Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
As
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 oper
ations for the three
and six months ended June 30
, 2016
.
During the first quarter of 2017, the Company renamed the Pigment
s, Powders and Oxides segment
“
C
olor Solutions
”
to align with our
go-to-market strategy.
Operating results for the
three and six
months ended
June 30, 2017
, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending
December 31, 2017
.
2.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 new guidance requires all income tax effects of awards to be recognized as income tax expense or benefit in the income statement when the awards vest or are settled. Cash flow related to excess tax benefits will no longer be classified as a financing activity on the statement of cash flows but will be presented with all other income tax cash flows as an operating activity. The new guidance also provides an accounting policy election to account for forfeitures as they occur. Finally, the updated standard also allows the Company to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and clarifies that all cash tax payments made on
an employee’s behalf for withhe
ld shares should be presented as financing activities on the statement of cash flows.
The Company adopted ASU 2016-09, in the first quarter of 2017. As a result of the adoption, tax benefits of $
0.3
million were r
ecorded in income tax expense.
The Company has elected to
account for forfeitures as they occur
.
In addition, the Company elected to apply the presentation requirements for cash flows related to excess tax benefits prospectively. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact on the statements of cash flows since the Company has historically presented such payments as financing activities.
New
Accounting Standards
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation: (Topic 718): Scope of Modification Accounting.
ASU 2017-09
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.
This pronouncement is effective for annual periods beginning after December
15, 2017, including interim periods within those annual periods. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07,
Compensation – Retirement Benefits:
(
Topic 715
)
: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.
ASU 2017-07
requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered during the period. The other components of net benefit costs are to be presented in the income statement separately from the service costs component and outside a subtotal of income from operations.
Employers will have to disclose the line(s) used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement
.
This pronouncement is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other:
(
Topic 350
)
: Simplifying the Test for Goodwill Impairment.
ASU 2017-04 is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. This pr
onouncement is effective for the
annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations:
(
Topic 805
)
: Clarifying the Definition of a Business.
ASU 2017-01 is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. This pr
onouncement is effective for the
annual periods beginning after December 15, 2017, including inte
rim periods within those fiscal years
. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes:
(
Topic 740
)
: Intra-Entity Transfers of Assets Other Than Inventory.
ASU 2016-16 is intended to improve the accounting for the income tax consequences of intra-entity transfers
of assets other than inventory and requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs.
This pr
onouncement is effective for the
annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In August 2016, the FASB
issued ASU 2016-15,
Statement of Cash Flow:
(
Topic 230
)
: Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 is intended to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. This pronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
The Company is in the process of assessing the impact the adoption of this ASU will have on our consolidated financial statements.
In February 2016, the FASB
issued ASU 2016-02,
Leases:
(
Topic 842
)
.
ASU 2016-02 requires companies to recognize a lease liability and asset on the balance sheet for operating leases with a term greater than one year. This pronouncement is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
The Company is in the process of assessing the impact the adoption of this ASU will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers:
(
Topic 606
)
. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.
The Company continues to assess the impact of the standard
. While we anticipate some changes to revenue recognition for certain customer contracts, we do not currently believe ASU 2014-09 will have a material effect on our consolidated financial statements.
No other new accounting pronouncements issued had or are expected to have a material impact of the Company’s consolidated financial statements.
3. Discontinued Operations
During 2014, we commenced a process to market for sale our Europe-based Polymer Additives business. We determined that the criteria to classify these assets as held-for-sal
e under ASC Topic 360, Property,
Plant and Equipment, were met. On August 22, 2016, we completed the disposition of the Europe-based Polymer Additives business to Plahoma Two AG, an affiliate of the LIVIA Group.
We have classified the
Europe-based Polymer Additives
operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for
the three
and six months ended June 30
, 2016
.
The table below summarizes results for the Europe-based Polymer Additives assets, for the
three and six
months ended
June 30
, 2016
, which are reflected in our condensed consolidated statements of operations as discontinued operations. Interest expense has been allocated to the discontinued operations based on the ratio of net assets of each business to consolidated net assets excluding debt.
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Three Months Ended
|
|
Six Months Ended
|
|
|
June 30, 2016
|
|
June 30, 2016
|
|
|
(Dollars in thousands)
|
|
Net sales
|
$
|
6,900
|
|
$
|
14,650
|
|
Cost of sales
|
|
10,789
|
|
|
22,819
|
|
Gross loss
|
|
(3,889)
|
|
|
(8,169)
|
|
Selling, general and administrative expenses
|
|
1,502
|
|
|
2,505
|
|
Restructuring and impairment charges
|
|
—
|
|
|
24,059
|
|
Interest expense
|
|
40
|
|
|
276
|
|
Miscellaneous expense (income)
|
|
30
|
|
|
(387)
|
|
Loss from discontinued operations before income taxes
|
|
(5,461)
|
|
|
(34,622)
|
|
Income tax expense
|
|
287
|
|
|
620
|
|
Loss from discontinued operations, net of income taxes
|
$
|
(5,748)
|
|
$
|
(35,242)
|
4.
Acquisitions
Smalti per Ceramiche, s.r.l
On April 24, 2017, the Company acquired
100%
of the equity interests of S.P.C. Group s.r.l., a company duly organized under the laws of Italy, and
100%
of the equity interests of Smalti per Ceramiche, s.r.l. (“SPC”), a company duly organized under the laws of Italy, for
€
17.
8
million (approximately
$19.
3
million), subject to customary working capital adjustments, including the assumption of debt of
€
5.
8
million. SPC is a high-end tile coatings manufacturer based in Italy
focused
on fast-growing specialty
products
. SPC’s
products, strong technology, design capabilities, and customer-centric business model are complementary to our Performance Coatings segment, and position us for continued growth in the high-end tile markets
.
The Company incurred acquisition costs for the
three and six
months ended
June 30, 2017, of
$
0.8
million
and
$1.2
million
, respectively
,
which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations.
The information included herein has been prepared based on the
preliminary
allocation of the purchase price using
estimates of
the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using
discounted cash flow and comparative market approaches
,
and estimates made by management. As of
June 30, 2017
, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the C
ompany. The Company preliminarily recorded
$6.7
million of personal and real property,
$5.
5
million of net working capital,
$4.
5
million
of
goodwill,
$4.
4
million of
amortizable intangible assets and
$1.
8
million of a deferred tax liability on the condensed consolidated balance sheet.
Cappelle
On December 9, 2016, the Company acquired
100%
of the share capital of Belgium-based Cappelle Pigments NV (“Cappelle”), a leader in specialty, high-performance inorganic and organic pigments used in coatings, inks and plastics, for
€49.
8
million
(approximately
$52.
7
million)
, including the assumption of debt of
€
9.
8
million.
The acquired business contributed net sales of
$19.
1
million
and
$
38.1
million for
the three and six months ended June 30, 2017, respectively,
and
net income attributable to Ferro
Corporation of
$0.
5
million and
$
1.1
million for
the three and six months ended June 30, 2017, respectively.
The information included herein has been prepared based on the
preliminary
allocation of the purchase price using
estimates of
the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management.
As of
June 30, 2017
, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company.
The Com
pany preliminarily recorded
$28.6
million of net working capital,
$24.1
million of per
sonal and real property,
$3.5
million
of goodwill and
$3.5
million of a deferred tax liability on the condensed consolidated balance sheet.
Electro-Science Laboratories, Inc
.
On October 31, 2016, the Company acquired
100%
of the membership interest of Electro-Science Laboratories, Inc. (“ESL”), a leader in electronic packaging materials, for
$78.
5
million. ESL is headquartered in King of Prussia, Pennsylvania. The acquisition of ESL enhances the Company’s position in the electronic packaging materials space with complementary products, and provides a platform for growth in our Performance Colors and Glass segment. ESL produces thick-film pastes and ceramics tape systems that enable important functionality in a wide variety of industrial and consumer applications. The acquired business con
tributed net sales of
$10.
6
million
and
$
21.3
million
for the three and six months ended June 30, 2017, respectively, and net income attributable to Ferro
Corporation
of
$1.
8
million and
$
2.7
million for
the three and six months ended June 30, 2017, respectively. The Company incurred acquisition costs for the six months ended
June 30, 2017, of
$
0.3
million, respectively
,
which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations.
The information included herein has been prepared based on the
preliminary
allocation of the purchase price using
estimates of
the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management.
As of
June 30, 2017
, the purchase price allocation is subject to further adjustment until all information is fully evaluated by
the Company. The Company preliminarily recorded
$39.
7
million of intangible assets,
$19.
0
million of goodwill,
$18.
9
million of net working capital,
$2.9
million
of personal and real property and
$2.0
million of a deferred tax liability on the condensed consolidated balance sheet.
Delta Performance
Products
On August 1
, 2016, the Company acquired
certain
assets of Delta Performance Products, LLC, for a cash purchase price of
$4.4
million.
The information included herein has been prepared based on the
preliminary
allocation of the purchase price using
estimates of
the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management.
As of
June 30, 2017
, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company
preliminarily
recorded
$3.2
million of amortizable intangible assets,
$0.6
million of net working capital
,
$0.
4
million of goodwill and
$0.2
mil
lion of a deferred tax asset
on the condensed consolidated balance sheet.
Pinturas
On June 1, 2016, the Company acquired
100%
of the equity of privately held Pinturas Benicarló, S.L. (“Pinturas”) for
€16.
5
million in cash (approximately
$18.
4
million). The information included herein has been p
repared based on the
allocation
of the purchase price using
the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches
,
and estimates made by management.
The Company
recorded
$8.
8
million of amortizable intangible assets,
$7.
7
million of net working capital
,
$3.
9
million of goodwill,
$2.
7
million of a deferred tax liability
, and
$0.7
million
of personal and real property
on the condensed consolidated balance sheet.
Ferer
On January 5, 2016, the Company completed the purchase of
100%
of the equity of privately held Istanbul-based Ferer Dis Ticaret Ve Kimyasallar Anonim Sirketi A.S. (“Ferer”) for approximately
$9.
4
million
. The information included herein has been p
repared based on the
allocation of the p
urchase price using
the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches
,
and estimates made by management. The Company recorded
$4.
5
million of goodwill
,
$3.
3
million of
amortizable intangible assets,
$1.
7
million of net working capital,
$0.
7
million of a deferred tax liability and
$0.
6
million of personal
and real property
on the condensed consolidated balance sheet.
5. Inventories
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Raw materials
|
|
$
|
91,510
|
|
$
|
72,943
|
|
Work in process
|
|
|
46,804
|
|
|
38,859
|
|
Finished goods
|
|
|
133,866
|
|
|
118,045
|
|
Total inventories
|
|
$
|
272,180
|
|
$
|
229,847
|
In the production of some of our products,
we use precious metals,
which we obtain from financial institutions under consignment agreements with terms of
one
year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amou
nts we consign. These fees were
$0.3 million and
$0.2
million
for the
three months ended
June 30, 2017
and
2016
,
respectively,
and were
$0.5 million and
$0.4
million for the six months ended June 30, 2017 and 2016
, respectively
.
