Table of Contents

rti8Mag

Mag

 

 

 

 

 





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549









FORM 10-Q













 

(Mark One)

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

For the quarterly period ended June 30, 20172018



or





 

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

For the transition period from _________ to __________



Commission File Number 1-584







FERRO CORPORATION

(Exact name of registrant as specified in its charter)













 

 

 

 



Ohio

(State or other jurisdiction of

incorporation or organization)

 

34-0217820

(I.R.S. Employer Identification No.)

 



 

 

 

 



6060 Parkland Boulevard

Suite 250

Mayfield Heights, OH

(Address of principal executive offices)

 

44124

(Zip Code)

 



 

 

 

 



216-875-5600

(Registrant’s telephone number, including area code)

 











Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES ☒ NO ☐

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





 

 

 

 

Large accelerated filer

 

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, 2017,2018, there were 83,694,14784,137,477 shares of Ferro Common Stock, par value $1.00, outstanding.





 

 

 

 





 


 

Table of Contents

TABLE OF CONTENTS





 



Page

PART I

Item 1. Financial Statements (Unaudited)

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

2528 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

4045 

Item 4. Controls and Procedures

4146 

PART II

Item 1. Legal Proceedings

4247 

Item 1A. Risk Factors

4247 

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

4247 

Item 3. Defaults Upon Senior Securities

4247 

Item 4. Mine Safety Disclosures

4247 

Item 5. Other Information

4248 

Item 6. Exhibits

4248 



 

Exhibit 31.1

 

Exhibit 31.2

 

Exhibit 32.1

 

Exhibit 32.2

 





 

2


 

Table of Contents

PART I — FINANCIAL INFORMATION



Item 1.  Financial Statements (Unaudited)



Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Operations





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

 

(Dollars in thousands, except per share amounts)

 

(Dollars in thousands, except per share amounts)

Net sales

 

$

348,632 

 

$

297,977 

 

$

669,187 

 

$

575,428 

 

$

416,239 

 

$

348,632 

 

$

821,771 

 

$

669,187 

Cost of sales

 

 

240,290 

 

 

199,604 

 

 

462,051 

 

 

392,826 

 

 

289,594 

 

 

240,290 

 

 

576,440 

 

 

462,051 

Gross profit

 

 

108,342 

 

 

98,373 

 

 

207,136 

 

 

182,602 

 

 

126,645 

 

 

108,342 

 

 

245,331 

 

 

207,136 

Selling, general and administrative expenses

 

 

62,514 

 

 

57,871 

 

 

121,472 

 

 

110,517 

 

 

70,124 

 

 

62,981 

 

 

143,216 

 

 

122,427 

Restructuring and impairment charges

 

 

3,224 

 

 

787 

 

 

6,242 

 

 

1,668 

 

 

3,768 

 

 

3,224 

 

 

7,874 

 

 

6,242 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

6,449 

 

 

5,428 

 

 

12,673 

 

 

10,275 

 

 

8,200 

 

 

6,449 

 

 

16,162 

 

 

12,673 

Interest earned

 

 

(175)

 

 

(115)

 

 

(355)

 

 

(200)

 

 

(186)

 

 

(175)

 

 

(387)

 

 

(355)

Foreign currency losses, net

 

 

4,868 

 

 

389 

 

 

4,554 

 

 

2,000 

 

 

2,660 

 

 

4,868 

 

 

4,500 

 

 

4,554 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

3,905 

 

 

 —

 

 

3,226 

 

 

 —

 

 

3,226 

 

 

3,905 

Miscellaneous expense (income), net

 

 

1,538 

 

 

669 

 

 

(538)

 

 

(2,784)

Miscellaneous (income) expense, net

 

 

(1,372)

 

 

1,071 

 

 

(597)

 

 

(1,493)

Income before income taxes

 

 

29,924 

 

 

33,344 

 

 

59,183 

 

 

61,126 

 

 

40,225 

 

 

29,924 

 

 

71,337 

 

 

59,183 

Income tax expense

 

 

8,695 

 

 

8,484 

 

 

15,833 

 

 

16,502 

 

 

10,364 

 

 

8,695 

 

 

17,878 

 

 

15,833 

Income from continuing operations

 

 

21,229 

 

 

24,860 

 

 

43,350 

 

 

44,624 

Loss from discontinued operations, net of income taxes

 

 

 —

 

 

(5,748)

 

 

 —

 

 

(35,242)

Net income

 

 

21,229 

 

 

19,112 

 

 

43,350 

 

 

9,382 

 

 

29,861 

 

 

21,229 

 

 

53,459 

 

 

43,350 

Less: Net income attributable to noncontrolling interests

 

 

204 

 

 

143 

 

 

427 

 

 

379 

 

 

193 

 

 

204 

 

 

400 

 

 

427 

Net income attributable to Ferro Corporation common shareholders

 

$

21,025 

 

$

18,969 

 

$

42,923 

 

$

9,003 

 

$

29,668 

 

$

21,025 

 

$

53,059 

 

$

42,923 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.25 

 

$

0.30 

 

$

0.51 

 

$

0.53 

Discontinued operations

 

 

 —

 

 

(0.07)

 

 

 —

 

 

(0.42)

 

$

0.25 

 

$

0.23 

 

$

0.51 

 

$

0.11 

Diluted earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.25 

 

$

0.29 

 

$

0.50 

 

$

0.53 

Discontinued operations

 

 

 —

 

 

(0.07)

 

 

 —

 

 

(0.42)

 

$

0.25 

 

$

0.22 

 

$

0.50 

 

$

0.11 

Earnings per share attributable to Ferro Corporation common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.35 

 

$

0.25 

 

$

0.63 

 

$

0.51 

Diluted earnings per share

 

$

0.35 

 

$

0.25 

 

$

0.62 

 

$

0.50 











See accompanying notes to condensed consolidated financial statements.



 

3


 

Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)











 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,



 

2017

 

2016

 

2017

 

2016



 

(Dollars in thousands)

Net income

 

$

21,229 

 

$

19,112 

 

$

43,350 

 

$

9,382 

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

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation income (loss)

 

 

13,866 

 

 

(3,269)

 

 

21,077 

 

 

(4,947)

Postretirement benefit liabilities gain

 

 

16 

 

 

27 

 

 

12 

 

 

295 

Other comprehensive income (loss), net of income tax

 

 

13,882 

 

 

(3,242)

 

 

21,089 

 

 

(4,652)

Total comprehensive income

 

 

35,111 

 

 

15,870 

 

 

64,439 

 

 

4,730 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

280 

 

 

(9)

 

 

543 

 

 

259 

Comprehensive income attributable to Ferro Corporation

 

$

34,831 

 

$

15,879 

 

$

63,896 

 

$

4,471 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

June 30,

 

June 30,



 

2018

 

2017

 

2018

 

2017



 

(Dollars in thousands)

Net income

 

$

29,861 

 

$

21,229 

 

$

53,459 

 

$

43,350 

Other comprehensive income, net of income tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) income

 

 

(30,315)

 

 

13,866 

 

 

(24,528)

 

 

21,077 

Cash flow hedging instruments, unrealized (loss) gain

 

 

(1,336)

 

 

 —

 

 

(22)

 

 

 —

Postretirement benefit liabilities (loss) gain

 

 

10 

 

 

16 

 

 

17 

 

 

12 

Other comprehensive (loss) income, net of income tax

 

 

(31,641)

 

 

13,882 

 

 

(24,533)

 

 

21,089 

Total comprehensive (loss) income

 

 

(1,780)

 

 

35,111 

 

 

28,926 

 

 

64,439 

Less: Comprehensive (loss) income attributable to noncontrolling interests

 

 

(114)

 

 

280 

 

 

221 

 

 

543 

Comprehensive (loss) income attributable to Ferro Corporation

 

$

(1,666)

 

$

34,831 

 

$

28,705 

 

$

63,896 



See accompanying notes to condensed consolidated financial statements.



 

4


 

Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

ASSETS

ASSETS

ASSETS

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

78,866 

 

$

45,582 

 

$

44,886 

 

$

63,551 

Accounts receivable, net

 

 

330,461 

 

 

259,687 

 

 

395,858 

 

 

354,416 

Inventories

 

 

272,180 

 

 

229,847 

 

 

381,763 

 

 

324,180 

Other receivables

 

 

40,893 

 

 

37,814 

 

 

66,519 

 

 

67,137 

Other current assets

 

 

13,808 

 

 

9,087 

 

 

25,765 

 

 

16,448 

Total current assets

 

 

736,208 

 

 

582,017 

 

 

914,791 

 

 

825,732 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

273,964 

 

 

262,026 

 

 

334,997 

 

 

321,742 

Goodwill

 

 

157,828 

 

 

148,296 

 

 

199,172 

 

 

195,369 

Intangible assets, net

 

 

142,524 

 

 

137,850 

 

 

179,154 

 

 

187,616 

Deferred income taxes

 

 

115,181 

 

 

106,454 

 

 

109,404 

 

 

108,025 

Other non-current assets

 

 

52,096 

 

 

47,126 

 

 

36,294 

 

 

43,718 

Total assets

 

$

1,477,801 

 

$

1,283,769 

 

$

1,773,812 

 

$

1,682,202 

LIABILITIES AND EQUITY

LIABILITIES AND EQUITY

LIABILITIES AND EQUITY

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Loans payable and current portion of long-term debt

 

$

23,051 

 

$

17,310 

 

$

25,739 

 

$

25,136 

Accounts payable

 

 

158,659 

 

 

127,655 

 

 

201,380 

 

 

211,711 

Accrued payrolls

 

 

35,151 

 

 

35,859 

 

 

39,904 

 

 

48,201 

Accrued expenses and other current liabilities

 

 

70,571 

 

 

65,203 

 

 

75,114 

 

 

70,151 

Total current liabilities

 

 

287,432 

 

 

246,027 

 

 

342,137 

 

 

355,199 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

 

637,863 

 

 

557,175 

 

 

815,015 

 

 

726,491 

Postretirement and pension liabilities

 

 

168,231 

 

 

162,941 

 

 

161,179 

 

 

166,680 

Other non-current liabilities

 

 

61,383 

 

 

62,594 

 

 

71,769 

 

 

77,152 

Total liabilities

 

 

1,154,909 

 

 

1,028,737 

 

 

1,390,100 

 

 

1,325,522 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

Ferro Corporation shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 83.7 million and 83.4 million shares outstanding at June 30, 2017, and December 31, 2016, respectively

 

 

93,436 

 

 

93,436 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 84.1 million and 84.0 million shares outstanding at June 30, 2018, and December 31, 2017, respectively

 

 

93,436 

 

 

93,436 

Paid-in capital

 

 

303,805 

 

 

306,566 

 

 

296,242 

 

 

302,158 

Retained earnings

 

 

157,613 

 

 

114,690 

 

 

228,944 

 

 

171,744 

Accumulated other comprehensive loss

 

 

(85,670)

 

 

(106,643)

 

 

(99,822)

 

 

(75,468)

Common shares in treasury, at cost

 

 

(154,280)

 

 

(160,936)

 

 

(144,172)

 

 

(147,056)

Total Ferro Corporation shareholders’ equity

 

 

314,904 

 

 

247,113 

 

 

374,628 

 

 

344,814 

Noncontrolling interests

 

 

7,988 

 

 

7,919 

 

 

9,084 

 

 

11,866 

Total equity

 

 

322,892 

 

 

255,032 

 

 

383,712 

 

 

356,680 

Total liabilities and equity

 

$

1,477,801 

 

$

1,283,769 

 

$

1,773,812 

 

$

1,682,202 



See accompanying notes to condensed consolidated financial statements.



 

5


 

Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Equity





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferro Corporation Shareholders

 

 

 

 

 

 

 

Ferro Corporation Shareholders

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

in Treasury

 

 

 

 

 

 

 

 

 

Other

 

Non-

 

 

 

 

in Treasury

 

 

 

 

 

 

 

 

 

Other

 

Non-

 

 

 

 

 

 

 

 

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

controlling

 

Total

 

 

 

 

 

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

controlling

 

Total

 

Shares

 

Amount

 

Stock

 

Capital

 

Earnings

 

(Loss)

 

Interests

 

Equity

 

Shares

 

Amount

 

Stock

 

Capital

 

Earnings

 

(Loss)

 

Interests

 

Equity

 

(In thousands)

 

(In thousands)

Balances at December 31, 2015

 

9,431 

 

$

(166,020)

 

$

93,436 

 

$

314,854 

 

$

135,507 

 

$

(61,318)

 

$

7,822 

 

$

324,281 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,003 

 

 

 —

 

 

379 

 

 

9,382 

Other comprehensive (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,532)

 

 

(120)

 

 

(4,652)

Purchase of treasury stock

 

1,175 

 

 

(11,429)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,429)

Stock-based compensation transactions

 

(399)

 

 

11,120 

 

 

 —

 

 

(7,795)

 

 

 —

 

 

 —

 

 

 —

 

 

3,325 

Balances at June 30, 2016

 

10,207 

 

 

(166,329)

 

 

93,436 

 

 

307,059 

 

 

144,510 

 

 

(65,850)

 

 

8,081 

 

 

320,907 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

9,996 

 

 

(160,936)

 

 

93,436 

 

 

306,566 

 

 

114,690 

 

 

(106,643)

 

 

7,919 

 

 

255,032 

 

9,996 

 

$

(160,936)

 

$

93,436 

 

$

306,566 

 

$

114,690 

 

$

(106,643)

 

$

7,919 

 

$

255,032 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

42,923 

 

 

 —

 

 

427 

 

 

43,350 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

42,923 

 

 

 —

 

 

427 

 

 

43,350 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

20,973 

 

 

116 

 

 

21,089 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

20,973 

 

 

116 

 

 

21,089 

Stock-based compensation transactions

 

(255)

 

 

6,656 

 

 

 —

 

 

(2,761)

 

 

 —

 

 

 —

 

 

 —

 

 

3,895 

 

(255)

 

 

6,656 

 

 

 —

 

 

(2,761)

 

 

 —

 

 

 —

 

 

 —

 

 

3,895 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(474)

 

 

(474)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(474)

 

 

(474)

Balances at June 30, 2017

 

9,741 

 

$

(154,280)

 

$

93,436 

 

$

303,805 

 

$

157,613 

 

$

(85,670)

 

$

7,988 

 

$

322,892 

 

9,741 

 

 

(154,280)

 

 

93,436 

 

 

303,805 

 

 

157,613 

 

 

(85,670)

 

 

7,988 

 

 

322,892 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

9,386 

 

 

(147,056)

 

 

93,436 

 

 

302,158 

 

 

171,744 

 

 

(75,468)

 

 

11,866 

 

 

356,680 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

53,059 

 

 

 —

 

 

400 

 

 

53,459 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(24,354)

 

 

(179)

 

 

(24,533)

Purchase of treasury stock

 

287 

 

 

(6,014)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,014)

Stock-based compensation transactions

 

(376)

 

 

8,898 

 

 

 —

 

 

(6,705)

 

 

 —

 

 

 —

 

 

 —

 

 

2,193 

Change in ownership interest

 

 —

 

 

 —

 

 

 —

 

 

789 

 

 

 —

 

 

 —

 

 

(2,228)

 

 

(1,439)

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(775)

 

 

(775)

Adjustment for accounting standards update 2016-16

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,141 

 

 

 —

 

 

 —

 

 

4,141 

Balances at June 30, 2018

 

9,297 

 

$

(144,172)

 

$

93,436 

 

$

296,242 

 

$

228,944 

 

$

(99,822)

 

$

9,084 

 

$

383,712 



See accompanying notes to condensed consolidated financial statements.



 

6


 

Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

$

14,705 

 

$

(1,975)

Net cash (used in) provided by operating activities

 

$

(37,675)

 

$

14,705 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(16,894)

 

 

(14,044)

 

 

(43,569)

 

 

(16,894)

Proceeds from sale of assets

 

 

145 

 

 

3,597 

Business acquisitions, net of cash acquired

 

 

(14,752)

 

 

(6,639)

 

 

(4,920)

 

 

(14,752)

Other investing activities

 

 

31 

 

 

145 

Net cash used in investing activities

 

 

(31,501)

 

 

(17,086)

 

 

(48,458)

 

 

(31,501)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 

 

 

Net (repayments) borrowings under loans payable

 

 

(5,645)

 

 

3,031 

Proceeds from revolving credit facility, maturing 2019

 

 

15,628 

 

 

163,516 

Principal payments on revolving credit facility, maturing 2019

 

 

(327,183)

 

 

(92,706)

Proceeds from term loan facility, maturing 2024

 

 

623,827 

 

 

 —

Principal payments on term loan facility, maturing 2024

 

 

(1,596)

 

 

 —

Principal payments on term loan facility, maturing 2021

 

 

(243,250)

 

 

(51,500)

Net (repayments) under loans payable

 

 

(1,828)

 

 

(5,645)

Proceeds from revolving credit facility - 2014 Credit Facility

 

 

 —

 

 

15,628 

Principal payments on revolving credit facility - 2014 Credit Facility

 

 

 —

 

 

(327,183)

Proceeds from term loan facility - Credit Facility

 

 

 —

 

 

623,827 

Principal payments on term loan facility - 2014 Credit Facility

 

 

 —

 

 

(243,250)

Principal payments on term loan facility - Credit Facility

 

 

(304,060)

 

 

(1,596)

Principal payments on term loan facility - Amended Credit Facility

 

 

(2,050)

 

 

 —

Proceeds from revolving credit facility - Credit Facility

 

 

134,950 

 

 

 —

Principal payments on revolving credit facility - Credit Facility

 

 

(212,950)

 

 

 —

Proceeds from revolving credit facility - Amended Credit Facility

 

 

580 

 

 

 —

Proceeds from term loan facility - Amended Credit Facility

 

 

466,075 

 

 

 —

Payment of debt issuance costs

 

 

(12,927)

 

 

(301)

 

 

(3,466)

 

 

(12,927)

Acquisition related contingent consideration payment

 

 

(348)

 

 

 —

Purchase of treasury stock

 

 

 —

 

 

(11,429)

 

 

(6,014)

 

 

 —

Other financing activities

 

 

(930)

 

 

211 

 

 

(2,387)

 

 

(930)

Net cash provided by financing activities

 

 

47,924 

 

 

10,822 

 

 

68,502 

 

 

47,924 

Effect of exchange rate changes on cash and cash equivalents

 

 

2,156 

 

 

(725)

 

 

(1,034)

 

 

2,156 

Increase (decrease) in cash and cash equivalents

 

 

33,284 

 

 

(8,964)

(Decrease) increase in cash and cash equivalents

 

 

(18,665)

 

 

33,284 

Cash and cash equivalents at beginning of period

 

 

45,582 

 

 

58,380 

 

 

63,551 

 

 

45,582 

Cash and cash equivalents at end of period

 

$

78,866 

 

$

49,416 

 

$

44,886 

 

$

78,866 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

14,714 

 

$

9,283 

 

$

16,450 

 

$

14,714 

Income taxes

 

$

9,513 

 

$

7,432 

 

$

14,378 

 

$

9,513 



 

See accompanying notes to condensed consolidated financial statements.



 

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Table of Contents

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, 2016.2017.



As discussed in Note 3,We produce our products primarily in the third quarter of 2016, we completedEurope-Middle East (“EMEA”) region, the disposition ofUnited States, the Europe-based Polymer Additives businessAsia Pacific region, and have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 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.Latin America.



Operating results for the three and six months ended June 30, 2017,2018, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2017.  

2018.  



2.    Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In March 2016, theOn April 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09,2017-12, Compensation – Stock Compensation:Derivatives and Hedging (Topic 718)815): Targeted Improvements to Employee Share-Based Payment Accounting.Accounting for Hedging Activities.  ASU 2016-09 is intended2017-12 provides guidance to simplify severalbetter align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The adoption of this ASU did not have an impact to the opening balance of Retained earnings. We will apply the guidance of this ASU to applicable transactions after the adoption date.

