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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒x NO ☐o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large |
| Accelerated |
| |
Non-accelerated |
| Smaller |
| |
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 March 31,September 30, 2019, there were 81,931,42881,968,492 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 | 30 | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 46 | |
47 | ||
48 | ||
48 | ||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 48 | |
49 | ||
49 | ||
49 | ||
| 49 | |
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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
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| Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||
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| March 31, | September 30, | September 30, | ||||||||||||||
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| 2019 |
| 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||
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| (Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | |||||||||||||||
Net sales |
| $ | 387,548 |
| $ | 405,532 | $ | 365,728 | $ | 395,163 | $ | 1,147,178 | $ | 1,216,934 | ||||
Cost of sales |
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| 285,692 |
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| 286,846 | 265,437 | 289,676 | 836,773 | 866,116 | ||||||||
Gross profit |
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| 101,856 |
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| 118,686 | 100,291 | 105,487 | 310,405 | 350,818 | ||||||||
Selling, general and administrative expenses |
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| 72,080 |
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| 73,092 | 67,723 | 64,344 | 211,448 | 207,560 | ||||||||
Restructuring and impairment charges |
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| 2,127 |
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| 4,106 | 6,226 | 2,561 | 18,613 | 10,435 | ||||||||
Other expense (income): |
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Interest expense |
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| 8,545 |
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| 7,962 | 8,138 | 8,553 | 25,198 | 24,715 | ||||||||
Interest earned |
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| (87) |
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| (201) | (93) | (110) | (329) | (497) | ||||||||
Foreign currency losses, net |
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| 738 |
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| 1,840 | 3,497 | 2,554 | 5,615 | 7,054 | ||||||||
Miscellaneous expense, net |
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| 275 |
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| 775 | ||||||||||||
Loss on extinguishment of debt | — | — | — | 3,226 | ||||||||||||||
Miscellaneous expense (income), net | (2,139) | 74 | (1,505) | (523) | ||||||||||||||
Income before income taxes |
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| 18,178 |
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| 31,112 | 16,939 | 27,511 | 51,365 | 98,848 | ||||||||
Income tax expense |
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| 4,300 |
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| 7,514 | 3,729 | 11,368 | 13,168 | 29,246 | ||||||||
Net income |
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| 13,878 |
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| 23,598 | 13,210 | 16,143 | 38,197 | 69,602 | ||||||||
Less: Net income attributable to noncontrolling interests |
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| 274 |
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| 207 | 390 | 85 | 902 | 485 | ||||||||
Net income attributable to Ferro Corporation common shareholders |
| $ | 13,604 |
| $ | 23,391 | $ | 12,820 | $ | 16,058 | $ | 37,295 | $ | 69,117 | ||||
Earnings per share attributable to Ferro Corporation common shareholders: |
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Basic earnings per share |
| $ | 0.16 |
| $ | 0.28 | $ | 0.16 | $ | 0.19 | $ | 0.45 | $ | 0.82 | ||||
Diluted earnings per share |
| $ | 0.16 |
| $ | 0.27 | $ | 0.16 | $ | 0.19 | $ | 0.45 | $ | 0.81 |
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 | Three Months Ended | Nine Months Ended | ||||||||||||||
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| March 31, | September 30, | September 30, | ||||||||||||||
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| 2019 |
| 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||
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| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Net income |
| $ | 13,878 |
| $ | 23,598 | $ | 13,210 | $ | 16,143 | $ | 38,197 | $ | 69,602 | ||||
Other comprehensive income, net of income tax: |
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Foreign currency translation income |
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| 3,508 |
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| 5,787 | ||||||||||||
Cash flow hedging instruments, unrealized (loss) gain |
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| (4,314) |
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| 1,314 | ||||||||||||
Foreign currency translation loss | (10,966) | (5,380) | (3,585) | (29,908) | ||||||||||||||
Cash flow hedging instruments, unrealized income (loss) | (1,644) | 3,610 | (13,307) | 3,588 | ||||||||||||||
Postretirement benefit liabilities income |
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| — |
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| 7 | — | — | — | 17 | ||||||||
Other comprehensive (loss) income, net of income tax |
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| (806) |
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| 7,108 | ||||||||||||
Other comprehensive loss, net of income tax | (12,610) | (1,770) | (16,892) | (26,303) | ||||||||||||||
Total comprehensive income |
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| 13,072 |
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| 30,706 | 600 | 14,373 | 21,305 | 43,299 | ||||||||
Less: Comprehensive income attributable to noncontrolling interests |
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| 380 |
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| 335 | ||||||||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | 146 | (115) | 648 | 106 | ||||||||||||||
Comprehensive income attributable to Ferro Corporation |
| $ | 12,692 |
| $ | 30,371 | $ | 454 | $ | 14,488 | $ | 20,657 | $ | 43,193 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
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| March 31, |
| December 31, | September 30, | December 31, | ||||||
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| 2019 |
| 2018 | 2019 | 2018 | ||||||
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| (Dollars in thousands) | (Dollars in thousands) | |||||||||
ASSETS | ASSETS | ASSETS | ||||||||||
Current assets |
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Cash and cash equivalents |
| $ | 57,637 |
| $ | 104,301 | $ | 51,741 | $ | 104,301 | ||
Accounts receivable, net |
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| 329,149 |
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| 306,882 | 320,359 | 306,882 | ||||
Inventories |
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| 366,628 |
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| 356,998 | 358,301 | 356,998 | ||||
Other receivables |
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| 86,022 |
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| 91,143 | 90,209 | 91,143 | ||||
Other current assets |
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| 25,474 |
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| 23,960 | 23,239 | 23,960 | ||||
Total current assets |
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| 864,910 |
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| 883,284 | 843,849 | 883,284 | ||||
Other assets |
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Property, plant and equipment, net |
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| 385,079 |
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| 381,341 | 382,842 | 381,341 | ||||
Goodwill |
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| 214,815 |
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| 216,464 | 203,595 | 216,464 | ||||
Intangible assets, net |
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| 179,349 |
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| 184,953 | 169,947 | 184,953 | ||||
Deferred income taxes |
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| 103,433 |
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| 103,488 | 103,648 | 103,488 | ||||
Operating leased assets |
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| 27,110 |
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| — | 23,206 | — | ||||
Other non-current assets |
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| 48,710 |
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| 42,930 | 55,595 | 42,930 | ||||
Total assets |
| $ | 1,823,406 |
| $ | 1,812,460 | $ | 1,782,682 | $ | 1,812,460 | ||
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | ||||||||||
Current liabilities |
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Loans payable and current portion of long-term debt |
| $ | 10,156 |
| $ | 10,260 | $ | 18,136 | $ | 10,260 | ||
Accounts payable |
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| 205,486 |
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| 256,573 | 178,412 | 256,573 | ||||
Accrued payrolls |
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| 33,305 |
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| 39,989 | 34,931 | 39,989 | ||||
Accrued expenses and other current liabilities |
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| 90,466 |
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| 77,995 | 91,185 | 77,995 | ||||
Total current liabilities |
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| 339,413 |
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| 384,817 | 322,664 | 384,817 | ||||
Other liabilities |
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Long-term debt, less current portion |
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| 860,441 |
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| 811,137 | 827,791 | 811,137 | ||||
Postretirement and pension liabilities |
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| 172,185 |
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| 173,046 | 168,218 | 173,046 | ||||
Operating leased non-current liabilities |
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| 17,562 |
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| — | 14,905 | — | ||||
Other non-current liabilities |
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| 57,908 |
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| 57,611 | 62,306 | 57,611 | ||||
Total liabilities |
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| 1,447,509 |
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| 1,426,611 | 1,395,884 | 1,426,611 | ||||
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; 81.9 million and 83.0 million shares outstanding at March 31, 2019, and December 31, 2018, 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; 82.0 million and 83.0 million shares outstanding at September 30, 2019, and December 31, 2018, respectively | 93,436 | 93,436 | ||||||||||
Paid-in capital |
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| 291,677 |
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| 298,123 | 293,970 | 298,123 | ||||
Retained earnings |
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| 269,582 |
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| 255,978 | 293,273 | 255,978 | ||||
Accumulated other comprehensive loss |
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| (106,273) |
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| (105,361) | (121,999) | (105,361) | ||||
Common shares in treasury, at cost |
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| (182,123) |
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| (165,545) | (181,094) | (165,545) | ||||
Total Ferro Corporation shareholders’ equity |
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| 366,299 |
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| 376,631 | 377,586 | 376,631 | ||||
Noncontrolling interests |
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| 9,598 |
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| 9,218 | 9,212 | 9,218 | ||||
Total equity |
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| 375,897 |
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| 385,849 | 386,798 | 385,849 | ||||
Total liabilities and equity |
| $ | 1,823,406 |
| $ | 1,812,460 | $ | 1,782,682 | $ | 1,812,460 |
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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| Ferro Corporation Shareholders | |||||||||||||||||||||||||||||||||||||
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| Common Shares |
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| Accumulated |
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| Common Shares | Accumulated | ||||||||||||||||||||||||||
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| in Treasury |
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| Other |
| Non- |
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| in Treasury | Other | Non- | ||||||||||||||||||||||||||
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| Common |
| Paid-in |
| Retained |
| Comprehensive |
| controlling |
| Total | Common | Paid-in | Retained | Comprehensive | Controlling | Total | |||||||||||||||||||||||
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| Shares |
| Amount |
| Stock |
| Capital |
| Earnings |
| (Loss) |
| Interests |
| Equity | Shares | Amount | Stock | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||||||||
|
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2017 |
| 9,386 |
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| (147,056) |
| $ | 93,436 |
| $ | 302,158 |
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| 171,744 |
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| (75,468) |
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| 11,866 |
| $ | 356,680 | |||||||||||||||||||||||
Net income |
| — |
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| — |
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| — |
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| — |
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| 23,391 |
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| — |
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| 207 |
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| 23,598 | |||||||||||||||||||||||
Other comprehensive income |
| — |
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| — |
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| — |
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| — |
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| — |
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| 6,980 |
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| 128 |
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| 7,108 | |||||||||||||||||||||||
Stock-based compensation transactions |
| (349) |
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| 8,209 |
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| — |
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| (6,986) |
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| — |
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| — |
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| — |
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| 1,223 | |||||||||||||||||||||||
Change in ownership interests |
| — |
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| — |
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| — |
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| 789 |
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| — |
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| — |
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| (2,228) |
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| (1,439) | |||||||||||||||||||||||
Adjustment for accounting standards update 2016-16 |
| — |
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| — |
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| — |
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| — |
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| 4,141 |
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| — |
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| — |
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| 4,141 | |||||||||||||||||||||||
Balances at March 31, 2018 |
| 9,037 |
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| (138,847) |
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| 93,436 |
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| 295,961 |
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| 199,276 |
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| (68,488) |
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| 9,973 |
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| 391,311 | |||||||||||||||||||||||
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Balances at December 31, 2018 |
| 10,433 |
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| (165,545) |
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| 93,436 |
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| 298,123 |
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| 255,978 |
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| (105,361) |
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| 9,218 |
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| 385,849 | 10,433 | $ | (165,545) | $ | 93,436 | $ | 298,123 | $ | 255,978 | $ | (105,361) | $ | 9,218 | $ | 385,849 | ||||||||
Net income |
| — |
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| — |
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| — |
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| — |
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| 13,604 |
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| — |
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| 274 |
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| 13,878 | — | — | — | — | 13,604 | — | 274 | 13,878 | |||||||||||||||
Other comprehensive (loss) income |
| — |
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| — |
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| — |
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| — |
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| — |
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| (912) |
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| 106 |
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| (806) | — | — | — | — | — | (912) | 106 | (806) | |||||||||||||||
Purchase of treasury stock |
| 1,441 |
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| (25,000) |
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| — |
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| — |
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| — |
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| — |
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| — |
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| (25,000) | 1,441 | (25,000) | — | — | — | — | — | (25,000) | |||||||||||||||
Stock-based compensation transactions |
| (370) |
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| 8,422 |
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| — |
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| (6,446) |
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| — |
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| — |
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| — |
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| 1,976 | (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 | 11,504 | (182,123) | 93,436 | 291,677 | 269,582 | (106,273) | 9,598 | 375,897 | |||||||||||||||
Net income | — | — | — | — | 10,871 | — | 238 | 11,109 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (3,360) | (116) | (3,476) | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation transactions | (1) | 37 | — | 2,181 | — | — | — | 2,218 | ||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (654) | (654) | ||||||||||||||||||||||||||||||||||||||
Balances at June 30, 2019 | 11,503 | (182,086) | 93,436 | 293,858 | 280,453 | (109,633) | 9,066 | 385,094 | ||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | 12,820 | — | 390 | 13,210 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | (12,366) | (244) | (12,610) | ||||||||||||||||||||||||||||||||||||||
Stock-based compensation transactions | (36) | 992 | — | 112 | — | — | — | 1,104 | ||||||||||||||||||||||||||||||||||||||
Balances at September 30, 2019 | 11,467 | $ | (181,094) | $ | 93,436 | $ | 293,970 | $ | 293,273 | $ | (121,999) | $ | 9,212 | $ | 386,798 |
Ferro Corporation Shareholders | |||||||||||||||||||||||
Common Shares | Accumulated | ||||||||||||||||||||||
in Treasury | Other | Non- | |||||||||||||||||||||
Common | Paid-in | Retained | Comprehensive | Controlling | Total | ||||||||||||||||||
Shares | Amount | Stock | Capital | Earnings | Loss | Interests | Equity | ||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Balances at December 31, 2017 | 9,386 | $ | (147,056) | $ | 93,436 | $ | 302,158 | $ | 171,744 | $ | (75,468) | $ | 11,866 | $ | 356,680 | ||||||||
Net income | — | — | — | — | 23,391 | — | 207 | 23,598 | |||||||||||||||
Other comprehensive income | — | — | — | — | — | 6,980 | 128 | 7,108 | |||||||||||||||
Stock-based compensation transactions | (349) | 8,209 | — | (6,986) | — | — | — | 1,223 | |||||||||||||||
Change in ownership interest | — | — | — | 789 | — | — | (2,228) | (1,439) | |||||||||||||||
Adjustment for accounting standards update 2016-16 | — | — | — | — | 4,141 | — | — | 4,141 | |||||||||||||||
Balances at March 31, 2018 | 9,037 | (138,847) | 93,436 | 295,961 | 199,276 | (68,488) | 9,973 | 391,311 | |||||||||||||||
Net income | — | — | — | — | 29,668 | — | 193 | 29,861 | |||||||||||||||
Other comprehensive loss | — | — | — | — | — | (31,334) | (307) | (31,641) | |||||||||||||||
Purchase of treasury stock | 287 | (6,014) | — | — | — | — | — | (6,014) | |||||||||||||||
Stock-based compensation transactions | (27) | 689 | — | 281 | — | — | — | 970 | |||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | (775) | (775) | |||||||||||||||
Balances at June 30, 2018 | 9,297 | (144,172) | 93,436 | 296,242 | 228,944 | (99,822) | 9,084 | 383,712 | |||||||||||||||
Net income | — | — | — | — | 16,058 | — | 85 | 16,143 | |||||||||||||||
Other comprehensive loss | — | — | — | — | — | (1,570) | (200) | (1,770) | |||||||||||||||
Purchase of treasury stock | 520 | (10,985) | — | — | — | — | — | (10,985) | |||||||||||||||
Stock-based compensation transactions | (39) | 1,071 | — | (173) | — | — | — | 898 | |||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | — | 3 | 3 | |||||||||||||||
Balances at September 30, 2018 | 9,778 | $ | (154,086) | $ | 93,436 | $ | 296,069 | $ | 245,002 | $ | (101,392) | $ | 8,972 | $ | 388,001 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
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| Three Months Ended | Nine Months Ended | |||||||||
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| March 31, | September 30, | |||||||||
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| 2019 |
| 2018 | 2019 | 2018 | ||||||
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| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Cash flows from operating activities |
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Net cash used in operating activities |
| $ | (67,527) |
| $ | (34,285) | ||||||
Net cash (used in) provided by operating activities | $ | (67,240) | $ | 35,686 | ||||||||
Cash flows from investing activities |
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| ||||||
Capital expenditures for property, plant and equipment and other long lived assets |
|
| (23,326) |
|
| (20,682) | (40,820) | (64,154) | ||||
Collections of financing receivables |
|
| 20,186 |
|
| — | 60,904 | — | ||||
Business acquisitions, net of cash acquired |
|
| (251) |
|
| (2,352) | (251) | (47,802) | ||||
Other investing activities |
|
| — |
|
| 22 | 1,930 | 37 | ||||
Net cash used in investing activities |
|
| (3,391) |
|
| (23,012) | ||||||
Net cash provided by (used in) investing activities | 21,763 | (111,919) | ||||||||||
Cash flows from financing activities |
|
|
|
|
|
| ||||||
Net borrowings under loans payable |
|
| 33 |
|
| 9,742 | ||||||
Net borrowings (payments) under loans payable | 8,220 | (17,182) | ||||||||||
Principal payments on term loan facility - Credit Facility |
|
| — |
|
| (1,664) | — | (304,060) | ||||
Principal payments on term loan facility - Amended Credit Facility |
|
| (2,050) |
|
| — | (6,150) | (4,100) | ||||
Proceeds from revolving credit facility - Credit Facility |
|
| — |
|
| 119,550 | — | 134,950 | ||||
Principal payments on revolving credit facility - Credit Facility |
|
| — |
|
| (79,367) | — | (212,950) | ||||
Proceeds from revolving credit facility - Amended Credit Facility |
|
| 104,174 |
|
| — | 216,066 | 168,023 | ||||
Principal payments on revolving credit facility - Amended Credit Facility |
|
| (52,866) |
|
| — | (193,595) | (56,090) | ||||
Proceeds from term loan facility - Amended Credit Facility | — | 466,075 | ||||||||||
Payment of debt issuance costs | — | (3,466) | ||||||||||
Acquisition-related contingent consideration payment |
|
| — |
|
| (348) | (5,200) | (9,464) | ||||
Purchase of treasury stock |
|
| (25,000) |
|
| — | (25,000) | (16,999) | ||||
Other financing activities |
|
| (414) |
|
| (2,133) | (757) | (3,516) | ||||
Net cash provided by financing activities |
|
| 23,877 |
|
| 45,780 | ||||||
Net cash (used in) provided by financing activities | (6,416) | 141,221 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents |
|
| 377 |
|
| 1,262 | (667) | (2,261) | ||||
Decrease in cash and cash equivalents |
|
| (46,664) |
|
| (10,255) | ||||||
(Decrease) Increase in cash and cash equivalents | (52,560) | 62,727 | ||||||||||
Cash and cash equivalents at beginning of period |
|
| 104,301 |
|
| 63,551 | 104,301 | 63,551 | ||||
Cash and cash equivalents at end of period |
| $ | 57,637 |
| $ | 53,296 | $ | 51,741 | $ | 126,278 | ||
Cash paid during the period for: |
|
|
|
|
|
| ||||||
Interest |
| $ | 8,232 |
| $ | 7,314 | $ | 25,475 | $ | 24,857 | ||
Income taxes |
| $ | 3,940 |
| $ | 4,575 | $ | 12,845 | $ | 17,577 |
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, 2018.
