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 |
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)
(State or other jurisdiction of incorporation or organization) | 34-0217820 (I.R.S. Employer Identification No.) | |||
6060 Parkland Boulevard Suite 250 Mayfield Heights, OH (Address of principal executive offices) | 44124 (Zip Code) | |||
216-875-5600 (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒x NO ☐o
Indicate by check mark whether the registrant has submitted electronically 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 x NO o
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 |
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Non-accelerated |
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| Smaller |
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Emerging |
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If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐o NO ☒x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $1.00 | FOE | NYSE |
At OctoberMarch 31, 2017,2020, there were 83,857,28982,242,817 shares of Ferro Common Stock, par value $1.00, outstanding.
Page | ||
3 | ||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24 | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 32 | |
33 | ||
34 | ||
34 | ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 35 | |
35 | ||
35 | ||
35 | ||
| 35 | |
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Exhibit | ||
Exhibit | ||
Exhibit 32.1 | ||
Exhibit 32.2 |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands, except per share amounts) | 2020 | 2019 | ||||
Net sales | $ | 252,326 | $ | 263,382 | ||
Cost of sales | 171,588 | 185,523 | ||||
Gross profit | 80,738 | 77,859 | ||||
Selling, general and administrative expenses | 56,046 | 56,931 | ||||
Restructuring and impairment charges | 1,165 | 1,740 | ||||
Other expense (income): | ||||||
Interest expense | 5,530 | 6,295 | ||||
Interest earned | (254) | (811) | ||||
Foreign currency losses (gains), net | (1,315) | 1,964 | ||||
Miscellaneous expense (income), net | (1,463) | 46 | ||||
Income before income taxes | 21,029 | 11,694 | ||||
Income tax expense | 5,117 | 2,893 | ||||
Income from continuing operations | 15,912 | 8,801 | ||||
Income from discontinued operations, net of income taxes | 221 | 5,077 | ||||
Net income | 16,133 | 13,878 | ||||
Less: Net income attributable to noncontrolling interests | 10 | 274 | ||||
Net income attributable to Ferro Corporation common shareholders | $ | 16,123 | $ | 13,604 | ||
Earnings per share attributable to Ferro Corporation common shareholders: | ||||||
Basic earnings: | ||||||
Continuing operations | $ | 0.19 | $ | 0.10 | ||
Discontinued operations | — | 0.06 | ||||
$ | 0.19 | $ | 0.16 | |||
Diluted earnings: | ||||||
Continuing operations | $ | 0.19 | $ | 0.10 | ||
Discontinued operations | — | 0.06 | ||||
$ | 0.19 | $ | 0.16 |
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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| (Dollars in thousands, except per share amounts) | ||||||||||
Net sales |
| $ | 350,012 |
| $ | 288,527 |
| $ | 1,019,199 |
| $ | 863,955 |
Cost of sales |
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| 246,396 |
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| 199,546 |
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| 708,447 |
|
| 592,372 |
Gross profit |
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| 103,616 |
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| 88,981 |
|
| 310,752 |
|
| 271,583 |
Selling, general and administrative expenses |
|
| 65,485 |
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| 55,588 |
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| 186,957 |
|
| 166,105 |
Restructuring and impairment charges |
|
| 1,471 |
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| 26 |
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| 7,713 |
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| 1,694 |
Other expense (income): |
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Interest expense |
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| 7,248 |
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| 5,304 |
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| 19,921 |
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| 15,579 |
Interest earned |
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| (201) |
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| (214) |
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| (556) |
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| (414) |
Foreign currency losses, net |
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| 1,021 |
|
| 867 |
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| 5,575 |
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| 2,867 |
Loss on extinguishment of debt |
|
| — |
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| — |
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| 3,905 |
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| — |
Miscellaneous (income) expense, net |
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| (1,726) |
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| 705 |
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| (2,264) |
|
| (2,079) |
Income before income taxes |
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| 30,318 |
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| 26,705 |
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| 89,501 |
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| 87,831 |
Income tax expense |
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| 7,353 |
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| 6,157 |
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| 23,186 |
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| 22,659 |
Income from continuing operations |
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| 22,965 |
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| 20,548 |
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| 66,315 |
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| 65,172 |
Loss from discontinued operations, net of income taxes |
|
| — |
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| (29,222) |
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| — |
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| (64,464) |
Net income (loss) |
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| 22,965 |
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| (8,674) |
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| 66,315 |
|
| 708 |
Less: Net income attributable to noncontrolling interests |
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| 148 |
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| 210 |
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| 575 |
|
| 589 |
Net income (loss) attributable to Ferro Corporation common shareholders |
| $ | 22,817 |
| $ | (8,884) |
| $ | 65,740 |
| $ | 119 |
Earnings (loss) per share attributable to Ferro Corporation common shareholders: |
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Basic earnings (loss): |
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Continuing operations |
| $ | 0.27 |
| $ | 0.24 |
| $ | 0.79 |
| $ | 0.78 |
Discontinued operations |
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| — |
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| (0.35) |
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| — |
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| (0.77) |
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| $ | 0.27 |
| $ | (0.11) |
| $ | 0.79 |
| $ | 0.01 |
Diluted earnings (loss): |
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Continuing operations |
| $ | 0.27 |
| $ | 0.24 |
| $ | 0.77 |
| $ | 0.77 |
Discontinued operations |
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| — |
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| (0.35) |
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| — |
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| (0.77) |
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| $ | 0.27 |
| $ | (0.11) |
| $ | 0.77 |
| $ | — |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
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| (Dollars in thousands) | ||||||||||
Net income (loss) |
| $ | 22,965 |
| $ | (8,674) |
| $ | 66,315 |
| $ | 708 |
Other comprehensive income (loss), net of income tax: |
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Foreign currency translation (loss) income |
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| (2,996) |
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| 2,680 |
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| 18,081 |
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| (2,267) |
Cash flow hedging instruments, unrealized gain |
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| 104 |
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| — |
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| 104 |
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| — |
Postretirement benefit liabilities (loss) gain |
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| (33) |
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| (2) |
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| (21) |
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| 293 |
Other comprehensive (loss) income, net of income tax |
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| (2,925) |
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| 2,678 |
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| 18,164 |
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| (1,974) |
Total comprehensive income (loss) |
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| 20,040 |
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| (5,996) |
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| 84,479 |
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| (1,266) |
Less: Comprehensive income attributable to noncontrolling interests |
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| 294 |
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| 191 |
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| 837 |
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| 450 |
Comprehensive income (loss) attributable to Ferro Corporation |
| $ | 19,746 |
| $ | (6,187) |
| $ | 83,642 |
| $ | (1,716) |
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||
Net income | $ | 16,133 | $ | 13,878 | ||
Other comprehensive income (loss), net of income tax: | ||||||
Foreign currency translation income (loss) | (18,366) | 3,508 | ||||
Cash flow hedging instruments, unrealized loss | (9,040) | (4,314) | ||||
Other comprehensive loss, net of income tax | (27,406) | (806) | ||||
Total comprehensive income (loss) | (11,273) | 13,072 | ||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | (84) | 380 | ||||
Comprehensive income (loss) attributable to Ferro Corporation | $ | (11,189) | $ | 12,692 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
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| September 30, |
| December 31, | March 31, | December 31, | ||||||
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| 2017 |
| 2016 | ||||||||
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| (Dollars in thousands) | ||||||||||
(Dollars in thousands) | 2020 | 2019 | ||||||||||
ASSETS | ASSETS | ASSETS | ||||||||||
Current assets |
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Cash and cash equivalents |
| $ | 52,211 |
| $ | 45,582 | $ | 43,018 | $ | 96,202 | ||
Accounts receivable, net |
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| 337,887 |
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| 259,687 | 150,639 | 139,333 | ||||
Inventories |
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| 286,848 |
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| 229,847 | 266,275 | 264,476 | ||||
Other receivables |
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| 50,057 |
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| 37,814 | 63,777 | 69,365 | ||||
Other current assets |
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| 19,533 |
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| 9,087 | 16,838 | 22,373 | ||||
Current assets held-for-sale | 289,325 | 291,420 | ||||||||||
Total current assets |
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| 746,536 |
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| 582,017 | 829,872 | 883,169 | ||||
Other assets |
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Property, plant and equipment, net |
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| 288,774 |
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| 262,026 | 295,899 | 302,249 | ||||
Goodwill |
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| 197,819 |
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| 148,296 | 170,778 | 172,209 | ||||
Intangible assets, net |
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| 190,985 |
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| 137,850 | 124,120 | 127,815 | ||||
Deferred income taxes |
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| 106,081 |
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| 106,454 | 100,391 | 98,714 | ||||
Operating leased assets | 17,294 | 20,088 | ||||||||||
Other non-current assets |
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| 45,472 |
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| 47,126 | 78,302 | 72,023 | ||||
Non-current assets held-for-sale | 155,313 | 158,354 | ||||||||||
Total assets |
| $ | 1,575,667 |
| $ | 1,283,769 | $ | 1,771,969 | $ | 1,834,621 | ||
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | ||||||||||
Current liabilities |
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Loans payable and current portion of long-term debt |
| $ | 18,477 |
| $ | 17,310 | $ | 8,730 | $ | 8,703 | ||
Accounts payable |
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| 155,542 |
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| 127,655 | 105,093 | 138,799 | ||||
Accrued payrolls |
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| 40,950 |
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| 35,859 | 27,697 | 27,447 | ||||
Accrued expenses and other current liabilities |
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| 85,927 |
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| 65,203 | 71,661 | 73,016 | ||||
Current liabilities held-for-sale | 122,366 | 133,780 | ||||||||||
Total current liabilities |
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| 300,896 |
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| 246,027 | 335,547 | 381,745 | ||||
Other liabilities |
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Long-term debt, less current portion |
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| 673,464 |
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| 557,175 | 797,017 | 798,862 | ||||
Postretirement and pension liabilities |
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| 170,199 |
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| 162,941 | 168,216 | 174,021 | ||||
Operating leased non-current liabilities | 11,973 | 14,474 | ||||||||||
Other non-current liabilities |
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| 83,995 |
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| 62,594 | 60,058 | 56,976 | ||||
Non-current liabilities held-for-sale | 37,620 | 38,341 | ||||||||||
Total liabilities |
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| 1,228,554 |
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| 1,028,737 | 1,410,431 | 1,464,419 | ||||
Equity |
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Ferro Corporation shareholders’ equity: |
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Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 83.8 million and 83.4 million shares outstanding at September 30, 2017, and December 31, 2016, respectively |
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| 93,436 |
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| 93,436 | ||||||
Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 82.2 million and 82.0 million shares outstanding at March 31, 2020, and December 31, 2019, respectively | 93,436 | 93,436 | ||||||||||
Paid-in capital |
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| 303,428 |
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| 306,566 | 291,820 | 294,543 | ||||
Retained earnings |
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| 180,430 |
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| 114,690 | 278,139 | 262,016 | ||||
Accumulated other comprehensive loss |
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| (88,741) |
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| (106,643) | (136,688) | (109,376) | ||||
Common shares in treasury, at cost |
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| (151,900) |
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| (160,936) | (174,911) | (180,243) | ||||
Total Ferro Corporation shareholders’ equity |
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| 336,653 |
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| 247,113 | 351,796 | 360,376 | ||||
Noncontrolling interests |
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| 10,460 |
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| 7,919 | 9,742 | 9,826 | ||||
Total equity |
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| 347,113 |
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| 255,032 | 361,538 | 370,202 | ||||
Total liabilities and equity |
| $ | 1,575,667 |
| $ | 1,283,769 | $ | 1,771,969 | $ | 1,834,621 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
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| Ferro Corporation Shareholders |
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| Common Shares |
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| Accumulated |
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| in Treasury |
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| Other |
| Non- |
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| Common |
| Paid-in |
| Retained |
| Comprehensive |
| controlling |
| Total | ||||||
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| Shares |
| Amount |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Interests |
| Equity | |||||||
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| (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 |
| — |
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| — |
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| — |
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| — |
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| 119 |
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| — |
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| 589 |
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| 708 |
Other comprehensive (loss) |
| — |
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| — |
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| — |
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| — |
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| — |
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| (1,835) |
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| (139) |
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| (1,974) |
Purchase of treasury stock |
| 1,175 |
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| (11,429) |
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| — |
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| — |
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| — |
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| — |
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| — |
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| (11,429) |
Stock-based compensation transactions |
| (556) |
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| 15,095 |
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| — |
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| (10,015) |
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| — |
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| — |
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| — |
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| 5,080 |
Distributions to noncontrolling interests |
| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| (502) |
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| (502) |
Balances at September 30, 2016 |
| 10,050 |
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| (162,354) |
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| 93,436 |
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| 304,839 |
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| 135,626 |
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| (63,153) |
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| 7,770 |
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| 316,164 |
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Balances at December 31, 2016 |
| 9,996 |
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| (160,936) |
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| 93,436 |
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| 306,566 |
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| 114,690 |
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| (106,643) |
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| 7,919 |
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| 255,032 |
Net income |
| — |
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| — |
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| — |
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| — |
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| 65,740 |
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| — |
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| 575 |
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| 66,315 |
Other comprehensive income |
| — |
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| — |
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| — |
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| — |
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| — |
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| 17,902 |
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| 262 |
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| 18,164 |
Stock-based compensation transactions |
| (359) |
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| 9,036 |
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| — |
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| (3,138) |
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| — |
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| — |
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| — |
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| 5,898 |
Change in ownership interest |
| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| 2,178 |
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| 2,178 |
Distributions to noncontrolling interests |
| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| (474) |
|
| (474) |
Balances at September 30, 2017 |
| 9,637 |
| $ | (151,900) |
| $ | 93,436 |
| $ | 303,428 |
| $ | 180,430 |
| $ | (88,741) |
| $ | 10,460 |
| $ | 347,113 |
Ferro Corporation Shareholders | |||||||||||||||||||||||
Common Shares | Accumulated | ||||||||||||||||||||||
in Treasury | Other | Non- | |||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | controlling | Total | ||||||||||||||||||
(In thousands) | Shares | Amount | Stock | Capital | Earnings | Loss | Interests | Equity | |||||||||||||||
Balances at December 31, 2019 | 11,431 | $ | (180,243) | $ | 93,436 | $ | 294,543 | $ | 262,016 | $ | (109,376) | $ | 9,826 | $ | 370,202 | ||||||||
Net income | — | — | — | — | 16,123 | — | 10 | 16,133 | |||||||||||||||
Other comprehensive loss | — | — | — | — | — | (27,312) | (94) | (27,406) | |||||||||||||||
Stock-based compensation transactions | (238) | 5,332 | — | (2,723) | — | — | — | 2,609 | |||||||||||||||
Balances at March 31, 2020 | 11,193 | $ | (174,911) | $ | 93,436 | $ | 291,820 | $ | 278,139 | $ | (136,688) | $ | 9,742 | $ | 361,538 |
Ferro Corporation Shareholders | |||||||||||||||||||||||
Common Shares | Accumulated | ||||||||||||||||||||||
in Treasury | Other | Non- | |||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | controlling | Total | ||||||||||||||||||
(In thousands) | Shares | Amount | Stock | Capital | Earnings | Loss | Interests | Equity | |||||||||||||||
Balances at December 31, 2018 | 10,433 | $ | (165,545) | $ | 93,436 | $ | 298,123 | $ | 255,978 | $ | (105,361) | $ | 9,218 | $ | 385,849 | ||||||||
Net income | — | — | — | — | 13,604 | — | 274 | 13,878 | |||||||||||||||
Other comprehensive income (loss) | — | — | — | — | — | (912) | 106 | (806) | |||||||||||||||
Purchase of treasury stock | 1,441 | (25,000) | — | — | — | — | — | (25,000) | |||||||||||||||
Stock-based compensation transactions | (370) | 8,422 | — | (6,446) | — | — | — | 1,976 | |||||||||||||||
Balances at March 31, 2019 | 11,504 | $ | (182,123) | $ | 93,436 | $ | 291,677 | $ | 269,582 | $ | (106,273) | $ | 9,598 | $ | 375,897 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
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| Nine Months Ended | ||||
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| September 30, | ||||
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| 2017 |
| 2016 | ||
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| (Dollars in thousands) | ||||
Cash flows from operating activities |
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Net cash provided by operating activities |
| $ | 34,691 |
| $ | 6,742 |
Cash flows from investing activities |
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Capital expenditures for property, plant and equipment and other long lived assets |
|
| (30,134) |
|
| (18,217) |
Proceeds from sale of assets |
|
| — |
|
| 3,598 |
Proceeds from sale of equity method investment |
|
| 2,268 |
|
| — |
Business acquisitions, net of cash acquired |
|
| (71,930) |
|
| (11,417) |
Other investing |
|
| 551 |
|
| — |
Net cash used in investing activities |
|
| (99,245) |
|
| (26,036) |
Cash flows from financing activities |
|
|
|
|
|
|
Net (repayments) borrowings under loans payable |
|
| (10,803) |
|
| 2,606 |
Proceeds from revolving credit facility, maturing 2019 |
|
| 15,628 |
|
| 212,906 |
Principal payments on revolving credit facility, maturing 2019 |
|
| (327,183) |
|
| (149,696) |
Proceeds from term loan facility, maturing 2024 |
|
| 623,827 |
|
| — |
Principal payments on term loan facility, maturing 2024 |
|
| (3,232) |
|
| — |
Principal payments on term loan facility, maturing 2021 |
|
| (243,250) |
|
| (52,250) |
Proceeds from revolving credit facility, maturing 2022 |
|
| 69,787 |
|
| — |
Principal payments on revolving credit facility, maturing 2022 |
|
| (42,400) |
|
| — |
Principal payments on other long-term debt |
|
| (2,978) |
|
| — |
Proceeds from other long-term debt |
|
| 2,700 |
|
| — |
Payment of debt issuance costs |
|
| (12,927) |
|
| (661) |
Acquisition related contingent consideration payment |
|
| (1,315) |
|
| — |
Purchase of treasury stock |
|
| — |
|
| (11,429) |
Other financing activities |
|
| 182 |
|
| 416 |
Net cash provided by financing activities |
|
| 68,036 |
|
| 1,892 |
Effect of exchange rate changes on cash and cash equivalents |
|
| 3,147 |
|
| (422) |
Increase (decrease) in cash and cash equivalents |
|
| 6,629 |
|
| (17,824) |
Cash and cash equivalents at beginning of period |
|
| 45,582 |
|
| 58,380 |
Cash and cash equivalents at end of period |
| $ | 52,211 |
| $ | 40,556 |
Cash paid during the period for: |
|
|
|
|
|
|
Interest |
| $ | 20,594 |
| $ | 15,032 |
Income taxes |
| $ | 16,619 |
| $ | 12,929 |
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||
Cash flows from operating activities | ||||||
Net cash used in operating activities | $ | (71,535) | $ | (67,527) | ||
Cash flows from investing activities | ||||||
Capital expenditures for property, plant and equipment and other long-lived assets | (8,316) | (23,326) | ||||
Collections of financing receivables | 28,827 | 20,186 | ||||
Business acquisitions, net of cash acquired | — | (251) | ||||
Other investing activities | 745 | — | ||||
Net cash provided by (used in) investing activities | 21,256 | (3,391) | ||||
Cash flows from financing activities | ||||||
Net borrowings under loans payable | 137 | 33 | ||||
Principal payments on term loan facility - Amended Credit Facility | (2,050) | (2,050) | ||||
Proceeds from revolving credit facility - Amended Credit Facility | 180,000 | 104,174 | ||||
Principal payments on revolving credit facility - Amended Credit Facility | (180,000) | (52,866) | ||||
Purchase of treasury stock | — | (25,000) | ||||
Other financing activities | 216 | (414) | ||||
Net cash provided by (used in) financing activities | (1,697) | 23,877 | ||||
Effect of exchange rate changes on cash and cash equivalents | (1,208) | 377 | ||||
Decrease in cash and cash equivalents | (53,184) | (46,664) | ||||
Cash and cash equivalents at beginning of period | 104,402 | 104,301 | ||||
Cash and cash equivalents at end of period | 51,218 | 57,637 | ||||
Less: Cash and cash equivalents of discontinued operations at end of period | 8,200 | 8,200 | ||||
Cash and cash equivalents of continuing operations at end of period | $ | 43,018 | $ | 49,437 | ||
Cash paid during the period for: | ||||||
Interest | $ | 7,853 | $ | 8,232 | ||
Income taxes | $ | 4,431 | $ | 3,940 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
As discussed in Note 3,We produce our products primarily in the third quarter of 2016, we completedEurope, Middle East and Africa (“EMEA”) region, the disposition ofUnited States (“U.S.”), 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 nine months ended September 30, 2016.Latin America.