On April 1, 2018, we adopted FASB ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2018-03 provides targeted improvements to address certain aspects of the accounting for share-based payment transactions, including the income tax consequences, classificationrecognition, measurement presentation, and disclosure of awards as either equity or liabilities, and classification on the statementfinancial instruments. The adoption 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 asASU 2018-03 did not have 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 nomaterial impact on the statements of cash flows since the Company has historically presented such payments as financing activities. 

NewAccounting StandardsCompany’s condensed consolidated financial statements.

In May 2017, theOn January 1, 2018, we adopted FASB issued ASU 2017-09, Compensation – Stock Compensation: (Topic 718): Scope of Modification Accounting.  ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual periods beginning after December

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15, 2017, including interim periods within those annual periods. The Company isnew guidance would only impact our consolidated financial statements if, in the processfuture, we modified the terms of assessingany of our share-based awards. We will apply the impact that the adoptionguidance of this ASU willto applicable transactions after the adoption date. The adoption of ASU 2017-09 did not have a material impact on ourthe Company’s condensed consolidated financial statements.

In March 2017, theOn January 1, 2018, we adopted 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 costscost component and outside a subtotal of income from operations. Employers will haveThis ASU also allows only the service cost component of net benefit costs to disclosebe eligible for capitalization. We adopted this new standard using the line(s) used to presentretrospective approach for the presentation of the service cost component and the other components of the net periodic pension (credit) cost and net periodic postretirement benefit cost if the components are not presented separately in the income statement.  statement. This pronouncement is effectiveresulted in the reclassification of income of $0.5 million and $1.0 million from Selling, general and administrative expenses to Other income, expense, net in our condensed consolidated statement of operations for annual periods beginning after December 15,the three and six months ended June 30, 2017, including interim periods within those annual periods.respectively. The Company isused a practical expedient where the amount disclosed in our Retirement Benefits footnote for the processprior

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Table of assessingContents

year comparative period was the impact thatbasis for the estimation for applying the retrospective presentation requirements. Other than this reclassification, the adoption of this ASU will2017-07 did not have an impact on ourthe Company’s condensed consolidated financial statements.

InOn January 2017, the1, 2018, we adopted 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. 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 within evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. This pronouncement is effective forWe will apply 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 adoptionguidance of this ASU willto applicable transactions after the adoption date. The adoption of ASU 2017-01 did not have a material impact on ourthe Company’s condensed consolidated financial statements.

In October 2016, theOn January 1, 2018, we adopted 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 effectiveWe adopted this new standard using the modified retrospective method.  The impact of adopting this guidance on the Company’s condensed consolidated financial statements resulted in an increase to  Retained earnings of $4.1 million and Deferred income taxes of $4.7 million and a decrease to Other receivables of $0.6 million for the annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.year ended June 30, 2018.

In August 2016, theOn January 1, 2018, we adopted 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.  Adoption of ASU 2016-15 did not have a material effect on our condensed consolidated financial statements.

On January 1, 2018, we adopted FASB ASU 2014-09, Revenue from Contracts with Customers: (Topic 606) (“ASC 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 require significant judgment.  We have completed our assessment and review of specific contracts and have adopted this new standard using the modified retrospective method with no impact to the opening  Retained earnings balance. We expect the impact of the adoption of this new standard will not have a material effect on our consolidated financial statements on an ongoing basis.

NewAccounting Standards

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from Accumulated Other Comprehensive (Loss) Income to Retained Earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects. This pronouncement is effective for fiscal years beginning after December 15, 2017, and2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. 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 current goodwill impairment test. This pronouncement is effective for the annual or any interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.



In February 2016, the FASB issued ASU 2016-02, Leases: (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. The Company is in the process of assessing the impact the adoption of this ASU will have on our consolidated financial statements.



In May 2014, the FASB issued ASU 2014-09, 9Revenue from Contracts with Customers: (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


Table 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 Company continues to assess the impact of the standard.  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 consolidated financial statements.Contents

No other new accounting pronouncements issued had, or are expected to have, a material impact ofon the Company’s consolidated financial statements.



3.    Revenue

Revenue Recognition

Under ASC 606, revenues are recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods.  In order to achieve that core principle, the Company applies the following five-step approach: 1) identify the contract with a customer, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when a performance obligation is satisfied.

The Company considers confirmed customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts, from an accounting perspective, with customers.  Under our standard contracts, the only performance obligation is the delivery of manufactured goods and the performance obligation is satisfied at a point in time, when the Company transfers control of the manufactured goodsThe Company may receive orders for products to be delivered over multiple dates that may extend across several reporting periods.  The Company invoices for each order and recognizes revenue for each distinct product upon shipment, once transfer of control has occurred.  Payment terms are standard for the industry and jurisdiction in which we operate.  In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment, to determine the net consideration to which the Company expects to be entitled.  Discounts or rebates are specifically stated in customer contracts or invoices, and are recorded as a reduction of revenue in the period the related revenue is recognized.  The product price as specified on the customer confirmed orders is considered the standalone selling price.  The Company allocates the transaction price to each distinct product based on its relative standalone selling price.  Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which generally occurs at shipment. We review all material contracts to determine transfer of control based upon the business practices and legal requirements of each country.

The amount of shipping and handling fees invoiced to our customers at the time our product is shipped is included in net sales as we are the principle in those activities.  Sales, valued-added and other taxes collected from our customers and remitted to governmental authorities are excluded from net sales. 

There were no changes in amounts previously reported in the Company’s condensed consolidated financial statements due to adopting ASC 606.

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Table of Contents

3.    Discontinued Operations

During 2014, we commenced a process to market for sale our Europe-based Polymer Additives business.  We determined that the criteria to classify these assets as held-for-sale under ASC Topic 360, Property, Plant

Revenues disaggregated by geography and Equipment, were 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 operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operationsreportable segment  for the three months ended June 30, 2018, follow:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

EMEA

 

United States

 

Asia Pacific

 

Latin America

 

Total



 

(Dollars in thousands)

Performance Coatings

 

$

126,133 

 

$

11,715 

 

$

29,129 

 

$

26,472 

 

$

193,449 

Performance Colors and Glass

 

 

63,675 

 

 

38,504 

 

 

18,063 

 

 

5,785 

 

 

126,027 

Color Solutions

 

 

36,227 

 

 

41,272 

 

 

10,532 

 

 

8,732 

 

 

96,763 

   Total net sales

 

$

226,035 

 

$

91,491 

 

$

57,724 

 

$

40,989 

 

$

416,239 

Revenues disaggregated by geography and reportable segment for the three months ended June 30, 2017, follow:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

EMEA

 

United States

 

Asia Pacific

 

Latin America

 

Total



 

(Dollars in thousands)

Performance Coatings

 

$

88,814 

 

$

11,604 

 

$

23,089 

 

$

28,239 

 

$

151,746 

Performance Colors and Glass

 

 

47,592 

 

 

37,832 

 

 

15,796 

 

 

5,417 

 

 

106,637 

Color Solutions

 

 

34,961 

 

 

39,179 

 

 

8,775 

 

 

7,334 

 

 

90,249 

   Total net sales

 

$

171,367 

 

$

88,615 

 

$

47,660 

 

$

40,990 

 

$

348,632 

Revenues disaggregated by geography and reportable segment for the six months ended June 30, 2016.  2018, follow:

The table below summarizes results



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

EMEA

 

United States

 

Asia Pacific

 

Latin America

 

Total



 

(Dollars in thousands)

Performance Coatings

 

$

245,249 

 

$

24,534 

 

$

55,076 

 

$

53,238 

 

$

378,097 

Performance Colors and Glass

 

 

125,019 

 

 

75,595 

 

 

34,578 

 

 

11,340 

 

 

246,532 

Color Solutions

 

 

76,710 

 

 

82,898 

 

 

20,470 

 

 

17,064 

 

 

197,142 

   Total net sales

 

$

446,978 

 

$

183,027 

 

$

110,124 

 

$

81,642 

 

$

821,771 

Revenues disaggregated by geography and reportable segment for the Europe-based Polymer Additives assets, for the three and six months ended June 30, 2016, 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.

2017, follow:







 

 

 

 

 



 

 

 

 

 



Three Months Ended

 

Six Months Ended



June 30, 2016

 

June 30, 2016



(Dollars in thousands)

Net sales

$

6,900 

 

$

14,650 

Cost of sales

 

10,789 

 

 

22,819 

Gross loss

 

(3,889)

 

 

(8,169)

Selling, general and administrative expenses

 

1,502 

 

 

2,505 

Restructuring and impairment charges

 

 —

 

 

24,059 

Interest expense

 

40 

 

 

276 

Miscellaneous expense (income)

 

30 

 

 

(387)

Loss from discontinued operations before income taxes

 

(5,461)

 

 

(34,622)

Income tax expense

 

287 

 

 

620 

Loss from discontinued operations, net of income taxes

$

(5,748)

 

$

(35,242)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

EMEA

 

United States

 

Asia Pacific

 

Latin America

 

Total



 

(Dollars in thousands)

Performance Coatings

 

$

157,973 

 

$

22,362 

 

$

44,406 

 

$

53,570 

 

$

278,311 

Performance Colors and Glass

 

 

92,178 

 

 

76,936 

 

 

30,429 

 

 

10,612 

 

 

210,155 

Color Solutions

 

 

70,138 

 

 

77,696 

 

 

17,034 

 

 

15,853 

 

 

180,721 

   Total net sales

 

$

320,289 

 

$

176,994 

 

$

91,869 

 

$

80,035 

 

$

669,187 





Practical Expedients and Exemptions



All material contracts have an original duration of one year or less and, as such, the Company uses the practical expedient applicable to such contracts, and has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period, or when the Company expects to recognize this revenue.



When the period of time between the transfer of control of the goods and the time the customer pays for the goods is one year or less, the Company uses the practical expedient allowed by ASC 606 that provides relief from adjusting the amount of promised consideration for the effects of a financing component.



We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within Selling, general and administrative expenses.

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4.    Acquisitions

Smalti per Ceramiche, s.r.lPT Ferro Materials Utama

On April 24,June 29, 2018, the Company acquired 66% of the equity interests in PT Ferro Materials Utama (“FMU”) for $2.7 million in cash, in addition to the forgiveness of debt of $9.2 million, bringing our total ownership to 100%. The Company previously recorded its investment in FMU as an equity method investment, and following this transaction, the Company fully consolidates FMU. Due to the change of control that occurred, the Company recorded a gain on purchase of $2.6 million, which is recorded in Miscellaneous (income), expense net, related to the difference between the Company’s carrying value and fair value of the previously held equity method investment during the second quarter of 2018.  

Endeka Group

On November 1, 2017, the Company acquired 100% of the equity interests of S.P.C.Endeka 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”Endeka”), a company duly organized underglobal producer of high-value coatings and key raw materials for the laws of Italy,ceramic tile market, for 17.€72.8 million (approximately $19.$84.38 million), subject to customary working capital adjustments, including the assumption of debt of 5.13.81 million. SPC is a high-end tile coatings manufacturer based in Italy focused on fast-growing specialty products. SPC’s 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 marketsmillion (approximately $15.3 million). The Company incurred acquisition costs for the three and six months ended June 30, 2017,2018, of $0.8$0.5 million, and $1.2 million, respectively, which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations.

The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of June 30, 2017, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $6.7 million of personal and real property, $5.5 million of net working capital, $4.5 million of goodwill, $4.4 million of amortizable intangible assets and $1.8 million of a deferred tax liability on the condensed consolidated balance sheet. 

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 €49.8 million

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(approximately $52.7 million), including the assumption of debt of 9.8 million. The acquired business contributed net sales of $19.1$30.5 million and $38.1$61.2 million for the three and six months ended June 30, 2017,2018, respectively, and net income attributable to Ferro Corporation of $0.5$4.8 million and $1.1$8.8 million for the three and six months ended June 30, 2017,2018, respectively.

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, 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, $3.5 million of goodwill and $3.5 million of a deferred tax liability on the condensed consolidated balance sheet.

Electro-Science Laboratories, Inc.

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 $10.6 million and $21.3 million for the three and six months ended June 30, 2017, respectively, and net income attributable to Ferro Corporation of $1.8 million and $2.7 million for the three and six months ended June 30, 2017, respectively. The Company incurred acquisition costs for the six months ended June 30, 2017, of $0.3 million, respectively, which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations.



The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. During the first half of 2018, the Company adjusted the net working capital on the opening balance sheet and as such, the carrying amount of the personal and real property decreased $4.1 million. As of June 30, 2017,2018, 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, $19.0 million of goodwill, $18.9$44.1 million of net working capital, $2.9$24.1 million of deferred tax assets, $17.7 million of personal and real property and $2.0$1.1 million of a deferred tax liabilitynoncontrolling interest on the condensed consolidated balance sheet.

Gardenia Quimica S.A.

Delta Performance Products

On August 1, 2016,3, 2017, the Company acquired certain assetsa majority interest in Gardenia Quimica S.A. (“Gardenia”) for $3.0 million. The Company previously owned 46% of Delta Performance Products, LLC,Gardenia and recorded it as an equity method investment. Following  this transaction, the Company owned 83.5% and fully consolidates Gardenia. Due to the change of control that occurred, the Company recorded a gain on purchase of $2.6 million related to the difference between the Company’s carrying value and fair value of the previously held equity method investment during the third quarter of 2017.  On March 1, 2018, the Company acquired the remaining equity interest in Gardenia for $1.4 million.

Dip Tech Ltd.

On August 2, 2017, the Company acquired 100% of the equity interests of Dip Tech Ltd. (“Dip-Tech”), a cashleading provider of digital printing solutions for glass coatings, for $77.0 million. Dip-Tech is headquartered in Kfar Saba, Israel. The purchase price consideration consisted of $4.4cash paid at closing of $60.1 million, net of the net working capital adjustment, and contingent consideration of $16.9 million. The Company incurred acquisition costs for the six months ended June 30,  2018, of $0.1 million, which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations. The acquired business contributed net sales of $7.0 million and $10.9 million for the three and six months ended June 30, 2018, respectively, and net loss attributable to Ferro Corporation of $1.6 million and $4.0 million for the three and six months ended June 30, 2018, respectively.  The net loss attributable to Ferro Corporation was driven by the amortization of acquired intangible asset amortization costs of $1.0 million and $2.0 million for the three and six months ended June 30, 2018, respectively.  Dip-Tech incurred research and development costs of $1.8 million and $3.3 million for the three and six months ended June 30, 2018, respectively.

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

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who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of June 30, 2017,2018, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $3.2$41.2 million of amortizable intangible assets, $0.6$33.5 million of goodwill, $7.2 million of a deferred tax liability, $5.1 million of indefinite-lived intangible assets, $3.2 million of personal and real property and $1.2 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.

Smalti per Ceramiche, s.r.l

Pinturas

On June 1, 2016,April 24, 2017, the Company acquired 100% of the equity interests of privately held Pinturas BenicarlóS.P.C. Group s.r.l., S.L.and 100% of the equity interests of Smalti per Ceramiche, s.r.l. (“Pinturas”SPC”), for €16.518.7 million in cash (approximately $18.4$20.3 million), including the assumption of debt of 5.7 million (approximately $6.2 million). SPC is a high-end tile coatings manufacturer based in Italy focused on fast-growing specialty products. SPC’s 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 information included herein has been prepared based on the allocation of the purchase price using the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. The Company recorded $8.8 million of amortizable intangible assets, $7.7 million of net working capital, $3.9 million of goodwill, $2.7 million of a deferred tax liability, and $0.7$6.1 million of personal and real property, on the condensed consolidated balance sheet. 

Ferer

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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”) for approximately $9.4 million. The information included herein has been prepared based on the allocation of the purchase price using the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. The Company recorded $4.5 million of goodwill, $3.3$6.0 million of amortizable intangible assets, $1.7$5.2 million of goodwill, $5.0 million of net working capital $0.7and $2.0 million of a deferred tax liability and $0.6 million of personal and real property on the condensed consolidated balance sheet.    





5.    Inventories





 

 

 

 

��

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Raw materials

 

$

91,510 

 

$

72,943 

 

$

135,595 

 

$

112,300 

Work in process

 

 

46,804 

 

 

38,859 

 

 

58,591 

 

 

39,454 

Finished goods

 

 

133,866 

 

 

118,045 

 

 

187,577 

 

 

172,426 

Total inventories

 

$

272,180 

 

$

229,847 

 

$

381,763 

 

$

324,180 



In the production of some of our products, we use precious metals, which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $0.3$0.4 million and $0.2$0.3 million for the three months ended June 30, 20172018 and 2016,2017, respectively, and were $0.5$0.8 million and $0.4$0.5 million for the six months ended June 30, 20172018 and 2016,2017, respectively. We had on-hand precious metals owned by participants in our precious metals consignment program of $33.4$44.1 million at June 30, 2017,2018, and $28.7$37.7  million at December 31, 2016,2017, measured at fair value based on market prices for identical assets and net of credits.assets.  



6.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $475.4$515.1 million at June 30, 2017,2018, and $439.4$502.9 million at December 31, 2016.2017. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $3.8 million at June 30, 2017,2018, and $2.1$3.8 million at June 30, 2016. 

We recorded a $3.9 million gain on sale of a closed site in Australia which was recorded in Miscellaneous expense (income), net in our condensed consolidated statements of operations for the six months ended June 30, 2016.2017. 



As discussed in Note 3, our Europe-based Polymer Additives assets had been classified as held-for-sale under ASC Topic 360, Property, Plant and Equipment from 2014 until the ultimate sale of the business in August 2016. As such, at each historical reporting date, these assets were 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, 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 six months ended June 30, 2016.





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7.   Goodwill and Other Intangible Assets 

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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance

 

 

 

 

 

 

 

 

Performance

 

 

 

Performance

 

Color

 

Colors and

 

 

 

Performance

 

Color

 

Colors and

 

 

 

Coatings

 

Solutions

 

Glass

 

Total

 

Coatings

 

Solutions

 

Glass

 

Total

 

(Dollars in thousands)

 

(Dollars in thousands)

Goodwill, net at December 31, 2016

 

$

28,090 

 

$

40,421 

 

$

79,785 

 

$

148,296 

Goodwill, net at December 31, 2017

 

$

38,236 

 

$

42,535 

 

$

114,598 

 

$

195,369 

Acquisitions

 

 

4,494 

2

 

 —

 

 

(854)

1

 

3,640 

 

 

5,140 

(2)

 

 —

 

 

1,291 

(1)

 

6,431 

Foreign currency adjustments

 

 

2,561 

 

 

1,143 

 

 

2,188 

 

 

5,892 

 

 

(1,348)

 

 

(445)

 

 

(835)

 

 

(2,628)

Goodwill, net at June 30, 2017

 

$

35,145 

 

$

41,564 

 

$

81,119 

 

$

157,828 

Goodwill, net at June 30, 2018

 

$

42,028 

 

$

42,090 

 

$

115,054 

 

$

199,172 



(1)

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

(1) During the first quarter of 2018, the Company recorded a purchase price adjustment within the measurement period for goodwill related to the Dip-Tech acquisition.

(2) During the second quarter of 2018, the Company recorded goodwill related to the FMU acquisition.

(2)

During the second quarter of 2017, the Company recorded goodwill related to the SPC acquisition.  Refer to Note 4 for additional details. 





 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Goodwill, gross

 

$

216,295 

 

$

206,763 

 

$

257,639 

 

$

253,836 

Accumulated impairment losses

 

 

(58,467)

 

 

(58,467)

Accumulated impairment

 

 

(58,467)

 

 

(58,467)

Goodwill, net

 

$

157,828 

 

$

148,296 

 

$

199,172 

 

$

195,369 



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, 2017,2018, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.