We produce our products primarily in the Europe, Middle East and Africa (“EMEA”) region, the United States (“U.S.”), the Asia Pacific region, and Latin America.
Operating results for the three and nine months ended March 31,September 30, 2019, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2019.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
On January 1, 2019, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases: (Topic 842), using the new transition method under ASU 2018-11, Targeted Improvements.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. ASU 2018-11 provided an additional transition method to adopt the new leasing standard. Under this new transition method, an entity initially applies the new leasing standard using a cumulative-effect adjustment to the opening balance of retained earnings but will continue to report comparative periods under existing guidance in accordance with ASC 840, Leases.
We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforwardcarry forward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that existexisted prior to adoption of the new standard. We also elected to combine lease and non-lease components for all asset classes. We elected the short-term lease recognition exemption for all leases that qualify. Consequently, for those leases that qualify, we will not recognize right of useright-of-use assets or lease liabilities on the balance sheet. The impact of adoption resulted in $28.6 million recognized as total right-of-use assets and total lease liabilities on our consolidated balance sheet as of January 1, 2019. Other than this impact, the adoption of ASU 2016-02 did not have a material impact on our remaining consolidated financial statements.
On January 1, 2019, we adopted FASB ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from Accumulated Other Comprehensive Income (Loss) Income to Retained Earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects. The Company has elected not to reclassify the stranded tax effects due toresulting from the Tax Cuts and Jobs Act within Accumulated Other Comprehensive Loss. As such, the adoption of this standard did not impact our consolidated financial statements.
On January 1, 2019, we adopted FASB ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The Company updated the disclosures for the fair value measurements in accordance with the standard updates.
On April 1, 2019, we adopted FASB 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. The Company updated its goodwill impairment test in accordance with the standard updates on a prospective basis.
NewAccounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 modifies
8
disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This pronouncement is effective for fiscal years beginning after December 15, 2020. 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.
No other new accounting pronouncements issued had, or are expected to have, a material impact on the Company’s consolidated financial statements.
3. Revenue
Revenues disaggregated by geography and reportable segment for the three months ended March 31,September 30, 2019, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| EMEA |
| United States |
| Asia Pacific |
| Latin America |
| Total | EMEA | United States | Asia Pacific | Latin America | Total | |||||||||||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||
Performance Coatings |
| $ | 113,426 |
| $ | 11,691 |
| $ | 22,865 |
| $ | 22,365 |
| $ | 170,347 | $ | 104,217 | $ | 8,964 | $ | 26,184 | $ | 23,026 | $ | 162,391 | |||||
Performance Colors and Glass |
|
| 57,448 |
|
| 40,288 |
|
| 16,570 |
|
| 6,539 |
|
| 120,845 | 50,670 | 37,694 | 19,123 | 5,255 | 112,742 | ||||||||||
Color Solutions |
|
| 35,567 |
|
| 43,599 |
|
| 8,825 |
|
| 8,365 |
|
| 96,356 | 33,350 | 38,759 | 10,411 | 8,075 | 90,595 | ||||||||||
Total net sales |
| $ | 206,441 |
| $ | 95,578 |
| $ | 48,260 |
| $ | 37,269 |
| $ | 387,548 | $ | 188,237 | $ | 85,417 | $ | 55,718 | $ | 36,356 | $ | 365,728 |
Revenues disaggregated by geography and reportable segment for the three months ended March 31,September 30, 2018, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| EMEA |
| United States |
| Asia Pacific |
| Latin America |
| Total | EMEA | United States | Asia Pacific | Latin America | Total | |||||||||||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||
Performance Coatings |
| $ | 119,116 |
| $ | 12,819 |
| $ | 25,947 |
| $ | 26,766 |
| $ | 184,648 | $ | 110,261 | $ | 12,170 | $ | 27,914 | $ | 25,594 | $ | 175,939 | |||||
Performance Colors and Glass |
|
| 61,344 |
|
| 37,091 |
|
| 16,515 |
|
| 5,555 |
|
| 120,505 | 55,782 | 43,087 | 18,564 | 5,844 | 123,277 | ||||||||||
Color Solutions |
|
| 40,483 |
|
| 41,626 |
|
| 9,938 |
|
| 8,332 |
|
| 100,379 | 33,276 | 43,699 | 10,136 | 8,836 | 95,947 | ||||||||||
Total net sales |
| $ | 220,943 |
| $ | 91,536 |
| $ | 52,400 |
| $ | 40,653 |
| $ | 405,532 | $ | 199,319 | $ | 98,956 | $ | 56,614 | $ | 40,274 | $ | 395,163 |
Revenues disaggregated by geography and reportable segment for the nine months ended September 30, 2019, follow:
EMEA | United States | Asia Pacific | Latin America | Total | |||||||||||
(Dollars in thousands) | |||||||||||||||
Performance Coatings | $ | 336,631 | $ | 30,448 | $ | 74,974 | $ | 68,917 | $ | 510,970 | |||||
Performance Colors and Glass | 161,850 | 119,126 | 53,288 | 17,727 | 351,991 | ||||||||||
Color Solutions | 105,960 | 125,499 | 28,248 | 24,510 | 284,217 | ||||||||||
Total net sales | $ | 604,441 | $ | 275,073 | $ | 156,510 | $ | 111,154 | $ | 1,147,178 |
Revenues disaggregated by geography and reportable segment for the nine months ended September 30, 2018, follow:
EMEA | United States | Asia Pacific | Latin America | Total | |||||||||||
(Dollars in thousands) | |||||||||||||||
Performance Coatings | $ | 355,510 | $ | 36,704 | $ | 82,990 | $ | 78,832 | $ | 554,036 | |||||
Performance Colors and Glass | 180,801 | 118,682 | 53,142 | 17,184 | 369,809 | ||||||||||
Color Solutions | 109,985 | 126,598 | 30,606 | 25,900 | 293,089 | ||||||||||
Total net sales | $ | 646,296 | $ | 281,984 | $ | 166,738 | $ | 121,916 | $ | 1,216,934 |
4. Acquisitions
Quimicer, S.A.
On October 1, 2018, the Company acquired 100% of the equity interests of Quimicer, S.A. (“Quimicer”), for €32.2€32.2 million (approximately $37.4$37.4 million), including the assumption of debt of €5.2€5.2 million (approximately $6.1 million). Its products include frits, varnishes, silk-screen printing pastes, crushed frits, pellets, atomized varnishes, and ceramic colors, as well as pigmented inks for digital printing on ceramic tiles within the Performance Coatings segment. The information included herein has been prepared based on the preliminary allocation of the purchase price using 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 $21.5 million of personal and real property, $15.9 million of net working capital, $3.0 million of goodwill and $3.0 million of deferred tax liability on the condensed consolidated balance sheets. During the third quarter of 2019, the Company recorded a goodwill impairment charge of $3.0 million as a result of the finalization of purchase accounting.
UWiZ Technology Co., Ltd.
On September 25, 2018, the Company acquired 100% of the equity interests of UWiZ Technology Co., Ltd. (“UWiZ”) for NTD 823.4 million (approximately $26.9 million) in cash. Its products include a range of slurry-based polishing products for the semiconductor and optoelectronics industry within the Color Solutions segment. The information included herein has been prepared based on the allocation of the purchase price using 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 $12.5 million of net working capital, $7.1 million of goodwill, $6.6 million of amortizable intangible assets, $2.4 million of personal and real property and $1.7 million of deferred tax liability on the condensed consolidated balance sheets.
Ernst Diegel GmbH
On August 31, 2018, the Company acquired 100% of the equity interests of Ernst Diegel GmbH (“Diegel”), including the real property of a related party, for €12.1 million (approximately $14.0 million) in cash. Its products include decorative coatings for glass and high-performance plastics coatings, primarily in automotive applications within the Performance Colors and Glass segment. 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. As of March 31, 2019, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company
9
preliminarily recorded $21.5$7.0 million of personal and real property, $15.9$4.8 million of net working capital, $3.0$2.0 million of amortizable intangible assets, $1.7 million of goodwill and $3.0$1.5 million of deferred tax liability on the condensed consolidated balance sheet. sheets.
UWiZ Technology Co., Ltd.MRA Laboratories, Inc.
On September 25,July 12, 2018, the Company acquired 100% of the equity interests of UWiZ Technology Co., Ltd.MRA Laboratories, Inc. (“UWiZ”MRA”) for NTD823.4$16.0 million (approximately $26.9 million) in cash.cash. Its products include dielectrics and electronic ink products for passive component applications within the Performance Colors and Glass segment. The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of March 31, 2019, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $12.5 million of net working capital, $7.1 million of goodwill, $6.6 million of amortizable intangible assets, $2.4 million of personal and real property and $1.7 million of deferred tax liability on the condensed consolidated balance sheet.
Ernst Diegel GmbH
On August 31, 2018, the Company acquired 100% of the equity interests of Ernst Diegel GmbH (“Diegel”), including the real property of a related party, for €12.1 million (approximately $14.0 million) in cash. The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of March 31, 2019, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $7.0 million of personal and real property, $4.8 million of net working capital, $2.0 million of amortizable intangible assets, $1.7 million of goodwill and $1.5 million of deferred tax liability on the condensed consolidated balance sheet.
MRA Laboratories, Inc.
On July 12, 2018, the Company acquired 100% of the equity interests of MRA Laboratories, Inc. (“MRA”) for $16.0 million in cash. The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of March 31, 2019, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $7.2 million of goodwill, $6.7 million of amortizable intangible assets, $3.4 million of net working capital, $1.6 million of deferred tax liability and $0.3 million of personal and real property on the condensed consolidated balance sheet. sheets.
PT Ferro Materials Utama
On June 29, 2018, the Company acquired the remaining 66% of the equity interests of PT Ferro Materials Utama (“FMU”) for $2.7 million in cash, in addition to the forgiveness of debt of $9.2 million, bringing our total ownership to 100%. Its products include additives and ceramics color products within the Performance Coatings segment. The Company previously recorded its investment in FMU as an equity method investment, and following this transaction, the Company fully consolidates FMU. Due to the change of
control that occurred, the Company recorded a gain on purchase of $2.6 million, which is recorded in Miscellaneous expense (income), net, related to the difference between the Company’s carrying value and fair value of the previously held equity method investment.investment during the second quarter of 2018.
Gardenia Quimica S.A.
On August 3, 2017, the Company acquired a majority interest of Gardenia Quimica S.A. (“Gardenia”) for $3.0 million.million. Its products include mediums, additives, binders, and other auxiliary products for the tile coatings industry within the Performance Coatings segment. The Company previously owned 46% of Gardenia and recorded it as an equity method investment. Following this transaction, the Company owned 83.5% and fully consolidates Gardenia. On March 1, 2018, the Company acquired the remaining equity interest in Gardenia for $1.4 million.
10
5. Inventories
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | September 30, | December 31, | ||||||
|
| 2019 |
| 2018 | 2019 | 2018 | ||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Raw materials |
| $ | 118,651 |
| $ | 116,219 | $ | 117,080 | $ | 116,219 | ||
Work in process |
|
| 60,297 |
|
| 55,884 | 58,143 | 55,884 | ||||
Finished goods |
|
| 187,680 |
|
| 184,895 | 183,078 | 184,895 | ||||
Total inventories |
| $ | 366,628 |
| $ | 356,998 | $ | 358,301 | $ | 356,998 |
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 $1.1 million and $0.4$0.5 million for the three months ended March 31,September 30, 2019 and 2018 and were $2.2 million and $1.3 million for the nine months ended September 30, 2019, and 2018, respectively. We had on-hand precious metals owned by participants in our precious metals consignment program of $53.6$65.9 million at March 31,September 30, 2019, and $55.2 million at December 31, 2018, measured at fair value based on market prices for identical assets.
6. Property, Plant and Equipment
Property, plant and equipment is reported net of accumulated depreciation of $527.3$537.9 million at March 31,September 30, 2019 and $523.4 million at December 31, 2018. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $8.4$4.0 million at March 31,September 30, 2019 and $4.8$7.7 million at March 31,September 30, 2018.
7. Goodwill and Other Intangible Assets
Details and activity in the Company’s goodwill by segment follow:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
| Performance |
|
| Performance | ||||||||||||||
|
| Performance |
| Color |
| Colors and |
|
| Performance | Color | Colors and | |||||||||||||
|
| Coatings |
| Solutions |
| Glass |
| Total | Coatings | Solutions | Glass | Total | ||||||||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||
Goodwill, net at December 31, 2018 |
| $ | 44,352 |
| $ | 50,545 |
| $ | 121,567 |
| $ | 216,464 | $ | 44,352 | $ | 50,545 | $ | 121,567 | $ | 216,464 | ||||
Impairments | (9,020) | — | — | (9,020) | ||||||||||||||||||||
Foreign currency adjustments |
|
| (855) |
|
| (319) |
|
| (475) |
|
| (1,649) | (1,926) | (809) | (1,114) | (3,849) | ||||||||
Goodwill, net at March 31, 2019 |
| $ | 43,497 |
| $ | 50,226 |
| $ | 121,092 |
| $ | 214,815 | ||||||||||||
Goodwill, net at September 30, 2019 | $ | 33,406 | $ | 49,736 | $ | 120,453 | $ | 203,595 |
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | September 30, | December 31, | ||||||
|
| 2019 |
| 2018 | 2019 | 2018 | ||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Goodwill, gross |
| $ | 273,282 |
| $ | 274,931 | $ | 271,082 | $ | 274,931 | ||
Accumulated impairment |
|
| (58,467) |
|
| (58,467) | (67,487) | (58,467) | ||||
Goodwill, net |
| $ | 214,815 |
| $ | 216,464 | $ | 203,595 | $ | 216,464 |
Goodwill is tested forFor the nine months ended September 30, 2019, the Company recorded a $9.0 million goodwill impairment atcharge within our Tile Coating Systems reporting unit, a component of the Performance Coatings reportable segment, against Restructuring and impairment charges. The goodwill impairment charge recorded was a result of the finalization of purchase accounting of the recent Quimicer, FMU, and Gardenia acquisitions that changed the carrying amount of net assets attributable to the reporting unit level onthat represented an annual basis in the fourth quarter, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying value. As of March 31, 2019, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.indicator.
11
Amortizable intangible assets consisted of the following:
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | September 30, | December 31, | ||||||
|
| 2019 |
| 2018 | 2019 | 2018 | ||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Gross amortizable intangible assets: |
|
|
|
|
|
| ||||||
Patents |
| $ | 5,430 |
| $ | 5,462 | $ | 5,371 | $ | 5,462 | ||
Land rights |
|
| 4,846 |
|
| 4,773 | 4,663 | 4,773 | ||||
Technology/know-how and other |
|
| 131,515 |
|
| 132,084 | 132,038 | 132,084 | ||||
Customer relationships |
|
| 99,217 |
|
| 100,368 | 97,268 | 100,368 | ||||
Total gross amortizable intangible assets |
|
| 241,008 |
|
| 242,687 | 239,340 | 242,687 | ||||
Accumulated amortization: |
|
|
|
|
|
| ||||||
Patents |
|
| (5,409) |
|
| (5,440) | (5,351) | (5,440) | ||||
Land rights |
|
| (2,966) |
|
| (2,909) | (2,932) | (2,909) | ||||
Technology/know-how and other |
|
| (51,384) |
|
| (48,898) | (56,419) | (48,898) | ||||
Customer relationships |
|
| (18,635) |
|
| (17,306) | (21,036) | (17,306) | ||||
Total accumulated amortization |
|
| (78,394) |
|
| (74,553) | (85,738) | (74,553) | ||||
Amortizable intangible assets, net |
| $ | 162,614 |
| $ | 168,134 | $ | 153,602 | $ | 168,134 |
Indefinite-lived intangible assets consisted of the following:
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | September 30, | December 31, | ||||||
|
| 2019 |
| 2018 | 2019 | 2018 | ||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Indefinite-lived intangibles assets: |
|
|
|
|
|
| ||||||
Trade names and trademarks |
| $ | 16,735 |
| $ | 16,819 | $ | 16,345 | $ | 16,819 |
8. Debt
Loans payable and current portion of long-term debt consisted of the following:
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | September 30, | December 31, | ||||||
|
| 2019 |
| 2018 | 2019 | 2018 | ||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Loans payable |
| $ | — |
| $ | 50 | $ | 8,270 | $ | 50 | ||
Current portion of long-term debt |
|
| 10,156 |
|
| 10,210 | 9,866 | 10,210 | ||||
Loans payable and current portion of long-term debt |
| $ | 10,156 |
| $ | 10,260 | $ | 18,136 | $ | 10,260 |
Long-term debt consisted of the following:
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
| ||||||
|
| March 31, |
| December 31, | September 30, | December 31, | ||||||
|
| 2019 |
| 2018 | 2019 | 2018 | ||||||
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| (Dollars in thousands) | (Dollars in thousands) | |||||||||
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Term loan facility, net of unamortized issuance costs, maturing 2024(1) |
| $ | 807,208 |
| $ | 809,022 | $ | 803,579 | $ | 809,022 | ||
Revolving credit facility |
|
| 51,308 |
|
| — | 22,471 | — | ||||
Capital lease obligations |
|
| 3,972 |
|
| 3,963 | 3,664 | 3,963 | ||||
Other notes |
|
| 8,109 |
|
| 8,362 | 7,943 | 8,362 | ||||
Total long-term debt |
|
| 870,597 |
|
| 821,347 | 837,657 | 821,347 | ||||
Current portion of long-term debt |
|
| (10,156) |
|
| (10,210) | (9,866) | (10,210) | ||||
Long-term debt, less current portion |
| $ | 860,441 |
| $ | 811,137 | $ | 827,791 | $ | 811,137 |
(1) The carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs of $4.6$4.1 million at March 31,September 30, 2019, and $4.8 million at December 31, 2018.