During the first quarter of 2017, the Company renamed the Pigments, Powders and Oxides segment “Color Solutions.”
Operating results for the three and nine months ended September 30, 2017,March 31, 2020, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2017. 2020.
During the fourth quarter of 2019, substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets. As further discussed in Note 4, we entered into a definitive agreement to sell our Tile Coatings business which has historically been included in the Performance Coatings reportable segment. Therefore, the associated operating results, net of income tax, have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Throughout this Quarterly Report on Form 10-Q, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
Subsequent to the treatment of the Tile Coatings business as discontinued operations, the remaining businesses within Performance Coatings were included within the Performance Colors and Glass reportable segment, which as of January 1, 2020, was renamed Functional Coatings.
Certain reclassifications have been made to the prior year financial statements to conform to current year classifications. The reclassification relates to the balance sheet presentation of assets and liabilities as held for sale and statement of operations presentation of results classified as discontinued operations in relation to the Tile Coatings business transaction.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In March 2016,This section provides a description of new accounting pronouncements ("Accounting Standard Update" or "ASU") issued by the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation: (Topic 718): Improvementsthat are applicable to Employee Share-Based Payment Accounting. ASU 2016-09 is intended to simplify several aspectsthe Company.
The following ASUs were adopted as of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,January 1, 2020 and classification on the statement of cash flows. This new guidance requires all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled. Cash flow related to excess tax benefits will no longer be classified asdid 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 award 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 award 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. consolidated financial statements:
NewAccounting Standards
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 provides guidance to better 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.��This pronouncement is effective for fiscal years beginning after December 15, 2018, including interim
Standard | Description | |
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, issued December, 2019 | Simplifies the accounting for income taxes by removing certain exceptions and by: altering the recognition of franchise tax partially based on income; requiring evaluation of proper treatment of a step up in the tax basis of goodwill; specifying requirements regarding the allocation of tax expense to a legal entity that is not subject to tax; requiring the effect of an enacted change in tax laws or rates be reflected in the annual effective tax rate computation in the interim period that includes the enactment date, and; other minor codification improvements. ASU 2019-12 was early adopted by the Company. | |
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, issued June 2016 | Changes the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of the financial asset. Additional disclosures are required regarding an entity’s assumptions, models and methods for estimating the expected credit loss. |
periods within those fiscal years. The Company is in the process of assessingNewAccounting Standards Not Yet Adopted
We are currently evaluating the impact that the adoption of this ASU will have on our consolidated financial statements.
In May 2017, the 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 15, 2017, including interim periods within those annual periods. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits: (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs. ASU 2017-07 requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered during the period. The other components of net benefit costs are to be presented in the income statement separately from the service costs component and outside a subtotal of income from operations. Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. This pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. 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 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 in evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. This pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory and requires the recognitionstatements of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This pronouncement is effective for 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.following ASUs:
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow: (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 is intended to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. This pronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those 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 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, Revenue 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 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. We will adopt the new standard effective January 1, 2018, using the modified
9
Standard | Description | |
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, issued March, 2020 | Provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU are effective for all entities through December 31, 2022. | |
ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, issued August, 2018 | Modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for fiscal years beginning after December 15, 2020 and is to be applied using a retrospective approach for all periods presented. Early adoption is permitted. |
retrospective method. We are nearing completion of our assessment and review of specific contracts and we do not currently believe ASU 2014-09 will have a material effect on our consolidated financial statements.
No other new accounting pronouncements issued had, or are expected to have, a material impact ofon the Company’s consolidated financial statements.
3. Revenue
Revenues disaggregated by geography and reportable segment for the three months ended March 31, 2020, follow:
(Dollars in thousands) | EMEA | United States | Asia Pacific | Latin America | Total | ||||||||||
Functional Coatings | $ | 75,857 | $ | 46,694 | $ | 21,756 | $ | 11,128 | $ | 155,435 | |||||
Color Solutions | 37,889 | 41,159 | 9,296 | 8,547 | 96,891 | ||||||||||
Total net sales | $ | 113,746 | $ | 87,853 | $ | 31,052 | $ | 19,675 | $ | 252,326 |
Revenues disaggregated by geography and reportable segment for the three months ended March 31, 2019, follow:
(Dollars in thousands) | EMEA | United States | Asia Pacific | Latin America | Total | ||||||||||
Functional Coatings | $ | 78,265 | $ | 51,979 | $ | 22,898 | $ | 13,884 | $ | 167,026 | |||||
Color Solutions | 35,567 | 43,599 | 8,825 | 8,365 | 96,356 | ||||||||||
Total net sales | $ | 113,832 | $ | 95,578 | $ | 31,723 | $ | 22,249 | $ | 263,382 |
4. Discontinued Operations
During 2014, we commenced a process to market for salethe fourth quarter of 2019, substantially all of the assets and liabilities of our Europe-based Polymer Additives business. We determined that the criteria to classify these assetsTile Coatings business were classified as held-for-sale under ASC Topic 360, Property, Plant and Equipment, were met at that time. On August 22, 2016, we completedin the dispositionaccompanying consolidated balance sheets. We entered into a definitive agreement to sell our Tile Coatings business which has historically been a part of our Performance Coatings reportable segment. Therefore, the Europe-based Polymer Additives business to Plahoma Two AG, an affiliate of the LIVIA Group. The Company made a capital contribution of €12 million (approximately $13.6 million) to its subsidiaries that owned the assets prior to the close of the sale. In August 2016, prior to the sale, an impairment charge of $26.8 million was recorded under ASC Topic 360 Property, Plant and Equipment. The charge was calculated as the difference of the executed transaction price and the carrying value of the assets. The impairment charge included $1.1 million associated with the reclassification of foreign currency translation loss from Accumulated other comprehensive loss (Note 17). We have classified the Europe-based Polymer Additives operating results, net of income tax, have been classified as discontinued operations in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2016. all periods presented.
The table below summarizes results for the Europe-based Polymer Additives assets,Tile Coatings business for the three and nine months ended September 30, 2016,March 31, 2020 and 2019 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 eachthe business to consolidated net assets excluding debt.
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||
Net sales | $ | 114,750 | $ | 124,166 | ||
Cost of sales | 86,902 | 100,169 | ||||
Gross profit | 27,848 | 23,997 | ||||
Selling, general and administrative expenses | 18,808 | 15,149 | ||||
Restructuring and impairment charges | 279 | 387 | ||||
Interest expense | 2,231 | 2,989 | ||||
Interest earned | (24) | (15) | ||||
Foreign currency losses (gains), net | 5,765 | (1,226) | ||||
Miscellaneous expense, net | 542 | 229 | ||||
Income from discontinued operations before income taxes | 247 | 6,484 | ||||
Income tax expense | 26 | 1,407 | ||||
Income from discontinued operations, net of income taxes | 221 | 5,077 | ||||
Less: Net income (loss) attributable to noncontrolling interests | (23) | 105 | ||||
Net income attributable to Tile Coatings business | $ | 244 | $ | 4,972 |
The following table summarizes the assets and liabilities which are classified as held-for-sale at March 31, 2020 and December 31, 2019:
March 31, | December 31, | |||||
(Dollars in thousands) | 2020 | 2019 | ||||
Cash and cash equivalents | $ | 8,200 | $ | 8,200 | ||
Accounts receivable, net | 158,035 | 156,645 | ||||
Inventories | 98,502 | 101,127 | ||||
Other receivables | 21,747 | 22,442 | ||||
Other current assets | 2,841 | 3,006 | ||||
Current assets held-for-sale | 289,325 | 291,420 | ||||
Property, plant and equipment, net | 95,495 | 97,185 | ||||
Goodwill | 3 | 3 | ||||
Amortizable intangible assets, net | 39,293 | 39,692 | ||||
Deferred income taxes | 14,135 | 14,425 | ||||
Other non-current assets | 6,387 | 7,049 | ||||
Non-current assets held-for-sale | 155,313 | 158,354 | ||||
Total assets held-for-sale | $ | 444,638 | $ | 449,774 | ||
| ||||||
Loans payable and current portion of long-term debt | $ | 4,053 | $ | 3,678 | ||
Accounts payable | 84,719 | 96,998 | ||||
Accrued payrolls | 3,637 | 4,838 | ||||
Accrued expenses and other current liabilities | 29,957 | 28,266 | ||||
Current liabilities held-for-sale | 122,366 | 133,780 | ||||
Long-term debt, less current portion | 25,331 | 25,805 | ||||
Postretirement and pension liabilities | 7,629 | 7,473 | ||||
Other non-current liabilities | 4,660 | 5,063 | ||||
Non-current liabilities held-for-sale | 37,620 | 38,341 | ||||
Total liabilities held-for-sale | $ | 159,986 | $ | 172,121 |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||
| September 30, 2016 |
| September 30, 2016 | ||
| (Dollars in thousands) | ||||
Net sales | $ | 3,831 |
| $ | 18,481 |
Cost of sales |
| 5,654 |
|
| 28,473 |
Gross loss |
| (1,823) |
|
| (9,992) |
Selling, general and administrative expenses |
| 588 |
|
| 3,094 |
Restructuring and impairment charges |
| 26,843 |
|
| 50,902 |
Interest expense |
| 49 |
|
| 325 |
Miscellaneous income |
| (4) |
|
| (392) |
Loss from discontinued operations before income taxes |
| (29,299) |
|
| (63,921) |
Income tax (benefit) expense |
| (77) |
|
| 543 |
Loss from discontinued operations, net of income taxes | $ | (29,222) |
| $ | (64,464) |
4. Acquisitions
Dip Tech Ltd.
On August 2, 2017, the Company acquired 100% of the equity interests of Dip Tech Ltd. (“Dip-Tech”), a leading provider of digital printing solutions for glass coatings, for $77.3 million, excluding customary adjustments. Dip-Tech is headquartered in Kfar Saba, Israel. The fair value of the consideration transferred wasfollowing table summarizes cash paid at closing of $60.4 million and contingent consideration of $16.9 million. The Company incurred acquisition costsflow data relating to discontinued operations for the three and nine months ended September 30, 2017, of $2.1 million, which is included in Selling, generalMarch 31, 2020 and administrative expenses in our condensed consolidated statements of operations. The acquired business contributed net sales of $6.4 million for the three and nine months ended September 30, 2017, and net loss attributable to Ferro Corporation of $1.1 million for the three and nine months ended September 30, 2017. The net loss attributable to Ferro Corporation was driven by the amortization of inventory step up costs of $0.8 million and acquired intangible asset amortization2019:
10
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||
Depreciation | $ | — | $ | 2,927 | ||
Amortization of intangible assets | — | 798 | ||||
Capital expenditures | (1,147) | (4,982) | ||||
Non-cash investing activities - capital expenditures, consisting of unpaid capital expenditure liabilities at period end | 667 | 2,428 |
costs of $0.6 million for the three and nine months ended September 30, 2017. Dip-Tech incurred research and development costs of $1.1 million for the three and nine months ended September 30, 2017.
The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of September 30, 2017, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $46.3 million of amortizable intangible assets, $38.2 million of goodwill, $11.5 million of a deferred tax liability, $3.2 million of personal and real property and $1.1 million of net working capital on the condensed consolidated balance sheet.
Gardenia Quimica S.A.
On August 3, 2017, the Company acquired the majority interest in Gardenia Quimica S.A. (“Gardenia”) for $3.0 million. The Company previously owned 46% of Gardenia and recorded it as an equity method investment. In connection with this transaction, the Company now owns 83.5% and fully consolidates Gardenia. Due to a 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.
Smalti per Ceramiche, s.r.l
On April 24, 2017, the Company acquired 100% of the equity interests of S.P.C. Group s.r.l., and 100% of the equity interests of Smalti per Ceramiche, s.r.l. (“SPC”), for €17.9 million (approximately $19.4 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 Company incurred acquisition costs for the three and nine months ended September 30, 2017, of $0.1 million and $1.3 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. As of September 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, $5.9 million of amortizable intangible assets, $5.7 million of net working capital, $3.3 million of goodwill and $2.2 million of a deferred tax liability on the condensed consolidated balance sheet.
Cappelle Pigments NV
On December 9, 2016, the Company acquired 100% of the equity interests 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 (approximately $52.7 million), including the assumption of debt of €9.8 million. The acquired business contributed net sales of $17.8 million and $55.8 million for the three and nine months ended September 30, 2017, respectively, and net income attributable to Ferro Corporation of $1.2 million and $2.3 million for the three and nine months ended September 30, 2017, 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 September 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.
11
Electro-Science Laboratories, Inc.
On October 31, 2016, the Company acquired 100% of the equity interests 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 $10.5 million and $31.8 million for the three and nine months ended September 30, 2017, respectively, and net income attributable to Ferro Corporation of $1.2 million and $3.9 million for the three and nine months ended September 30, 2017, respectively. The Company incurred acquisition costs for the nine months ended September 30, 2017, of $0.3 million, 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 September 30, 2017, 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 million of net working capital, $2.9 million of personal and real property and $2.0 million of a deferred tax liability on the condensed consolidated balance sheet.
Delta Performance Products, LLC
On August 1, 2016, the Company acquired certain assets of Delta Performance Products, LLC, for a cash purchase price of $4.4 million. The information included herein has been prepared based on the 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 $3.2 million of amortizable intangible assets, $0.6 million of net working capital, $0.4 million of goodwill and $0.2 million of a deferred tax asset on the condensed consolidated balance sheet.
Pinturas Benicarló, S.L.
On June 1, 2016, the Company acquired 100% of the equity interests of privately held Pinturas Benicarló, S.L. (“Pinturas”) for €16.5 million in cash (approximately $18.4 million). The information included herein has been prepared based on the 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 million of personal and real property on the condensed consolidated balance sheet.
Ferer Dis Ticaret Ve Kimyasallar Anonim Sirketi A.S.
On January 5, 2016, the Company completed the purchase of 100% of the equity interests 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 million of amortizable intangible assets, $1.7 million of net working capital, $0.7 million of a deferred tax liability and $0.6 million of personal and real property on the condensed consolidated balance sheet.
12
5. Inventories
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| September 30, |
| December 31, | March 31, | December 31, | ||||||
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| 2017 |
| 2016 | ||||||||
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| (Dollars in thousands) | ||||||||||
(Dollars in thousands) | 2020 | 2019 | ||||||||||
Raw materials |
| $ | 92,387 |
| $ | 72,943 | $ | 78,501 | $ | 80,176 | ||
Work in process |
|
| 48,131 |
|
| 38,859 | 48,996 | 49,717 | ||||
Finished goods |
|
| 146,330 |
|
| 118,045 | 138,778 | 134,583 | ||||
Total inventories |
| $ | 286,848 |
| $ | 229,847 | $ | 266,275 | $ | 264,476 |
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 million and $0.2$1.1 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and were $0.8 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.2019. We had on-hand precious metals owned by participants in our precious metals consignment program of $36.3$68.8 million at September 30, 2017,March 31, 2020, and $28.7$66.2 million at December 31, 2016,2019, 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 $493.6$412.7 million at September 30, 2017,March 31, 2020 and $439.4$412.9 million at December 31, 2016. 2019. As discussed in Note 4, the assets of our Tile Coatings business were classified as held-for-sale under ASC Topic 360; Property, Plant, and Equipment. As such, additional accumulated depreciation of $135.3 million at March 31, 2020 and $137.6 million at December 31, 2019 were classified as Non-current assets held for sale.
Unpaid capital expenditure liabilities, which are non-cash investing activities, were $3.2$1.9 million at September 30, 2017,March 31, 2020 and $2.4$3.4 million at September 30, 2016. March 31, 2019.
We recorded a $3.9 million gain on sale of a closed site in Australia which was recorded in Miscellaneous (income) expense, net in our condensed consolidated statements of operations for the nine months ended September 30, 2016.
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. During the third quarter of 2016, prior to the sale, an impairment charge of $26.8 million, representing net working capital, was recorded under ASC Topic 360 Property, Plant and Equipment. The impairment charges of $26.8 million and $50.9 million are included in Loss from discontinued operations, net of income taxes in our condensed consolidated statements of operations for the three and nine months ended September 30, 2016, respectively.
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13
7. Goodwill and Other Intangible Assets
Details and activity in the Company’s goodwill by segment follow:
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| Performance |
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| Performance |
| Color |
| Colors and |
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| Coatings |
| Solutions |
| Glass |
| Total | ||||
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| (Dollars in thousands) | ||||||||||
Goodwill, net at December 31, 2016 |
| $ | 28,090 |
| $ | 40,421 |
| $ | 79,785 |
| $ | 148,296 |
Acquisitions |
|
| 4,145 | 2,4 |
| — |
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| 37,371 | 1,3 |
| 41,516 |
Foreign currency adjustments |
|
| 3,062 |
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| 1,582 |
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| 3,363 |
|
| 8,007 |
Goodwill, net at September 30, 2017 |
| $ | 35,297 |
| $ | 42,003 |
| $ | 120,519 |
| $ | 197,819 |
Functional | Color | ||||||||
(Dollars in thousands) | Coatings | Solutions | Total | ||||||
Goodwill, net at December 31, 2019 | $ | 121,902 | $ | 50,307 | $ | 172,209 | |||
Foreign currency adjustments | (1,049) | (382) | (1,431) | ||||||
Goodwill, net at March 31, 2020 | $ | 120,853 | $ | 49,925 | $ | 170,778 |
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March 31, | December 31, | |||||
(Dollars in thousands) | 2020 | 2019 | ||||
Goodwill, gross | $ | 229,245 | $ | 230,676 | ||
Accumulated impairment | (58,467) | (58,467) | ||||
Goodwill, net | $ | 170,778 | $ | 172,209 |
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| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
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| (Dollars in thousands) | ||||
Goodwill, gross |
| $ | 256,286 |
| $ | 206,763 |
Accumulated impairment losses |
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| (58,467) |
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| (58,467) |
Goodwill, net |
| $ | 197,819 |
| $ | 148,296 |
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 September 30, 2017,March 31, 2020, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.