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Amortizable intangible assets consisted of the following:



 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Gross amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

$

5,277 

 

$

5,147 

 

$

5,210 

 

$

5,279 

Land rights

 

 

4,816 

 

 

4,746 

 

 

4,893 

 

 

4,947 

Technology/know-how and other

 

 

90,441 

 

 

84,837 

 

 

127,765 

 

 

131,070 

Customer relationships

 

 

84,914 

 

 

80,153 

 

 

92,493 

 

 

93,500 

Total gross amortizable intangible assets

 

 

185,448 

 

 

174,883 

 

 

230,361 

 

 

234,796 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Patents

 

 

(5,155)

 

 

(4,981)

 

 

(5,149)

 

 

(5,226)

Land rights

 

 

(2,776)

 

 

(2,698)

 

 

(2,912)

 

 

(2,883)

Technology/know-how and other

 

 

(38,667)

 

 

(34,775)

 

 

(46,580)

 

 

(45,214)

Customer relationships

 

 

(7,857)

 

 

(5,311)

 

 

(13,447)

 

 

(11,114)

Total accumulated amortization

 

 

(54,455)

 

 

(47,765)

 

 

(68,088)

 

 

(64,437)

Amortizable intangible assets, net

 

$

130,993 

 

$

127,118 

 

$

162,273 

 

$

170,359 



Indefinite-lived intangible assets consisted of the following:



 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Indefinite-lived intangibles assets:

 

 

 

 

 

 

 

 

 

 

 

 

Trade names and trademarks

 

$

11,531 

 

$

10,732 

 

$

16,881 

 

$

17,257 

































8.    Debt

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



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Loans payable

 

$

14,508 

 

$

11,452 

 

$

16,494 

 

$

16,360 

Current portion of long-term debt

 

 

8,543 

 

 

5,858 

 

 

9,245 

 

 

8,776 

Loans payable and current portion of long-term debt

 

$

23,051 

 

$

17,310 

 

$

25,739 

 

$

25,136 



Long-term debt consisted of the following:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

239,530 

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

 

 

633,463 

 

 

 —

Revolving credit facility, maturing 2019

 

 

 —

 

 

311,555 

Term loan facility, net of unamortized issuance costs, maturing 2024(1)

 

$

812,665 

 

$

645,242 

Revolving credit facility

 

 

580 

 

 

78,000 

Capital lease obligations

 

 

5,216 

 

 

3,720 

 

 

4,425 

 

 

4,913 

Other notes

 

 

7,727 

 

 

8,228 

 

 

6,590 

 

 

7,112 

Total long-term debt

 

 

646,406 

 

 

563,033 

 

 

824,260 

 

 

735,267 

Current portion of long-term debt

 

 

(8,543)

 

 

(5,858)

 

 

(9,245)

 

 

(8,776)

Long-term debt, less current portion

 

$

637,863 

 

$

557,175 

 

$

815,015 

 

$

726,491 



(1) The carrying value of the term loan facility, maturing 2021, was 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  $8.1 million.$5.3 million at June 30, 2018, and  $7.5 million at December 31, 2017.

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2014Amended Credit Facility

In 2014,On April 25, 2018 the Company entered into aan amendment (the “Amended Credit Facility”) to its existing credit facility that was amended(the “Credit Facility”) which Amended Credit Facility (a) provided a new revolving facility (the “2018 Revolving Facility”), which replaced the Company’s existing revolving facility, (b) repriced the (“Tranche B-1 Loans”), (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars borrowed by the Company’s existing credit facility and will be used for ongoing working capital requirements and general corporate purposes. The (“Tranche B-2 Loans”) are borrowed by the Company and the (“Tranche B-3 Loans”) are borrowed on January 25, 2016,a joint and August 29, 2016, resulting inseveral basis by Ferro GmbH and Ferro Europe Holdings LLC.  

The Amended Credit Facility consists of a $400$500 million secured revolving line of credit with a termmaturity of five years andFebruary 2023, a $300$355 million secured term loan facility with a termmaturity of seven years from the original issuance date (the “Previous Credit Facility”) withFebruary 2024, a group of lenders that was replaced on February 14, 2017, by the Credit Facility (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 on extinguishment of debt in our condensed consolidated statement of operations for the six months ended June 30, 2017.

2017 Credit Facility

On February 14, 2017, the Company entered into a new credit facility (the “Credit Facility”) with a group of lenders to refinance 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 with a term of five years, a $357.5$235 million secured term loan facility with a termmaturity of seven yearsFebruary 2024 and a €250$230 million secured euro term loan facility with a termmaturity of seven years.February 2024. The term loans are payable in equal quarterly installments in an amount equal to 0.25% of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof.  In addition, the Company is required, on an annual basis, to make a prepayment of term loans until they are fully paid and then to the revolving loans in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Amended Credit Facility.Facility, which prepayment will be applied first to the term loans until they are paid in full, and then to the revolving loans.

Subject to the satisfaction of certain conditions, the Company can request additional commitments under the revolving line of credit or term loans in the aggregate principal amount of up to $250 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans and,loans. The Company can also raise certain additional debt or credit facilities subject to satisfaction of certain covenant levels.

Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Amended Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of certain of the Company’s U.S. subsidiaries and 65% of the stock of certain of the Company’s direct foreign subsidiaries.   The Tranche B-3 Loans are guaranteed by the Company, the U.S. subsidiary guarantors and a cross-guaranty by the borrowers of the Tranche B-3 Loans, and are secured by the collateral securing the revolving loans and the other term loans, in addition to a pledge of the equity interests of Ferro GmbH.

Interest Rate – Term Loans:  The interest rates applicable to the U.S. term loans will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable margin. The 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% or (iv) 0.00%.  The applicable margin for base rate loans is 1.50%1.25%.

·

The LIBOR rate for U.S. term loans shall not be less than 0.75%0.0% and the applicable margin for LIBOR rate U.S. term loans is 2.50%.

·

The EURIBOR rate for Euro term loans shall not be less than 0% and the applicable margin for EURIBOR rate loans is 2.75%2.25%.

·

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 June 30, 2017,2018, the Company had borrowed $356.6$354.1 million under the secured term loan facilityTranche B-1 Loans at an interest rate of 3.73% and €249.44.58%,  $234.4 million under the secured euro term loan facilityTranche B-2 Loans at an interest rate of 2.75%4.58%, and $229.4 million under the Tranche B-3 Loans at an interest rate of 4.58%. At June 30, 2017,2018, there were no additional borrowings available under the term loan facilities.Tranche B-1 Loans, Tranche B-2 Loans and Tranche B-3 Loans.  

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Table of Contents

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% or (iv) 0.00%.  The applicable margin for base rate loans will vary between 0.75% and 1.75%0.50% to 1.50%.

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·

The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.75%1.50% and 2.75%2.50%.

·

For LIBOR rate revolving loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.

At June 30, 2017,2018, there were no$0.6 million borrowings under the revolving credit line.line at an interest rate of 4.09%. After reductions for outstanding letters of credit secured by these facilities, we had $395.3$494.8 million of additional borrowings available under the revolving credit facilities at June 30, 2017.2018.

The Amended Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Amended Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.

Specific to the revolving credit facility,2018 Revolving Facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Amended Credit Facility agreement may be accelerated and become immediately due and payable.  At June 30, 2017,2018, we were in compliance with the covenants of the Amended Credit Facility.

Credit Facility

On February 14, 2017, the Company entered into a credit facility (the “Credit Facility”) with a group of lenders to refinance its then outstanding credit facility debt and to provide liquidity for ongoing working capital requirements and general corporate purposes. The Credit Facility consisted of a $400 million secured revolving line of credit with a term of five years, a $357.5 million 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. For discussion of the Company’s Credit Facility, refer to Note 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

In conjunction with the refinancing of the Credit Facility, we recorded a charge of $3.2 million in connection with the write-off of unamortized issuance costs, which is recorded within Loss on extinguishment of debt in our condensed consolidated statement of operations for the three and six months ended June 30, 2018.

2014 Credit Facility

In 2014, the Company entered into a credit facility that was amended on January 25, 2016, and August 29, 2016, resulting in a  $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 from the original issuance date (the “2014 Credit Facility”) with a group of lenders that was replaced on February 14, 2017, by the Credit Facility (as defined above).  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, 2017.

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 on extinguishment of debt in our condensed consolidated statement of operations for the six months ended June 30, 2017.

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 $63.3$43.3 million and $7.3$64.5 million at June 30, 2017,2018, and December 31, 2016,2017, respectively. The unused portions of these lines provided additional liquidity of $40.4$21.1 million at June 30, 2017,2018, and $6.7$39.4 million at December 31, 2016.2017.





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Table of Contents

9.    Financial Instruments

The following financial instrument assets (liabilities) are presented at their respective carrying amount, fair value and classification within the fair value hierarchy:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

June 30, 2018

 

Carrying

 

Fair Value

 

Carrying

 

Fair Value

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

(Dollars in thousands)

 

(Dollars in thousands)

Cash and cash equivalents

 

$

78,866 

 

$

78,866 

 

$

78,866 

 

$

 —

 

$

 —

 

$

44,886 

 

$

44,886 

 

$

44,886 

 

$

 —

 

$

 —

Loans payable

 

 

(14,508)

 

 

(14,508)

 

 

 —

 

 

(14,508)

 

 

 —

 

 

(16,494)

 

 

(16,494)

 

 

 —

 

 

(16,494)

 

 

 —

Term loan facility, maturing 2024(1)

 

 

(633,463)

 

 

(633,622)

 

 

 —

 

 

(633,622)

 

 

 —

 

 

(812,665)

 

 

(807,468)

 

 

 —

 

 

(807,468)

 

 

 —

Revolving credit facility, maturing 2023

 

 

(580)

 

 

(573)

 

 

 —

 

 

(573)

 

 

 —

Other long-term notes payable

 

 

(7,727)

 

 

(6,870)

 

 

 —

 

 

(6,870)

 

 

 —

 

 

(6,590)

 

 

(4,073)

 

 

 —

 

 

(4,073)

 

 

 —

Cross currency swaps

 

 

10,820 

 

 

10,820 

 

 

 —

 

 

10,820 

 

 

 —

Interest rate swaps

 

 

(1,610)

 

 

(1,610)

 

 

 —

 

 

(1,610)

 

 

 —

Foreign currency forward contracts, net

 

 

(1,188)

 

 

(1,188)

 

 

 —

 

 

(1,188)

 

 

 —

 

 

2,860 

 

 

2,860 

 

 

 —

 

 

2,860 

 

 

 —



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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

December 31, 2017

 

Carrying

 

Fair Value

 

Carrying

 

Fair Value

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

(Dollars in thousands)

 

(Dollars in thousands)

Cash and cash equivalents

 

$

45,582 

 

$

45,582 

 

$

45,582 

 

$

 —

 

$

 —

 

$

63,551 

 

$

63,551 

 

$

63,551 

 

$

 —

 

$

 —

Loans payable

 

 

(11,452)

 

 

(11,452)

 

 

 —

 

 

(11,452)

 

 

 —

 

 

(16,360)

 

 

(16,360)

 

 

 —

 

 

(16,360)

 

 

 —

Term loan facility, maturing 2021(1)

 

 

(239,530)

 

 

(252,052)

 

 

 —

 

 

(252,052)

 

 

 —

Revolving credit facility, maturing 2019

 

 

(311,555)

 

 

(318,389)

 

 

 —

 

 

(318,389)

 

 

 —

Term loan facility, maturing 2024(1)

 

 

(645,242)

 

 

(646,979)

 

 

 —

 

 

(646,979)

 

 

 —

Revolving credit facility, maturing 2022

 

 

(78,000)

 

 

(79,295)

 

 

 —

 

 

(79,295)

 

 

 —

Other long-term notes payable

 

 

(8,228)

 

 

(7,315)

 

 

 —

 

 

(7,315)

 

 

 —

 

 

(7,112)

 

 

(3,973)

 

 

 —

 

 

(3,973)

 

 

 —

Interest rate swaps

 

 

1,616 

 

 

1,616 

 

 

 —

 

 

1,616 

 

 

 —

Interest rate swaps

 

 

(124)

 

 

(124)

 

 

 —

 

 

(124)

 

 

 —

Foreign currency forward contracts, net

 

 

350 

 

 

350 

 

 

 —

 

 

350 

 

 

 —

 

 

(469)

 

 

(469)

 

 

 —

 

 

(469)

 

 

 —



(1) The carrying valuevalues of the term loan facility isare net of unamortized debt issuance costs of $8.1$5.3 million and $3.7$7.5 million for the period ended June 30, 2017,2018, and December 31, 2016,2017, respectively.  



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.  At June 30, 2017, theThe fair value of the term loan facility is based on market price information and is measured using the last available bid price of the instrument on a secondary market 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 performance risk.market.  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 performance risk.  The fair values of our interest rate swaps and cross currency swaps are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair values of the foreign currency forward contracts are based on market prices for comparable contracts.

Derivative Instruments



The Company may use derivative instruments to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investment in certain foreign subsidiaries and on certain existing assets and liabilities.  However,

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the Company may choose not to hedge in countries where it is not economically feasible to enter into hedging arrangements andor where hedging inefficiencies exist, such as timing of transactions.    

Derivatives Designated as Hedging Instruments

InterestCash Flow Hedges. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is recorded in Accumulated other comprehensive loss (“AOCL”) and reclassified into earnings in the same period during which the hedged transaction affects earnings.

The Company utilizes interest rate swaps. To reduce ourswaps to limit exposure to interest rate changesmarket fluctuations on our variable-rate debt, wefloating-rate debt. During the second quarter of 2017, the Company entered into interest rate swap agreements in the second quarter of 2017.  These swapsthat converted $150 million and €90 million of our term loan facilityloans from variable-rate term loanvariable interest rates to a fixed interest rate, and are effective on June 30, 2017.rates. These swaps qualified for, and were designated and qualify as, cash flow hedges. The effective portions of cash flow hedges are recorded in accumulated other comprehensive income (“AOCI”) and are reclassified into earningsThis interest rate swap agreement was terminated in the same periodsecond quarter of 2018 in connection with the underlying hedged items impact earnings.  The ineffective portionsrefinancing of cash flow hedges is recognized immediatelythe Credit Facility.  

During the second quarter of 2018, the Company entered into earnings. 

As the effective date for thevariable to fixed interest rate swaps isfor an initial aggregate notional amount of $319.2 million with a maturity date of February 28, 2024. These swaps are hedging risk associated with the Tranche B-1 Loans. These interest rate swaps are designated as cash flow hedges.As of June 30, 2017,2018, the Company expects it will reclassify net losses of approximately $1.2 million, currently recorded in AOCL, into earnings within the next twelve months.  However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives. 

The Company has converted a US dollar denominated, variable rate debt obligation into a  euro fixed rate obligation using a receive-float, pay fixed cross currency swaps in the interest ratesecond quarter of 2018. These swaps are hedging risk associated with the Tranche B-3 Loans. These cross currency swaps are designated as cash flow hedges.The initial aggregate notional amount is zero at inception and no$230 million with a maturity date of February 28, 2024. As of June 30, 2018, the Company expects it will reclassify net gains of approximately $5.5 million, currently recorded in AOCL, into earnings within the next twelve months.  However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.

The amount of (loss) gain or loss was recognized in AOCI or throughAOCL and the amount of (loss) gain reclassified into earnings duringfor the three months ended June 30, 2018 and 2017, follow:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Amount of Gain

 

 

 



 

Amount of (Loss) Gain

 

Reclassified from 

 

Location of (Loss) Gain

 



 

Recognized in AOCL

 

AOCL into Income

 

Reclassified from

 



 

2018

 

 

2017

 

2018

 

2017

 

AOCL into Income

 



 

(Dollars in thousands)

 

 

 

Interest rate swaps

 

$

(1,947)

 

$

 —

 

$

125 

 

$

 —

 

Interest expense

 

Cross currency swaps

 

 

9,429 

 

 

 —

 

 

888 

 

 

 —

 

Interest expense

 



 

 

 

 

 

 

 

$

1,013 

 

$

 

 

Total Interest expense

 

Cross currency swaps

 

 

 —

 

 

 —

 

 

10,315 

 

 

 —

 

Foreign currency losses, net

 



 

 

 

 

 

 

 

$

10,315 

 

$

 —

 

Total Foreign currency losses, net

 

The amount of gain recognized in AOCL and the amount of (loss) gain reclassified into earnings for the six months ended June 30, 2017.2018 and 2017, follow:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Amount of (Loss) Gain

 

 

 



 

Amount of Gain

 

Reclassified from 

 

Location of (Loss) Gain

 



 

Recognized in AOCL

 

AOCL into Income

 

Reclassified from

 



 

2018

 

 

2017

 

2018

 

2017

 

AOCL into Income

 



 

(Dollars in thousands)

 

 

 

Interest rate swaps

 

$

(374)

 

$

 —

 

$

(11)

 

$

 —

 

Interest expense

 

Cross currency swaps

 

 

9,429 

 

 

 —

 

 

888 

 

 

 —

 

Interest expense

 



 

 

 

 

 

 

 

$

877 

 

$

 —

 

Total Interest expense

 

Cross currency swap

 

 

 —

 

 

 —

 

 

10,315 

 

 

 —

 

Foreign currency losses, net

 

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$

10,315 

$

 —

Total Foreign currency losses, net

Net investment hedge. To help protect the value of the Company’s net investment in EuropeEuropean operations against adverse changes in exchange rates, the Company uses non-derivative financial instruments, such as its foreign currency denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. Net investment hedges that use foreign currency denominated debt to hedge net investments are not impacted by ASC Topic 820, Fair Value Measurements, as the debt used as a hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value.

In the second quarter of 2017, the Company designated a portion of its Euro denominated debt as a net investment hedge for accounting purposes. This net investment hedge was terminated in the second quarter of 2018.

17


TableIn the second quarter of Contents

2018, the Company entered into cross currency swap agreements to convert a notional amount of $117.5 million, where we pay variable rate interest in Euros and receive variable rate interest in US dollars. These swaps are hedging risk associated with the Tranche B-2 Loans. These cross currency swaps are designated as net investment hedges with the spot method of accounting applied. The effective portions of net investment hedges are recorded in AOCIAOCL as a part of the cumulative translation adjustment. The ineffective portions of net investment hedges are recognized immediately into earnings.

 Effective May 1, 2017, the Company designated a portion of its euro denominated debt as a net investment hedge for accounting purposes.  The fair value of the net investment hedge is €130 million at June 30, 2017.  The Company did not have any ineffectiveness related to net investment hedges during the three and six months ended June 30, 2017. 

The amount of lossgain recognized in AOCIAOCL, the amount reclassified into earnings and the amount of loss reclassified into earningsgain recognized in income on derivative (amount excluded from effectiveness testing) for the three months ended June 30, 2018 and 2017, and 2016, respectively, follow:follow







 

 

 

 

 

 

 

 

 

 

 

 



 

Amount of (Loss)

 

Amount of Loss Reclassified



 

Recognized in AOCI

 

from AOCI into Income



 

2017

 

2016

 

2017

 

2016



 

(Dollars in thousands)

Net investment hedge

 

$

(6,828)

 

$

 —

 

$

 —

 

$

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Amount of Gain

 

Amount of Gain Recognized in

 

 



 

Amount of Gain

 

Reclassified from 

 

Income on Derivative (Amount

 

 



 

Recognized in AOCL

 

AOCL into Income

 

Excluded from Effectiveness Testing)

 

Location of Gain



 

2018

 

2017

 

2018

 

 

2017

 

2018

 

 

2017

 

in Earnings



 

(Dollars in thousands)

 

 

Cross currency swaps

 

$

2,774 

 

$

 —

 

$

 —

 

$

 —

 

$

495 

 

$

 —

 

Interest expense

Net investment hedge

 

 

 —

 

 

(6,828)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

The amount of lossgain (loss) recognized in AOCIAOCL, the amount reclassified into earnings and the amount of loss reclassified into earningsgain recognized in income on derivative (amount excluded from effectiveness testing) for the six months ended June 30, 2018 and 2017, and 2016, respectively, follow:follow







 

 

 

 

 

 

 

 

 

 

 

 



 

Amount of (Loss)

 

Amount of Loss Reclassified



 

Recognized in AOCI

 

from AOCI into Income



 

2017

 

2016

 

2017

 

2016



 

(Dollars in thousands)

Net investment hedge

 

$

(6,828)

 

$

 —

 

$

 —

 

$

 —



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Amount of Gain

 

Amount of Gain Recognized in

 

 



 

Amount of Gain (Loss)

 

Reclassified from 

 

Income on Derivative (Amount

 

 



 

Recognized in AOCL

 

AOCL into Income

 

Excluded from Effectiveness Testing)

 

Location of Gain



 

2018

 

2017

 

2018

 

 

2017

 

2018

 

 

2017

 

in Earnings



 

(Dollars in thousands)

 

 

Cross currency swaps

 

$

2,774 

 

$

 —

 

$

 —

 

$

 —

 

$

495 

 

$

 —

 

Interest expense

Net investment hedge

 

 

(860)

 

 

(6,828)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 



Derivatives Not Designated as Hedging Instruments

Foreign currency forward contracts.  We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges. Gains and losses on these foreign currency forward contracts are netted with gains and losses from currency fluctuations on transactions arising from international trade and reported as Foreign currency losses, net in the condensed consolidated statements of operations. We recognized net gains of $1.0 million and $1.4 million in the three and six months ended June 30, 2018, respectively, and net losses of $3.0 million and $2.7 million in the three and six months ended June 30, 2017, respectively, and net gains of $5.9 million and net losses of $4.7 million in the three and six months ended June 30, 2016, respectively, arising from the change in fair value of our financial

20


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instruments, which partially 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 $192.5$345.3 million at June 30, 2017,2018, and $338.2$238.5 million at December 31, 2016.2017.