We had on-
hand precious metals owned by participants in our precious metals consignment program of
$33.4
million at
June 30, 2017
, and
$28.7
m
illion at
December 31, 2016
, measured at fair value based on market prices for identical assets and net of credits.
6. Property, Plant and Equipment
Property, plant and equipment is reported net of accumulated depreciation of
$475.4
million at
June 30, 2017
, and
$439.4
million at
December 31, 2016
. Unpaid capital expenditure liabilities, which are non-cash investing activities, were
$3.8
million at
June 30, 2017
, and
$2.1
million at
June 30, 2016
.
We recorded a
$3.9
million gain on sale
of a closed site in Australia which was recorded
in
Miscellaneous
expense
(income)
, net
in our condensed consolidated statements of opera
tions for the six months ended June 30
, 2016.
As discussed in Note 3, o
ur Europe-based Polymer Additives assets had been classified as held-for-sale under ASC Topic 360, Property, Plant and Equipment
from 2014
until the ultimate sale of the business in August 2016
. As such, at each historical reporting date, these assets were tested for impairment comparing the fair value of the assets
,
less costs to sell
,
to the carrying value. The fair value was determined using both the 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
.
The impairment charge
of
$24.1
million
is
included in Loss from discontinued operations, net of income taxes in our condensed consolidated statem
ents of operations for the six
months ended
June 30
, 2016
.
7. Goodwill and Other Intangible Assets
Details and activity in the Company’s goodwill by segment follow:
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Performance
|
|
|
|
|
|
Performance
|
|
Color
|
|
Colors and
|
|
|
|
|
|
Coatings
|
|
Solutions
|
|
Glass
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Goodwill, net at December 31, 2016
|
|
$
|
28,090
|
|
$
|
40,421
|
|
$
|
79,785
|
|
$
|
148,296
|
|
Acquisitions
|
|
|
4,494
|
2
|
|
—
|
|
|
(854)
|
1
|
|
3,640
|
|
Foreign currency adjustments
|
|
|
2,561
|
|
|
1,143
|
|
|
2,188
|
|
|
5,892
|
|
Goodwill, net at June 30, 2017
|
|
$
|
35,145
|
|
$
|
41,564
|
|
$
|
81,119
|
|
$
|
157,828
|
|
|
(1)
|
|
During the first quarter of 2017, the Company recorded a purchase price adjustment within the measurement period for goodwill related to the ESL acquisition.
|
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|
(2)
|
|
During the second quarter of 2017, the Company recorded goodwill related to the SPC acquisition. Refer to Note 4 for additional details.
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|
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|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Goodwill, gross
|
|
$
|
216,295
|
|
$
|
206,763
|
|
Accumulated impairment losses
|
|
|
(58,467)
|
|
|
(58,467)
|
|
Goodwill, net
|
|
$
|
157,828
|
|
$
|
148,296
|
Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below
its carrying value. As of June 30
, 2017, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.
Amortizable intangible assets consisted of the following:
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|
June 30,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Gross amortizable intangible assets:
|
|
|
|
|
|
|
|
Patents
|
|
$
|
5,277
|
|
$
|
5,147
|
|
Land rights
|
|
|
4,816
|
|
|
4,746
|
|
Technology/know-how and other
|
|
|
90,441
|
|
|
84,837
|
|
Customer relationships
|
|
|
84,914
|
|
|
80,153
|
|
Total gross amortizable intangible assets
|
|
|
185,448
|
|
|
174,883
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
Patents
|
|
|
(5,155)
|
|
|
(4,981)
|
|
Land rights
|
|
|
(2,776)
|
|
|
(2,698)
|
|
Technology/know-how and other
|
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|
(38,667)
|
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|
(34,775)
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|
Customer relationships
|
|
|
(7,857)
|
|
|
(5,311)
|
|
Total accumulated amortization
|
|
|
(54,455)
|
|
|
(47,765)
|
|
Amortizable intangible assets, net
|
|
$
|
130,993
|
|
$
|
127,118
|
Indefinite-lived intangible assets consisted of the following:
|
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|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Indefinite-lived intangibles assets:
|
|
|
|
|
|
|
|
Trade names and trademarks
|
|
$
|
11,531
|
|
$
|
10,732
|
8. Debt
Loans payable and current portion of long-term debt consisted of the following:
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|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Loans payable
|
|
$
|
14,508
|
|
$
|
11,452
|
|
Current portion of long-term debt
|
|
|
8,543
|
|
|
5,858
|
|
Loans payable and current portion of long-term debt
|
|
$
|
23,051
|
|
$
|
17,310
|
Long-term debt consisted of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Term loan facility, net of unamortized issuance costs, maturing 2021
(1)
|
|
$
|
—
|
|
$
|
239,530
|
|
Term loan facility, net of unamortized issuance costs, maturing 2024
(2)
|
|
|
633,463
|
|
|
—
|
|
Revolving credit facility, maturing 2019
|
|
|
—
|
|
|
311,555
|
|
Capital lease obligations
|
|
|
5,216
|
|
|
3,720
|
|
Other notes
|
|
|
7,727
|
|
|
8,228
|
|
Total long-term debt
|
|
|
646,406
|
|
|
563,033
|
|
Current portion of long-term debt
|
|
|
(8,543)
|
|
|
(5,858)
|
|
Long-term debt, less current portion
|
|
$
|
637,863
|
|
$
|
557,175
|
(1) T
he carrying value of the term loan facility,
maturing 2021, was
net of unamortized debt issuance costs of
$3.7
million.
(2)
T
he carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs
of
$8.
1
million.
2014 Credit Facility
In 2014, the Company entered into a credit facility that was amended on January 25, 2016
,
and August 29, 2016
,
resulting in
a
$400
million secured revolving line of credit with a term of
five
years and a
$300
million secured term loan facility with a term of
seven
years
from the original issuance date
(the “Previous Credit Facility”) with a group of lenders that was replaced on February 14, 2017
,
by the Credit Facility (as defined below). For discussion of the Company’s Previous Credit Facility, refer
to Note 8 in the Company’s
Annual Report on Form 10-K
for the year ended December 31, 2016
.
In conjunction with the refinancing of
the Previous Credit Facility, we recorded a charge of
$3.9
million
in connection with the write-off of unamortized issuance costs,
which is recorded within Loss on
extinguishment of debt in our condensed consolidated state
ment of oper
ations for the six months ended June 30
, 2017.
2017 Credit Facility
On February 14, 2017, the Company entered into a new credit facility (the “Credit Facility”) with a group of lenders to refinance its then outstanding credit facility debt and to provide liquidity for ongoing working capital requirements and general corporate purposes.
The Credit Facility consists of a
$400
million secured revolving line of credit with a term of
five
years, a
$357.5
million secured term loan facility with a term of
seven
years and a
€250
million secured euro term loan facility with a term of
seven
years. The term loans are payable in equal quarterly installments in an amount equal to
0.25%
of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof. In addition, the Company is required, on an annual basis, to make a prepayment of term loans until they are fully paid and then to the revolving loans in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Credit Facility.
Subject to the satisfaction of certain conditions, the Company can request additional commitments under the revolving line of credit or term loans in the aggregate principal amount of up to
$250
million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans
and,
certain additional debt subject to satisfaction of certain covenant levels.
Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of
100%
of the stock of certain of the Company’s U.S. subsidiaries and
65%
of the stock of certain of the Company’s direct foreign subsidiaries.
Interest Rate – Term Loans: The interest rates applicable to the U.S. term loans will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable margin. The interest rates applicable to the Euro term loans will be a Euro Interbank Offered Rate (“EURIBOR”) rate plus an applicable margin.
|
|
·
|
|
The base rate for U.S. term loans will be the highest of (i) the federal funds rate plus
0.50%
, (ii) syndication agent’s prime rate or (iii) the daily LIBOR rate plus
1.00%
. The applicable margin for base rate loans is
1.50%
.
|
|
|
·
|
|
The LIBOR rate for U.S. term loans shall not be less than
0.75%
and the applicable margin for LIBOR rate U.S. term loans is
2.50%
.
|
|
|
·
|
|
The EURIBOR rate for Euro term loans shall not be less than
0%
and the applicable margin for EURIBOR rate loans is
2.75%
.
|
|
|
·
|
|
For LIBOR rate term loans and EURIBOR rate term loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate or EURIBOR rate, as applicable, for the corresponding duration.
|
At June 30
, 2017, the Company had
borrowed
$356
.
6
million under the
secured t
erm loan facility at an interest
rate of
3.73
%
and
€2
49.4
million under the secured euro
term loan facility at an interest
rate of
2.75%
. At June
30
, 2017,
there
were
no
additional borrowings available under the term loan facilities.
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated
net
debt outstanding at such time to (b) the Company’s consolidated EBITDA computed for the period of four consecutive fiscal quarters most recently ended.
|
|
·
|
|
The base rate for revolving loans will be the highest of (i) the federal funds rate plus
0.50%
, (ii) syndication agent’s prime rate or (iii) the daily LIBOR rate plus
1.00%
. The applicable margin for base rate loans will vary between
0.75%
and
1.75%
.
|
|
|
·
|
|
The LIBOR rate for revolving loans shall not be less than
0%
and the applicable margin for LIBOR rate revolving loans will vary between
1.75%
and
2.75%
.
|
|
|
·
|
|
For LIBOR rate revolving loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
|
At
June 30
, 2017,
there were
no
borrowings under the revolving credit line. After reductions for outstanding letters of credit secured by these facilities, we had
$395.
3
million of
additional
borrowings available
under the revolving credit facilities
at
June 30
, 2017.
The Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.
Specific to the revolving credit facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Credit Facility may be accelerated and become immedi
ately due and payable. At June 30
, 2017, we were in compliance with the covenants of the Credit Facility.
Other Financing Arrangements
We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and
totaled
$63.3
million and
$7.3
million at
June 30, 2017
, and
December 31, 2016
, respectively. The unused portions of these lines provided additional liquidity of
$40.4
million
at
June 30, 2017
, and
$6.7
million at
December 31, 2016
.