Amortizable intangible assets consisted of the following:
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| September 30, |
| December 31, | March 31, | December 31, | ||||||
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| 2017 |
| 2016 | ||||||||
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| (Dollars in thousands) | ||||||||||
(Dollars in thousands) | 2020 | 2019 | ||||||||||
Gross amortizable intangible assets: |
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Patents |
| $ | 5,334 |
| $ | 5,147 | $ | 5,394 | $ | 5,434 | ||
Land rights |
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| 4,876 |
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| 4,746 | 2,931 | 2,900 | ||||
Technology/know-how and other |
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| 129,003 |
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| 84,837 | 112,894 | 112,940 | ||||
Customer relationships |
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| 92,678 |
|
| 80,153 | 65,618 | 66,454 | ||||
Total gross amortizable intangible assets |
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| 231,891 |
|
| 174,883 | 186,837 | 187,728 | ||||
Accumulated amortization: |
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| ||||||
Patents |
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| (5,228) |
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| (4,981) | (5,373) | (5,413) | ||||
Land rights |
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| (2,825) |
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| (2,698) | (1,449) | (1,378) | ||||
Technology/know-how and other |
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| (40,723) |
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| (34,775) | (53,411) | (50,973) | ||||
Customer relationships |
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| (9,204) |
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| (5,311) | (15,072) | (14,831) | ||||
Total accumulated amortization |
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| (57,980) |
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| (47,765) | (75,305) | (72,595) | ||||
Amortizable intangible assets, net |
| $ | 173,911 |
| $ | 127,118 | $ | 111,532 | $ | 115,133 |
Indefinite-lived intangible assets consisted of the following:
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| September 30, |
| December 31, | March 31, | December 31, | ||||||
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| 2017 |
| 2016 | ||||||||
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| (Dollars in thousands) | ||||||||||
(Dollars in thousands) | 2020 | 2019 | ||||||||||
Indefinite-lived intangibles assets: |
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Trade names and trademarks |
| $ | 17,074 |
| $ | 10,732 | $ | 12,588 | $ | 12,682 |
8. Debt
Loans payable and current portion of long-term debt consisted of the following:
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| September 30, |
| December 31, | ||
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| 2017 |
| 2016 | ||
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| (Dollars in thousands) | ||||
Loans payable |
| $ | 10,409 |
| $ | 11,452 |
Current portion of long-term debt |
|
| 8,068 |
|
| 5,858 |
Loans payable and current portion of long-term debt |
| $ | 18,477 |
| $ | 17,310 |
March 31, | December 31, | |||||
(Dollars in thousands) | 2020 | 2019 | ||||
Current portion of long-term debt | $ | 8,730 | $ | 8,703 | ||
Current portion of long-term debt | $ | 8,730 | $ | 8,703 |
Long-term debt consisted of the following:
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| September 30, |
| December 31, | March 31, | December 31, | ||||||
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| 2017 |
| 2016 | ||||||||
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| (Dollars in thousands) | ||||||||||
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Term loan facility, net of unamortized issuance costs, maturing 2021(1) |
| $ | — |
| $ | 239,530 | ||||||
Term loan facility, net of unamortized issuance costs, maturing 2024(2) |
|
| 641,842 |
|
| — | ||||||
Revolving credit facility, maturing 2019 |
|
| — |
|
| 311,555 | ||||||
Revolving credit facility, maturing 2022 |
|
| 27,387 |
|
| — | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||||||||
Term loan facility, net of unamortized issuance costs, maturing 2024(1) | $ | 799,950 | $ | 801,764 | ||||||||
Capital lease obligations |
|
| 5,292 |
|
| 3,720 | 2,315 | 2,305 | ||||
Other notes |
|
| 7,011 |
|
| 8,228 | 3,482 | 3,496 | ||||
Total long-term debt |
|
| 681,532 |
|
| 563,033 | 805,747 | 807,565 | ||||
Current portion of long-term debt |
|
| (8,068) |
|
| (5,858) | (8,730) | (8,703) | ||||
Long-term debt, less current portion |
| $ | 673,464 |
| $ | 557,175 | $ | 797,017 | $ | 798,862 |
15
(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 $7.7 million.$3.7 million at March 31, 2020, and $3.9 million at December 31, 2019.
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”), and (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars. The Amended Credit Facility will be used for ongoing working capital requirements and general corporate purposes. The Tranche B-2 Loans are borrowed by the Company and the Tranche B-3 Loans are borrowed on 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 14, 2023, a $300$355 million secured term loan facility with a termmaturity of seven years from the original issuance date (the “Previous Credit Facility”) with 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 recorded2024, 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 nine months ended September 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 14, 2024 and a €250$230 million secured euro term loan facility with a termmaturity of seven years.February 14, 2024. The term loans are payable in equal quarterly installments in an amount equal to 0.25% of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof. In addition, the Company is required, on an annual basis, to make a prepayment 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 Eurobase rate for term loans will be a Euro Interbank Offered Rate (“EURIBOR”)the highest of (i) the federal funds rate plus an0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin.margin for base rate loans is 1.25%.
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The LIBOR rate for term loans shall not be less than 0.0% and the applicable margin for LIBOR rate term loans is 2.25%.
For LIBOR rate term loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
At September 30, 2017,March 31, 2020, the Company had borrowed $355.7$347.9 million under the secured term loan facilityTranche B-1 Loans at an interest rate of 3.73% and €248.83.70%, $230.3 million under the secured euro term loan facilityTranche B-2 Loans at an interest rate of 2.75%3.70%, and $225.4 million under the Tranche B-3 Loans at an interest rate of 3.70%. At September 30, 2017,March 31, 2020, there were no0 additional borrowings available under the term loan facilities. WeTranche B-1 Loans, Tranche B-2 Loans, or Tranche B-3 Loans. In connection with these borrowings, we entered into interest rate swap agreements in the second quarter of 2017. These
16
swaps converted $150 million and €90 million of our term loans from variable interest rates to fixed interest rates.2018. At September 30, 2017,March 31, 2020, the effective interest rate for the term loan facilitiesTranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans, after adjusting for the interest rate swap, was 4.27% for the secured term loan facility5.05%, 2.74%, and 3.00% for the euro term loan facility.2.48%, respectively.
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the revolving credit line2018 Revolving Credit Facility will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding (as defined in the Amended Credit Agreement) at such time to (b) the Company’s consolidated EBITDA (as defined in the Amended Credit Agreement) computed for the period of four consecutive fiscal quarters most recently ended.
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The base rate for revolving loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans will vary between 0.50% to 1.50%.
The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.50% and 2.50%.
For LIBOR rate revolving loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
At September 30, 2017,March 31, 2020, there were $27.4 million0 borrowings under the revolving credit line at an interest rate of 3.48%.2018 Revolving Credit Facility. After reductions for outstanding letters of credit secured by these facilities, we had $367.9$495.8 million of additional borrowings available under the revolving credit facilities at September 30, 2017.March 31, 2020.
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 September 30, 2017,March 31, 2020, we were in compliance with the covenants of the Amended Credit Facility.
Credit Facility
On February 14, 2017, the Company entered into 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 further discussion of the Company’s Credit Facility, refer to Note 9 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
International Receivable Sales Programs
We have several international programs to sell without recourse trade accounts receivable to financial institutions. These transactions are treated as a sale and are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. The Company continues to service the receivables sold in exchange for a fee. The servicing fee for the three months ended March 31, 2020, was immaterial. The program, whose maximum capacity is €100 million, is scheduled to expire in December 31, 2023. Generally, at the transfer date, the Company receives cash equal to approximately 65% of the value of the sold receivable. Cash proceeds at the transfer date from these arrangements are reflected in operating activities in our consolidated statement of cash flows. The proceeds from the deferred purchase price are reflected in investing activities.
The outstanding principal amount of receivables sold under this program was $20.9 million at March 31, 2020 and $19.3 million at December 31, 2019. The carrying amount of deferred purchase price was $7.4 million at March 31, 2020 and $6.6 million at December 31, 2019 and is recorded in Other receivables. Trade accounts receivable collected to be remitted were $12.8 million at March 31, 2020 and December 31, 2019 and is recorded in Accrued expenses and other current liabilities. As discussed in Note 4, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business. As such, our Tile Coatings business was classified as held-for-sale. At March 31, 2020 and December 31, 2019, $48.2 million and $52.6 million, respectively, of the outstanding principal amount of receivables sold under this program pertained to the Tile Coatings business. The carrying amount of the deferred purchase price at March 31, 2020 and December 31, 2019 was $20.6 million and $20.5 million, respectively. Both are recorded in Current assets held-for-sale in our consolidated balance sheets.
Activity from these programs for the three months ended March 31, 2020 and 2019 is detailed below:
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||
Trade accounts receivable sold to financial institutions | $ | 50,537 | $ | 9,117 | ||
Cash proceeds from financial institutions (1) | 35,390 | 6,554 |
(1)In the three months ended March 31, 2020 and 2019, our Tile Coatings business received cash proceeds from financial institutions of $29.7 million and $29.9 million, respectively. Refer to Note 4 for additional discussion of the Tile Coatings business and its classification as discontinued operations.
Other Financing Arrangements
We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $61.8 million and $7.3$28.1 million at September 30, 2017,March 31, 2020 and December 31, 2016, respectively.2019. The unused portions of these lines provided additional liquidity of $43.5$25.0 million at September 30, 2017,March 31, 2020 and $6.7 million at December 31, 2016.2019.
9. Financial Instruments
The following financial instrument assets (liabilities) are presented at their respective carrying amount, fair value and classification within the fair value hierarchy:
March 31, 2020 | |||||||||||||||
Carrying | Fair Value | ||||||||||||||
(Dollars in thousands) | Amount | Total | Level 1 | Level 2 | Level 3 | ||||||||||
Cash and cash equivalents | $ | 43,018 | $ | 43,018 | $ | 43,018 | $ | — | $ | — | |||||
Term loan facility - Amended Credit Facility (1) | (799,950) | (709,631) | — | (709,631) | — | ||||||||||
Other long-term notes payable | (3,482) | (1,594) | — | (1,594) | — | ||||||||||
Cross currency swaps | 27,833 | 27,833 | — | 27,833 | — | ||||||||||
Interest rate swaps | (26,773) | (26,773) | — | (26,773) | — | ||||||||||
Foreign currency forward contracts, net | (947) | (947) | — | (947) | — |
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| September 30, 2017 | |||||||||||||
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| Carrying |
| Fair Value | |||||||||||
|
| Amount |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
|
| (Dollars in thousands) | |||||||||||||
Cash and cash equivalents |
| $ | 52,211 |
| $ | 52,211 |
| $ | 52,211 |
| $ | — |
| $ | — |
Loans payable |
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| (10,409) |
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| (10,409) |
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| — |
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| (10,409) |
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| — |
Term loan facility, maturing 2024(1) |
|
| (641,842) |
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| (644,916) |
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| — |
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| (644,916) |
|
| — |
Revolving credit facility, maturing 2022 |
|
| (27,387) |
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| (27,835) |
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| — |
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| (27,835) |
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| — |
Other long-term notes payable |
|
| (7,011) |
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| (3,781) |
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| — |
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| (3,781) |
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| — |
Interest rate swaps - asset |
|
| 298 |
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| 298 |
|
| — |
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| 298 |
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| — |
Interest rate swaps - liability |
|
| (132) |
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| (132) |
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| — |
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| (132) |
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| — |
Foreign currency forward contracts, net |
|
| 52 |
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| 52 |
|
| — |
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| 52 |
|
| — |
December 31, 2019 | |||||||||||||||
Carrying | Fair Value | ||||||||||||||
(Dollars in thousands) | Amount | Total | Level 1 | Level 2 | Level 3 | ||||||||||
Cash and cash equivalents | $ | 96,202 | $ | 96,202 | $ | 96,202 | $ | — | $ | — | |||||
Term loan facility - Amended Credit Facility (1) | (801,764) | (799,750) | — | (799,750) | — | ||||||||||
Other long-term notes payable | (3,496) | (1,557) | — | (1,557) | — | ||||||||||
Cross currency swaps | 22,111 | 22,111 | — | 22,111 | — | ||||||||||
Interest rate swaps | (14,698) | (14,698) | — | (14,698) | — | ||||||||||
Foreign currency forward contracts, net | 601 | 601 | — | 601 | — |
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| December 31, 2016 | |||||||||||||
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| Carrying |
| Fair Value | |||||||||||
|
| Amount |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
|
| (Dollars in thousands) | |||||||||||||
Cash and cash equivalents |
| $ | 45,582 |
| $ | 45,582 |
| $ | 45,582 |
| $ | — |
| $ | — |
Loans payable |
|
| (11,452) |
|
| (11,452) |
|
| — |
|
| (11,452) |
|
| — |
Term loan facility, maturing 2021(1) |
|
| (239,530) |
|
| (252,052) |
|
| — |
|
| (252,052) |
|
| — |
Revolving credit facility, maturing 2019 |
|
| (311,555) |
|
| (318,389) |
|
| — |
|
| (318,389) |
|
| — |
Other long-term notes payable |
|
| (8,228) |
|
| (7,315) |
|
| — |
|
| (7,315) |
|
| — |
Foreign currency forward contracts, net |
|
| 350 |
|
| 350 |
|
| — |
|
| 350 |
|
| — |
(1)The carrying valuesvalue of the term loan facilities arefacility is net of unamortized debt issuance costs of $7.7$3.7 million and $3.7$3.9 million for the period ended September 30, 2017,March 31, 2020, and December 31, 2016,2019, 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 September 30, 2017, the fair value of the term loan facility is based on market price information and is measured using the last available bid price of the instrument on a secondary market 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 investmentinvestments in certain foreign subsidiaries and on certain existing assets and liabilities. However, the Company may choose not to hedge in countries where it is not economically feasible to enter into hedging arrangements or where hedging inefficiencies exist, such as timing of transactions.
Derivatives Designated as Hedging Instruments
Interest rate swaps. To reduce our exposure to interest rate changes on our variable-rate debt, we entered into interest rate swap agreements in the second quarter of 2017. These swaps converted $150 millionCash Flow Hedges. For derivative instruments that are designated and €90 million of our term loans from variable interest
18
rates to fixed interest rates. These swaps qualify and were designated as cash flow hedges. The effective portionshedges, the gain or loss on the derivative is recorded as a component of cash flow hedges are recorded in accumulatedAccumulated other comprehensive incomeloss (“AOCI”AOCL”) and are reclassified into earnings in the same period during which the underlying hedged items impacttransaction affects earnings. The ineffective portions of cash flow hedges is recognized immediately into earnings.
The Company did not have any ineffectiveness related to theutilizes interest rate swaps duringto limit exposure to market fluctuations on floating-rate debt.
During the threesecond quarter of 2018, the Company entered into variable to fixed interest rate swaps with a maturity date of February 14, 2024. The notional amount is $313.6 million at March 31, 2020. These swaps are hedging risk associated with the Tranche B-1 Loans. These interest rate swaps are designated as cash flow hedges.As of March 31, 2020, the Company expects it will reclassify net losses of approximately $7.1million, currently recorded in AOCL, into interest expense in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
The Company has converted a U.S. dollar denominated, variable rate debt obligation into a Euro fixed rate obligation using receive-float, pay-fixed cross currency swaps in the second quarter of 2018. These swaps are hedging currency and nine months ended September 30, 2017. interest rate risk associated with the Tranche B-3 Loans. These cross currency swaps are designated as cash flow hedges.The notional amount is $225.4 million at March 31, 2020, with a maturity date of February 14, 2024. As of March 31, 2020, the Company expects it will reclassify net gains of approximately $1.7 million, currently recorded in AOCL, into interest expense in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
The amount of gain (loss) recognized in AOCIAOCL and the amount of gainloss (gain) reclassified into earnings for the three months ended September 30, 2017March 31, 2020 and 2016, respectively,2019, follow:
Amount of Loss (Gain) | ||||||||||||||
Amount of Gain (Loss) | Reclassified from | Location of Gain (Loss) | ||||||||||||
Recognized in AOCL | AOCL into Income | Reclassified from | ||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | AOCL into Income | |||||||||
Interest rate swaps | $ | (12,874) | $ | (4,107) | $ | (498) | $ | 178 | Interest expense | |||||
Cross currency swaps | 5,258 | 5,080 | 1,168 | 1,632 | Interest expense | |||||||||
$ | 670 | $ | 1,810 | Total Interest expense | ||||||||||
Cross currency swap | 3,622 | 4,944 | Foreign currency losses, net | |||||||||||
$ | 3,622 | $ | 4,944 | Total Foreign currency losses, net |
The total amounts of expense and the respective line items in which the effect of cash flow hedges is presented in the condensed consolidated statement of operations for the three months ended March 31, 2020 and 2019, are as follows:
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|
| Amount of Gain Recognized |
| Amount of Gain Reclassified | ||||||||
|
| in AOCI - Effective Portion |
| from AOCI into Income - Effective Portion | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| (Dollars in thousands) | ||||||||||
Interest rate swap |
| $ | 166 |
| $ | — |
| $ | — |
| $ | — |
March 31, | March 31, | |||||
(Dollars in thousands) | 2020 | 2019 | ||||
Interest expense | $ | 5,530 | $ | 6,295 | ||
Foreign currency losses (gains), net | (1,315) | 1,964 |
Net Investment Hedges. For derivatives that are designated and qualify as net investment hedges, the gain or loss on the derivative is reported as a component of the currency translation adjustment in AOCL. These cross currency swaps are designated as hedges of our net investment in European operations. Time value is excluded from the assessment of effectiveness and the amount of interest paid or received on the swaps will be recognized as an adjustment to interest expense in earnings over the life of the swaps.
In the second quarter of 2018, the Company entered into cross currency swap agreements under which we pay variable rate interest in Euros and receive variable rate interest in U.S. dollars. The notional amount is €96.0 million at March 31, 2020, with a maturity date of February 14, 2024. These swaps are hedging risk associated with the net investment in Euro denominated operations due to fluctuating exchange rates and are designated as net investment hedges. The changes in the fair value of these designated cross-currency swaps will be recognized in AOCL.
The amount of gain on net investment hedges recognized in AOCL, the amount reclassified into earnings and the amount of gain recognized in AOCI and the amount of gain reclassified into earnings for the nine months ended September 30, 2017 and 2016, respectively, follow:
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|
|
|
| Amount of Gain Recognized |
| Amount of Gain Reclassified | ||||||||
|
| in AOCI - Effective Portion |
| from AOCI into Income - Effective Portion | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| (Dollars in thousands) | ||||||||||
Interest rate swap |
| $ | 166 |
| $ | — |
| $ | — |
| $ | — |
Net investment hedge. To help protect the value of the Company’s net investment in European 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. The effective portions of net investment hedges are recorded in AOCI 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 €79.4 million at September 30, 2017. The Company did not have any ineffectiveness related to net investment hedges during the three and nine months ended September 30, 2017.
The amount of loss recognized in AOCI and the amount of loss reclassified into earningsincome on derivative (amount excluded from effectiveness testing) for the three months ended September 30, 2017March 31, 2020 and 2016, respectively,2019, follow:
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|
|
| Amount of (Loss) Recognized |
| Amount of Loss Reclassified from | ||||||||
|
| in AOCI - Effective Portion |
| AOCI into Income - Effective Portion | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| (Dollars in thousands) | ||||||||||
Net investment hedge |
| $ | (8,020) |
| $ | — |
| $ | — |
| $ | — |
Amount of Gain | ||||||||||||||||||||
Amount of Gain | Recognized in Income on | |||||||||||||||||||
Amount of Gain | Reclassified from | Derivative (Amount Excluded | Location of Gain | |||||||||||||||||
Recognized in AOCL | AOCL into Income | from Effectiveness Testing) | in Earnings | |||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||
Cross currency swaps | $ | 2,659 | $ | 3,737 | $ | — | $ | — | $ | 780 | $ | 1,001 | Interest expense |
The amount of loss recognized in AOCI and the amount of loss reclassified into earnings for the nine months ended September 30, 2017 and 2016, respectively, follow:
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|
|
| Amount of (Loss) Recognized |
| Amount of Loss Reclassified from | ||||||||
|
| in AOCI - Effective Portion |
| AOCI into Income - Effective Portion | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| (Dollars in thousands) | ||||||||||
Net investment hedge |
| $ | (14,848) |
| $ | — |
| $ | — |
| $ | — |
Derivatives Not Designated as Hedging Instruments
Foreign currency forward contracts.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 lossesgains of $1.4 million and $4.1$0.3 million in the three and nine months ended September 30, 2017, respectively,March 31, 2020 and net lossesgains of $1.2 million and $5.8$1.5 million in the three and nine months ended September 30, 2016,March 31, 2019, respectively, arising from the change in fair value of our financial instruments, which partially offset the related net gains and losses on international trade transactions. The notional amount of foreign currency forward contracts was $212.1$618.0 million at September 30, 2017,March 31, 2020 and $338.2$625.9 million at December 31, 2016.2019.
