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, 2017
.
We produce our products primarily in the Europe-Middle East (“EMEA”) region, the United States, the Asia Pacific region, and Latin America.
Operating results for the
three
months ended
March 31, 2018
, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending
December 31,
2018
.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
On
January 1, 20
18, we
adopted Financial Accounting Standards Board
(“
FASB
”) Accounting Standards Update
(“
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 new guidance would only impact our consolidated financial statements if, in the future, we modified the terms of any of our share-based awards.
We will
apply the guidance
of this ASU
to applicable transactions after the adoption date
.
The adoption of ASU 2017-09 d
id not have a material impact on
the Company’s condensed consolidated financial statements as of
,
and for the quarter ended
,
March 31, 2018.
On January
1, 201
8, we adopted
FASB
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 s
eparately from the service cost
component and outside a subtotal of income from operations.
This ASU also allows only the service cost component of net benefit costs to be eligible for capitalization.
We adopted this new standard using the retrospective approach for the presentation of the service cost component and the other components of the net periodic pension
(credit)
cost and net periodic postretirement benefit cost in the income statement. This resulted in the reclassification of income of
$0.5
million from
Selling, general and administrative expenses to Other income, expense, net in our condensed consolidated stat
ement of operations for the three months
ended March 31, 2017. The Company used a practical expedient where the
amount disclosed in our Retirement B
enefits footnote
for the prior year comparative period was the basis for the estimation for applying the retrospective presentation
requirements
.
Other than this reclassification, the adoption of ASU 2017-07 d
id not have an
impact on
the Company’s condensed consolidated financial statements
as of and for the quarter ended March 31, 2018
.
O
n January 1, 2018, we
adopted
FASB
ASU 2017-01,
Business Combinations: (Topic 805): Clarifying the Definition of a Business.
ASU 2017-01 is intended to clarify the definition of a business with the objective of adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses.
We will
apply the guidance of this
ASU to applicable transactions after the adoption date.
The adoption of ASU 2017-01 d
id not have a material impact on
the Company’s condensed consolidated financial statements as of
,
and for the quarter ended
,
March 31, 2018.
On January 1, 2018, we adopted FASB
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.
We adopted this new standard using the modified retrospective method. The impact
of adopting this guidance on the Company’s
condensed
consolidated financial
statements resulted in an increase
to
R
etained earnings
of
$4.1
million
and D
eferred income taxes of $4.7 million and a decrease to Other receivables of $0.6 million.
On January 1, 2018
,
we adopted FASB ASU 2016-15,
Statement of Cash Flow: (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
ASU
2016-15 is intended to address eight specific cash flow issues with the objective of reducing the existing diversity in practice.
Adoption of ASU 20161-15 did not have a material effect on our
condensed
consolidated financial statements.
On January 1, 2018, we adopted FASB
ASU 2014-09,
Revenue from Contracts with Customers: (Topic
606
) (“ASC 606”)
. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the a
pplication of which require
significant judgment.
We have completed our assessment and review of specific contracts and have
adopted this
new sta
ndard
using the modified retrospective method
with no impact to the opening
retained earnings
balance. We expect the impact of the adoption of
this new standard
will not have
a material effect on our consolidated financial statements
on an ongoing basis
.
New
Accounting Standards
In February 2018, the FASB issued ASU 2018-03,
Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU 2018-03 provides targeted improvements to address certain aspects of recognition measurement presentation, and disclosure of financial instruments. This pronouncement is effective for fiscal years b
eginning after December 15, 2017, and
interim periods within those fiscal years
beginning after June 15, 2018
. Early adoption is permitted, including adoption in any interim period. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
ASU 2018-02 allows a reclassification from Accumulated Other Comprehensive (Loss) Income to Retained Earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects. This pronouncement is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
ASU 2017-12 provides guidance
to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
This pronouncement is effective for fiscal years beginning after December 15, 2018, including interim 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 January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other:
(
Topic 350
)
: Simplifying the Test for Goodwill Impairment.
ASU 2017-04 is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the
current
goodwill impairment test. This pr
onouncement is effective for the
annual or any interim goodwill impairment tests
conducted
in fiscal years beginning after December 15, 2019. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.
In February 2016, the FASB
issued ASU 2016-02,
Leases:
(
Topic 842
)
.
ASU 2016-02 requires companies to recognize a lease liability and asset on the balance sheet for operating leases with a term greater than one year. This pronouncement is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
The Company is in the process of assessing the impact the adoption of this ASU will have on our con
solidated financial statements.
No other new accounting pronouncements issued had
,
or are expected to have
,
a material impact on
the Company’s consolidated financial statements.
3.
Revenue
Revenue Recognition
Under ASC 606, revenues are recognized when c
ontrol of the promised goods is
transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods. In order to achieve that core principle, the Company applies the following five-step approach: 1) identify the contract with a customer, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when a performance obligation is satisfied.
The Company considers confirmed customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts
, from an accounting perspective,
with customers. Under our standard contracts, the only performance obligation is the delivery of manufactured goods and the performance obligation is satisfied
at a point in time
,
when
the Company transfers control
of the manufactured goods
.
The Company may receive orders for products to be delivered over multiple dates that may extend across several reporting periods. The Co
mpany invoices for each order and recognizes revenues for each distinct product upon shipment
, once
tra
nsfer of control
has occurred
. P
ayment terms are standard for the industry and jurisdiction in which we operate. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. Discounts or rebates are specifically stated in customer contracts or invoices
,
and are recorded as a reduction of revenue in the period the related revenue is recognized. The product price as specified on the customer confirmed orders is considered the
standalone selling price. The Company allocates the transaction price to each
distinct product based on its
relative standalone selling price. Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligatio
n is satisfied), which generally
occurs at shipme
nt. We
review
all material contracts
to determine transfer of control
based upon the business practices and legal requirements of each country.
The amount of shipping and handling fees invoiced to our customers at the time our product is shipped is included in net sales as we are the principle in those activities. Sales, valued-added and other taxes collected from our customers and remitted to governmental authorities are excluded from net sales.
There were no changes in amounts previously reported in the
Company’s condensed consolidated financial statements
due to adoption
of ASC 606.