12
Amended Credit Facility
On April 25, 2018, the Company entered into an amendment (the “Amended Credit Facility”) to its existing credit facility (the “Credit Facility”), which Amended Credit Facility (a) provided a new revolving facility (the “2018 Revolving Facility”), which replaced the Company’s existing revolving facility, (b) repriced the (“Tranche B-1 Loans”), and (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars anddollars. The Amended Credit Facility will be used for ongoing working capital requirements and general corporate purposes. The Tranche B-2 Loans are borrowed by the Company and the Tranche B-3 Loans are borrowed on a joint and several basis by Ferro GmbH and Ferro Europe Holdings LLC.
The Amended Credit Facility consists of a $500 million secured revolving line of credit with a maturity of February 14, 2023, a $355 million secured term loan facility with a maturity of February 14, 2024, a $235 million secured term loan facility with a maturity of February 14, 2024 and a $230 million secured term loan facility with a maturity of February 14, 2024. The term loans are payable in equal quarterly installments in an amount equal to 0.25% of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof. In addition, the Company is required, on an annual basis, to make a prepayment in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Amended Credit Facility, which prepayment will be applied first to the term loans until they are paid in full, and then to the revolving loans.
Subject to the satisfaction of certain conditions, the Company can request additional commitments under the revolving line of credit or term loans in the aggregate principal amount of up to $250 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans. The Company can also raise certain additional debt or credit facilities subject to satisfaction of certain covenant levels.
Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Amended Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of certain of the Company’s U.S. subsidiaries and 65% of the stock of certain of the Company’s direct foreign subsidiaries. The Tranche B-3 Loans are guaranteed by the Company, the U.S. subsidiary guarantors and a cross-guaranty by the borrowers of the Tranche B-3 Loans, and are secured by the collateral securing the revolving loans and the other term loans, in addition to a pledge of the equity interests of Ferro GmbH.
Interest Rate – Term Loans: The interest rates applicable to the term loans will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable margin.
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The base rate for term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans is 1.25%.
The LIBOR rate for term loans shall not be less than 0.0% and the applicable margin for LIBOR rate term loans is 2.25%.
For LIBOR rate term loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
At March 31,September 30, 2019, the Company had borrowed $351.5$349.7 million under the Tranche B-1 Loans at an interest rate of 4.85%4.35%, $232.7$231.5 million under the Tranche B-2 Loans at an interest rate of 4.85%4.35%, and $227.7$226.6 million under the Tranche B-3 Loans at an interest rate of 4.85%4.35%. At March 31,September 30, 2019, there were no0 additional borrowings available under the Tranche B-1 Loans, Tranche B-2 Loans, andor Tranche B-3 Loans. In connection with these borrowings, we entered into swap agreements in the second quarter of 2018. At March 31,September 30, 2019, the effective interest rate for the Tranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans, after adjusting for the interest rate swap, was 5.17%5.12%, 3.33%3.03%, and 2.48%, respectively.
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the 2018 Revolving Credit Facility will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding (as defined in the Amended Credit Agreement) at such time to (b) the Company’s consolidated EBITDA (as defined in the Amended Credit Agreement) computed for the period of four consecutive fiscal quarters most recently ended.
13
TableThe base rate for revolving loans will be the highest of Contents(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%.
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The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.50% 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 March 31,September 30, 2019, there were $51.3$22.5 million borrowings under the 2018 Revolving Credit Facility at an interest rate of 4.49%4.27%. After reductions for outstanding letters of credit secured by these facilities, we had $444.0$472.9 million of additional borrowings available under the revolving credit facilities at March 31,September 30, 2019.
The Amended Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Amended Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.
Specific to the 2018 Revolving Facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Amended Credit Facility agreement may be accelerated and become immediately due and payable. At March 31,September 30, 2019, we were in compliance with the covenants of the Amended Credit Facility.
Credit Facility
On February 14, 2017, the Company entered into Thethe 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, 2018.
In conjunction with the refinancing of the Credit Facility, we recorded a charge of $3.2 million in connection with the write-off of unamortized issuance costs, which is recorded within Loss on extinguishment of debt in our condensed consolidated statement of operations for the nine months ended September 30, 2018.
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 and nine months ended March 31,September 30, 2019, 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 receivedreceives 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 $63.9$61.4 million at March 31,September 30, 2019 and $71.3 million at December 31, 2018. The carrying amount of deferred purchase price was $23.1$22.5 million at March 31,September 30, 2019 and $23.0 million at December 31, 2018, and is recorded in Other receivables.
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|
| March 31, |
| December 31, | ||
|
| 2019 |
| 2018 | ||
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| (Dollars in thousands) | ||||
Trade accounts receivable sold to financial institutions |
| $ | 54,873 |
| $ | 89,894 |
Cash proceeds from financial institutions |
|
| 36,497 |
|
| 57,316 |
Trade accounts receivable collected to be remitted(1) |
|
| 17,012 |
|
| 11,552 |
14
(1) Included Trade accounts receivable collected to be remitted were $14.3 million at September 30, 2019 and $11.6 million at December 31, 2018, and is recorded in Accrued expenseexpenses and other current liabilitiesliabilities.
Activity from these programs for the nine months ended September 30, 2019 is detailed below:
September 30, | |||
2019 | |||
(Dollars in thousands) | |||
Trade accounts receivable sold to financial institutions | $ | 58,861 | |
Cash proceeds from financial institutions | 39,364 |
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 $40.9$33.9 million and $41.4 million at March 31,September 30, 2019, and December 31, 2018, respectively. The unused portions of these lines provided additional liquidity of $28.1$20.1 million at March 31,September 30, 2019, and $30.3 million at December 31, 2018.
9. Financial Instruments
The following financial instrument assets (liabilities) are presented at their respective carrying amount, fair value and classification within the fair value hierarchy:
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| March 31, 2019 | September 30, 2019 | |||||||||||||||||||||||||||
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| Carrying |
| Fair Value | Carrying | Fair Value | ||||||||||||||||||||||||
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| Amount |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||
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| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||
Cash and cash equivalents |
| $ | 57,637 |
| $ | 57,637 |
| $ | 57,637 |
| $ | — |
| $ | — | $ | 51,741 | $ | 51,741 | $ | 51,741 | $ | — | $ | — | |||||
Loans payable | (8,270) | (8,270) | — | (8,270) | — | |||||||||||||||||||||||||
Term loan facility - Amended Credit Facility(1) |
|
| (807,208) |
|
| (794,728) |
|
| — |
|
| (794,728) |
|
| — | (803,579) | (801,424) | — | (801,424) | — | ||||||||||
Revolving credit facility |
|
| (51,308) |
|
| (50,709) |
|
| — |
|
| (50,709) |
|
| — | (22,471) | (22,757) | — | (22,757) | — | ||||||||||
Other long-term notes payable |
|
| (8,109) |
|
| (5,385) |
|
| — |
|
| (5,385) |
|
| — | (7,943) | (5,441) | — | (5,441) | — | ||||||||||
Cross currency swaps |
|
| 23,000 |
|
| 23,000 |
|
| — |
|
| 23,000 |
|
| — | 28,662 | 28,662 | — | 28,662 | — | ||||||||||
Interest rate swaps |
|
| (9,227) |
|
| (9,227) |
|
| — |
|
| (9,227) |
|
| — | (17,577) | (17,577) | — | (17,577) | — | ||||||||||
Foreign currency forward contracts, net |
|
| 1,021 |
|
| 1,021 |
|
| — |
|
| 1,021 |
|
| — | (265) | (265) | — | (265) | — |
December 31, 2018 | |||||||||||||||
Carrying | Fair Value | ||||||||||||||
Amount | Total | Level 1 | Level 2 | Level 3 | |||||||||||
(Dollars in thousands) | |||||||||||||||
Cash and cash equivalents | $ | 104,301 | $ | 104,301 | $ | 104,301 | $ | — | $ | — | |||||
Loans payable | (50) | (50) | — | (50) | — | ||||||||||
Term loan facility - Amended Credit Facility(1) | (809,022) | (796,796) | — | (796,796) | — | ||||||||||
Other long-term notes payable | (8,362) | (5,258) | — | (5,258) | — | ||||||||||
Cross currency swaps | 17,104 | 17,104 | — | 17,104 | — | ||||||||||
Interest rate swaps | (5,244) | (5,244) | — | (5,244) | — | ||||||||||
Foreign currency forward contracts, net | (270) | (270) | — | (270) | — |
(1) The carrying valuesvalue of the term loan facility areis net of unamortized debt issuance costs of $4.6$4.1 million and $4.8 million for the period ended March 31,September 30, 2019, and December 31, 2018, 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. The fair value of the term loan facility is based on market price information and is measured using the last available bid price of the instrument on a secondary market. The 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.
15
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
Cash Flow Hedges. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is recorded inas a component of Accumulated other comprehensive loss (“AOCL”) and reclassified into earnings in the same period during which the hedged transaction affects earnings.
The Company utilizes interest rate swaps to limit exposure to market fluctuations on floating-rate debt. During the second quarter of 2017, the Company entered into interest rate swap agreements that converted $150 million and €90 million of our term loans from variable interest rates to fixed interest rates. These swaps qualified for, and were designated as, cash flow hedges. These interest rate swap agreements were terminated in the second quarter of 2018 in connection with the refinancing of the Credit Facility.
During the second quarter of 2018, the Company entered into variable to fixed interest rate swaps with a maturity date of February 14, 2024. The notional amount is $316.8$315.2 million at March 31,September 30, 2019. 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,September 30, 2019, the Company expects it will reclassify net losses of approximately $1.4 $3.6million, 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 USU.S. dollar denominated, variable rate debt obligation into a Euro fixed rate obligation using a receive-float, pay fixedpay-fixed cross currency swaps in the second quarter of 2018. These swaps are hedging currency and interest rate risk associated with the Tranche B-3 Loans. These cross currency swaps are designated as cash flow hedges.The notional amount is $227.7$226.6 million at March 31,September 30, 2019, with a maturity date of February 14, 2024. As of March 31,September 30, 2019, the Company expects it will reclassify net gains of approximately $5.6$4.3 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 (loss) gain recognized in AOCL and the amount of (loss) gain (loss) reclassified into earnings for the three months ended March 31,September 30, 2019 and 2018, follow:
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| Amount of Gain (Loss) |
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| Amount of (Loss) Gain | ||||||||||||||||||
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| Amount of (Loss) Gain |
| Reclassified from |
| Location of Gain (Loss) |
| Amount of (Loss) Gain | Reclassified from | Location of (Loss) Gain | ||||||||||||||||||||
|
| Recognized in AOCL |
| AOCL into Income |
| Reclassified from |
| Recognized in AOCL | AOCL into Income | Reclassified from | ||||||||||||||||||||
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| 2019 |
|
| 2018 |
| 2019 |
| 2018 |
| AOCL into Income |
| 2019 | 2018 | 2019 | 2018 | AOCL into Income | |||||||||||||
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| (Dollars in thousands) |
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| (Dollars in thousands) | ||||||||||||||||||||||||
Interest rate swaps |
| $ | (4,107) |
| $ | 1,709 |
| $ | 178 |
| $ | (136) |
| Interest expense |
| $ | (2,328) | $ | 2,135 | $ | (363) | $ | (186) | Interest expense | ||||||
Cross currency swaps |
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| 5,080 |
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| — |
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| 1,632 |
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| — |
| Interest expense |
| 10,750 | 3,237 | 1,419 | 1,327 | Interest expense | ||||||||||
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| $ | 1,810 |
| $ | (136) |
| Total Interest expense |
| $ | 1,056 | $ | 1,141 | Total Interest expense | ||||||||||
Cross currency swaps |
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| 4,944 |
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| — |
| Foreign currency losses, net |
| 9,497 | 1,549 | Foreign currency losses, net | ||||||||||||
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| $ | 4,944 |
| $ | — |
| Total Foreign currency losses, net |
| $ | 9,497 | $ | 1,549 | Total Foreign currency losses, net |
The amount of (loss) gain recognized in AOCL and the amount of (loss) gain reclassified into earnings for the nine months ended September 30, 2019 and 2018, follow:
Amount of (Loss) Gain | |||||||||||||||
Amount of (Loss) Gain | Reclassified from | Location of (Loss) Gain | |||||||||||||
Recognized in AOCL | AOCL into Income | Reclassified from | |||||||||||||
2019 | 2018 | 2019 | 2018 | AOCL into Income | |||||||||||
(Dollars in thousands) | |||||||||||||||
Interest rate swaps | $ | (13,248) | $ | 1,761 | $ | (149) | $ | (197) | Interest expense | ||||||
Cross currency swaps | 11,122 | 12,666 | 4,579 | 2,215 | Interest expense | ||||||||||
$ | 4,430 | $ | 2,018 | Total Interest expense | |||||||||||
Cross currency swap | 11,275 | 11,864 | Foreign currency losses, net | ||||||||||||
$ | 11,275 | $ | 11,864 | 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 September 30, 2019 and 2018, are as follows:
September 30, | September 30, | |||||
2019 | 2018 | |||||
(Dollars in thousands) | ||||||
Interest expense | $ | 8,138 | $ | 8,553 | ||
Foreign currency losses, net | 3,497 | 2,554 |
The total amounts of expense and the respective line items in which the effect of cash flow hedges follow:is presented in the condensed consolidated statement of operations for the nine months ended September 30, 2019 and 2018, are as follows:
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| March 31, |
| March 31, | September 30, | September 30, | ||||||
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| 2019 |
| 2018 | 2019 | 2018 | ||||||
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| ||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Interest expense |
| $ | 8,545 |
| $ | 7,962 | $ | 25,198 | $ | 24,715 | ||
Foreign currency losses, net |
|
| 738 |
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| 1,840 | 5,615 | 7,054 |
16
Net investment hedge. 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 other comprehensive income or loss.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 2017, the Company designated a portion of its Euro denominated debt as a net investment hedge for accounting purposes. This net investment hedge was terminated in the second quarter of 2018.
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 USU.S. dollars. The notional amount is €97.0€96.5 million at March 31,September 30, 2019, 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 (loss) on net investment hedges recognized in AOCL, the amount reclassified into earnings and the amount of gain recognized in income on derivative (amount excluded from effectiveness testing) for the three months ended March 31,September 30, 2019 and 2018, follow:
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| Amount of Gain |
| Amount of Gain Recognized in |
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| Amount of Gain (Loss) |
| Reclassified from |
| Income on Derivative (Amount |
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| ||||||||||||
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| Recognized in AOCL |
| AOCL into Income |
| Excluded from Effectiveness Testing) |
| Location of Gain | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
|
| 2018 |
| 2019 |
|
| 2018 |
| (Loss) in Earnings | ||||
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| (Dollars in thousands) |
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Cross currency swaps |
| $ | 3,737 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1,001 |
| $ | — |
| Interest expense |
Net investment hedge |
|
| — |
|
| (860) |
|
| — |
|
| — |
|
| — |
|
| — |
| Foreign currency losses, net |
Amount of Gain | Amount of Gain Recognized in | |||||||||||||||||||
Amount of Gain | Reclassified from | Income on Derivative (Amount | ||||||||||||||||||
Recognized in AOCL | AOCL into Income | Excluded from Effectiveness Testing) | Location of Gain | |||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | in Earnings | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Cross currency swaps | $ | 5,977 | $ | 1,272 | $ | — | $ | — | $ | 897 | $ | 858 | Interest expense |
The amount of gain on net investment hedges recognized in AOCL, the amount reclassified into earnings and the amount of gain recognized in income on derivative (amount excluded from effectiveness testing) for the nine months ended September 30, 2019 and 2018, follow:
Amount of Gain | Amount of Gain Recognized in | |||||||||||||||||||
Amount of Gain | Reclassified from | Income on Derivative (Amount | ||||||||||||||||||
Recognized in AOCL | AOCL into Income | Excluded from Effectiveness Testing) | Location of Gain | |||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | in Earnings | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Cross currency swaps | $ | 8,454 | $ | 4,046 | $ | — | $ | — | $ | 2,847 | $ | 1,353 | Interest expense |
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 gainslosses of $1.5$1.6 million in the three and nine months ended March 31,September 30, 2019 and net gains of $0.4$1.3 million and $2.7 million in the three and nine months ended March 31,September 30, 2018, 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 $410.1606.1 million at March 31,September 30, 2019 and $387.2 million at December 31, 2018.