The following table presents the effect on our condensed consolidated statements of operations for the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, of our foreign currency forward contracts:
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| Amount of (Loss) |
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| ||||
|
| Recognized in Earnings |
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| ||||
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| Three Months Ended |
|
| ||||
|
| September 30, |
|
| ||||
|
| 2017 |
| 2016 |
| Location of (Loss) in Earnings | ||
|
| (Dollars in thousands) |
|
| ||||
Foreign currency forward contracts |
| $ | (1,438) |
| $ | (1,163) |
| Foreign currency losses, net |
Amount of Gain (Loss) | ||||||||
Recognized in Earnings | ||||||||
Three Months Ended | ||||||||
March 31, | Location of Gain (Loss) in Earnings | |||||||
(Dollars in thousands) | 2020 | 2019 | ||||||
Foreign currency forward contracts | $ | 268 | $ | 1,524 | Foreign currency losses, net |
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| Amount of (Loss) |
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| Recognized in Earnings |
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| Nine Months Ended |
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| September 30, |
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| 2017 |
| 2016 |
| Location of (Loss) in Earnings | ||
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| (Dollars in thousands) |
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| ||||
Foreign currency forward contracts |
| $ | (4,149) |
| $ | (5,848) |
| Foreign currency losses, net |
20
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 derivative instruments:sheets. All derivatives are reported on a gross basis.
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| September 30, |
| December 31, |
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| March 31, | December 31, | ||||||||
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| 2017 |
| 2016 |
| Balance Sheet Location | ||||||||||
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| (Dollars in thousands) |
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| ||||||||||||
(Dollars in thousands) | 2020 | 2019 | Balance Sheet Location | |||||||||||||
Asset derivatives: |
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|
|
|
|
|
| ||||||||
Interest rate swaps |
| $ | 298 |
| $ | — |
| Other assets | ||||||||
Cross currency swaps | $ | 3,270 | $ | 6,711 | Other current assets | |||||||||||
Cross currency swaps | 24,563 | 15,400 | Other non-current assets | |||||||||||||
Foreign currency forward contracts |
|
| 620 |
|
| 1,854 |
| Other current assets | 1,189 | 1,474 | Other current assets | |||||
Liability derivatives: |
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|
|
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|
|
| ||||||||
Interest rate swaps |
|
| (132) |
|
| — |
| Accrued expenses and other current liabilities | $ | (7,054) | $ | (3,723) | Accrued expenses and other current liabilities | |||
Interest rate swaps | (19,719) | (10,975) | Other non-current liabilities | |||||||||||||
Foreign currency forward contracts |
| $ | (568) |
| $ | (1,504) |
| Accrued expenses and other current liabilities | (2,136) | (873) | Accrued expenses and other current liabilities |
10. Income Taxes
Income tax expense for the ninethree months ended September 30, 2017,March 31, 2020 was $23.2$5.1 million, or 25.9%24.3% of pre-tax income, compared with $22.7income. Income tax expense for the three months ended March 31, 2019 was $2.9 million, or 25.8%24.7% of pre-tax income in the prior-year same period.income. The tax expense induring the first ninethree months of 2017ended March 31, 2020 and 2016,March 31, 2019, as a percentage of pre-tax income, is lowerhigher than the U.S. federal statutory income tax rate of 35%21% primarily as a result of foreign statutory rate differences.
In response to the COVID-19 outbreak, various global legislation was passed in March 2020. The Company is still assessing the applicability of the stimulus elements within the global legislation, however, it is not expected to have a material impact on the income taxes in the Company's consolidated financial statements.
11. Contingent Liabilities
We have recorded environmental liabilities of $6.6$5.7 million at September 30, 2017,March 31, 2020 and $7.2 million at December 31, 2016,2019, for costs associated with the remediation of certain of our current or former properties that have been contaminated. The liabilitybalance at September 30, 2017,March 31, 2020 and December 31, 2016, was2019, were primarily comprised of liabilities related to a non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product linesline in 2013. TheThese costs include, but are not limited to, legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring, and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring, and the ultimate cost of required remediation.remediation, and other circumstances.
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, pendingand is vigorously defending this proceeding. Since December 2018, additional complaints were filed in the same court by 25 other New York municipal water suppliers and in New York State Supreme Court by one water supplier against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.
In 2013, the Supreme Court in Argentina ruled favorably related to certain export taxes associated with a divested operation. The liability recorded at March 31, 2020 and December 31, 2019 is $0.5 million and $0.6 million, respectively.
In addition to the proceedings 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 cost (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 September 30, 2017March 31, 2020 and 2016,2019, respectively, follow:
U.S. Pension Plans | Non-U.S. Pension Plans | Other Benefit Plans | ||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||
Service cost | $ | 3 | $ | 3 | $ | 285 | $ | 281 | $ | 1 | $ | 1 | ||||||
Interest cost | 2,387 | 2,963 | 330 | 469 | 132 | 175 | ||||||||||||
Expected return on plan assets | (3,708) | (3,153) | (112) | (166) | — | — | ||||||||||||
Amortization of prior service cost | — | — | (5) | 5 | — | — | ||||||||||||
Net periodic benefit (credit) cost | $ | (1,318) | $ | (187) | $ | 498 | $ | 589 | $ | 133 | $ | 176 |
21Interest cost, expected return on plan assets and amortization of prior service cost are recorded in Miscellaneous expense (income), net on the condensed consolidated statement of operations.
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| U.S. Pension Plans |
| Non-U.S. Pension Plans |
| Other Benefit Plans | ||||||||||||
|
| Three Months Ended September 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||
|
| (Dollars in thousands) | ||||||||||||||||
Service cost |
| $ | 4 |
| $ | 4 |
| $ | 432 |
| $ | 346 |
| $ | — |
| $ | — |
Interest cost |
|
| 3,666 |
|
| 3,937 |
|
| 621 |
|
| 914 |
|
| 211 |
|
| 236 |
Expected return on plan assets |
|
| (4,740) |
|
| (4,935) |
|
| (227) |
|
| (493) |
|
| — |
|
| — |
Amortization of prior service cost |
|
| 2 |
|
| 3 |
|
| 11 |
|
| 12 |
|
| — |
|
| — |
Net periodic benefit (credit) cost |
| $ | (1,068) |
| $ | (991) |
| $ | 837 |
| $ | 779 |
| $ | 211 |
| $ | 236 |
Net periodic benefit (credit) cost for the nine months ended September 30, 2017 and 2016, respectively, follow:
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| U.S. Pension Plans |
| Non-U.S. Pension Plans |
| Other Benefit Plans | ||||||||||||
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| Nine Months Ended September 30, | ||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||
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| (Dollars in thousands) | ||||||||||||||||
Service cost |
| $ | 13 |
| $ | 13 |
| $ | 1,259 |
| $ | 1,081 |
| $ | — |
| $ | — |
Interest cost |
|
| 10,997 |
|
| 11,812 |
|
| 1,801 |
|
| 2,808 |
|
| 632 |
|
| 708 |
Expected return on plan assets |
|
| (14,218) |
|
| (14,805) |
|
| (659) |
|
| (1,538) |
|
| — |
|
| — |
Amortization of prior service cost |
|
| 5 |
|
| 8 |
|
| 33 |
|
| 34 |
|
| — |
|
| — |
Net periodic benefit (credit) cost |
| $ | (3,203) |
| $ | (2,972) |
| $ | 2,434 |
| $ | 2,385 |
| $ | 632 |
| $ | 708 |
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, subject to shareholder approval.2018. The Plan’s purpose is to promote the Company’s long-term financial interests and growth by attracting, retaining and motivating high qualityhigh-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 Plan replaced the 2013 Omnibus Incentive Plan (the “Previous Plan”), and no future grants may be made under the Previous Plan. However, any outstanding awards or grants made under the Previous Plan will continue until the end of their specified terms.
In the first nine monthsquarter of 2017,2020, our Board of Directors granted 0.20.3 million stock options, 0.2 million performance share units, and 0.2 million restricted stock units under the Plan.
We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. The following table details the weighted-average grant-date fair values and the assumptions used for estimating the fair values of stock option grants made during the ninethree months ended September 30, 2017:March 31, 2020:
Stock Options | ||||
Weighted-average grant-date fair value | $ | 5.28 | ||
Expected life, in years | 5.2 | |||
Risk-free interest rate |
| % | ||
Expected volatility |
| % |
The weighted average grant date fair value of our performance share units granted in the ninethree months ended September 30, 2017,March 31, 2020, was $14.89.$14.64. 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.
22
our restricted share units granted in the three months ended March 31, 2020, was $14.64. We measure the fair value of restricted share units based on the closing market price of our common stock on the date of the grant. The restricted share units vest over three years. The weighted-average grant date fair value per unit for grants made during the nine months ended September 30, 2017, was $14.73.
We recognized stock-based compensation expense of $6.9$2.8 million for the ninethree months ended September 30, 2017,March 31, 2020 and $5.3 million for the nine months ended September 30, 2016.2019. At September 30, 2017,March 31, 2020, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $9.6$12.8 million and is expected to be recognized over the remaining vesting period of the respective grants, through the first quarter of 2020.2022.
14. Restructuring and Cost ReductionOptimization Programs
Total restructuring and impairment charges were $1.5 million and $7.7 million for the three and nine months ended September 30, 2017, respectively, and $0.0$1.2 million and $1.7 million for the three and nine months ended September 30, 2016,March 31, 2020 and March 31, 2019, respectively. IncludedAs discussed in Note 4, our Tile Coatings business was classified as held-for-sale during the fourth quarter of 2019. As such, there were additional restructuring charges of $0.3 million and $0.4 million for the ninethree months ended September 30, 2017, was an impairment chargeMarch 31, 2020 and March 31, 2019 classified as Net income from discontinued operations, net of $1.5 million relatedincome taxes.
In the second quarter of 2019, we developed and initiated a program across the organization with the objective of realigning the business and lowering our cost structure. The program involves our global operations and certain functions and initiatives to an equity method investment. The remainderincrease operational efficiencies, some of the charges relate to our restructuring and cost reduction programs, which are primarily related to costsis associated with integration of our recent acquisitions, andacquisitions. As a result of these actions, the Company expects to incur total charges of approximately $8.0 million, substantially all of which will be for severance costs expected. The remaining activities of the program are expected to be recognized within the next 12 months. Charges associated with the program were $0.2 million for the three months ended March 31, 2020.
The charges associated with these programs are further summarized below.
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| |||||||||
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| Employee |
| Other |
| Asset |
|
|
| Employee | Other | ||||||||||
|
| Severance |
| Costs |
| Impairment |
| Total | |||||||||||||
|
| (Dollars in thousands) | |||||||||||||||||||
Balances at December 31, 2016 |
| $ | 239 |
| $ | 1,489 |
| $ | — |
| $ | 1,728 | |||||||||
(Dollars in thousands) | Severance | Costs | Total | ||||||||||||||||||
Balances at December 31, 2019 | $ | 747 | $ | 1,492 | $ | 2,239 | |||||||||||||||
Restructuring charges |
|
| 2,455 |
|
| 2,583 |
|
| 1,176 |
|
| 6,214 | 658 | 507 | 1,165 | ||||||
Cash payments |
|
| (2,555) |
|
| (1,529) |
|
| — |
|
| (4,084) | (394) | (464) | (858) | ||||||
Non-cash items |
|
| 64 |
|
| (1,282) |
|
| (1,176) |
|
| (2,394) | (23) | (11) | (34) | ||||||
Balances at September 30, 2017 |
| $ | 203 |
| $ | 1,261 |
| $ | — |
| $ | 1,464 | |||||||||
Balances at March 31, 2020 | $ | 988 | $ | 1,524 | $ | 2,512 |
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.
15. Leases
The Company has leases for equipment, office space, plant sites and distribution centers. Certain of these leases include options to extend the lease and some include options to terminate the lease early. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
There are no leases that have not yet commenced that create significant rights and obligations for the Company.
The components of lease cost are shown below:
Three Months Ended | ||||||||
March 31, | ||||||||
(Dollars in thousands) | 2020 | 2019 | Income Statement Location | |||||
Operating lease cost(1) | $ | 1,259 | $ | 1,360 | Selling, general and administrative expenses | |||
Operating lease cost(2) | 2,131 | 2,234 | Cost of sales | |||||
Finance lease cost | ||||||||
Amortization of right-of-use assets | 72 | 51 | Cost of sales | |||||
Interest of lease liabilities | 7 | 3 | Interest expense | |||||
Net lease cost | $ | 3,469 | $ | 3,648 |
23
(1)Included in operating lease cost is $0.2 million of short-term lease costs for the three months ended March 31, 2020 and March 31, 2019 and $0.1 million of variable lease costs for the three months ended March 31, 2020 and March 31, 2019.
(2)Included in operating lease cost is $0.6 million of short-term lease costs for the three months ended March 31, 2020 and March 31, 2019 and $0.3 million and $0.2 million of variable lease costs for the three months ended March 31, 2020 and March 31, 2019, respectively.
Supplemental balance sheet information related to leases are shown below:
March 31, | December 31, | |||||||
(Dollars in thousands) | 2020 | 2019 | Balance Sheet Location | |||||
Assets | ||||||||
Operating leased assets | $ | 17,294 | $ | 20,088 | Operating leased assets | |||
Finance leased assets (1) | 805 | 859 | Property, plant and equipment, net | |||||
Total leased assets | $ | 18,099 | $ | 20,947 | ||||
Liabilities | ||||||||
Current | ||||||||
Operating | $ | 5,822 | $ | 6,515 | Accrued expenses and other current liabilities | |||
Finance | 466 | 438 | Loans payable and current portion of long-term debt | |||||
Noncurrent | ||||||||
Operating | 11,973 | 14,474 | Operating lease non-current liabilities | |||||
Finance | 1,849 | 1,867 | Long-term debt, less current portion | |||||
Total lease liabilities | $ | 20,110 | $ | 23,294 |
(1)Finance leases are net of accumulated depreciation of $3.4 million and $3.4 million for March 31, 2020 and December 31, 2019, respectively.
15.Supplemental cash flow information related to leases are shown below:
Three Months Ended | ||||||
March 31, | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||
Operating cash flows from finance leases | $ | 7 | $ | 3 | ||
Operating cash flows from operating leases | 2,019 | 2,260 | ||||
Financing cash flows from finance leases | 65 | 45 | ||||
Leased assets obtained in exchange for new finance lease liabilities | 104 | 129 | ||||
Leased assets obtained in exchange for new operating lease liabilities | 1,499 | 24,035 |
March 31, | |||
2020 | |||
Weighted-average remaining lease term (years) | |||
Operating leases | 4.1 | ||
Finance leases | 5.9 | ||
Weighted-average discount rate | |||
Operating leases | 4.0% | ||
Finance leases | 5.3% |
Maturities of lease liabilities are shown below as of March 31, 2020:
(Dollars in thousands) | Capital | Operating | ||||
Remaining in 2020 | $ | 567 | $ | 5,996 | ||
2021 | 520 | 5,666 | ||||
2022 | 504 | 3,246 | ||||
2023 | 448 | 1,929 | ||||
2024 | 346 | 1,044 | ||||
2025 | 279 | 789 | ||||
Thereafter | 418 | 1,688 | ||||
Net minimum lease payments | $ | 3,082 | $ | 20,358 | ||
Less: interest | 767 | 2,563 | ||||
Present value of lease liabilities | $ | 2,315 | $ | 17,795 |
16. Earnings Per Share
Details of the calculation of basic and diluted earnings per share are shown below:
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| Three Months Ended |
| Nine Months Ended | Three Months Ended | |||||||||||||
|
| September 30, |
| September 30, | March 31, | |||||||||||||
(Dollars in thousands, except per share amounts) | 2020 | 2019 | ||||||||||||||||
Basic earnings per share computation: | ||||||||||||||||||
Income from continuing operations | $ | 15,912 | $ | 8,801 | ||||||||||||||
Less: Net income attributable to noncontrolling interests from continuing operations | 33 | 169 | ||||||||||||||||
Net income attributable to Ferro Corporation from continuing operations | 15,879 | 8,632 | ||||||||||||||||
Income from discontinued operations, net of income taxes | 221 | 5,077 | ||||||||||||||||
Less: Net income attributable to noncontrolling interests from discontinued operations | (23) | 105 | ||||||||||||||||
Net income attributable to Ferro Corporation from discontinued operations | 244 | 4,972 | ||||||||||||||||
Total | $ | 16,123 | $ | 13,604 | ||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||||
|
| (Dollars in thousands, except per share amounts) | ||||||||||||||||
Basic earnings per share computation: |
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|
|
|
|
|
|
| ||||||
Net income (loss) attributable to Ferro Corporation common shareholders |
| $ | 22,817 |
| $ | (8,884) |
| $ | 65,740 |
| $ | 119 | ||||||
Adjustment for loss from discontinued operations |
|
| — |
|
| 29,222 |
|
| — |
|
| 64,464 | ||||||
Total |
| $ | 22,817 |
| $ | 20,338 |
| $ | 65,740 |
| $ | 64,583 | ||||||
Weighted-average common shares outstanding |
|
| 83,735 |
|
| 83,268 |
|
| 83,646 |
|
| 83,263 | 82,096 | 82,480 | ||||
Basic earnings per share from continuing operations attributable to Ferro Corporation common shareholders |
| $ | 0.27 |
| $ | 0.24 |
| $ | 0.79 |
| $ | 0.78 | $ | 0.19 | $ | 0.10 | ||
Diluted earnings per share computation: |
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|
|
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|
|
|
|
|
|
|
| ||||||
Net income (loss) attributable to Ferro Corporation common shareholders |
| $ | 22,817 |
| $ | (8,884) |
| $ | 65,740 |
| $ | 119 | ||||||
Adjustment for loss from discontinued operations |
|
| — |
|
| 29,222 |
|
| — |
|
| 64,464 | ||||||
Net income attributable to Ferro Corporation common shareholders | $ | 15,879 | $ | 8,632 | ||||||||||||||
Adjustment for income from discontinued operations | 244 | 4,972 | ||||||||||||||||
Total |
| $ | 22,817 |
| $ | 20,338 |
| $ | 65,740 |
| $ | 64,583 | $ | 16,123 | $ | 13,604 | ||
Weighted-average common shares outstanding |
|
| 83,735 |
|
| 83,268 |
|
| 83,646 |
|
| 83,263 | 82,096 | 82,480 | ||||
Assumed exercise of stock options |
|
| 808 |
|
| 544 |
|
| 671 |
|
| 499 | 297 | 596 | ||||
Assumed exercise of deferred stock unit conditions |
|
| — |
|
| 80 |
|
| — |
|
| — | ||||||
Assumed satisfaction of restricted stock unit conditions |
|
| 424 |
|
| 473 |
|
| 383 |
|
| 419 | 85 | 145 | ||||
Assumed satisfaction of performance stock unit conditions |
|
| 483 |
|
| 111 |
|
| 474 |
|
| 58 | ||||||
Assumed satisfaction of performance share unit conditions | 44 | 80 | ||||||||||||||||
Weighted-average diluted shares outstanding |
|
| 85,450 |
|
| 84,476 |
|
| 85,174 |
|
| 84,239 | 82,522 | 83,301 | ||||
Diluted earnings per share from continuing operations attributable to Ferro Corporation common shareholders |
| $ | 0.27 |
| $ | 0.24 |
| $ | 0.77 |
| $ | 0.77 | $ | 0.19 | $ | 0.10 |
The number of anti-dilutive or unearned shares was 1.6 million and 1.8were 3.0 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and 2.3 million and 2.52.2 million for the three and nine months ended September 30, 2016, respectively.March 31, 2019. These shares wereare excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.