R
evenu
es disaggregated by geography and
reportable segment
for the three months ending March 31, 2018, follow
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
United States
|
|
Asia Pacific
|
|
Latin America
|
|
Total
|
|
|
(Dollars in thousands)
|
Performance Coatings
|
|
$
|
119,116
|
|
$
|
12,819
|
|
$
|
25,947
|
|
$
|
26,766
|
|
$
|
184,648
|
Performance Colors and Glass
|
|
|
61,344
|
|
|
37,091
|
|
|
16,515
|
|
|
5,555
|
|
|
120,505
|
Color Solutions
|
|
|
40,483
|
|
|
41,626
|
|
|
9,938
|
|
|
8,332
|
|
|
100,379
|
Total net sales
|
|
$
|
220,943
|
|
$
|
91,536
|
|
$
|
52,400
|
|
$
|
40,653
|
|
$
|
405,532
|
Revenu
es disaggregated by geography and
reportable segment for the three months ending March 31, 2017, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
United States
|
|
Asia Pacific
|
|
Latin America
|
|
Total
|
|
|
(Dollars in thousands)
|
Performance Coatings
|
|
$
|
69,160
|
|
$
|
10,758
|
|
$
|
21,317
|
|
$
|
25,330
|
|
$
|
126,565
|
Performance Colors and Glass
|
|
|
44,586
|
|
|
39,104
|
|
|
14,633
|
|
|
5,195
|
|
|
103,518
|
Color Solutions
|
|
|
35,177
|
|
|
38,518
|
|
|
8,258
|
|
|
8,519
|
|
|
90,472
|
Total net sales
|
|
$
|
148,923
|
|
$
|
88,380
|
|
$
|
44,208
|
|
$
|
39,044
|
|
$
|
320,555
|
Practical Expedients and Exemptions
All material
contracts have an original duration of one year or less and
,
as such, the Company uses the practical expedient applicable to such contracts
,
and has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period
,
or when t
he Company expects to recognize
this revenue.
When the
period of
time between the transfer
of control of the goods and the time
the customer pays for the goods is one year or less, the Company uses the practical expedient
allowed by ASC 606 that
provides relief from adjusting the amount of promised consideration
for the effects of a
financing component.
We generally expense sales commissions when incurred because the amortization period
is
one year or less. These costs are recorded within SG&A expenses
.
4
.
Acquisitions
Endeka Group
On November 1, 2017, the Company acquired
100%
of the equity interests of Endeka Group (“Endeka”), a global producer of high-value coatings and key raw materials for the ceramic tile market, for
€72.
8
million (approximately
$84.
8
million), including the assumption of debt of
€
13.
1
million (approximately
$15.3
million).
The Company incurre
d acquisition costs for the three months ended March 31, 2018
, of
$0
.5
million,
which is included in Selling, general and administrative expenses in our
condensed
consolidated statements of operations. The acquired business contributed net sales of
$30
.
7
million for the three months ended March
31, 201
8
, and net income
attributable to Ferro Corporation
of
$4
.
0
million for
the three months ended March 31, 2018
.
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 ma
de by management.
During the first quarter of 2018, the Company adjusted the net working capital on the opening balance sheet and as such, the carrying amount of the personal and real property decreased $6.0 million.
As of March 31, 2018
, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded
$46
.
0
million of net working
capital,
$24.1
million of deferred tax assets,
$15
.8
million of personal and real property and
$1.1
million of noncontrolling interest on the
condensed
consolidated balance sheet.
Gardenia Quimica S.A.
On August 3
, 2017, the Company acquired a
majority interest in Gardenia Quimica S.A. (“Gardenia”) for
$3.0
million
. The Company previously owned
46%
of Gardenia and recorded it as an equity metho
d investment. Following
t
his transaction, the Company owned
83.5%
and fully
consolidates Gardenia. Due to the
change of control that occurred, the Company recorded a gain on purchase of
$2.6
million related to the difference between the Company’s carrying value and fair value of the previously held equity method investment
during the third quarter of 2017
.
On March 1, 2018, the Company acquired the remaining equity interest in Gardenia for
$1.
4
million.
Dip Tech Ltd.
On August 2, 2017, the Company acquired
100%
of the equity interests
of
Dip Tech Ltd. (“Dip-Tech”), a leading provider of digital printing solutions for glass co
atings, for
$77
.
0
million
. Dip-Tech is headquartered in Kfar Saba, Israel.
The purchase price consideration consisted of
cash paid at closing of
$60
.
1
million
, net of the net working capital adjustment,
and contingent consideration of
$16.9
million.
The Company inc
urred acquisit
ion costs for the three
months ended
March 31
,
2018
, of
$0
.1
million,
which is included in Selling, general and administrative expenses in our condensed consolidated state
ments of operations. The acquired business contributed net sales of
$3
.
9
milli
on for the three
months
ended March 31, 2018
, and
net loss
attribu
table to Ferro
Corporation of
$2
.
4
million
for the three months ended March 31, 2018
. The net loss attributable to Ferro Corporation was driven by the amortization of acquired intangible asset amortization costs of
$1
.
0
million for the three months ended March 31, 2018
. Dip-Tech incurred research and development costs of
$1.
5
million for the three months ended March 31, 2018
.
The information included herein has been prepared based on the
preliminary
allocation of the purchase price using
estimates of
the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using
discounted cash flow and comparative market approaches
,
and estimates made by management. As of
March 31, 2018
, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the C
ompany
. The Company preliminarily recorded
$41
.
2
million of amortizable intangible assets
,
$33
.
5
million of goodwill,
$7
.
2
million of a deferred tax liability
,
$5.1
million of indefinite-lived
intangible assets,
$3.
2
million of person
al and real property and
$1.
2
million of net working capital
on the condensed consolidated balance sheet.
Smalti per Ceramiche, s.r.l
On April 24, 2017, the Company acquired
100%
of the equity in
terests of S.P.C. Group s.r.l.
, and
100%
of the equity interests of Smalti
per Ceramiche, s.r.l. (“SPC”)
, for
€
18
.
7
million (approximately
$20
.
3
million)
, including the assumption of debt of
€
5.
7
million
(approximately
$6.2
million)
. SPC is a high-end tile coatings manufacturer based in Italy
focused
on fast-growing specialty
products
. SPC’s
products, strong technology, design capabilities, and customer-centric business model are complementary to our Performance Coatings segment, and position us for continued growth in the high-end tile markets
.
The information included herein has been prepared based on the allocation of the purchase price using the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using
discounted cash flow and comparative market approaches
,
and estimates made by management.
The Company
recorded
$6.
1
million of personal and real property,
$6
.
0
million of amortizable intangible assets
,
$5.
2
million of goodwill,
$5.
0
million of net working capital
and
$2.
0
million of a deferred tax liability on the condensed consolidated balance sheet.
5
. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Raw materials
|
|
$
|
121,840
|
|
$
|
112,300
|
Work in process
|
|
|
54,626
|
|
|
39,454
|
Finished goods
|
|
|
181,617
|
|
|
172,426
|
Total inventories
|
|
$
|
358,083
|
|
$
|
324,180
|
In the production of some of our products,
we use precious metals,
which we obtain from financial institutions under consignment agreements with terms of
one
year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amou
nts we consign. These fees
were
$0.
4
million
and
$0.2
million
for the
three months ended
March 31, 2018
and
2017
,
respectively
.