The following table presents the effect on our condensed consolidated statements of operations for the three and six months ended June 30, 20172018 and 2016,2017, respectively, of our foreign currency forward contracts:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Amount of (Loss) Gain

 

 



 

Recognized in Earnings

 

 



 

Three Months Ended

 

 



 

June 30,

 

 



 

2017

 

2016

 

Location of (Loss) Gain in Earnings



 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

(2,954)

 

$

5,884 

 

Foreign currency losses, net



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Amount of Gain (Loss)

 

 



 

Recognized in Earnings

 

 



 

Three Months Ended

 

 



 

June 30,

 

 



 

2018

 

2017

 

Location of Gain (Loss) in Earnings



 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

1,020 

 

$

(2,954)

 

Foreign currency losses, net









18



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Amount of Gain (Loss)

 

 



 

Recognized in Earnings

 

 



 

 

 

 

 

 

 

 



 

Six Months Ended

 

 



 

June 30,

 

 



 

 

 

 

 

 

 

 



 

2018

 

2017

 

Location of Gain (Loss) in Earnings



 

 

 

 

 

 

 

 



 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

1,411 

 

$

(2,711)

 

Foreign currency losses, net


Table of Contents



 

Amount of (Loss)

 

 



 

Recognized in Earnings

 

 



 

 

 

 

 

 

 

 



 

Six Months Ended

 

 



 

June 30,

 

 



 

 

 

 

 

 

 

 



 

2017

 

2016

 

Location of (Loss) in Earnings



 

 

 

 

 

 

 

 



 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

(2,711)

 

$

(4,684)

 

Foreign currency losses, net

Location and Fair Value Amount of Derivative Instruments



The following table presents the fair values of our derivative instruments on our condensed consolidated balance sheets of foreign currency forward contracts:sheets. All derivatives are reported on a gross basis.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

Balance Sheet Location

 

2018

 

2017

 

Balance Sheet Location

 

(Dollars in thousands)

 

 

 

(Dollars in thousands)

 

 

Asset derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 —

 

$

1,616 

 

Other non-current assets

Cross currency swaps

 

 

8,980 

 

 

 —

 

Other current assets

Cross currency swaps

 

 

3,043 

 

 

 —

 

Other non-current assets

Foreign currency forward contracts

 

$

365 

 

$

1,854 

 

Other current assets

 

 

3,640 

 

 

661 

 

Other current assets

Liability derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

 

(1,243)

 

 

(124)

 

Accrued expenses and other current liabilities

Interest rate swaps

 

 

(367)

 

 

 —

 

Other non-current liabilities

Cross currency swaps

 

 

(1,203)

 

 

 —

 

Other non-current liabilities

Foreign currency forward contracts

 

$

(1,553)

 

$

(1,504)

 

Accrued expenses and other current liabilities

 

$

(780)

 

$

(1,130)

 

Accrued expenses and other current liabilities





















10.    Income Taxes

IncomeDuring the first half of 2018, income tax expense forwas $17.9 million, or 25.1% of pre-tax income.  In the six months ended June 30,first half of 2017, waswe recorded tax expense of $15.8 million, or 26.8% of pre-tax income, compared with $16.5 million, or 27.0% of pre-tax income in the prior-year same period.income.  The tax expense in the first half of 2017 and 2016,2018, as a percentage of pre-tax income, iswas higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences.  The tax expense for the first half of 2017, as a percentage of pre-tax income, was lower than the U.S. federal statutory income tax rate of 35% primarily as a result of foreign statutory rate differences.



We have recognized the provisional tax impacts related to the 2017 Tax Cut and Jobs Act (the “Tax Act”) under the guidance of the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”).  The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.  The Company’s preliminary

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determinations related to the estimable impacts of the Tax Act that are effective for the year-ended December 31, 2017 have not changed in the current quarter.

The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) on the Company for 2018.  For the current quarter, the Company has made reasonable estimates of GILTI and FDII, as well as the impact of changes to valuation allowances related to certain positions.  The combined provisional net impact of these items are not anticipated to be material to the tax rate in 2018.  The Company has not recorded any potential deferred tax effects related to GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.



11.    Contingent Liabilities

We have recorded environmental liabilities of $6.8$5.7 million at June 30, 2017,2018, and $7.2$6.7 million at December 31, 2016,2017, for costs associated with the remediation of certain of our properties that have been contaminated. The liability at June 30, 2017,2018, and December 31, 2016,2017, was primarily comprised of liabilities related to a non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product lines in 2013. The costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring and the ultimate cost of required remediation.

In 2013,November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the SupremeCompany and a number of other companies in the U.S. Federal Court in Argentina ruled unfavorablyfor the Eastern District of New York with regard to the product 1,4 dioxane.  The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages.  The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to certain export taxes associated withliability for the plaintiff’s claims, and is vigorously defending this proceeding.  In March 2018, the defendants, including the Company, filed a divested operation.  As a resultmotion to dismiss the complaint, which was heard by the court in June 2018.  The Company currently does not expect the outcome of this ruling, in 2013, we recordedproceeding to have a liability and at December 31, 2016,material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage.  However, it is not possible to predict the liability was $8.7 million. Duringultimate outcome of this proceeding due to the first quarterunpredictable nature of 2017,litigation.

In addition to the Company participated in a newly available tax regime, resulting in the reduction of interest on these outstanding tax liabilities. The remaining liability at the time of the reduction was $4.6 million, and will be paid down over a five-year term.  The liability recorded at June 30, 2017, is $3.9 million.

There are various lawsuits and claims pending againstproceeding described above, the Company and its consolidated subsidiaries.subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses.  The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.  We do not currently expect the resolution of these lawsuits and claimssuch matters 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, 20172018 and 2016,2017, 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

 

Three Months Ended June 30,

 

Three Months Ended June 30,

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Service cost

 

$

 

$

 

$

423 

 

$

371 

 

$

 —

 

$

 —

 

$

 

$

 

$

447 

 

$

423 

 

$

 

$

 —

Interest cost

 

 

3,666 

 

 

3,937 

 

 

606 

 

 

954 

 

 

211 

 

 

236 

 

 

2,788 

 

 

3,666 

 

 

667 

 

 

606 

 

 

183 

 

 

211 

Expected return on plan assets

 

 

(4,740)

 

 

(4,935)

 

 

(222)

 

 

(525)

 

 

 —

 

 

 —

 

 

(3,995)

 

 

(4,740)

 

 

(225)

 

 

(222)

 

 

 —

 

 

 —

Amortization of prior service cost

 

 

 

 

 

 

11 

 

 

11 

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

10 

 

 

11 

 

 

 —

 

 

 —

Net periodic benefit (credit) cost

 

$

(1,068)

 

$

(991)

 

$

818 

 

$

811 

 

$

211 

 

$

236 

 

$

(1,204)

 

$

(1,068)

 

$

899 

 

$

818 

 

$

184 

 

$

211 





Net periodic benefit (credit) cost for the six months ended June 30, 20172018 and 2016,2017, respectively, follow:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Pension Plans

 

Non-U.S. Pension Plans

 

Other Benefit Plans

 

U.S. Pension Plans

 

Non-U.S. Pension Plans

 

Other Benefit Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

Service cost

 

$

 

$

 

$

827 

 

$

734 

 

$

 —

 

$

 —

 

$

 

$

 

$

908 

 

$

827 

 

$

 

$

 —

Interest cost

 

 

7,331 

 

 

7,875 

 

 

1,179 

 

 

1,893 

 

 

422 

 

 

472 

 

 

5,576 

 

 

7,331 

 

 

1,356 

 

 

1,179 

 

 

366 

 

 

422 

Expected return on plan assets

 

 

(9,479)

 

 

(9,870)

 

 

(432)

 

 

(1,045)

 

 

 —

 

 

 —

 

 

(7,989)

 

 

(9,479)

 

 

(459)

 

 

(432)

 

 

 —

 

 

 —

Amortization of prior service cost

 

 

 

 

 

 

21 

 

 

22 

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

22 

 

 

21 

 

 

 —

 

 

 —

Net periodic benefit (credit) cost

 

$

(2,136)

 

$

(1,980)

 

$

1,595 

 

$

1,604 

 

$

422 

 

$

472 

 

$

(2,407)

 

$

(2,136)

 

$

1,827 

 

$

1,595 

 

$

367 

 

$

422 





Interest cost, expected return on plan assets and amortization of prior service cost are recorded in Miscellaneous (income) expense, net on the condensed consolidated statement of operations.















13.    Stock-Based Compensation

On May 22, 2013,3, 2018, our shareholders approved the 20132018 Omnibus Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 22, 2013,2018, 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 4,400,0004,500,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restricted shares,awards, performance shares,awards, other common stock-based awards, and dividend equivalent rights.

The 2013 Omnibus Incentive Plan (the “Previous Plan”), was replaced by the Plan, and no future grants may be made under the Previous Plan. However, any outstanding awards or grants made under the Previous Plan will continue until the end of their specified terms.



In the first half of 2017,2018, our Board of Directors granted 0.2 million stock options, 0.20.1 million performance share units and 0.20.1 million restricted stock units under the Plan.units.    

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 six months ended June 30, 2017:2018:







 

 

 

 



 

 

 

 



 

Stock Options

Weighted-average grant-date fair value

 

$

7.268.91 

 

Expected life, in years

 

 

6.05.4 

 

Risk-free interest rate

 

 

2.32.7 

%

Expected volatility

 

 

51.539.7 

%



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The weighted average grant date fair value of our performance share units granted in the six months ended June 30, 2017,2018, was $14.89.$22.92. We measure the fair value of performance share units based on the closing market price of our common stock on the date of the grant. These shares are evaluated each reporting period for respective attainment rates against the performance criteria.

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The weighted-average grant date fair value per unit for grants made during the six months ended June 30, 2018,  was $22.27. We measure the fair value of restricted stockshare units based on the closing market price of our common stock on the date of the grant. The restricted stockshare units vest over three years. The weighted-average grant date fair value per unit for grants made during the six months ended June 30, 2017, was $14.27.

We recognized stock-based compensation expense of $1.4 million and $3.8 million for the three and six months ended June 30, 2018, and $2.7 million and $5.4 million for the six months ended June 30, 2017, and $2.2 million for the six months ended June 30, 2016.2017. At June 30, 2017,2018, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $10.0$9.7 million and is expected to be recognized over the remaining vesting period of the respective grants, through the first quarter of 2020.2021.





14.    Restructuring and Cost ReductionOptimization Programs

Total restructuring and impairment charges were $3.8 million and $7.9 million for the three and six months ended June 30, 2018, respectively, and $3.2 million and $6.2 million for the three and six months ended June 30, 2017, respectively, and $0.8 million and $1.7 million for the three and six months ended June 30, 2016, respectively. Included in the charges for the three and six months ended June 30, 2017, was an impairment charge of $1.5 million related to an equity method investment. The remainder of the charges relate to our restructuring and cost reduction programs, which are primarily relatedrelate to costs associated with integration of our recent acquisitions and optimization programs, and are further summarized below.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

 

Other

 

Asset

 

 

 

 

Employee

 

Other

 

 

 

 

Severance

 

Costs

 

Impairment

 

Total

 

Severance

 

Costs

 

Total

 

(Dollars in thousands)

 

(Dollars in thousands)

Balances at December 31, 2016

 

$

239 

 

$

1,489 

 

$

 —

 

$

1,728 

Balances at December 31, 2017

 

$

2,286 

 

$

1,234 

 

$

3,520 

Restructuring charges

 

 

1,795 

 

 

1,772 

 

 

1,176 

 

 

4,743 

 

 

3,432 

 

 

4,442 

 

 

7,874 

Cash payments

 

 

(1,715)

 

 

(652)

 

 

 —

 

 

(2,367)

 

 

(3,237)

 

 

(283)

 

 

(3,520)

Non-cash items

 

 

51 

 

 

(1,325)

 

 

(1,176)

 

 

(2,450)

 

 

(91)

 

 

(3,534)

 

 

(3,625)

Balances at June 30, 2017

 

$

370 

 

$

1,284 

 

$

 —

 

$

1,654 

Balances at June 30, 2018

 

$

2,390 

 

$

1,859 

 

$

4,249 



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



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15.    Earnings Per Share

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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

 

(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

 

$

21,025 

 

$

18,969 

 

$

42,923 

 

$

9,003 

 

$

29,668 

 

$

21,025 

 

$

53,059 

 

$

42,923 

Adjustment for loss from discontinued operations

 

 

 —

 

 

5,748 

 

 

 —

 

 

35,242 

Total

 

$

21,025 

 

$

24,717 

 

$

42,923 

 

$

44,245 

Weighted-average common shares outstanding

 

 

83,673 

 

 

83,209 

 

 

83,602 

 

 

83,260 

 

 

84,341 

 

 

83,673 

 

 

84,284 

 

 

83,602 

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

 

$

0.25 

 

$

0.30 

 

$

0.51 

 

$

0.53 

Basic earnings per share attributable to Ferro Corporation common shareholders

 

$

0.35 

 

$

0.25 

 

$

0.63 

 

$

0.51 

Diluted earnings per share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Ferro Corporation common shareholders

 

$

21,025 

 

$

18,969 

 

$

42,923 

 

$

9,003 

 

$

29,668 

 

$

21,025 

 

$

53,059 

 

$

42,923 

Adjustment for loss from discontinued operations

 

 

 —

 

 

5,748 

 

 

 —

 

 

35,242 

Total

 

$

21,025 

 

$

24,717 

 

$

42,923 

 

$

44,245 

Weighted-average common shares outstanding

 

 

83,673 

 

 

83,209 

 

 

83,602 

 

 

83,260 

 

 

84,341 

 

 

83,673 

 

 

84,284 

 

 

83,602 

Assumed exercise of stock options

 

 

677 

 

 

551 

 

 

599 

 

 

462 

 

 

791 

 

 

677 

 

 

818 

 

 

599 

Assumed exercise of deferred stock unit conditions

 

 

 —

 

 

80 

 

 

 —

 

 

 —

Assumed satisfaction of restricted stock unit conditions

 

 

425 

 

 

473 

 

 

376 

 

 

419 

 

 

281 

 

 

425 

 

 

271 

 

 

376 

Assumed satisfaction of performance stock unit conditions

 

 

502 

 

 

111 

 

 

503 

 

 

58 

 

 

176 

 

 

502 

 

 

172 

 

 

503 

Weighted-average diluted shares outstanding

 

 

85,277 

 

 

84,424 

 

 

85,080 

 

 

84,199 

 

 

85,589 

 

 

85,277 

 

 

85,545 

 

 

85,080 

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

 

$

0.25 

 

$

0.29 

 

$

0.50 

 

$

0.53 

Diluted earnings per share attributable to Ferro Corporation common shareholders

 

$

0.35 

 

$

0.25 

 

$

0.62 

 

$

0.50 



The number of anti-dilutive or unearned shares was 1.7 million and 1.7 million for the three and six months ended June 30, 2018, respectively, and 1.8 million and 1.9 million for the three and six months ended June 30, 2017, respectively, and 2.5 million and 2.8 million for the three and six months ended June 30, 2016, respectively.2017.  These shares were excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.



16.    Share Repurchase Program

The Company’s Board of Directors has approved $50 million of a share repurchase programs,program, under which the Company is authorized to repurchase up to $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. 



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 doprogram does 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 six months ended June 30, 2016,2018, the Company repurchased 1,175,437287,257 shares of common stock at an average price of $9.$20.7294 per share for a total cost of $11.4$6.0 million.  As of June 30, 2017, Company shares having an aggregate value of up to $50.02018, $44.0 million may still be purchased under the programs.program.



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17.    Accumulated Other Comprehensive Income (Loss)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, 2016

 

$

1,079 

 

$

(63,769)

 

$

(70)

 

$

(62,760)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

(3,117)

 

 

 —

 

 

(3,117)

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities income

 

 

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)



 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2017

 

$

1,137 

 

$

(100,543)

 

$

(70)

 

$

(99,476)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

13,790 

 

 

 —

 

 

13,790 

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities income

 

 

16 

 

 

 —

 

 

 —

 

 

16 

Net current period other comprehensive income (loss)

 

 

16 

 

 

13,790 

 

 

 —

 

 

13,806 

Balances at June 30, 2017

 

$

1,153 

 

$

(86,753)

 

$

(70)

 

$

(85,670)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended June 30,



 

Postretirement

 

 

 

 

 

Net Gain

 

 

 



 

Benefit Liability

 

Translation

 

 

on Cash

 

 

 



 

Adjustments

 

Adjustments

 

 

Flow Hedges

 

Total



 

(Dollars in thousands)

Balances at March 31, 2017

 

$

1,137 

 

$

(100,613)

 

$

 —

 

$

(99,476)

Other comprehensive income before reclassifications, before tax

 

 

 —

 

 

13,790 

 

 

 —

 

 

13,790 

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities loss, before tax

 

 

18 

 

 

 —

 

 

 —

 

 

18 

Current period other comprehensive (loss) income, before tax

 

 

18 

 

 

13,790 

 

 

 —

 

 

13,808 

Tax effect

 

 

 

 

 —

 

 

 —

 

 

Current period other comprehensive income (loss), net of tax

 

 

16 

 

 

13,790 

 

 

 —

 

 

13,806 

Balances at June 30, 2017

 

$

1,153 

 

$

(86,823)

 

$

 —

 

$

(85,670)



 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2018

 

$

1,172 

 

$

(71,919)

 

$

2,259 

 

$

(68,488)

Other comprehensive (loss) income before reclassifications, before tax

 

 

 —

 

 

(29,482)

 

 

10,256 

 

 

(19,226)

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities income, before tax

 

 

 

 

 —

 

 

 —

 

 

Cash flow hedge income, before tax

 

 

 —

 

 

 —

 

 

(11,823)

 

 

(11,823)

Current period other comprehensive income (loss), before tax

 

 

 

 

(29,482)

 

 

(1,567)

 

 

(31,043)

Tax effect

 

 

(4)

 

 

526 

 

 

(231)

 

 

291 

Current period other comprehensive (loss) income, net of tax

 

 

10 

 

 

(30,008)

 

 

(1,336)

 

 

(31,334)

Balances at June 30, 2018

 

$

1,182 

 

$

(101,927)

 

$

923 

 

$

(99,822)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Six Months Ended June 30,



 

Postretirement

 

 

 

 

 

 

 

 

 



 

Benefit Liability

 

Translation

 

Other

 

 

 



 

Adjustments

 

Adjustments

 

Adjustments

 

Total



 

 

 

 

 

 

 

 

 

 

 

 



 

(Dollars in thousands)

Balances at December 31, 2015

 

$

811 

 

$

(62,059)

 

$

(70)

 

$

(61,318)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

(4,827)

 

 

 —

 

 

(4,827)

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities income

 

 

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)



 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

$

1,141 

 

$

(107,714)

 

$

(70)

 

$

(106,643)

Other comprehensive income (loss) before reclassifications

 