16.17. Share Repurchase Program
The Company’s Board of Directors has approved a share repurchase programs,program under which the Company is authorized to repurchase up to $100$150 million of the Company’s outstanding shares of Common Stockcommon 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 do not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.
ForAs of March 31, 2020, $46.2 million remains authorized under the nine months ended September 30, 2016,program for the Company repurchased 1,175,437 sharesrepurchase of common stock at an average price of $9.72 per share for a total cost of $11.4 million. As of September 30, 2017, Company shares having an aggregate value of up to $50.0 million may still be purchased under the programs.stock.
17.18. Accumulated Other Comprehensive Income (Loss)Loss
Changes in accumulated other comprehensive income (loss)loss by component, net of tax, were as follows:
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|
|
| Three Months Ended September 30, | ||||||||||||||
|
| Postretirement |
|
|
|
|
| Net Gain |
|
|
|
|
|
| |
|
| Benefit Liability |
| Translation |
|
| on Cash |
| Other |
|
|
| |||
|
| Adjustments |
| Adjustments |
|
| Flow Hedges | Adjustments |
| Total | |||||
|
| (Dollars in thousands) | |||||||||||||
Balances at June 30, 2016 |
| $ | 1,106 |
| $ | (66,886) |
| $ | — |
| $ | (70) |
| $ | (65,850) |
Other comprehensive income (loss) before reclassifications, before tax |
|
| — |
|
| 1,584 |
|
| — |
|
| — |
|
| 1,584 |
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities loss, before tax |
|
| (2) |
|
| — |
|
| — |
|
| — |
|
| (2) |
Foreign currency translation adjustment, before tax(1) |
|
| — |
|
| 1,115 |
|
| — |
|
| — |
|
| 1,115 |
Current period other comprehensive income (loss), before tax |
|
| (2) |
|
| 2,699 |
|
| — |
|
| — |
|
| 2,697 |
Tax effect |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Current period other comprehensive income (loss), net of tax |
|
| (2) |
|
| 2,699 |
|
| — |
|
| — |
|
| 2,697 |
Balances at September 30, 2016 |
| $ | 1,104 |
| $ | (64,187) |
| $ | — |
| $ | (70) |
| $ | (63,153) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2017 |
| $ | 1,153 |
| $ | (86,753) |
| $ | — |
| $ | (70) |
| $ | (85,670) |
Other comprehensive income (loss) before reclassifications, before tax |
|
| — |
|
| (141) |
|
| 166 |
|
| — |
|
| 25 |
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities income, before tax |
|
| (39) |
|
| — |
|
| — |
|
| — |
|
| (39) |
Current period other comprehensive income (loss), before tax |
|
| (39) |
|
| (141) |
|
| 166 |
|
| — |
|
| (14) |
Tax effect |
|
| (6) |
|
| 3,001 |
|
| 62 |
|
| — |
|
| 3,057 |
Current period other comprehensive income (loss), net of tax |
|
| (33) |
|
| (3,142) |
|
| 104 |
|
| — |
|
| (3,071) |
Balances at September 30, 2017 |
| $ | 1,120 |
| $ | (89,895) |
| $ | 104 |
| $ | (70) |
| $ | (88,741) |
Three Months Ended March 31, | ||||||||||||
Postretirement | Foreign | Net Gain (Loss) | ||||||||||
Benefit Liability | Currency | on Cash Flow | ||||||||||
(Dollars in thousands) | Adjustments | Items | Hedges | Total | ||||||||
Balances at December 31, 2018 | $ | 1,126 | $ | (103,190) | $ | (3,297) | $ | (105,361) | ||||
Other comprehensive income before reclassifications, before tax | — | 4,036 | 973 | 5,009 | ||||||||
Reclassification to earnings: | ||||||||||||
Cash flow hedge loss, before tax | — | — | (6,754) | (6,754) | ||||||||
Current period other comprehensive income (loss), before tax | — | 4,036 | (5,781) | (1,745) | ||||||||
Tax effect | — | 634 | (1,467) | (833) | ||||||||
Current period other comprehensive income (loss), net of tax | — | 3,402 | (4,314) | (912) | ||||||||
Balances at March 31, 2019 | $ | 1,126 | $ | (99,788) | $ | (7,611) | $ | (106,273) | ||||
Balances at December 31, 2019 | $ | 1,206 | $ | (97,575) | $ | (13,007) | $ | (109,376) | ||||
Other comprehensive loss before reclassifications, before tax | — | (17,837) | (7,616) | (25,453) | ||||||||
Reclassification to earnings: | ||||||||||||
Cash flow hedge loss, before tax | — | — | (4,292) | (4,292) | ||||||||
Current period other comprehensive loss, before tax | — | (17,837) | (11,908) | (29,745) | ||||||||
Tax effect | — | 435 | (2,868) | (2,433) | ||||||||
Current period other comprehensive loss, net of tax | — | (18,272) | (9,040) | (27,312) | ||||||||
Balances at March 31, 2020 | $ | 1,206 | $ | (115,847) | $ | (22,047) | $ | (136,688) |
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|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | ||||||||||||||
|
| Postretirement |
|
|
|
|
| Net Gain |
|
|
|
|
|
| |
|
| Benefit Liability |
| Translation |
|
| on Cash |
| Other |
|
|
| |||
|
| Adjustments |
| Adjustments |
|
| Flow Hedges |
| Adjustments |
| Total | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) | |||||||||||||
Balances at December 31, 2015 |
| $ | 811 |
| $ | (62,059) |
| $ | — |
| $ | (70) |
| $ | (61,318) |
Other comprehensive income (loss) before reclassifications, before tax |
|
| — |
|
| (3,243) |
|
| — |
|
| — |
|
| (3,243) |
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities income, before tax |
|
| 320 |
|
| — |
|
| — |
|
| — |
|
| 320 |
Foreign currency translation adjustment, before tax(1) |
|
| — |
|
| 1,115 |
|
| — |
|
| — |
|
| 1,115 |
Current period other comprehensive income (loss), before tax |
|
| 320 |
|
| (2,128) |
|
| — |
|
| — |
|
| (1,808) |
Tax effect |
|
| 27 |
|
| — |
|
| — |
|
| — |
|
| 27 |
Current period other comprehensive income (loss), net of tax |
|
| 293 |
|
| (2,128) |
|
| — |
|
| — |
|
| (1,835) |
Balances at September 30, 2016 |
| $ | 1,104 |
| $ | (64,187) |
| $ | — |
| $ | (70) |
| $ | (63,153) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2016 |
| $ | 1,141 |
| $ | (107,714) |
| $ | — |
| $ | (70) |
| $ | (106,643) |
Other comprehensive income (loss) before reclassifications, before tax |
|
| — |
|
| 20,820 |
|
| 166 |
|
| — |
|
| 20,986 |
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities income, before tax |
|
| (30) |
|
| — |
|
| — |
|
| — |
|
| (30) |
Current period other comprehensive income (loss), before tax |
|
| (30) |
|
| 20,820 |
|
| 166 |
|
| — |
|
| 20,956 |
Tax effect |
|
| (9) |
|
| 3,001 |
|
| 62 |
|
| — |
|
| 3,054 |
Current period other comprehensive income (loss), net of tax |
|
| (21) |
|
| 17,819 |
|
| 104 |
|
| — |
|
| 17,902 |
Balances at September 30, 2017 |
| $ | 1,120 |
| $ | (89,895) |
| $ | 104 |
| $ | (70) |
| $ | (88,741) |
19. Reporting for Segments
25
(1) Includes2019, we entered into a releasedefinitive agreement to sell our Tile Coatings business which has historically been the majority of accumulated foreign currency translation of $1.1 million related to the Company’s saleour Performance Coatings reportable segment. Substantially all of the Europe-based Polymer Additivesassets and liabilities of our Tile Coatings business (Note 3), which iswere classified as held-for-sale in the accompanying consolidated balance sheets and results are included within discontinued operation in Loss from discontinued operations, net of income taxes in our condensedthe consolidated statementsstatement of operations for all periods presented. The retained assets, liabilities and operations of the three and nine months ended September 30, 2016.Performance Coatings reportable segment are reflected within our Functional Coatings reportable segment.
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.
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| ||||||
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|
|
| ||||||
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended | |||||||||||||
|
| September 30, |
| September 30, | March 31, | |||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||||
|
| (Dollars in thousands) | ||||||||||||||||
Performance Coatings |
| $ | 146,238 |
| $ | 130,453 |
| $ | 424,549 |
| $ | 399,166 | ||||||
Performance Colors and Glass |
|
| 110,578 |
|
| 92,793 |
|
| 320,733 |
|
| 276,896 | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||||||||||||||
Functional Coatings | $ | 155,435 | $ | 167,026 | ||||||||||||||
Color Solutions |
|
| 93,196 |
|
| 65,281 |
|
| 273,917 |
|
| 187,893 | 96,891 | 96,356 | ||||
Total net sales |
| $ | 350,012 |
| $ | 288,527 |
| $ | 1,019,199 |
| $ | 863,955 | $ | 252,326 | $ | 263,382 |
Each segment’s gross profit and reconciliationsreconciliation to income before income taxes are presented in the table below:
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| September 30, |
| September 30, | March 31, | |||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||||
|
| (Dollars in thousands) | ||||||||||||||||
Performance Coatings |
| $ | 35,470 |
| $ | 33,636 |
| $ | 109,205 |
| $ | 104,985 | ||||||
Performance Colors and Glass |
|
| 37,880 |
|
| 32,282 |
|
| 115,385 |
|
| 100,825 | ||||||
(Dollars in thousands) | 2020 | 2019 | ||||||||||||||||
Functional Coatings | $ | 47,817 | $ | 48,230 | ||||||||||||||
Color Solutions |
|
| 31,044 |
|
| 23,178 |
|
| 87,642 |
|
| 65,868 | 33,787 | 28,396 | ||||
Other cost of sales |
|
| (778) |
|
| (115) |
|
| (1,480) |
|
| (95) | (866) | 1,233 | ||||
Total gross profit |
|
| 103,616 |
|
| 88,981 |
|
| 310,752 |
|
| 271,583 | 80,738 | 77,859 | ||||
Selling, general and administrative expenses |
|
| 65,485 |
|
| 55,588 |
|
| 186,957 |
|
| 166,105 | 56,046 | 56,931 | ||||
Restructuring and impairment charges |
|
| 1,471 |
|
| 26 |
|
| 7,713 |
|
| 1,694 | 1,165 | 1,740 | ||||
Other expense, net |
|
| 6,342 |
|
| 6,662 |
|
| 26,581 |
|
| 15,953 | 2,498 | 7,494 | ||||
Income before income taxes |
| $ | 30,318 |
| $ | 26,705 |
| $ | 89,501 |
| $ | 87,831 | $ | 21,029 | $ | 11,694 |
19. Subsequent Events
On November 1, 2017, the Company acquired 100% of the equity interests of Endeka Group, a global producer of high-value coatings and key raw materials for €63.8 million (approximately $74.3 million), excluding customary adjustments and fees.
The operating results related to the Endeka Group acquisition will be included in the Company’s condensed consolidated financial statements commencing on the date of the acquisition.
Due to the timing of the acquisition, the Company’s initial purchase price accounting was incomplete at the time these financial statements were issued. As such, the Company cannot disclose the allocation of the acquisition price to acquired assets and liabilities and the related disclosures at this time.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net sales for the three months ended September 30, 2017, increasedMarch 31, 2020, decreased by $61.5$11.1 million, or 21.3%4.2%, compared with the prior-year same period. TheNet sales decreased by $11.6 million in Functional Coatings, which was partially mitigated by an increase in net sales was driven by higher salesof $0.5 million in Color Solutions, Performance Colors and Glass and Performance Coatings of $27.9 million, $17.8 million and $15.8 million, respectively.Solutions. During the three months ended September 30, 2017,March 31, 2020, gross profit increased $14.6$2.9 million, or 16.4%3.7%, compared with the prior-year same period; as a percentage of net sales, it decreasedincreased approximately 120240 basis points to 29.6%32.0%. Our total gross profit for the first quarter of 2020 was $80.7 million, compared with $77.9 million for the three months ended March 31, 2019. The increase in gross profit was attributable to higher gross profit across all of our segments, with increases in Color Solutions Performance Colors and Glass and Performanceof $5.4 million, partially offset by lower gross profit in Functional Coatings of $7.9 million, $5.6 million and $1.8 million, respectively. $0.4 million.
For the three months ended September 30, 2017,March 31, 2020, selling, general and administrative (“SG&A”) expenses increased $9.9decreased $0.9 million, or 17.8%1.6%, compared with the prior-year same period. The increase was primarily driven by $6.7 millionAs a percentage of expenses relatednet sales, it increased approximately 60 basis points to acquisitions completed within the last year.22.2%.
For the three months ended September 30, 2017,March 31, 2020, net income was $23.0$16.1 million, compared with net lossincome of $8.7$13.9 million for the prior-year same period, and net income attributable to common shareholders was $22.8$16.1 million, compared with net lossincome attributable to common shareholders of $8.9$13.6 million for the prior-year same period. Income from continuing operations was $23.0$15.9 million for the three months ended September 30, 2017,March 31, 2020, compared with $20.5$8.8 million in 2019.
Outlook
While the novel coronavirus (“COVID-19”) pandemic did not have a significant effect on the Company’s reported results for the three months ended September 30, 2016. Our total gross profit for the thirdfirst quarter of 2017 was $103.6 million, compared with $89.0 million for the three months ended September 30, 2016.
Outlook
For the remainder of 2017,2020, we expect a more negative impact on our business and results of operations in the second quarter of 2020 and perhaps thereafter. Having said that, we expect the impact of COVID-19 to be less severe in the future than it might otherwise be because many Ferro products and services support niche markets in “critical” or “essential” industries such as healthcare, food and beverage, energy, information technology, and defense, and these industries generally have been allowed by governments around the world to continue operating in spite of the pandemic. The extent to benefit from strong organic growth inwhich our businesses, in addition to contributions from recent acquisitions. With respect to gross margins, we could continue tooperations will be impacted by the raw material headwinds that have been experienced throughoutpandemic will depend largely on future developments, including the year thus far, whichseverity of the pandemic and actions by government authorities to contain it or treat its impact, as more fully discussed below.
As we would expect to cover through pricing actions, product reformations and other optimization actions, with some lag. We expect Selling, general and administrative costs to continue to leverage favorably as a percentage of Net sales, compared with the prior year. Further, as we movemanage through the balance ofchallenges caused by the year,COVID-19 pandemic, controlling what we will continue to monitor currentcan and near-term increasing customer demand levels, and align our production and inventories accordingly.
Weplanning for contingencies, we remain focused on executing our key strategic priorities. These include advancing our optimization initiatives, the integrationpreparation for and completion of the sale of our recent acquisitionsTile Coatings business and achievingcontinuing to develop innovative products that our customers need.
We anticipate continued uncertainty in macroeconomic conditions going forward. This may result in volatility in foreign exchange rates and in interest rates, which could impact our reported results through the identified synergies.course of 2020.
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has spread through Asia, Europe, the Middle East and North and South America, all regions in which we have operations. In response, government authorities have issued an evolving set of mandates, including requirements to shelter-in-place, curtail business operations, restrict travel, and avoid physical interaction. These mandates have substantially disrupted normal business activities in many segments of the global economy. We are monitoring the impact of the outbreak of COVID-19 on our business, including how it may impact our customers, employees, supply chain, and distribution network.
Our manufacturing facilities generally have continued to operate since the pandemic was declared in early March 2020, with most sites experiencing only relatively brief or no suspensions of activity. While COVID-19 did not have a significant effect on our reported results for the first quarter of 2020, we are unable to reliably predict the ultimate impact that it may have on our business, future results of operations, financial position or cash flows. We anticipate an adverse impact of COVID-19 on the U.S and global economies and expect a negative impact on our business in the second quarter and possibly in subsequent quarters, primarily as a result of reduced demand in certain of our end markets, such as the automotive sector. In addition, we may be required to take further precautionary and preemptive actions to comply with orders or directives of national, state or local authorities, and we may take additional actions that we determine to be in the best interests of our employees, customers, suppliers and other stakeholders, which could disrupt or restrict our ability to operate our facilities and travel to our domestic and international sites. The extent to which our operations will be impacted by COVID-19 in the remaining quarters of 2020 depends on a variety of factors, including, the duration, severity and scope of the pandemic, which remain uncertain.
We believe we are well positioned from a liquidity perspective to manage through the effects of the COVID-19 pandemic. Subsequent to the end of the first quarter, we borrowed $180.0 million under our revolving credit facility out of an abundance of caution associated with the pandemic. As of May 5, 2020, we had liquidity of approximately $550.0 million, consisting of cash and availability under our various credit facilities, primarily our revolving credit facility. We are in compliance with the covenants under our various credit facilities and expect to remain in compliance. We will continue to drive innovationevaluate and optimization throughout our business.take action to preserve liquidity and generate cash flow during the crisis, including by limiting capital expenditures and discretionary spending, as appropriate and where possible.
Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of ourthe Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Results of Operations - Consolidated
Comparison of the three months ended September 30, 2017March 31, 2020 and 2016 2019
For the three months ended September 30, 2017,March 31, 2020, net income from continuing operations was $23.0$15.9 million, compared with $20.5 million income from continuing operations for the three months ended September 30, 2016. Net income was $23.0 million, compared with net loss of $8.7$8.8 million for the three months ended September 30, 2016.March 31, 2019. For the three months ended September 30, 2017,March 31, 2020, net income attributable to common shareholders was $22.8$16.1 million, or earnings per share of $0.27,$0.19, compared with net lossincome attributable to common shareholders of $8.9$13.6 million, or lossearnings per share of $0.11,$0.16, for the three months ended September 30, 2016.March 31, 2019.
Net Sales
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| Three Months Ended |
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|
| September 30, |
|
|
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|
| March 31, | |||||||||||||||||||
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||||||||||||||
|
| (Dollars in thousands) |
|
|
| |||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||||||
Net sales |
| $ | 350,012 |
|
| $ | 288,527 |
|
| $ | 61,485 |
| 21.3 | % | $ | 252,326 | $ | 263,382 | $ | (11,056) | (4.2) | % | ||||||
Cost of sales |
|
| 246,396 |
|
|
| 199,546 |
|
|
| 46,850 |
| 23.5 | % | 171,588 | 185,523 | (13,935) | (7.5) | % | |||||||||
Gross profit |
| $ | 103,616 |
|
| $ | 88,981 |
|
| $ | 14,635 |
| 16.4 | % | $ | 80,738 | $ | 77,859 | $ | 2,879 | 3.7 | % | ||||||
Gross profit as a % of net sales |
|
| 29.6 | % |
|
| 30.8 | % |
|
|
|
|
|
| 32.0 | % | 29.6 | % |
Net sales increaseddecreased by $61.5$11.1 million, or 21.3%4.2%, infor the three months ended September 30, 2017,March 31, 2020, compared with the prior-year same period, driven by lower sales in Functional Coatings of $11.6 million, partially offset by higher sales in Color Solutions Performance Colors and Glass and Performance Coatings of $27.9 million, $17.8 million and $15.8 million, respectively.$0.5 million. The increasedecrease in net sales was driven in part by acquisitions including Cappelle, which contributed saleslower volume and mix of $17.8 million, ESL, which contributed sales of $10.5$6.2 million and SPC, which contributed salesunfavorable foreign currency impacts of $7.8$5.0 million, eachpartially mitigated by higher product pricing of which was acquired after the third quarter of 2016. The increase in net sales was also driven by organic growth, with Color Solutions growing $10.1 million and Performance Coatings growing $7.2$0.1 million.
