Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2015
.
The Company owned
51%
of an operatin
g affiliate in Venezuela that was
a consolidated subsidiary of Ferro.
During the fourth quarter of 2015, we sold our interest in the operating affiliate in Venezuela for a cash purchase price of
$0.5
million.
During the secon
d quarter of 2014,
all of the assets and liabiliti
es of the
Europe-based
Polym
er Additives business
were classified as held-for-sale. As further discussed in
Note 3, in the third quarter of 2016,
w
e
completed the disposition of the Europe-based Polymer Additives business and
have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.
Operating results for the
three and nine
months ended
September 30, 2016
, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending
December 31, 2016
.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In November 2015, the
Financial Accounting Standards Board (“FASB”)
issued
Accounting Standards Update (“ASU”) 2015-17,
Income Taxes: Topic 740: Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position. During the second quarter of 2016, we elected to prospectively adopt ASU 2015-17, thus reclassifying current deferred tax assets to noncurrent on the accompanying condensed consolidated balance sheets. The prior reporting period was not retrospectively adjusted. Other than this reclassification, the adoption of ASU 2015-17 did not have an impact on the Company’s condensed consolidated financial statements.
New
Accounting Standards
In August 2016, the FASB
issued ASU 2016-15,
Statement of Cash Flow: Topic 230: Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 is intended to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. This pronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted.
The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.
In March 2016, the FASB
issued ASU 2016-09,
Compensation – Stock Compensation: Topic 718: Improvements to Employee Share-Based Payment Accounting.
ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This pronouncement is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted.
The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.
In February 2016, the FASB
issued ASU 2016-02,
Leases: Topic 842.
ASU 2016-02 requires companies to recognize a lease liability and asset on the balance sheet for operating leases with a term greater than one year. This pronouncement is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.
The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers: Topic 606
. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.
No other new accounting pronouncements issued or with effective dates during fiscal 2016 had or are expected to have a material impact of the Company’s condensed consolidated financial statements.
3. Discontinued Operations
During the second quarter of 2014, we commenced a process to market for sale all of the assets within our
Europe-based Polymer Additives business,
including the Antwerp, Belgium dibenzoates manufacturing assets, and related Polymer Additives European headquarters and lab facilities. We determined that the criteria to classify these assets as held-for-sale under ASC Topic 360, Property, Pl
ant and Equipment, were
met. On August 22
, 2016, the Company completed the disposition of the Europe-based Polymer Additives business to Plahoma Two AG, an affiliate of the LIVIA Group.
The Company made a capital contribution
of
€12
million (approximately
$13.6
million) to its subsidiaries that owned the assets prior to the close of the sale.
In August 2016, prior to the sale, an
impairment charge
of
$26.8
million
was recorded under ASC Topic 360 Property, Plant and Equipment
.
The
charge
was
calculated as the difference of the executed transaction price and the carrying value of the assets. The impairment charge included
$1.1
million associated with the reclassification of foreign currency translation
loss
from Accumulated other comprehensive loss (Note 17).
T
he Europe-based Polymer Additives
operating results, net of income tax,
are classified
as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented
and the
assets and liabilities
are classified
as held-for-sale in the accompanying condensed consolidated balance sheets
at December 31, 2015
as the criteria to do so under ASC Topic 360, Property, Plant and Equipment were met as the respective periods
.
The table below summarizes results for the Europe-based Polymer Additives assets, for the
three and nine
months ended
September 30, 2016
and
2015
, which are reflected in our condensed consolidated statements of operations as discontinued operations. Interest expense has been allocated to the discontinued operations based on the ratio of net assets of each business to consolidated net assets excluding debt.
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Three Months Ended
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Nine Months Ended
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|
September 30,
|
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September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Net sales
|
|
$
|
3,831
|
|
$
|
7,493
|
|
$
|
18,481
|
|
$
|
27,229
|
Cost of sales
|
|
|
5,654
|
|
|
13,231
|
|
|
28,473
|
|
|
39,689
|
Gross loss
|
|
|
(1,823)
|
|
|
(5,738)
|
|
|
(9,992)
|
|
|
(12,460)
|
Selling, general and administrative expenses
|
|
|
588
|
|
|
1,156
|
|
|
3,094
|
|
|
3,384
|
Restructuring and impairment charges
|
|
|
26,843
|
|
|
11,792
|
|
|
50,902
|
|
|
11,792
|
Interest expense
|
|
|
49
|
|
|
237
|
|
|
325
|
|
|
557
|
Miscellaneous (income) expense
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|
|
(4)
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|
|
163
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|
|
(392)
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|
|
495
|
(Loss) from discontinued operations before income taxes
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|
|
(29,299)
|
|
|
(19,086)
|
|
|
(63,921)
|
|
|
(28,688)
|
Income tax (benefit) expense
|
|
|
(77)
|
|
|
—
|
|
|
543
|
|
|
—
|
(Loss) from discontinued operations, net of income taxes
|
|
$
|
(29,222)
|
|
$
|
(19,086)
|
|
$
|
(64,464)
|
|
$
|
(28,688)
|
The following table summarizes
the assets and liabilities that
are classified as held-for-sale at
September 30, 2016
, and
December 31, 2015
:
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|
|
|
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|
September 30, 2016
|
|
December 31, 2015
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|
|
(Dollars in thousands)
|
Accounts receivable, net
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|
$
|
—
|
|
$
|
4,028
|
Inventories
|
|
|
—
|
|
|
9,733
|
Other current assets
|
|
|
—
|
|
|
2,454
|
Current assets held-for-sale
|
|
|
—
|
|
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16,215
|
Property, plant and equipment, net
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|
|
—
|
|
|
22,973
|
Other non-current assets
|
|
|
—
|
|
|
205
|
Total assets held-for-sale
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|
$
|
—
|
|
$
|
39,393
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|
|
|
|
|
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|
Accounts payable
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|
$
|
—
|
|
$
|
5,736
|
Accrued expenses and other current liabilities
|
|
|
—
|
|
|
1,420
|
Current liabilities held-for-sale
|
|
|
—
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7,156
|
Other non-current liabilities
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|
|
—
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|
|
1,493
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Total liabilities held-for-sale
|
|
$
|
—
|
|
$
|
8,649
|
4. Acquisitions
Delta Performance
Products
On August 1
, 2016, the Company acquired
certain
assets of Delta Performance Products, LLC, for a cash purchase price of
$4.4
million. The Company
preliminarily
recorded
$3.2
million of amortizable intangible assets,
$1.8
million of goodwill,
$1.2
million of a deferred tax liability related to the amortizable intangible assets, and
$0.6
million of net working capital on the condensed consolidated balance sheet.
Pinturas
On June 1, 2016, the Company acquired
100%
of the equity of privately held Pinturas Benicarló, S.L. (“Pinturas”) for
€16.
5
million in cash (approximately
$18.
4
million). The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of September 30, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded
$8.5
million of amortizable intangible assets,
$3.8
million of goodwill,
$0.7
million of personal and real property,
$2.6
million of a deferred tax liability related to the amortizable intangible assets, and
$8.0
million of net working capital on the condensed consolidated balance sheet.
Ferer
On January 5, 2016, the Company completed the purchase of
100%
of the equity of privately held Istanbul-based Ferer Dis Ticaret Ve Kimyasallar Anonim Sirketi A.S. (“Ferer”) on a cash-free and debt-free basis for approximately
$9.
4
million in cash, subject to customary working capital and other adjustments. The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of September 30, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded
$3.
3
million of amortizable intangible assets,
$4.
5
million of goodwill,
$0.
6
million of personal and real property,
$0.
7
million of a deferred tax liability related to the amortizable intangible assets, and
$1.
7
million of net working capital on the condensed consolidated balance sheet.
Al Salomi
On November 17, 2015, the Company acquired
100%
of the equity of Egypt-based tile coatings manufacturer Al Salomi for Frits and Glazes (“Al Salomi”) for
Egyptian Pound
(“
EGP
”)
307
million (approximately
$38.2
million), including the assumption of debt. The acquired business contributed net sales of
$6.2
million and
$18.2
million for the three and nine months ended September 30, 2016 and net income attributable to Ferro Corporation of
$0.6
million and
$2.8
million for the three and nine months ended September 30, 2016.
The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of September 30, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded
$15.0
million of amortizable intangible assets,
$14.3
million of goodwill,
$10.7
million of personal and real property,
$4.8
million of a deferred tax liability related to the amortizable intangible assets, and
$3.0
million of net working capital on the condensed consolidated balance sheet.
Nubiola
On July 7, 2015, the Company acquired the entire share capital of Corporación Química Vhem, S.L., Dibon USA, LLC and Ivory Corporation, S.A. (together with their direct and indirect subsidiaries, “Nubiola”) on a cash-free and debt-free basis for
€167
million (approximately
$184.2
million). The acquisition was funded with excess cash and borrowings under the Company’s existing revolving credit facility. See Note 8 for additional detail on the revolving credit facility. During the second qu
arter of 2016, the Company finalized
a
p
urchase price adjustment for
the settlement of an escrow that reduced the fair value of net assets acquired to $168.1 million. As a result of the purchase price adjustment, the carrying amount of goodwill decreased by
$11.7
million,
amortizable intangible assets
decreased
$6.4
million and the related deferred tax liability decreased
$1.9
million. The impact of the change on the condensed consolidated statements of operations was not material.
The information included herein has been prepared based on the 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.
The following table summarizes the purchase price allocations:
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July 7, 2015
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(Dollars in thousands)
|
Net working capital
(1)
|
|
$
|
46,642
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Cash and equivalents
|
|
|
19,966
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Personal property
|
|
|
39,444
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Real property
|
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|
28,510
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Intangible assets
|
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|
26,757
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Other assets and liabilities
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|
|
(20,733)
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Goodwill
|
|
|
27,498
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Net assets acquired
|
|
$
|
168,084
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(1)
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Net working capital is defined as current assets, less cash, less current liabilities.
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The acquired business contributed net sales of
$33.0
million and
$97.2
million for the three and nine months ended September 30, 2016
,
and net income attributable to Ferro Corporation of
$7.2
million and
$21.4
million for the three and nine months ended September 30, 2016.
The
fair value of the receivables acquired is
$24.5
million, with a gross contractual amount of
$25.2
million. The Company recorded acquired intangible assets subject to amortization of
$21.1
million, which is comprised of
$5.4
million of customer relationships and
$15.7
million of technology/know-how, which will be amortized over
20
years and
15
years, respectively. The Company recorded acquired indefinite-lived intangible assets of
$5.6
million related to trade names and trademarks. Goodwill is
calculated as the excess of the p
urchase price over the
fair values of the assets acquired and the liabilities assumed in the acquisition and is a result of anticipated synergies.
Goodwill is not
deductible for tax purposes.
The following unaudited pro for
ma information represents the consolidated results of the Company as if the Nubiola acquisitio
n occurred as of January 1, 2015
:
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Three months ended September 30, 2015
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Nine months ended September 30, 2015
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(unaudited)
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(In thousands, except per share amounts)
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Net sales
|
|
$
|
279,365
|
|
$
|
902,092
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Net income attributable to Ferro Corporation common shareholders
|
|
$
|
17,731
|
|
$
|
48,658
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Net earnings per share attributable to Ferro Corporation common shareholders - Basic
|
|
$
|
0.20
|
|
$
|
0.55
|
Net earnings per share attributable to Ferro Corporation common shareholders - Diluted
|
|
$
|
0.20
|
|
$
|
0.55
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The unaudited pro forma information has been adjusted with the respect to certain aspects of the acquisition to reflect the following:
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·
|
|
Additional depreciation and amortization expenses that would have been recognized assuming fair value adjustments to the existing Nubiola assets acquired, including intangible assets and fixed assets.
|
|
·
|
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Elimination of revenue and cost of goods sold for sales from Nubiola to the Company, which would be eliminated as intercompany transactions for Nubiola and the Company on a consolidated basis.
|
|
·
|
|
Increased interest expense due to additional borrowings to fund the acquisition.
|
|
·
|
|
Acquisition-related costs, which were included in the Company’s results.
|
|
·
|
|
Adjustments for the income tax effect of the pro forma adjustments related to the acquisition.