 

 —

 

 

20,961 

 

 

 —

 

 

20,961 

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities income

 

 

12 

 

 

 —

 

 

 —

 

 

12 

Net current period other comprehensive income (loss)

 

 

12 

 

 

20,961 

 

 

 —

 

 

20,973 

Balances at June 30, 2017

 

$

1,153 

 

$

(86,753)

 

$

(70)

 

$

(85,670)



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



Six Months Ended June 30,



 

Postretirement

 

 

 

 

 

Net Gain

 

 

 



 

Benefit Liability

 

Translation

 

 

on Cash

 

 

 



 

Adjustments

 

Adjustments

 

 

Flow Hedges

 

Total



 

 

 

 

 

 

 

 

 

 

 

 



 

(Dollars in thousands)

Balances at December 31, 2016

 

$

1,141 

 

$

(107,784)

 

$

 —

 

$

(106,643)

Other comprehensive income before reclassifications, before tax

 

 

 —

 

 

20,961 

 

 

 —

 

 

20,961 

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities loss, before tax

 

 

 

 

 —

 

 

 —

 

 

Current period other comprehensive (loss) income, before tax

 

 

 

 

20,961 

 

 

 —

 

 

20,970 

Tax effect

 

 

(3)

 

 

 —

 

 

 —

 

 

(3)

Current period other comprehensive income, net of tax

 

 

12 

 

 

20,961 

 

 

 —

 

 

20,973 

Balances at June 30, 2017

 

$

1,153 

 

$

(86,823)

 

$

 —

 

$

(85,670)



 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

$

1,165 

 

$

(77,578)

 

$

945 

 

$

(75,468)

Other comprehensive (loss) income before reclassifications, before tax

 

 

 —

 

 

(24,021)

 

 

11,829 

 

 

(12,192)

Reclassification to earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement benefit liabilities income, before tax

 

 

22 

 

 

 —

 

 

 —

 

 

22 

Cash flow hedge income, before tax

 

 

 —

 

 

 —

 

 

(11,687)

 

 

(11,687)

Current period other comprehensive income (loss), before tax

 

 

22 

 

 

(24,021)

 

 

142 

 

 

(23,857)

Tax effect

 

 

 

 

328 

 

 

164 

 

 

497 

Current period other comprehensive income (loss), net of tax

 

 

17 

 

 

(24,349)

 

 

(22)

 

 

(24,354)

Balances at June 30, 2018

 

$

1,182 

 

$

(101,927)

 

$

923 

 

$

(99,822)

























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Table of Contents

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

 

Six Months Ended

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Performance Coatings

 

$

151,746 

 

$

140,589 

 

$

278,311 

 

$

268,713 

 

$

193,449 

 

$

151,746 

 

$

378,097 

 

$

278,311 

Performance Colors and Glass

 

 

106,637 

 

 

95,933 

 

 

210,155 

 

 

184,103 

 

 

126,027 

 

 

106,637 

 

 

246,532 

 

 

210,155 

Color Solutions

 

 

90,249 

 

 

61,455 

 

 

180,721 

 

 

122,612 

 

 

96,763 

 

 

90,249 

 

 

197,142 

 

 

180,721 

Total net sales

 

$

348,632 

 

$

297,977 

 

$

669,187 

 

$

575,428 

 

$

416,239 

 

$

348,632 

 

$

821,771 

 

$

669,187 



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

 

June 30,

 

June 30,

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Performance Coatings

 

$

40,246 

 

$

39,234 

 

$

73,735 

 

$

71,349 

 

$

50,297 

 

$

40,246 

 

$

94,062 

 

$

73,735 

Performance Colors and Glass

 

 

40,087 

 

 

36,705 

 

 

77,505 

 

 

68,543 

 

 

45,362 

 

 

40,087 

 

 

88,690 

 

 

77,505 

Color Solutions

 

 

28,416 

 

 

22,404 

 

 

56,598 

 

 

42,690 

 

 

31,541 

 

 

28,416 

 

 

63,690 

 

 

56,598 

Other cost of sales

 

 

(407)

 

 

30 

 

 

(702)

 

 

20 

 

 

(555)

 

 

(407)

 

 

(1,111)

 

 

(702)

Total gross profit

 

 

108,342 

 

 

98,373 

 

 

207,136 

 

 

182,602 

 

 

126,645 

 

 

108,342 

 

 

245,331 

 

 

207,136 

Selling, general and administrative expenses

 

 

62,514 

 

 

57,871 

 

 

121,472 

 

 

110,517 

 

 

70,124 

 

 

62,981 

 

 

143,216 

 

 

122,427 

Restructuring and impairment charges

 

 

3,224 

 

 

787 

 

 

6,242 

 

 

1,668 

 

 

3,768 

 

 

3,224 

 

 

7,874 

 

 

6,242 

Other expense, net

 

 

12,680 

 

 

6,371 

 

 

20,239 

 

 

9,291 

 

 

12,528 

 

 

12,213 

 

 

22,904 

 

 

19,284 

Income before income taxes

 

$

29,924 

 

$

33,344 

 

$

59,183 

 

$

61,126 

 

$

40,225 

 

$

29,924 

 

$

71,337 

 

$

59,183 













































 19.    Subsequent Event

We have signed definitive acquisition agreements (subject to customary closing conditions) in July 2018 with purchase prices in the aggregate amount of approximately $70 million.

Due to the timing of the acquisitions, 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 prices to acquired assets and liabilities and the related disclosures at this time.







2427


 

Table of Contents

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

Overview

Net sales for the three months ended June 30, 2017,2018, increased by $50.7$67.6 million, or 17.0%19.4%, compared with the prior-year same period.    The increase in net sales was driven by higher sales in Color Solutions, Performance Coatings, and Performance Colors and Glass and Color Solutions of $28.8$41.7 million, $11.2$19.4 million and $10.7$6.5 million, respectively.  During the three months ended June 30, 2017,2018, gross profit increased $10.0$18.3 million, or 10.1%16.9%, compared with the prior-year same period; as a percentage of net sales, it decreased approximately 19070 basis points to 31.1%30.4%.  Our total gross profit for the second quarter of 2018 was $126.6 million, compared with $108.3 million for the three months ended June 30, 2017. The increase in gross profit was attributable to higher salesgross profit across all of our segments, with increases in Color Solutions,Performance Coatings, Performance Colors and Glass and Performance CoatingsColor Solutions of $6.0$10.1 million, $3.4$5.3 million and $1.0$3.1 million, respectively.    

For the three months ended June 30, 2017,2018,  selling, general and administrative (“SG&A”) expenses increased $4.6$7.1 million, or 8.0%11.3%, compared with the prior-year same period. As a percentage of net sales, it decreased approximately 130 basis points to 16.8%.    The increase washigher SG&A expenses compared to the prior-year same period are primarily driven by $5.7 million of expenses related to acquisitions completedassociated with businesses acquired within the last year.

For the three months ended June 30, 2017,2018, net income was $21.2$29.9 million, compared with $19.1net income of $21.2 million for the prior-year same period, and net income attributable to common shareholders was $21.0$29.7 million, compared with $19.0net income attributable to common shareholders of $21.0 million for the prior-year same period. Income from continuing operations was $21.2 million for the three months ended June 30, 2017, compared with $24.9 million for the three months ended June 30, 2016.  Our total gross profit for the second quarter of 2017 was $108.3 million, compared with $98.4 million for the three months ended June 30, 2016.



Outlook 

ForIn the second half of 2017, we expect that gross margin will continue to grow at a measured pace based on strategic actions taken to improve growth in our core businesses and contributions from recent acquisitions.  Raw material costs have increased in 2017, as expected, however,2018, we expect to continue to offset these cost increases through pricing actions, product reformulationsexecute the dynamic innovation and optimization actions.phase of our corporate strategy, which includes organic and inorganic growth, and optimization efforts throughout the organization. We expect organic growth from sales of new products and repositioning of our portfolio to address the higher end of our target markets. Inorganically, we expect to invest at levels of approximately $100 million to $150 million per year in strategic acquisitions. We are implementing optimization programs to improve efficiency and upgrade operations throughout our business.

We expect continued raw material headwinds through the near term. Over the long term, we are confident in our ability to mitigate raw material inflation due to our pricing initiatives, technological advances in reformulating compounds, and optimization initiatives. Foreign currency rates may continue to be volatile through the second half of 2018 and changes in interest rates could adversely impact reported results.

We remain focused on the integration of our recent acquisitions and continue to work toward achieving the identified synergies. We willare concurrently focusing on opportunities to optimize our cost structure and on making our business processes and systems more efficient. We continue to drive innovation and optimization throughout our business and to advance tax planning opportunities.  We expect cash flow from operating activities to be positive for the year,2018, providing additional liquidity.

Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016.2017.

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Table of Contents

Results of Operations - Consolidated

Comparison of the three months ended June 30, 20172018 and 20162017 

For the three months ended June 30, 2017,  income from continuing operations was $21.2 million, compared with $24.9 million income from continuing operations for the three months ended June 30, 2016.  Net2018, net income was $21.2$29.9 million, compared with net income of $19.1$21.2 million for the three months ended June 30, 2016.2017. For the three months ended June 30, 2017,2018, net income attributable to common shareholders was $21.0$29.7 million, or earnings per share of $0.25,$0.35, compared with net income attributable to common shareholders of $19.0$21.0 million, or earnings per share of $0.23,$0.25, for the three months ended June 30, 2016.2017.



Net Sales





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Net sales

 

$

348,632 

 

 

$

297,977 

 

 

$

50,655 

 

17.0 

%

 

$

416,239 

 

 

$

348,632 

 

 

$

67,607 

 

19.4 

%

Cost of sales

 

 

240,290 

 

 

 

199,604 

 

 

 

40,686 

 

20.4 

%

 

 

289,594 

 

 

 

240,290 

 

 

 

49,304 

 

20.5 

%

Gross profit

 

$

108,342 

 

 

$

98,373 

 

 

$

9,969 

 

10.1 

%

 

$

126,645 

 

 

$

108,342 

 

 

$

18,303 

 

16.9 

%

Gross profit as a % of net sales

 

 

31.1 

%

 

 

33.0 

%

 

 

 

 

 

 

 

 

30.4 

%

 

 

31.1 

%

 

 

 

 

 

 



Net sales increased by  $50.7$67.6 million, or 17.0%19.4%, infor the three months ended June 30, 2017,2018,  compared with the prior-year same period, driven by higher sales in Color Solutions, Performance Coatings, and Performance Colors and Glass and Color Solutions of $28.8$41.7 million, $11.2$19.4 million and $10.7$6.5 million, respectively. The increase in net sales was driven in part by Cappelle,acquisitions, including Endeka, which contributed sales of $19.1$30.5 million, ESL,and Dip-Tech, which contributed sales of $10.6 million, and SPC, which contributed sales of $5.7$7.0 million, each of which was acquired after the second quarter of 2016.2017.  The increase in net sales was also driven by organic growth, with Performance Coatings growing $10.0$11.2 million, Performance Colors and Glass growing $10.4 million and Color Solutions growing $9.1$6.5 million.



Gross Profit



Gross profit increased $10.0$18.3 million, or 10.1%16.9%, infor the three months ended June 30, 2017,2018, compared with the prior-year same period, and as a percentage of net sales, it decreased 19070 basis points to  31.1%30.4%.  The increase in gross profit was attributable to increases across all of our segments, with increases in Color Solutions,Performance Coatings, Performance Colors and Glass and Performance CoatingsColor Solutions of $6.0$10.1 million, $3.4$5.3 million and $1.0$3.1 million, respectively. The increase in gross profit was driven by acquisitions of $11.8 million, lower manufacturing costs of $6.5 million, favorable product pricing of $1.9$12.9 million, andgross profit from acquisitions of $10.6 million, higher sales volumes and mix of $1.5$6.4 million, favorable foreign currency impacts of $3.4 million and lower manufacturing costs of $0.7 million, partially offset by higher raw material costs of $9.2 million and unfavorable foreign currency impacts of $2.0$15.5 million.    

Geographic Revenues



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Geographic Revenues on a sales origination basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

171,367 

 

$

138,888 

 

$

32,479 

 

23.4 

%

EMEA

 

$

226,035 

 

$

171,367 

 

$

54,668 

 

31.9 

%

United States

 

 

88,615 

 

 

76,853 

 

 

11,762 

 

15.3 

%

 

 

91,491 

 

 

88,615 

 

 

2,876 

 

3.2 

%

Asia Pacific

 

 

47,660 

 

 

44,887 

 

 

2,773 

 

6.2 

%

 

 

57,724 

 

 

47,660 

 

 

10,064 

 

21.1 

%

Latin America

 

 

40,990 

 

 

37,349 

 

 

3,641 

 

9.7 

%

 

 

40,989 

 

 

40,990 

 

 

(1)

 

(0.0)

%

Net sales

 

$

348,632 

 

$

297,977 

 

$

50,655 

 

17.0 

%

 

$

416,239 

 

$

348,632 

 

$

67,607 

 

19.4 

%



The increase in net sales of $50.7$67.6 million, compared with the prior-year same period, was driven by an increase in sales from all regions.EMEA, Asia Pacific and the United States. The increase in sales from EuropeEMEA was primarily attributable to higher sales in Color Solutions, Performance Coatings, and Performance Colors and Glass and Color Solutions of $18.3$37.3 million, $8.6$16.1 million and $5.6$1.3 million, respectively. The increase in sales from the UnitedAsia Pacific was attributable to higher sales in Performance Coatings, Performance Colors and Glass and Color Solutions of $6.0 

2629


 

Table of Contents

million, $2.3 million and $1.8 million, respectively. The increase in sales from the United States was attributable to higher sales in Color Solutions and Performance Colors and Glass of $8.4$2.1 million and $3.4  million.  The increase in sales$0.7 million, respectively. Sales from Latin America and Asia Pacific was attributable to higher sales across all segments.were flat.  



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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Geographic Revenues on a shipped-to basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

162,569 

 

$

136,454 

 

$

26,115 

 

19.1 

%

EMEA

 

$

213,089 

 

$

162,569 

 

$

50,520 

 

31.1 

%

Asia Pacific

 

 

74,700 

 

 

60,152 

 

 

14,548 

 

24.2 

%

 

 

93,619 

 

 

74,700 

 

 

18,919 

 

25.3 

%

United States

 

 

64,861 

 

 

60,590 

 

 

4,271 

 

7.0 

%

 

 

62,114 

 

 

64,861 

 

 

(2,747)

 

(4.2)

%

Latin America

 

 

46,502 

 

 

40,781 

 

 

5,721 

 

14.0 

%

 

 

47,417 

 

 

46,502 

 

 

915 

 

2.0 

%

Net sales

 

$

348,632 

 

$

297,977 

 

$

50,655 

 

17.0 

%

 

$

416,239 

 

$

348,632 

 

$

67,607 

 

19.4 

%





Selling, General and Administrative Expenses

The following table includes SG&A components with significant changes between 20172018 and 2016.2017.

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Personnel expenses

 

$

33,604 

 

$

28,751 

 

$

4,853 

 

16.9 

%

 

$

41,709 

 

$

33,604 

 

$

8,105 

 

24.1 

%

Incentive compensation

 

 

2,465 

 

 

3,161 

 

 

(696)

 

(22.0)

%

 

 

2,531 

 

 

2,465 

 

 

66 

 

2.7 

%

Stock-based compensation

 

 

2,668 

 

 

2,211 

 

 

457 

 

20.7 

%

 

 

1,426 

 

 

2,668 

 

 

(1,242)

 

(46.6)

%

Pension and other postretirement benefits

 

 

(39)

 

 

104 

 

 

(143)

 

(137.5)

%

 

 

339 

 

 

428 

 

 

(89)

 

(20.8)

%

Bad debt

 

 

(126)

 

 

345 

 

 

(471)

 

(136.5)

%

 

 

389 

 

 

(126)

 

 

515 

 

(408.7)

%

Business development

 

 

4,250 

 

 

3,855 

 

 

395 

 

10.2 

%

 

 

3,213 

 

 

4,250 

 

 

(1,037)

 

(24.4)

%

Research and development expenses

 

 

10,263 

 

 

8,301 

 

 

1,962 

 

23.6 

%

Intangible asset amortization

 

 

2,088 

 

 

1,257 

 

 

831 

 

66.1 

%

 

 

2,011 

 

 

2,088 

 

 

(77)

 

(3.7)

%

All other expenses

 

 

17,604 

 

 

18,187 

 

 

(583)

 

(3.2)

%

 

 

8,243 

 

 

9,303 

 

 

(1,060)

 

(11.4)

%

Selling, general and administrative expenses

 

$

62,514 

 

$

57,871 

 

$

4,643 

 

8.0 

%

 

$

70,124 

 

$

62,981 

 

$

7,143 

 

11.3 

%



SG&A expenses were $4.6$7.1 million higher in the three months ended June 30, 2017,2018,  compared with the prior-year same period.    The higher SG&A expenses compared with the prior-year same period are primarily driven by businesses acquired within the last year, of approximately  $5.7 million. The acquisitions were the primary driver of the increase inprimarily related to personnel expenses and accounted for the entireresearch and development expenses. This increase was mitigated by a decrease in intangible asset amortization.stock-based compensation and in business development expenses.



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Strategic services

 

$

33,013 

 

$

29,012 

 

$

4,001 

 

13.8 

%

 

$

39,643 

 

$

33,013 

 

$

6,630 

 

20.1 

%

Functional services

 

 

24,368 

 

 

23,487 

 

 

881 

 

3.8 

%

 

 

26,524 

 

 

24,835 

 

 

1,689 

 

6.8 

%

Incentive compensation

 

 

2,465 

 

 

3,161 

 

 

(696)

 

(22.0)

%

 

 

2,531 

 

 

2,465 

 

 

66 

 

2.7 

%

Stock-based compensation

 

 

2,668 

 

 

2,211 

 

 

457 

 

20.7 

%

 

 

1,426 

 

 

2,668 

 

 

(1,242)

 

(46.6)

%

Selling, general and administrative expenses

 

$

62,514 

 

$

57,871 

 

$

4,643 

 

8.0 

%

 

$

70,124 

 

$

62,981 

 

$

7,143 

 

11.3 

%



2730


 

Table of Contents

Restructuring and Impairment Charges





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Employee severance

 

$

815 

 

$

609 

 

$

206 

 

33.8 

%

 

$

2,775 

 

$

815 

 

$

1,960 

 

240.5 

%

Equity method investment impairment

 

 

1,499 

 

 

 —

 

 

1,499 

 

NM

 

 

 

 —

 

 

1,499 

 

 

(1,499)

 

NM

 

Other restructuring costs

 

 

910 

 

 

178 

 

 

732 

 

411.2 

%

 

 

993 

 

 

910 

 

 

83 

 

9.1 

%

Restructuring and impairment charges

 

$

3,224 

 

$

787 

 

$

2,437 

 

309.7 

%

 

$

3,768 

 

$

3,224 

 

$

544 

 

16.9 

%



Restructuring and impairment charges increased in the second quarter of 20172018 compared with the prior-year same period. The increase was primarily duerelates to an “other than temporary impairment” charge on an equity method investmentcosts associated with integration of $1.5 million.our recent acquisitions and optimization programs.



Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Interest expense

 

$

5,517 

 

$

5,118 

 

$

399 

 

7.8 

%

 

$

7,699 

 

$

5,517 

 

$

2,182 

 

39.6 

%

Amortization of bank fees

 

 

953 

 

 

329 

 

 

624 

 

189.7 

%

 

 

903 

 

 

953 

 

 

(50)

 

(5.2)

%

Interest swap amortization

 

 

(131)

 

 

 —

 

 

(131)

 

 —

%

Interest capitalization

 

 

(21)

 

 

(19)

 

 

(2)

 

10.5 

%

 

 

(271)

 

 

(21)

 

 

(250)

 

NM

%

Interest expense

 

$

6,449 

 

$

5,428 

 

$

1,021 

 

18.8 

%

 

$

8,200 

 

$

6,449 

 

$

1,751 

 

27.2 

%



Interest expense increased in the second quarter of 20172018 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, 2017,2018, compared with the prior-year same period and anperiod. Also, interest expense increased due to the increase of the amortization of debt issuance costs associated with the 2017 Credit Facility, partiallyin LIBOR, offset by a favorable average borrowing rate as a result of the refinancing completeddecrease in the first quarter of 2017.applicable margin rate from borrowings from the Amended Credit Facility.