9. Financial Instruments
The following financial instrument assets (liabilities) are presented at their respective carrying amount, fair value and classification within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
Carrying
|
|
Fair Value
|
|
|
|
Amount
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(Dollars in thousands)
|
|
Cash and cash equivalents
|
|
$
|
78,866
|
|
$
|
78,866
|
|
$
|
78,866
|
|
$
|
—
|
|
$
|
—
|
|
Loans payable
|
|
|
(14,508)
|
|
|
(14,508)
|
|
|
—
|
|
|
(14,508)
|
|
|
—
|
|
Term loan facility, maturing 2024
(1)
|
|
|
(633,463)
|
|
|
(633,622)
|
|
|
—
|
|
|
(633,622)
|
|
|
—
|
|
Other long-term notes payable
|
|
|
(7,727)
|
|
|
(6,870)
|
|
|
—
|
|
|
(6,870)
|
|
|
—
|
|
Foreign currency forward contracts, net
|
|
|
(1,188)
|
|
|
(1,188)
|
|
|
—
|
|
|
(1,188)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Carrying
|
|
Fair Value
|
|
|
|
Amount
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(Dollars in thousands)
|
|
Cash and cash equivalents
|
|
$
|
45,582
|
|
$
|
45,582
|
|
$
|
45,582
|
|
$
|
—
|
|
$
|
—
|
|
Loans payable
|
|
|
(11,452)
|
|
|
(11,452)
|
|
|
—
|
|
|
(11,452)
|
|
|
—
|
|
Term loan facility, maturing 2021
(1)
|
|
|
(239,530)
|
|
|
(252,052)
|
|
|
—
|
|
|
(252,052)
|
|
|
—
|
|
Revolving credit facility, maturing 2019
|
|
|
(311,555)
|
|
|
(318,389)
|
|
|
—
|
|
|
(318,389)
|
|
|
—
|
|
Other long-term notes payable
|
|
|
(8,228)
|
|
|
(7,315)
|
|
|
—
|
|
|
(7,315)
|
|
|
—
|
|
Foreign currency forward contracts, net
|
|
|
350
|
|
|
350
|
|
|
—
|
|
|
350
|
|
|
—
|
(1) The carrying value of the term loan facility is net of unamortized debt issuance costs
of
$8.1
million and
$3.7
million
for the period ended June 30, 2017
,
and December 31, 2016, respectively
.
The fair values of cash and cash equivalents are based on the fair values of identical assets. The fair values of loans payable are based on the present value of expected future cash flows and approximate their carrying amounts due to t
he shor
t periods to maturity. At June 30
, 2017, the fair value
of the term loan fac
ility is
based on market price information and is measure
d using the last available bid price
of the instrument on a secondary market
and at December 31, 2016, is
based on the present value of expected future cash flows and interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities
adjusted for the Company's
performance risk
.
T
he 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 adjust
ed for the Company's
performance risk.
Derivative Instruments
The Company may use derivative
instruments
to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investment in certain foreign subsidiaries and on certain existing assets and liabilities. However, the Company may choose not to hedge
in countries where it is
not economically feasible
to enter into hedging arrangements and
where
hedging inefficiencies
exist
, such as timing of transactions
.
Derivatives De
signated as Hedging Instruments
Interest rate swaps.
To reduce our exposure to interest rate changes on
our
variable-rate debt, we entered into interest rate swap agreements in the second quarter o
f 2017. These swaps
converted
$150
million and
€90
million of our term loan facility from
variable-rate term loan
to a fixed interest rate
, and are
effective on June 30, 2017
. These swa
ps were designated and
qualify
as cash flow hedges.
The effective
portions of cash flow hedges are
recorded in accumulated other comprehensive income (“AOCI”)
and are
reclassified into
earnings
in the same period the
underlying hedged items impact
earnings
. The ineffective portions
of cash flow hedges is
recognized
immediately into earnings.
A
s the effective date for the interest rate swaps is June 30, 2017,
the
fair value of the interest
rate swaps is
zero
at incep
tion and
no
gain or loss was
recognized in AOCI or through earnings during the three and six months ended June 30, 2017.
Net investment
hedge.
To help protect the value of the
Company’s
net inv
estment in Europe
operation
s
against adverse changes in
exchange rates, the Company
use
s
non-derivative financial instrument
s, such as its foreign currency
denominated debt, as economic hedges of its net investments in certain foreign subsidiaries.
Net investment hedges that use foreign currency denominated debt to hedge net investments are not impacted by ASC Topic 820,
Fair Value Measurements,
as the debt used as a hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value.
The effective portions of net investment hedges are recorded in AOCI as a part of the cumulative translation adjustment. The ineffective portions of net investment hedges are recognized immediately into earnings.
Effective May 1, 2017, the Company designated a portion of its
euro
denominated
debt
as a net investment hedge
for accounting purposes
. The
fair value
of the
net investment hedge
is
€130
million at June 30, 2017. The
Company did
no
t have any ineffectiveness related to net investment hedges during the three and six months ended June 30, 2017.
The a
mount of loss recognized in AOCI
and the amount
of loss reclassified into earnings
for the three months ended June 30, 2017 and 2016, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss)
|
|
Amount of Loss Reclassified
|
|
|
|
Recognized in AOCI
|
|
from AOCI into Income
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Net investment hedge
|
|
$
|
(6,828)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
The a
mount of loss recognized in AOCI
and the amount
of loss reclassified into earnings
for the six months ended June 30, 2017 and 2016, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss)
|
|
Amount of Loss Reclassified
|
|
|
|
Recognized in AOCI
|
|
from AOCI into Income
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Net investment hedge
|
|
$
|
(6,828)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
Derivatives Not Designated as Hedging Instruments
Foreign currency forward contracts.
We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges.
Gains and losses on these foreign currency forward contracts are netted with gains and losses from currency fluctuations on transactions arising from international trade and
reported as
Foreign currency
losses,
net in the condensed consolidated statements of operations.
We
recognized
net losses
of
$3.0
million
and
$
2.7
million
in the
three and six months ended
June 30, 2017
,
respectively, and net gains
of
$5.9
million
and net losses of
$4.7
million
in the
three and six
months ended
June 30, 2016
,
respectively,
arising from the change in fair value of our financial 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
$
192.5
million
at
June 30, 2017
, and
$338.2
million at
December 31, 2016
.
The following table presents the effect on our condensed consolidated statements of operations for the three
and six
months ended
June 30, 2017
and
2016
, respectively, of our foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain
|
|
|
|
|
|
Recognized in Earnings
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
2017
|
|
2016
|
|
Location of (Loss) Gain in Earnings
|
|
|
|
(Dollars in thousands)
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(2,954)
|
|
$
|
5,884
|
|
Foreign currency losses, net
|
|
|
|
Amount of (Loss)
|
|
|
|
|
|
Recognized in Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Location of (Loss) in Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(2,711)
|
|
$
|
(4,684)
|
|
Foreign currency losses, net
|
Location and Fair Value Amount of Derivative Instruments
The following table presents the fair values on our condensed consolidated balance sheets of fo
reign currency forward contract
s
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
|
2017
|
|
2016
|
|
Balance Sheet Location
|
|
|
|
(Dollars in thousands)
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
365
|
|
$
|
1,854
|
|
Other current assets
|
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
(1,553)
|
|
$
|
(1,504)
|
|
Accrued expenses and other current liabilities
|
10.
Income Taxes
Income tax expense for the six
months ended June 30
, 2017
,
was
$15.8
million, or
26.8
%
of p
re
-tax
income, compared with $16.5
million, or
27.0
%
of pre-tax income in the prior-year same period.
The
tax expense in the first half
of 2017 and 2016, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of
35%
primarily as a result of foreign statutory rate differences.
11. Contingent Liabilities
We have recorded environmental liabilities of
$6.8
m
illion at
June 30, 2017
, and
$7.2
million at
December 31, 2016
, for costs associated with the remediation of certain of our properties that hav
e been contaminated. The liability
at
June 30, 2017
, and
December 31, 2016
, was primarily
related to a non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product lines in 2013. The costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring and the ultimate cost of required remediation.
In
2013, the Supreme Court in Argentina ruled unfavorably related to certain export taxes associated with a divested operation. As
a result of this ruling,
in 2013,
we
recorded
a liability and at December 31, 2016, the liability was
$8
.
7
million.
During the first quarter of 2017, the Company participated in a
newly available
tax regime
, resulting in the reduction of interest on these outstanding
tax liabilities. T
he remaining liability
at the time of the reduction was
$4.6
million
, and
will be paid down over a
five
-y
ear term
.
The liability recorded at June 30, 2017
,
is
$3.9
million.
There are various lawsuits and claims pending against the Company and its consolidated subsidiaries. We do not currently expect the resolution of these lawsuits and claims to materially affect the consolidated financial position, results of operations, or cash flows of the Company.
12. Retirement Benefits
Net periodic benefit (credit) cost of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the three months ended
June 30, 2017
and
2016
, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
Other Benefit Plans
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Service cost
|
|
$
|
4
|
|
$
|
4
|
|
$
|
423
|
|
$
|
371
|
|
$
|
—
|
|
$
|
—
|
|
Interest cost
|
|
|
3,666
|
|
|
3,937
|
|
|
606
|
|
|
954
|
|
|
211
|
|
|
236
|
|
Expected return on plan assets
|
|
|
(4,740)
|
|
|
(4,935)
|
|
|
(222)
|
|
|
(525)
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
|
|
2
|
|
|
3
|
|
|
11
|
|
|
11
|
|
|
—
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
|
$
|
(1,068)
|
|
$
|
(991)
|
|
$
|
818
|
|
$
|
811
|
|
$
|
211
|
|
$
|
236
|
Net
periodic benefit (credit) cost
for the six months ended June 30, 2017 and 2016, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
Other Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Service cost
|
|
$
|
9
|
|
$
|
9
|
|
$
|
827
|
|
$
|
734
|
|
$
|
—
|
|
$
|
—
|
|
Interest cost
|
|
|
7,331
|
|
|
7,875
|
|
|
1,179
|
|
|
1,893
|
|
|
422
|
|
|
472
|
|
Expected return on plan assets
|
|
|
(9,479)
|
|
|
(9,870)
|
|
|
(432)
|
|
|
(1,045)
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
|
|
3
|
|
|
6
|
|
|
21
|
|
|
22
|
|
|
—
|
|
|
—
|
|
Net periodic benefit (credit) cost
|
|
$
|
(2,136)
|
|
$
|
(1,980)
|
|
$
|
1,595
|
|
$
|
1,604
|
|
$
|
422
|
|
$
|
472
|
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 half
of
2017
, our Board of Directors granted
0.
2
million stock options,
0.2
million performance share units and
0.
2
million restricted
stock units under the Plan.
We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. The following table details the weighted-average grant-date fair values and the assumptions used for estimating the fair values of stock option grants made during the
six months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Weighted-average grant-date fair value
|
|
$
|
7.26
|
|
|
Expected life, in years
|
|
|
6.0
|
|
|
Risk-free interest rate
|
|
|
2.3
|
%
|
|
Expected volatility
|
|
|
51.5
|
%
|
The weighted average grant date fair value of our performance share units
granted
in the six months ended June 30
, 2017
, was
$
14
.
89
. We measure the fair value of performance share units based on the closing market price of our common stock on the date of the grant. These shares are evaluated each
reporting period for respective attainment rates against the performance criteria
.
We me
asure the fair value of restricted
stock units based on the closing market price of our common stock on the date of the grant
. The restricted stock units vest over three years
. The weighted-average grant date fair value per unit for grants made during the
six months ended
June 30, 2017
, was
$
14
.
27
.
We recognized stock-based compensation
expense of
$5.4
million
for the
six months ended
June 30, 2017
,
and
$2.2
million for the
six months ended
June 30, 2016
. At
June 30, 2017
, unearned compensation cost related to the unvested portion of all stock-based
compensation
awards was approximately
$10.0
million and is expected to be recognized over the remaining vesting period of the respective grants
, through
the
first quarter of 2020
.