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Thermark
In February 2015, the Company acquired TherMark Holdings, Inc., a leader in laser marking technology, for a cash purchase price of
$5.5
million. The Company recorded
$4.6
million of amortizable intangible assets,
$2.5
million of goodwill,
$1.7
million of a deferred tax liability related to the amortizable intangible assets, and
$0.1
million of net working capital on the condensed consolidated balance sheet.
5. Inventories
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|
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|
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|
September 30,
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|
December 31,
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|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Raw materials
|
|
$
|
63,754
|
|
$
|
56,291
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Work in process
|
|
|
35,895
|
|
|
33,099
|
Finished goods
|
|
|
111,612
|
|
|
95,464
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Total inventories
|
|
$
|
211,261
|
|
$
|
184,854
|
In the production of some of our products, we use precious metals, some of which we obtain from financial institutions under consignment agreements with terms of
one
year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amou
nts we consign. These fees were
$0.2
million
for the
three months ended
September 30, 2016
and
2015
, and were
$0.6
million for the nine months ended September 30, 2016 and 2015. We had on-
hand precious metals owned by participants in our precious metals consignment program of
$26.8
million at
September 30, 2016
, and
$20.5
million at
December 31, 2015
, measured at fair value based on market prices for identical assets and net of credits.
6. Property, Plant and Equipment
Property, plant and equipment is reported net of accumulated depreciation of
$447.0
million at
September 30, 2016
, and
$421.3
million at
December 31, 2015
. Unpaid capital expenditure liabilities, which are non-cash investing activities, were
$2.4
million at
September 30, 2016
, and
$3.4
million at
September 30, 2015
.
As discussed in Note 3 - Discontinued Operations, our Europe-based Polymer Additives assets have been classified as held-for-sale under ASC Topic 360, Property, Plant and Equipment until the ultimate sale of the business in August 2016. As such, at each historical reporting date, these assets were tested for impairment comparing the fair value of the assets less costs to sell to the carrying value. The fair value was determined using both the m
arket approach and income approach, utilizing Level 3 measurements within the fair value hierarchy, which indicated the fair value less costs to sell was less than the carrying value during the first quarter of 2016, resulting in an impairment charge of
$24.1
million, representing the remaining carrying value of long-lived assets
at that reporting date
. During the third quarter of 2016, prior to the sale, an impairment charge
of
$26.8
million
, representing net working capital,
was recorded under ASC Topic 360 Property, Plant and Equipment. The impairment charges of
$26.8 million and
$50.9
million
are included in Loss from discontinued operations, net of income taxes in our condensed consolidated statements of operations for the three and nine months ended September 30, 2016, respectively.
During the third quarter of 2015, we recorded an impairment charge of $11.8 million, which represented additional capital expenditures related to the construction of the facility. The impairment charge of $11.8 million is included in Loss from discontinued operations, net of income taxes in our condensed consolidated statements of operations for the three and nine months ended September 30, 2015.
The following table presents information about the Company's impairment charges on assets that were measured on a fair value basis for the
nine
months ended
September 30, 2016
,
and for the year ended
December 31, 2015
. The table also indicates the
level within the
fair value hierarchy of the valuation techniques used by the Company to determine the fair value:
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Fair Value Measurements Using
|
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Total
|
Description
|
|
Level 1
|
|
Level 2
|
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Level 3
|
|
Total
|
|
(Losses)
|
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(Dollars in thousands)
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(50,902)
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
|
$
|
—
|
|
$
|
—
|
|
$
|
33,711
|
|
$
|
33,711
|
|
$
|
(11,792)
|
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
7. Goodwill and Other Intangible Assets
Details and activity in the Company’s goodwill by segment follow:
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Pigments,
|
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Performance
|
|
|
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Performance
|
|
Powders and
|
|
Colors and
|
|
|
|
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Coatings
|
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Oxides
|
|
Glass
|
|
Total
|
|
|
(Dollars in thousands)
|
Goodwill, net at December 31, 2015
|
|
$
|
43,484
|
|
$
|
48,794
|
|
$
|
53,391
|
|
$
|
145,669
|
Acquisitions
|
|
|
—
|
|
|
(9,825)
|
(3), (4)
|
|
8,286
|
(1), (2)
|
|
(1,539)
|
Foreign currency adjustments
|
|
|
(1,010)
|
|
|
156
|
|
|
(396)
|
|
|
(1,250)
|
Goodwill, net at September 30, 2016
|
|
$
|
42,474
|
|
$
|
39,125
|
|
$
|
61,281
|
|
$
|
142,880
|
|
(1)
|
|
During the first quarter of 2016, the Company recorded goodwill related to the Ferer acquisition. Refer to Note 4 for additional details.
|
|
(2)
|
|
During the second quarter of 2016, the Company recorded goodwill related to the Pinturas acquisition. Refer to Note 4 for additional details.
|
|
(3)
|
|
During the second quarter of 2016, the Company recorded a purchase price adjustment within the measurement period for goodwill related to the Nubiola acquisition. Refer to Note 4 for additional details.
|
|
(4)
|
|
During the third quarter of 2016, the Company recorded goodwill related to the Delta Performance
P
roducts
acquisition. Refer to Note 4 for additional details.
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September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Goodwill, gross
|
|
$
|
188,149
|
|
$
|
190,938
|
Accumulated impairment losses
|
|
|
(45,269)
|
|
|
(45,269)
|
Goodwill, net
|
|
$
|
142,880
|
|
$
|
145,669
|
Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition.
Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting
unit below its carrying value.
Amortizable intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Gross amortizable intangible assets:
|
|
|
|
|
|
|
Patents
|
|
$
|
5,251
|
|
$
|
5,229
|
Land rights
|
|
|
4,865
|
|
|
4,947
|
Technology/know-how and other
|
|
|
83,213
|
|
|
66,558
|
Customer relationships
|
|
|
55,044
|
|
|
46,320
|
Total gross amortizable intangible assets
|
|
|
148,373
|
|
|
123,054
|
Accumulated amortization:
|
|
|
|
|
|
|
Patents
|
|
|
(5,040)
|
|
|
(4,880)
|
Land rights
|
|
|
(2,719)
|
|
|
(2,671)
|
Technology/know-how and other
|
|
|
(33,911)
|
|
|
(16,473)
|
Customer relationships
|
|
|
(4,269)
|
|
|
(2,234)
|
Total accumulated amortization
|
|
|
(45,939)
|
|
|
(26,258)
|
Amortizable intangible assets, net
|
|
$
|
102,434
|
|
$
|
96,796
|
Indefinite-lived intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Indefinite-lived intangibles assets:
|
|
|
|
|
|
|
Trade names and trademarks
|
|
$
|
9,587
|
|
$
|
9,837
|
8. Debt
Loans payable and current portion of long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Loans payable
|
|
$
|
6,033
|
|
$
|
2,749
|
Current portion of long-term debt
|
|
|
4,188
|
|
|
4,697
|
Loans payable and current portion of long-term debt
|
|
$
|
10,221
|
|
$
|
7,446
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Term loan facility, net of unamortized issuance costs
|
|
$
|
240,078
|
|
$
|
291,717
|
Revolving credit facility
|
|
|
233,210
|
|
|
170,000
|
Capital lease obligations
|
|
|
3,839
|
|
|
4,478
|
Other notes
|
|
|
4,161
|
|
|
4,610
|
Total long-term debt
|
|
|
481,288
|
|
|
470,805
|
Current portion of long-term debt
|
|
|
(4,188)
|
|
|
(4,697)
|
Long-term debt, less current portion
|
|
$
|
477,100
|
|
$
|
466,108
|
Credit Facility
On July 31, 2014, the Company entered into
a credit facility (the “
Credit Facility”) with a group of lenders to refinance the majority of its
then outstanding debt. The Credit Facility consisted
of a
$200
million secured revolving line of credit with a term of
five
years and a
$300
million secured term loan facility with a term of
seven
years.
On January 25, 2016, the Company amended the Credit Facility by entering into the Incremental Assumption Agreement (the “Incremental Agreement”) to increase the revolving line of credit commitment amount from $200 million to
$300
million. The Company then used a portion of the increase in the revolving line of credit to repay
$50
million of the term loan facility.
The Credit Facility was amended and a porti
on of the outstanding term loan was
repaid to increase the amount of total liquidity available under t
he Credit Facility and
reduce the total cost of borrowings.
On August 29, 2016, the Company amended the Credit Facility by entering into the Second Incremental Assumption Agreement (the “Second Incremental Agreement”) to increase the revolving line of credit commitment amount to
$400
million.
The increase in the revolving line of credit commitment will be used for general corporate purposes, including acquisitions.
Principal payments on the term loan facility of
$0.75
million quarterly
, are payable commencing
December 31, 2014
,
with the remaining balance du
e on the maturity date.
At
September 30, 2016
,
after
taking into account all prior quarterly payments and the $50 million prepayment that was made in January
2016,
the Company had borrowed
$244.0
million
under the term loan facility at an annual rate
of
4.0%
. There
are
no
additional borrowings available
under the term loan facility.
Certain of the Company’s U.S. subsidiaries have guaranteed the Com
pany’s obligations under the
Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of
100%
of the stock of most of the Company’s U.S. subsidiaries and
65%
of most of the stock of the Company’s first tier foreign subsidiaries.
Interest Rate – Term Loan: The interest rates applicable to the term loans will be, at the Company’s option, equal to either a base rate or a London Interbank Offered Rate (“LIBOR”) rate plus, in both cases, an applicable margin.
|
·
|
|
The base rate will be the highest of (i) the federal funds rate plus
0.50%
, (ii) syndication agent
’s prime rate or (iii) the daily LIBOR rate plus
1.00%
.
|
|
·
|
|
The applicable margin for base rate loans is
2.25%
.
|
|
·
|
|
The LIBOR rate will be set as quoted by Bloomberg and shall not be less than
0.75%
.
|
|
·
|
|
The applicable margin for LIBOR rate loans is
3.25%
.
|
|
·
|
|
For LIBOR rate 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.
|
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated debt outstanding at such time to (b) the Company’s consolidated EBITDA computed for the period of four consecutive fiscal quarters most recently ended.
|
·
|
|
The base rate will be the highest of (i) the federal funds rate plus
0.50%
, (ii) syndication agent
’s prime rate or (iii) the daily LIBOR rate plus
1.00%
.
|
|
·
|
|
The applicable margin for base rate loans will vary between
1.50%
and
2.00%
.
|
|
·
|
|
The LIBOR rate will be set as quoted by Bloomberg for U.S. Dollars.
|
|
·
|
|
The applicable margin for LIBOR Rate Loans will vary between
2.50%
and
3.00%
.
|
|
·
|
|
For LIBOR rate loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
|
At
September 30, 2016
, the Company had
borrowed
$233.2
million
under the revolving credit facilities at an annual weighted average interest
rate
of
3.5%
. The
bor
rowing on the revolving credit facilities
was used to fund the acquisitions, the share repurchase program
s
, an
d for other general business purposes
.
After reductions for outstanding letters of credit secured by these facilities, we
had
$162.4
million of additional borrowings available
under the revolving credit facilities
at
September 30, 2016
.
The
Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions and limitations on certain
types of investments. The
Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.
Specific to the revolving credit facility, the Company is subject to financial covenants regarding the Company’s outstanding net indebtedness and interest coverage ratios.
If an event of default occurs, all am
ounts outstanding under the
Credit Facility may be accelerated and become immediately due and payable. At
September 30, 2016
, we were in complianc
e with the covenants of the
Credit Facility.