We had on-
hand precious metals owned by participants in our precious metals consignment program of
$39.6
million at
March 31, 2018
, and
$37
.7
m
illion at
December 31, 2017
, measured at fair value based on market prices for ide
ntical assets
.
6
. Property, Plant and Equipment
Property, plant and equipment is reported net of accumulated depreciation of
$522.0
million at
March 31, 2018
, and
$502.9
million at
December 31, 2017
. Unpaid capital expenditure liabilities, which are non-cash investing activities, were
$4.8
million at
March 31, 2018
, and
$2.5
million at
March 31, 2017
.
7
.
Goodwill and Other Intangible Assets
Details and activity in the Company’s goodwill by segment follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
|
|
|
|
|
Performance
|
|
Color
|
|
Colors and
|
|
|
|
|
Coatings
|
|
Solutions
|
|
Glass
|
|
Total
|
|
|
(Dollars in thousands)
|
Goodwill, net at December 31, 2017
|
|
$
|
38,236
|
|
$
|
42,535
|
|
$
|
114,598
|
|
$
|
195,369
|
Acquisitions
|
|
|
—
|
|
|
—
|
|
|
1,291
|
(1)
|
|
1,291
|
Foreign currency adjustments
|
|
|
803
|
|
|
309
|
|
|
766
|
|
|
1,878
|
Goodwill, net at March 31, 2018
|
|
$
|
39,039
|
|
$
|
42,844
|
|
$
|
116,655
|
|
$
|
198,538
|
(1) During the first quarter of 2018, the Company recorded a purchase price adjustment within the measurement period for goodwill related to the Dip
-
Tech acquisition.
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Goodwill, gross
|
|
$
|
257,005
|
|
$
|
253,836
|
Accumulated impairment
|
|
|
(58,467)
|
|
|
(58,467)
|
Goodwill, net
|
|
$
|
198,538
|
|
$
|
195,369
|
Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter
,
and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below
its
carrying
value. As of March 31, 2018
, 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:
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Gross amortizable intangible assets:
|
|
|
|
|
|
|
Patents
|
|
$
|
5,610
|
|
$
|
5,279
|
Land rights
|
|
|
5,061
|
|
|
4,947
|
Technology/know-how and other
|
|
|
129,984
|
|
|
131,070
|
Customer relationships
|
|
|
95,972
|
|
|
93,500
|
Total gross amortizable intangible assets
|
|
|
236,627
|
|
|
234,796
|
Accumulated amortization:
|
|
|
|
|
|
|
Patents
|
|
|
(5,566)
|
|
|
(5,226)
|
Land rights
|
|
|
(2,957)
|
|
|
(2,883)
|
Technology/know-how and other
|
|
|
(45,048)
|
|
|
(45,214)
|
Customer relationships
|
|
|
(12,873)
|
|
|
(11,114)
|
Total accumulated amortization
|
|
|
(66,444)
|
|
|
(64,437)
|
Amortizable intangible assets, net
|
|
$
|
170,183
|
|
$
|
170,359
|
Indefinite-lived intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Indefinite-lived intangibles assets:
|
|
|
|
|
|
|
Trade names and trademarks
|
|
$
|
17,510
|
|
$
|
17,257
|
8
. Debt
Loans payable and current portion of long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Loans payable
|
|
$
|
27,022
|
|
$
|
16,360
|
Current portion of long-term debt
|
|
|
8,527
|
|
|
8,776
|
Loans payable and current portion of long-term debt
|
|
$
|
35,549
|
|
$
|
25,136
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Term loan facility, net of unamortized issuance costs, maturing 2024
(1)
|
|
$
|
651,780
|
|
$
|
645,242
|
Revolving credit facility, maturing 2022
|
|
|
118,183
|
|
|
78,000
|
Capital lease obligations
|
|
|
4,776
|
|
|
4,913
|
Other notes
|
|
|
7,006
|
|
|
7,112
|
Total long-term debt
|
|
|
781,745
|
|
|
735,267
|
Current portion of long-term debt
|
|
|
(8,527)
|
|
|
(8,776)
|
Long-term debt, less current portion
|
|
$
|
773,218
|
|
$
|
726,491
|
(1
)
T
he carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs of
$
7.2
million at March 31, 2018
,
and
$
7
.
5
million
at December 31, 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 E
uro 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
. The Company can also raise
certain additional debt
or credit facilities
subject to satisfaction of certain covenant levels.
Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the 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 March 31, 2018
, the Company had
borrowed
$353
.
9
million under the
secured t
erm loan facility at an interest
ra
te of
4.38
%
and
€2
47
.
5
million
(approximately
$
305.
1
million) under the secured Eu
ro
term loan facility at an interest
rate of
2.75%
.
At
March 31, 2018
,
there
were
no
additional borrowings available under the term loan facilities.
We entered into interest rate swap agreements in the second quarter of 2017. These swaps converted
$150
million and
€90
million of our term loans from variable interest rates to fixed interest rates.
At March 31, 2018
, t
he effective interest rate
for the term loan facilities after adjusting for the interest rate swap was
4.27%
for the secured term loan facility and
3.0
0
%
for
the E
uro term loan facility.
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
March 31
, 201
8
,
there were
$118
.
2
million
borrowings
under the revolving credit line
at an interest rate
of
4.04
%
.
After reductions for outstanding letters of credit secured by these facilities, we
had
$
277.2
million of
additional
borrowings available
under the revolving credit facilities
at March 31
, 201
8
.
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
atel
y due and payable. At March 31, 2018
, we were in compliance with the covenants of the Credit Facility.
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 C
redit Facility (as defined above
). For discussion of the Company’s Previous Credit Facility, refer
to Note 8 in the Company’s
Annual Report on Form 10-K
for
the year ended December 31, 2017
.
In conjunction with the refinancing of
the Previous Credit Facility, we recorded a charge of
$3.9
million
in connection with the write-off of unamortized issuance costs, which is recorded within Loss on extinguishment of debt in our condensed consolidated statement of oper
ations for the three months ended March 31
, 2017.
Other Financing Arrangements
We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and
totaled
$45.6
million and
$64.5
million at
March 31, 2018
, and
December 31, 2017
, respectively. The unused portions of these lines provided additional liquidity of
$13.1
million
at
March 31, 2018
, and
$39.4
million at
December 31, 2017
.