Income Tax Expense



During the second quarter of 2017,2018, income tax expense was $8.7$10.4 million, or 29.1%25.8% of pre-tax income.  In the second quarter of 2016,2017, we recorded tax expense of $8.5$8.7 million, or 25.4%29.1% of pre-tax income.  The tax expense in the second quarter of 2017 and 2016,2018, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences.  The tax expense for the second quarter of 2017, as a percentage of pre-tax income, was lower than the U.S. federal statutory income tax rate of 35%, primarily as a result of foreign statutory rate differences.



We have recognized the provisional tax impacts related to the 2017 Tax Cut and Jobs Act (the “Tax Act”) under the guidance of the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”).  The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.  The Company’s preliminary determinations related to the estimable impacts of the Tax Act that are effective for the year-ended December 31, 2017 have not changed in the current quarter.

The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) on the Company for 2018.  For the current quarter the Company has made reasonable estimates of GILTI and FDII, as well as the impact of changes to valuation allowances related to certain positions.  The combined provisional net impact of these items are not anticipated to be material to the tax rate in 2018.  The Company has not recorded any potential deferred tax effects related to GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.

31


Table of Contents

Results of Operations - Segment Information

Comparison of the three months ended June 30, 20172018 and 20162017 

Performance Coatings





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to

 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to

 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

 

Acquisitions

Other

 

2018

 

2017

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

 

Acquisitions

Other

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

151,746 

 

 

$

140,589 

 

 

$

11,157 

 

7.9 

%

 

$

481 

 

$

9,485 

 

$

(4,506)

 

$

5,697 

 

$

 —

 

$

193,449 

 

 

$

151,746 

 

 

$

41,703 

 

27.5 

%

 

$

8,531 

 

$

(107)

 

$

2,726 

 

$

30,553 

 

$

 —

Segment gross profit

 

 

40,246 

 

 

 

39,234 

 

 

 

1,012 

 

2.6 

%

 

 

481 

 

 

2,584 

 

 

(1,236)

 

 

1,310 

 

 

(2,127)

 

 

50,297 

 

 

 

40,246 

 

 

 

10,051 

 

25.0 

%

 

 

8,531 

 

 

55 

 

 

1,425 

 

 

8,139 

 

 

(8,099)

Gross profit as a % of segment net sales

 

 

26.5 

%

 

 

27.9 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26.0 

%

 

 

26.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





       Net sales increased in Performance Coatings compared with the prior-year same period, primarily driven by sales from SPCEndeka of $5.7$29.1 million and Gardenia of $1.5 million, each of which was acquired after the second quarter of 2017, and increases in sales of frits and glazes, digital inks and porcelain enamel and digital inks of $2.2$7.7 million, $3.4 million and $1.6$1.0 million, respectively.respectively, partially offset by a decrease in sales of colors. The increase in net sales was driven by sales from acquisitions of $30.6 million, higher sales volumeproduct pricing of $8.5 million and favorable mixforeign currency impacts of $9.5 million, sales from SPC of $5.7 million and higher product pricing

28


Table of Contents

of $0.5$2.7 million, partially offset by unfavorable foreign currency impactsvolume and mix of $4.5$0.1 million. Gross profit increased $1.0$10.1 million from the prior-year same period, primarily driven by lower manufacturing costs of $3.1 million, higher sales volumes and favorable mix of $2.6 million, gross profit from SPC of $1.3 million and favorable product pricing impacts of $0.5$8.5 million, gross profit from acquisitions of $8.1 million, lower manufacturing costs of $1.7 million, favorable foreign currency impacts of $1.4 million and higher sales volumes and mix of $0.1 million, partially offset by higher raw material costs of $5.2 million and unfavorable foreign currency impacts of $1.2$9.8 million.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

88,814 

 

$

80,224 

 

$

8,590 

 

10.7 

%

EMEA

 

$

126,133 

 

$

88,814 

 

$

37,319 

 

42.0 

%

Latin America

 

 

28,239 

 

 

26,165 

 

 

2,074 

 

7.9 

%

 

 

26,472 

 

 

28,239 

 

 

(1,767)

 

(6.3)

%

Asia Pacific

 

 

23,089 

 

 

22,502 

 

 

587 

 

2.6 

%

 

 

29,129 

 

 

23,089 

 

 

6,040 

 

26.2 

%

United States

 

 

11,604 

 

 

11,698 

 

 

(94)

 

(0.8)

%

 

 

11,715 

 

 

11,604 

 

 

111 

 

1.0 

%

Total

 

$

151,746 

 

$

140,589 

 

$

11,157 

 

7.9 

%

 

$

193,449 

 

$

151,746 

 

$

41,703 

 

27.5 

%





The net sales increase of $11.2$41.7 million was driven by increases in sales from Europe,in EMEA, Asia Pacific, and the United States, partially offset by a decrease in sales in Latin America and Asia Pacific.America. The increase in sales from EuropeEMEA was primarily attributable to SPC,sales from Endeka and Gardenia,  each of which was acquired inafter the second quarter of 2017, which contributed $5.7$28.4 million and $1.5 million, respectively, and higher sales of frits and glazes, porcelain enamel and digital inks of $6.4 million, $1.5 million and $1.1 million, partially offset by a decrease in sales of colors of $1.7 million and $1.5 million, respectively. The sales increase from Latin America was primarily driven by higher sales from frits and glazes of $2.0$1.6 million. The increase in sales from Asia Pacific was driven by higher sales inof frits and glazes, digital inks and porcelain enamel of $1.1$3.2 million, $1.8 million and $0.4 million, respectively, and sales from Endeka, which contributed $0.6 million, partially offsetmillion.  The increase in sales from the United States was fully attributable to higher sales of porcelain enamel. The decrease in sales from Latin America was driven by lower sales of frits and glazes and porcelain enamel of $1.1 million.$1.9 million and $1.0 million, respectively, partially offset by higher sales of digital inks.  

32


Table of Contents

Performance Colors and Glass





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Change due to

 

Three Months Ended

 

 

 

 

 

 

 

Change due to

 

June 30,

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other

 

2018

 

2017

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

106,637 

 

 

$

95,933 

 

 

$

10,704 

 

11.2 

%

 

$

561 

 

$

(732)

 

$

(1,510)

 

$

12,385 

 

$

 —

 

$

126,027 

 

 

$

106,637 

 

 

$

19,390 

 

18.2 

%

 

$

1,395 

 

$

5,436 

 

$

3,618 

 

$

8,941 

 

$

 —

Segment gross profit

 

 

40,087 

 

 

 

36,705 

 

 

3,382 

 

9.2 

%

 

 

561 

 

 

(1,559)

 

 

(582)

 

 

5,708 

 

 

(746)

 

 

45,362 

 

 

 

40,087 

 

 

5,275 

 

13.2 

%

 

 

1,395 

 

 

826 

 

 

1,234 

 

 

2,424 

 

 

(604)

Gross profit as a % of segment net sales

 

 

37.6 

%

 

 

38.3 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36.0 

%

 

 

37.6 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



       Net sales increased compared with the prior-year same period, primarily driven by $10.6organic sales of $10.4 million ofand $7.0 million in sales from ESL,Dip-Tech, which was acquired in the third quarter of 2017, and $1.4 million in sales from Endeka, which was acquired in the fourth quarter of 2016.2017. The increase in net sales was driven by sales from acquisitions of $12.4$8.9 million, favorable volume and mix of $5.4 million, favorable  foreign currency impacts of $3.6 million, and higher product pricing of $0.6 million,  partially offset by unfavorable foreign currency impacts of $1.5 million and unfavorable volume and mix of $0.7$1.4 million. Gross profit increased from the prior-year same period, primarily due to gross profit from acquisitions which contributed $5.7of $2.4 million, higher product pricing of $0.6$1.4 million, andfavorable foreign currency impacts of $1.2 million, favorable manufacturing costs of $0.2$1.0 million partially offset by lowerand higher sales volumes and mix of $1.6$0.8 million, unfavorablepartially offset by higher raw material costs of $0.9 million and unfavorable foreign currency impacts of $0.6$1.6 million.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

47,592 

 

$

41,960 

 

$

5,632 

 

13.4 

%

EMEA

 

$

63,675 

 

$

47,592 

 

$

16,083 

 

33.8 

%

United States

 

 

37,832 

 

 

34,420 

 

 

3,412 

 

9.9 

%

 

 

38,504 

 

 

37,832 

 

 

672 

 

1.8 

%

Asia Pacific

 

 

15,796 

 

 

14,750 

 

 

1,046 

 

7.1 

%

 

 

18,063 

 

 

15,796 

 

 

2,267 

 

14.4 

%

Latin America

 

 

5,417 

 

 

4,803 

 

 

614 

 

12.8 

%

 

 

5,785 

 

 

5,417 

 

 

368 

 

6.8 

%

Total

 

$

106,637 

 

$

95,933 

 

$

10,704 

 

11.2 

%

 

$

126,027 

 

$

106,637 

 

$

19,390 

 

18.2 

%



The net sales increase of $10.7$19.4 million was driven by higher sales from all regions. The increase in sales from EuropeEMEA was primarily attributable to $4.4 million and $1.8$6.5 million in sales from ESL and Pinturas, respectively,acquisitions and higher sales in electronics

29


Table of Contents

decoration products and electronic products of $0.7$3.7 million partially offset by lowerand $3.1 million, respectively. The increase from Asia Pacific was primarily due to an increase in sales in industrialof automobile products of $1.1$1.3 million and decoration products of $0.8 million.  The increase in sales from the United States was primarily attributable to an increase in sales from ESLDip-Tech of $6.2$1.4 million, partially offset by a decrease in sales of industrial products of $2.2 million. The increase from Asia Pacific was due to an increase inlower sales of automobile and decoration products of $0.6 million and $1.4 million, respectively and the increaseproducts. Sales from Latin America was attributable to an increase in sales of decoration products of $0.6 million.remained relatively flat. 

Color Solutions





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to

 

Three Months Ended

 

 

 

 

 

 

 

 

Change due to

 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other

 

2018

 

2017

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

90,249 

 

 

$

61,455 

 

 

$

28,794 

 

46.9 

%

 

$

827 

 

$

8,280 

 

$

(548)

 

$

20,235 

 

$

 —

 

$

96,763 

 

 

$

90,249 

 

 

$

6,514 

 

7.2 

%

 

$

3,019 

 

$

910 

 

$

2,585 

 

$

 —

 

$

 —

Segment gross profit

 

 

28,416 

 

 

 

22,404 

 

 

 

6,012 

 

26.8 

%

 

 

827 

 

 

453 

 

 

(155)

 

 

4,753 

 

 

134 

 

 

31,541 

 

 

 

28,416 

 

 

 

3,125 

 

11.0 

%

 

 

3,019 

 

 

5,490 

 

 

705 

 

 

 —

 

 

(6,089)

Gross profit as a % of segment net sales

 

 

31.5 

%

 

 

36.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.6 

%

 

 

31.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



       Net sales increased compared with the prior-year same period, primarily due to sales from Cappelle, and higher sales of pigments and surface technology products of $19.1 million, $5.6$3.5 million and $3.1$3.2 million, respectively.  The increase in net sales was driven by acquisitionshigher product pricing of $20.2$3.0 million, favorable foreign currency impacts of $2.6 million and higher volumes and mix of $8.3 million and higher product pricing of $0.8 million, partially offset by unfavorable foreign currency impacts of $0.5$0.9 million. Gross profit increased from the prior-year same period, primarily due to acquisitions, which contributed $4.8 million, lower manufacturing costs of $3.2 million, higher product pricing of $0.8 million and favorable sales volumes and mix of $0.5$5.5 million, higher product pricing of $3.0 million and 

33


Table of Contents

favorable foreign currency impacts of $0.7 million, partially offset by higher raw material costs of $3.1$4.1 million and unfavorable foreign currency impactshigher manufacturing costs of $0.2$2.0 million. 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

39,179 

 

$

30,735 

 

$

8,444 

 

27.5 

%

 

$

41,272 

 

$

39,179 

 

$

2,093 

 

5.3 

%

Europe

 

 

34,961 

 

 

16,704 

 

 

18,257 

 

109.3 

%

EMEA

 

 

36,227 

 

 

34,961 

 

 

1,266 

 

3.6 

%

Asia Pacific

 

 

8,775 

 

 

7,635 

 

 

1,140 

 

14.9 

%

 

 

10,532 

 

 

8,775 

 

 

1,757 

 

20.0 

%

Latin America

 

 

7,334 

 

 

6,381 

 

 

953 

 

14.9 

%

 

 

8,732 

 

 

7,334 

 

 

1,398 

 

19.1 

%

Total

 

$

90,249 

 

$

61,455 

 

$

28,794 

 

46.9 

%

 

$

96,763 

 

$

90,249 

 

$

6,514 

 

7.2 

%



The net sales increase of $28.8$6.5 million was driven by higher sales from all regions.  The higher sales from Europe wasEMEA,  Asia Pacific and Latin America were driven by sales from Cappelle of $16.0 million and pigment products of $2.3 million.products.  The increase in sales from the United States was primarily driven by sales from Cappelle of $3.1$3.2 million and increases inof surface technology andproducts, partially offset by lower sales of pigment products of $3.1 million and $1.2 million, respectively. The increases in sales from Asia Pacific and Latin America were attributable to higher sales for pigment products of $1.1 million and $1.0 million, respectively. 

Results of Operations - Consolidated$0.9 million.  



Comparison of the six months ended June 30, 20172018 and 20162017 

For the six months ended June 30, 2017,  income from continuing operations was $43.4 million, compared with $44.6 million income from continuing operations for the six months ended June 30, 2016.  Net2018,  net income was $43.4$53.5 million, compared with net income of $9.4$43.4 million for the six months ended June 30, 2016.2017. For the six months ended June 30, 2017,2018, net income attributable to common shareholders was $42.9$53.1 million, or earnings per share of $0.51,$0.63, compared with net income attributable to common shareholders of $9.0$42.9 million, or earnings per share of $0.11,$0.51, for the six months ended June 30, 2016.2017.

30




Table of ContentsNet Sales





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Net sales

 

$

669,187 

 

 

$

575,428 

 

 

$

93,759 

 

16.3 

%

 

$

821,771 

 

 

$

669,187 

 

 

$

152,584 

 

22.8 

%

Cost of sales

 

 

462,051 

 

 

 

392,826 

 

 

 

69,225 

 

17.6 

%

 

 

576,440 

 

 

 

462,051 

 

 

 

114,389 

 

24.8 

%

Gross profit

 

$

207,136 

 

 

$

182,602 

 

 

$

24,534 

 

13.4 

%

 

$

245,331 

 

 

$

207,136 

 

 

$

38,195 

 

18.4 

%

Gross profit as a % of net sales

 

 

31.0 

%

 

 

31.7 

%

 

 

 

 

 

 

 

 

29.9 

%

 

 

31.0 

%

 

 

 

 

 

 



Net sales increased by $93.8$152.6 million, or 16.3%22.8%, in the six months ended June 30, 2017,2018, compared with the prior-year same period, driven by higher sales in Color Solutions,Performance Coatings, Performance Colors and Glass and Performance CoatingsColor Solutions of $58.1$99.8 million, $26.1$36.4 million and $9.6$16.4 million, respectively. The increase in net sales was driven by Cappelle,Endeka, which contributed sales of $38.1$61.2 million, ESL,and Dip-Tech, which contributed sales of $21.3 million, and SPC, which contributed sales of $5.7$10.9 million,  each of which was acquired after the second quarter of 2016.2017.  The increase in net sales was also driven by organic growth, with Color Solutions growing $19.1 million, Performance Coatings growing $13.8$29.2 million, and Performance Colors and Glass growing $4.0$21.2 million and Color Solutions growing $16.4 million. 



Gross Profit



Gross profit increased $24.5$38.2 million, or 13.4%18.4%, in the six months ended June 30, 2017,2018, compared with the prior-year same period, and as a percentage of net sales, it decreased 70110 basis points to 31.0%29.9%.  The increase in gross profit was attributable to increases across all of our segments, with increases in Color Solutions,Performance Coatings, Performance Colors and Glass and Performance CoatingsColor Solutions of $13.9$20.3 million, $9.0$11.2 million and $2.4$7.1 million, respectively.  The increase in gross profit was primarily driven by favorable product pricing of $24.1 million, gross profit from acquisitions of $19.3$23.2 million, lower manufacturing costsfavorable foreign currency impacts of $15.5$10.7 million, and higher sales volumes and mix of $7.2$10.3 million, and lower manufacturing costs of $2.6 million, partially offset by higher raw material costs of $12.1 million, unfavorable foreign currency impacts$32.3 million.    

34


Table of $4.2 million and  unfavorable product pricing of $0.5 million.    Contents

Geographic Revenues



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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Geographic Revenues on a sales origination basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

320,289 

 

$

267,591 

 

$

52,698 

 

19.7 

%

 

$

446,978 

 

$

320,289 

 

$

126,689 

 

39.6 

%

United States

 

 

176,994 

 

 

147,023 

 

 

29,971 

 

20.4 

%

 

 

183,027 

 

 

176,994 

 

 

6,033 

 

3.4 

%

Asia Pacific

 

 

91,869 

 

 

87,824 

 

 

4,045 

 

4.6 

%

 

 

110,124 

 

 

91,869 

 

 

18,255 

 

19.9 

%

Latin America

 

 

80,035 

 

 

72,990 

 

 

7,045 

 

9.7 

%

 

 

81,642 

 

 

80,035 

 

 

1,607 

 

2.0 

%

Net sales

 

$

669,187 

 

$

575,428 

 

$

93,759 

 

16.3 

%

 

$

821,771 

 

$

669,187 

 

$

152,584 

 

22.8 

%



The increase in net sales of $93.8$152.6 million, compared with the prior-year same period, was driven by higheran increase in sales from all regions. The increase in sales from Europe was primarily attributable to higher sales in Color Solutions,Performance Coatings, Performance Colors and Glass and Color Solutions of $87.3 million, $32.8 million and $6.6 million, respectively. The increase in sales from Asia Pacific was primarily attributable to higher sales in Performance Coatings, Performance Colors and Glass and Color Solutions of $35.9$10.7 million, $11.1$4.1 million and $5.7 million.$3.4 million, respectively. The increase in sales from the United States was primarilyattributable to higher sales in Color Solutions and Performance Coatings of $5.2 million and $2.2 million, respectively, partially offset by a decrease in sales in Performance Colors and Glass of $1.3 million.  The increase in sales from Latin America was attributable to higher sales in Color Solutions and Performance Colors and Glass of $18.6$1.2 million and $12.0  million.  The increase$0.7 million, respectively, partially offset by a decrease in sales from Latin America and Asia Pacific was attributable to higher sales across all segments.in Performance Coatings of $0.3 million. 