14. Restructuring and Cost Reduction Programs
Total restructuring
and impairment
charges
were
$3.2
million and
$6.2
million for
the
three and six
months ended
June 30, 2017
,
respectively,
and
$0.8
million and
$1.7
million for the three and six months ended June 30, 2016,
respectively.
Included in the charges for the three and six months ended June 30, 2017
,
was an impairment charge of
$1.5
million related to an equity method investment. The remainder of the charges relate to our restructuring and cost reduction programs, which are primarily related to costs associated with integration of our recent acquisitions, and are further summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
Other
|
|
Asset
|
|
|
|
|
|
|
Severance
|
|
Costs
|
|
Impairment
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balances at December 31, 2016
|
|
$
|
239
|
|
$
|
1,489
|
|
$
|
—
|
|
$
|
1,728
|
|
Restructuring charges
|
|
|
1,795
|
|
|
1,772
|
|
|
1,176
|
|
|
4,743
|
|
Cash payments
|
|
|
(1,715)
|
|
|
(652)
|
|
|
—
|
|
|
(2,367)
|
|
Non-cash items
|
|
|
51
|
|
|
(1,325)
|
|
|
(1,176)
|
|
|
(2,450)
|
|
Balances at June 30, 2017
|
|
$
|
370
|
|
$
|
1,284
|
|
$
|
—
|
|
$
|
1,654
|
We expect to make cash payments to settle the remaining li
ability for employee severance
benefits and other costs
primarily
over the next twelve months where applicable
, except where legal or
contractual obligations would require it to extend beyond that period
.
15. Earnings Per Share
Details of the calculation of basic and diluted earnings per share are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Basic earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Ferro Corporation common shareholders
|
|
$
|
21,025
|
|
$
|
18,969
|
|
$
|
42,923
|
|
$
|
9,003
|
|
Adjustment for loss from discontinued operations
|
|
|
—
|
|
|
5,748
|
|
|
—
|
|
|
35,242
|
|
Total
|
|
$
|
21,025
|
|
$
|
24,717
|
|
$
|
42,923
|
|
$
|
44,245
|
|
Weighted-average common shares outstanding
|
|
|
83,673
|
|
|
83,209
|
|
|
83,602
|
|
|
83,260
|
|
Basic earnings per share from continuing operations attributable to Ferro Corporation common shareholders
|
|
$
|
0.25
|
|
$
|
0.30
|
|
$
|
0.51
|
|
$
|
0.53
|
|
Diluted earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Ferro Corporation common shareholders
|
|
$
|
21,025
|
|
$
|
18,969
|
|
$
|
42,923
|
|
$
|
9,003
|
|
Adjustment for loss from discontinued operations
|
|
|
—
|
|
|
5,748
|
|
|
—
|
|
|
35,242
|
|
Total
|
|
$
|
21,025
|
|
$
|
24,717
|
|
$
|
42,923
|
|
$
|
44,245
|
|
Weighted-average common shares outstanding
|
|
|
83,673
|
|
|
83,209
|
|
|
83,602
|
|
|
83,260
|
|
Assumed exercise of stock options
|
|
|
677
|
|
|
551
|
|
|
599
|
|
|
462
|
|
Assumed exercise of deferred stock unit conditions
|
|
|
—
|
|
|
80
|
|
|
—
|
|
|
—
|
|
Assumed satisfaction of restricted stock unit conditions
|
|
|
425
|
|
|
473
|
|
|
376
|
|
|
419
|
|
Assumed satisfaction of performance stock unit conditions
|
|
|
502
|
|
|
111
|
|
|
503
|
|
|
58
|
|
Weighted-average diluted shares outstanding
|
|
|
85,277
|
|
|
84,424
|
|
|
85,080
|
|
|
84,199
|
|
Diluted earnings per share from continuing operations attributable to Ferro Corporation common shareholders
|
|
$
|
0.25
|
|
$
|
0.29
|
|
$
|
0.50
|
|
$
|
0.53
|
The number of anti-dilutive or unearned shares was
1.8
million
and
1.9
million
for the
three and six
months ended
June 30, 2017
,
respectively,
and
2.5
million
and
2.8
million
for the
three and six
months ended
June 30, 2016
, respectively.
These shares were excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.
16. Share Repurchase Program
The Company’s Board of Directors approved share repurchase programs, under which the Company is authorized to repurchase up to
$100
million of the Company’s outstanding shares of Common Stock on the open market, including through a Rule 10b5-1 plan, or in privately negotiated transactions.
The timing and amount of shares to be repurchased will be determined by the Company, based on evaluation of market and business conditions, share price, and other factors. The share repurchase programs 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
six months ended June 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. As of June 30
, 2017
, Company shares having an aggregate value of up to
$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 June 30,
|
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Liability
|
|
Translation
|
|
Other
|
|
|
|
|
|
|
Adjustments
|
|
Adjustments
|
|
Adjustments
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Balances at March 31, 2016
|
|
$
|
1,079
|
|
$
|
(63,769)
|
|
$
|
(70)
|
|
$
|
(62,760)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
(3,117)
|
|
|
—
|
|
|
(3,117)
|
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities income
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
27
|
|
Net current period other comprehensive income (loss)
|
|
|
27
|
|
|
(3,117)
|
|
|
—
|
|
|
(3,090)
|
|
Balances at June 30, 2016
|
|
$
|
1,106
|
|
$
|
(66,886)
|
|
$
|
(70)
|
|
$
|
(65,850)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2017
|
|
$
|
1,137
|
|
$
|
(100,543)
|
|
$
|
(70)
|
|
$
|
(99,476)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
13,790
|
|
|
—
|
|
|
13,790
|
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities income
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Net current period other comprehensive income (loss)
|
|
|
16
|
|
|
13,790
|
|
|
—
|
|
|
13,806
|
|
Balances at June 30, 2017
|
|
$
|
1,153
|
|
$
|
(86,753)
|
|
$
|
(70)
|
|
$
|
(85,670)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Liability
|
|
Translation
|
|
Other
|
|
|
|
|
|
|
Adjustments
|
|
Adjustments
|
|
Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Balances at December 31, 2015
|
|
$
|
811
|
|
$
|
(62,059)
|
|
$
|
(70)
|
|
$
|
(61,318)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
(4,827)
|
|
|
—
|
|
|
(4,827)
|
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities income
|
|
|
295
|
|
|
—
|
|
|
—
|
|
|
295
|
|
Net current period other comprehensive income (loss)
|
|
|
295
|
|
|
(4,827)
|
|
|
—
|
|
|
(4,532)
|
|
Balances at June 30, 2016
|
|
$
|
1,106
|
|
$
|
(66,886)
|
|
$
|
(70)
|
|
$
|
(65,850)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2016
|
|
$
|
1,141
|
|
$
|
(107,714)
|
|
$
|
(70)
|
|
$
|
(106,643)
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
20,961
|
|
|
—
|
|
|
20,961
|
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities income
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Net current period other comprehensive income (loss)
|
|
|
12
|
|
|
20,961
|
|
|
—
|
|
|
20,973
|
|
Balances at June 30, 2017
|
|
$
|
1,153
|
|
$
|
(86,753)
|
|
$
|
(70)
|
|
$
|
(85,670)
|
18. Reporting for
Segments
In the first quarter of 2017,
the Company’s
Pigment
s, P
owders and Oxides segment was renamed
Color Solutions.
Net sales to external customers by segment are presented in the table below. Sales between segments were not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Performance Coatings
|
|
$
|
151,746
|
|
$
|
140,589
|
|
$
|
278,311
|
|
$
|
268,713
|
|
Performance Colors and Glass
|
|
|
106,637
|
|
|
95,933
|
|
|
210,155
|
|
|
184,103
|
|
Color Solutions
|
|
|
90,249
|
|
|
61,455
|
|
|
180,721
|
|
|
122,612
|
|
Total net sales
|
|
$
|
348,632
|
|
$
|
297,977
|
|
$
|
669,187
|
|
$
|
575,428
|
Each segment’s gross profit and reconciliations to income before income taxes are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Performance Coatings
|
|
$
|
40,246
|
|
$
|
39,234
|
|
$
|
73,735
|
|
$
|
71,349
|
|
Performance Colors and Glass
|
|
|
40,087
|
|
|
36,705
|
|
|
77,505
|
|
|
68,543
|
|
Color Solutions
|
|
|
28,416
|
|
|
22,404
|
|
|
56,598
|
|
|
42,690
|
|
Other cost of sales
|
|
|
(407)
|
|
|
30
|
|
|
(702)
|
|
|
20
|
|
Total gross profit
|
|
|
108,342
|
|
|
98,373
|
|
|
207,136
|
|
|
182,602
|
|
Selling, general and administrative expenses
|
|
|
62,514
|
|
|
57,871
|
|
|
121,472
|
|
|
110,517
|
|
Restructuring and impairment charges
|
|
|
3,224
|
|
|
787
|
|
|
6,242
|
|
|
1,668
|
|
Other expense, net
|
|
|
12,680
|
|
|
6,371
|
|
|
20,239
|
|
|
9,291
|
|
Income before income taxes
|
|
$
|
29,924
|
|
$
|
33,344
|
|
$
|
59,183
|
|
$
|
61,126
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net sales for the
three months
ended
June 30, 2017
, increased by
$50.7
million, or
17.0
%, compared with the prior-year same peri
od.
The increase in net sales was
driven by
higher sales in
Color Solutions
, Performance Coatings and
Pe
rformance Colors and Glass
of $28.8
millio
n,
$1
1.2
million
and $10.7 million,
respectively
.
During the three months ended
June 30, 2017
, gross profit increased
$10.0
million, or
10.1%
, compared with
the prior-year same period;
as a
percentage of net sales, it de
creased approximately
190
basis points to
31.1
%
.
The increase
in gross profit
was
attributable
to
higher sales
across all of our segment
s,
with
increase
s
in
Color Solutions
, Performance Colors and Glass
and Performance Coatings of $6.0 million, $3.4 million and $1.0
million, respectively.
For the
three months
ended
June 30, 2017
, selling, general and administrative (“SG&A”) e
xpenses increased $4.6
million, or
8.0
%, compared with the prior-year
same period.
The increase was primarily driven by
$
5.7
million of expenses
related to acquisitions completed
within the last year
.
For the
three months
ended
June 30, 2017
, net income
was $
21.2
million, compared with
$
19.1
million for the prior-year same period
, and net income
attributable to common shareholders was
$21.0
million, compared with
$19.0
million for the prior-year same period.
Income from
continuing operations was
$21.2
million for the
three months
ended
June 30, 2017
, compared with
$24.9
million for the three months ended
June 30, 2016
. Our t
otal gross profit for the second
quarter of
2017
was
$108.3
million, compared with
$98.4
million for the three months ended
June 30, 2016
.
Outlook
For the second half of 2017, we expect that gross margin will continue to grow at a measured pace based on strategic actions taken to improve growth in our core businesses and contributions from recent acquisitions. Raw material costs hav
e increased in 2017
, as expected,
however
,
we expect to continue to offset these cost increases through pricing actions, product reformulations and optimization actions
.
We remain focused on the integration of our recent acquisitions and achieving the identified synergies. We will continue to
drive innovation and optimization through
out
our business
and to
advance
tax planning opportunities. We 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, 2016
.