Gross Profit
Gross profit increased $14.6$2.9 million, or 16.4%3.7%, infor the three months ended September 30, 2017,March 31, 2020, compared with the prior-year same period, and as a percentage of net sales, it decreased 120increased approximately 240 basis points to 29.6%32.0%. The increase in gross profit was primarily attributable to increases across all of our segments, with increasesan increase in Color Solutions Performance Colors and Glass and Performanceof $5.4 million, partially offset by a decrease in Functional Coatings of $7.9 million, $5.6 million and $1.8 million, respectively.$0.4 million. The increase in gross profit was primarily driven by acquisitionslower raw material costs of $11.9 million, favorable product pricing of $6.0$4.5 million, lower manufacturing costs of $4.7$3.9 million and favorablehigher product pricing of $0.1 million, partially offset by unfavorable sales volume and mix of $4.1 million, unfavorable foreign currency impacts of $1.6 million, partially offset by higher raw material costs of $8.6 million and lower sales volumes and mix of $0.3$1.2 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
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| Three Months Ended |
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| Three Months Ended | |||||||||||||||
|
| September 30, |
|
|
|
|
|
| March 31, | |||||||||||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||||||||||
|
| (Dollars in thousands) |
|
|
| |||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
Geographic Revenues on a sales origination basis |
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|
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|
|
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|
|
| ||||||||||||
Europe |
| $ | 169,718 |
| $ | 124,801 |
| $ | 44,917 |
| 36.0 | % | ||||||||||||
EMEA | $ | 113,746 | $ | 113,832 | $ | (86) | (0.1) | % | ||||||||||||||||
United States |
|
| 88,391 |
|
| 77,211 |
|
| 11,180 |
| 14.5 | % | 87,853 | 95,578 | (7,725) | (8.1) | % | |||||||
Asia Pacific |
|
| 50,864 |
|
| 46,646 |
|
| 4,218 |
| 9.0 | % | 31,052 | 31,723 | (671) | (2.1) | % | |||||||
Latin America |
|
| 41,039 |
|
| 39,869 |
|
| 1,170 |
| 2.9 | % | 19,675 | 22,249 | (2,574) | (11.6) | % | |||||||
Net sales |
| $ | 350,012 |
| $ | 288,527 |
| $ | 61,485 |
| 21.3 | % | $ | 252,326 | $ | 263,382 | $ | (11,056) | (4.2) | % |
The increasedecline in net sales of $61.5$11.1 million, compared with the prior-year same period, was driven by an increasea decrease in sales from all regions. The increasedecrease in sales from Europethe United States was primarily attributable to lower sales in Functional Coatings and Color Solutions of $5.3 million and $2.4 million, respectively. The decrease in sales from Latin America was attributable to lower sales in Functional Coatings of $2.8 million, partially offset by higher sales in Color Solutions Performance Coatings and Performance Colors and Glass of $17.9 million, $14.7 million and $12.3 million, respectively.$0.2 million. The increasedecrease in sales from the United
28
StatesAsia Pacific was attributable to lower sales in Functional Coatings of $1.1 million, partially offset by higher sales in Color Solutions and Performance Colors and Glass of $7.9 million and $3.9 million, respectively.$0.5 million. The increasedecrease in sales from Latin America and Asia PacificEMEA was attributable to lower sales in Functional Coatings of $2.4 million, partially offset by higher sales across all segments.in Color Solutions of $2.3 million.
The following table presents our sales on the basis of where sold products were shipped.
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| Three Months Ended |
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| September 30, |
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
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| (Dollars in thousands) |
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| |||||||
Geographic Revenues on a shipped-to basis |
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Europe |
| $ | 161,764 |
| $ | 122,986 |
| $ | 38,778 |
| 31.5 | % |
Asia Pacific |
|
| 75,274 |
|
| 62,812 |
|
| 12,462 |
| 19.8 | % |
United States |
|
| 65,356 |
|
| 60,172 |
|
| 5,184 |
| 8.6 | % |
Latin America |
|
| 47,618 |
|
| 42,557 |
|
| 5,061 |
| 11.9 | % |
Net sales |
| $ | 350,012 |
| $ | 288,527 |
| $ | 61,485 |
| 21.3 | % |
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 20172020 and 2016.2019.
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| Three Months Ended |
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| September 30, |
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| March 31, | |||||||||||||||
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||||||||||
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| (Dollars in thousands) |
|
|
| |||||||||||||||||||
Personnel expenses |
| $ | 36,364 |
| $ | 29,634 |
| $ | 6,730 |
| 22.7 | % | ||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
Personnel expenses (excluding R&D personnel expenses) | $ | 22,749 | $ | 26,179 | $ | (3,430) | (13.1) | % | ||||||||||||||||
Research and development expenses | 10,087 | 10,980 | (893) | (8.1) | % | |||||||||||||||||||
Business development | 535 | 1,858 | (1,323) | (71.2) | % | |||||||||||||||||||
Incentive compensation |
|
| 3,637 |
|
| 2,153 |
|
| 1,484 |
| 68.9 | % | 2,120 | 1,288 | 832 | 64.6 | % | |||||||
Stock-based compensation |
|
| 1,510 |
|
| 1,442 |
|
| 68 |
| 4.7 | % | 2,759 | 2,769 | (10) | (0.4) | % | |||||||
Intangible asset amortization | 1,678 | 2,343 | (665) | (28.4) | % | |||||||||||||||||||
Pension and other postretirement benefits |
|
| (20) |
|
| (109) |
|
| 89 |
| (81.7) | % | 158 | 245 | (87) | (35.5) | % | |||||||
Bad debt |
|
| 289 |
|
| 797 |
|
| (508) |
| (63.7) | % | 136 | 6 | 130 | NM | % | |||||||
Business development |
|
| 4,649 |
|
| 3,660 |
|
| 989 |
| 27.0 | % | ||||||||||||
Intangible asset amortization |
|
| 2,898 |
|
| 1,555 |
|
| 1,343 |
| 86.4 | % | ||||||||||||
All other expenses |
|
| 16,158 |
|
| 16,456 |
|
| (298) |
| (1.8) | % | 15,824 | 11,263 | 4,561 | 40.5 | % | |||||||
Selling, general and administrative expenses |
| $ | 65,485 |
| $ | 55,588 |
| $ | 9,897 |
| 17.8 | % | $ | 56,046 | $ | 56,931 | $ | (885) | (1.6) | % |
SG&A expenses were $9.9$0.9 million higherlower in the three months ended September 30, 2017,March 31, 2020, compared with the prior-year same period. The higherlower SG&A expenses compared withto the prior-year same period are primarily driven by expenses associated with businesses acquired within the last year of approximately $6.7 million. The acquisitions were the primary driver of the increase inlower personnel expenses, business development expenses and accounted for the entire increase in intangible asset amortization. The increase in incentive compensation of $1.5 million was drivenresearch and development expenses, partially offset by the Company’s performance relativehigher miscellaneous expenses, primarily related to targets established for certain awards compared with the prior-year same period.increased consulting and legal services.
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.
29
Three Months Ended | ||||||||||||
March 31, | ||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||
Strategic services | $ | 25,616 | $ | 28,259 | $ | (2,643) | (9.4) | % | ||||
Functional services | 25,551 | 24,615 | 936 | 3.8 | % | |||||||
Incentive compensation | 2,120 | 1,288 | 832 | 64.6 | % | |||||||
Stock-based compensation | 2,759 | 2,769 | (10) | (0.4) | % | |||||||
Selling, general and administrative expenses | $ | 56,046 | $ | 56,931 | $ | (885) | (1.6) | % |
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| Three Months Ended |
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| September 30, |
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
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| (Dollars in thousands) |
|
|
| |||||||
Strategic services |
| $ | 34,408 |
| $ | 29,385 |
| $ | 5,023 |
| 17.1 | % |
Functional services |
|
| 25,930 |
|
| 22,608 |
|
| 3,322 |
| 14.7 | % |
Incentive compensation |
|
| 3,637 |
|
| 2,153 |
|
| 1,484 |
| 68.9 | % |
Stock-based compensation |
|
| 1,510 |
|
| 1,442 |
|
| 68 |
| 4.7 | % |
Selling, general and administrative expenses |
| $ | 65,485 |
| $ | 55,588 |
| $ | 9,897 |
| 17.8 | % |
Restructuring and Impairment Charges
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| 2016 |
| $ Change |
| % Change | ||||||||||||||||
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| (Dollars in thousands) |
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(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
Employee severance |
| $ | 660 |
| $ | 20 |
| $ | 640 |
| 3,200.0 | % | $ | 658 | $ | 1,020 | $ | (362) | (35.5) | % | ||||
Other restructuring costs |
|
| 811 |
|
| 6 |
|
| 805 |
| 13,416.7 | % | 507 | 720 | (213) | (29.6) | % | |||||||
Restructuring and impairment charges |
| $ | 1,471 |
| $ | 26 |
| $ | 1,445 |
| 5,557.7 | % | $ | 1,165 | $ | 1,740 | $ | (575) | (33.0) | % |
Restructuring and impairment charges increaseddecreased in the third quarter of 2017three months ended March 31, 2020, compared with the prior-year same period. The increase wasdecrease primarily duerelates to actions takenlower costs associated with optimization programs in connection with recent acquisitions designed to achieve our targeted synergies.the first three months of 2020.
Interest Expense
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| 2016 |
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| % Change | ||||||||||||||||
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| (Dollars in thousands) |
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(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
Interest expense |
| $ | 6,326 |
| $ | 4,967 |
| $ | 1,359 |
| 27.4 | % | $ | 5,846 | $ | 6,347 | $ | (501) | (7.9) | % | ||||
Amortization of bank fees |
|
| 943 |
|
| 347 |
|
| 596 |
| 171.8 | % | 929 | 900 | 29 | 3.2 | % | |||||||
Interest swap amortization | (316) | (316) | — | — | % | |||||||||||||||||||
Interest capitalization |
|
| (21) |
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| (10) |
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| (11) |
| 110.0 | % | (929) | (636) | (293) | 46.1 | % | |||||||
Interest expense |
| $ | 7,248 |
| $ | 5,304 |
| $ | 1,944 |
| 36.7 | % | $ | 5,530 | $ | 6,295 | $ | (765) | (12.2) | % |
Interest expense increaseddecreased in the third quarter of 2017three months ended March 31, 2020, compared with the prior-year same period. The increasedecrease in interest expense was due to an increasedecreases in the average long-term debt balance and the average interest rate and an increase in capitalized interest during the three months ended September 30, 2017,March 31, 2020, compared with the prior-year same period and an increaseperiod.
Income Tax Expense
During the third quarter of 2017, incomeIncome tax expense for the three months ended March 31, 2020 was $7.4$5.1 million, or 24.3% of pre-tax income. In the third quarter of 2016, we recordedIncome tax expense of $6.2for the three months ended March 31, 2019 was $2.9 million, or 23.1%24.7% of pre-tax income. The tax expense infor the third quarter of 2017three months ended March 31, 2020 and 2016,March 31, 2019, as a percentage of pre-tax income, is lowerhigher than the U.S. federal statutory income tax rate of 35%,21% primarily as a result of foreign statutory rate differences.
30
Results of Operations - Segment Information
Comparison of the three months ended September 30, 2017March 31, 2020 and 2016 2019
PerformanceFunctional Coatings
Three Months Ended | Change due to | |||||||||||||||||||||||||
March 31, | Volume / | |||||||||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | Price | Mix | Currency | Other | ||||||||||||||||||
Segment net sales | $ | 155,435 | $ | 167,026 | $ | (11,591) | (6.9) | % | $ | (43) | $ | (8,023) | $ | (3,525) | $ | — | ||||||||||
Segment gross profit | 47,817 | 48,230 | (413) | (0.9) | % | (43) | (3,434) | (1,038) | 4,102 | |||||||||||||||||
Gross profit as a % of segment net sales | 30.8 | % | 28.9 | % |
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Segment net sales |
| $ | 146,238 |
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| $ | 130,453 |
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| $ | 15,785 |
| 12.1 | % |
| $ | 2,683 |
| $ | 3,428 |
| $ | 1,043 |
| $ | 8,631 |
| $ | — |
Segment gross profit |
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| 35,470 |
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| 33,636 |
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| 1,834 |
| 5.5 | % |
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| 2,683 |
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| 967 |
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| 697 |
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| 2,651 |
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| (5,164) |
Gross profit as a % of segment net sales |
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| 24.3 | % |
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| 25.8 | % |
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Net sales increased in Performance Coatingsdecreased compared with the prior-year same period, primarily driven by lower sales from SPC of $7.8 million, and increases in sales of colors, frits and glazes,industrial, automotive and porcelain enamel products of $2.9$5.1 million, $2.4$3.2 million and $1.1$3.1 million, respectively.The increasedecrease in net sales was driven by salesunfavorable volume and mix of $8.0 million and foreign currency impacts of $3.5 million. Gross profit decreased from acquisitions of $8.6 million, higher salesthe prior-year same period primarily due to unfavorable volume and mix of $3.4 million higher product pricing of $2.7 million, and favorable foreign currency impacts of $1.0 million. Gross profit increased $1.8 million from the prior-year same period, primarily driven by gross profit from acquisitions of $2.7 million, favorable product pricing impacts of $2.7 million, higher sales volumes and mix of $1.0 million, and favorable foreign currency impacts of $0.7 million, partially offsetmitigated by higherfavorable raw material costs of $4.8$2.8 million and higherfavorable manufacturing costs of $0.4$1.3 million.
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| March 31, | |||||||||||||||
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||||||||||
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| (Dollars in thousands) |
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(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
Segment net sales by Region |
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Europe |
| $ | 83,910 |
| $ | 69,171 |
| $ | 14,739 |
| 21.3 | % | ||||||||||||
EMEA | $ | 75,857 | $ | 78,265 | $ | (2,408) | (3.1) | % | ||||||||||||||||
United States | 46,694 | 51,979 | (5,285) | (10.2) | % | |||||||||||||||||||
Asia Pacific | 21,756 | 22,898 | (1,142) | (5.0) | % | |||||||||||||||||||
Latin America |
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| 26,699 |
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| 26,523 |
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| 176 |
| 0.7 | % | 11,128 | 13,884 | (2,756) | (19.9) | % | |||||||
Asia Pacific |
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| 24,264 |
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| 22,715 |
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| 1,549 |
| 6.8 | % | ||||||||||||
United States |
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| 11,365 |
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| 12,044 |
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| (679) |
| (5.6) | % | ||||||||||||
Total |
| $ | 146,238 |
| $ | 130,453 |
| $ | 15,785 |
| 12.1 | % | $ | 155,435 | $ | 167,026 | $ | (11,591) | (6.9) | % |
The net sales increasedecrease of $15.8$11.6 million was primarily driven by increaseslower sales from all regions. The decrease in sales from Europe, Asia Pacific and Latin America, partially offset by lower sales in the United States. The increase in sales from EuropeStates was primarily attributable to SPC, which was acquired in second quarter of 2017, which contributed $7.8 million, and higherlower sales of colors, frits and glazes, andautomotive, porcelain enamel, industrial and electronic products of $3.0$1.5 million, $1.5 million, $1.3 million and $1.0 million, respectively. The increasedecrease in sales from Latin America was primarily attributable to lower sales from all groups.The decrease in sales from EMEA was primarily attributable to lower sales of industrial, automotive and porcelain enamel products of $4.3 million, $0.9 million and $0.8 million, respectively, partially mitigated by higher sales of electronic products of $3.4 million. The decrease in sales from Asia Pacific was drivenprimarily attributable to decreased sales of porcelain enamel, automotive and decoration products of $0.7 million, $0.6 million and $0.3 million, partially mitigated by higher sales of digital inks and porcelain enamelindustrial products of $1.1 million and $0.4$0.5 million. Latin America sales remained relatively flat and the decrease in sales in the United States is fully attributable to lower sales of porcelain enamel.
Performance Colors and GlassColor Solutions
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| Change due to | Three Months Ended | Change due to | |||||||||||||||||||||||||||||||||||||||||||
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| Volume / |
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| March 31, | Volume / | ||||||||||||||||||||||||||||||||
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| 2017 |
| 2016 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Acquisitions |
| Other | |||||||||||||||||||||||||||||||||||||
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| (Dollars in thousands) |
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(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | Price | Mix | Currency | Other | |||||||||||||||||||||||||||||||||||||||||||||||
Segment net sales |
| $ | 110,578 |
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| $ | 92,793 |
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| $ | 17,785 |
| 19.2 | % |
| $ | 490 |
| $ | (1,519) |
| $ | 2,000 |
| $ | 16,814 |
| $ | — | $ | 96,891 | $ | 96,356 | $ | 535 | 0.6 | % | $ | 169 | $ | 1,851 | $ | (1,485) | $ | — | ||||||||||
Segment gross profit |
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| 37,880 |
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| 32,282 |
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| 5,598 |
| 17.3 | % |
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| 490 |
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| (1,536) |
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| 644 |
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| 5,397 |
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| 603 | 33,787 | 28,396 | 5,391 | 19.0 | % | 169 | (624) | (190) | 6,036 | ||||||||||||||||||
Gross profit as a % of segment net sales |
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| 34.3 | % |
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| 34.8 | % |
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| 34.9 | % | 29.5 | % |
Net sales increased compared with the prior-year same period, primarily driven by $10.5higher sales of pigment products of $7.1 million, partially offset by decreased sales of sales from ESL, which was acquired in the fourth quartersurface technology products of 2016, and $6.4 million in sales from Dip-Tech, which was acquired in the third quarterand dispersions and colorants of 2017.$0.2 million. The increase in net sales was driven by acquisitionsfavorable volume and mix of $16.8 million, favorable foreign currency impacts of $2.0$1.9 million and higher product pricing of $0.5$0.2 million, partially offset by unfavorable volume and mixforeign currency impacts of $1.5 million. Gross profit increased from the prior-year same period, primarily due to acquisitions, which contributed $5.4 million, favorable manufacturing costs of $1.5$4.3 million, favorable foreign currency impactsraw material costs of $0.6$1.7 million and higher product pricing of $0.5$0.2 million, partially offsetmitigated by lowerunfavorable sales volumesvolume and mix of $1.5$0.6 million and unfavorable raw material costsforeign currency impacts of $0.9$0.2 million.
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| Three Months Ended |
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| Three Months Ended | |||||||||||||||
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| September 30, |
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| March 31, | |||||||||||||||
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||||||||||||
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| (Dollars in thousands) |
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(Dollars in thousands) | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||
Segment net sales by Region |
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Europe |
| $ | 52,408 |
| $ | 40,149 |
| $ | 12,259 |
| 30.5 | % | ||||||||||||
United States |
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| 35,836 |
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| 31,924 |
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| 3,912 |
| 12.3 | % | $ | 41,159 | $ | 43,599 | $ | (2,440) | (5.6) | % | ||||
EMEA | 37,889 | 35,567 | 2,322 | 6.5 | % | |||||||||||||||||||
Asia Pacific |
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| 16,663 |
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| 15,112 |
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| 1,551 |
| 10.3 | % | 9,296 | 8,825 | 471 | 5.3 | % | |||||||
Latin America |
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| 5,671 |
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| 5,608 |
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| 63 |
| 1.1 | % | 8,547 | 8,365 | 182 | 2.2 | % | |||||||
Total |
| $ | 110,578 |
| $ | 92,793 |
| $ | 17,785 |
| 19.2 | % | $ | 96,891 | $ | 96,356 | $ | 535 | 0.6 | % |
The net sales increase of $17.8$0.5 million was driven by higher sales from all regions.EMEA, Asia Pacific and Latin America, partially offset by lower sales from the United States. The increase in sales from EuropeEMEA was primarily attributable to $8.9 million in sales from acquisitions and higher sales in decorationof pigment products of $2.4$2.5 million, partially offset by decreased sales of dispersions and colorants of $0.2 million.The increase in sales from the United StatesAsia Pacific was primarily attributable to sales from acquisitions of $7.9 million, partially offset by a decrease in sales of automobile and industrial products of $2.1 million and $1.7 million, respectively. The increase from Asia Pacific was due to an increase in sales of decoration and automobile products of $0.9 million and $0.7 million, respectively. Sales from Latin America remained relatively flat.