31


Table of Contents

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





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Geographic Revenues on a shipped-to basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

303,108 

 

$

264,790 

 

$

38,318 

 

14.5 

%

EMEA

 

$

423,420 

 

$

303,108 

 

$

120,312 

 

39.7 

%

Asia Pacific

 

 

144,821 

 

 

114,680 

 

 

30,141 

 

26.3 

%

 

 

164,984 

 

 

144,821 

 

 

20,163 

 

13.9 

%

United States

 

 

131,779 

 

 

120,218 

 

 

11,561 

 

9.6 

%

 

 

138,374 

 

 

131,779 

 

 

6,595 

 

5.0 

%

Latin America

 

 

89,479 

 

 

75,740 

 

 

13,739 

 

18.1 

%

 

 

94,993 

 

 

89,479 

 

 

5,514 

 

6.2 

%

Net sales

 

$

669,187 

 

$

575,428 

 

$

93,759 

 

16.3 

%

 

$

821,771 

 

$

669,187 

 

$

152,584 

 

22.8 

%

35


Table of Contents



Selling, General and Administrative Expenses

The following table includes SG&A components with significant changes between 20172018 and 2016.2017.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Personnel expenses

 

$

66,508 

 

$

59,580 

 

$

6,928 

 

11.6 

%

 

$

82,828 

 

$

66,508 

 

$

16,320 

 

24.5 

%

Incentive compensation

 

 

4,295 

 

 

5,146 

 

 

(851)

 

(16.5)

%

 

 

5,497 

 

 

4,295 

 

 

1,202 

 

28.0 

%

Stock-based compensation

 

 

5,391 

 

 

3,837 

 

 

1,554 

 

40.5 

%

 

 

3,856 

 

 

5,391 

 

 

(1,535)

 

(28.5)

%

Pension and other postretirement benefits

 

 

(119)

 

 

142 

 

 

(261)

 

(183.8)

%

 

 

681 

 

 

836 

 

 

(155)

 

(18.5)

%

Bad debt

 

 

(367)

 

 

223 

 

 

(590)

 

(264.6)

%

 

 

494 

 

 

(367)

 

 

861 

 

(234.6)

%

Business development

 

 

6,611 

 

 

4,955 

 

 

1,656 

 

33.4 

%

 

 

5,636 

 

 

6,611 

 

 

(975)

 

(14.7)

%

Research and development expenses

 

 

21,104 

 

 

16,970 

 

 

4,134 

 

24.4 

%

Intangible asset amortization

 

 

4,139 

 

 

2,757 

 

 

1,382 

 

50.1 

%

 

 

4,084 

 

 

4,139 

 

 

(55)

 

(1.3)

%

All other expenses

 

 

35,014 

 

 

33,877 

 

 

1,137 

 

3.4 

%

 

 

19,036 

 

 

18,044 

 

 

992 

 

5.5 

%

Selling, general and administrative expenses

 

$

121,472 

 

$

110,517 

 

$

10,955 

 

9.9 

%

 

$

143,216 

 

$

122,427 

 

$

20,789 

 

17.0 

%



SG&A expenses were $11.0$20.8 million higher in the six months ended June 30, 2017,2018, compared with the prior-year same period.  The higher SG&A expenses compared with the prior-year same period are primarily driven by businesses acquired within the last year, of approximately  $10.5 million. The acquisitions were the primary driver of the increase inprimarily related to personnel expenses and accounted for the entire increase in intangible asset amortization. The increase in stock-based compensation expense of $1.6 million is driven by the Company’s performance relative to targets for certain awards compared with the prior-year same period, as well as changes in the Company’s stock price. The increase in businessresearch and development expenses is due to higher professional fees.expenses.



32


Table of Contents

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.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Strategic services

 

$

64,673 

 

$

57,416 

 

$

7,257 

 

12.6 

%

 

$

80,821 

 

$

64,673 

 

$

16,148 

 

25.0 

%

Functional services

 

 

47,113 

 

 

44,118 

 

 

2,995 

 

6.8 

%

 

 

53,042 

 

 

48,068 

 

 

4,974 

 

10.3 

%

Incentive compensation

 

 

4,295 

 

 

5,146 

 

 

(851)

 

(16.5)

%

 

 

5,497 

 

 

4,295 

 

 

1,202 

 

28.0 

%

Stock-based compensation

 

 

5,391 

 

 

3,837 

 

 

1,554 

 

40.5 

%

 

 

3,856 

 

 

5,391 

 

 

(1,535)

 

(28.5)

%

Selling, general and administrative expenses

 

$

121,472 

 

$

110,517 

 

$

10,955 

 

9.9 

%

 

$

143,216 

 

$

122,427 

 

$

20,789 

 

17.0 

%



Restructuring and Impairment Charges





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Employee severance

 

$

1,795 

 

$

1,141 

 

$

654 

 

57.3 

%

 

$

3,432 

 

$

1,795 

 

$

1,637 

 

91.2 

%

Equity method investment impairment

 

 

1,499 

 

 

 —

 

 

1,499 

 

 —

%

 

 

 —

 

 

1,499 

 

 

(1,499)

 

 —

%

Asset impairment

 

 

1,176 

 

 

 —

 

 

1,176 

 

 —

%

 

 

 —

 

 

1,176 

 

 

(1,176)

 

 —

%

Other restructuring costs

 

 

1,772 

 

 

527 

 

 

1,245 

 

236.2 

%

 

 

4,442 

 

 

1,772 

 

 

2,670 

 

150.7 

%

Restructuring and impairment charges

 

$

6,242 

 

$

1,668 

 

$

4,574 

 

274.2 

%

 

$

7,874 

 

$

6,242 

 

$

1,632 

 

26.1 

%

36


Table of Contents



Restructuring and impairment charges increased in the first half of 2017six months ended June 30, 2018 compared with the prior-year same period. The increase was primarily duerelates to an “other than temporary impairment” charge on an equity method investment of $1.5 million and costs associated with a restructuring plan in Italy, which includes $1.2 millionintegration 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.and optimization programs. 



Interest Expense



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Interest expense

 

$

11,265 

 

$

9,662 

 

$

1,603 

 

16.6 

%

 

$

14,950 

 

$

11,265 

 

$

3,685 

 

32.7 

%

Amortization of bank fees

 

 

1,432 

 

 

644 

 

 

788 

 

122.4 

%

 

 

1,773 

 

 

1,432 

 

 

341 

 

23.8 

%

Interest swap amortization

 

 

(131)

 

 

 —

 

 

(131)

 

 —

%

Interest capitalization

 

 

(24)

 

 

(31)

 

 

 

(22.6)

%

 

 

(430)

 

 

(24)

 

 

(406)

 

1,691.7 

%

Interest expense

 

$

12,673 

 

$

10,275 

 

$

2,398 

 

23.3 

%

 

$

16,162 

 

$

12,673 

 

$

3,489 

 

27.5 

%



Interest expense increased in the first half of 2017six months ended June 30, 2018 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 six months ended June 30, 2017,2018, compared with the prior-year same period and anperiod. Also, interest expense increased due to the increase of the amortization of debt issuance costs associated with the 2017 Credit Facility, partiallyin LIBOR, offset by a favorable average borrowing rate as a result of the refinancing completeddecrease in the first quarter of 2017.applicable margin rate from borrowings from the Amended Credit Facility.



Income Tax Expense



During the first half of 2017,2018, income tax expense was $15.8$17.9 million, or 26.8%25.1% of pre-tax income.  In the first half of 2016,2017, we recorded tax expense of $16.5$15.8 million, or 27.0%26.8% of pre-tax income.  The tax expense in the first half of 2017 and 2016,2018, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences.  The tax expense for the first half of 2017, as a percentage of pre-tax income, was lower than the U.S. federal statutory income tax rate of 35%, primarily as a result of foreign statutory rate differences.

33




TableWe have recognized the provisional tax impacts related to the 2017 Tax Cut and Jobs Act (the “Tax Act”) under the guidance of Contentsthe SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”).  The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.  The Company’s preliminary determinations related to the estimable impacts of the Tax Act that are effective for the year-ended December 31, 2017 have not changed in the current quarter.

The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) on the Company for 2018.  For the current quarter the Company has made reasonable estimates of GILTI and FDII, as well as the impact of changes to valuation allowances related to certain positions.  The combined provisional net impact of these items are not anticipated to be material to the tax rate in 2018.  The Company has not recorded any potential deferred tax effects related to GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.



Results of Operations - Segment Information

Comparison of the six months ended June 30, 20172018 and 20162017 

Performance Coatings







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended

 

 

 

 

 

 

 

 

Change due to



 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

 

Acquisitions

Other



 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

278,311 

 

 

$

268,713 

 

 

$

9,598 

 

3.6 

%

 

$

(3,110)

 

$

16,905 

 

$

(9,894)

 

$

5,697 

 

$

 —

Segment gross profit

 

 

73,735 

 

 

 

71,349 

 

 

 

2,386 

 

3.3 

%

 

 

(3,110)

 

 

5,207 

 

 

(2,703)

 

 

1,310 

 

 

1,682 

Gross profit as a % of segment net sales

 

 

26.5 

%

 

 

26.6 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended

 

 

 

 

 

 

 

 

Change due to



 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 



 

2018

 

2017

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

 

Acquisitions

Other

37




 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

378,097 

 

 

$

278,311 

 

 

$

99,786 

 

35.9 

%

 

$

15,631 

 

$

1,111 

 

$

12,449 

 

$

70,595 

 

$

 —

Segment gross profit

 

 

94,062 

 

 

 

73,735 

 

 

 

20,327 

 

27.6 

%

 

 

15,631 

 

 

887 

 

 

4,478 

 

 

19,787 

 

 

(20,456)

Gross profit as a % of segment net sales

 

 

24.9 

%

 

 

26.5 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Net sales increased in Performance Coatings compared with the prior-year same period, primarily driven by sales from Endeka of $57.6 million and Gardenia of $3.0 million, each of which was acquired after the second quarter of 2017, sales from SPC of $5.7 million$10.1, which was acquired in the second quarter of 2017, and an increaseincreases in sales of frits and glazes, porcelain enamel productsand digital inks of $1.9 million.$13.1 million $7.8 million and $6.9 million, respectively. The increase in net sales was driven by higher sales volume and favorable mix of $16.9 million and sales from SPCacquisitions of $5.7$70.6 million, partially offset by unfavorablehigher product pricing of $15.6 million, favorable foreign currency impacts of $9.9$12.4 million, and lower product pricingfavorable volume and mix of $3.1$1.1 million. Gross profit increased $2.4$20.3 million from the prior-year same period, primarily driven by lower manufacturing costsgross profit from acquisitions of $8.1$19.8 million, favorable product pricing impacts of $15.6 million, favorable foreign currency impacts of $4.5 million, higher sales volumes and favorable mix of $5.2$0.9 million and gross profit from acquisitionslower manufacturing costs of $1.3$0.7 million, partially offset by higher raw material costs of $6.4 million, unfavorable product pricing impacts of $3.1 million and unfavorable foreign currency impacts of $2.7$21.2 million.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

2018

 

2017

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

157,973 

 

$

152,251 

 

$

5,722 

 

3.8 

%

EMEA

 

$

245,249 

 

$

157,973 

 

$

87,276 

 

55.2 

%

Latin America

 

 

53,570 

 

 

49,410 

 

 

4,160 

 

8.4 

%

 

 

53,238 

 

 

53,570 

 

 

(332)

 

(0.6)

%

Asia Pacific

 

 

44,406 

 

 

44,069 

 

 

337 

 

0.8 

%

 

 

55,076 

 

 

44,406 

 

 

10,670 

 

24.0 

%

United States

 

 

22,362 

 

 

22,983 

 

 

(621)

 

(2.7)

%

 

 

24,534 

 

 

22,362 

 

 

2,172 

 

9.7 

%

Total

 

$

278,311 

 

$

268,713 

 

$

9,598 

 

3.6 

%

 

$

378,097 

 

$

278,311 

 

$

99,786 

 

35.9 

%



The net sales increase of $9.6$99.8 million was primarily driven by increases in sales from Europe,EMEA and Asia Pacific. The increase in sales from EMEA was primarily attributable to sales from acquisitions which contributed $67.5 million and higher sales of all product lines. The increase in sales from Asia Pacific was driven by higher sales of frits and glazes, digital inks and porcelain enamel of $5.2 million, $2.1 million and $1.6 million, respectively, and sales from Endeka, which contributed $1.6 million.  The increase in sales from the United States was fully attributable to higher sales of porcelain enamel. The decrease in sales from Latin America was driven by lower sales of porcelain enamel and frits and glazes, partially offset by higher sales of digital inks.  

38


Table of Contents

Performance Colors and Glass



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended

 

 

 

 

 

 

 

 

Change due to



 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 



 

2018

 

2017

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other



 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

246,532 

 

 

$

210,155 

 

 

$

36,377 

 

17.3 

%

 

$

2,231 

 

$

7,770 

 

$

11,206 

 

$

15,170 

 

$

 —

Segment gross profit

 

 

88,690 

 

 

 

77,505 

 

 

 

11,185 

 

14.4 

%

 

 

2,231 

 

 

2,165 

 

 

3,948 

 

 

3,458 

 

 

(618)

Gross profit as a % of segment net sales

 

 

36.0 

%

 

 

36.9 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales increased compared with the prior-year same period, primarily driven by $10.9 million in sales from Dip-Tech, which was acquired in the third quarter of 2017, and $3.6 million in sales from Endeka, which was acquired in the fourth quarter of 2017. The increase in net sales was driven by sales from acquisitions of $15.2 million, favorable foreign currency impacts of $11.2 million,  favorable volume and mix of $7.8 million and higher product pricing of $2.2 million. Gross profit increased from the prior-year same period, primarily due to favorable foreign currency impacts of $3.9 million, gross profit from acquisitions of $3.5 million, favorable manufacturing costs of $2.8 million, higher product pricing of $2.2 million and higher sales volumes and mix of $2.2 million, partially offset by  higher raw material costs of $3.4 million.



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended

 

 

 

 

 

 



 

June 30,

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

2017

 

$ Change

 

% Change



 

 

 

 

 

 

 

 

 

 

 

 



 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

EMEA

 

$

125,019 

 

$

92,178 

 

$

32,841 

 

35.6 

%

United States

 

 

75,595 

 

 

76,936 

 

 

(1,341)

 

(1.7)

%

Asia Pacific

 

 

34,578 

 

 

30,429 

 

 

4,149 

 

13.6 

%

Latin America

 

 

11,340 

 

 

10,612 

 

 

728 

 

6.9 

%

Total

 

$

246,532 

 

$

210,155 

 

$

36,377 

 

17.3 

%

The net sales increase of $36.4 million was driven by higher sales from EMEA, Asia Pacific and Latin America, partially offset by a decrease in sales from the United States. The increase in sales from EuropeEMEA was primarily driven byattributable to $11.5 million in sales from SPC of $5.7 millionacquisitions and higher sales from all product groups. The increase from Asia Pacific was primarily due to an increase in sales of porcelain enamel of $1.5 million, partially offset by a decrease in sales of digital inks of $1.3 million. The sales increaseautomobile products. Sales from Latin America was primarily driven by higher sales of frits and glazes and digital inks of $2.7 million and $1.4 million, respectively.remained relatively flat. The decrease in sales from the United States was primarily attributable to lower sales of porcelain enamel.

Performance Colorsautomobile products and Glass



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended

 

 

 

 

 

 

 

 

Change due to



 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other



 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

210,155 

 

 

$

184,103 

 

 

$

26,052 

 

14.2 

%

 

$

1,182 

 

$

2,782 

 

$

(3,105)

 

$

25,193 

 

$

 —

Segment gross profit

 

 

77,505 

 

 

 

68,543 

 

 

 

8,962 

 

13.1 

%

 

 

1,182 

 

 

(345)

 

 

(1,132)

 

 

9,528 

 

 

(271)

Gross profit as a % of segment net sales

 

 

36.9 

%

 

 

37.2 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The net sales increase of $26.1 million was driven by sales from ESL of $21.3 million and higher sales of electronicindustrial products, of $3.7 million. The increase in net sales was driven by acquisitions of $25.2 million, favorable volume and mix of $2.8 million and higher product pricing of $1.2 million, partially offset by unfavorable foreign currency impacts of $3.1 million. Gross profit increased

34


Table of Contents

from the prior-year same period, primarily due to gross profit from acquisitions of $9.5 million, favorable manufacturing costs of $1.3 million and higher product pricing of $1.2 million, partially offset by unfavorable raw material costs of $1.6 million, unfavorable foreign currency impacts of $1.1 million and lower sales volumes and mix of $0.3 million.



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended

 

 

 

 

 

 



 

June 30,

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

$ Change

 

% Change



 

 

 

 

 

 

 

 

 

 

 

 



 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

92,178 

 

$

81,057 

 

$

11,121 

 

13.7 

%

United States

 

 

76,936 

 

 

64,909 

 

 

12,027 

 

18.5 

%

Asia Pacific

 

 

30,429 

 

 

28,990 

 

 

1,439 

 

5.0 

%

Latin America

 

 

10,612 

 

 

9,147 

 

 

1,465 

 

16.0 

%

Total

 

$

210,155 

 

$

184,103 

 

$

26,052 

 

14.2 

%

The net sales increase of $26.1 million was driven by higher sales from all regions. The increase in sales from the United States was driven by sales from ESL of $13.1 million, partially offset by a decrease in sales of industrial products. The increase in sales from Europe was primarily driven by $8.2 million and $3.9 million in sales from ESL and Pinturas, respectively, partially offset by a decrease in sales of industrial products. The increase from Latin America was primarily drivenmitigated by an increase in sales from Dip-Tech of decoration products of $1.6$2.2 million.  The increase from Asia Pacific was primarily due to higher sales of automobile and electronics products of $0.9 million and $0.5 million, respectively. 

Color Solutions





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

 

 

 

Change due to

 

Six Months Ended

 

 

 

 

 

 

 

 

Change due to

 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

Volume /

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other

 

2018

 

2017

 

$ Change

 

% Change

 

Price

 

Mix

 

Currency

 

Acquisitions

 

Other

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment net sales

 

$

180,721 

 

 

$

122,612 

 

 

$

58,109 

 

47.4 

%

 

$

1,430 

 

$

17,703 

 

$

(1,177)

 

$

40,153 

 

$

 —

 

$

197,142 

 

 

$

180,721 

 

 

$

16,421 

 

9.1 

%

 

$

6,204 

 

$

1,999 

 

$

8,219 

 

$

 —

 

$

 —

Segment gross profit

 

 

56,598 

 

 

 

42,690 

 

 

 

13,908 

 

32.6 

%

 

 

1,430 

 

 

2,359 

 

 

(370)

 

 

8,467 

 

 

2,022 

 

 

63,690 

 

 

 

56,598 

 

 

 

7,092 

 

12.5 

%

 

 

6,204 

 

 

7,214 

 

 

2,289 

 

 

 —

 

 

(8,616)

Gross profit as a % of segment net sales

 

 

31.3 

%

 

 

34.8 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32.3 

%

 

 

31.3 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Net sales increased compared with the prior-year same period, primarily due to sales from Cappelle of $38.1 million, and higher sales of pigments and surface technology products of $11.2$10.5 million and $6.8$6.3 million, respectively.  The increase in net sales was driven by acquisitionsfavorable foreign currency impacts

39


Table of $40.2Contents

of $8.2 million, higher product pricing of $6.2 million and higher volumes and mix of $17.7 million and higher product pricing of $1.4 million, partially offset by unfavorable foreign currency impacts of $1.2$2.0 million. Gross profit increased from the prior-year same period, primarily due to gross profit from acquisitionshigher product pricing of $8.5$6.2 million, lower manufacturing costs of $6.1 million, higherfavorable sales volumes and mix of $2.4$7.2 million and higher product pricingfavorable foreign currency impacts of $1.4$2.3 million, partially offset by unfavorablehigher raw material costs of $4.1$7.7 million and unfavorable foreign currency impactshigher manufacturing costs of $0.4$0.9 million.





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended

 

 

 

 

 

 



 

June 30,

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2017

 

2016

 

$ Change

 

% Change



 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

77,696 

 

$

59,131 

 

$

18,565 

 

31.4 

%

Europe

 

 

70,138 

 

 

34,283 

 

 

35,855 

 

104.6 

%

Asia Pacific

 

 

17,034 

 

 

14,765 

 

 

2,269 

 

15.4 

%

Latin America

 

 

15,853 

 

 

14,433 

 

 

1,420 

 

9.8 

%

Total

 

$

180,721 

 

$

122,612 

 

$

58,109 

 

47.4 

%

35


Table of Contents



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Six Months Ended

 

 

 

 

 

 



 

June 30,

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

2018

 

2017

 

$ Change

 

% Change



 

(Dollars in thousands)

 

 

 

Segment net sales by Region

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

82,898 

 

$

77,696 

 

$

5,202 

 

6.7 

%

EMEA

 

 

76,710 

 

 

70,138 

 

 

6,572 

 

9.4 

%

Asia Pacific

 

 

20,470 

 

 

17,034 

 

 

3,436 

 

20.2 

%

Latin America

 

 

17,064 

 

 

15,853 

 

 

1,211 

 

7.6 

%

Total

 

$

197,142 

 

$

180,721 

 

$

16,421 

 

9.1 

%



The net sales increase of $58.1$16.4 million was driven by higher sales from all regions. The increase inhigher sales from Europe was primarilyEMEA, Asia Pacific and Latin America were driven by sales from Cappelle of $31.9 million.pigment products.  The increase in sales from the United States was primarily driven by sales from Cappelle of $6.2 million, surface technology products of $6.7 million and pigments of $3.6 million.  The increases in sales from Asia Pacific and Latin America were driven by an increase in pigment products of $2.2 million and $1.4 million, respectively.products.