9
. Financial Instruments
The following financial instrument assets (liabilities) are presented at their respective carrying amount, fair value and classification within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Carrying
|
|
Fair Value
|
|
|
Amount
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(Dollars in thousands)
|
Cash and cash equivalents
|
|
$
|
53,296
|
|
$
|
53,296
|
|
$
|
53,296
|
|
$
|
—
|
|
$
|
—
|
Loans payable
|
|
|
(27,022)
|
|
|
(27,022)
|
|
|
—
|
|
|
(27,022)
|
|
|
—
|
Term loan facility, maturing 2024
(1)
|
|
|
(651,780)
|
|
|
(653,410)
|
|
|
—
|
|
|
(653,410)
|
|
|
—
|
Revolving credit facility, maturing 2022
|
|
|
(118,183)
|
|
|
(119,312)
|
|
|
—
|
|
|
(119,312)
|
|
|
—
|
Other long-term notes payable
|
|
|
(7,006)
|
|
|
(4,526)
|
|
|
—
|
|
|
(4,526)
|
|
|
—
|
Interest rate swaps - asset
|
|
|
3,392
|
|
|
3,392
|
|
|
—
|
|
|
3,392
|
|
|
—
|
Interest rate swaps - liability
|
|
|
(191)
|
|
|
(191)
|
|
|
—
|
|
|
(191)
|
|
|
—
|
Foreign currency forward contracts, net
|
|
|
460
|
|
|
460
|
|
|
—
|
|
|
460
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Carrying
|
|
Fair Value
|
|
|
Amount
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
(Dollars in thousands)
|
Cash and cash equivalents
|
|
$
|
63,551
|
|
$
|
63,551
|
|
$
|
63,551
|
|
$
|
—
|
|
$
|
—
|
Loans payable
|
|
|
(16,360)
|
|
|
(16,360)
|
|
|
—
|
|
|
(16,360)
|
|
|
—
|
Term loan facility, maturing 2024
(1)
|
|
|
(645,242)
|
|
|
(646,979)
|
|
|
—
|
|
|
(646,979)
|
|
|
—
|
Revolving credit facility, maturing 2022
|
|
|
(78,000)
|
|
|
(79,295)
|
|
|
—
|
|
|
(79,295)
|
|
|
—
|
Other long-term notes payable
|
|
|
(7,112)
|
|
|
(3,973)
|
|
|
—
|
|
|
(3,973)
|
|
|
—
|
Interest rate swaps - asset
|
|
|
1,616
|
|
|
1,616
|
|
|
—
|
|
|
1,616
|
|
|
—
|
Interest rate swaps - liability
|
|
|
(124)
|
|
|
(124)
|
|
|
—
|
|
|
(124)
|
|
|
—
|
Foreign currency forward contracts, net
|
|
|
(469)
|
|
|
(469)
|
|
|
—
|
|
|
(469)
|
|
|
—
|
(1) The carrying value
s of the term loan facility
are
net of unamortized debt issuance costs
of
$
7
.
2
million and
$7
.
5
million
for the period ended March 31, 2018
,
and December 31, 201
7
, 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 ma
turity. T
he 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
.
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.
The fair valu
es of our interest rate swaps are
determined based on inputs that are read
ily available in public market
s
or can be derived from information available in publicly quoted markets.
The fair values of the foreign currency forward
contracts are based on market prices for comparable contracts.
Derivative Instruments
The Company may use derivative
instruments
to
partially
offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investment in certain foreign subsidiaries and on certain existing assets and liabilities. However, the Company may choose not to hedge
in countries where it is
not economically feasible
to ent
er into hedging arrangements or
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
s
from
variable interest
rate
s to
fixed interest rate
s
.
These swa
ps
qualify
and were designated
as cash flow hedges.
The effective
portions of cash flow hedges are
recorded in accumu
lated other comprehensive loss (“AOCL
”)
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.
The Company did not have any ineffectiveness related to
the interest rate swaps
during the three months ended March 31, 2018
.
The amount of gain
recognize
d in AOCL and the amount of loss
reclassified into earnings for
the three months ended March 31, 2018
, follow:
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
Amount of Loss Reclassified
|
|
|
Recognized in AOCL -
|
|
from AOCL into
|
|
|
|
Effective Portion
|
|
|
|
Income - Effective Portion
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
Interest rate swap
|
|
$
|
1,709
|
|
|
$
|
(136)
|
|
Net investment
hedge.
To help protect the value of the
Company’s
net inv
estment in Europe
an
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 invest
ment hedges are recorded in AOCL
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
E
uro
denominated
debt
as a net investment hedge
for accounting purposes
. The
fair value
of the
net investment hedge
is
€
19
.
6
million
at March
31, 2018
.
The Company did
no
t have any ineffectiveness related to net investment
hedges d
uring the three
months
ended March 31, 2018
.
The a
mount of loss recognized in AOCL
and the amount
of loss reclassified into earnings
f
or
the three months ended March 31, 2018
, follow:
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss
|
|
Amount of Loss Reclassified
|
|
|
Recognized in AOCL -
|
|
from AOCL into
|
|
|
|
Effective Portion
|
|
|
|
Income - Effective Portion
|
|
|
|
2018
|
|
|
2018
|
|
|
|
(Dollars in thousands)
|
Net investment hedge
|
|
$
|
(860)
|
|
|
$
|
—
|
|
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
loss (gain)
, net in
the condensed consolidated statements of operations.
We
recognized
net gains
of
$0.4
million
in the
three months ended
March 31, 2018
,
and net gains of
$0
.
2
million
in the
three
months ended
March 31, 2017
,
arising from the change in fair value of our financial instruments, which
partially
offset the related net gains and losses on international trade transactions.
The notional amount of foreign currency forward contracts
was
$302.3
million
at
March 31, 2018
, and
$238.5
million at
December 31, 2017
.
The following table presents the effect on our condensed consolidated statements of operations for the three months ended
March 31, 2018
and
2017
, respectively, of our foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
|
|
|
|
|
Recognized in Earnings
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2018
|
|
2017
|
|
Location of Gain in Earnings
|
|
|
(Dollars in thousands)
|
|
|
Foreign currency forward contracts
|
|
$
|
391
|
|
$
|
243
|
|
Foreign currency loss (gain), net
|
Location and Fair Value Amount of Derivative Instruments
The following table presents the fair values on our condensed consolidated balance sheets of
derivative instruments
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
|
|
2018
|
|
2017
|
|
Balance Sheet Location
|
|
|
(Dollars in thousands)
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
3,392
|
|
$
|
1,616
|
|
Other non-current assets
|
Foreign currency forward contracts
|
|
|
804
|
|
|
661
|
|
Other current assets
|
Liability derivatives:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
(191)
|
|
|
(124)
|
|
Accrued expenses and other current liabilities
|
Foreign currency forward contracts
|
|
$
|
(344)
|
|
$
|
(1,130)
|
|
Accrued expenses and other current liabilities
|
10
. Income Taxes
During the first quarter of 2018, income tax expense was $7.