Results of Operations - Consolidated
Comparison of the three months ended
June 30, 2017
and
2016
For the
three months ended
June 30, 2017
,
income
from continuing operations
was
$21.2 m
illion, compared with
$24.9
million
income
from continuing operations for the three months ended
June 30, 2016
. Net
income
was
$21.2
million, compared with net
income
of
$19.1
million for the
three months ended
June 30, 2016
. For the
three months ended
June 30, 2017
, net
income
attributable to common shareholders was
$21.0 million, or
earnings
per share
of $0.25
, compared with
net
income
attributable to common shareholders of
$19.0
millio
n, or
earnings
per share
of
$0.23
, for the
three months ended
June 30, 2016
.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Net sales
|
|
$
|
348,632
|
|
|
$
|
297,977
|
|
|
$
|
50,655
|
|
17.0
|
%
|
|
Cost of sales
|
|
|
240,290
|
|
|
|
199,604
|
|
|
|
40,686
|
|
20.4
|
%
|
|
Gross profit
|
|
$
|
108,342
|
|
|
$
|
98,373
|
|
|
$
|
9,969
|
|
10.1
|
%
|
|
Gross profit as a % of net sales
|
|
|
31.1
|
%
|
|
|
33.0
|
%
|
|
|
|
|
|
|
Net sales increased b
y
$50.7
million, or
17.0%
, in the
three months ended
June 30, 2017
,
compared with the prior-year same period
, driven by
higher sales in
Color Solutions, Performance Coatings and
Pe
rformance Colors and Glass of $28.8
millio
n,
$1
1.2
million
and
$1
0.7
million
, respectively
.
The increase in net sales was driven
by
Cappelle, which contributed sales of $19.1 million, ESL, which contributed sales of $10.6
million, and SPC
, which contributed sales
of $5.7 million,
each of which was acquired
after the second
quarter of 2016. The increase in net sales was also driven by organic growth, with Performance Coatings growing $10.0 million and Color Solutions growing $9.1 million.
Gross Profit
Gross profit
increased
$10.0
million, or
10.1%
, in the
three months ended
June 30, 2017
, compared with
the prior-year same period
, and as a percentage of net sales
, it de
creased
190
basis
points t
o
31.1%
. The increase
in gross profit
was
attributable to increases across all of our segments, with increases in Color Solutions
, Performance Colors and Glass
and Performance Coatings of $6.0 million, $3.4 million and $1.0
m
illion, respectively. The increase in gross profit was
driven by
acquisitions of $11.8 million, lower manufacturing costs of $6.5 million, favorable product pricing of $1.9 million
and
higher sales vol
umes and mix of $1.5 million
, partially offset by higher raw material costs of $9.2 million and unfavorable foreign currency impacts of $2.0 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Geographic Revenues on a sales origination basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
171,367
|
|
$
|
138,888
|
|
$
|
32,479
|
|
23.4
|
%
|
|
United States
|
|
|
88,615
|
|
|
76,853
|
|
|
11,762
|
|
15.3
|
%
|
|
Asia Pacific
|
|
|
47,660
|
|
|
44,887
|
|
|
2,773
|
|
6.2
|
%
|
|
Latin America
|
|
|
40,990
|
|
|
37,349
|
|
|
3,641
|
|
9.7
|
%
|
|
Net sales
|
|
$
|
348,632
|
|
$
|
297,977
|
|
$
|
50,655
|
|
17.0
|
%
|
The
increase
in net sales
of
$50.7
million
, compared with the prior-year same period,
was driven by an increase in sales from all regions
.
The increase in
sales from
Europe was primarily attributable to higher sales in Color Solutions, Performance Coatings and Performance Colors and Glass of $18.3 million, $8.6 million and $5.6 million, respectively.
The increase in sales from
the United
States was attributable to higher sales in
Color Solutions and Performance Colors and Glass of $8.4
million
and $3.4
m
illion. The increase in sales from Latin America and Asia Pacific was attributable to higher sales across all segments.
The following table presents our sales on the basis of
where sold products were shipped.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Geographic Revenues on a shipped-to basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
162,569
|
|
$
|
136,454
|
|
$
|
26,115
|
|
19.1
|
%
|
|
Asia Pacific
|
|
|
74,700
|
|
|
60,152
|
|
|
14,548
|
|
24.2
|
%
|
|
United States
|
|
|
64,861
|
|
|
60,590
|
|
|
4,271
|
|
7.0
|
%
|
|
Latin America
|
|
|
46,502
|
|
|
40,781
|
|
|
5,721
|
|
14.0
|
%
|
|
Net sales
|
|
$
|
348,632
|
|
$
|
297,977
|
|
$
|
50,655
|
|
17.0
|
%
|
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Personnel expenses
|
|
$
|
33,604
|
|
$
|
28,751
|
|
$
|
4,853
|
|
16.9
|
%
|
|
Incentive compensation
|
|
|
2,465
|
|
|
3,161
|
|
|
(696)
|
|
(22.0)
|
%
|
|
Stock-based compensation
|
|
|
2,668
|
|
|
2,211
|
|
|
457
|
|
20.7
|
%
|
|
Pension and other postretirement benefits
|
|
|
(39)
|
|
|
104
|
|
|
(143)
|
|
(137.5)
|
%
|
|
Bad debt
|
|
|
(126)
|
|
|
345
|
|
|
(471)
|
|
(136.5)
|
%
|
|
Business development
|
|
|
4,250
|
|
|
3,855
|
|
|
395
|
|
10.2
|
%
|
|
Intangible asset amortization
|
|
|
2,088
|
|
|
1,257
|
|
|
831
|
|
66.1
|
%
|
|
All other expenses
|
|
|
17,604
|
|
|
18,187
|
|
|
(583)
|
|
(3.2)
|
%
|
|
Selling, general and administrative expenses
|
|
$
|
62,514
|
|
$
|
57,871
|
|
$
|
4,643
|
|
8.0
|
%
|
SG&A
expen
ses
were
$4.6
million
higher
in the
three months ended
June 30, 2017
,
compared with the prior-year same period.
The higher
SG&A expenses
compared with the prior-year same period are primarily driven by businesses acquired within the last year of approximately
$
5.7
million
. The acquisitions were the primary driver of the increase in personnel expenses, and accounted for the entire increase in intangible asset amortization.
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
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Strategic services
|
|
$
|
33,013
|
|
$
|
29,012
|
|
$
|
4,001
|
|
13.8
|
%
|
|
Functional services
|
|
|
24,368
|
|
|
23,487
|
|
|
881
|
|
3.8
|
%
|
|
Incentive compensation
|
|
|
2,465
|
|
|
3,161
|
|
|
(696)
|
|
(22.0)
|
%
|
|
Stock-based compensation
|
|
|
2,668
|
|
|
2,211
|
|
|
457
|
|
20.7
|
%
|
|
Selling, general and administrative expenses
|
|
$
|
62,514
|
|
$
|
57,871
|
|
$
|
4,643
|
|
8.0
|
%
|
Restructuring and Impairment
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Employee severance
|
|
$
|
815
|
|
$
|
609
|
|
$
|
206
|
|
33.8
|
%
|
|
Equity method investment impairment
|
|
|
1,499
|
|
|
—
|
|
|
1,499
|
|
NM
|
|
|
Other restructuring costs
|
|
|
910
|
|
|
178
|
|
|
732
|
|
411.2
|
%
|
|
Restructuring and impairment charges
|
|
$
|
3,224
|
|
$
|
787
|
|
$
|
2,437
|
|
309.7
|
%
|
Restructuring
and impairment charges
increased
in
the
second
quarter of 2017
compared with the prior-year same period.
The increase was primarily due to an “other than temporary impairment” charge on an equity method investment of $1.5 million.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Interest expense
|
|
$
|
5,517
|
|
$
|
5,118
|
|
$
|
399
|
|
7.8
|
%
|
|
Amortization of bank fees
|
|
|
953
|
|
|
329
|
|
|
624
|
|
189.7
|
%
|
|
Interest capitalization
|
|
|
(21)
|
|
|
(19)
|
|
|
(2)
|
|
10.5
|
%
|
|
Interest expense
|
|
$
|
6,449
|
|
$
|
5,428
|
|
$
|
1,021
|
|
18.8
|
%
|
Interest expense increased
in the second
quarter of 2017 compared with the prior-year same period
. The increase in interest expense was due to an increase in the average long-term debt balance during the three months ended
June
30
, 2017, compared with the prior-year same period
and an increase of the amortization of debt issuance costs associated with the 2017 Credit Facility, partially offset by a favorable average borrowing rate as a result of the refinancing completed in the first quarter of 2017
.
Income Tax Expense
During the second quarter of 2017, income tax expense was $8.7 million, or 29.1% of pre-tax income. In the second quarter of 2016, we recorded tax expense of $8.5 million, or 25.4% of pre-tax income. The tax expense in the second quarter of 2017 and 2016, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35%, primarily as a result of foreign statutory rate differences.
Results of Operations - Segment Information
Comparison of the three months ended
June 30, 2017
and
2016
Performance Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
|
Acquisitions
|
Other
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
151,746
|
|
|
$
|
140,589
|
|
|
$
|
11,157
|
|
7.9
|
%
|
|
$
|
481
|
|
$
|
9,485
|
|
$
|
(4,506)
|
|
$
|
5,697
|
|
$
|
—
|
|
Segment gross profit
|
|
|
40,246
|
|
|
|
39,234
|
|
|
|
1,012
|
|
2.6
|
%
|
|
|
481
|
|
|
2,584
|
|
|
(1,236)
|
|
|
1,310
|
|
|
(2,127)
|
|
Gross profit as a % of segment net sales
|
|
|
26.5
|
%
|
|
|
27.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased in Performance Coatings compared with the prior-year same period, primarily driven by sales from SPC of $5.7 million, and increases in
porcelain enamel and digital inks of $2.2 million and $1.6 million, respectively
.
The in
crease in n
et sales was driven by higher sales volume and favorable mix of $9.5
million
, sales from SPC of $5.7 million and higher product pricing
of $0.5 million, partially offset by un
favorable foreign curren
cy impacts of $4.5 million.
Gross profit increas
ed $1.0
million from the prior-year same period, primari
ly driven by lower manufacturing costs of $3.1 million,
high
er sales volumes and favorable mix of $2.6
million,
gross profit from SPC of $1.3 million and
favorable product pricing impac
ts of $0.5 million,
partially offset by
higher raw material costs of $5.2
million
and
unfavorable foreign currency impacts of
$1.2 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
88,814
|
|
$
|
80,224
|
|
$
|
8,590
|
|
10.7
|
%
|
|
Latin America
|
|
|
28,239
|
|
|
26,165
|
|
|
2,074
|
|
7.9
|
%
|
|
Asia Pacific
|
|
|
23,089
|
|
|
22,502
|
|
|
587
|
|
2.6
|
%
|
|
United States
|
|
|
11,604
|
|
|
11,698
|
|
|
(94)
|
|
(0.8)
|
%
|
|
Total
|
|
$
|
151,746
|
|
$
|
140,589
|
|
$
|
11,157
|
|
7.9
|
%
|
The net
sales increase of $11.2 million was driven by increases in sales from Europe, Latin America and Asia Pacific. The increase in sales from Europe was primarily attributable to SPC, which was acquired in second quarter of 2017, which contributed $5.7 million, and higher
sales of
porcelain enamel
and colors of
$1.7 million and $1.5 million, respectively. The sales increase from Latin America was primarily driven by higher sales from frits and glazes of $2.0 million
.