The following table presents the effect on our condensed consolidated statements of operations for the three and nine months ended March 31,September 30, 2019 and 2018, respectively, of our foreign currency forward contracts:
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| Recognized in Earnings |
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| Three Months Ended |
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| March 31, |
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| 2019 |
| 2018 |
| Location of Gain in Earnings | ||
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| (Dollars in thousands) |
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Foreign currency forward contracts |
| $ | 1,524 |
| $ | 391 |
| Foreign currency losses, net |
Amount of (Loss) Gain | ||||||||
Recognized in Earnings | ||||||||
Three Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | Location of (Loss) Gain in Earnings | ||||||
(Dollars in thousands) | ||||||||
Foreign currency forward contracts | $ | (1,642) | $ | 1,339 | Foreign currency losses, net |
Amount of (Loss) Gain | ||||||||
Recognized in Earnings | ||||||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | Location of (Loss) Gain in Earnings | ||||||
(Dollars in thousands) | ||||||||
Foreign currency forward contracts | $ | (1,615) | $ | 2,728 | Foreign currency losses, net |
Location and Fair Value Amount of Derivative Instruments
The following table presents the fair values of our derivative instruments on our condensed consolidated balance sheets. All derivatives are reported on a gross basis.
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| March 31, |
| December 31, |
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| September 30, | December 31, | ||||||||
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| 2019 |
| 2018 |
| Balance Sheet Location | 2019 | 2018 | Balance Sheet Location | |||||||
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| (Dollars in thousands) |
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| (Dollars in thousands) | |||||||||||
Asset derivatives: |
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Cross currency swaps |
| $ | 9,164 |
| $ | 9,606 |
| Other current assets | $ | 7,298 | $ | 9,606 | Other current assets | |||
Cross currency swaps |
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| 13,836 |
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| 7,498 |
| Other non-current assets | 21,364 | 7,498 | Other non-current assets | |||||
Foreign currency forward contracts |
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| 2,291 |
|
| 626 |
| Other current assets | 2,025 | 626 | Other current assets | |||||
Liability derivatives: |
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Interest rate swaps |
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| (1,396) |
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| (755) |
| Accrued expenses and other current liabilities | (3,556) | (755) | Accrued expenses and other current liabilities | |||||
Interest rate swaps |
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| (7,831) |
|
| (4,489) |
| Other non-current liabilities | (14,021) | (4,489) | Other non-current liabilities | |||||
Foreign currency forward contracts |
| $ | (1,270) |
| $ | (896) |
| Accrued expenses and other current liabilities | $ | (2,290) | $ | (896) | Accrued expenses and other current liabilities |
10. Income Taxes
Income tax expense for the threenine months ended March 31,September 30, 2019 was $4.3$13.2 million, or 23.7%25.6% of pre-tax income. Income tax expense for the threenine months ended March 31,September 30, 2018 was $7.5$29.2 million, or 24.2%29.6% of pre-tax income. The tax expense induring the first quarternine months ended September 30, 2019, as a percentage of 2019 andpre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences. The tax expense for the nine months ended September 30, 2018, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences.differences and discrete items recorded in the third quarter. The discrete items recorded in the third quarter of 2018 primarily include a reduction to the tax expense related to provision to return adjustments and an increase from the impact of resolving a foreign tax audit.
11. Contingent Liabilities
We have recorded environmental liabilities of $6.6$6.0 million at March 31,September 30, 2019 and $8.5 million at December 31, 2018, for costs associated with the environmental remediation of certain of our current or former properties that have been contaminated. The liability at March 31, 2019,within and December 31, 2018, was primarily comprised of liabilities related to a non-operating facility in Brazil, and for retained environmental obligations related to a site inoutside the United States that was part of the sale of our North American and Asian metal powders product lines in 2013.States. These costs include, but are not limited to, legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring, and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring, the ultimate cost of required remediation, and other circumstances.
In November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane. The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages. The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to the liability for the plaintiff’s claims, and is vigorously defending this proceeding. Since December 2018, additional complaints have been filed in the same court by 1525 other New York water suppliers and in New York State Supreme Court by one water supplier against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.
In addition to the proceedings described above, the Company and its consolidated subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety,
employment, intellectual property, and other matters, including with respect to divested businesses. The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s
18
consolidated financial position, results of operations, or cash flows. We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.
12. Retirement Benefits
Net periodic benefit (credit) cost of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the three months ended March 31,September 30, 2019 and 2018, respectively, follow:
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| U.S. Pension Plans |
| Non-U.S. Pension Plans |
| Other Benefit Plans | U.S. Pension Plans | Non-U.S. Pension Plans | Other Benefit Plans | |||||||||||||||||||||||||||
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| Three Months Ended March 31, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||||
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
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| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||||||||||||
Service cost |
| $ | 3 |
| $ | 3 |
| $ | 433 |
| $ | 461 |
| $ | 1 |
| $ | 1 | $ | 3 | $ | 3 | $ | 445 | $ | 436 | $ | 1 | $ | 1 | ||||||
Interest cost |
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| 2,963 |
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| 2,788 |
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| 702 |
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| 689 |
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| 175 |
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| 183 | 2,963 | 2,788 | 682 | 653 | 175 | 183 | ||||||||||||
Expected return on plan assets |
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| (3,153) |
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| (3,995) |
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| (210) |
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| (233) |
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| — |
|
| — | (3,153) | (3,995) | (204) | (222) | — | — | ||||||||||||
Amortization of prior service cost |
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| — |
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| — |
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| 20 |
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| 11 |
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| — |
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| — | — | — | 9 | 10 | — | — | ||||||||||||
Net periodic benefit (credit) cost |
| $ | (187) |
| $ | (1,204) |
| $ | 945 |
| $ | 928 |
| $ | 176 |
| $ | 184 | $ | (187) | $ | (1,204) | $ | 932 | $ | 877 | $ | 176 | $ | 184 |
Net periodic benefit (credit) cost for the nine months ended September 30, 2019 and 2018, respectively, follow:
U.S. Pension Plans | Non-U.S. Pension Plans | Other Benefit Plans | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Service cost | $ | 8 | $ | 9 | $ | 1,337 | $ | 1,344 | $ | 2 | $ | 2 | ||||||
Interest cost | 8,889 | 8,363 | 2,091 | 2,009 | 526 | 549 | ||||||||||||
Expected return on plan assets | (9,458) | (11,984) | (626) | (681) | — | — | ||||||||||||
Amortization of prior service cost | — | — | 39 | 32 | — | — | ||||||||||||
Net periodic benefit (credit) cost | $ | (561) | $ | (3,612) | $ | 2,841 | $ | 2,704 | $ | 528 | $ | 551 |
Interest 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.
13. Stock-Based Compensation
On May 3, 2018, our shareholders approved the 2018 Omnibus Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 22, 2018, 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-quality key employees and directors, motivating such employees and directors to achieve the Company’s short- and long-range performance goals and objectives, and thereby align their interests with those of the Company’s shareholders. The Plan reserves 4,500,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restricted awards, performance awards, other common stock-based awards, and dividend equivalent rights.
The Plan replaced the 2013 Omnibus Incentive Plan (the “Previous Plan”), and no future grants may be made under the Previous Plan. However, any outstanding awards or grants made under the Previous Plan will continue until the end of their specified terms.
In the first quarternine months of 2019, our Board of Directors granted 0.3 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 threenine months ended March 31,September 30, 2019:
Stock Options | ||||
Weighted-average grant-date fair value | $ | 6.47 | ||
Expected life, in years | 5.6 | |||
Risk-free interest rate | 2.5 | % | ||
Expected volatility | 33.9 | % |
The weighted average grant date fair value of our performance share units granted in the threenine months ended March 31,September 30, 2019, was $17.61. 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.
19
The weighted-average grant date fair value of our restricted share units granted in the threenine months ended March 31,September 30, 2019, was $17.61.$17.18. We measure the fair value of restricted share units based on the closing market price of our common stock on the date of the grant. The restricted share units vest over three years.
We recognized stock-based compensation expense of $2.8$0.3 million and $5.9 million for the three and nine months ended March 31,September 30, 2019, respectively, and $2.4$1.4 million and $5.2 million for the three and nine months ended March 31, 2018.September 30, 2018 respectively. At March 31,September 30, 2019, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $13.8$8.8 million and is expected to be recognized over the remaining vesting period of the respective grants, through the first quarter of 2022.
14. Restructuring and Optimization Programs
Total restructuring and impairment charges were $2.1$6.2 million and $4.1$18.6 million for the three and nine months ended March 31,September 30, 2019 and March 31,$2.6 million and $10.4 million for the three and nine months ended September 30, 2018, respectively.
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 charges primarily relateprogram involves our global operations and certain functions and initiatives to costsincrease operational efficiencies, some of which is associated with integration of our recent acquisitionsacquisitions. As a result of the actions, the Company expects to incur total charges of approximately $7.0 million, substantially all of which will be for severance costs. Charges associated with these programs were $2.0 million and optimization programs,$5.5 million for the three and nine months ended September 30, 2019.
The charges associated with the program are further summarized below.
Employee | Other | ||||||||
Severance | Costs | Total | |||||||
(Dollars in thousands) | |||||||||
Balances at December 31, 2018 | $ | 1,151 | $ | 1,288 | $ | 2,439 | |||
Restructuring charges | 6,782 | 2,811 | 9,593 | ||||||
Cash payments | (6,998) | (1,772) | (8,770) | ||||||
Non-cash items | (40) | (1,453) | (1,493) | ||||||
Balances at September 30, 2019 | $ | 895 | $ | 874 | $ | 1,769 |
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| Employee |
| Other |
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|
| Severance |
| Costs |
| Total | |||
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| (Dollars in thousands) | |||||||
Balances at December 31, 2018 |
| $ | 1,151 |
| $ | 1,288 |
| $ | 2,439 |
Restructuring charges |
|
| 1,155 |
|
| 972 |
|
| 2,127 |
Cash payments |
|
| (1,460) |
|
| (488) |
|
| (1,948) |
Non-cash items |
|
| (7) |
|
| (721) |
|
| (728) |
Balances at March 31, 2019 |
| $ | 839 |
| $ | 1,051 |
| $ | 1,890 |
We expect to make cash payments to settle the remaining liability for employee severance benefits and other costs over the next twelve months, except where legal or contractual obligations would require it to extend beyond that period.
15. Leases
The Company determines if a contract is a lease at inception. 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.
The right of useright-of-use asset represents the right to use an underlying asset for the lease term and the lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right of useRight-of-use assets and lease liabilities are recognized as of the commencement date based on the present value of the lease payments over the lease term. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise the applicable option.
The Company’s lease payments consist of both fixed and variable lease payments. Residual value guarantees are not common within the Company’s lease agreements nor are restrictions or covenants imposed by leases. The Company has elected the practical expedient to combine lease and non-lease components. The Company determined the discount rate to be used in measuring lease liabilities at a portfolio level using a collateralized rate. Specifically, we segregated our lease portfolio into different populations based on (1) lease currency, (2) lease term, and (3) creditworthiness of the lessee and security structure. There are no leases that have not yet commenced but that create significant rights and obligations for the Company.
20
The components of lease cost are shown below:
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Three Months Ended | Nine Months Ended | ||||||
September 30, | September 30, | ||||||
2019 | 2019 | Income Statement Location | |||||
(Dollars in thousands) | |||||||
Lease Cost | |||||||
Operating lease cost(1) | $ | 1,628 | $ | 5,069 | Selling, general and administrative expenses | ||
Operating lease cost(2) | 2,497 | 7,718 | Cost of sales | ||||
Finance lease cost | |||||||
Amortization of right-of-use assets | 233 | 716 | Cost of sales | ||||
Interest of lease liabilities | 12 | 38 | Interest expense | ||||
Net lease cost | $ | 4,370 | $ | 13,541 |
(1) Included in operating lease cost is $0.3$0.2 million and $0.8 million of short-term lease costs for the three and nine months ended September 30, 2019, respectively, and $0.1 million and $0.3 million of variable lease costs.costs for the three and nine months ended September 30, 2019, respectively.
(2) Included in operating lease cost is $0.7$0.8 million and $2.3 million of short-term lease costs for the three and $0.3nine months ended September 30, 2019, respectively, and $0.2 million and $0.9 million of variable lease costs.costs for the three and nine months ended September 30, 2019, respectively.
Supplemental balance sheet information related to leases are shown below:
September 30, | |||||||
| Balance Sheet Location | ||||||
|
| ||||||
Assets |
| ||||||
| $ | 23,206 | Operating leased assets | ||||
|
|
| |||||
Finance leased assets(3) | 1,943 | Property, plant and equipment, net | |||||
Total leased assets | $ | 25,149 | |||||
Liabilities | |||||||
Current | |||||||
Operating | $ | 8,264 | Accrued expenses and other current liabilities | ||||
Finance | 692 | Loans payable and current portion of long-term debt | |||||
Noncurrent | |||||||
Operating | 14,905 | Operating lease non-current liabilities | |||||
Finance | 2,972 | Long-term debt, less current portion | |||||
Total lease liabilities | $ | 26,833 |
(3) Finance leases are net of accumulated depreciation of $5.8$6.1 million for March 31,September 30, 2019.
Supplemental cash flow information related to leases are shown below:
Three Months Ended | Nine Months Ended | |||||
September 30, | September 30, | |||||
2019 | 2019 | |||||
(Dollars in thousands) | ||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||
Operating cash flows from finance leases | $ | 12 | $ | 38 | ||
Operating cash flows from operating leases | 2,779 | 8,541 | ||||
Financing cash flows from finance leases | 202 | 615 | ||||
Leased assets obtained in exchange for new finance lease liabilities | 127 | 345 | ||||
Leased assets obtained in exchange for new operating lease liabilities | 805 | 31,128 |
| September 30, | |||
| 2019 | |||
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Weighted-average remaining lease term (years) | ||||
Operating leases | 3.8 | |||
Finance leases | 4.8 | |||
Weighted-average discount rate | ||||
Operating leases |
| |||
Finance leases |
| |||
4.3% |
Maturities of lease liabilities are shown below as of March 31,September 30, 2019:
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| Finance |
| Operating | Finance | Operating | ||||||
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| Leases |
| Leases | Leases | Leases | ||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Remaining in 2019 |
| $ | 809 |
| $ | 8,411 | $ | 275 | $ | 2,704 | ||
2020 |
|
| 786 |
|
| 7,844 | 860 | 8,098 | ||||
2021 |
|
| 546 |
|
| 5,781 | 593 | 6,123 | ||||
2022 |
|
| 1,335 |
|
| 3,512 | 1,363 | 3,684 | ||||
2023 |
|
| 323 |
|
| 1,888 | 368 | 2,163 | ||||
2024 |
|
| 285 |
|
| 850 | 298 | 945 | ||||
Thereafter |
|
| 696 |
|
| 1,563 | 697 | 1,586 | ||||
Net minimum lease payments |
| $ | 4,780 |
| $ | 29,849 | $ | 4,454 | $ | 25,303 | ||
Less: interest |
|
| 808 |
|
| 2,778 | 790 | 2,134 | ||||
Present value of lease liabilities |
| $ | 3,972 |
| $ | 27,071 | $ | 3,664 | $ | 23,169 |
Maturities of lease liabilities under ASC 840 are shown below as of December 31, 2018:
Capital | Operating | |||||
Leases | Leases | |||||
(Dollars in thousands) | ||||||
2019 | $ | 1,048 | $ | 11,419 | ||
2020 | 755 | 7,314 | ||||
2021 | 477 | 5,302 | ||||
2022 | 1,287 | 3,301 | ||||
2023 | 279 | 1,971 | ||||
Thereafter | 992 | 2,401 | ||||
Net minimum lease payments | $ | 4,838 | $ | 31,708 | ||
Less: interest | 875 | |||||
Present value of lease liabilities | $ | 3,963 | ||||
Less: current portion | 679 | |||||
Long-term obligations | $ | 3,284 |
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 | Three Months Ended | Nine Months Ended | ||||||||||||||
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| March 31, | September 30, | September 30, | ||||||||||||||
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| 2019 |
| 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||
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| (Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | |||||||||||||||
Basic earnings per share computation: |
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| ||||||||||||
Net income attributable to Ferro Corporation common shareholders |
| $ | 13,604 |
| $ | 23,391 | $ | 12,820 | $ | 16,058 | $ | 37,295 | $ | 69,117 | ||||
Weighted-average common shares outstanding |
|
| 82,480 |
|
| 84,228 | 81,942 | 83,893 | 82,118 | 84,154 | ||||||||
Basic earnings per share attributable to Ferro Corporation common shareholders |
| $ | 0.16 |
| $ | 0.28 | $ | 0.16 | $ | 0.19 | $ | 0.45 | $ | 0.82 | ||||
Diluted earnings per share computation: |
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|
|
|
|
| ||||||||||||
Net income attributable to Ferro Corporation common shareholders |
| $ | 13,604 |
| $ | 23,391 | $ | 12,820 | $ | 16,058 | $ | 37,295 | $ | 69,117 | ||||
Weighted-average common shares outstanding |
|
| 82,480 |
|
| 84,228 | 81,942 | 83,893 | 82,118 | 84,154 | ||||||||
Assumed exercise of stock options |
|
| 596 |
|
| 839 | 319 | 788 | 470 | 811 | ||||||||
Assumed satisfaction of restricted stock unit conditions |
|
| 145 |
|
| 279 | 143 | 289 | 232 | 281 | ||||||||
Assumed satisfaction of performance share unit conditions |
|
| 80 |
|
| 164 | 91 | 192 | 136 | 182 | ||||||||
Weighted-average diluted shares outstanding |
|
| 83,301 |
|
| 85,510 | 82,495 | 85,162 | 82,956 | 85,428 | ||||||||
Diluted earnings per share attributable to Ferro Corporation common shareholders |
| $ | 0.16 |
| $ | 0.27 | $ | 0.16 | $ | 0.19 | $ | 0.45 | $ | 0.81 |
The number of anti-dilutive or unearned shares waswere 2.5 million and 2.2 million for the three and nine months ended March 31,September 30, 2019, respectively, and 1.7 million for the three and nine months ended March 31,September 30, 2018. These shares wereare excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.
17. Share Repurchase Program
The Company’s Board of Directors has approved a share repurchase program under which the Company is authorized to repurchase up to $150 million of the Company’s outstanding shares of common stock on the open market, including through a Rule 10b5-1 plan, or in privately negotiated transactions.