Other Financing Arrangements
We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and
totaled
$32.9
million and
$8.0
million at September 30, 2016 and December 31, 2015, respectively. The unused portions of these lines provided additional liquidity of
$28.8
million at September 30, 2016, and
$7.3
million at December 31, 2015.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
Carrying
|
|
Fair Value
|
|
|
Amount
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(Dollars in thousands)
|
Cash and cash equivalents
|
|
$
|
40,556
|
|
$
|
40,556
|
|
$
|
40,556
|
|
$
|
—
|
|
$
|
—
|
Loans payable
|
|
|
(6,033)
|
|
|
(6,033)
|
|
|
—
|
|
|
(6,033)
|
|
|
—
|
Term loan facility
(1)
|
|
|
(240,078)
|
|
|
(249,255)
|
|
|
—
|
|
|
(249,255)
|
|
|
—
|
Revolving credit facility
|
|
|
(233,210)
|
|
|
(235,825)
|
|
|
—
|
|
|
(235,825)
|
|
|
—
|
Other long-term notes payable
|
|
|
(4,161)
|
|
|
(3,571)
|
|
|
—
|
|
|
(3,571)
|
|
|
—
|
Foreign currency forward contracts, net
|
|
|
468
|
|
|
468
|
|
|
—
|
|
|
468
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Carrying
|
|
Fair Value
|
|
|
Amount
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(Dollars in thousands)
|
Cash and cash equivalents
|
|
$
|
58,380
|
|
$
|
58,380
|
|
$
|
58,380
|
|
$
|
—
|
|
$
|
—
|
Loans payable
|
|
|
(2,749)
|
|
|
(2,749)
|
|
|
—
|
|
|
(2,749)
|
|
|
—
|
Term loan facility
(1)
|
|
|
(291,717)
|
|
|
(297,552)
|
|
|
—
|
|
|
(297,552)
|
|
|
—
|
Revolving credit facility
|
|
|
(170,000)
|
|
|
(169,019)
|
|
|
—
|
|
|
(169,019)
|
|
|
—
|
Other long-term notes payable
|
|
|
(4,610)
|
|
|
(3,956)
|
|
|
—
|
|
|
(3,956)
|
|
|
—
|
Foreign currency forward contracts, net
|
|
|
(1,207)
|
|
|
(1,207)
|
|
|
—
|
|
|
(1,207)
|
|
|
—
|
(1) The carrying value of the term loan facility is net of unamortized debt issuance costs.
The fair values of cash and cash equivalents are based on the fair values of identical assets. The fair values of loans payable are based on the present value of expected future cash flows and approximate their carrying amounts due to the short periods to maturity. The fair values of the term loan fac
ility, the revolving credit facility
and other long-term notes payable are based on the present value of expected future cash flows and interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities adjusted for the Company's non-performance risk.
Foreign currency forward contracts.
We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges.
Gains and losses on these foreign currency forward contracts are netted with gains and losses from currency fluctuations on transactions arising from international trade and reported as
Foreign currency losses, net in
the condensed consolidated statements of operations. We
recognized net foreign
currency losses
of
$0.9
million
and $
2.9
m
illion
in the
three and nine months ended
September 30, 2016
, respectively, and net foreign currency losses of
$1.2
million and
$5.8
million in the three and nine months ended Septe
mber 30, 2015, respectively, which is primarily comprised of the foreign exchange impact on transactions in countries where it is not economically feasible for us to enter into hedging arrangements and hedging inefficiencies, such as timing of transactions.
The net foreign currency loss of $5.8 million for the nine months ended September 30, 2015, includes a loss on a foreign currency contract related to the Euro denominated purchase of Nubiola of
$2.7
million.
We
recognized net losses
of
$1.2
million and
$5.8
million
in the
three and nine months ended
September 30, 2016
, respectively, and net losses
of
$2.3
million and
$1.0
million
in the
three and nine
months ended
September 30, 2015
, respectively,
arising from the change in fair value of our financial instruments, which offset the related net gains and losses on international trade transactions. The fair values of these contracts are based on market prices for comparable contracts.
The notional amount of foreign currency forward contracts was
$243.3
million
at
September 30, 2016
, and
$338.4
million at
December 31, 2015
.
The following table presents the effect on our condensed consolidated statements of operations for the three
and nine
months ended
September 30, 2016
and
2015
, respectively, of our foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss)
|
|
|
|
|
Recognized in Earnings
|
|
|
|
|
Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2016
|
|
2015
|
|
Location of (Loss) in Earnings
|
|
|
(Dollars in thousands)
|
|
|
Foreign currency forward contracts
|
|
$
|
(1,163)
|
|
$
|
(2,279)
|
|
Foreign currency losses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss)
|
|
|
|
|
Recognized in Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Location of (Loss) in Earnings
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Foreign currency forward contracts
|
|
$
|
(5,848)
|
|
$
|
(951)
|
|
Foreign currency losses, net
|
The following table presents the fair values on our condensed consolidated balance sheets of foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
|
2016
|
|
2015
|
|
Balance Sheet Location
|
|
|
(Dollars in thousands)
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
733
|
|
$
|
913
|
|
Other current assets
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(265)
|
|
$
|
(2,120)
|
|
Accrued expenses and other current liabilities
|
10. Income Taxes
Income tax expense for the nine months ended September 30, 2016, was $22.7 million, or
25.8%
of pre-tax income, compared with $11.9 million, or
22.6%
of pre-tax income in the prior-year same period. The tax expense, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of
35%
primarily as a result of foreign statutory rate differences. Through the third quarter of 2015, tax expense was further lowered as a result of pre-tax losses in jurisdictions for which no tax benefit is recognized in proportion to the amount of pre-tax income in jurisdictions with no tax expense due to the utilization of fully valued tax
attributes. Additionally, during the third quarter of 2015, the Company made a tax payment to a foreign tax jurisdiction for the ability to deduct specific intangible items in the future which resulted in the accounting for the net benefit in the period.
11. Contingent Liabilities
We have recorded environmental liabilities of
$7.6
m
illion at
September 30, 2016
, and
$7.4
million at
December 31, 2015
, for costs associated with the remediation of certain of our properties that hav
e been contaminated. The liability
at
September 30, 2016
, and
December 31, 2015
, was primarily
related to a non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product lines in 2013. The costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring and the ultimate cost of required remediation.
In the fourth quarter of 2013, the Supreme Court in Argentina ruled unfavorably related to certain export taxes associated with a divested operation. As a result of this ruling, we have recorded a
liability of
$8.5
million
and
a
$7.8
million
at
September 30, 2016, and
December 31, 2015
, respectively
.
There are various lawsuits and claims pending against the Company and its consolidated subsidiaries. We do not currently expect the resolution of these lawsuits and claims to materially affect the consolidated financial position, results of operations, or cash flows of the Company.
12. Retirement Benefits
Net
periodic benefit (credit) cost
of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the
three months ended
September 30, 2016
and
2015
, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
Other Benefit Plans
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Service cost
|
|
$
|
4
|
|
$
|
5
|
|
$
|
346
|
|
$
|
385
|
|
$
|
—
|
|
$
|
—
|
Interest cost
|
|
|
3,937
|
|
|
4,697
|
|
|
914
|
|
|
926
|
|
|
236
|
|
|
242
|
Expected return on plan assets
|
|
|
(4,935)
|
|
|
(7,291)
|
|
|
(493)
|
|
|
(683)
|
|
|
—
|
|
|
—
|
Amortization of prior service cost
|
|
|
3
|
|
|
3
|
|
|
12
|
|
|
17
|
|
|
—
|
|
|
—
|
Net periodic benefit (credit) cost
|
|
$
|
(991)
|
|
$
|
(2,586)
|
|
$
|
779
|
|
$
|
645
|
|
$
|
236
|
|
$
|
242
|
Net
periodic benefit (credit) cost
for the nine months ended September 30, 2016 and 2015, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
Other Benefit Plans
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Service cost
|
|
$
|
13
|
|
$
|
14
|
|
$
|
1,081
|
|
$
|
1,160
|
|
$
|
—
|
|
$
|
—
|
Interest cost
|
|
|
11,812
|
|
|
14,092
|
|
|
2,808
|
|
|
2,764
|
|
|
708
|
|
|
727
|
Expected return on plan assets
|
|
|
(14,805)
|
|
|
(21,874)
|
|
|
(1,538)
|
|
|
(2,032)
|
|
|
—
|
|
|
—
|
Amortization of prior service cost
|
|
|
8
|
|
|
9
|
|
|
34
|
|
|
47
|
|
|
—
|
|
|
—
|
Net periodic benefit (credit) cost
|
|
$
|
(2,972)
|
|
$
|
(7,759)
|
|
$
|
2,385
|
|
$
|
1,939
|
|
$
|
708
|
|
$
|
727
|
Net periodic benefit credit
for our U.S. pension plans for the
nine months ended
September 30, 2016
de
creased
from
the prior year due to reduced plan assets as a result of executing our terminated-vested buyout program in the fourth quarter of 2015
. Net periodic benefit cost for our non-U.S. pension plans
and
our postretirement health care and life insurance benefit plans did not change significantly compared with the prior-year same period.
In 2015, the
Company initiated and executed on a buyout of terminated vested participants in our U.S defined benefit pension plan. In October 2015, the buyout was funded and r
educed plan assets and liabilities
by approximately
$71 million
.
13. Stock-Based Compensation
On May 22, 2013, our shareholders approved the 2013 Omnibus Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 22, 2013, subject to shareholder approval. The Plan’s purpose is to promote the Company’s long-term financial interests and growth by attracting, retaining and motivating high quality key employees and directors, motivating such employees and directors to achieve the Company’s short- and long-range p
erformance goals and objectives and thereby align
t
heir interests with those of the Company’s
shareholders. The Plan reserves
4,400,000
shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restric
ted shares, performance shares,
other common stock based awards,
and dividend equivalent rights.
In
the first nine months
of
2016
, our Board of Di
rec
tors granted
0.3
million stock options,
0.3
million performance share units and
0.3
million deferred 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
nine months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Weighted-average grant-date fair value
|
|
$
|
4.94
|
|
Expected life, in years
|
|
|
6.0
|
|
Risk-free interest rate
|
|
|
1.4% - 1.6
|
%
|
Expected volatility
|
|
|
52.0% - 53.6
|
%
|
The weighted average grant date fair value of our performance share units
granted in the nine months ended September 30, 2016,
was
$10.02
.
We measure the fair value of performance share units based on the closing market price of our common stock on the date of the grant. These shares are evaluated each reporting period for likelihood of achieving the performance criteria.
We measure the fair value of deferred stock units based on the closing market price of our common stock on the date of the grant
, which is when the
awards immediately vest. The weighted-average
grant date
fair value per unit for grants made during the
nine months ended
September 30, 2016
, was
$10.46
.
We recognized stock-based compensation expense of
$5.3
million for the
nine months ended
September 30, 2016
,
and
$7.4
million for the
nine months ended
September 30, 2015
. At
September 30, 2016
, unearned compensation cost related to the unvested portion of all stock-based
compensation
awards was approximately
$9.3
million and is expected to be recognized over the remaining vesting period of the respective grants
, through the first quarter of 2019.
14. Restructuring and Cost Reduction Programs
In 2013, we initiated a Global Cost Reduction Progra
m that was designed to address three
key areas of the company - (1) business realignment, (2) operational efficiency and (3) corporate and back office functions. Business realignment was targeted at right-sizing our commercial management organizations globally. The operational efficiency component of the program was designed to improve the efficiency of our plant operations and supply chain. The corporate and back office initiative
relates to
work that we are doing with our strategic partners in the areas of finance and accounting
,
information technology outsourcing, and procurement. The cumulative charges incurred
to date associated with this Program
are
$51.3
million. Total costs related to the Program expected to be incurred, as of September 30, 2016, are approximately
$51.3
million.
Total restructuring charges were
approximately
$0.0
million and
$1.7
million for the
three and nine
months ended
September 30, 2016
, respectively, and
$3.8
million and
$5.3
million for the three and nine months ended September
30, 2015, respectively.
The activities and accruals related to our restructuring
and cost reduction programs
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
Other
|
|
|
|
|
|
Severance
|
|
Costs
|
|
Total
|
|
|
(Dollars in thousands)
|
Balances at December 31, 2015
|
|
$
|
693
|
|
$
|
2,077
|
|
$
|
2,770
|
Restructuring charges
|
|
|
1,161
|
|
|
533
|
|
|
1,694
|
Cash payments
|
|
|
(1,164)
|
|
|
(1,041)
|
|
|
(2,205)
|
Non-cash items
|
|
|
27
|
|
|
54
|
|
|
81
|
Balances at September 30, 2016
|
|
$
|
717
|
|
$
|
1,623
|
|
$
|
2,340
|
We expect to make cash payments to settle the remaining liability for employee termination benefits and other costs
over the next twelve months
, except where legal or contractual restrictions prevent us from doing so.