The increase in sales from Asia Pacific was driven by higher sales in digital inks and porcelain enamel of $1.1 million and $0.6 million, partially offset by lower sales of frits and glazes of $1.1 million.
Performance Colors and Glass
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Acquisitions
|
|
Other
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
106,637
|
|
|
$
|
95,933
|
|
|
$
|
10,704
|
|
11.2
|
%
|
|
$
|
561
|
|
$
|
(732)
|
|
$
|
(1,510)
|
|
$
|
12,385
|
|
$
|
—
|
|
Segment gross profit
|
|
|
40,087
|
|
|
|
36,705
|
|
|
|
3,382
|
|
9.2
|
%
|
|
|
561
|
|
|
(1,559)
|
|
|
(582)
|
|
|
5,708
|
|
|
(746)
|
|
Gross profit as a % of segment net sales
|
|
|
37.6
|
%
|
|
|
38.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased compared with the prior-year same period, primarily driven by $10.6 million of sales from ESL, which was acquired in the fourth quarter of 2016. The increase in net sales was driven by acquisitions of $12.4 million and
higher product pr
icing of $0.6
million
,
partially offset by unfavorabl
e foreign currency impacts of $1.5
million
and unfavorable volume and mix of $0.7
million. Gross profit increased from the prior-year same period, primarily due to
acquisitions, which contributed $5.7 million, higher product pricing of $0.6
million
and
favor
able manufacturing costs of $0.2
million
, partially offset by lower sales volumes and mix of $1.6 million, unfavorable raw material costs of $0.9 million
and unfavorable
foreign currency impacts of $0.6
million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
47,592
|
|
$
|
41,960
|
|
$
|
5,632
|
|
13.4
|
%
|
|
United States
|
|
|
37,832
|
|
|
34,420
|
|
|
3,412
|
|
9.9
|
%
|
|
Asia Pacific
|
|
|
15,796
|
|
|
14,750
|
|
|
1,046
|
|
7.1
|
%
|
|
Latin America
|
|
|
5,417
|
|
|
4,803
|
|
|
614
|
|
12.8
|
%
|
|
Total
|
|
$
|
106,637
|
|
$
|
95,933
|
|
$
|
10,704
|
|
11.2
|
%
|
The net sales increase of $10.7 million
was driven by higher sales from all regions. The increase in sales from Europe was primarily attributable to $4.4 million and $1.8 million in sales from ESL and Pinturas, respectively, and higher sales in electronics
products of $0.7 million, partially offset by lower sales in industrial products of $1.1 million. The increase in sales from the United States was primarily attributable to sales from ESL of $6.2 million, partially offset by a decrease in sales of industrial products of $2.2 million. The increase from Asia Pacific was due to an increase in sales of automobile and decoration products of $0.6 million and $1.4 million, respectively and the increase from Latin America was attributable to an increase in sales of decoration products of $0.6 million.
Color Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Acquisitions
|
|
Other
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
90,249
|
|
|
$
|
61,455
|
|
|
$
|
28,794
|
|
46.9
|
%
|
|
$
|
827
|
|
$
|
8,280
|
|
$
|
(548)
|
|
$
|
20,235
|
|
$
|
—
|
|
Segment gross profit
|
|
|
28,416
|
|
|
|
22,404
|
|
|
|
6,012
|
|
26.8
|
%
|
|
|
827
|
|
|
453
|
|
|
(155)
|
|
|
4,753
|
|
|
134
|
|
Gross profit as a % of segment net sales
|
|
|
31.5
|
%
|
|
|
36.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
increased compared with the prior-year same period, primarily due to sales from Cappelle, and higher sales of pigments and surface technology products of $19.1 million, $5.6 million, and $3.1 million, respectively. The increase in n
et sales
was driven by acquisitions of $20.2 million, higher volumes and mix of $8.3
million an
d higher product pricing of $0.8
million, partially offset by unfavorable
foreign currency impacts of $0.5
million. Gross profit increased from the prior-year same period, primarily due to
acquisitions, which contributed $4.8 million,
l
ower manufacturing costs of $3.2 million, higher product pricing of $0.8 million and
favorab
le sales volumes and mix of $0.5 million, partially offset by higher raw material costs of $3.1 million and unfavorable foreign currency impacts of $0.2 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
39,179
|
|
$
|
30,735
|
|
$
|
8,444
|
|
27.5
|
%
|
|
Europe
|
|
|
34,961
|
|
|
16,704
|
|
|
18,257
|
|
109.3
|
%
|
|
Asia Pacific
|
|
|
8,775
|
|
|
7,635
|
|
|
1,140
|
|
14.9
|
%
|
|
Latin America
|
|
|
7,334
|
|
|
6,381
|
|
|
953
|
|
14.9
|
%
|
|
Total
|
|
$
|
90,249
|
|
$
|
61,455
|
|
$
|
28,794
|
|
46.9
|
%
|
The net sales increase of $28.8 million was driven by higher sales from all regions. The higher sales from Europe was driven by sales from Cappelle of $16.0 million and pigment products of $2.3 million. The increase in sales from the United States was primarily driven by sales from Cappelle of $3.1 million and increases in surface technology and pigment products of $3.1 million and $1.2 million, respectively. The increases in sales from Asia Pacific and Latin America were attributable to higher sales for pigment products of $1.1 million and $1.0 million, respectively.
Results of Operations - Consolidated
Comparison of the
six
months ended
June 30, 2017
and
2016
For the
six
months ended
June 30, 2017
,
income
from continuing operations
was
$43.4 m
illion, compared with
$44.6
million
income
from continuing operations for the
six
months ended
June 30, 2016
. Net
income
was
$43.4
million, compared with net
income
of
$9.4
million for the
six
months ended
June 30, 2016
. For the
six
months ended
June 30, 2017
, net
income
attributable to common shareholders was
$42.9 million, or
earnings
per share
of $0.51
, compared with
net
income
attributable to common shareholders of
$9.0
millio
n, or earnings
per share
of
$0.11
, for the
six
months ended
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Net sales
|
|
$
|
669,187
|
|
|
$
|
575,428
|
|
|
$
|
93,759
|
|
16.3
|
%
|
|
Cost of sales
|
|
|
462,051
|
|
|
|
392,826
|
|
|
|
69,225
|
|
17.6
|
%
|
|
Gross profit
|
|
$
|
207,136
|
|
|
$
|
182,602
|
|
|
$
|
24,534
|
|
13.4
|
%
|
|
Gross profit as a % of net sales
|
|
|
31.0
|
%
|
|
|
31.7
|
%
|
|
|
|
|
|
|
Net sales increased b
y
$93.8
million, or
16.3%
, in the
six
months ended
June 30, 2017
,
compared with the prior-year same period
, driven by
higher sales in
Color Solutions,
Pe
rformance Colors and Glass and Performance Coatings of $58.1
millio
n, $26.1
million
and $9
.6 million
, respectively
.
The increase in net sales was driven b
y Cappelle, which contributed sales of $38.1 million, ESL, which contributed sales of $21.3 million, and SPC, which contributed sales
of $
5.7
million
, each of which was acquired after the second quarter of 2016. The increase in net sales was also driven by organic growth with Color Solutions growing $19.1 million, Performance Coatings growing $13.8 million and Performance Colors and Glass growing $4.0 million.
Gross Profit
Gross profit
increased
$24.5
million, or
13.4%
, in the
six
months ended
June 30, 2017
, compared with
the prior-year same period
, and as a percentage of net sales
, it de
creased
70
basis
points t
o 31.0%. The increase
in gross profit
was
attributable to increases across all of our segments, with increases in Color Solutions
,
Performance Colors and Glass and Performance Coatings of $13.9 million, $9.0 million and $2.4 million, respectively
.
The increase in
g
ross profit was primarily driven by acquisitions of $19.3 million, lower manufacturing costs of $15.5
million
and
higher sales volumes and mix
of $7.2 million
, partially offset by
higher raw material costs of $12.1 million,
unfavorable
foreign
currency impacts of $4.2
million
and
u
nfavorable product pricing of $0.5 million
.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Geographic Revenues on a sales origination basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
320,289
|
|
$
|
267,591
|
|
$
|
52,698
|
|
19.7
|
%
|
|
United States
|
|
|
176,994
|
|
|
147,023
|
|
|
29,971
|
|
20.4
|
%
|
|
Asia Pacific
|
|
|
91,869
|
|
|
87,824
|
|
|
4,045
|
|
4.6
|
%
|
|
Latin America
|
|
|
80,035
|
|
|
72,990
|
|
|
7,045
|
|
9.7
|
%
|
|
Net sales
|
|
$
|
669,187
|
|
$
|
575,428
|
|
$
|
93,759
|
|
16.3
|
%
|
The increase in net sales
of
$93.8
million
, compared with the prior-year same period,
was driven by higher sales from all regions
.
The increase in
sales from
Europe was primarily attributable to
higher
sales
in Color Solutions, Performance Colors and Glass and Performance Coatings of $35.9 million, $11.1 million
and $5.7 million
.
The increase in sales from
the United States was
primarily
attributable to higher sales in
Color Solutions and Performance Colors and Glass of $18.6
million
and $12.0
m
illion. The increase in sales from Latin America and Asia Pacific was attributable to higher sales across all segments.
The following table presents our sales on the basis of
where sold products were shipped.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Geographic Revenues on a shipped-to basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
303,108
|
|
$
|
264,790
|
|
$
|
38,318
|
|
14.5
|
%
|
|
Asia Pacific
|
|
|
144,821
|
|
|
114,680
|
|
|
30,141
|
|
26.3
|
%
|
|
United States
|
|
|
131,779
|
|
|
120,218
|
|
|
11,561
|
|
9.6
|
%
|
|
Latin America
|
|
|
89,479
|
|
|
75,740
|
|
|
13,739
|
|
18.1
|
%
|
|
Net sales
|
|
$
|
669,187
|
|
$
|
575,428
|
|
$
|
93,759
|
|
16.3
|
%
|
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between
2017
and
2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Personnel expenses
|
|
$
|
66,508
|
|
$
|
59,580
|
|
$
|
6,928
|
|
11.6
|
%
|
|
Incentive compensation
|
|
|
4,295
|
|
|
5,146
|
|
|
(851)
|
|
(16.5)
|
%
|
|
Stock-based compensation
|
|
|
5,391
|
|
|
3,837
|
|
|
1,554
|
|
40.5
|
%
|
|
Pension and other postretirement benefits
|
|
|
(119)
|
|
|
142
|
|
|
(261)
|
|
(183.8)
|
%
|
|
Bad debt
|
|
|
(367)
|
|
|
223
|
|
|
(590)
|
|
(264.6)
|
%
|
|
Business development
|
|
|
6,611
|
|
|
4,955
|
|
|
1,656
|
|
33.4
|
%
|
|
Intangible asset amortization
|
|
|
4,139
|
|
|
2,757
|
|
|
1,382
|
|
50.1
|
%
|
|
All other expenses
|
|
|
35,014
|
|
|
33,877
|
|
|
1,137
|
|
3.4
|
%
|
|
Selling, general and administrative expenses
|
|
$
|
121,472
|
|
$
|
110,517
|
|
$
|
10,955
|
|
9.9
|
%
|
SG&A
expen
ses
were
$11.0
million
higher
in the
six
months ended
June 30, 2017
,
compared with the prior-year same period.