The timing and amount of shares to be repurchased will be determined by the Company, based on evaluation of market and business conditions, share price, and other factors. The share repurchase program does not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.
23
For the threenine months ended March 31,September 30, 2019, the Company repurchased 1,440,678 shares of common stock at an average price of $17.35$17.35 per share for a total cost of $25.0 million. For the nine months ended September 30, 2018, the Company repurchased 807,816 shares of common stock at an average price of $21.04 per share for a total cost of $17.0 million. As of March 31,September 30, 2019, $46.2$46.2 million remains authorized under the program for the purchaserepurchase of common stock.
18. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss)loss by component, net of tax, were as follows:
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| Three Months Ended March 31, | |||||||||||
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| Postretirement |
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| Net Gain |
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| |
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| Benefit Liability |
| Translation |
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| on Cash |
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| ||
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| Adjustments |
| Adjustments |
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| Flow Hedges |
| Total | |||
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| (Dollars in thousands) | ||||||||||
Balances at December 31, 2017 |
| $ | 1,165 |
| $ | (77,578) |
| $ | 945 |
| $ | (75,468) |
Other comprehensive income before reclassifications, before tax |
|
| — |
|
| 5,461 |
|
| 1,845 |
|
| 7,306 |
Reclassification to earnings: |
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|
|
|
|
Postretirement benefit liabilities income, before tax |
|
| 16 |
|
| — |
|
| — |
|
| 16 |
Cash flow hedge loss, before tax |
|
| — |
|
| — |
|
| (136) |
|
| (136) |
Current period other comprehensive income, before tax |
|
| 16 |
|
| 5,461 |
|
| 1,709 |
|
| 7,186 |
Tax effect |
|
| 9 |
|
| (198) |
|
| 395 |
|
| 206 |
Current period other comprehensive income, net of tax |
|
| 7 |
|
| 5,659 |
|
| 1,314 |
|
| 6,980 |
Balances at March 31, 2018 |
| $ | 1,172 |
| $ | (71,919) |
| $ | 2,259 |
| $ | (68,488) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
Three Months Ended September 30, | ||||||||||||
Postretirement | Foreign | Net Gain | ||||||||||
Benefit Liability | Currency | on Cash | ||||||||||
Adjustments | Items | Flow Hedges | Total | |||||||||
(Dollars in thousands) | ||||||||||||
Balances at June 30, 2018 | $ | 1,182 | $ | (101,927) | $ | 923 | $ | (99,822) | ||||
Other comprehensive (loss) income before reclassifications, before tax | — | (5,086) | 6,644 | 1,558 | ||||||||
Reclassification to earnings: | ||||||||||||
Cash flow hedge loss, before tax | — | — | (3,548) | (3,548) | ||||||||
Current period other comprehensive income (loss), before tax | — | (5,086) | 3,096 | (1,990) | ||||||||
Tax effect | — | 94 | (514) | (420) | ||||||||
Current period other comprehensive income (loss), net of tax | — | (5,180) | 3,610 | (1,570) | ||||||||
Balances at September 30, 2018 | $ | 1,182 | $ | (107,107) | $ | 4,533 | $ | (101,392) | ||||
Balances at June 30, 2019 | $ | 1,126 | $ | (95,799) | $ | (14,960) | $ | (109,633) | ||||
Other comprehensive income (loss) before reclassifications, before tax | — | (9,547) | 8,422 | (1,125) | ||||||||
Reclassification to earnings: | ||||||||||||
Cash flow hedge loss, before tax | — | — | (10,553) | (10,553) | ||||||||
Current period other comprehensive loss, before tax | — | (9,547) | (2,131) | (11,678) | ||||||||
Tax effect | — | 1,175 | (487) | 688 | ||||||||
Current period other comprehensive loss, net of tax | — | (10,722) | (1,644) | (12,366) | ||||||||
Balances at September 30, 2019 | $ | 1,126 | $ | (106,521) | $ | (16,604) | $ | (121,999) |
Nine Months Ended September 30, | ||||||||||||
Postretirement | Foreign | Net Gain | ||||||||||
Benefit Liability | Currency | on Cash | ||||||||||
Adjustments | Items | Flow Hedges | Total | |||||||||
(Dollars in thousands) | ||||||||||||
Balances at December 31, 2017 | $ | 1,165 | $ | (77,578) | $ | 945 | $ | (75,468) | ||||
Other comprehensive (loss) income before reclassifications, before tax | — | (29,107) | 18,473 | (10,634) | ||||||||
Reclassification to earnings: | ||||||||||||
Postretirement benefit liabilities income, before tax | 22 | — | — | 22 | ||||||||
Cash flow hedge loss, before tax | — | — | (15,235) | (15,235) | ||||||||
Current period other comprehensive income (loss), before tax | 22 | (29,107) | 3,238 | (25,847) | ||||||||
Tax effect | 5 | 422 | (350) | 77 | ||||||||
Current period other comprehensive income (loss), net of tax | 17 | (29,529) | 3,588 | (25,924) | ||||||||
Balances at September 30, 2018 | $ | 1,182 | $ | (107,107) | $ | 4,533 | $ | (101,392) | ||||
Balances at December 31, 2018 | $ | 1,126 | $ | (103,190) | $ | (3,297) | $ | (105,361) | ||||
Other comprehensive loss before reclassifications, before tax | — | (2,033) | (2,126) | (4,159) | ||||||||
Reclassification to earnings: | ||||||||||||
Cash flow hedge loss, before tax | — | — | (15,705) | (15,705) | ||||||||
Current period other comprehensive loss, before tax | — | (2,033) | (17,831) | (19,864) | ||||||||
Tax effect | — | 1,298 | (4,524) | (3,226) | ||||||||
Current period other comprehensive loss, net of tax | — | (3,331) | (13,307) | (16,638) | ||||||||
Balances at September 30, 2019 | $ | 1,126 | $ | (106,521) | $ | (16,604) | $ | (121,999) |
19. Reporting for Segments
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 | Three Months Ended | Nine Months Ended | ||||||||||||||
|
| March 31, | September 30, | September 30, | ||||||||||||||
|
| 2019 |
| 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Performance Coatings |
| $ | 170,347 |
| $ | 184,648 | $ | 162,391 | $ | 175,939 | $ | 510,970 | $ | 554,036 | ||||
Performance Colors and Glass |
|
| 120,845 |
|
| 120,505 | 112,742 | 123,277 | 351,991 | 369,809 | ||||||||
Color Solutions |
|
| 96,356 |
|
| 100,379 | 90,595 | 95,947 | 284,217 | 293,089 | ||||||||
Total net sales |
| $ | 387,548 |
| $ | 405,532 | $ | 365,728 | $ | 395,163 | $ | 1,147,178 | $ | 1,216,934 |
24
Each segment’s gross profit and reconciliationsreconciliation to income before income taxes are presented in the table below:
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| Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||
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| March 31, | September 30, | September 30, | ||||||||||||||
|
| 2019 |
| 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||
|
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
Performance Coatings |
| $ | 33,645 |
| $ | 43,765 | $ | 35,436 | $ | 36,257 | $ | 108,903 | $ | 130,319 | ||||
Performance Colors and Glass |
|
| 39,467 |
|
| 43,328 | 36,829 | 40,095 | 115,672 | 128,785 | ||||||||
Color Solutions |
|
| 28,396 |
|
| 32,149 | 29,122 | 30,174 | 87,220 | 93,864 | ||||||||
Other cost of sales |
|
| 348 |
|
| (556) | (1,096) | (1,039) | (1,390) | (2,150) | ||||||||
Total gross profit |
|
| 101,856 |
|
| 118,686 | 100,291 | 105,487 | 310,405 | 350,818 | ||||||||
Selling, general and administrative expenses |
|
| 72,080 |
|
| 73,092 | 67,723 | 64,344 | 211,448 | 207,560 | ||||||||
Restructuring and impairment charges |
|
| 2,127 |
|
| 4,106 | 6,226 | 2,561 | 18,613 | 10,435 | ||||||||
Other expense, net |
|
| 9,471 |
|
| 10,376 | 9,403 | 11,071 | 28,979 | 33,975 | ||||||||
Income before income taxes |
| $ | 18,178 |
| $ | 31,112 | $ | 16,939 | $ | 27,511 | $ | 51,365 | $ | 98,848 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net sales for the three months ended March 31,September 30, 2019, decreased by $18.0$29.4 million, or 4.4%7.4%, compared with the prior-year same period. The decrease in netNet sales was drivendecreased by lower sales$13.5 million, $10.5 million, and $5.4 million in Performance Coatings, and Color Solutions of $14.3 million and $4.0 million, respectively, partially mitigated by an increase in sales in Performance Colors and Glass, of $0.3 million.and Color Solutions, respectively. During the three months ended March 31,September 30, 2019, gross profit decreased $16.8$5.2 million, or 14.2%4.9%, compared with the prior-year same period; as a percentage of net sales, it decreasedincreased approximately 30070 basis points to 26.3%27.4%. Our total gross profit for the firstthird quarter of 2019 was $101.9$100.3 million, compared with $118.7$105.5 million for the three months ended March 31,September 30, 2018. The decrease in gross profit was attributable to decreaseslower gross profit in Performance Coatings, Performance Colors and Glass, and Color Solutions, and Performance Coatings, of $10.1$3.3 million, $3.9$1.1 million, and $3.8$0.8 million, respectively.
For the three months ended March 31,September 30, 2019, selling, general and administrative (“SG&A”) expenses decreased $1.0increased $3.4 million, or 1.4%5.3%, compared with the prior-year same period. As a percentage of net sales, it increased approximately 60220 basis points to 18.6%18.5%.
For the three months ended March 31,September 30, 2019, net income was $13.9$13.2 million, compared with net income of $23.6$16.1 million for the prior-year same period, and net income attributable to common shareholders was $13.6$12.8 million, compared with net income attributable to common shareholders of $23.4$16.1 million for the prior-year same period.
Outlook
ThroughoutIn 2019, we will continue to execute the dynamic innovation and optimization phase of the Company’s value creation strategy, which includes organic and inorganic growth and optimization initiatives. We expect organic growth from new products and positioning our portfolio to continue transitioning to the higher end of our target markets. We also intend to advance the business through acquisitions, and investments in technology, facilities and equipment. We will continue to implement optimization initiatives throughout the Company to further improve efficiency, productivity and profitability. We will be judicious through the remainder of 2019 with our strategic investments, which may include acquisitions, share repurchases and debt retirement, and remain mindful of our overall leverage.
We believe that 2019 gross marginsglobal macro-economic uncertainties will compare favorably tocontinue through the prior year due in part to stabilizing raw materials costs after a period of price inflation.
In the first halfremainder of 2019 we expect that uncertainty throughout the global macro-economic landscapeand into 2020, which could result in continued slower growth across several industries and geographic regions, particularly Europe and Asia.outside North America. We expect demand will continuethis macro-landscape to impact our customers’ visibility and cause them to be more conservative in their order patterns. Some of the specialized markets for our technology-driven functional coatings and color solutions in the niche markets onproducts are subject to ramp-up and mature cycles, which we focus,also affects demand. The diversity of our customer base, industries served and thatglobal operations reduces any one market’s impact. However, we will continue to develop innovative new products relevant to the megatrends our customers are addressing with their products. We are actively implementingadvancing on optimization initiatives throughout our global footprint to increase productivity and efficiency.efficiency and contribute to long-term, sustainable value creation. In addition, we expect to see continued favorable margin benefit from raw material costs lower than in 2018.
Foreign currency rates may continue to be volatile through 2019, and changes in interest rates could adversely impact reported results. We expect cash flow from operating activities to continue to be availablepositive for debt pay down and other strategic investments.2019, providing additional liquidity.
Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part I of thisthe Annual Report on Form 10-K for the year ended December 31, 2018.
Results of Operations - Consolidated
Comparison of the three months ended March 31,September 30, 2019 and 2018
For the three months ended March 31,September 30, 2019, net income was $13.9$13.2 million, compared with net income of $23.6$16.1 million for the three months ended March 31,September 30, 2018. For the three months ended March 31,September 30, 2019, net income attributable to common shareholders was $13.6$12.8 million, or earnings per share of $0.16, compared with net income attributable to common shareholders of $23.4$16.1 million, or earnings per share of $0.28,$0.19, for the three months ended March 31,September 30, 2018.
Net Sales
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| Three Months Ended |
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| Three Months Ended | |||||||||||||||||||
|
| March 31, |
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|
|
| September 30, | |||||||||||||||||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||||||
|
| (Dollars in thousands) |
|
|
| (Dollars in thousands) | ||||||||||||||||||||||
Net sales |
| $ | 387,548 |
|
| $ | 405,532 |
|
| $ | (17,984) |
| (4.4) | % | $ | 365,728 | $ | 395,163 | $ | (29,435) | (7.4) | % | ||||||
Cost of sales |
|
| 285,692 |
|
|
| 286,846 |
|
|
| (1,154) |
| (0.4) | % | 265,437 | 289,676 | (24,239) | (8.4) | % | |||||||||
Gross profit |
| $ | 101,856 |
|
| $ | 118,686 |
|
| $ | (16,830) |
| (14.2) | % | $ | 100,291 | $ | 105,487 | $ | (5,196) | (4.9) | % | ||||||
Gross profit as a % of net sales |
|
| 26.3 | % |
|
| 29.3 | % |
|
|
|
|
|
| 27.4 | % | 26.7 | % |
Net sales decreased by $18.0$29.4 million, or 4.4%7.4%, for the three months ended March 31,September 30, 2019, compared with the prior-year same period, driven by lower sales in Performance Coatings, Performance Colors and Glass, and Color Solutions of $14.3$13.5 million, $10.5 million, and $4.0$5.4 million, respectively, partially mitigated by an increase in sales in Performance Colors and Glass of $0.3 million.respectively. The decrease in net sales was driven by lower volume and mix of $29.7 million, unfavorable foreign currency impacts of $20.7$7.1 million, and lower volume and mixunfavorable product pricing of $19.0$3.4 million, partially mitigated by sales from recent acquisitions of $15.7 million and higher product pricing of $6.0$10.8 million.
Gross Profit
Gross profit decreased $16.8$5.2 million, or 14.2%4.9%, for the three months ended March 31,September 30, 2019, compared with the prior-year same period, and as a percentage of net sales, it decreased 300increased 70 basis points to 26.3%27.4%. The decrease in gross profit was attributable to decreaseslower gross profit in Performance Coatings, Performance Colors and Glass, and Color Solutions, and Performance Coatings of $10.1$3.3 million, $3.9$1.1 million, and $3.8$0.8 million, respectively. The decrease in gross profit was primarily driven by lower sales volumesvolume and mix of $9.3$10.7 million, unfavorable product pricing of $3.4 million, higher manufacturing costs of $7.8$1.4 million, and unfavorable foreign currency impacts of $5.9$1.9 million, and higherpartially mitigated by lower raw material costs of $5.1 million, partially mitigated by favorable product pricing of $6.0$9.7 million and gross profit fromrecent acquisitions of $4.4$2.6 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
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| Three Months Ended |
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| Three Months Ended | |||||||||||||||
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| March 31, |
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|
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| September 30, | |||||||||||||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||
|
| (Dollars in thousands) |
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|
| (Dollars in thousands) | ||||||||||||||||||
Geographic Revenues on a sales origination basis |
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EMEA |
| $ | 206,441 |
| $ | 220,943 |
| $ | (14,502) |
| (6.6) | % | $ | 188,237 | $ | 199,319 | $ | (11,082) | (5.6) | % | ||||
United States |
|
| 95,578 |
|
| 91,536 |
|
| 4,042 |
| 4.4 | % | 85,417 | 98,956 | (13,539) | (13.7) | % | |||||||
Asia Pacific |
|
| 48,260 |
|
| 52,400 |
|
| (4,140) |
| (7.9) | % | 55,718 | 56,614 | (896) | (1.6) | % | |||||||
Latin America |
|
| 37,269 |
|
| 40,653 |
|
| (3,384) |
| (8.3) | % | 36,356 | 40,274 | (3,918) | (9.7) | % | |||||||
Net sales |
| $ | 387,548 |
| $ | 405,532 |
| $ | (17,984) |
| (4.4) | % | $ | 365,728 | $ | 395,163 | $ | (29,435) | (7.4) | % |
The decline in net sales of $18.0$29.4 million, compared with the prior-year same period, was driven by a decrease in sales from EMEA, Asia Pacific and Latin America, partially mitigated by an increaseall regions. The decrease in sales from the United States.States was attributable to lower sales in Performance Colors and Glass, Color Solutions, and Performance Coatings, of $5.4 million, $4.9 million, and $3.2 million, respectively. The decrease in sales from EMEA was attributable to lower sales in Performance Coatings and Performance Colors and Glass of $6.0 million and $5.1 million, respectively. The decrease in sales from Latin America was attributable to lower sales in Performance Coatings, Color Solutions, and Performance Colors and Glass of $5.7$2.6 million, $4.9$0.8 million, and $3.9$0.6 million, respectively. The decrease in sales from Asia Pacific was attributable to lower sales in Performance Coatings and Color Solutions of $3.1 million and $1.1 million, respectively, partially mitigated by an increase in sales in Performance
Colors and Glass of $0.1 million. The decrease in sales from Latin America was attributable to lower sales in Performance Coatings of $4.4$1.7 million, partially mitigated by an increase in sales from Performance Colors and Glass of $1.0 million. The increase in sales from the United States was attributable to higher sales in Performance Colors and Glass and Color Solutions of $3.2$0.6 million and $2.0$0.3 million, respectively, partially offset by a decrease in sales in Performance Coatings of $1.1 million.respectively.
The following table presents our sales on the basis of where sold products were shipped.