15. Earnings Per Share
Details of the calculation of basic and diluted earnings per share are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands, except per share amounts)
|
Basic earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Ferro Corporation common shareholders
|
|
$
|
(8,884)
|
|
$
|
(4,059)
|
|
$
|
119
|
|
$
|
13,510
|
Adjustment for loss from discontinued operations
|
|
|
29,222
|
|
|
19,086
|
|
|
64,464
|
|
|
28,688
|
Total
|
|
$
|
20,338
|
|
$
|
15,027
|
|
$
|
64,583
|
|
$
|
42,198
|
Weighted-average common shares outstanding
|
|
|
83,268
|
|
|
87,130
|
|
|
83,263
|
|
|
87,169
|
Basic earnings per share from continuing operations attributable to Ferro Corporation common shareholders
|
|
$
|
0.24
|
|
$
|
0.17
|
|
$
|
0.78
|
|
$
|
0.48
|
Diluted earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Ferro Corporation common shareholders
|
|
$
|
(8,884)
|
|
$
|
(4,059)
|
|
$
|
119
|
|
$
|
13,510
|
Adjustment for loss from discontinued operations
|
|
|
29,222
|
|
|
19,086
|
|
|
64,464
|
|
|
28,688
|
Total
|
|
$
|
20,338
|
|
$
|
15,027
|
|
$
|
64,583
|
|
$
|
42,198
|
Weighted-average common shares outstanding
|
|
|
83,268
|
|
|
87,130
|
|
|
83,263
|
|
|
87,169
|
Assumed exercise of stock options
|
|
|
544
|
|
|
433
|
|
|
499
|
|
|
443
|
Assumed exercise of deferred stock unit conditions
|
|
|
80
|
|
|
126
|
|
|
—
|
|
|
101
|
Assumed satisfaction of restricted stock unit conditions
|
|
|
473
|
|
|
327
|
|
|
419
|
|
|
305
|
Assumed satisfaction of performance stock unit conditions
|
|
|
111
|
|
|
384
|
|
|
58
|
|
|
395
|
Weighted-average diluted shares outstanding
|
|
|
84,476
|
|
|
88,400
|
|
|
84,239
|
|
|
88,413
|
Diluted earnings per share from continuing operations attributable to Ferro Corporation common shareholders
|
|
$
|
0.24
|
|
$
|
0.17
|
|
$
|
0.77
|
|
$
|
0.48
|
The number of anti-dilutive or unearned shares was
2.3
million
and
2.5
million
for the
three and nine
months ended
September 30, 2016
,
respectively,
and
2.3
million for the
three and nine
months ended
September 30, 2015
. These shares were excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.
16. Share Repurchase Program
On July 25, 2016, the
Company’s Board of Directors approved a
new
share repurchase pro
gram, under which the Company is
authorized to repurchase up to
an additional
$25
million of the Company’s outstanding shares of Common Stock on the open market, including through a Rule 10b5-1 plan, or in privately negotiated transactions.
This new program is in addition to the
$75
million of authorization previously approved and announced
.
The timing and amount of shares to be repurchased will be determined by the Company, based on evaluation of market and business conditions, share price, and other factors. The share repurchase programs do not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.
For the nine months ended September 30, 2016, the Company
repurchased
1,175,
437
shares of common stock at an average price of
$9.
72
per share for a total cost of $11.4
million. Under the
share repurchase programs, the Company
has
repurchased
an aggregate of
4,458,345
shares of common stock, at an average price of
$11.
21
per share, for a total cost of
$50.0
million. As of September 30, 2016,
$50.0
million may still be purchased under the programs.
17. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Liability
|
|
Translation
|
|
Other
|
|
|
|
|
|
Adjustments
|
|
Adjustments
|
|
Adjustments
|
|
Total
|
|
|
(Dollars in thousands)
|
Balances at June 30, 2015
|
|
$
|
886
|
|
$
|
(49,873)
|
|
$
|
(70)
|
|
$
|
(49,057)
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
(5,179)
|
|
|
—
|
|
|
(5,179)
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities (loss)
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
(4)
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Net current period other comprehensive (loss) income
|
|
|
(4)
|
|
|
(5,179)
|
|
|
—
|
|
|
(5,183)
|
Balances at September 30, 2015
|
|
$
|
882
|
|
$
|
(55,052)
|
|
$
|
(70)
|
|
$
|
(54,240)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2016
|
|
|
1,106
|
|
|
(66,886)
|
|
|
(70)
|
|
|
(65,850)
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
1,584
|
|
|
—
|
|
|
1,584
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities (loss)
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
(2)
|
Foreign currency translation adjustment
(1)
|
|
|
—
|
|
|
1,115
|
|
|
—
|
|
|
1,115
|
Net current period other comprehensive income (loss)
|
|
|
(2)
|
|
|
2,699
|
|
|
—
|
|
|
2,697
|
Balances at September 30, 2016
|
|
$
|
1,104
|
|
$
|
(64,187)
|
|
$
|
(70)
|
|
$
|
(63,153)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Liability
|
|
Translation
|
|
Other
|
|
|
|
|
|
Adjustments
|
|
Adjustments
|
|
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Balances at December 31, 2014
|
|
$
|
888
|
|
$
|
(22,623)
|
|
$
|
(70)
|
|
$
|
(21,805)
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
(32,429)
|
|
|
—
|
|
|
(32,429)
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities (loss)
|
|
|
(6)
|
|
|
—
|
|
|
—
|
|
|
(6)
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
Net current period other comprehensive (loss) income
|
|
|
(6)
|
|
|
(32,429)
|
|
|
—
|
|
|
(32,435)
|
Balances at September 30, 2015
|
|
|
882
|
|
|
(55,052)
|
|
|
(70)
|
|
|
(54,240)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2015
|
|
|
811
|
|
|
(62,059)
|
|
|
(70)
|
|
|
(61,318)
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
(3,243)
|
|
|
—
|
|
|
(3,243)
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities gain
|
|
|
293
|
|
|
—
|
|
|
—
|
|
|
293
|
Foreign currency translation adjustment
(1)
|
|
|
—
|
|
|
1,115
|
|
|
—
|
|
|
1,115
|
Net current period other comprehensive income (loss)
|
|
|
293
|
|
|
(2,128)
|
|
|
—
|
|
|
(1,835)
|
Balances at September 30, 2016
|
|
$
|
1,104
|
|
$
|
(64,187)
|
|
$
|
(70)
|
|
$
|
(63,153)
|
(1) Includes a release of accumulated foreign currency translation of $1.1 million related to the Company’s sale of the Europe-based Polymer Additives business (Note 3), which is included in Loss from discontinued operations, net of income taxes in our condensed consolidated statements of operations for the three and nine months ended September 30, 2016.
18. Reporting for Segments
Net sales to external customers by segment are presented in the table below. Sales between segments were not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Performance Coatings
|
|
$
|
130,453
|
|
$
|
128,745
|
|
$
|
399,166
|
|
$
|
404,991
|
Performance Colors and Glass
|
|
|
92,793
|
|
|
92,168
|
|
|
276,896
|
|
|
290,361
|
Pigments, Powders and Oxides
|
|
|
65,281
|
|
|
58,452
|
|
|
187,893
|
|
|
114,999
|
Total net sales
|
|
$
|
288,527
|
|
$
|
279,365
|
|
$
|
863,955
|
|
$
|
810,351
|
Each segment’s gross profit and reconciliations to income before income taxes are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
(Dollars in thousands)
|
Performance Coatings
|
|
$
|
33,636
|
|
$
|
32,107
|
|
$
|
104,985
|
|
$
|
96,126
|
Performance Colors and Glass
|
|
|
32,282
|
|
|
31,662
|
|
|
100,825
|
|
|
99,540
|
Pigments, Powders and Oxides
|
|
|
23,178
|
|
|
13,179
|
|
|
65,868
|
|
|
30,325
|
Other cost of sales
|
|
|
(115)
|
|
|
80
|
|
|
(95)
|
|
|
(688)
|
Total gross profit
|
|
|
88,981
|
|
|
77,028
|
|
|
271,583
|
|
|
225,303
|
Selling, general and administrative expenses
|
|
|
55,588
|
|
|
48,417
|
|
|
166,105
|
|
|
150,568
|
Restructuring and impairment charges
|
|
|
26
|
|
|
3,844
|
|
|
1,694
|
|
|
5,469
|
Other expense, net
|
|
|
6,662
|
|
|
5,450
|
|
|
15,953
|
|
|
16,409
|
Income before income taxes
|
|
$
|
26,705
|
|
$
|
19,317
|
|
$
|
87,831
|
|
$
|
52,857
|
19
.
Subsequent Events
On October 31, 2016, the Company
acquired
100%
of
the membership interests of Electro-Science Laboratories (“ESL”),
a leader in electronic packaging materials for
$75
million, excluding customary adjustments and fees. ESL is headquartered in King of Prussia, Pennsylvania.
The acquisition of ESL enhances the Company’s position in the electronic packaging materials space with complementary products,
and offers a platform for growth in Ferro’s Performance Colors and Glass segment.
ESL produces thick-film pastes and ceramic tape systems that enable important functionality in a wide variety of industrial and consumer applications.
The operating results related to the ESL acquisition will be included in the Company’s condensed consolidated financial statements commencing October 31, 2016, the date of the acquisition.
Due to the timing of the acquisition, the Company’s initial purchase price accounting was incomplete at the time these financial statements were issued. As such, the Company cannot disclose the allocation of the acquisition price to acquired assets and liabilities and the related disclosures at this time.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net sales for the
three months
ended
September 30, 2016
, increased by
$9.2
million, or
3.3
%, compared with the prior-year same peri
od.
The increase in net sales was primarily driven by the sales from
Al Salomi, which was acquired in the fourth quarter of 2015, the increase in sales in surface technology products, and the sales from Pinturas, which was acquired in the second quarter of 2016, of $6.2
million
, $2.5 million and $2.0 million, respectively. This increase was partially offset by $1.8 million due to the
sale of
our interest in an operating affiliate in
Venezuela
(“Venezuela”)
in the fourth quarter
of 2015
.
During the three months ended
September 30, 2016
, gross profit increased
$12.0
million, or
15.5%
, compared with the prior-year same period; and, as a percentage of net sales, it increased approximately
320
basis points to
30.8%
.
The increase
in gross profit
was
attributable to
an increase in
Pigments, Powders and Oxides, Performance Coatings, and Performance Colors and Glass of $10.0 million, $1.5 million and $0.6
million, respectively.
For the
three months
ended
September 30, 2016
, selling, general and administrative (“SG&A”) expenses increased $
7.2
million, or
14.8
%, compared with the prior-year same period.
The increase was
primarily driven
by higher expenses
in stock-based compensation of $2.0 million and incentive compensation of $1.2 million as a result of the Company’s performance relative to targets for certain awards compared with the prior-year same period
and an
increase in pension and other postretirement benefits of $1.6 million which is a result of the
effect of a
lower expected return on plan assets in the current year as a result of executing our terminated-vested buyout program in the fourth quarter of 2015
.
For the
three months
ended
September 30, 2016
, net loss was $
8.7
million, compared with net loss of $
3.6
million for the prior-year same period, and net loss attributable to common shareholders was
$8.9
million, compared with net loss attributable to common shareholders of
$4.1
million for the prior-year same period.
Income from
continuing operations was
$20.5
million for the
three months
ended
September 30, 2016
, compared with income from continuing operations of
$15.5
million for the three months ended
September 30, 2015
. Our t
otal gross profit for the third
quarter of
2016
was
$89.0
million, compared with
$77.0
million for the three months ended
September 30, 2015
.
2016 Transactional Activity
Disposition of the Europe-based Polymer Additives business
As discussed in Note 3
,
in the third quarter of 2016,
the Company completed the disposition of the Europe-based Polymer Additives business to Plahoma Two AG, an affiliate of the LIVIA Group.
Business Acquisitions
Acquisition
of Delta Performance
Products:
As di
scussed in Note 4, in the third
quarter of
2016, the Company
acquired
certain
assets of Delta Performance Products, LLC
, for a cash purchase price of
$4.4
million.