The higher
SG&A expenses
compared with the prior-year same period are primarily driven by businesses acquired within the last year of approximately
$
10.5
million
. The acquisitions were the primary driver of the increase in personnel expenses, and accounted for the entire increase in intangible asset amortization. The increase in stock-based compensation expense of $1.6 million is driven by the Company’s performance relative to targets for certain awards compared with the prior-year same period, as well as changes in the Company’s stock price. The increase in business
development expenses is
due to
higher
professional fees.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Strategic services
|
|
$
|
64,673
|
|
$
|
57,416
|
|
$
|
7,257
|
|
12.6
|
%
|
|
Functional services
|
|
|
47,113
|
|
|
44,118
|
|
|
2,995
|
|
6.8
|
%
|
|
Incentive compensation
|
|
|
4,295
|
|
|
5,146
|
|
|
(851)
|
|
(16.5)
|
%
|
|
Stock-based compensation
|
|
|
5,391
|
|
|
3,837
|
|
|
1,554
|
|
40.5
|
%
|
|
Selling, general and administrative expenses
|
|
$
|
121,472
|
|
$
|
110,517
|
|
$
|
10,955
|
|
9.9
|
%
|
Restructuring and Impairment
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Employee severance
|
|
$
|
1,795
|
|
$
|
1,141
|
|
$
|
654
|
|
57.3
|
%
|
|
Equity method investment impairment
|
|
|
1,499
|
|
|
—
|
|
|
1,499
|
|
—
|
%
|
|
Asset impairment
|
|
|
1,176
|
|
|
—
|
|
|
1,176
|
|
—
|
%
|
|
Other restructuring costs
|
|
|
1,772
|
|
|
527
|
|
|
1,245
|
|
236.2
|
%
|
|
Restructuring and impairment charges
|
|
$
|
6,242
|
|
$
|
1,668
|
|
$
|
4,574
|
|
274.2
|
%
|
Restructuring
and impairment charges
increased
in
the
first half of 2017
compared with the prior-year same period.
The increase was primarily due to an “other than temporary impairment” charge on an equity method investment of $1.5 million and costs associated with a restructuring plan in Italy, which includes $1.2 million of asset impairment associated with assets that have been taken out of service, as well as actions taken at our recent acquisitions associated with achieving our targeted synergies.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Interest expense
|
|
$
|
11,265
|
|
$
|
9,662
|
|
$
|
1,603
|
|
16.6
|
%
|
|
Amortization of bank fees
|
|
|
1,432
|
|
|
644
|
|
|
788
|
|
122.4
|
%
|
|
Interest capitalization
|
|
|
(24)
|
|
|
(31)
|
|
|
7
|
|
(22.6)
|
%
|
|
Interest expense
|
|
$
|
12,673
|
|
$
|
10,275
|
|
$
|
2,398
|
|
23.3
|
%
|
Interest expense increased
in the first half
of 2017 compared with the prior-year same period
. The increase in interest expense was due to an increase in the average long-te
rm debt balance during the six
months ended
June
30
, 2017, compared with the prior-year same period
and an increase of the amortization of debt issuance costs associated with the 2017 Credit Facility, partially offset by a favorable average borrowing rate as a result of the refinancing completed in the first quarter of 2017
.
Income Tax Expense
During the first half of 2017, income tax expense was $15.8 million, or 26.8% of pre-tax income. In the first half of 2016, we recorded tax expense of $16.5 million, or 27.0% of pre-tax income. The tax expense in the first half of 2017 and 2016, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35%, primarily as a result of foreign statutory rate differences.
Results of Operations - Segment Information
Comparison of the six months ended June 30, 2017 and
2016
Performance Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
|
Acquisitions
|
Other
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
278,311
|
|
|
$
|
268,713
|
|
|
$
|
9,598
|
|
3.6
|
%
|
|
$
|
(3,110)
|
|
$
|
16,905
|
|
$
|
(9,894)
|
|
$
|
5,697
|
|
$
|
—
|
|
Segment gross profit
|
|
|
73,735
|
|
|
|
71,349
|
|
|
|
2,386
|
|
3.3
|
%
|
|
|
(3,110)
|
|
|
5,207
|
|
|
(2,703)
|
|
|
1,310
|
|
|
1,682
|
|
Gross profit as a % of segment net sales
|
|
|
26.5
|
%
|
|
|
26.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased in Performance Coatings compared with the prior-year same period, primarily driven by sales from SPC of $5.7 million and an increase in sales of porcelain enamel products of $1.9 million
.
The in
crease in net sales was driven by
higher sales volume and favorable mix of $16.9
million
and sales from SPC of $5.7 million, partially offset by
unfavorabl
e foreign currency impacts of $9.9
million a
nd lower product pricing of $3.1
million
. Gross profit increas
ed $2.4
million from the prior-year same period, primari
ly driven by lower manufacturing costs of $8.1
million
,
high
er sales volumes and favorable mix of $5.2
million
and gross profit from acquisitions of $1.3 million
, partially offset by
higher raw material costs of $6.4
million
,
unfavorable product pricing impac
ts of $3.1 million and
unfavorable foreign currency impacts of
$2.7 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
157,973
|
|
$
|
152,251
|
|
$
|
5,722
|
|
3.8
|
%
|
|
Latin America
|
|
|
53,570
|
|
|
49,410
|
|
|
4,160
|
|
8.4
|
%
|
|
Asia Pacific
|
|
|
44,406
|
|
|
44,069
|
|
|
337
|
|
0.8
|
%
|
|
United States
|
|
|
22,362
|
|
|
22,983
|
|
|
(621)
|
|
(2.7)
|
%
|
|
Total
|
|
$
|
278,311
|
|
$
|
268,713
|
|
$
|
9,598
|
|
3.6
|
%
|
The net sales increase of $9.6 million was driven by increases in sales from Europe, Latin America and Asia Pacific, partially offset by a decrease in sales from the United States. The increase in sales from Europe was primarily driven by sales from SPC of $5.7 million and an increase in sales of porcelain enamel of $1.5 million, partially offset by a decrease in sales of digital inks of $1.3 million. The sales increase from Latin America was primarily driven by higher sales of frits and glazes and digital inks of $2.7 million and $1.4 million, respectively
.
The decrease in sales from the United States was attributable to lower sales of porcelain enamel.
Performance Colors and Glass
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Acquisitions
|
|
Other
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
210,155
|
|
|
$
|
184,103
|
|
|
$
|
26,052
|
|
14.2
|
%
|
|
$
|
1,182
|
|
$
|
2,782
|
|
$
|
(3,105)
|
|
$
|
25,193
|
|
$
|
—
|
|
Segment gross profit
|
|
|
77,505
|
|
|
|
68,543
|
|
|
|
8,962
|
|
13.1
|
%
|
|
|
1,182
|
|
|
(345)
|
|
|
(1,132)
|
|
|
9,528
|
|
|
(271)
|
|
Gross profit as a % of segment net sales
|
|
|
36.9
|
%
|
|
|
37.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net sales increase of $26.1 million
was driven by sales from ESL of $21.3 million and higher sales of electronic products of $3.7 million. The increase in net sales was driven by acquisitions of $25.2 million,
favorable volume and mix of $2.8
million
and
higher product pr
icing of $1.2 million,
partially offset by unfavorabl
e foreign currency impacts of $3.1
million. Gross profit increased
from the prior-year same period, primarily due to
gross profit from acquisitions of $9.5 million,
favor
able manufacturing costs of $1.3
million
and higher product pricing of $1.2
million
, partially offset by unfavorable raw material costs of $1.6 million,
unfavorable
foreign currency impacts of $1.1
million
and lower sales volumes and mix of $0.3 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
92,178
|
|
$
|
81,057
|
|
$
|
11,121
|
|
13.7
|
%
|
|
United States
|
|
|
76,936
|
|
|
64,909
|
|
|
12,027
|
|
18.5
|
%
|
|
Asia Pacific
|
|
|
30,429
|
|
|
28,990
|
|
|
1,439
|
|
5.0
|
%
|
|
Latin America
|
|
|
10,612
|
|
|
9,147
|
|
|
1,465
|
|
16.0
|
%
|
|
Total
|
|
$
|
210,155
|
|
$
|
184,103
|
|
$
|
26,052
|
|
14.2
|
%
|
The net sales increase of $26.1 million
was driven by higher sales from all regions. The increase in sales from the United States was driven by sales from ESL of $13.1 million, partially offset by a decrease in sales of industrial products. The increase in sales from Europe was primarily driven by $8.2 million and $3.9 million in sales from ESL and Pinturas, respectively, partially offset by a decrease in sales of industrial products. The increase from Latin America was primarily driven by an increase in sales of decoration products of $1.6 million. The increase from Asia Pacific was primarily due to higher sales of automobile and electronics products of $0.9 million and $0.5 million, respectively.
Color Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Acquisitions
|
|
Other
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
180,721
|
|
|
$
|
122,612
|
|
|
$
|
58,109
|
|
47.4
|
%
|
|
$
|
1,430
|
|
$
|
17,703
|
|
$
|
(1,177)
|
|
$
|
40,153
|
|
$
|
—
|
|
Segment gross profit
|
|
|
56,598
|
|
|
|
42,690
|
|
|
|
13,908
|
|
32.6
|
%
|
|
|
1,430
|
|
|
2,359
|
|
|
(370)
|
|
|
8,467
|
|
|
2,022
|
|
Gross profit as a % of segment net sales
|
|
|
31.3
|
%
|
|
|
34.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
increased compared with the prior-year same period, primarily due to sales from Cappelle of $38.1 million, and higher sales of pigments and surface technology products of $11.2 million and $6.8 million, respectively. The increase in net sales was driven by acquisitions of $40.2 million, higher volumes and mix of $17.7
million an
d higher product pricing of $1.4
million, partially offset by unfavorable
foreign currency impacts of $1.2
million. Gross profit increased from the pr
ior-year same period
due to
gross profit from acquisitions of $8.5 million,
l
ower manufacturing costs of $6.1 million, higher sales volumes and mix of $2.4 million and higher product pricing of $1.4 million, partially offset by
un
favo
rable raw material costs of $4.1
million
and unfavorable foreign currency impacts of $0.4 million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
77,696
|
|
$
|
59,131
|
|
$
|
18,565
|
|
31.4
|
%
|
|
Europe
|
|
|
70,138
|
|
|
34,283
|
|
|
35,855
|
|
104.6
|
%
|
|
Asia Pacific
|
|
|
17,034
|
|
|
14,765
|
|
|
2,269
|
|
15.4
|
%
|
|
Latin America
|
|
|
15,853
|
|
|
14,433
|
|
|
1,420
|
|
9.8
|
%
|
|
Total
|
|
$
|
180,721
|
|
$
|
122,612
|
|
$
|
58,109
|
|
47.4
|
%
|
The net sales increase of $58.1 million was driven by higher sales from all regions. The increase in sales from Europe was primarily driven by sales from Cappelle of $31.9 million. The increase in sales from the United States was primarily driven by sales from Cappelle of $6.2 million, surface technology products of $6.7 million and pigments of $3.6 million. The increases in sales from Asia Pacific and Latin America were driven by an increase in pigment products of $2.2 million and $1.4 million, respectively.