Three Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Geographic Revenues on a shipped-to basis | ||||||||||||
EMEA | $ | 171,410 | $ | 188,112 | $ | (16,702) | (8.9) | % | ||||
Asia Pacific | 81,757 | 88,991 | (7,234) | (8.1) | % | |||||||
United States | 69,808 | 71,333 | (1,525) | (2.1) | % | |||||||
Latin America | 42,753 | 46,727 | (3,974) | (8.5) | % | |||||||
Net sales | $ | 365,728 | $ | 395,163 | $ | (29,435) | (7.4) | % |
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| Three Months Ended |
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| March 31, |
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| 2019 |
| 2018 |
| $ Change |
| % Change | ||||
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| (Dollars in thousands) |
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Geographic Revenues on a shipped-to basis |
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EMEA |
| $ | 193,829 |
| $ | 210,331 |
| $ | (16,502) |
| (7.8) | % |
Asia Pacific |
|
| 86,743 |
|
| 76,260 |
|
| 10,483 |
| 13.7 | % |
United States |
|
| 67,015 |
|
| 71,365 |
|
| (4,350) |
| (6.1) | % |
Latin America |
|
| 39,961 |
|
| 47,576 |
|
| (7,615) |
| (16.0) | % |
Net sales |
| $ | 387,548 |
| $ | 405,532 |
| $ | (17,984) |
| (4.4) | % |
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 2019 and 2018.
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| Three Months Ended |
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| March 31, |
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| September 30, | |||||||||||||||
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| 2019 |
| 2018 |
| $ Change |
| % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||
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| (Dollars in thousands) |
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| (Dollars in thousands) | ||||||||||||||||||
Personnel expenses (excluding R&D personnel expenses) |
| $ | 34,411 |
| $ | 33,757 |
|
| 654 |
| 1.9 | % | $ | 29,081 | $ | 30,570 | (1,489) | (4.9) | % | |||||
Research and development expenses |
|
| 10,998 |
|
| 10,841 |
|
| 157 |
| 1.4 | % | 9,905 | 9,159 | 746 | 8.1 | % | |||||||
Business development |
|
| 2,475 |
|
| 2,423 |
|
| 52 |
| 2.1 | % | 8,866 | 4,261 | 4,605 | 108.1 | % | |||||||
Incentive compensation |
|
| 1,375 |
|
| 2,966 |
|
| (1,591) |
| (53.6) | % | 607 | (489) | 1,096 | (224.1) | % | |||||||
Stock-based compensation |
|
| 2,769 |
|
| 2,430 |
|
| 339 |
| 14.0 | % | 300 | 1,361 | (1,061) | (78.0) | % | |||||||
Intangible asset amortization |
|
| 2,343 |
|
| 2,073 |
|
| 270 |
| 13.0 | % | 2,054 | 2,042 | 12 | 0.6 | % | |||||||
Pension and other postretirement benefits |
|
| 323 |
|
| 342 |
|
| (19) |
| (5.6) | % | 335 | 328 | 7 | 2.3 | % | |||||||
Bad debt |
|
| 230 |
|
| 105 |
|
| 125 |
| 119.0 | % | (43) | (64) | 21 | (32.8) | % | |||||||
All other expenses |
|
| 17,156 |
|
| 18,155 |
|
| (999) |
| (5.5) | % | 16,618 | 17,176 | (558) | (3.3) | % | |||||||
Selling, general and administrative expenses |
| $ | 72,080 |
| $ | 73,092 |
| $ | (1,012) |
| (1.4) | % | $ | 67,723 | $ | 64,344 | $ | 3,379 | 5.3 | % |
SG&A expenses were $1.0$3.4 million lowerhigher in the three months ended March 31,September 30, 2019, compared with the prior-year same period. The lowerhigher SG&A expenses compared to the prior-year same period are primarily driven by lowerhigher business development expenses and incentive compensation, partially mitigated by lower personnel costs and an adjustment to an environmental reserve, partially offset by greater expenses associated with businesses acquired within the last year.stock-based compensation expenses.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
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| Three Months Ended |
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| Three Months Ended | |||||||||||||||
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| March 31, |
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| 2019 |
| 2018 |
| $ Change |
| % Change | 2019 | 2018 | $ Change | % Change | ||||||||||||
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| (Dollars in thousands) |
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| (Dollars in thousands) | ||||||||||||||||||
Strategic services |
| $ | 40,325 |
| $ | 41,178 |
| $ | (853) |
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| 14.0 | % | 300 | 1,361 | (1,061) | (78.0) | % | |||||||
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| $ | 72,080 |
| $ | 73,092 |
| $ | (1,012) |
| (1.4) | % | $ | 67,723 | $ | 64,344 | $ | 3,379 | 5.3 | % |
Restructuring and Impairment Charges
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Employee severance |
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| 75.8 | % | $ | 2,754 | $ | 1,278 | $ | 1,476 | 115.5 | % | ||||
Goodwill impairment | 3,100 | — | 3,100 | NM | ||||||||||||||||||||
Other restructuring costs |
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Restructuring and impairment charges |
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| $ | 4,106 |
| $ | (1,979) |
| (48.2) | % | $ | 6,226 | $ | 2,561 | $ | 3,665 | 143.1 | % |
Restructuring and impairment charges decreasedincreased in the firstthird quarter of 2019 compared with the prior-year same period. The decreaseincrease primarily relates to lowergoodwill impairment charges within the Tile Coating Systems reporting unit and higher costs associated with integration of our recent acquisitions and optimization programs in the firstthird quarter of 2019, compared with the prior-year same period, partially offset by an increase in employee severance costs.period.
Interest Expense
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Interest expense |
| $ | 8,597 |
| $ | 7,251 |
| $ | 1,346 |
| 18.6 | % | $ | 8,396 | $ | 8,632 | $ | (236) | (2.7) | % | ||||
Amortization of bank fees |
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Interest swap amortization |
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Interest capitalization |
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| (477) |
| 300.0 | % | (911) | (674) | (237) | 35.2 | % | |||||||
Interest expense |
| $ | 8,545 |
| $ | 7,962 |
| $ | 583 |
| 7.3 | % | $ | 8,138 | $ | 8,553 | $ | (415) | (4.9) | % |
Interest expense increaseddecreased in the firstthird quarter of 2019 compared with the prior-year same period. The increasedecrease in interest expense was due to an increasea decrease in the average long-term debt balance during the three months ended March 31, 2019,and an increase in capitalized interest compared with the prior-year same period, offset by an increase in capitalized interest.the average interest rate during the three months ended September 30, 2019.
Income Tax Expense
During the firstthird quarter of 2019, income tax expense was $4.3$3.7 million, or 23.7%22.0% of pre-tax income. In the firstthird quarter of 2018, we recordedincome tax expense of $7.5was $11.4 million, or 24.2%41.3% of pre-tax income. The tax expense in the firstthird quarter of 2019, andas a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences. The tax expense for the third quarter of 2018, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences.differences and discrete items recorded in the period. The discrete items recorded in the third quarter of 2018 primarily include a reduction to the tax expense related to provision to return adjustments and an increase from the impact of resolving a foreign tax audit.
Results of Operations - Segment Information
Comparison of the three months ended March 31,September 30, 2019 and 2018
Performance Coatings
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Segment net sales |
| $ | 170,347 |
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| $ | 184,648 |
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| $ | (14,301) |
| (7.7) | % |
| $ | 2,764 |
| $ | (15,088) |
| $ | (10,734) |
| $ | 8,757 |
| $ | — | $ | 162,391 | $ | 175,939 | $ | (13,548) | (7.7) | % | $ | (4,135) | $ | (13,575) | $ | (3,104) | $ | 7,263 | $ | 3 | |||||||||||
Segment gross profit |
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| 43,765 |
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| (23.1) | % |
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| 2,764 |
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| (5,693) |
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| 1,466 |
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| (6,020) | 35,436 | 36,257 | (821) | (2.3) | % | (4,135) | (660) | (695) | 971 | 3,698 | |||||||||||||||||||
Gross profit as a % of segment net sales |
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Net sales decreased in Performance Coatings compared with the prior-year same period, primarily driven by decreases in sales of frits and glazes, colors, opacifiers, and colorsporcelain enamel of $9.9$7.1 million, $4.9 million, $4.2 million, and $6.0$3.7 million, respectively.respectively, partially mitigated by increased sales from acquisitions. The decrease in net sales was driven by unfavorable volume
29
and mix of $15.1$13.6 million, unfavorableproduct pricing of $4.1 million, and foreign currency impacts of $10.7$3.1 million, partially mitigated by sales from acquisitions of $8.8 million and higher product pricing of $2.8$7.3 million. Gross profit decreased $10.1$0.8 million from the prior-year same period, primarily driven by unfavorable product pricing of $4.1 million, higher manufacturing costs of $1.8 million, unfavorable foreign currency impacts of $0.7 million, and lower sales volume and mix of $5.7$0.7 million, higherpartially mitigated by lower raw material costs of $3.8 million, unfavorable foreign currency impacts of $2.6 million and higher manufacturing costs of $2.2 million, partially mitigated by favorable product pricing impacts of $2.8$5.5 million and gross profit from acquisitions of $1.5$1.0 million.
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Segment net sales by Region |
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EMEA |
| $ | 113,426 |
| $ | 119,116 |
| $ | (5,690) |
| (4.8) | % | $ | 104,217 | $ | 110,261 | $ | (6,044) | (5.5) | % | ||||
Latin America |
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| 22,365 |
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| 26,766 |
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| (4,401) |
| (16.4) | % | 23,026 | 25,594 | (2,568) | (10.0) | % | |||||||
Asia Pacific |
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| 22,865 |
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| 25,947 |
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| (3,082) |
| (11.9) | % | 26,184 | 27,914 | (1,730) | (6.2) | % | |||||||
United States |
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| 11,691 |
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| 12,819 |
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| (1,128) |
| (8.8) | % | 8,964 | 12,170 | (3,206) | (26.3) | % | |||||||
Total |
| $ | 170,347 |
| $ | 184,648 |
| $ | (14,301) |
| (7.7) | % | $ | 162,391 | $ | 175,939 | $ | (13,548) | (7.7) | % |
The net sales decrease of $14.3$13.5 million was driven by lower sales from all regions. The decrease in sales from EMEA was primarily attributable to lower sales of colors of $5.4 million, frits and glazes of $3.9$4.7 million, colors of $4.2 million, opacifiers of $2.8 million, and opacifiersFAS of $3.4$1.1 million, partially mitigated by an increase in sales from Quimicer of $7.8$7.3 million. The decrease in sales from the United States was fully attributable to lower sales of porcelain enamel. The decrease in sales from Latin America was primarily driven by lower sales of opacifiers of $1.5 million and frits and glazes of $1.3 million. The decrease in sales from Asia Pacific was driven by lower sales of frits and glazes of $1.1 million, colors of $0.4 million, and FAS of $0.4 million.
Performance Colors and Glass
Three Months Ended | Change due to | ||||||||||||||||||||||||||||
September 30, | Volume / | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | Price | Mix | Currency | Acquisitions | Other | |||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||
Segment net sales | $ | 112,742 | $ | 123,277 | $ | (10,535) | (8.5) | % | $ | 966 | $ | (9,811) | $ | (2,347) | $ | 656 | $ | 1 | |||||||||||
Segment gross profit | 36,829 | 40,095 | (3,266) | (8.1) | % | 966 | (5,210) | (760) | 172 | 1,566 | |||||||||||||||||||
Gross profit as a % of segment net sales | 32.7 | % | 32.5 | % |
Net sales decreased compared with the prior-year same period primarily due to lower sales in decoration, electronic, industrial, and automotive products of $5.0 million, $2.7 million, $2.0 million, and $1.9 million, respectively, partially mitigated by net sales from acquisitions of $0.7 million. The decrease in net sales was driven by unfavorable volume and mix of $9.8 million and foreign currency impacts of $2.3 million, partially mitigated by favorable product pricing of $1.0 million and sales from acquisitions of $0.7 million. Gross profit decreased from the prior-year same period primarily due to unfavorable volume and mix of $5.2 million and foreign currency impacts of $0.8 million, partially mitigated by favorable product pricing of $1.0 million, manufacturing costs of $0.9 million, and raw material costs of $0.7 million.
Three Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Segment net sales by Region | ||||||||||||
EMEA | $ | 50,670 | $ | 55,782 | $ | (5,112) | (9.2) | % | ||||
United States | 37,694 | 43,087 | (5,393) | (12.5) | % | |||||||
Asia Pacific | 19,123 | 18,564 | 559 | 3.0 | % | |||||||
Latin America | 5,255 | 5,844 | (589) | (10.1) | % | |||||||
Total | $ | 112,742 | $ | 123,277 | $ | (10,535) | (8.5) | % |
The net sales decrease of $10.5 million was driven by lower sales from EMEA, the United States, and Latin America, partially mitigated by an increase in sales from Asia Pacific. The decrease in sales from the United States was primarily attributable to lower sales in electronic, decoration, industrial, and automotive products of $1.8 million, $1.8 million, $1.5 million, and $0.8 million, respectively. The decrease in sales from EMEA was primarily attributable to lower sales of decoration, automotive, and electronic products of $2.9 million, $1.0 million, and $0.9 million, respectively. The decrease in sales from Latin America was primarily attributable to a decrease in sales of decoration products of $0.5 million. The increase in sales in Asia Pacific was primarily attributable to increases in decoration products of $0.2 million and industrial products of $0.3 million.
Color Solutions
Three Months Ended | Change due to | ||||||||||||||||||||||||||||
September 30, | Volume / | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | Price | Mix | Currency | Acquisitions | Other | |||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||
Segment net sales | $ | 90,595 | $ | 95,947 | $ | (5,352) | (5.6) | % | $ | (271) | $ | (6,285) | $ | (1,659) | $ | 2,864 | $ | (1) | |||||||||||
Segment gross profit | 29,122 | 30,174 | (1,052) | (3.5) | % | (271) | (4,878) | (453) | 1,485 | 3,065 | |||||||||||||||||||
Gross profit as a % of segment net sales | 32.1 | % | 31.4 | % |
Net sales decreased compared with the prior-year same period, primarily due to decreased sales in surface technology products and pigment products of $4.6 million and $3.5 million, respectively, partially mitigated from increased sales from UWiZ and Diegel of $1.8 million and $1.0 million, respectively. The decrease in net sales was driven by lower volume and mix of $6.3 million and unfavorable foreign currency impacts of $1.7 million, partially offset by net sales from acquisitions of $2.9 million. Gross profit decreased from the prior-year same period, primarily due to unfavorable volume and mix of $4.9 million, unfavorable foreign currency impacts of $0.5 million, and higher manufacturing costs of $0.4 million, partially mitigated by gross profit from lower raw material costs of $3.5 million and acquisitions of $1.5 million.
Three Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Segment net sales by Region | ||||||||||||
United States | $ | 38,759 | $ | 43,699 | $ | (4,940) | (11.3) | % | ||||
EMEA | 33,350 | 33,276 | 74 | 0.2 | % | |||||||
Asia Pacific | 10,411 | 10,136 | 275 | 2.7 | % | |||||||
Latin America | 8,075 | 8,836 | (761) | (8.6) | % | |||||||
Total | $ | 90,595 | $ | 95,947 | $ | (5,352) | (5.6) | % |
The net sales decrease of $5.4 million was primarily driven by lower sales from the United States and Latin America. The decrease in sales from the United States was primarily driven by lower sales in surface technology and pigment products of $4.4 million and $0.4 million, respectively. The decrease in sales from Latin America was primarily attributable to sales from pigment products of $0.9 million.
Comparison of the nine months ended September 30, 2019 and 2018
For the nine months ended September 30, 2019, net income was $38.2 million, compared with net income of $69.6 million for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, net income attributable to common shareholders was $37.3 million, or earnings per share of $0.45, compared with net income attributable to common shareholders of $69.1 million, or earnings per share of $0.82, for the nine months ended September 30, 2018.
Net Sales
Nine Months Ended | ||||||||||||||
September 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||
(Dollars in thousands) | ||||||||||||||
Net sales | $ | 1,147,178 | $ | 1,216,934 | $ | (69,756) | (5.7) | % | ||||||
Cost of sales | 836,773 | 866,116 | (29,343) | (3.4) | % | |||||||||
Gross profit | $ | 310,405 | $ | 350,818 | $ | (40,413) | (11.5) | % | ||||||
Gross profit as a % of net sales | 27.1 | % | 28.8 | % |
Net sales decreased by $69.8 million, or 5.7%, for the nine months ended September 30, 2019, compared with the prior-year same period, driven by lower sales in Performance Coatings, Performance Colors and Glass, and Color Solutions of $43.1 million, $17.8 million, and $8.9 million, respectively. The decrease in net sales was driven by lower volume and mix of $71.4 million and unfavorable foreign currency impacts of $26.3 million, partially mitigated by sales from acquisitions of $22.5 million and higher product pricing of $5.4 million.
Gross Profit
Gross profit decreased $40.4 million, or 11.5%, for the nine months ended September 30, 2019, compared with the prior-year same period, and as a percentage of net sales, it decreased approximately 170 basis points to 27.1%. The decrease in gross profit was primarily attributable to decreases in Performance Coatings, Performance Colors and Glass, and Color Solutions of $21.4 million, $13.1 million, and $6.6 million, respectively. The decrease in gross profit was primarily driven by lower sales volume and mix of $32.0 million, higher manufacturing costs of $21.7 million, and unfavorable foreign currency impacts of $12.1 million, partially mitigated by gross profit from lower raw material costs of $11.0 million, acquisitions of $10.7 million, and favorable product pricing of $2.9 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Geographic Revenues on a sales origination basis | ||||||||||||
EMEA | $ | 604,441 | $ | 646,296 | $ | (41,855) | (6.5) | % | ||||
United States | 275,073 | 281,984 | (6,911) | (2.5) | % | |||||||
Asia Pacific | 156,510 | 166,738 | (10,228) | (6.1) | % | |||||||
Latin America | 111,154 | 121,916 | (10,762) | (8.8) | % | |||||||
Net sales | $ | 1,147,178 | $ | 1,216,934 | $ | (69,756) | (5.7) | % |
The decline in net sales of $69.8 million, compared with the prior-year same period, was driven by a decrease in sales from all regions. The decrease in sales from EMEA was attributable to lower sales in Performance Colors and Glass, Performance Coatings, and Color Solutions of $19.0 million, $18.9 million, and $4.0 million, respectively. The decrease in sales from Latin America was attributable to lower sales in Performance Coatings and Color Solutions of $9.9 million and $1.4 million, respectively, partially mitigated by an increase in sales from Performance Colors and Glass of $0.5 million. The decrease in sales from Asia Pacific was attributable to lower sales in Performance Coating and Color Solutions of $8.0 million and $2.4 million, respectively, slightly offset by an increase in net sales in Performance Colors and Glass of $0.1 million. The decrease in sales from the United States was attributable to lower sales in Performance Coatings and Color Solutions of $6.3 million and $1.1 million, respectively, partially offset by an increase in sales in Performance Colors and Glass of $0.4 million.