Acquisition of
Pinturas
:
As discussed in Note 4, in the second quarter of 2016, the Company acquired 100% of the equity of privately held Pinturas Benicarló, S.L. (“Pinturas
”) for €16.5
mill
ion in cash (approximately $18.4
million).
Acquisition of
Ferer
:
As discussed in Note 4, in the first quarter of 2016, the Company completed the purchase of
100%
of the equity of privately held Istanbul-based Ferer Dis Ticaret Ve Kimyasallar Anonim Sirketi A.S. (“Ferer”) on a cash-free and debt-free basis for approximately
$9.
4
million in cash.
Outlook
The Company delivered strong performance in the third quarter
of 2016. Sales increased 3.3% primarily due to acquisitions acquired within the last year. In
addition, gross profit, as a percentage of net sales, increased to 30.8% from 27.6%. Partially offsetting the higher gross profit were increased SG&A c
osts, primarily driven by an
increase in stock-based compensation
expense, incentive compensation
expense and a reduction in p
ension and postretirement benefits income. Our effective tax rate for the third quarter of 2016 was 25.8%, compared with 22.6% in the third quarter of 2015. We continue to expect the full year 2016 tax rate to be in the range of 27% - 28%.
For the remainder of 2016, we anticipate benefitting from strategic actions taken to improve growth in our core businesses and will continue to benefit from recent acquisitions. We expect Pigments, Powders and Oxides to provide growth
through the remainder of 2016
.
The net impact is expected to result in increased sales growth over the remainder of the year, before consideration of foreign currency impacts.
We remain focused on the integration of our recent acquisitions and continue to work toward achieving the identified synergies. We will continue to focus on opportunities to optimize our cost structure and make our business processes and systems more efficient, and to leverage tax planning opportunities. We continue to expect cash flow from operating activities to be positive for the year, providing additional liquidity.
Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2015.
Results of Operations - Consolidated
Comparison of the three months ended
September 30, 2016
and
2015
For the
three months ended
September 30, 2016
,
income
from continuing operations
was
$20.5
m
illion, compared with
$15.5
million
income
from continuing operations for the three months ended
September 30, 2015
. Net
loss
was
$8.7
million, compared with net
loss
of
$3.6
million for the
three months ended
September 30, 2015
. For the
three months ended
September 30, 2016
, net
loss
attributable to common shareholders was
$8.9
million, or
loss
per share
of
$0.11
, compared with
net
loss
attributable to common shareholders of
$4.1
millio
n, or
loss
per share
of
$0.05
, for the
three months ended
September 30, 2015
.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Net sales
|
|
|
288,527
|
|
|
|
279,365
|
|
|
|
9,162
|
|
3.3
|
%
|
Cost of sales
|
|
|
199,546
|
|
|
|
202,337
|
|
|
|
(2,791)
|
|
(1.4)
|
%
|
Gross profit
|
|
$
|
88,981
|
|
|
$
|
77,028
|
|
|
$
|
11,953
|
|
15.5
|
%
|
Gross profit as a % of net sales
|
|
|
30.8
|
%
|
|
|
27.6
|
%
|
|
|
|
|
|
|
Net sales increased b
y
$9.2
million, or
3.3%
, in the
three months ended
September 30, 2016
,
compared with the prior-year same period
, driven by
higher sales in
Pigments, Powders and Oxides, Performance Coatings and Performance Colors and Glass of $6.8 million, $1.7 million and $0.6 million
,
respectively
.
The increase in net sales was primarily driven by the sales
in Pigments, Powders and Oxides from all product lines of $6.8 million and the sales from Al Salomi of $6.2
million
, which was acquired in the fourth quarter of 2015, partially offset by $1.8 million due to the
sale of
our interest in an operating affiliate in
Venezuela
in the fourth quarter
of 2015
.
Gross Profit
Gross profit
increased
$12.0
million, or
15.5%
, in the
three months ended
September 30, 2016
, compared to the prior-year same period
, and as a percentage of net sales
, it in
creased
320
basis
points t
o
30.8%
. The increase
in gross profit
was
attributable to
an increase in
Pigments, Powders
and Oxides, Performance Coatings, and Performance Colors and Glass of $10.0 million, $1.5 million and $0.6 million, respectively. The increase in gross profit was primarily due to higher sales volumes and mix
of $7.7
million, lower raw material costs of $6.1 million and lower manufacturing costs of $3.8 million, partially offset by unfavorable product pricing of $3.8 million and unfavorable
foreign currency impacts of $1.6
million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Geographic Revenues on a sales origination basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
124,801
|
|
$
|
120,840
|
|
$
|
3,961
|
|
3.3
|
%
|
United States
|
|
|
77,211
|
|
|
73,961
|
|
|
3,250
|
|
4.4
|
%
|
Asia Pacific
|
|
|
46,646
|
|
|
41,963
|
|
|
4,683
|
|
11.2
|
%
|
Latin America
|
|
|
39,869
|
|
|
42,601
|
|
|
(2,732)
|
|
(6.4)
|
%
|
Net sales
|
|
$
|
288,527
|
|
$
|
279,365
|
|
$
|
9,162
|
|
3.3
|
%
|
The
increase
in net sales
of
$9.2
million
, compared with the prior-year same period,
was driven by an increase in sales in Asia Pacific, Europe and the United States,
partially offset by
a sales decrease in
Latin America.
The increase in sal
es in Asia Pacific was
attributable to increased sales across all
segments. The increase in
sales in
Europe was primarily attributable to sales from acquisitions
acquired within the last year of $9.6 million, partially offset by a decrease in sales in Performance Coatings excluding
sales from
Al Salomi.
The increase in sales in the United States was attributable to higher sales in Pigments
,
Powders and Oxides of $5.4 million, partially offset by lower sales in Performance Colors and Glass of $2.5 million. The decrease in sales in Latin America was primarily attributable to
the
sale of our interest in an operating affi
liate in Venezuela
in the fourth quarter of 2015.
The following table presents our sales on the basis of
where sold products were shipped.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Geographic Revenues on a shipped-to basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
122,986
|
|
$
|
118,209
|
|
$
|
4,777
|
|
4.0
|
%
|
United States
|
|
|
60,172
|
|
|
56,891
|
|
|
3,281
|
|
5.8
|
%
|
Asia Pacific
|
|
|
62,812
|
|
|
57,509
|
|
|
5,303
|
|
9.2
|
%
|
Latin America
|
|
|
42,557
|
|
|
46,756
|
|
|
(4,199)
|
|
(9.0)
|
%
|
Net sales
|
|
$
|
288,527
|
|
$
|
279,365
|
|
$
|
9,162
|
|
3.3
|
%
|
Selling, General and Administrative Expenses
The following table includes significant components of SG&A and their respective changes between 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Personnel expenses
|
|
$
|
29,634
|
|
$
|
27,099
|
|
$
|
2,535
|
|
9.4
|
%
|
Incentive compensation
|
|
|
2,153
|
|
|
940
|
|
|
1,213
|
|
129.0
|
%
|
Stock-based compensation
|
|
|
1,442
|
|
|
(529)
|
|
|
1,971
|
|
(372.6)
|
%
|
Pension and other postretirement benefits
|
|
|
(109)
|
|
|
(1,699)
|
|
|
1,590
|
|
(93.6)
|
%
|
Bad debt
|
|
|
797
|
|
|
64
|
|
|
733
|
|
1,145.3
|
%
|
Business development
|
|
|
3,660
|
|
|
4,175
|
|
|
(515)
|
|
(12.3)
|
%
|
All other expenses
|
|
|
18,011
|
|
|
18,367
|
|
|
(356)
|
|
(1.9)
|
%
|
Selling, general and administrative expenses
|
|
$
|
55,588
|
|
$
|
48,417
|
|
$
|
7,171
|
|
14.8
|
%
|
SG&A
expen
ses
were
$7.2
million
higher
in the
three months ended
September 30, 2016
,
compared with the prior-year same period.
Included in SG&A expenses were
$
1.1 million of expenses related to acquisitions acquired within the last year. The increase in stock-based compensation expense of $2.0 million and incentive compensation expense of $1.2 million is a result of the Company’s performance relative to targets for certain awards compared with the prior-year same period. The increase in pension and other postretirement benefits of
$1.6
million is a result of the
effect of a
lower expected return on plan assets in the current year as a result of executing our terminated-vested buyout program in the fourth quarter of 2015.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Strategic services
|
|
$
|
29,385
|
|
$
|
27,319
|
|
$
|
2,066
|
|
7.6
|
%
|
Functional services
|
|
|
22,608
|
|
|
20,687
|
|
|
1,921
|
|
9.3
|
%
|
Incentive compensation
|
|
|
2,153
|
|
|
940
|
|
|
1,213
|
|
129.0
|
%
|
Stock-based compensation
|
|
|
1,442
|
|
|
(529)
|
|
|
1,971
|
|
(372.6)
|
%
|
Selling, general and administrative expenses
|
|
$
|
55,588
|
|
$
|
48,417
|
|
$
|
7,171
|
|
14.8
|
%
|
SG&A expenses were $7.2 million higher in the three months ended September 30, 2016, compared with the prior-year same period.
The increase
in SG&A expenses was driven by higher expenses
in strategic services from
acquisitions acquired within the last year
of $0.9 million and the increase in bad debt expense o
f $0.7 million for the three months ended September 30, 2016
,
compared with the prior-year same period. In addition, the
functional services
expense increase
was driven by an increase in expense from acquis
itions acquired within the last year of $0.2 million and the increase in pension and other postretirement benefits of $1.6 million
for the three months ended September 30, 2016
,
compared with the prior-year same period
.
Restructuring and Impairment
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Employee severance
|
|
$
|
20
|
|
$
|
669
|
|
$
|
(649)
|
|
(97.0)
|
%
|
Other restructuring costs
|
|
|
6
|
|
|
3,175
|
|
|
(3,169)
|
|
(99.8)
|
%
|
Restructuring and impairment charges
|
|
$
|
26
|
|
$
|
3,844
|
|
$
|
(3,818)
|
|
(99.3)
|
%
|
Restructuring
and impairment charges
decreased
in
the
third
quarter of 2016 compared with the prior-year same period.
The decrease was primarily due to early termination costs of a contract associated with restructuring a corporate function of $2.8 million during the third quarter of 2015 and lower costs associated with employee severance for the three months ended September 30, 2016 compared with the prior-year same period.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Interest expense
|
|
$
|
4,967
|
|
$
|
4,079
|
|
$
|
888
|
|
21.8
|
%
|
Amortization of bank fees
|
|
|
347
|
|
|
289
|
|
|
58
|
|
20.1
|
%
|
Interest capitalization
|
|
|
(10)
|
|
|
(491)
|
|
|
481
|
|
(98.0)
|
%
|
Interest expense
|
|
$
|
5,304
|
|
$
|
3,877
|
|
$
|
1,427
|
|
36.8
|
%
|
Interest expense increased the third quarter of 2016
compared with the
prior-year same period
. The increase in interest expense
was due to an
increase in the average long-term debt balance during the three months ended September 30, 2016, compared with the prior-year same period, as well as less interest capitalization associated with long-term capital projects.
Income Tax Expense
During the third quarter of 2016, income tax expense was $6.2 million, or 23.1% of pre-tax income. In the third quarter of 2015, we recorded tax expense of $3.8 million, or 19.6% of pre-tax income. The tax expense in the third quarter of 2016 and 2015, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35% primarily as a result of foreign statutory rate differences. The third quarter 2015 tax expense was further lowered as a result of pre-tax losses in jurisdictions for which no tax benefit was recognized in proportion to the amount of pre-tax income in jurisdictions with no tax expense due to the utilization of fully
valued tax attributes. Additionally, during the third quarter of 2015, the Company made a tax payment to a foreign tax jurisdiction for the ability to deduct specific intangible items in the future which resulted in a net benefit in the period.