Color Solutions
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| Three Months Ended |
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| Change due to | ||||||||||||||||||
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| Volume / |
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| 2017 |
| 2016 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Acquisitions |
| Other | |||||||||||
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| (Dollars in thousands) |
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Segment net sales |
| $ | 93,196 |
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| $ | 65,281 |
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| $ | 27,915 |
| 42.8 | % |
| $ | 2,781 |
| $ | 6,505 |
| $ | 860 |
| $ | 17,769 |
| $ | — |
Segment gross profit |
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| 31,044 |
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| 23,178 |
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| 7,866 |
| 33.9 | % |
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| 2,781 |
|
| 305 |
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| 225 |
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| 3,841 |
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| 714 |
Gross profit as a % of segment net sales |
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| 33.3 | % |
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| 35.5 | % |
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Net sales increased compared with the prior-year same period, primarily due to sales from Cappelle of $17.8 million, and higher sales of pigments and surface technology products of $6.6 million and $3.7 million, respectively.pigment products. The increase in net sales was driven by acquisitions of $17.8 million, higher volumes and mix of $6.5 million, higher product pricing of $2.8 million, and favorable foreign currency impacts of $0.9 million. Gross profit increased from the prior-year same period, primarily due to acquisitions, which contributed $3.8 million, lower manufacturing costs of $3.6 million, higher product pricing of $2.8 million, favorable sales volumes
32
and mix of $0.3 million, and favorable foreign currency impacts of $0.2 million, partially offset by higher raw material costs of $2.9 million.
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| Three Months Ended |
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
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Segment net sales by Region |
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United States |
| $ | 41,190 |
| $ | 33,243 |
| $ | 7,947 |
| 23.9 | % |
Europe |
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| 33,400 |
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| 15,481 |
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| 17,919 |
| 115.7 | % |
Asia Pacific |
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| 9,937 |
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| 8,819 |
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| 1,118 |
| 12.7 | % |
Latin America |
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| 8,669 |
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| 7,738 |
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| 931 |
| 12.0 | % |
Total |
| $ | 93,196 |
| $ | 65,281 |
| $ | 27,915 |
| 42.8 | % |
The net sales increase of $27.9 million was driven by higher sales from all regions. The higher sales from Europe was driven by sales from Cappelle of $14.8 million and pigment products of $3.1 million. The increasedecrease in sales from the United States was primarily driven by lower sales inof surface technology products of $3.7 million, sales from Cappelle of $3.0 million and sales in pigment products of $1.4 million. The increases in sales from Asia Pacific and Latin America of $1.1 million and $0.9 million, respectively, were fully attributable to higher sales for pigment products.
Results of Operations - Consolidated
Comparison of the nine months ended September 30, 2017 and 2016
For the nine months ended September 30, 2017, income from continuing operations was $66.3 million, compared with $65.2 million income from continuing operations for the nine months ended September 30, 2016. Net income was $66.3 million, compared with net income of $0.7 million for the nine months ended September 30, 2016. For the nine months ended September 30, 2017, net income attributable to common shareholders was $65.7 million, or earnings per share of $0.79, compared with net income attributable to common shareholders of $0.1 million, or earnings per share of $0.01, for the nine months ended September 30, 2016.
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| Nine Months Ended |
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||||
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| (Dollars in thousands) |
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Net sales |
| $ | 1,019,199 |
|
| $ | 863,955 |
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| $ | 155,244 |
| 18.0 | % |
Cost of sales |
|
| 708,447 |
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|
| 592,372 |
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|
| 116,075 |
| 19.6 | % |
Gross profit |
| $ | 310,752 |
|
| $ | 271,583 |
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| $ | 39,169 |
| 14.4 | % |
Gross profit as a % of net sales |
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| 30.5 | % |
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| 31.4 | % |
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Net sales increased by $155.2 million, or 18.0%, in the nine months ended September 30, 2017, compared with the prior-year same period, driven by higher sales in Color Solutions, Performance Colors and Glass and Performance Coatings of $86.0 million, $43.8 million and $25.4 million, respectively. The increase in net sales was driven largely by acquisitions, including Cappelle, which contributed sales of $55.8 million, ESL, which contributed sales of $31.8 million, and SPC, which contributed sales of $13.5 million, each of which was acquired after the third quarter of 2016. The increase in net sales was also driven by organic growth with Color Solutions growing $28.1 million, Performance Coatings growing $11.1 million and Performance Colors and Glass growing $1.8 million.
Gross Profit
Gross profit increased $39.2 million, or 14.4%, in the nine months ended September 30, 2017, compared with the prior-year same period, and as a percentage of net sales, it decreased 90 basis points to 30.5%. The increase in gross profit was attributable to increases across all of our segments, with increases in Color Solutions, Performance Colors and Glass and Performance Coatings of
33
$21.8 million, $14.6 million and $4.2 million, respectively. The increase in gross profit was primarily driven by acquisitions of $31.2 million, lower manufacturing costs of $20.2 million, higher sales volumes and mix of $7.0 million, and favorable product pricing of $5.5$6.0 million, partially offset by higher raw material costs of $20.7 million and unfavorable foreign currency impacts of $2.6 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
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| 2016 |
| $ Change |
| % Change | ||||
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Geographic Revenues on a sales origination basis |
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Europe |
| $ | 490,008 |
| $ | 392,392 |
| $ | 97,616 |
| 24.9 | % |
United States |
|
| 265,385 |
|
| 224,234 |
|
| 41,151 |
| 18.4 | % |
Asia Pacific |
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| 142,732 |
|
| 134,470 |
|
| 8,262 |
| 6.1 | % |
Latin America |
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| 121,074 |
|
| 112,859 |
|
| 8,215 |
| 7.3 | % |
Net sales |
| $ | 1,019,199 |
| $ | 863,955 |
| $ | 155,244 |
| 18.0 | % |
The increase in net sales of $155.2 million, compared with the prior-year same period, was driven by higher sales from all regions. The increase in sales from Europe was attributable to higher sales in Color Solutions, Performance Colors and Glass and Performance Coatings of $53.8 million, $23.4 million and $20.5 million, respectively. The increase in sales from the United States was primarily attributable to higher sales in Color Solutions and Performance Colors and Glass of $26.5 million and $15.9 million. The increase in sales from Latin America and Asia Pacific was attributable to higher sales across all segments.
The following table presents our sales on the basis of where sold products were shipped.
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
|
| |||||||
Geographic Revenues on a shipped-to basis |
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
| $ | 464,872 |
| $ | 387,776 |
| $ | 77,096 |
| 19.9 | % |
Asia Pacific |
|
| 220,095 |
|
| 177,492 |
|
| 42,603 |
| 24.0 | % |
United States |
|
| 197,135 |
|
| 180,390 |
|
| 16,745 |
| 9.3 | % |
Latin America |
|
| 137,097 |
|
| 118,297 |
|
| 18,800 |
| 15.9 | % |
Net sales |
| $ | 1,019,199 |
| $ | 863,955 |
| $ | 155,244 |
| 18.0 | % |
34
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 2017 and 2016.
|
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| Nine Months Ended |
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| ||||
|
| September 30, |
|
|
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|
| ||||
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|
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|
|
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
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|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
|
| |||||||
Personnel expenses |
| $ | 102,872 |
| $ | 89,214 |
| $ | 13,658 |
| 15.3 | % |
Incentive compensation |
|
| 7,932 |
|
| 7,299 |
|
| 633 |
| 8.7 | % |
Stock-based compensation |
|
| 6,901 |
|
| 5,279 |
|
| 1,622 |
| 30.7 | % |
Pension and other postretirement benefits |
|
| (139) |
|
| 33 |
|
| (172) |
| (521.2) | % |
Bad debt |
|
| (78) |
|
| 1,020 |
|
| (1,098) |
| (107.6) | % |
Business development |
|
| 11,260 |
|
| 8,615 |
|
| 2,645 |
| 30.7 | % |
Intangible asset amortization |
|
| 7,037 |
|
| 4,312 |
|
| 2,725 |
| 63.2 | % |
All other expenses |
|
| 51,172 |
|
| 50,333 |
|
| 839 |
| 1.7 | % |
Selling, general and administrative expenses |
| $ | 186,957 |
| $ | 166,105 |
| $ | 20,852 |
| 12.6 | % |
SG&A expenses were $20.9 million higher in the nine months ended September 30, 2017, 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 $17.2 million. The acquisitions were the primary driver of the increase in personnel expenses, and accounted for the entire increase in intangible asset amortization. The increase in business development expenses is due to higher professional fees. 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 increases in the Company’s stock price.
35
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
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|
|
| Nine Months Ended |
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|
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|
| ||||
|
| September 30, |
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|
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|
| ||||
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|
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
| |||||||
Strategic services |
| $ | 99,081 |
| $ | 86,801 |
| $ | 12,280 |
| 14.1 | % |
Functional services |
|
| 73,043 |
|
| 66,726 |
|
| 6,317 |
| 9.5 | % |
Incentive compensation |
|
| 7,932 |
|
| 7,299 |
|
| 633 |
| 8.7 | % |
Stock-based compensation |
|
| 6,901 |
|
| 5,279 |
|
| 1,622 |
| 30.7 | % |
Selling, general and administrative expenses |
| $ | 186,957 |
| $ | 166,105 |
| $ | 20,852 |
| 12.6 | % |
Restructuring and Impairment Charges
|
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| Nine Months Ended |
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| ||||
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| September 30, |
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| ||||
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| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
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|
|
| (Dollars in thousands) |
|
|
| |||||||
Employee severance |
| $ | 2,455 |
| $ | 1,161 |
| $ | 1,294 |
| 111.5 | % |
Equity method investment impairment |
|
| 1,499 |
|
| — |
|
| 1,499 |
| — | % |
Asset impairment |
|
| 1,176 |
|
| — |
|
| 1,176 |
| — | % |
Other restructuring costs |
|
| 2,583 |
|
| 533 |
|
| 2,050 |
| 384.6 | % |
Restructuring and impairment charges |
| $ | 7,713 |
| $ | 1,694 |
| $ | 6,019 |
| 355.3 | % |
Restructuring and impairment charges increased in the first nine months of 2017 compared with the prior-year same period. The increase was primarily due 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 million of asset impairment associated with assets that have been taken out of service, as well as actions taken in connection with recent acquisitions designed to achieve our targeted synergies.
Interest Expense
|
|
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|
|
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|
|
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|
|
| Nine Months Ended |
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|
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|
| ||||
|
| September 30, |
|
|
|
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|
| ||||
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|
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|
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
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|
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|
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|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
|
| |||||||
Interest expense |
| $ | 17,591 |
| $ | 14,629 |
| $ | 2,962 |
| 20.2 | % |
Amortization of bank fees |
|
| 2,375 |
|
| 991 |
|
| 1,384 |
| 139.7 | % |
Interest capitalization |
|
| (45) |
|
| (41) |
|
| (4) |
| 9.8 | % |
Interest expense |
| $ | 19,921 |
| $ | 15,579 |
| $ | 4,342 |
| 27.9 | % |
Interest expense increased in the first nine months of 2017 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 nine months ended September 30, 2017, compared with the prior-year same period and an increase of the amortization of debt issuance costs associated with the 2017 Credit Facility, partially offset by a favorable average borrowing rate as a result of the refinancing completed in the first quarter of 2017.
Income Tax Expense
During the first nine months of 2017, income tax expense was $23.2 million, or 25.9% of pre-tax income. In the first nine months of 2016, we recorded tax expense of $22.7 million, or 25.8% of pre-tax income. The tax expense in the first nine months of 2017 and 2016, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35%, primarily as a result of foreign statutory rate differences.
36
Results of Operations - Segment Information
Comparison of the nine months ended September 30, 2017 and 2016
Performance Coatings
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| Nine Months Ended |
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|
|
| Change due to | ||||||||||||||||||
|
| September 30, |
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|
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|
|
| Volume / |
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|
| |||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
|
| Acquisitions | Other | |||||||||||
|
| (Dollars in thousands) |
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|
|
|
| |||||||||
Segment net sales |
| $ | 424,549 |
|
| $ | 399,166 |
|
| $ | 25,383 |
| 6.4 | % |
| $ | (427) |
| $ | 20,333 |
| $ | (8,851) |
| $ | 14,328 |
| $ | — |
Segment gross profit |
|
| 109,205 |
|
|
| 104,985 |
|
|
| 4,220 |
| 4.0 | % |
|
| (427) |
|
| 6,174 |
|
| (2,006) |
|
| 3,961 |
|
| (3,482) |
Gross profit as a % of segment net sales |
|
| 25.7 | % |
|
| 26.3 | % |
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
Net sales increased in Performance Coatings compared with the prior-year same period, primarily driven by sales from SPC of $13.5 million and an increase in organic growth across all product lines. The increase in net sales was driven by higher sales volume and mix of $20.3 million and sales from acquisitions of $14.3 million, partially offset by unfavorable foreign currency impacts of $8.9 million and lower product pricing of $0.4 million. Gross profit increased $4.2 million from the prior-year same period, primarily driven by lower manufacturing costs of $7.7 million, higher sales volumes and mix of $6.2 million and gross profit from acquisitions of $4.0 million, partially offset by higher raw material costs of $11.2 million, unfavorable foreign currency impacts of $2.0 million and unfavorable product pricing impacts of $0.4 million.
|
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|
|
|
| Nine Months Ended |
|
|
|
|
|
| ||||
|
| September 30, |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
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|
|
|
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|
|
|
|
|
|
|
| (Dollars in thousands) |
|
|
| |||||||
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
| $ | 241,884 |
| $ | 221,422 |
| $ | 20,462 |
| 9.2 | % |
Latin America |
|
| 80,268 |
|
| 75,933 |
|
| 4,335 |
| 5.7 | % |
Asia Pacific |
|
| 68,670 |
|
| 66,784 |
|
| 1,886 |
| 2.8 | % |
United States |
|
| 33,727 |
|
| 35,027 |
|
| (1,300) |
| (3.7) | % |
Total |
| $ | 424,549 |
| $ | 399,166 |
| $ | 25,383 |
| 6.4 | % |
The net sales increase of $25.4 million was driven by increases in sales from Europe, Latin America and Asia Pacific, partially offset by a decrease in sales from the United States. The increase in sales from Europe was primarily driven by sales from SPC of $13.5 million and an increase in sales of colors and porcelain enamel of $3.2 million and $2.6 million, respectively. The sales increase from Latin America was primarily drivenmitigated by higher sales of frits and glazes and porcelain enamel of $3.8 million and $0.8 million, respectively. The sales increase from Asia Pacific was primarily driven by higher sales of digital inks and porcelain enamel of $2.5 million and $0.9 million, respectively, partially offset by lower sales of frits and glazes of $1.7 million. The decrease in sales from the United States was attributable to lower sales of porcelain enamel.
37
Performance Colors and Glass
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|
|
|
|
|
|
|
|
|
| Nine Months Ended |
|
|
|
|
|
|
|
| Change due to | ||||||||||||||||||
|
| September 30, |
|
|
|
|
|
|
|
|
|
| Volume / |
|
|
|
|
|
|
|
|
| |||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Acquisitions |
| Other | |||||||||||
|
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Segment net sales |
| $ | 320,733 |
|
| $ | 276,896 |
|
| $ | 43,837 |
| 15.8 | % |
| $ | 1,672 |
| $ | 1,263 |
| $ | (1,105) |
| $ | 42,007 |
| $ | — |
Segment gross profit |
|
| 115,385 |
|
|
| 100,825 |
|
|
| 14,560 |
| 14.4 | % |
|
| 1,672 |
|
| (1,881) |
|
| (488) |
|
| 14,925 |
|
| 332 |
Gross profit as a % of segment net sales |
|
| 36.0 | % |
|
| 36.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net sales increase of $43.8 million was driven by sales from ESL of $31.8 million, Dip-Tech of $6.4 million and organic growth in electronicpigment products of $4.3$3.4 million. The increase in net sales was driven by acquisitions of $42.0 million, higher product pricing of $1.7 million, and favorable volume and mix of $1.3 million, partially offset by unfavorable foreign currency impacts of $1.1 million. Gross profit increased from the prior-year same period, primarily due to gross profit from acquisitions of $14.9 million, favorable manufacturing costs of $2.8 million, and higher product pricing of $1.7 million, partially offset by unfavorable raw material costs of $2.5 million, lower sales volumes and mix of $1.9 million, and unfavorable foreign currency impacts of $0.5 million.
|
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|
|
| Nine Months Ended |
|
|
|
|
|
| ||||
|
| September 30, |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
|
| |||||||
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
| $ | 144,586 |
| $ | 121,206 |
| $ | 23,380 |
| 19.3 | % |
United States |
|
| 112,772 |
|
| 96,833 |
|
| 15,939 |
| 16.5 | % |
Asia Pacific |
|
| 47,091 |
|
| 44,102 |
|
| 2,989 |
| 6.8 | % |
Latin America |
|
| 16,284 |
|
| 14,755 |
|
| 1,529 |
| 10.4 | % |
Total |
| $ | 320,733 |
| $ | 276,896 |
| $ | 43,837 |
| 15.8 | % |
The net sales increase of $43.8 million was driven by higher sales from all regions. The increase in sales from Europe was primarily driven by higher sales from acquisitions. The increase in sales from the United States was driven by sales from ESL of $20.2 million, partially offset by a decrease in sales of industrial products. The increase from Asia Pacific was primarily due to higher sales of automobile and decoration products of $1.6 million and $0.8 million, respectively. The increase from Latin America was primarily driven by an increase in sales of decoration products of $1.8 million, partially offset by a decrease in sales of automobile and industrial products.
38
Color Solutions
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|
|
| Nine Months Ended |
|
|
|
|
|
|
|
| Change due to | ||||||||||||||||||
|
| September 30, |
|
|
|
|
|
|
|
|
|
| Volume / |
|
|
|
|
|
|
|
|
| |||||||
|
| 2017 |
| 2016 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Acquisitions |
| Other | |||||||||||
|
| (Dollars in thousands) |
|
|
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|
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|
|
|
| |||||||||
Segment net sales |
| $ | 273,917 |
|
| $ | 187,893 |
|
| $ | 86,024 |
| 45.8 | % |
| $ | 4,211 |
| $ | 24,208 |
| $ | (317) |
| $ | 57,922 |
| $ | — |
Segment gross profit |
|
| 87,642 |
|
|
| 65,868 |
|
|
| 21,774 |
| 33.1 | % |
|
| 4,211 |
|
| 2,664 |
|
| (145) |
|
| 12,308 |
|
| 2,736 |
Gross profit as a % of segment net sales |
|
| 32.0 | % |
|
| 35.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased compared with the prior-year same period, primarily due to sales from Cappelle of $55.8 million, and higher sales of pigments and surface technology products of $17.8 million and $10.5 million, respectively. The increase in net sales was driven by sales from acquisitions of $57.9 million, higher volumes and mix of $24.2 million, and higher product pricing of $4.2 million, partially offset by unfavorable foreign currency impacts of $0.3 million. Gross profit increased from the prior-year same period due to gross profit from acquisitions of $12.3 million, lower manufacturing costs of $9.7 million, higher product pricing of $4.2 million, and higher sales volumes and mix of $2.7 million, partially offset by unfavorable raw material costs of $7.0 million and unfavorable foreign currency impacts of $0.1 million.
|
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|
|
|
| Nine Months Ended |
|
|
|
|
|
| ||||
|
| September 30, |
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| $ Change |
| % Change | ||||
|
| (Dollars in thousands) |
|
|
| |||||||
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 118,886 |
| $ | 92,374 |
| $ | 26,512 |
| 28.7 | % |
Europe |
|
| 103,538 |
|
| 49,764 |
|
| 53,774 |
| 108.1 | % |
Asia Pacific |
|
| 26,971 |
|
| 23,584 |
|
| 3,387 |
| 14.4 | % |
Latin America |
|
| 24,522 |
|
| 22,171 |
|
| 2,351 |
| 10.6 | % |
Total |
| $ | 273,917 |
| $ | 187,893 |
| $ | 86,024 |
| 45.8 | % |
The net sales increase of $86.0 million was driven by higher sales from all regions. The increase in sales from Europe was primarily driven by sales from Cappelle of $46.7 million and higher sales of pigments of $7.1 million. The increase in sales from the United States was primarily driven by sales from Cappelle of $9.1 million, surface technology products of $10.4 million and pigments of $5.0 million. The increases in sales from Asia Pacific and Latin America of $3.3 million and $2.4 million, respectively, were driven by an increase in pigment products.