Summary of Cash Flows for the
six
months ended June 2017
and
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
14,705
|
|
$
|
(1,975)
|
|
$
|
16,680
|
|
Net cash used in investing activities
|
|
|
(31,501)
|
|
|
(17,086)
|
|
|
(14,415)
|
|
Net cash provided by financing activities
|
|
|
47,924
|
|
|
10,822
|
|
|
37,102
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
2,156
|
|
|
(725)
|
|
|
2,881
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
33,284
|
|
$
|
(8,964)
|
|
$
|
42,248
|
The following table includes d
etails of net cash provided by ope
rating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2017
|
|
2016
|
|
$ Change
|
|
|
|
(Dollars in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
43,350
|
|
$
|
9,382
|
|
$
|
33,968
|
|
Loss (gain) on sale of assets and business
|
|
|
1,285
|
|
|
(3,774)
|
|
|
5,059
|
|
Depreciation and amortization
|
|
|
23,156
|
|
|
21,929
|
|
|
1,227
|
|
Interest amortization
|
|
|
1,432
|
|
|
644
|
|
|
788
|
|
Restructuring and impairment
|
|
|
3,874
|
|
|
23,651
|
|
|
(19,777)
|
|
Loss on extinguishment of debt
|
|
|
3,905
|
|
|
—
|
|
|
3,905
|
|
Accounts receivable
|
|
|
(48,183)
|
|
|
(41,687)
|
|
|
(6,496)
|
|
Inventories
|
|
|
(28,659)
|
|
|
(17,695)
|
|
|
(10,964)
|
|
Accounts payable
|
|
|
14,122
|
|
|
3,226
|
|
|
10,896
|
|
Other current assets and liabilities, net
|
|
|
(5,111)
|
|
|
2,968
|
|
|
(8,079)
|
|
Other adjustments, net
|
|
|
5,534
|
|
|
(619)
|
|
|
6,153
|
|
Net cash provided by (used in) operating activities
|
|
$
|
14,705
|
|
$
|
(1,975)
|
|
$
|
16,680
|
Cash flows from
operating activities.
Cash fl
ows provided by
operating activities
increased $16.7 million in the first half of 2017
compared with the prior-year same period
. The increase was
primarily
due to higher earnings after consideration of non-cash items, partially offset by
higher
cash outflows
for
other current assets and liabilities
of
$8.1
million
, and net working capital
.
Cash flows from investing activities.
Cash flows used in i
nvesting activities increased $14.4 million in the first half of 2017
compared with the
prior-year same period.
The increase was primarily due to higher
cash outflows for business
acquisitions of $8.1 million, and lower
proceeds
from asset sales
of
$3.5
million
,
w
hich primarily consisted of the proceeds from
a closed si
te in Australia during the six months ended June 30
, 2016
, and higher capital expenditures
.
Cash flows from financing activities.
Cash flows provided by fin
ancing activities increased $37.1 million in the first half of 2017
compared with the prior-year same period
. As further discussed in Note 8, during the six months ended June 30, 2017, we paid off our Previous Credit Facility and entered into our Credit Facility,
consisting of a
$400
million secured revolving line of credit, a
$357.5
million secured term loan facility and a
€250
million secured euro term loan facility. This transaction resulted in additional borrowings in the first six months of $48.1 million compared to the prior-year same period.
Further, compared to the prior-year same period, net repayments under loans payable was $8.7 million higher. Additionally, during the first half of 2017, we paid $12.9 million
in debt issuance costs related to the Credit Facility entered into during the period, partially offset by lower purchases of treasury stock during the first half of 2017.
Capital Resources and Liquidity
2017 Credit Facility
On February 14, 2017, the Company entered into a new credit facility (the “Credit Facility”) with a group of lenders to refinance its then outstanding credit facility debt and to provide liquidity for ongoing working capital requirements and general corporate purposes.
The Credit Facility consists of a
$400
million secured revolving line of credit with a term of
five
years, a
$357.5
million secured term loan facility with a term of
seven
years and a
€250
million secured euro term loan facility with a term of
seven
years. The term loans are payable in equal quarterly installments in an amount equal to
0.25%
of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof. In addition, the Company is required, on an annual basis, to make a prepayment of term loans until they are fully paid and then to the revolving loans in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Credit Facility.
Subject to the satisfaction of certain conditions, the Company can request additional commitments under the revolving line of credit or term loans in the aggregate principal amount of up to
$250
million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans and, certain additional debt subject to satisfaction of certain covenant levels.
Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of
100%
of the stock of certain of the Company’s U.S. subsidiaries and
65%
of the stock of certain of the Company’s direct foreign subsidiaries.
Interest Rate – Term Loans: The interest rates applicable to the U.S. term loans will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable margin. The interest rates applicable to the Euro term loans will be a Euro Interbank Offered Rate (“EURIBOR”) rate plus an applicable margin.
|
|
·
|
|
The base rate for U.S. term loans will be the highest of (i) the federal funds rate plus
0.50%
, (ii) syndication agent’s prime rate or (iii) the daily LIBOR rate plus
1.00%
. The applicable margin for base rate loans is
1.50%
.
|
|
|
·
|
|
The LIBOR rate for U.S. term loans shall not be less than
0.75%
and the applicable margin for LIBOR rate U.S. term loans is
2.50%
.
|
|
|
·
|
|
The EURIBOR rate for Euro term loans shall not be less than
0%
and the applicable margin for EURIBOR rate loans is
2.75%
.
|
|
|
·
|
|
For LIBOR rate term loans and EURIBOR rate term loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate or EURIBOR rate, as applicable, for the corresponding duration.
|
At June 30, 2017, the Company had borrowed $356.6 million under the
secu
red term loan facility at an interest rate of 3.73
% and €249.4
million under the secured euro term loan facility at an interest rate of 2.75%.
At June 30, 2017, there were
no
additional borrowings available under the term loan facilities.
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding at such time to (b) the Company’s consolidated EBITDA computed for the period of four consecutive fiscal quarters most recently ended.
|
|
·
|
|
The base rate for revolving loans will be the highest of (i) the federal funds rate plus
0.50%
, (ii) syndication agent’s prime rate or (iii) the daily LIBOR rate plus
1.00%
. The applicable margin for base rate loans will vary between
0.75%
and
1.75%
.
|
|
|
·
|
|
The LIBOR rate for revolving loans shall not be less than
0%
and the applicable margin for LIBOR rate revolving loans will vary between
1.75%
and
2.75%
.
|
|
|
·
|
|
For LIBOR rate revolving loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.
|
At June 30, 2017,
there were no borrowings under
the revolving credit line. After reductions for outstanding letters of credit secured by these facilities, we
had $395.3
million of additional
borrowings available under the revolving credit facilities at June 30, 2017.
The Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.
Specific to the revolving credit facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Credit Agreement may be accelerated and become immediately due and payable. At June 30, 2017, we were in compliance with the covenants of the Credit Facility.
Off Balance Sheet Arrangements
Consignment and Customer Arrangements for Precious Metals.
We use precious metals, primarily silver, in the production of some
of our products. We obtain
precious metals from financial institutio
ns under consignment agreements.
The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign and the period of consignment. These
fees were $0.3 million
and $0.2 million
for the
three months ended
June 30, 2017
and
2016
.
We had on hand precious metals owned by participants in our precious metals program of
$33.4
million at
June 30, 2017
, and
$28.7
million at
December 31, 2016
, 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
June 30, 2017
, or
December 31, 2016
,
we may be required to furnish cash collateral in the future based on the quantity and market value of the precious metals under consignment and the amount of collateral-free lines provided by the financial institutions. The amount of cash collateral required is subject to review by the financial institutions and can be changed at any time at their discretion, based in part on their assessment of our creditworthiness.
Bank Guarantees and Standby Letters of Credit.
At
June 30, 2017
, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled
$7.1
million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.
Other Financing Arrangements
We maintain other lines of credit to provide global flexibility for Ferro’s short-term liquidity requirements. These facilities are uncommitted lines for our international operations and
totaled
$63.3
million and $7.3
million at
June 30, 2017
, and December 31, 2016
, respectively. We had
$40.4
million and $6.7
million
of additional borrowings available under these lines at
June 30, 2017
, and December 31, 2016
, respectively.
Liquidity Requirements
Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under the revolving credit facility, and cash flows from operating activities. As of
June 30, 2017
,
we had
$78.9
million of cash and cash equivalents. Cash generated in the U.S. is generally used to pay down amounts outstanding under our revolving credit facility and for general corporate purposes, including acquisitions. If needed, we could repatriate the majority of cash held by foreign subsidiaries without the need to accrue and pay U.S. income taxes. We do not anticipate a liquidity need requiring such repatriation of these funds to the U.S.
Our liquidity requirements
and uses
primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures,
acquisition costs,
capital investments, precious metals cash collateral requirements, and postretirement obligations. We expect to meet these requirements in the long term through cash provided by operating activities and availability under existing credit facilities or other financing arrangements. Cash flows from operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. We had additional borrowing capacity of
$435.7
million
at
June 30, 2017
, and
$112.0
million at
December 31, 2016
, available under our
various credit facilities, primarily our revolving credit facility.
Our revolving credit facility subjects us
to a customary financial covenant regarding the Company’s maximum leverage ratio. This covenant
under our credit facility restrict
s
the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.
As of
June 30, 2017
,
we were in compliance with our maximum leverage ratio covenant of 4.
25x as our actual ratio was 2.63
x
, providing $85.6 million
of EBITDA cushion on the leverage ratio, as
defined within the Credit Facility. To the extent that economic conditions in key markets deteriorate or we are unable to meet our business projections and EBITDA falls below approximately $
130
million for rolling four quarters, based on reasonably consistent net debt levels with those as of
March 31, 2017
, we could become unable to maintain compliance with our leverage ratio covenant.
In such case, our lenders could demand immediate payment of outstanding amounts and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all.
Difficulties experienced in global capital markets could affect the ability or willingness of counterparties to perform under our various lines of credit, forward contracts, and precious metals program. These counterparties are major, reputable, multinational institutions, all having investment-grade credit ratings. 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, 2016
.
Impact of Newly Issued Accounting Pronouncements
Refer to Note 2 to the condensed consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of accounting standards we recently 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, 2016
.