Results of Operations - Segment Information
Comparison of the three months ended
September 30, 2016
and
2015
Performance Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Other
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
130,453
|
|
|
$
|
128,745
|
|
|
$
|
1,708
|
|
1.3
|
%
|
|
$
|
(4,543)
|
|
$
|
12,029
|
|
$
|
(5,778)
|
|
$
|
—
|
Segment gross profit
|
|
|
33,636
|
|
|
|
32,107
|
|
|
|
1,529
|
|
4.8
|
%
|
|
|
(4,543)
|
|
|
1,919
|
|
|
(1,393)
|
|
|
5,546
|
Gross profit as a % of segment net sales
|
|
|
25.8
|
%
|
|
|
24.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased in Performance Coatings compared with the prior-year same period, primarily driven by an increase in sales from Al Salomi of $6.2 million and in digital inks of $2.7 million
,
partially offset by a decrease in sales of $5.1 million in frits and glazes and $1.8 million in sales due to the
sale of
our interest in an operating affiliate in
Venezuela in the fourth quarter
of 2015.
The increase in net sales was driven by increased sales volume and mix of $12.0 million, partially offset by unfavorable foreign currency impacts of $5.8 million and lower product pricing of $4.5 million. Gross profit increased $1.5 million from the prior-year same period, primari
ly driven by lower raw material costs
of $2.9 million, lower manufacturing costs of $2.6 million and high
er sales volumes and mix of $1.9
million, partially offset by unfavorable product pricing impacts of $4.5 million and unfavorable foreign currency impacts of
$1.4 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
69,171
|
|
$
|
66,476
|
|
$
|
2,695
|
|
4.1
|
%
|
Latin America
|
|
|
26,523
|
|
|
29,806
|
|
|
(3,283)
|
|
(11.0)
|
%
|
Asia Pacific
|
|
|
22,715
|
|
|
20,792
|
|
|
1,923
|
|
9.2
|
%
|
United States
|
|
|
12,044
|
|
|
11,671
|
|
|
373
|
|
3.2
|
%
|
Total
|
|
$
|
130,453
|
|
$
|
128,745
|
|
$
|
1,708
|
|
1.3
|
%
|
The net sales increase of $1.7 million was driven by increases in Europe, Asia Pacific and the United States, partially offset by a decrease in Latin America. The increase in sales in Europe was primary attributable to $6.2 million in sales from Al Salomi, partially offset by a decrease in sales in digital inks and Vetriceramici products of $1.8 million and $1.5 million, respectively. The sales increase in Asia Pacific was driven by higher sales in frits and glazes and digital inks of $1.3 million and $0.6 million, respectively, and the increase in sales in the United States was fully attributable to higher sales in porcelain enamel of $0.4 million. The sales decrease in Latin America was primarily driven by lower sales in frits and glazes of $6.6 million and lower sales of $1.8 million due to the
sale of
our interest in an operating affiliate in
Venezuela in the fourth quarter
of 2015
, partially mitigated by increased sales in digital inks of $3.9 million and
opacifiers of $1.3 million.
Performance Colors and Glass
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Other
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
92,793
|
|
|
$
|
92,168
|
|
|
$
|
625
|
|
0.7
|
%
|
|
$
|
283
|
|
$
|
875
|
|
$
|
(533)
|
|
$
|
—
|
Segment gross profit
|
|
|
32,282
|
|
|
|
31,662
|
|
|
|
620
|
|
2.0
|
%
|
|
|
283
|
|
|
285
|
|
|
(225)
|
|
|
277
|
Gross profit as a % of segment net sales
|
|
|
34.8
|
%
|
|
|
34.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased compared with the prior-year same period, primarily driven by $2.0 million of sales attributable to Pinturas and $1.1 million of sales attributable to Ferer,
partially offset by lower sales of our decoration and electronics products
(excluding the acquisitions acquired within the last year) of $1.3 million and $1.0 million
, respectiv
ely. Net sales were impacted by favorable volume and mix of $0.9 million and higher product pricing of $0.3 million, partially offset by unfavorable foreign currency impacts of $0.5 million. Gross profit increased from the prior-year same period, primarily due to lower raw material costs of $1.3 million, higher sales volumes and mix of $0.3 million and higher product pricing of $0.3 million, partially offset by unfavorable manufacturing costs of $1.0 million and unfavorable foreign currency impacts of $0.2 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
40,149
|
|
$
|
38,377
|
|
$
|
1,772
|
|
4.6
|
%
|
United States
|
|
|
31,924
|
|
|
34,410
|
|
|
(2,486)
|
|
(7.2)
|
%
|
Asia Pacific
|
|
|
15,112
|
|
|
14,183
|
|
|
929
|
|
6.6
|
%
|
Latin America
|
|
|
5,608
|
|
|
5,198
|
|
|
410
|
|
7.9
|
%
|
Total
|
|
$
|
92,793
|
|
$
|
92,168
|
|
$
|
625
|
|
0.7
|
%
|
The net sales increase of $0.6 million
was driven by higher sales in Europe, Asia Pacific and Latin America, partially offset by lower sales in the United States. The increase in Europe was primarily attributable to $2.0 million and $1.1 million in sales from Pinturas and Ferer, respectively, and an increase of $0.4 million in electronic products, partially offset by a decrease in decoration products (excluding the acquisitions acquired within the last year) of $2.0 million. The increase in Asia Pacific was primarily due to higher sales of automotive products of $1.1 million and the increase in Latin America was attributable to an increase in sales of decoration products of $0.5 million. The decrease in sales in the United States was attributable to lower sales in electronics and automotive products of $1.8 million and $1.4 million, respectively, partially mitigated by an increase in sales of decoration products of $0.9 million.
Pigments, Powders and Oxides
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Other
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
65,281
|
|
|
$
|
58,452
|
|
|
$
|
6,829
|
|
11.7
|
%
|
|
$
|
416
|
|
$
|
6,512
|
|
$
|
(99)
|
|
$
|
—
|
Segment gross profit
|
|
|
23,178
|
|
|
|
13,179
|
|
|
|
9,999
|
|
75.9
|
%
|
|
|
416
|
|
|
5,447
|
|
|
7
|
|
|
4,129
|
Gross profit as a % of segment net sales
|
|
|
35.5
|
%
|
|
|
22.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
increased compared with the prior-year same period, primarily due to increased sales from Nubiola products, surface technology and pigment products of $2.7 million, $2.5 million, and $1.4 million, respectively
. Net sales were positively impacted by higher volumes and mix of $6.5 million and higher product pricing of $0.4 million, partially offset by unfavorable foreign currency impacts of $0.1 million. Gross profit increased from the prior-year same period, primarily due to favorable sales volumes
and mix of $5.5 million, l
ower manufacturing costs of $2.2 million,
favo
rable raw material costs of $1.9
million
and higher product pricing of $0.4 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
33,243
|
|
$
|
27,880
|
|
$
|
5,363
|
|
19.2
|
%
|
Europe
|
|
|
15,481
|
|
|
15,987
|
|
|
(506)
|
|
(3.2)
|
%
|
Asia Pacific
|
|
|
8,819
|
|
|
6,988
|
|
|
1,831
|
|
26.2
|
%
|
Latin America
|
|
|
7,738
|
|
|
7,597
|
|
|
141
|
|
1.9
|
%
|
Total
|
|
$
|
65,281
|
|
$
|
58,452
|
|
$
|
6,829
|
|
11.7
|
%
|
The net sales increase of $6.8 million was driven by increased sales in the United States and Asia Pacific, partially offset by a decrease in sales in Europe. The increase in sales in the United States and Asia Pacific was attributable to higher sales in all products. The decrease in Europe was due to lower sales in pigment products of $0.3 million.
Comparison of the nine months ended September 30, 2016 and 2015
For the
nine months ended
September
30, 2016, income from continuing operations was
$65.2
million, compared with
$40.9
million income from continuing operations for the
nine months ended
September
30, 2015. Net income was
$0.7
million
for the nine months ended September 30, 2016
, compared with net income of
$12.2
million for the
nine months ended
September
30, 2015. For the
nine months ended
September
30, 2016, net income attributable to common shareholders was
$0.1
million, or earnings per share of
$0.01
, compared with net income attributable to common shareholders of
$13.5
million, or earnings per share of
$0.15
, for the
nine months ended
September
30, 2015.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Net sales
|
|
|
863,955
|
|
|
|
810,351
|
|
|
|
53,604
|
|
6.6
|
%
|
Cost of sales
|
|
|
592,372
|
|
|
|
585,048
|
|
|
|
7,324
|
|
1.3
|
%
|
Gross profit
|
|
$
|
271,583
|
|
|
$
|
225,303
|
|
|
$
|
46,280
|
|
20.5
|
%
|
Gross profit as a % of net sales
|
|
|
31.4
|
%
|
|
|
27.8
|
%
|
|
|
|
|
|
|
Net sales increased by
$53.6
million, or
6.6%
, in the
nine months ended
September
30, 2016, compared with the prior-year same period driven by
higher sales in
Pigments, Powders and Oxides of $72.9 million
, partially offset by
lower sales in Performance Colors and Glass and Performance Coatings of $13.5 million and $5.8 million, respectively. The increase in net sales was primarily driven by the sales from Nubiola of $66.9 million, which was acquired in the third quarter of 2015, and sales from Al Salomi of $18.2 million partially offset by a decrease in frits and glazes
in Latin America of $20.1
million and electronic products of $11.1 million.
Gross Profit
Gross profit increased
$46.3
million, or
20.5%
, in the
nine months ended
September 30, 2016, compared with
the prior-year same period
, and as a percentage of net sales, it increased
360
basis points
to
31.4%
. The increase in gross profit was driven by increases in Pigments, Powders and
Oxides, Performance Coatings and Performance Colors and Glass of $35.5 million, $8.9 million and $1.3 million, respectively. The increase was primarily due to highe
r sales volumes and mix of $29.3
million, lower raw material costs of $20.7 million and lower manufacturing costs of $16.6 million, partially offset by unfavorable
product pricing of $14.5
million and unfavorabl
e foreign currency impacts of $6.5
million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Geographic Revenues on a sales origination basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
392,392
|
|
$
|
357,694
|
|
$
|
34,698
|
|
9.7
|
%
|
United States
|
|
|
224,234
|
|
|
215,647
|
|
|
8,587
|
|
4.0
|
%
|
Asia Pacific
|
|
|
134,470
|
|
|
119,152
|
|
|
15,318
|
|
12.9
|
%
|
Latin America
|
|
|
112,859
|
|
|
117,858
|
|
|
(4,999)
|
|
(4.2)
|
%
|
Net sales
|
|
$
|
863,955
|
|
$
|
810,351
|
|
$
|
53,604
|
|
6.6
|
%
|
The increase in
net sales
of
$53
.
6
million
, compared with the prior-year same period,
was driven by increases in Europe, Asia Pacific and the United States
of $34.7 million, $15.3 million and $8.6 million, respectively, partially offset by a decrease in Latin America of $5.0
million. The increase
in Europe
was primarily attributable to Nubiola sales of $24.8 million and an increase in Performance Coatings sales of $10.8 million and the increase in Asia Pacific was
attributable to
an increase in sales in all segments
. The increase in the United States was attr
ibutable to higher
sales
in Pigments, Powders and Oxides of $23.9
million, partially offset by lower sales in Per
formance Colors and Glass of $14.9
million. The decrease in sales in Latin America was due to lower sales in Performance Coatings, partially offset
by higher sales in Pigments, Powders and Oxides
.