5
million, or
24.2%
of pre-tax income. In the first quarter of 2017, we recorded tax expense of $7.1 million, or
24.4%
of pre-tax income. The tax expense in the first quarter of 2018, as a
percentage of pre-tax income, was
higher than the U.S. federal statutory income tax rate of
21%
primarily as a result of foreign statutory rate differences. The tax expense for the first quarter of 2017, as a
percentage of pre-tax income, was
lower than the U.S. federal statutory income tax rate of
35%
primarily as a result of foreign statutory rate differences.
We
recognized the provisional tax impacts
on our financial statements for the period ended December 31, 2017
,
related to the
Tax Cut and Jobs Act (the “Tax Act”) under the guidance of the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. The Company’s preliminary determinations related to the estimable impacts of the Tax Act have not changed in the current quarter.
The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) on the Company for 2018. For the current quarter
, the Company
made reasonable estimates of GILTI and FDII, as well as the impact of changes to valuation allowances related to certain posi
tions. The combined projected
net impact of these items are not anticipated to be material to the tax rate in 2018. The Company has not recorded any potential deferred tax effects related to GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.
11
. Contingent Liabilities
We have recorded environmental liabilities of
$6.4
m
illion at
March 31, 2018
, and
$6.7
million at
December 31, 2017
, for costs associated with the remediation of certain of our properties that hav
e been contaminated. The liability
at
March 31, 2018
, and
December 31, 2017
, was primarily
comprised of liabilities related to a
non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product lines in 2013. The costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring and the ultimate cost of required remediation.
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
March 31, 2018
and
2017
, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans
|
|
Non-U.S. Pension Plans
|
|
Other Benefit Plans
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Service cost
|
|
$
|
3
|
|
$
|
4
|
|
$
|
461
|
|
$
|
404
|
|
$
|
1
|
|
$
|
—
|
Interest cost
|
|
|
2,788
|
|
|
3,666
|
|
|
689
|
|
|
573
|
|
|
183
|
|
|
211
|
Expected return on plan assets
|
|
|
(3,995)
|
|
|
(4,740)
|
|
|
(233)
|
|
|
(210)
|
|
|
—
|
|
|
—
|
Amortization of prior service cost
|
|
|
—
|
|
|
2
|
|
|
11
|
|
|
10
|
|
|
—
|
|
|
—
|
Net periodic benefit (credit) cost
|
|
$
|
(1,204)
|
|
$
|
(1,068)
|
|
$
|
928
|
|
$
|
777
|
|
$
|
184
|
|
$
|
211
|
Interest cost, expected return on plan assets and amortization of prior service cost are recorded in Miscellaneous
expense (income)
, net on the condensed consolidated statement of operations.
13
. Stock-Based Compensation
On May 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 quarter
of
2018
, our Board of Directors gran
ted
0.
2
million stock options,
0.
1
million performance share units and
0.
1
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
three months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Weighted-average grant-date fair value
|
|
$
|
8.91
|
|
Expected life, in years
|
|
|
5.4
|
|
Risk-free interest rate
|
|
|
2.7
|
%
|
Expected volatility
|
|
|
39.7
|
%
|
The weighted average grant date fair value of our performance share units
granted
in the three months ended March 31, 2018
, was
$
22
.
92
. We
measure the fair value of performance share units based on the closing market price of our common stock on the date of the grant. These shares are evaluated each
reporting period for respective attainment rates against the performance criteria
.
We me
asure the fair value of restricted
share
units based on the closing market price of our common stock on the date of the grant
. The restricted share
units vest over
three
years
. The weighted-average grant date fair value per unit for grants made during the
three months ended
March 31, 2018
,
was
$
22
.
27
.
We recognized stock-based compensation
expense of
$2
.
4
million
for the
three months ended
March 31, 2018
,
and
$2.7
million for the
three months ended
March 31, 2017
. At
March 31, 2018
, unearned compensation cost related to the unvested portion of all stock-based
compensation
awards was approximately
$11
.
6
million and is expected to be recognized over the remaining vesting period of the respective grants
, through
the
first quarter of 2021
.
14
.
Restructuring and Optimization
Programs
Total restructuring
and impairment
charges
were $
4
.
1
million and
$3
.
0
million for
the
three
months ended
March 31, 2018
,
and March 31, 2017,
respectively
.
T
he charges primarily relate
to costs associated with integration of our recent acquisitions
and optimization programs
, and are further summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
Other
|
|
|
|
|
|
Severance
|
|
Costs
|
|
Total
|
|
|
(Dollars in thousands)
|
Balances at December 31, 2017
|
|
$
|
2,286
|
|
$
|
1,234
|
|
$
|
3,520
|
Restructuring charges
|
|
|
657
|
|
|
3,449
|
|
|
4,106
|
Cash payments
|
|
|
(1,616)
|
|
|
(62)
|
|
|
(1,678)
|
Non-cash items
|
|
|
65
|
|
|
(2,646)
|
|
|
(2,581)
|
Balances at March 31, 2018
|
|
$
|
1,392
|
|
$
|
1,975
|
|
$
|
3,367
|
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
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands, except per share amounts)
|
Basic earnings per share computation:
|
|
|
|
|
|
|
Net income attributable to Ferro Corporation common shareholders
|
|
$
|
23,391
|
|
$
|
21,898
|
Weighted-average common shares outstanding
|
|
|
84,228
|
|
|
83,530
|
Basic earnings per share attributable to Ferro Corporation common shareholders
|
|
$
|
0.28
|
|
$
|
0.26
|
Diluted earnings per share computation:
|
|
|
|
|
|
|
Net income attributable to Ferro Corporation common shareholders
|
|
$
|
23,391
|
|
$
|
21,898
|
Weighted-average common shares outstanding
|
|
|
84,228
|
|
|
83,530
|
Assumed exercise of stock options
|
|
|
839
|
|
|
516
|
Assumed satisfaction of restricted stock unit conditions
|
|
|
279
|
|
|
574
|
Assumed satisfaction of performance stock unit conditions
|
|
|
164
|
|
|
268
|
Weighted-average diluted shares outstanding
|
|
|
85,510
|
|
|
84,888
|
Diluted earnings per share attributable to Ferro Corporation common shareholders
|
|
$
|
0.27
|
|
$
|
0.26
|
The number of anti-dilutive or unearned
shares was
1.7
million for
the
three
months ended
March 31, 2018
,
and
2.1
million for the
three
months ended
March 31, 2017
.
These shares were excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.