The following table presents our sales on the basis of where sold products were shipped.
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Geographic Revenues on a shipped-to basis | ||||||||||||
EMEA | $ | 561,379 | $ | 611,532 | $ | (50,153) | (8.2) | % | ||||
Asia Pacific | 251,729 | 253,975 | (2,246) | (0.9) | % | |||||||
United States | 210,721 | 209,707 | 1,014 | 0.5 | % | |||||||
Latin America | 123,349 | 141,720 | (18,371) | (13.0) | % | |||||||
Net sales | $ | 1,147,178 | $ | 1,216,934 | $ | (69,756) | (5.7) | % |
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 2019 and 2018.
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Personnel expenses (excluding R&D personnel expenses) | $ | 94,462 | $ | 97,477 | $ | (3,015) | (3.1) | % | ||||
Research and development expenses | 31,132 | 30,263 | 869 | 2.9 | % | |||||||
Business development | 16,826 | 9,897 | 6,929 | 70.0 | % | |||||||
Incentive compensation | 2,161 | 5,008 | (2,847) | (56.8) | % | |||||||
Stock-based compensation | 5,945 | 5,217 | 728 | 14.0 | % | |||||||
Intangible asset amortization | 6,611 | 6,126 | 485 | 7.9 | % | |||||||
Pension and other postretirement benefits | 1,007 | 1,009 | (2) | (0.2) | % | |||||||
Bad debt | 725 | 430 | 295 | 68.6 | % | |||||||
All other expenses | 52,579 | 52,133 | 446 | 0.9 | % | |||||||
Selling, general and administrative expenses | $ | 211,448 | $ | 207,560 | $ | 3,888 | 1.9 | % |
SG&A expenses were $3.9 million higher in the nine months ended September 30, 2019, compared with the prior-year same period. The higher SG&A expenses compared to the prior-year same period are primarily driven by higher business development expenses, research and development expenses, and stock-based compensation, partially mitigated by lower personnel expenses and incentive compensation.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Strategic services | $ | 114,507 | $ | 117,905 | $ | (3,398) | (2.9) | % | ||||
Functional services | 88,835 | 79,430 | 9,405 | 11.8 | % | |||||||
Incentive compensation | 2,161 | 5,008 | (2,847) | (56.8) | % | |||||||
Stock-based compensation | 5,945 | 5,217 | 728 | 14.0 | % | |||||||
Selling, general and administrative expenses | $ | 211,448 | $ | 207,560 | $ | 3,888 | 1.9 | % |
Restructuring and Impairment Charges
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Employee severance | $ | 6,782 | $ | 4,710 | $ | 2,072 | 44.0 | % | ||||
Goodwill impairment | 9,020 | — | 9,020 | NM | ||||||||
Other restructuring costs | 2,811 | 5,725 | (2,914) | (50.9) | % | |||||||
Restructuring and impairment charges | $ | 18,613 | $ | 10,435 | $ | 8,178 | 78.4 | % |
Restructuring and impairment charges increased in the nine months ended September 30, 2019, compared with the prior-year same period. The increase primarily relates to goodwill impairment charges within the Tile Coating Systems reporting unit, partially mitigated by lower costs associated with integration of our recent acquisitions and optimization programs in the first nine months of 2019.
Interest Expense
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Interest expense | $ | 25,624 | $ | 23,582 | $ | 2,042 | 8.7 | % | ||||
Amortization of bank fees | 2,780 | 2,684 | 96 | 3.6 | % | |||||||
Interest swap amortization | (947) | (447) | (500) | 111.9 | % | |||||||
Interest capitalization | (2,259) | (1,104) | (1,155) | 104.6 | % | |||||||
Interest expense | $ | 25,198 | $ | 24,715 | $ | 483 | 2.0 | % |
Interest expense increased in the nine months ended September 30, 2019, compared with the prior-year same period. The increase in interest expense was due to increases in the average long-term debt balance and the average interest rate, offset by an increase in capitalized interest during the nine months ended September 30, 2019, compared with the prior-year same period.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2019 was $13.2 million, or 25.6% of pre-tax income. Income tax expense for the nine months ended September 30, 2018 was $29.2 million, or 29.6% of pre-tax income. The tax expense for the nine months ended September 30, 2019, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences. The tax expense for the nine months ended September 20, 2018, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences and discrete items recorded in the third quarter. The discrete items recorded in the third quarter of 2018 primarily include a reduction to the tax expense related to provision to return adjustments and an increase from the impact of resolving a foreign tax audit.
Results of Operations - Segment Information
Comparison of the nine months ended September 30, 2019 and 2018
Performance Coatings
Nine Months Ended | Change due to | ||||||||||||||||||||||||||||
September 30, | Volume / | ||||||||||||||||||||||||||||
2019 | 2018 | $ Change | % Change | Price | Mix | Currency | Acquisitions | Other | |||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||
Segment net sales | $ | 510,970 | $ | 554,036 | $ | (43,066) | (7.8) | % | $ | (2,494) | $ | (44,584) | $ | (20,760) | $ | 24,769 | $ | 3 | |||||||||||
Segment gross profit | 108,903 | 130,319 | (21,416) | (16.4) | % | (2,494) | (13,350) | (5,294) | 4,111 | (4,389) | |||||||||||||||||||
Gross profit as a % of segment net sales | 21.3 | % | 23.5 | % |
Net sales decreased in Performance Coatings compared with the prior-year same period, primarily driven by decreases in sales of frits and glazes, colors, opacifiers, and porcelain enamel of $27.9 million, $13.6 million, $12.5 million, and $10.3 million, respectively, partially mitigated by sales of $24.8 million from acquisitions. The decrease in net sales was driven by unfavorable volume and mix of $44.6 million, foreign currency impacts of $20.8 million, and product pricing of $2.5 million, partially mitigated by sales from acquisitions of $24.8 million. Gross profit decreased $21.4 million from the prior-year same period, primarily driven by lower volume and mix of $13.4 million, higher manufacturing costs of $11.0 million, unfavorable foreign currency impacts of $5.3 million, and product pricing of $2.5 million, partially mitigated by gross profit from favorable raw material costs of $6.7 million and acquisitions of $4.1 million.
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Segment net sales by Region | ||||||||||||
EMEA | $ | 336,631 | $ | 355,510 | $ | (18,879) | (5.3) | % | ||||
Latin America | 68,917 | 78,832 | (9,915) | (12.6) | % | |||||||
Asia Pacific | 74,974 | 82,990 | (8,016) | (9.7) | % | |||||||
United States | 30,448 | 36,704 | (6,256) | (17.0) | % | |||||||
Total | $ | 510,970 | $ | 554,036 | $ | (43,066) | (7.8) | % |
The net sales decrease of $43.1 million was driven by lower sales from all regions. The decrease in sales from EMEA was primarily attributable to lower sales of frits and glazes of $15.1 million, colors of $11.6 million, opacifiers of $8.7 million, and FAS of $2.9 million, partially mitigated by an increase in sales from Quimicer of $22.7 million. The decrease in sales from Latin America was primarily driven by lower sales of frits and glazes and opacifiers of $2.7$5.7 million and $0.7$3.8 million, respectively. The decrease in sales from Asia Pacific was driven by lower sales of frits and glazes and colors of $3.2$7.1 million and $0.5$1.6 million, respectively, partially mitigated by sales from FMU, which contributed $1.0 million.respectively. The decrease in sales from the United States was fully attributable to lower sales of porcelain enamel.
Performance Colors and Glass
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| $ Change |
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| Price |
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| Acquisitions |
| Other | 2019 | 2018 | $ Change | % Change | Price | Mix | Currency | Acquisitions | Other | |||||||||||||||||||||||||||||||||||
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Segment net sales |
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| $ | 120,505 |
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| 0.3 | % |
| $ | 841 |
| $ | 2,612 |
| $ | (5,787) |
| $ | 2,674 |
| $ | — | $ | 351,991 | $ | 369,809 | $ | (17,818) | (4.8) | % | $ | 3,222 | $ | (14,192) | $ | (12,556) | $ | 5,707 | $ | 1 | |||||||||||||||
Segment gross profit |
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| 39,467 |
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| 43,328 |
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| (8.9) | % |
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| 841 |
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| 1,156 |
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| (1,328) | 115,672 | 128,785 | (13,113) | (10.2) | % | 3,222 | (12,086) | (4,394) | 2,121 | (1,976) | ||||||||||||||||||||||||
Gross profit as a % of segment net sales |
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| 32.9 | % | 34.8 | % |
Net sales increaseddecreased compared with the prior-year same period, primarily driven by sales from acquisitions and increasedlower sales in electronics of $3.0 milliondecoration, automotive, and industrial products of $0.8$13.6 million, $8.8 million, and $3.4 million, respectively, partially offsetmitigated by lowernet sales from acquisitions of $5.7 million and higher sales in decoration and automotiveelectronic products of $3.5 million and $2.6 million, respectively.$1.9 million. The increasedecrease in net sales was driven by unfavorable volume and mix of $14.2 million and foreign currency impacts of $12.6 million, partially mitigated by net sales from acquisitions of $2.7 million, favorable volume and mix of $2.6$5.7 million and higher product pricing of $0.8 million, partially offset by unfavorable foreign currency impacts of $5.8$3.2 million. Gross profit decreased from the prior-year same period primarily due to unfavorable volume and mix of $2.4$12.1 million, unfavorable foreign currency impacts of $2.1$4.4 million, and unfavorable manufacturing costs of $1.7$4.0 million, partially mitigated by higher product pricing of $3.2 million, gross profit from acquisitions of $1.2 million, higher product pricing of $0.8$2.1 million, and favorable raw material costs of $0.3$2.1 million.
30
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Segment net sales by Region | ||||||||||||
EMEA | $ | 161,850 | $ | 180,801 | $ | (18,951) | (10.5) | % | ||||
United States | 119,126 | 118,682 | 444 | 0.4 | % | |||||||
Asia Pacific | 53,288 | 53,142 | 146 | 0.3 | % | |||||||
Latin America | 17,727 | 17,184 | 543 | 3.2 | % | |||||||
Total | $ | 351,991 | $ | 369,809 | $ | (17,818) | (4.8) | % |
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Segment net sales by Region |
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EMEA |
| $ | 57,448 |
| $ | 61,344 |
| $ | (3,896) |
| (6.4) | % |
United States |
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| 40,288 |
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| 37,091 |
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| 3,197 |
| 8.6 | % |
Asia Pacific |
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| 16,570 |
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| 16,515 |
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| 55 |
| 0.3 | % |
Latin America |
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| 6,539 |
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| 5,555 |
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| 984 |
| 17.7 | % |
Total |
| $ | 120,845 |
| $ | 120,505 |
| $ | 340 |
| 0.3 | % |
The net sales increasedecrease of $0.3$17.8 million was primarily driven by lower sales from EMEA, partially mitigated by higher sales fromin the United States, Latin America, and Asia Pacific,Pacific. The decrease in sales from EMEA was primarily attributable to lower sales of decoration, electronic, industrial, and automotive products of $9.8 million, $4.1 million, $3.9 million, and $3.8 million, respectively, partially offset by lowera $2.6 million increase in sales from EMEA.Diegel. The increase in sales from Latin America was attributable to an increase in sales of industrial products of $1.1 million, partially offset by a decrease in sales of automotive products of $0.7 million. The increase in sales from the United States was primarily attributable to an increase in sales of electronicselectronic products of $4.1$5.8 million and sales from MRA of $1.5$3.4 million, partially offset by lower sales of automotive, decoration, and automotiveindustrial products of $1.3$3.5 million, $3.1 million, and $1.0$2.1 million, respectively. The increase in sales from Latin AmericaAsia Pacific was primarily attributable to an increase inincreased sales of decoration and industrial products of $0.6$1.5 million and $0.6 million, respectively, partially offset by a decrease in sales of automotive productselectronics of $0.2 million. Sales from Asia Pacific remained relatively flat. The decrease in sales from EMEA was primarily attributable tomillion, offset by lower sales of decoration products of $0.8 million and electronicautomotive products of $3.0 million and $1.2 million, respectively, partially offset by sales from Diegel.$0.8 million.
Color Solutions
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| Change due to | Nine Months Ended | Change due to | ||||||||||||||||||||||||||||||||||||||||||||||
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| 2019 |
| 2018 |
| $ Change |
| % Change |
| Price |
| Mix |
| Currency |
| Acquisitions |
| Other | 2019 | 2018 | $ Change | % Change | Price | Mix | Currency | Acquisitions | Other | ||||||||||||||||||||||||||||||||
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Segment net sales |
| $ | 96,356 |
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| $ | 100,379 |
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| $ | (4,023) |
| (4.0) | % |
| $ | 2,371 |
| $ | (6,523) |
| $ | (4,152) |
| $ | 4,281 |
| $ | — | $ | 284,217 | $ | 293,089 | $ | (8,872) | (3.0) | % | $ | 2,172 | $ | (12,647) | $ | (8,716) | $ | 10,320 | $ | (1) | ||||||||||||
Segment gross profit |
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| 28,396 |
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| 32,149 |
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| 2,371 |
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| (1,206) |
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| 1,751 |
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| (5,526) | 87,220 | 93,864 | (6,644) | (7.1) | % | 2,172 | (6,569) | (2,417) | 4,507 | (4,337) | ||||||||||||||||||||
Gross profit as a % of segment net sales |
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| 29.5 | % |
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| 30.7 | % | 32.0 | % |
Net sales decreased compared with the prior-year same period, primarily due to lower sales of pigmentspigment products of $21.0 million, partially mitigated by increased sales in Diegel of $5.3 million, UWiZ of $5.0 million, and surface technology products and sales from Diegel and UWiZ of $2.2 million and $2.1 million, respectively.$1.4 million. The decrease in net sales was driven by lowerunfavorable volume and mix of $6.5$12.6 million and unfavorable foreign currency impacts of $4.2$8.7 million, partially mitigated by sales from acquisitions of $4.3$10.3 million and higherfavorable product pricing of $2.4$2.2 million. Gross profit decreased from the prior-year same period, primarily due higher manufacturing costs of $3.9 million, higher raw material costs of $1.6 million, unfavorableto lower sales volume and mix of $1.2$6.6 million, unfavorable manufacturing costs of $6.5 million, and unfavorable foreign currency impacts of $1.1$2.4 million, partially mitigated by higher product pricing of $2.4 million and gross profit from acquisitions of $1.8$4.5 million, higher product pricing of $2.2 million, and favorable raw material costs of $2.2 million.
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Segment net sales by Region |
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United States |
| $ | 43,599 |
| $ | 41,626 |
| $ | 1,973 |
| 4.7 | % |
EMEA |
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| 35,567 |
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| 40,483 |
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| (4,916) |
| (12.1) | % |
Asia Pacific |
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| 8,825 |
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| 9,938 |
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Latin America |
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| 8,365 |
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| 33 |
| 0.4 | % |
Total |
| $ | 96,356 |
| $ | 100,379 |
| $ | (4,023) |
| (4.0) | % |
Nine Months Ended | ||||||||||||
September 30, | ||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||
(Dollars in thousands) | ||||||||||||
Segment net sales by Region | ||||||||||||
United States | $ | 125,499 | $ | 126,598 | $ | (1,099) | (0.9) | % | ||||
EMEA | 105,960 | 109,985 | (4,025) | (3.7) | % | |||||||
Asia Pacific | 28,248 | 30,606 | (2,358) | (7.7) | % | |||||||
Latin America | 24,510 | 25,900 | (1,390) | (5.4) | % | |||||||
Total | $ | 284,217 | $ | 293,089 | $ | (8,872) | (3.0) | % |
The net sales decrease of $4.0$8.9 million was driven by lower sales from EMEA and Asia Pacific, partially mitigated by higher sales from the United States.all regions. The decrease in sales from EMEA was primarily attributable to lower sales of pigment products of $7.0$9.1 million, partially mitigated by sales from Diegel of $2.1$5.0 million. The decrease in sales from Asia Pacific was primarily attributable to lower sales of pigment products of $3.3$7.4 million, partially mitigated by increased sales from UWiZ of $2.1$5.0 million. SalesThe decrease in sales from Latin America
31
remained relatively flat.pigment products of $1.6 million. The increasedecrease in sales from the United States was primarily driven by higher sales of surface technology of $4.2 million, partially offset by lower sales of pigment products of $2.6$2.9 million, partially offset by higher sales of surface technology products of $1.4 million.
Summary of Cash Flows for the threenine months ended March 31,September 30, 2019 and 2018
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| March 31, |
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| 2019 |
| 2018 |
| $ Change | |||
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| (Dollars in thousands) | |||||||
Net cash used in operating activities |
| $ | (67,527) |
| $ | (34,285) |
| $ | (33,242) |
Net cash used in investing activities |
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| (3,391) | �� |
| (23,012) |
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| 19,621 |
Net cash provided by financing activities |
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| 23,877 |
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| 45,780 |
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| (21,903) |
Effect of exchange rate changes on cash and cash equivalents |
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| 377 |
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| 1,262 |
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| (885) |
(Decrease) in cash and cash equivalents |
| $ | (46,664) |
| $ | (10,255) |
| $ | (36,409) |
Nine Months Ended | |||||||||
September 30, | |||||||||
2019 | 2018 | $ Change | |||||||
(Dollars in thousands) | |||||||||
Net cash (used in) provided by operating activities | $ | (67,240) | $ | 35,686 | $ | (102,926) | |||
Net cash provided by (used in) investing activities | 21,763 | (111,919) | 133,682 | ||||||
Net cash (used in) provided by financing activities | (6,416) | 141,221 | (147,637) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (667) | (2,261) | 1,594 | ||||||
(Decrease) Increase in cash and cash equivalents | $ | (52,560) | $ | 62,727 | $ | (115,287) |
The following table includes details of net cash provided by operating activities.