The following table presents our sales on the basis of
where sold products were shipped.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Geographic Revenues on a shipped-to basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
387,776
|
|
$
|
352,124
|
|
$
|
35,652
|
|
10.1
|
%
|
|
United States
|
|
|
180,390
|
|
|
160,041
|
|
|
20,349
|
|
12.7
|
%
|
|
Asia Pacific
|
|
|
177,492
|
|
|
164,532
|
|
|
12,960
|
|
7.9
|
%
|
|
Latin America
|
|
|
118,297
|
|
|
133,654
|
|
|
(15,357)
|
|
(11.5)
|
%
|
|
Net sales
|
|
$
|
863,955
|
|
$
|
810,351
|
|
$
|
53,604
|
|
6.6
|
%
|
|
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Personnel expenses
|
|
$
|
89,214
|
|
$
|
83,964
|
|
$
|
5,250
|
|
6.3
|
%
|
Incentive compensation
|
|
|
7,299
|
|
|
2,664
|
|
|
4,635
|
|
174.0
|
%
|
Stock-based compensation
|
|
|
5,279
|
|
|
7,451
|
|
|
(2,172)
|
|
(29.2)
|
%
|
Pension and other postretirement benefits
|
|
|
33
|
|
|
(5,093)
|
|
|
5,126
|
|
(100.6)
|
%
|
Bad debt
|
|
|
1,020
|
|
|
(86)
|
|
|
1,106
|
|
(1,286.0)
|
%
|
Business development
|
|
|
8,615
|
|
|
8,604
|
|
|
11
|
|
0.1
|
%
|
All other expenses
|
|
|
54,645
|
|
|
53,064
|
|
|
1,581
|
|
3.0
|
%
|
Selling, general and administrative expenses
|
|
$
|
166,105
|
|
$
|
150,568
|
|
$
|
15,537
|
|
10.3
|
%
|
SG&A expenses were
$15.5
million higher in the
nine months ended
September
30, 2016, compared with the prior-year same period.
Included in SG&A expenses were $8.8 million of expenses from acquisitions
acquired within the last year
. The increase in pension and other postretirement benefits
of $5.1 million
is a result of the effect of a lower
expected return on plan assets in the current year as a result of executing our terminated-vested buyout program in the fourth quarter of 2015.
The increase in incentive compensation expense of $4.6 million was a result of the Company’s performance relative to targets for certain
awards compared with the prior-
year
same period
.
These increases were partially offset by lower stock-based compensation expense of $2.2 million.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Strategic services
|
|
$
|
86,801
|
|
$
|
79,301
|
|
$
|
7,500
|
|
9.5
|
%
|
Functional services
|
|
|
66,726
|
|
|
61,152
|
|
|
5,574
|
|
9.1
|
%
|
Incentive compensation
|
|
|
7,299
|
|
|
2,664
|
|
|
4,635
|
|
174.0
|
%
|
Stock-based compensation
|
|
|
5,279
|
|
|
7,451
|
|
|
(2,172)
|
|
(29.2)
|
%
|
Selling, general and administrative expenses
|
|
$
|
166,105
|
|
$
|
150,568
|
|
$
|
15,537
|
|
10.3
|
%
|
SG&A expenses were $15.5 million higher in the nine months ended September 30, 2016, compared with the prior-year same period.
The increase in
SG&A expenses was driven by higher expenses in
strategic
services
from
acquisitions acquired within the last year of $6.1 million and an
in
crease in bad debt expense of $1.1
million
for the first nine months
of 2016
,
compared with the prior-year same period
.
In addition, the
functional services
expenses
increase
was driven by the increase
in pension and other postretirement benefits of $5.1 million
the first nine months
of 2016
,
compared with the prior-year same period
.
Restructuring and Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Employee severance
|
|
$
|
1,161
|
|
$
|
1,959
|
|
$
|
(798)
|
|
(40.7)
|
%
|
Other restructuring costs
|
|
|
533
|
|
|
3,510
|
|
|
(2,977)
|
|
(84.8)
|
%
|
Restructuring and impairment charges
|
|
$
|
1,694
|
|
$
|
5,469
|
|
$
|
(3,775)
|
|
(69.0)
|
%
|
Restructuring and impairment charges
decreased by $3.8 million
in
the first nine months
of 2016 compared with the prior-year same period.
The decrease was primarily due to the early termination costs of a contract associated with restructuring a corporate function of $2.8 million during the third quarter of 2015 and lower costs associated with employee severance for the nine months ended September 30, 2016 compared with the prior-year same period.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Interest expense
|
|
$
|
14,629
|
|
$
|
10,682
|
|
$
|
3,947
|
|
37.0
|
%
|
Amortization of bank fees
|
|
|
991
|
|
|
875
|
|
|
116
|
|
13.3
|
%
|
Interest capitalization
|
|
|
(41)
|
|
|
(1,420)
|
|
|
1,379
|
|
(97.1)
|
%
|
Interest expense
|
|
$
|
15,579
|
|
$
|
10,137
|
|
$
|
5,442
|
|
53.7
|
%
|
Interest expense increased in the first nine months of 2016
due to an
increase in the average long-term debt balance for the 2016 period, compared with the prior-year same period, as well as less interest capitalization associated with long-term capital projects which was driven by lower spend
for th
e Antwerp, Belgium facility, which was
substantially completed in the fourth quarter of 2015
.
Income Tax Expense
During the nine months ended September 30, 2016, income tax expense was $22.7 million, or 25.8% of pre-tax income, compared with $11.9 million, or 22.6% of pre-tax income in the prior-year same period. The tax expense, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35% primarily as a result of foreign statutory rate differences. Through the third quarter of 2015, tax expense was further lowered as a result of pre-tax losses in jurisdictions for which no tax benefit is recognized in proportion to the amount of pre-tax income in jurisdictions with no tax expense due to the utilization of fully valued tax attributes. Additionally, during the third quarter of 2015, the Company made a tax payment to a foreign tax jurisdiction for the ability to deduct specific intangible items in the future which resulted in the accounting for the net benefit in the period.
Results of Operations - Segment Information
Comparison of the nine months ended September
30, 2016 and 2015
Performance Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
399,166
|
|
|
$
|
404,991
|
|
|
$
|
(5,825)
|
|
(1.4)
|
%
|
|
$
|
(15,949)
|
|
$
|
34,421
|
|
$
|
(24,297)
|
|
$
|
—
|
Segment gross profit
|
|
|
104,985
|
|
|
|
96,126
|
|
|
|
8,859
|
|
9.2
|
%
|
|
|
(15,949)
|
|
|
10,796
|
|
|
(5,125)
|
|
|
19,137
|
Gross profit as a % of segment net sales
|
|
|
26.3
|
%
|
|
|
23.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales declined in Performance Coatings compared with the prior-year same period, primarily driven by a decreas
e in sales of $20.1
million
in Latin America
in frits and glazes,
and
$6.8 million due to
the sale of Venezuela, which was sold in the fourth quarter of 2015, partially mitigated by $18.2 million in sales from Al
Salomi. The decrease in net sales was
impacted
by unfa
vorable foreign currency impacts
of $24.3 million and lower product pricing of $15.9 million, partially offset by increased sales volume of $33.0 million and favorable mix of $1.4 million. Gross profit increased $8.9 million from the prior-year same period, primarily driven by lower manufacturing costs of $11.6 million, highe
r sales volumes and mix of $10.8
million, and lower raw material
costs of $7.5 million, partially offset by unfavorable product pricing impacts of $15.9 million and unfavorabl
e foreign currency impacts of $5.1
million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
221,422
|
|
$
|
210,582
|
|
$
|
10,840
|
|
5.1
|
%
|
Latin America
|
|
|
75,933
|
|
|
94,515
|
|
|
(18,582)
|
|
(19.7)
|
%
|
Asia Pacific
|
|
|
66,784
|
|
|
64,459
|
|
|
2,325
|
|
3.6
|
%
|
United States
|
|
|
35,027
|
|
|
35,435
|
|
|
(408)
|
|
(1.2)
|
%
|
Total
|
|
$
|
399,166
|
|
$
|
404,991
|
|
$
|
(5,825)
|
|
(1.4)
|
%
|
The net sales decrease of $5.8 million was driven by declines in Latin America and the United States, partially mitigated by an increase in Europe and Asia Pacific. The sales decline in Latin America included lower sales in frits and glazes of $20.1 million and
lower sales from Venezuela of $6.8 million, which was sold in the fourth quarter of 2015, partially mitigated by increased sales in digital inks and Vetriceram
ici products of $4.1 million and $3.9 million, respectively.
The sales decline in the United States was fully attributable to lower s
ales in porcelain enamel of $0.4
million. The increase in sales in Europe
was primary attributable to $18.2 million in sales from Al Salomi and $1.6 million in frits and glazes (excluding Al Salomi), partially offset by decreased sales in digital inks and Vetriceramici products of $4.7 million and $3.9 million, respectively. The increase in Asia Pacific was primarily due to increased sales in digital inks and frits and glazes of $2.4 million and $1.9 million, partially offset by decreased sales in porcelain enamel of $1.7 million.
Performance Colors and Glass
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
276,896
|
|
|
$
|
290,361
|
|
|
$
|
(13,465)
|
|
(4.6)
|
%
|
|
$
|
919
|
|
$
|
(10,498)
|
|
$
|
(3,886)
|
|
$
|
—
|
Segment gross profit
|
|
|
100,825
|
|
|
|
99,540
|
|
|
|
1,285
|
|
1.3
|
%
|
|
|
919
|
|
|
(8,369)
|
|
|
(1,268)
|
|
|
10,003
|
Gross profit as a % of segment net sales
|
|
|
36.4
|
%
|
|
|
34.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales decreased compared with the prior-year same period, primarily driven by lower sales of our electronics and decoration products (excluding acquisitions acquired within the last year) of $11.1 million and $8.2 million
, respectively
, partially mitigated by increased sales attributable from Ferer of $3.3 million and Pinturas of $2.6 million.
Net sales were impacted by unfavorable volume and mix of $10.5 million and unfavorable foreign currency impacts of $3.9 million, partially mitigated by higher product pricing of $0.9 million. Gross profit increased from the prior-year same period, primarily due to lower raw material costs of $8.6 million, lower manufacturing costs of $1.4 million and higher product pricing of $0.9 million, partially offset by lower sales volumes and mix of $8.4 million and unfavorable foreign currency impacts of $1.3 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
121,206
|
|
$
|
121,894
|
|
$
|
(688)
|
|
(0.6)
|
%
|
United States
|
|
|
96,833
|
|
|
111,741
|
|
|
(14,908)
|
|
(13.3)
|
%
|
Asia Pacific
|
|
|
44,102
|
|
|
41,780
|
|
|
2,322
|
|
5.6
|
%
|
Latin America
|
|
|
14,755
|
|
|
14,946
|
|
|
(191)
|
|
(1.3)
|
%
|
Total
|
|
$
|
276,896
|
|
$
|
290,361
|
|
$
|
(13,465)
|
|
(4.6)
|
%
|
The net sales decline of $13.5 million
was
driven by lower sales in the United States, Europe
, and Latin America, partially mitigated by increased sales in Asia Pacific. The decrease in sales in the United States was attributable to lower sales across all product lines, and the decline in sales in Europe and Latin America was primarily due to lower sales of decoration products (excluding acquisitions acquired within the last year) of $6.2 million and $0.3 million, respectively. The decreased sales in Europe was partially mitigated by increased sales attributable to Ferer of $3.3 million and Pinturas of $2.6 million. The increase in sales in Asia Pacific was primarily due to higher sales of automotive products of $3.0 million, partially offset by lower sales in decoration products of $0.7 million.
Pigments, Powders and Oxides
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
187,893
|
|
|
$
|
114,999
|
|
|
$
|
72,894
|
|
63.4
|
%
|
|
$
|
517
|
|
$
|
72,867
|
|
$
|
(490)
|
|
$
|
—
|
Segment gross profit
|
|
|
65,868
|
|
|
|
30,325
|
|
|
|
35,543
|
|
117.2
|
%
|
|
|
517
|
|
|
26,853
|
|
|
(100)
|
|
|
8,273
|
Gross profit as a % of segment net sales
|
|
|
35.1
|
%
|
|
|
26.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased compared with the prior-year same period, primarily due to higher sales from Nubiola products of $66.9 million, which was acquired in the third quarter of 2015, and an increase in sales of pigments and surface technology products of $4.2 million and $1.6 million, respectively
. Net sales were positively impacted by higher volumes and mix of $72.9 million and favorable product pricing of $0.5 million, partially offset by unfavorable foreign currency impacts of $0.5 million. Gross profit increased from the prior-year same period, primarily due to
higher sales volumes and mix of $26.9 million, favorable raw material costs of $4.6 million, lower manufacturing costs of $3.6 million and favorable product pricing of $0.5 million, partially offset by unfavorable foreign currency impacts of $0.1 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
92,374
|
|
$
|
68,471
|
|
$
|
23,903
|
|
34.9
|
%
|
Europe
|
|
|
49,764
|
|
|
25,218
|
|
|
24,546
|
|
97.3
|
%
|
Asia Pacific
|
|
|
23,584
|
|
|
12,913
|
|
|
10,671
|
|
82.6
|
%
|
Latin America
|
|
|
22,171
|
|
|
8,397
|
|
|
13,774
|
|
164.0
|
%
|
Total
|
|
$
|
187,893
|
|
$
|
114,999
|
|
$
|
72,894
|
|
63.4
|
%
|
Net sales increased $72.9 million, primarily driven by increased sales from Nubiola products of $66.9 million, which was acquired in the third quarter of 2015, and contributed to the increased sales in all regions.
