | — |
| — | $ | |
|
| — |
| $ | — |
| — | $ | |
|
| — |
| $ | — |
| — | $ | |
Total |
| — |
|
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Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
The exhibits listed in the attached Exhibit Index are the exhibits required by Item 601 of Regulation S-K.
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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.
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| FERRO CORPORATION (Registrant) |
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Date: |
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| /s/ Peter T. Thomas |
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| Peter T. Thomas |
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| Chairman, President and Chief Executive Officer (Principal Executive Officer) |
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Date: |
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| /s/ |
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| Vice President and Chief Financial Officer (Principal Financial |
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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:
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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 |
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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 S‑3, 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 S‑3, 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 S‑3, 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 |
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 S‑3, 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 8‑K, 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 S‑3ASR, 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 8‑K, 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 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 lenders. (incorporated by reference to Exhibit 4.1 to Ferro Corporation’s current Report on Form 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 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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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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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 |
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*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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