16
. Accumulated Ot
her Comprehensive Loss
Changes in accumulated other comprehensive income (loss) by
component, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Postretirement
|
|
|
|
|
|
Net Gain
|
|
|
|
|
|
Benefit Liability
|
|
Translation
|
|
|
on Cash
|
|
|
|
|
|
Adjustments
|
|
Adjustments
|
|
|
Flow Hedges
|
|
Total
|
|
|
(Dollars in thousands)
|
Balances at December 31, 2016
|
|
$
|
1,141
|
|
$
|
(107,784)
|
|
$
|
—
|
|
$
|
(106,643)
|
Other comprehensive income before reclassifications, before tax
|
|
|
—
|
|
|
7,171
|
|
|
—
|
|
|
7,171
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities loss, before tax
|
|
|
(9)
|
|
|
—
|
|
|
—
|
|
|
(9)
|
Current period other comprehensive (loss) income, before tax
|
|
|
(9)
|
|
|
7,171
|
|
|
—
|
|
|
7,162
|
Tax effect
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
Current period other comprehensive (loss) income, net of tax
|
|
|
(4)
|
|
|
7,171
|
|
|
—
|
|
|
7,167
|
Balances at March 31, 2017
|
|
$
|
1,137
|
|
$
|
(100,613)
|
|
$
|
—
|
|
$
|
(99,476)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2017
|
|
$
|
1,165
|
|
$
|
(77,578)
|
|
$
|
945
|
|
$
|
(75,468)
|
Other comprehensive income before reclassifications, before tax
|
|
|
—
|
|
|
5,461
|
|
|
1,845
|
|
|
7,306
|
Reclassification to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit liabilities income, before tax
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
Cash flow hedge loss, before tax
|
|
|
—
|
|
|
—
|
|
|
(136)
|
|
|
(136)
|
Current period other comprehensive income (loss), before tax
|
|
|
16
|
|
|
5,461
|
|
|
1,709
|
|
|
7,186
|
Tax effect
|
|
|
9
|
|
|
(198)
|
|
|
395
|
|
|
206
|
Current period other comprehensive income (loss), net of tax
|
|
|
7
|
|
|
5,659
|
|
|
1,314
|
|
|
6,980
|
Balances at March 31, 2018
|
|
$
|
1,172
|
|
$
|
(71,919)
|
|
$
|
2,259
|
|
$
|
(68,488)
|
17
. Reporting for Segments
Net sales to external customers by segment are presented in the table below. Sales between segments were not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Performance Coatings
|
|
$
|
184,648
|
|
$
|
126,565
|
Performance Colors and Glass
|
|
|
120,505
|
|
|
103,518
|
Color Solutions
|
|
|
100,379
|
|
|
90,472
|
Total net sales
|
|
$
|
405,532
|
|
$
|
320,555
|
Each segment’s gross profit and reconciliations to income before income taxes are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2018
|
|
2017
|
|
|
(Dollars in thousands)
|
Performance Coatings
|
|
$
|
43,765
|
|
$
|
33,489
|
Performance Colors and Glass
|
|
|
43,328
|
|
|
37,418
|
Color Solutions
|
|
|
32,149
|
|
|
28,182
|
Other cost of sales
|
|
|
(556)
|
|
|
(295)
|
Total gross profit
|
|
|
118,686
|
|
|
98,794
|
Selling, general and administrative expenses
|
|
|
73,092
|
|
|
59,446
|
Restructuring and impairment charges
|
|
|
4,106
|
|
|
3,018
|
Other expense, net
|
|
|
10,376
|
|
|
7,071
|
Income before income taxes
|
|
$
|
31,112
|
|
$
|
29,259
|
18. Subsequent Event
On April 25, 2018 the Company entered into an amendment (the “Amended Credit Facility”) to its Credit Facility. The Amended Credit Facility consists of a $500 million secured revolving line of credit with a maturity of February 2023, a $355 million secured term loan facility with a maturity of February 2024, a $235 million secured term loan facility with a maturity of February 2024
,
and a $230 million sec
ured term loan facility with a
maturity of February 2024.
Item 2.
Management’s Discussion
and Analysis of Financial Condition and
Results of Operations
Overview
Net sales for the
three months
ended
March 31, 2018
, increased by
$85.0
million, or
26.5
%, compared with the prior-year same peri
od.
The increase in net sales was
driven by
higher sales in
Pe
rformance Coatings, Performance Colors
an
d Glass and Color Solutions of $58.1
millio
n,
$1
7.0
million
and $9.9
million, respectively.
During the three months ended
March 31, 2018
, gross profit increased
$19.9
million, or
20.1%
, compared with the prior-year same period; as a percentage of net sales, it decreased approximately
150
basis points to
29.3%
.
The increase
in gross profit
was
attributable
to higher gross profit across all of our segments, with increases in
Pe
rformance Coating
s
, Performance Colors and Glass and Color Solutions
of $10.3 million, $5.9 million and $4.0
million, respectively.
For the
three months
ended
March 31, 2018
, selling, general and administrativ
e (
“SG&A”) expenses increased $13.6 million, or 23.0
%, compared with the prior-year
same period.
The higher SG&A expenses compared to the prior-year same period are primarily driven by expenses associated with businesses acquired within the last year.
For the
three months
ended
March 31, 2018
, net income was $
23.6
million, compared with net income
of $
22.1
million for the prior-year same period, and net income attributable to common shareholders was
$23.4
million, compared with net income
attributable to common shareholders of
$21.9
million for the prior-year same period.
Our t
otal gross profit for the first
quarter of
2018
was
$118.7
million, compared with
$98.8
million for the three months ended
March 31, 2017
.
Outlook
For 2018, we will continue to exe
cute our dynamic innovation and optimization phase
, which includes organic and inorganic growth, and optimization. We expect organic growth through new products and repositioning of our portfolio to continue transitioning to the higher end of our target markets. We expect to
invest at
level
s
of approximately $100
million
to $150 million per year in strategic acquisitions. We are implementing optimization programs to improve efficiency and upgrade operations throughout our business.
We
still
expect
continued raw material headwinds through the near term
.
Over the long term, we are confident in our ability to mitigate raw material inflation due to our pricing initiatives,
technological advances in
reformulating compounds
,
and optimization initi
atives. Foreign currency rates may
continue to be volatile in 2018
and changes in interest rates could adversely impact reported results.
We remain focused on the integration of recent acquisitions and continue to work toward achieving the identified sy
nergies. We are
concurrently focus
ing
on opportunities to optimize our cost structure and
on making
our business processes and systems more efficient. We continue to expect
strong
cash flow from operating activities to be positive for 2018, providing additional liquidity.
Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for
the year ended December 31, 2017
.