Summary of Cash Flows for the
nine
months ended September 2016
and
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
(Dollars in thousands)
|
Net cash provided by operating activities
|
|
$
|
6,742
|
|
$
|
31,498
|
|
$
|
(24,756)
|
Net cash (used in) investing activities
|
|
|
(26,036)
|
|
|
(203,104)
|
|
|
177,068
|
Net cash provided by financing activities
|
|
|
1,892
|
|
|
107,419
|
|
|
(105,527)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(422)
|
|
|
(6,820)
|
|
|
6,398
|
(Decrease) in cash and cash equivalents
|
|
$
|
(17,824)
|
|
$
|
(71,007)
|
|
$
|
53,183
|
Details of net cash provided by ope
rating activities
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
2016
|
|
2015
|
|
$ Change
|
|
|
(Dollars in thousands)
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
708
|
|
$
|
12,239
|
|
$
|
(11,531)
|
(Gain) loss on sale of assets and business
|
|
|
(3,459)
|
|
|
1,288
|
|
|
(4,747)
|
Depreciation and amortization
|
|
|
33,599
|
|
|
32,002
|
|
|
1,597
|
Interest amortization
|
|
|
991
|
|
|
875
|
|
|
116
|
Restructuring and impairment
|
|
|
37,173
|
|
|
11,282
|
|
|
25,891
|
Devaluation of Venezuela
|
|
|
—
|
|
|
3,343
|
|
|
(3,343)
|
Accounts receivable
|
|
|
(44,370)
|
|
|
(3,022)
|
|
|
(41,348)
|
Inventories
|
|
|
(20,453)
|
|
|
(1,226)
|
|
|
(19,227)
|
Accounts payable
|
|
|
(3,209)
|
|
|
(9,645)
|
|
|
6,436
|
Other current assets and liabilities, net
|
|
|
9,479
|
|
|
(5,757)
|
|
|
15,236
|
Other adjustments, net
|
|
|
(3,717)
|
|
|
(9,881)
|
|
|
6,164
|
Net cash provided by operating activities
|
|
$
|
6,742
|
|
$
|
31,498
|
|
$
|
(24,756)
|
Cash flows from
operating activities.
Cash fl
ows provided by
operating activities
decreased $24.8 million in the first nine
months of 2016 compared with the prior-year same period.
The decrease was due to higher cash outflows for working capital of $54.1 million, partially mitigated by lower cash outflows for other assets and liabilities and higher earnings after consideration of non-cash items
.
Cash flows from investing activities.
Cash flows used in i
nvesting activities decreased $177.1 million in the first nine
months of 2016 compared with the
prior-year same period. The decrease was primarily due to
lower cash outflows for business combinations of $155.6 million and lower capital expenditures of $18.0 million that was driven by lower spend
for th
e Antwerp, Belgium facility, which was
substantially completed in the fourth quarter of 2015.
Cash flows from financing activities.
Cash flows provided by fin
ancing activities decreased $105.6 million in the first nine
months of 2016 compared with the prior-year same period
, driven by the
$50
.0
million prepayment
on the term loan facility
that was made in January
2016
, a net borrowing decrease on the revolving credit facility of $52.8 million, and the additional purchase of treasury stock of $4.4 million.
Capital Resources and Liquidity
Credit Facility
On July 31, 2014, the Company entered into
a credit facility (the “
Credit Facility”) with a group of lenders to refinance the majority of its
then outstanding debt. The Credit Facility consisted
of a
$200
million secured revolving line of credit with a term of
five
years and a
$300
million secured term loan facility with a term of
seven
years.
On January 25, 2016, the Company amended the Credit Facility by entering into the Incremental Assumption Agreement (the “Incremental Agreement”) to increase the revolving line of credit commitment amount from $200 million to
$300
million. The Company then used a portion of the increase in the revolving line of credit to repay
$50
million of the term loan facility.
The Credit Facility was amended and a porti
on of the outstanding term loan was
repaid to increase the amount of total liquidity available under t
he Credit Facility and
reduce the total cost of borrowings.
On August 29, 2016, the Company amended the Credit Facility by entering into the Second Incremental Assumption Agreement (the “Second Incremental Agreement”) to increase the revolving line of credit commitment amount to $400 million.
The increase in the revolving line of credit commitment will be used for general corporate purposes, including acquisitions.
Principal payments on the term loan facility of
$0.75
million quarterly
, are payable commencing
December 31, 2014
,
with the remaining balance du
e on the maturity date.
At
September 30
, 2016
, the Company had
borrowed $244.0 million
under the term loan facility
,
taking into account all prior quarterly payments and the $50 million prepayment that was made in January
2016,
at an annual rate
of
4.0%
. There
are
no
additional borrowings available
under the term loan facility.
Certain of the Company’s U.S. subsidiaries have guaranteed the Comp
any’s obligations under the
Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of most of the Company’s U.S. subsidiaries and 65% of most of the stock of the Company’s first tier foreign subsidiaries.
Interest Rate – Term Loan: The interest rates applicable to the term loans will be, at the Company’s option, equal to either a base rate or a London Interbank Offered Rate (“LIBOR”) rate plus, in both cases, an applicable margin.
|
·
|
|
The base rate will be the highest of (i) the federal
funds rate plus 0.50%, (ii) syndication agent
’s prime rate or (iii) the daily LIBOR rate plus 1.00%.
|
|
·
|
|
The applicable margin for base rate loans is 2.25%.
|
|
·
|
|
The LIBOR rate will be set as quoted by Bloomberg and shall not be less than 0.75%.
|
|
·
|
|
The applicable margin for LIBOR rate loans is 3.25%.
|
|
·
|
|
For LIBOR rate 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.
|
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated debt outstanding at such time to (b) the Company’s consolidated EBITDA computed for the period of four consecutive fiscal quarters most recently ended.
|
·
|
|
The base rate will be the highest of (i) the federal
funds rate plus 0.50%, (ii) syndication agent
’s prime rate or (iii) the daily LIBOR rate plus 1.00%.
|
|
·
|
|
The applicable margin for base rate loans will vary between 1.50% and 2.00%.
|
|
·
|
|
The LIBOR rate will be set as quoted by Bloomberg for U.S. Dollars.
|
|
·
|
|
The applicable margin for LIBOR Rate Loans will vary between 2.50% and 3.00%.
|
|
·
|
|
For LIBOR rate loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
|
At
September 30, 2016
,
the Company had
borrowed $233.2
million
under the revolving credit
facilities at an annual weighted average interest rate
of 3.5%.
The
borrow
ing on the revolving credit facilities
was used to fund the acquisitions, the share repurchase program
s
, and for ot
her general business purposes.
After reductions for outstanding letters of credit secured
by these facilities,
we
had $
162.4
million of additional borrowings available
under the revolving credit facilities at
September 30, 2016
.
The
Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions and limitations on certain
types of investments. The
Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.
Specific to the revolving credit facility, the Company is subject to financial covenants regarding the Company’s outstanding net indebtedness and interest coverage ratios.
If an event of default occurs, all am
ounts outstanding under the
Credit Facility may be accelerated and become immediately due and payable. At
September 30, 2016
, we were in complianc
e with the covenants of the
Credit Facility.
Off Balance Sheet Arrangements
Consignment and Customer Arrangements for Precious Metals.
We use precious metals, primarily silver, in the production of some of our products. We obtain most precious metals from financial institutions under consignment agreements (generally referred to as our precious metals consignment program). The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign and the period of consignment. These
fees were
$0.2 million
for the
three months ended
September 30, 2016
and
2015
, and were $0.6 million for the nine months ended September 30, 2016 and 2015.
We had on hand precious metals owned by participants in our precious metals program of
$26.8
million at
September 30, 2016
, and
$20.5
million at
December 31, 2015
, measured at fair value based on market prices for identical assets and net of credits.
The consignment agreements under our precious metals program involve short-term commitments that typically mature within 30 to 90 days of each transaction and are typically renewed on an ongoing basis. As a result, the Company relies on the continued willingness of financial institutions to participate in these arrangements to maintain this source of liquidity. On occasion, we have been required to deliver cash collateral. While no deposits were outstanding at
September 30, 2016
, or
December 31, 2015
,
we may be required to furnish cash collateral in the future based on the quantity and market value of the precious metals under consignment and the amount of collateral-free lines provided by the financial institutions. The amount of cash collateral required is subject to review by the financial institutions and can be changed at any time at their discretion, based in part on their assessment of our creditworthiness.
Bank Guarantees and Standby Letters of Credit.
At
September 30,
2016, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled
$6.3
million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.
Other Financing Arrangements
We maintain other lines of credit to provide global flexibility for Ferro’s short-term liquidity requirements. These facilities are uncommitted lines for our international operations and
totaled
$32.9
million and $8.0 million at September 30, 2016 and December 31, 2015, respectively. We had
$28.8
million and $7.3 million
of additional borrowings available under these lines at
September 30, 2016 and December 31, 2015, respectively.
Liquidity Requirements
Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under the revolving credit facility, and cash flows from operating activities. As of September 30, 2016 we had $40.6 million of cash and cash equivalents. Substantially all of our cash and cash equivalents were held by foreign subsidiaries. Cash generated in the U.S. is generally used to pay down amounts outstanding under our revolving credit facility and for general corporate purposes, including acquisitions. If needed, we could repatriate the majority of cash held by foreign subsidiaries without the need to accrue and pay U.S. income taxes. We do not anticipate a liquidity need requiring such repatriation of these funds to the U.S.
Our liquidity requirements primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures, capital investments, precious metals cash collateral requirements, and postretirement obligations. We expect to meet these requirements in the long term through cash provided by operating activities and availability under existing credit facilities or other financing arrangements. Cash flows from operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. We had additional borrowing capacity of
$191.3
million
at
September 30, 2016
, and
$32.9
million at
December 31, 2015
, available under our
various credit facilities, primarily our revolving credit facility.
Our revolving credit facility subjects us to customary financial covenants, including a leverage ratio and an interest coverage ratio. These covenants under our credit facility restrict the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.
The most critical of these ratios is the leverage ratio for the revolving credit facility. As of
September 30, 2016
, we were in compliance with our maximum leverage ratio covenant of 3.75x as our actual
ratio was 2.58x, providing $59.3
million of EBITDA cushion on the leverage ratio, as defined within the Credit Facility. To the extent that economic conditions in key markets deteriorate or we are unable to meet our business projections and EBITDA falls below approximately $130 million
for rolling four quarters, based on reasonably consistent debt levels with those as of
December 31, 2015
, we could become unable to maintain compliance with our
leverage ratio covenant. In such case, our lenders could demand immediate payment of outstanding amounts and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all.
Difficulties experienced in global capital markets could affect the ability or willingness of counterparties to perform under our various lines of credit, forward contracts, and precious metals program. These counterparties are major, reputable, multinational institutions, all having investment-grade credit ratings, except for one, which is not rated. 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 o
f such businesses and assets
. We also evaluate and pursue acquisition opportunities that we believe will enhance our strategic position. Generally, we publicly announce divestiture and acquisition transactions only when we have
closed on
those transactions.
Critical Accounting Policies and Their Application
There were no material changes to our critical accounting policies described in “Critical Accounting Policies” within Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2015
.
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 adopte
d or will be required to adopt.
Risk Factors
Certain statements contained here and in future filings with the SEC reflect the Company’s expectations with respect to future performance and constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Company’s operations and business environment, which are difficult to predict and are beyond the control of the Company. Factors that could adversely affect our future financial performance include those described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for
the year ended December 31, 2015
.