Summary of Cash Flows for the ninethree months ended September 2017March 31, 2020 and 2016 2019
|
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| Nine Months Ended |
|
|
| ||||
|
| September 30, |
|
|
| ||||
|
| 2017 |
| 2016 |
| $ Change | |||
|
| (Dollars in thousands) | |||||||
Net cash provided by operating activities |
| $ | 34,691 |
| $ | 6,742 |
| $ | 27,949 |
Net cash used in investing activities |
|
| (99,245) |
|
| (26,036) |
|
| (73,209) |
Net cash provided by financing activities |
|
| 68,036 |
|
| 1,892 |
|
| 66,144 |
Effect of exchange rate changes on cash and cash equivalents |
|
| 3,147 |
|
| (422) |
|
| 3,569 |
Increase (decrease) in cash and cash equivalents |
| $ | 6,629 |
| $ | (17,824) |
| $ | 24,453 |
Three Months Ended | |||||||||
March 31, | |||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | ||||||
Net cash used in operating activities | $ | (71,535) | $ | (67,527) | $ | (4,008) | |||
Net cash provided by (used in) investing activities | 21,256 | (3,391) | 24,647 | ||||||
Net cash provided by (used in) financing activities | (1,697) | 23,877 | (25,574) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1,208) | 377 | (1,585) | ||||||
Decrease in cash and cash equivalents | $ | (53,184) | $ | (46,664) | $ | (6,520) |
39
The following table includes details of net cash provided by operating activities.
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| Nine Months Ended |
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| 2017 |
| 2016 |
| $ Change | ||||||||||||
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| (Dollars in thousands) | ||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ Change | |||||||||||||||
Cash flows from operating activities: |
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Net income |
| $ | 66,315 |
| $ | 708 |
| $ | 65,607 | $ | 16,133 | $ | 13,878 | $ | 2,255 | |||
(Gain) on sale of assets and business |
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| (1,214) |
|
| (3,459) |
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| 2,245 | |||||||||
Loss on sale of assets | 487 | 164 | 323 | |||||||||||||||
Depreciation and amortization |
|
| 36,040 |
|
| 33,599 |
|
| 2,441 | 10,451 | 14,264 | (3,813) | ||||||
Interest amortization |
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| 2,375 |
|
| 991 |
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| 1,384 | 929 | 900 | 29 | ||||||
Restructuring and impairment |
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| 3,629 |
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| 37,173 |
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| (33,544) | 307 | 179 | 128 | ||||||
Loss on extinguishment of debt |
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| 3,905 |
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| — |
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| 3,905 | |||||||||
Accounts receivable |
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| (44,952) |
|
| (44,370) |
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| (582) | (50,541) | (43,733) | (6,808) | ||||||
Inventories |
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| (31,379) |
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| (20,453) |
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| (10,926) | (11,297) | (12,652) | 1,355 | ||||||
Accounts payable |
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| 581 |
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| (3,209) |
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| 3,790 | (39,651) | (43,680) | 4,029 | ||||||
Other current assets and liabilities, net |
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| (11,655) |
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| 9,479 |
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| (21,134) | |||||||||
Other adjustments, net |
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| 11,046 |
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| (3,717) |
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| 14,763 | |||||||||
Net cash provided by operating activities |
| $ | 34,691 |
| $ | 6,742 |
| $ | 27,949 | |||||||||
Other current asset, liabilities and adjustments, net | 1,647 | 3,153 | (1,506) | |||||||||||||||
Net cash used in operating activities | $ | (71,535) | $ | (67,527) | $ | (4,008) |
Cash flows from operating activities. Cash flows provided byfrom operating activities decreased $4.0 million during the three months ended March 31, 2020 compared with the prior-year same period. The decrease in cash from operating activities was primarily due to a decrease in depreciation and amortization of $3.8 million and higher cash outflows for net working capital of $1.4 million, partially mitigated by an increase in net income of $2.3 million.
Cash flows used in investing activities. Cash flows from investing activities increased $27.9$24.6 million induring the first ninethree months of 2017ended March 31, 2020 compared with the prior-year same period. The increase in cash from investing activities was primarily due to higher earnings after consideration of non-cash items, partially offset by higherlower cash outflows for net working capital expenditures of $7.7$15.0 million and other current assets and liabilitieshigher collections of $6.3 million.financing receivables from the international receivable sales program (Note 8) of $8.6 million in the three months ended March 31, 2020, compared to the prior-year same period.
Cash flows from investingfinancing activities.Cash flows used in investingfrom financing activities increased $73.2decreased $25.6 million induring the first ninethree months of 2017ended March 31, 2020 compared with the prior-year same period. The increase was primarily due to higher cash outflows for acquisitions of $60.5 million, higher capital expenditures of $11.9 million, and lower proceeds from a closed site in Australia of $3.6 million which occurred during the nine months ended September 30, 2016. The cash outflow was partially offset by proceeds from the sale of an equity method investment of $2.3 million.
Cash flows from financing activities. Cash flows provided by financing activities increased $66.1 million in the first nine months of 2017 compared with the prior-year same period. As further discussed in Note 8, during the nine months ended September 30, 2017, we paid off our Previous Credit Facility and entered into our Credit Facility, consisting of a $400 million secured revolving line of credit, a $357.5 million secured term loan facility and a €250 million secured euro term loan facility. This transaction resulted in additional borrowings in the first nine months of 2017 of $82.2 million compared to the prior-year same period. Further, comparedCompared to the prior-year same period, net repayments under loans payable was $13.4 million higher. Additionally, during the first nine months of 2017, we paid debt issuance costs related to the Credit Facility entered into during the period, partially offset by no repurchases of treasury stock being made during the first nine months of 2017.
Capital Resources and Liquidity
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 million secured term loan facility with a term of seven years and a €250 million secured euro term loan facility with a term of seven years. The term loans are payable in equal quarterly installments in an amount 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 Credit Facility.
40
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, certain additional debt subject to satisfaction of certain covenant levels.
Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of certain of the Company’s U.S. subsidiaries and 65% of the stock of certain of the Company’s direct foreign subsidiaries.
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.
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At September 30, 2017, the Company had borrowed $355.7 million under the secured term loan facility at an interest rate of 3.73% and €248.8 million under the secured euro term loan facility at an interest rate of 2.75%. At September 30, 2017, there were no additional borrowings available under the term loan facilities.
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding at such time to (b) the Company’s consolidated EBITDA computed for the period of four consecutive fiscal quarters most recently ended.
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At September 30, 2017, there were $27.4 million borrowings under the revolving credit line at an interest rate of 3.48%. After reductions for outstanding letters of credit secured by these facilities, we had $367.9 million of additional borrowings available under the revolving credit facilities at September 30, 2017.
The Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.
Specific tofrom the revolving credit facility decreased by $51.3 million, partially offset by lower cash outflows for the Company is subjectpurchase of treasury stock of $25.0 million.
Capital Resources and Liquidity
Refer to Note 8 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a financial covenant regarding the Company’s maximum leverage ratio. If an eventdiscussion of default occurs, all amountsmajor debt instruments that were outstanding under the Credit Agreement may be accelerated and become immediately due and payable. At September 30, 2017, we were in compliance with the covenants of the Credit Facility.during 2020.
41
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$1.1 million and $0.2 million for the three months ended September 30, 2017March 31, 2020 and 2016. 2019. We had on hand precious metals owned by participants in our precious metals program of $36.3$68.8 million at September 30, 2017,March 31, 2020, and $28.7$66.2 million at December 31, 2016,2019, 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 September 30, 2017,March 31, 2020, or December 31, 2016, 2019, we may be required to furnish cash collateral in the future based on the quantity and market value of the precious metals under consignment and the amount of collateral-free lines provided by the financial institutions. The amount of cash collateral required is subject to review by the financial institutions and can be changed at any time at their discretion, based in part on their assessment of our creditworthiness.
Bank Guarantees and Standby Letters of Credit.
At September 30, 2017,March 31, 2020, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled totaled $7.15.0 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 $61.8 million and $7.3 million at September 30, 2017, and December 31, 2016, respectively. We had $43.5 million and $6.7 million of additional borrowings available under these lines at September 30, 2017, and December 31, 2016, respectively.
Liquidity Requirements
Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under the revolving credit facility, and cash flows from operating activities. As of September 30, 2017,March 31, 2020, we had $52.2$43.0 million of cash and cash equivalents. The majority of our cash and cash equivalents were held by foreign subsidiaries. Cash generated in the U.S. is generally used to pay down amounts outstanding under our revolving credit facility and for general corporate purposes, including acquisitions. If needed, we could repatriate the majority of cash held by foreign subsidiaries without the need to accrue and pay U.S. income taxes. We do not anticipate a liquidity need requiring such repatriation of these funds to the U.S.
During the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business which has historically been a part of our Performance Coatings reportable segment. We expect to use the proceeds of the sale to settle long-term obligations.
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 fromprovided by operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. WeAs of May 5, 2020, we had additional borrowing capacityliquidity of $411.4approximately $550.0 million, at September 30, 2017,consisting of cash and $112.0 million at December 31, 2016, availableavailability under our various credit facilities, primarily our revolving credit facility.
Our revolving credit facilityThe 2018 Revolving Facility subjects us to a customary financial covenant regarding the Company’s maximum leverage ratio. This covenant under our Amended Credit Facility restricts the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.
As of September 30, 2017,March 31, 2020, we were in compliance with our maximum leverage ratio covenant of 4.25x4.00x as our actual ratio was 2.79x,2.76, providing $80.3$91.2 million of EBITDA cushion on the leverage ratio, as defined within the Amended Credit Facility. To the extent that economic conditions in key markets deteriorate or we are unable to meet our business projections and EBITDA, as defined within the Amended Credit Facility, falls below approximately $130$203 million for rollingthe most recently ended trailing four quarters, based on reasonably consistent net debt levels with those as of March 31, 2017,
42
2020, we could become unable to maintain compliance with our leverage ratio covenant. In such case, our lenders could demand immediate payment of outstanding amounts and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all.
Difficulties experienced in global capital markets could affect the ability or willingness of counterparties to perform under our various lines of credit, forward contracts, and precious metals program. These counterparties are major, reputable, multinational institutions, all having investment-grade credit ratings. Accordingly, we do not anticipate counterparty default. However, an interruption in access to external financing could adversely affect our business prospects and financial condition.
We assess on an ongoing basis our portfolio of businesses, as well as our financial and capital structure, to ensure that we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate the possible divestiture of businesses that are not critical to our core strategic objectives and, where appropriate, pursue the sale of such businesses and assets. We also evaluate and pursue acquisition opportunities that we believe will enhance our strategic position. Generally, we publicly announce divestiture and acquisition transactions only when we have entered into a material definitive agreement or closed on those transactions.
Critical Accounting Policies and Their Application
There were no material changes to our critical accounting policies described in “Critical Accounting Policies” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Impact of Newly Issued Accounting Pronouncements
Refer to Note 2 to the condensed consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of accounting standards we recently adopted or will be required to adopt.
Risk Factors
Certain statements contained here and in future filings with the SEC reflect the Company’s expectations with respect to future performance and constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Company’s operations and business environment, which are difficult to predict and are beyond the control of the Company. Factors that could adversely affect our future financial performance include those described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to instruments that are sensitive to fluctuations in interest rates and foreign currency exchange rates.
Our exposure to interest rate risk arises from our debt portfolio. We manage this risk by controlling the mix of fixedfixed-rate versus variable-rate debt after considering the interest rate environment and expected future cash flows. To reduce our exposure to interest rate changes on variable ratevariable-rate debt, we have entered into interest rate swap agreements. These swaps effectively convert a portion of our variable ratevariable-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.
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| 2016 | ||||||||
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(Dollars in thousands) | 2020 | 2019 | ||||||||||
Variable-rate debt: |
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Carrying amount |
| $ | 679,638 |
| $ | 562,537 | ||||||
Carrying amount(1) | $ | 799,950 | $ | 801,764 | ||||||||
Fair value |
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| 683,160 |
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| 581,893 | 709,631 | 799,750 | ||||
Increase in annual interest expense from 1% increase in interest rates |
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| 4,311 |
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| 5,611 | 2,637 | 2,656 | ||||
Decrease in annual interest expense from 1% decrease in interest rates |
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| (2,420) |
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| (5,611) | (2,637) | (2,656) | ||||
Fixed-rate debt: |
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Carrying amount |
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| 7,011 |
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| 8,228 | 3,482 | 3,496 | ||||
Fair value |
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| 3,781 |
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| 7,315 | 1,594 | 1,557 | ||||
Change in fair value from 1% increase in interest rates |
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| NM |
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| NM | NM | NM | ||||
Change in fair value from 1% decrease in interest rates |
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| NM | NM | NM | ||||
Interest rate swaps: |
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Notional amount |
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| 256,326 |
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| — | 313,614 | 314,412 | ||||
Carrying amount and fair value |
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| 166 |
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| — | (26,773) | (14,698) | ||||
Change in fair value from 1% increase in interest rates |
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| 7,995 |
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| — | 10,023 | 11,399 | ||||
Change in fair value from 1% decrease in interest rates |
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| (5,270) |
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| — | (6,887) | (10,676) | ||||
Cross currency swaps: | ||||||||||||
Notional amount | 340,550 | 341,419 | ||||||||||
Carrying amount and fair value | 27,833 | 22,111 | ||||||||||
Change in fair value from 10% appreciation of U.S. dollar | (34,126) | (34,795) | ||||||||||
Change in fair value from 10% depreciation of U.S. dollar | 34,126 | 34,795 | ||||||||||
Foreign currency forward contracts: |
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Notional amount |
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| 212,100 |
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| 338,186 | 617,975 | 625,908 | ||||
Carrying amount and fair value |
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| 52 |
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| 350 | (947) | 601 | ||||
Change in fair value from 10% appreciation of U.S. dollar |
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| 4,406 |
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| 15,589 | 7,185 | 3,540 | ||||
Change in fair value from 10% depreciation of U.S. dollar |
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| (5,385) |
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| (19,054) | (8,781) | (4,144) |
(1)The carrying value of the term loan facility is net of unamortized debt issuance costs of $3.7 million and $3.9 million for the period ended March 31, 2020 and December 31, 2019, respectively.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Ferro is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) of the Exchange Act, Ferro has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of September 30, 2017,March 31, 2020, 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 September 30, 2017.March 31, 2020.
Changes in Internal Control over Financial Reporting
During the thirdfirst quarter of 2017,2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.We have not observed any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
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, pendingand is vigorously defending this proceeding. Since December 2018, additional complaints were filed in the same court by 25 other New York water suppliers against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. An additional complaint also was filed by the Hicksville Water District against the Company and others in New York State Supreme Court making substantially similar allegations and seeking damages of $900 million. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.
In addition to the proceedings described above, the Company and its consolidated subsidiaries.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.
There were no material changesReference is made to the risk factors disclosedPart 1, Item 1A. “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019. The risk factor set forth below updates, and should be read together with, such risk factors. Furthermore, the impact of the novel coronavirus COVID-19 may exacerbate the risks discussed therein, any of which could have a material effect on the Company.
COVID-19 has spread around the world, including in Asia, Europe, the Middle East, and North and South America, all of which are regions in which Ferro has operations. The spread of COVID-19 has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. The measures taken by the authorities have impacted and may further impact our workforce and operations, the operations of our customers, and those of our vendors and suppliers. There is considerable uncertainty regarding measures that authorities may implement in the future, which may restrict our operations and those of our suppliers and customers and disrupt logistics and other supply and distribution service providers. The spread of COVID-19 has caused us to modify our business practices (including site operations, employee workplace practices, travel, and participation in meetings, events, and conferences), and we may take further actions as required or recommended by authorities or deemed to be in the best interests of our employees and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely affected. These circumstances could negatively impact our business, results of operations, financial condition and cash flows.
The degree to which COVID-19 will impact our results depends on many factors, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, actions to contain the virus or limit its impact, and the speed and extent to which normal economic and operating conditions resume. Even after the COVID-19 outbreak has subsided, we may experience material adverse impacts to our business as a result of the economic impact and any recession or other macroeconomic weakness that may occur.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our ability to payBoard of Directors has not declared any dividends on common stock dividends is limited by certain covenants in ourduring 2020 or 2019. The Company’s Amended Credit Facility restricts the amount of dividends we can pay on our common stock. Any future dividends declared would be at the discretion of our Board of Directors and would depend on our financial condition, results of operations, cash flows, contractual obligations, the terms our financing agreements at the time a dividend is considered, and other than dividends payable solely in Capital Securities, as defined in the agreement.relevant factors.
The following table summarizes purchases of our common stock by the Company and affiliated purchasers during the three months ended September 30, 2017:March 31, 2020:
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Total Amount of | Maximum Dollar | ||||||||||
Shares Purchased | Amount that May | ||||||||||
Total Number | as Part of Publicly | Yet Be Purchased | |||||||||
of Shares | Average Price | Announced Plans | Under the Plans | ||||||||
(Dollars in thousands, except for per share amounts) | Purchased | Paid per Share | or Programs | or Programs | |||||||
January 1, 2020 to January 31, 2020 | — | $ | — | $ | — | $ | 46,192,535 | ||||
February 1, 2020 to February 29, 2020 | — | $ | — | $ | — | $ | 46,192,535 | ||||
March 1, 2020 to March 31, 2020 | — | $ | — | $ | — | $ | 46,192,535 | ||||
Total | — | $ | — |
__________________________
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
The exhibits listed in the attached Exhibit Index are the exhibits required by Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FERRO CORPORATION (Registrant) | ||
Date: |
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/s/ Peter T. Thomas | ||
Peter T. Thomas | ||
Chairman, President and Chief Executive Officer (Principal Executive Officer) | ||
Date: |
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/s/ Benjamin J. Schlater | ||
Benjamin J. Schlater | ||
Group Vice President and Chief Financial Officer (Principal Financial Officer) |
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated here by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934.
Exhibit:
Exhibit:
3 | Articles of incorporation and by-laws: | |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
31 | Certifications: | |
31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). | |
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101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Schema Document | |
101.CAL | Inline XBRL Calculation Linkbase Document | |
101.LAB | Inline XBRL Labels Linkbase Document | |
101.PRE | Inline XBRL Presentation Linkbase Document | |
101.DEF | Inline XBRL Definition Linkbase Document | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, | |
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Exhibit:
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*Indicates management contract or compensatory plan, contract or arrangement in which one or more Directors and/or executives of Ferro Corporation may be participants.
** Certain exhibits and schedules have been omitted and the registrant agrees to furnish a copy of any omitted exhibits and schedules to the Securities and Exchange Commission
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