Results of Operations - Consolidated
Comparison of the three months ended
March 31, 2018
and
2017
For the
three months ended
March 31, 2018
, net
income
was
$23.6
million, compared with net
income
of
$22.1
million for the
three months ended
March 31, 2017
. For the
three months ended
March 31, 2018
, net
income
attributable to common shareholders was
$23.4
million, or
earnings
per share
of
$0.28
, compared with
net
income
attributable to common shareholders of
$21.9
millio
n, or
earnings
per share
of
$0.26
, for the
three months ended
March 31, 2017
.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Net sales
|
|
$
|
405,532
|
|
|
$
|
320,555
|
|
|
$
|
84,977
|
|
26.5
|
%
|
Cost of sales
|
|
|
286,846
|
|
|
|
221,761
|
|
|
|
65,085
|
|
29.3
|
%
|
Gross profit
|
|
$
|
118,686
|
|
|
$
|
98,794
|
|
|
$
|
19,892
|
|
20.1
|
%
|
Gross profit as a % of net sales
|
|
|
29.3
|
%
|
|
|
30.8
|
%
|
|
|
|
|
|
|
Net sales increased b
y
$85.0
million, or
26.5%
, for
the
three months ended
March 31, 2018
,
compared with the prior-year same period
, driven
by higher sales in
Pe
rformance Coatings, Performance Colors and Glass and Color Solutions of $58.1
millio
n,
$1
7.0
million
and $9.9 million,
respectively.
The increase in net sales was driven in part by acquisitions
,
including
Endeka, which contributed sales of $30.7 million
,
and SPC, which contributed sales
of $10.1
million, each of wh
ich was acquired after the first
quarter of 2017
. The increase in net sales was also dr
iven by organic growth, with
Performance Coatings growing $18.0
million
, Performance Colors and Glass growing $10.8 million and Color Solutions growing $9.9 million
.
Gross Profit
Gross profit
increased
$19.9
million, or
20.1%
, for
the
three months ended
March 31, 2018
, compared with
the prior-year same period
, and as a percentage of net sales
, it de
creased
150
basis
points t
o
29.3%
. The increase
in gross profit
was
attributable to increases across all of our
segments, with increases in
Pe
rformance Coatings, Performance Colors and Glass and Color Solutions of $10.3 million, $5.9 million and $4.0
million, respectively.
The increase in gross profit w
as driven by acquisitions of $12.7
million, favo
rable product pricing of $11.1
million,
favorable foreign currency impacts of $7.4 million, higher s
ales volumes and mix of $3.9
million
and
lower manufacturing costs of $2.0 million
, partially offset by
higher raw material costs of $16.9 million
.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Geographic Revenues on a sales origination basis
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
220,943
|
|
$
|
148,923
|
|
$
|
72,020
|
|
48.4
|
%
|
United States
|
|
|
91,536
|
|
|
88,380
|
|
|
3,156
|
|
3.6
|
%
|
Asia Pacific
|
|
|
52,400
|
|
|
44,208
|
|
|
8,192
|
|
18.5
|
%
|
Latin America
|
|
|
40,653
|
|
|
39,044
|
|
|
1,609
|
|
4.1
|
%
|
Net sales
|
|
$
|
405,532
|
|
$
|
320,555
|
|
$
|
84,977
|
|
26.5
|
%
|
The
increase
in net sales
of
$85.0
million, compared with the prior-year same period, was driven by an increase in sales from all regions. The increase in
sales from EMEA
was
attributable to higher sales in
Performance Coatings
,
Per
formance Colors and Glass and Color Solutions
of $50.0 million, $16.8 million and $5.3
million, respectively.
The increase in
sales from Asia Pacific was
attributable to higher sales in
Performance Coatings
,
Per
formance Colors and Glass and Color Solutions
of $4.6 million, $1.9 million
and $1.7
million, respectively.
The increase in sales from the United States was attributable to higher sales in Color Solutions and
Performance Coatings of $3.1 million and $2.1 million, respectively, partially offset by a decrease in
sales in
Performance Colors
and Glass of $2.0
million
. The increase in sales from Latin America was
primarily
attributable to
higher sales in Performance Coatings
.
The following table presents our sales on the basis of
where sold products were shipped.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Geographic Revenues on a shipped-to basis
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
210,331
|
|
$
|
140,539
|
|
$
|
69,792
|
|
49.7
|
%
|
Asia Pacific
|
|
|
76,260
|
|
|
70,121
|
|
|
6,139
|
|
8.8
|
%
|
United States
|
|
|
71,365
|
|
|
66,918
|
|
|
4,447
|
|
6.6
|
%
|
Latin America
|
|
|
47,576
|
|
|
42,977
|
|
|
4,599
|
|
10.7
|
%
|
Net sales
|
|
$
|
405,532
|
|
$
|
320,555
|
|
$
|
84,977
|
|
26.5
|
%
|
Selling, General and Administrative Expenses
The following table includes SG&A components with
significant changes between 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Personnel expenses
|
|
$
|
41,119
|
|
$
|
32,904
|
|
$
|
8,215
|
|
25.0
|
%
|
Incentive compensation
|
|
|
2,966
|
|
|
1,830
|
|
|
1,136
|
|
62.1
|
%
|
Stock-based compensation
|
|
|
2,430
|
|
|
2,723
|
|
|
(293)
|
|
(10.8)
|
%
|
Pension and other postretirement benefits
|
|
|
342
|
|
|
408
|
|
|
(66)
|
|
(16.2)
|
%
|
Bad debt
|
|
|
105
|
|
|
(241)
|
|
|
346
|
|
(143.6)
|
%
|
Business development
|
|
|
2,423
|
|
|
2,361
|
|
|
62
|
|
2.6
|
%
|
Research and development expenses
|
|
|
10,841
|
|
|
8,669
|
|
|
2,172
|
|
25.1
|
%
|
Intangible asset amortization
|
|
|
2,073
|
|
|
2,051
|
|
|
22
|
|
1.1
|
%
|
All other expenses
|
|
|
10,793
|
|
|
8,741
|
|
|
2,052
|
|
23.5
|
%
|
Selling, general and administrative expenses
|
|
$
|
73,092
|
|
$
|
59,446
|
|
$
|
13,646
|
|
23.0
|
%
|
SG&A
expen
ses
were
$13.6
million
higher
in the
three months ended
March 31, 2018
,
compared with the prior-year same period.
The higher
SG&A expenses
compared wit
h the prior-year same period were
primarily driven by expenses associated with businesses acquired withi
n the last year
.
The acquisitions were the primary driver of the
increase in personnel expenses and
re
search and development expenses.
The increase i
n incentive compensation of $1.1
million was driven by the Company’s performance relative to targets established for
performance
awards compared with the prior-year same period.
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
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Strategic services
|
|
$
|
41,178
|
|
$
|
31,693
|
|
$
|
9,485
|
|
29.9
|
%
|
Functional services
|
|
|
26,518
|
|
|
23,200
|
|
|
3,318
|
|
14.3
|
%
|
Incentive compensation
|
|
|
2,966
|
|
|
1,830
|
|
|
1,136
|
|
62.1
|
%
|
Stock-based compensation
|
|
|
2,430
|
|
|
2,723
|
|
|
(293)
|
|
(10.8)
|
%
|
Selling, general and administrative expenses
|
|
$
|
73,092
|
|
$
|
59,446
|
|
$
|
13,646
|
|
23.0
|
%
|
Restructuring and Impairment
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Employee severance
|
|
$
|
657
|
|
$
|
980
|
|
$
|
(323)
|
|
(33.0)
|
%
|
Asset impairment
|
|
|
—
|
|
|
1,176
|
|
|
(1,176)
|
|
NM
|
|
Other restructuring costs
|
|
|
3,449
|
|
|
862
|
|
|
2,587
|
|
300.1
|
%
|
Restructuring and impairment charges
|
|
$
|
4,106
|
|
$
|
3,018
|
|
$
|
1,088
|
|
36.1
|
%
|
Restructuring
and impairment charges
increased
in
the
first
quarter of 2018
compared with the prior-year same period.