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| March 31, |
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| September 30, | ||||||||||||
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| 2019 |
| 2018 |
| $ Change | 2019 | 2018 | $ Change | |||||||||
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Cash flows from operating activities: |
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Net income |
| $ | 13,878 |
| $ | 23,598 |
| $ | (9,720) | $ | 38,197 | $ | 69,602 | $ | (31,405) | |||
Loss on sale of assets |
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| 164 |
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| 229 |
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| (65) | |||||||||
(Gain) loss on sale of assets | (947) | 485 | (1,432) | |||||||||||||||
Depreciation and amortization |
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| 14,264 |
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| 13,392 |
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| 872 | 42,041 | 40,238 | 1,803 | ||||||
Interest amortization |
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| 900 |
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| 870 |
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| 30 | 2,780 | 2,684 | 96 | ||||||
Restructuring and impairment |
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| 179 |
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| 2,429 |
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| (2,250) | 9,837 | 4,277 | 5,560 | ||||||
Loss on extinguishment of debt | — | 3,226 | (3,226) | |||||||||||||||
Accounts receivable |
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| (43,733) |
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| (32,657) |
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| (11,076) | (78,082) | (36,439) | (41,643) | ||||||
Inventories |
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| (12,652) |
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| (28,820) |
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| 16,168 | (9,182) | (58,833) | 49,651 | ||||||
Accounts payable |
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| (43,680) |
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| (7,139) |
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| (36,541) | (63,452) | 11,103 | (74,555) | ||||||
Other current assets and liabilities, net |
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| (819) |
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| (6,735) |
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| 5,916 | 3,735 | (17,331) | 21,066 | ||||||
Other adjustments, net |
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| 3,972 |
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| 548 |
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| 3,424 | (12,167) | 16,674 | (28,841) | ||||||
Net cash used in operating activities |
| $ | (67,527) |
| $ | (34,285) |
| $ | (33,242) | |||||||||
Net cash (used in) provided by operating activities | $ | (67,240) | $ | 35,686 | $ | (102,926) |
Cash flows from operating activities. Cash flows provided byfrom operating activities decreased $33.2$102.9 million induring the first threenine months ofended September 30, 2019 compared with the prior-year same period. The decrease in cash from operating activities was primarily due to a decrease in net income of $9.7$31.4 million, and higher cash outflows for net working capital of $31.4$66.5 million partially offset by an increase inand net other current assets, and liabilities and other adjustments of $9.3$7.8 million.
Cash flows used in investing activities. Cash flows used infrom investing activities decreased $19.6increased $133.7 million induring the first threenine months ofended September 30, 2019 compared with the prior-year same period. The increase in cash from investing activities was primarily due to collections of financing receivables from the international receivable sales program (Note 8) of $20.2$60.9 million in the first quarter of 2019 and lower cash outflows for business acquisitions netand capital expenditures of cash acquired of $2.1$47.6 million and $23.3 million, respectively, in the threenine months ended March 31,September 30, 2019, compared to the prior-year same period.
Cash flows from financing activities. Cash flows provided byfrom financing activities decreased $21.9$147.6 million induring the first threenine months ofended September 30, 2019 compared with the prior-year same period. The decrease was primarily dueDuring 2018, we paid off our Credit Facility and entered into our Amended Credit Facility, consisting of a $500 million secured revolving line of credit and $820 million secured term loan facilities. Further, compared to the prior-year same period, the purchase of treasury stock increased $8.0 million which was mitigated by an increase in cash flows of $25.0$25.4 million infrom proceeds from loans payables as compared to the three months ended March 31, 2019.prior year borrowings.
32
Capital Resources and Liquidity
Amended Credit Facility
On April 25, 2018 the Company entered into an amendment (the “Amended Credit Facility”) to its existing credit facility (the “Credit Facility”), which Amended Credit Facility (a) provided a new revolving facility (the “2018 Revolving Facility”), which replaced the Company’s existing revolving facility, (b) repriced the (“Tranche B-1 Loans”), (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars anddollars. The Amended Credit Facility will be used for ongoing working capital requirements and general corporate purposes. The Tranche B-2 Loans are borrowed by the Company and the Tranche B-3 Loans are borrowed on a joint and several basis by Ferro GmbH and Ferro Europe Holdings LLC.
The Amended Credit Facility consists of a $500 million secured revolving line of credit with a maturity of February 2023, a $355 million secured term loan facility with a maturity of February 2024, a $235 million secured term loan facility with a maturity of February 2024 and a $230 million secured term loan facility with a maturity of February 2024. The term loans are payable in equal quarterly installments in an amount equal to 0.25% of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof. In addition, the Company is required, on an annual basis, to make a prepayment in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Amended Credit Facility, which prepayment will be applied first to the term loans until they are paid in full, and then to the revolving loans.
Subject to the satisfaction of certain conditions, the Company can request additional commitments under the revolving line of credit or term loans in the aggregate principal amount of up to $250 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans. The Company can also raise certain additional debt or credit facilities subject to satisfaction of certain covenant levels.
Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Amended Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of certain of the Company’s U.S. subsidiaries and 65% of the stock of certain of the Company’s direct foreign subsidiaries. The Tranche B-3 Loans are guaranteed by the Company, the U.S. subsidiary guarantors and a cross-guaranty by the borrowers of the Tranche B-3 Loans, and are secured by the collateral securing the revolving loans and the other term loans, in addition to a pledge of the equity interests of Ferro GmbH.
Interest Rate – Term Loans: The interest rates applicable to the term loans will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable margin.
The base rate for term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans is 1.25%. The LIBOR rate for term loans shall not be less than 0.0% and the applicable margin for LIBOR rate term loans is 2.25%. For LIBOR rate term loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration. |
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At March 31,September 30, 2019, the Company had borrowed $351.5$349.7 million under the Tranche B-1 Loans at an interest rate of 4.85%4.35%, $232.7$231.5 million under the Tranche B-2 Loans at an interest rate of 4.85%4.35%, and $227.7$226.6 million under the Tranche B-3 Loans at an interest rate of 4.85%4.35%. At March 31,September 30, 2019, there were no additional borrowings available under the Tranche B-1 Loans, Tranche B-2 Loans andor Tranche B-3 Loans. In connection with these borrowings, we entered into swap agreements in the second quarter of 2018. At March 31,September 30, 2019, the effective interest rate for the Tranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans, after adjusting for the interest rate swap, was 5.17%5.12%, 3.33%3.03%, and 2.48%, respectively.
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the 2018 Revolving Credit Facility will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding (as defined in the Amended Credit Agreement) at such time to (b) the Company’s consolidated EBITDA (as defined in the Amended Credit Agreement) computed for the period of four consecutive fiscal quarters most recently ended.
33
TableThe base rate for revolving loans will be the highest of Contents(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%.
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The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.50% 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 March 31,September 30, 2019, there were $51.3$22.5 million borrowings under the 2018 Revolving Credit Facility at an interest rate of 4.49%4.27%. After reductions for outstanding letters of credit secured by these facilities, we had $444.0$472.9 million of additional borrowings available under the revolving credit facilities at March 31,September 30, 2019.
The Amended Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Amended Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.
Specific to the 2018 Revolving Facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Amended Credit Facility agreement may be accelerated and become immediately due and payable. At March 31,September 30, 2019, we were in compliance with the covenants of the Amended Credit Facility.
Off Balance Sheet Arrangements
Consignment and Customer Arrangements for Precious Metals. We use precious metals, primarily silver, in the production of some of our products. We obtain precious metals from financial institutions under consignment agreements. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign and the period of consignment. These fees were $1.1$0.5 million and $0.4 millionfor the three months ended March 31,September 30, 2019 and 2018 and were $2.2 million and $1.3 million for the nine months ended September 30, 2019 and 2018, respectively. We had on hand precious metals owned by participants in our precious metals program of $53.6$65.9 million at March 31,September 30, 2019, and $55.2 million at December 31, 2018, measured at fair value based on market prices for identical assets.
The consignment agreements under our precious metals program involve short-term commitments that typically mature within 30 to 90 days of each transaction and are typically renewed on an ongoing basis. As a result, the Company relies on the continued willingness of financial institutions to participate in these arrangements to maintain this source of liquidity. On occasion, we have been required to deliver cash collateral. While no deposits were outstanding at March 31,September 30, 2019, or December 31, 2018, 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.
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 program, whose maximum capacity is €100 million, is scheduled to expire in December 2023. The outstanding principal amount of receivables sold under this program was $63.9$61.4 million at March 31,September 30, 2019 and $71.3 million at December 31, 2018. The carrying amount
34
of deferred purchase price was $23.1$22.5 million at March 31,September 30, 2019 and $23.0 million at December 31, 2018, and is recorded in Other Receivables.receivables.
Bank Guarantees and Standby Letters of Credit.
At March 31,September 30, 2019, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $7.46.0 million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.
Liquidity Requirements
Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under the revolving credit facility, and cash flows from operating activities. As of March 31,September 30, 2019, we had $57.7$51.7 million of cash and cash equivalents. The majority of our cash and cash equivalents were held by foreign subsidiaries. Cash generated in the U.S. is generally used to pay down amounts outstanding under our revolving credit facility and for general corporate purposes, including acquisitions. If needed, we could repatriate the majority of cash held by foreign subsidiaries without the need to accrue and pay U.S. income taxes. We do not anticipate a liquidity need requiring such repatriation of these funds to the U.S.
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 provided by operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. We had additional borrowing capacity of $472.1$493.0 million at March 31,September 30, 2019, and $525.6 million at December 31, 2018, available under our various credit facilities, primarily the 2018 Revolving Facility.
The 2018 Revolving Facility subjects us to a customary financial covenant regarding the Company’s maximum leverage ratio. This covenant under our Amended Credit Facility restricts the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.
As of March 31,September 30, 2019, we were in compliance with our maximum leverage ratio covenant of 4.00x as our actual ratio was 2.95x,2.98x, providing $78.4$72.9 million of EBITDA cushion on the leverage ratio, as defined within the Amended Credit Facility. To the extent that economic conditions in key markets deteriorate or we are unable to meet our business projections and EBITDA falls below approximately $219$214 million for rolling four quarters, based on reasonably consistent net debt levels with those as of March 31,September 30, 2019, 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, 2018.
35
Impact of Newly Issued Accounting Pronouncements
Refer to Note 2 to the condensed consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of accounting standards we recently adopted or will be required to adopt.
Risk Factors
Certain statements contained here and in future filings with the SEC reflect the Company’s expectations with respect to future performance and constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Company’s operations and business environment, which are difficult to predict and are beyond the control of the Company. Factors that could adversely affect our future financial performance include those described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to instruments that are sensitive to fluctuations in interest rates and foreign currency exchange rates.
Our exposure to interest rate risk arises from our debt portfolio. We manage this risk by controlling the mix of fixed-rate versus variable-rate debt after considering the interest rate environment and expected future cash flows. To reduce our exposure to interest rate changes on variable-rate debt, we have entered into interest rate swap agreements. These swaps effectively convert a portion of our variable-rate debt to a fixed rate. Our objective is to limit variability in earnings, cash flows and overall borrowing costs caused by changes in interest rates, while preserving operating flexibility.
We operate internationally and enter into transactions denominated in foreign currencies. These transactions expose us to gains and losses arising from exchange rate movements between the dates foreign currencies are recorded and the dates they are settled. We manage this risk by entering into forward currency contracts 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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| December 31, | September 30, | December 31, | ||||||
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| 2019 |
| 2018 | 2019 | 2018 | ||||||
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| (Dollars in thousands) | (Dollars in thousands) | |||||||||
Variable-rate debt: |
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Carrying amount(1) |
| $ | 858,516 |
| $ | 809,072 | $ | 834,320 | $ | 809,072 | ||
Fair value |
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| 845,437 |
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| 796,846 | 832,451 | 796,846 | ||||
Increase in annual interest expense from 1% increase in interest rates |
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| 3,186 |
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| 2,680 | 2,967 | 2,680 | ||||
Decrease in annual interest expense from 1% decrease in interest rates |
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| (3,186) |
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| (2,680) | (2,967) | (2,680) | ||||
Fixed-rate debt: |
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Carrying amount |
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| 8,109 |
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| 8,362 | 7,943 | 8,362 | ||||
Fair value |
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| 5,385 |
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| 5,258 | 5,441 | 5,258 | ||||
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 |
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| NM | NM | NM | ||||
Interest rate swaps: |
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Notional amount |
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| 316,806 |
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| 317,604 | 315,210 | 317,604 | ||||
Carrying amount and fair value |
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| (9,227) |
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| (5,244) | (17,577) | (5,244) | ||||
Change in fair value from 1% increase in interest rates |
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| 13,404 |
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| 13,945 | 11,959 | 13,945 | ||||
Change in fair value from 1% decrease in interest rates |
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| (12,923) |
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| (13,508) | (10,829) | (13,508) | ||||
Cross currency swaps: |
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Notional amount |
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| 344,025 |
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| 344,894 | 342,288 | 344,894 | ||||
Carrying amount and fair value |
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| 23,000 |
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| 17,104 | 28,662 | 17,104 | ||||
Change in fair value from 10% increase |
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| (34,908) |
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| (35,455) | ||||||
Change in fair value from 10% decrease |
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| 39,988 |
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| 40,575 | ||||||
Change in fair value from 10% appreciation of U.S. dollar | (34,182) | (35,455) | ||||||||||
Change in fair value from 10% depreciation of U.S. dollar | 39,201 | 40,575 | ||||||||||
Foreign currency forward contracts: |
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Notional amount |
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| 410,061 |
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| 387,190 | 606,065 | 387,190 | ||||
Carrying amount and fair value |
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| 1,021 |
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| (270) | (265) | (270) | ||||
Change in fair value from 10% appreciation of U.S. dollar |
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| 10,691 |
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| 8,070 | 5,401 | 8,070 | ||||
Change in fair value from 10% depreciation of U.S. dollar |
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| (13,490) |
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| (9,863) | (5,941) | (9,863) |
(1) The carrying valuesvalue of the term loan facilitates arefacility is net of unamortized debt issuance costs of $4.6$4.1 million and $4.8 million for the period ended March 31,September 30, 2019 and December 31, 2018, 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 March 31,September 30, 2019, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the disclosure controls and procedures were effective as of March 31,September 30, 2019.
Changes in Internal Control over Financial Reporting
During the firstthird quarter of 2019, 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.
In November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane. The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages. The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to liability for the plaintiff’s claims, and is vigorously defending this proceeding. Since December 2018, additional complaints have been filed in the same court by 1525 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 has also been filed by the Hicksville Water District against the Company and others in New York State Supreme Court making substantially similar allegations and seeking damages of $900 million. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.
In addition to the proceedings described above, the Company and its consolidated subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses. The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.
There were no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Board of Directors has not declared any dividends on common stock during 2019 or 2018. The Company’s Amended Credit Facility restricts the amount of dividends we can pay on our common stock. Any future dividends declared would be at the discretion of our Board of Directors and would depend on our financial condition, results of operations, cash flows, contractual obligations, the terms our financing agreements at the time a dividend is considered, and other relevant factors.
The following table summarizes purchases of our common stock by the Company and affiliated purchasers during the three months ended:ended September 30, 2019:
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| Total Amount of |
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| Maximum Dollar |
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| Shares Purchased |
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| Amount that May |
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| Total Number |
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| as Part of Publicly |
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| Yet Be Purchased |
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| of Shares |
| Average Price |
| Announced Plans |
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| Under the Plans | |
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| Purchased |
| Paid per Share |
| or Programs |
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| or Programs | |
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| (Dollars in thousands, except for per share amounts) | ||||||||
January 1, 2019 to January 31, 2019 |
| 319,713 |
| $ | 16.42 | $ | 5,249,278 |
| $ | 65,943,242 |
February 1, 2019 to February 28, 2019 |
| 831,693 |
| $ | 17.13 | $ | 14,247,290 |
| $ | 51,695,952 |
March 1, 2019 to March 31, 2019 |
| 289,272 |
| $ | 19.03 | $ | 5,503,417 |
| $ | 46,192,535 |
Total |
| 1,440,678 |
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| $ | 24,999,985 |
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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 | |||||||
Purchased (1) | Paid per Share | or Programs | or Programs | |||||||
(Dollars in thousands, except for per share amounts) | ||||||||||
July 1, 2019 to July 31, 2019 | — | $ | — | $ | — | $ | 46,192,535 | |||
August 1, 2019 to August 31, 2019 | 336 | $ | 10.05 | $ | — | $ | 46,192,535 | |||
September 1, 2019 to September 30, 2019 | — | $ | — | $ | — | $ | 46,192,535 | |||
Total | 336 | $ | — |
__________________________
(1) Includes the surrender of the Company’s common shares in connection with the vesting of restricted awards.
__________________________
Item 3. Defaults Upon Senior Securities
Not applicable.
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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 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:
3 | Articles of incorporation and by-laws: | |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
3.5 | ||
3.6 | ||
31 |
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42
Exhibit:
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| Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). | |
31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). | |
32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350. | |
32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350. | |
101 | Inline XBRL Documents: | |
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Schema Document | |
101.CAL | Inline XBRL Calculation Linkbase Document | |
101.LAB | Inline XBRL Labels Linkbase Document | |
101.PRE | Inline XBRL Presentation Linkbase Document | |
101.DEF | Inline XBRL Definition Linkbase Document | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL and contained in Exhibit 101. |
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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