Summary of Cash Flows for the six months ended June 20172018 and 20162017 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

June 30,

 

 

 

 

2017

 

2016

 

$ Change

 

2018

 

2017

 

$ Change

 

(Dollars in thousands)

 

(Dollars in thousands)

Net cash provided by (used in) operating activities

 

$

14,705 

 

$

(1,975)

 

$

16,680 

Net cash (used in) provided by operating activities

 

$

(37,675)

 

$

14,705 

 

$

(52,380)

Net cash used in investing activities

 

 

(31,501)

 

 

(17,086)

 

 

(14,415)

 

 

(48,458)

 

 

(31,501)

 

 

(16,957)

Net cash provided by financing activities

 

 

47,924 

 

 

10,822 

 

 

37,102 

 

 

68,502 

 

 

47,924 

 

 

20,578 

Effect of exchange rate changes on cash and cash equivalents

 

 

2,156 

 

 

(725)

 

 

2,881 

 

 

(1,034)

 

 

2,156 

 

 

(3,190)

Increase (decrease) in cash and cash equivalents

 

$

33,284 

 

$

(8,964)

 

$

42,248 

(Decrease) increase in cash and cash equivalents

 

$

(18,665)

 

$

33,284 

 

$

(51,949)



The following table includes details of net cash (used in) provided by operating activities.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

June 30,

 

 

 

 

2017

 

2016

 

$ Change

 

2018

 

2017

 

$ Change

 

(Dollars in thousands)

 

(Dollars in thousands)

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

43,350 

 

$

9,382 

 

$

33,968 

 

$

53,459 

 

$

43,350 

 

$

10,109 

Loss (gain) on sale of assets and business

 

 

1,285 

 

 

(3,774)

 

 

5,059 

Gain on sale of assets and business

 

 

288 

 

 

1,285 

 

 

(997)

Depreciation and amortization

 

 

23,156 

 

 

21,929 

 

 

1,227 

 

 

26,966 

 

 

23,156 

 

 

3,810 

Interest amortization

 

 

1,432 

 

 

644 

 

 

788 

 

 

1,773 

 

 

1,432 

 

 

341 

Restructuring and impairment

 

 

3,874 

 

 

23,651 

 

 

(19,777)

 

 

5,479 

 

 

3,874 

 

 

1,605 

Loss on extinguishment of debt

 

 

3,905 

 

 

 —

 

 

3,905 

 

 

3,226 

 

 

3,905 

 

 

(679)

Accounts receivable

 

 

(48,183)

 

 

(41,687)

 

 

(6,496)

 

 

(50,764)

 

 

(48,183)

 

 

(2,581)

Inventories

 

 

(28,659)

 

 

(17,695)

 

 

(10,964)

 

 

(65,364)

 

 

(28,659)

 

 

(36,705)

Accounts payable

 

 

14,122 

 

 

3,226 

 

 

10,896 

 

 

(1,531)

 

 

14,122 

 

 

(15,653)

Other current assets and liabilities, net

 

 

(5,111)

 

 

2,968 

 

 

(8,079)

 

 

(18,800)

 

 

(5,111)

 

 

(13,689)

Other adjustments, net

 

 

5,534 

 

 

(619)

 

 

6,153 

 

 

7,593 

 

 

5,534 

 

 

2,059 

Net cash provided by (used in) operating activities

 

$

14,705 

 

$

(1,975)

 

$

16,680 

Net cash (used in) provided by operating activities

 

$

(37,675)

 

$

14,705 

 

$

(52,380)



40


Table of Contents

Cash flows from operating activities. Cash flows provided by operating activities increased $16.7decreased $52.4 million in the first halfsix months of 20172018 compared with the prior-year same period. The increasedecrease was primarily due to higher earnings after consideration of non-cash items, partially offset by higher cash outflows for net working capital of $54.9 million and other current assets and liabilities of $8.1$13.7 million, andpartially offset by an increase in net working capital.income of $10.1 million.



Cash flows from investing activities. Cash flows used in investing activities increased $14.4$17.0 million in the first halfsix months of 20172018 compared with the prior-year same period. The increase was primarily due to higher cash outflows for capital expenditures of $26.7 million, offset by lower cash outflows for business acquisitions, net of $8.1 million, and lower proceeds from asset salescash acquired of $3.5 million,  which primarily consisted of the proceeds from a closed site in Australia during the six months ended June 30, 2016, and higher capital expenditures. $9.8 million.



Cash flows from financing activities. Cash flows provided by financing activities increased $37.1$20.6 million in the first halfsix months of 20172018 compared with the prior-year same period.    As further discussed in Note 8, during the sixthree months ended June 30, 2017,2018, we paid off our Previous Credit Facility and entered into our Amended Credit Facility, consisting of a $400$500 million secured revolving line of credit a $357.5and $820 million secured term loan facility and a €250 million secured euro term loan facility.  This transaction resulted in additional borrowings in the first six months of $48.1 million compared to the prior-year same period.facilities. Further, compared to the prior-year same period, net repayments under loans payable was $8.7 million higher.  Additionally, during the first halfpayment of 2017, we paid $12.9 million

36


Table of Contents

in debt issuance costs related to the Credit Facility entered into during the period, partiallydecreased $9.5 million, offset by lower purchasesthe purchase of treasury stock duringin the first halfsix months ended of 2017. $6.0 million.





Capital Resources and Liquidity

2017Amended Credit Facility

On February 14, 2017,April 25, 2018 the Company entered into a newan amendment (the “Amended Credit Facility”) to its existing credit facility (the “Credit Facility”) withwhich Amended Credit Facility (a) provided a groupnew revolving facility (the “2018 Revolving Facility”), which replaced the Company’s existing revolving facility, (b) repriced the (“Tranche B-1 Loans”), (c) provided new tranches of lenders to refinance its then outstandingterm loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars borrowed by the Company’s existing credit facility debt and to provide liquiditywill be used for ongoing working capital requirements and general corporate purposes. The (“Tranche B-2 Loans”) are borrowed by the Company and the (“Tranche B-3 Loans”) are borrowed on a joint and several basis by Ferro GmbH and Ferro Europe Holdings LLC.  

The Amended Credit Facility consists of a $400$500 million secured revolving line of credit with a termmaturity of five years,February 2023, a $357.5$355 million secured term loan facility with a termmaturity of seven years andFebruary 2024, a €250$235 million secured euro term loan facility with a maturity of February 2024 and a $230 million secured term loan facility with a maturity of seven years.February 2024. The term loans are payable in equal quarterly installments in an amount equal to 0.25% of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof.  In addition, the Company is required, on an annual basis, to make a prepayment of term loans until they are fully paid and then to the revolving loans in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Amended Credit Facility.Facility, which prepayment will be applied first to the term loans until they are paid in full, and then to the revolving loans.

Subject to the satisfaction of certain conditions, the Company can request additional commitments under the revolving line of credit or term loans in the aggregate principal amount of up to $250 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans and,loans. The Company can also raise certain additional debt or credit facilities subject to satisfaction of certain covenant levels.

Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Amended Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of certain of the Company’s U.S. subsidiaries and 65% of the stock of certain of the Company’s direct foreign subsidiaries.   The Tranche B-3 Loans are guaranteed by the Company, the U.S. subsidiary guarantors and a cross-guaranty by the borrowers of the Tranche B-3 Loans, and are secured by the collateral securing the revolving loans and the other term loans, in addition to a pledge of the equity interests of Ferro GmbH.

Interest Rate – Term Loans:  The interest rates applicable to the U.S. term loans will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable margin. The 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% or (iv) 0.00%.  The applicable margin for base rate loans is 1.50%1.25%.

·

The LIBOR rate for U.S. term loans shall not be less than 0.75%0.0% and the applicable margin for LIBOR rate U.S. term loans is 2.50%2.25%.

41


·

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

·

For LIBOR rate term loans and EURIBOR rate term loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate or EURIBOR rate, as applicable, for the corresponding duration.

At June 30, 2017,2018, the Company had borrowed $356.6$354.1 million under the secured term loan facilityTranche B-1 Loans at an interest rate of 3.73% and €249.44.58%, $234.4 million under the secured euro term loan facilityTranche B-2 Loans at an interest rate of 2.75%4.58%, and $229.4 million under the Tranche B-3 Loans at an interest rate of 4.58%. At June 30, 2017,2018, there were no additional borrowings available under the term loan facilities.Tranche B-1 Loans, Tranche B-2 Loans and Tranche B-3 Loans.

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% or (iv) 0.00%.  The applicable margin for base rate loans will vary between 0.75% and 1.75%0.50% to 1.50%.

37


Table of Contents

·

The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.75%1.50% and 2.75%2.50%.

·

For LIBOR rate revolving loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.

At June 30, 2017,2018, there were no$0.6 million borrowings under the revolving credit line.line at an interest rate of 4.09%. After reductions for outstanding letters of credit secured by these facilities, we had $395.3$494.8 million of additional borrowings available under the revolving credit facilities at June 30, 2017.2018.

The Amended Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Amended Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.

Specific to the revolving credit facility,2018 Revolving Facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Amended Credit AgreementFacility agreement may be accelerated and become immediately due and payable. At June 30, 2017,2018, we were in compliance with the covenants of the Amended 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 precious metals from financial institutions under consignment agreements. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign and the period of consignment. These fees were $0.3$0.4 million and $0.2$0.3 million for the three months ended June 30, 2018 and 2017 and 2016.respectively.  We had on hand precious metals owned by participants in our precious metals program of $33.4$44.1 million at June 30, 2017,2018, and $28.7$37.7 million at December 31, 2016,2017, measured at fair value based on market prices for identical assets and net of credits.assets.  

The consignment agreements under our precious metals program involve short-term commitments that typically mature within 30 to 90 days of each transaction and are typically renewed on an ongoing basis. As a result, the Company relies on the continued willingness of financial institutions to participate in these arrangements to maintain this source of liquidity. On occasion, we have been required to deliver cash collateral. While no deposits were outstanding at June 30, 2017,2018, or December 31, 2016,2017,  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. 

42


Table of Contents

At June 30, 2017,2018, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $7.18.1 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 $63.3$43.3 million and $7.3$64.5 million at June 30, 2017,2018, and December 31, 2016,2017, respectively. We had $40.4$21.1 million and $6.7$39.4 million of additional borrowings available under these lines at June 30, 2017,2018, and December 31, 2016,2017, 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, 2017,2018,  we had $78.9$44.9 million of cash and cash equivalents. 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.

38


Table of Contents

Our liquidity requirements and uses primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures, acquisition costs, capital investments, precious metals cash collateral requirements, and postretirement obligations. We expect to meet these requirements in the long term through cash provided by operating activities and availability under existing credit facilities or other financing arrangements. Cash flows from(used in) provided by operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. We had additional borrowing capacity of $435.7$515.9 million at June 30, 2017,2018, and $112.0$356.7 million at December 31, 2016,2017, available under our various credit facilities, primarily our revolving credit facility. 

We have signed definitive acquisition agreements (subject to customary closing conditions) in July 2018 with purchase prices in the aggregate amount of approximately $70 million.

Our revolving credit facility subjects us to a customary financial covenant regarding the Company’s maximum leverage ratio. This covenant under our credit facilityCredit Facility restricts the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.

As of June 30, 2017,2018,  we were in compliance with our maximum leverage ratio covenant of 4.25x as our actual ratio was 2.63x,2.86x, providing $85.6$92.1 million of EBITDA cushion on the leverage ratio, as defined within the Amended Credit Facility. To the extent that economic conditions in key markets deteriorate or we are unable to meet our business projections and EBITDA falls below approximately $130$189 million for rolling four quarters, based on reasonably consistent net debt levels with those as of March 31, 2017,June 30, 2018, we could become unable to maintain compliance with our leverage ratio covenant. In such case, our lenders could demand immediate payment of outstanding amounts and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all.    

Difficulties experienced in global capital markets could affect the ability or willingness of counterparties to perform under our various lines of credit, forward contracts, and precious metals program. These counterparties are major, reputable, multinational institutions, all having investment-grade credit ratings. Accordingly, we do not anticipate counterparty default. However, an interruption in access to external financing could adversely affect our business prospects and financial condition.

We assess on an ongoing basis our portfolio of businesses, as well as our financial and capital structure, to ensure that we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate the possible divestiture of businesses that are not critical to our core strategic objectives and, where appropriate, pursue the sale of such businesses and assets. We also evaluate and pursue acquisition opportunities that we believe will enhance our strategic position. Generally, we publicly announce divestiture and acquisition transactions only when we have entered into a material definitive agreement or closed on those transactions.



43


Table of Contents

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, 2016.2017.

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, 2016.2017.





 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk



The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to instruments that are sensitive to fluctuations in interest rates and foreign currency exchange rates, and costs of raw materials and energy.rates.

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. To reduce our exposure to interest rate changes on variable rate debt, we entered into interest rate swap agreements. These swaps effectively convert a portion of our variable rate debt to a fixed rate. Our objective is to limit variability in earnings, cash flows and overall borrowing costs caused by changes in interest rates, while preserving operating flexibility.

We operate internationally and enter into transactions denominated in foreign currencies. These transactions expose us to gains and losses arising from exchange rate movements between the dates foreign currencies are recorded and the dates they are settled. We manage this risk by entering into forward currency contracts 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 in the table below.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

2017

 

2016

 

2018

 

2017

 

(Dollars in thousands)

 

(Dollars in thousands)

Variable-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

647,971 

 

$

562,537 

 

$

829,739 

 

$

739,602 

Fair value

 

 

648,130 

 

 

581,893 

 

 

824,535 

 

 

742,634 

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

 

 

6,561 

 

 

5,611 

Increase in annual interest expense from 1% increase in interest rates

 

 

2,864 

 

 

4,890 

Decrease in annual interest expense from 1% decrease in interest rates

 

 

(2,864)

 

 

(2,992)

Fixed-rate debt:

 

 

 

 

 

 

 

 

 

 

 

 

Carrying amount

 

 

7,727 

 

 

8,228 

 

 

6,590 

 

 

7,112 

Fair value

 

 

6,870 

 

 

7,315 

 

 

4,073 

 

 

3,973 

Change in fair value from 1% increase in interest rates

 

 

NM

 

 

NM

Change in fair value from 1% decrease in interest rates

 

 

NM

 

 

NM

Interest rate swaps:

 

 

 

 

 

 

Notional amount

 

 

319,200 

 

 

258,045 

Carrying amount and fair value

 

 

(1,610)

 

 

1,492 

Change in fair value from 1% increase in interest rates

 

 

14,104 

 

 

9,157 

Change in fair value from 1% decrease in interest rates

 

 

(16,303)

 

 

(3,678)

Cross currency swaps:

 

 

 

 

 

 

Notional amount

 

 

346,631 

 

 

 —

Carrying amount and fair value

 

 

10,820 

 

 

 —

Change in fair value from 1% increase in interest rates

 

 

NM

 

 

NM

 

 

24,404 

 

 

 —

Change in fair value from 1% decrease in interest rates

 

 

NM

 

 

NM

 

 

(53,873)

 

 

 —

Foreign currency forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Notional amount

 

 

192,469 

 

 

338,186 

 

 

345,262 

 

 

238,457 

Carrying amount and fair value

 

 

(1,188)

 

 

350 

 

 

2,860 

 

 

(469)

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

 

 

4,266 

 

 

15,589 

 

 

13,366 

 

 

3,541 

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

 

 

(5,214)

 

 

(19,054)

 

 

(16,340)

 

 

(4,328)































































 

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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Ferro is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) of the Exchange Act, Ferro has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of June 30, 2017,2018, 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, 2017.2018.

Changes in Internal Control over Financial Reporting

During the second quarter of 2017,2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





 

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

ThereIn November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane.  The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are various lawsuitsliable for unspecified costs of cleanup and remediation of the water supply, among other damages.  The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to liability for the plaintiff’s claims, pending againstand is vigorously defending this proceeding.  In March 2018, the defendants, including the Company, filed a motion to dismiss the complaint, which was heard by the court in June 2018.  The Company currently does not expect the outcome of this proceeding to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage.  However, it is not possible to predict the ultimate outcome of this proceeding due to the unpredictable nature of litigation.

In addition to the proceeding described above, the Company and its consolidated subsidiaries.subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses.  The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.  We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.

Item 1A.  Risk Factors

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, 2016.2017.

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 Amended 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, 2017:2018:





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)

April 1, 2017 to April 30, 2017

 —

$

 —

 —

$

50,000,000 

May 1, 2017 to May 31, 2017

 —

$

 —

 —

$

50,000,000 

June 1, 2017 to June 30, 2017

 —

$

 —

 —

$

50,000,000 

Total

 —

 —



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

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)

April 1, 2018 to April 30, 2018

 

 —

 

$

 —

 

 —

 

$

50,000,000 

May 1, 2018 to May 31, 2018

 

 —

 

$

 —

 

 —

 

$

50,000,000 

June 1, 2018 to June 30, 2018

 

287,257 

 

$

20.94 

 

6,013,799 

 

$

43,986,201 

Total

 

 —

 

 

 

 

 —

 

 

 

__________________________





Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

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Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

The exhibits listed in the attached Exhibit Index are the exhibits required by Item 601 of Regulation S-K.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.







 

 

 

 



 

FERRO CORPORATION

(Registrant)



 

 

Date:

July 26, 201725, 2018

 



 

/s/ Peter T. Thomas



 

Peter T. Thomas



 

Chairman, President and Chief Executive Officer

(Principal Executive Officer)



 

 

Date:

July 26, 201725, 2018

 



 

/s/ Benjamin J. Schlater



 

Benjamin J. Schlater



 

Vice President and Chief Financial Officer

(Principal Financial Officer)







 

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EXHIBIT INDEX



The following exhibits are filed with this report or are incorporated here by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934.



Exhibit:



 

2

Plan of acquisition, reorganization, arrangement, liquidation or succession

2.1

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

3

Articles of incorporation and by-laws:

3.1

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

3.2

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

3.3

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

3.4

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed on October 14,17, 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 December 12, 2016.)

4

Instruments defining rights of security holders, including indentures:

4.1

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

4.2

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

4.3

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

4.4

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

4.5

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



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

10.1

Credit Agreement,First Amendment, dated as of February 14, 2017,April 25, 2018, to Credit Agreement among Ferro Corporation, the lenders party thereto,Ferro GmbH and Ferro Europe Holding LLC, certain other subsidiaries of Ferro Corporation, PNC Bank, National Association, as the administrative agent, collateral agentAdministrative Agent, Collateral Agent and a letter of credit issuer,an Issuer, Deutsche Bank AG New York Branch, as the syndication agentSyndication Agent and as a letter of credit issuer,an Issuer, and the various financial institutions and other persons from time to time party theretoas lenders (incorporated by reference to Exhibit 10.1 to Ferro Corporation’s current Report on Form 8-K, filed February 17, 2017)April 27, 2018).

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.2018 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.110.1 to Ferro Corporation’s currentCurrent Report on Form 8K,8-K, 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.*May 7, 2018.



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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.

101

XBRL Documents:

101.INS

XBRL Instance Document

101.SCH

XBRL Schema Document

101.CAL

XBRL Calculation Linkbase Document

101.LAB

XBRL Labels Linkbase Document

101.PRE

XBRL Presentation Linkbase Document

101.DEF

XBRL Definition Linkbase Document

__________________________

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

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





4551