The increase
primarily relates to costs associated with integration of our recent acquisitions and optimization programs.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Interest expense
|
|
$
|
7,251
|
|
$
|
5,748
|
|
$
|
1,503
|
|
26.1
|
%
|
Amortization of bank fees
|
|
|
870
|
|
|
479
|
|
|
391
|
|
81.6
|
%
|
Interest capitalization
|
|
|
(159)
|
|
|
(3)
|
|
|
(156)
|
|
NM
|
%
|
Interest expense
|
|
$
|
7,962
|
|
$
|
6,224
|
|
$
|
1,738
|
|
27.9
|
%
|
Interest expense i
ncreased in the first quarter of 2018
compared with the prior-year same period
. The increase in interest expense was due to an increase in the average long-term debt balance during
the three months ended March 31, 2018
, compared with the prior-year same period and an increase
of the amortization of debt issuance costs associated with the 2017 Credit Facility
.
Income Tax Expense
During the first quarter of 2
018, income tax expense was $7.5
million, or 24.2% of pre-tax income. In the first quarter of 2017, we recorded tax expense of $7.1 million, or 24.4% of pre-tax income. The tax expense in the first quarter of 2018, as a percentage of
pre-tax income, was
higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences
.
The tax expense for the first quarter of 2017, as a
percentage of pre-tax income, was
lower than the U.S. federal statutory income tax rate of 35% primarily as a result of foreign statutory rate differences.
We
recognized the provisional tax impacts
on our financial statements for the period ended December 31, 2017
,
related to the
Tax Cut and Jobs Act (the “Tax Act”) under the guidance of the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may
take as a result of the Tax Act. The Company’s preliminary determinations related to the estimable impacts of the Tax Act have not changed in the current quarter.
The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) on the Company for 2018. For the current quarter
, the Company
made reasonable estimates of GILTI and FDII, as well as the impact of changes to valuation allowances related to certain posi
tions. The combined projected
net impact of these items are not anticipated to be material to the tax rate in 2018. The Company has not recorded any potential deferred tax effects related to GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.
Results of Operations - Segment Information
Comparison of the three months ended
March 31, 2018
and
2017
Performance Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
|
Acquisitions
|
Other
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
184,648
|
|
|
$
|
126,565
|
|
|
$
|
58,083
|
|
45.9
|
%
|
|
$
|
7,100
|
|
$
|
1,218
|
|
$
|
9,723
|
|
$
|
40,042
|
|
$
|
—
|
Segment gross profit
|
|
|
43,765
|
|
|
|
33,489
|
|
|
|
10,276
|
|
30.7
|
%
|
|
|
7,100
|
|
|
832
|
|
|
3,053
|
|
|
11,648
|
|
|
(12,357)
|
Gross profit as a % of segment net sales
|
|
|
23.7
|
%
|
|
|
26.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased in Performance Coatings compared with the prior-year same period, pr
imarily driven by sales from Endeka
of
$2
8
.5
million
and SPC of $
10.1
million
,
each of wh
ich was acquired after the first
quarter of 2017
,
and increases in sales of
porcelain enamel, frits and glazes
and
digital inks
of $6.8 million $5.4 million and $3.5
million, respectively
.
The in
crease in n
et sales was driven
by sales from acquisitions of $40.0
million,
favorable foreign curren
cy impacts of $9.7 million,
higher product pricing of $7.1 million and favorable volume and mix of $1.2
million
.
Gross profit increas
ed $1
0.3
million from the prior-year same period, primari
ly driven by gros
s profit from acquisitions of $11.6
million,
favorable product pricing impac
ts of $7.1
million,
favorable foreign currency impacts of
$3.1 million and
high
er sales volumes and mix
of $0.8
million
, partially offset by
higher raw material costs of $11.4
million
and
higher manufacturing costs of $1.0
million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
119,116
|
|
$
|
69,160
|
|
$
|
49,956
|
|
72.2
|
%
|
Latin America
|
|
|
26,766
|
|
|
25,330
|
|
|
1,436
|
|
5.7
|
%
|
Asia Pacific
|
|
|
25,947
|
|
|
21,317
|
|
|
4,630
|
|
21.7
|
%
|
United States
|
|
|
12,819
|
|
|
10,758
|
|
|
2,061
|
|
19.2
|
%
|
Total
|
|
$
|
184,648
|
|
$
|
126,565
|
|
$
|
58,083
|
|
45.9
|
%
|
The net
sales increase of $58.1
million was driven by increases in sales from
all regions
. T
he increase in sales from EMEA
was primarily attributable
to
Endeka and
SPC,
each of which was acquired after the first quarter
of 2017, which contributed $27.5
million
and $10.1 million, respectively
, and higher sales of
all product lines
. The increase in sales from Asia Pacific was driven
by higher sales of frits and glazes
an
d porcelain enamel of $2.0
million and $1.3
million
, respectively
, and sales fro
m Endeka, which contributed $1.0
million
.
The increase in sales from
Latin America
was driven by
sales of
frits and glazes and digital inks of $1.0 million and $0.7
million, respectively, pa
rtially offset by lower sales of
porcelain ena
mel. T
he increase
in sales from
the United State
s was
fully attributable to higher
sales of porcelain enamel.
Performance Colors and Glass
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Acquisitions
|
|
Other
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
120,505
|
|
|
$
|
103,518
|
|
|
$
|
16,987
|
|
16.4
|
%
|
|
$
|
836
|
|
$
|
2,334
|
|
$
|
7,588
|
|
$
|
6,229
|
|
$
|
—
|
Segment gross profit
|
|
|
43,328
|
|
|
|
37,418
|
|
|
|
5,910
|
|
15.8
|
%
|
|
|
836
|
|
|
1,339
|
|
|
2,714
|
|
|
1,034
|
|
|
(13)
|
Gross profit as a % of segment net sales
|
|
|
36.0
|
%
|
|
|
36.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased compared with the prior-year same period, prim
arily driven
by $3.9
million in sales from Dip-Tech, which was acquired in the third quarter of 2017
,
and
$2.2
million in sales from Endeka
, which was acquired in the fourth quarter of 2017
. The increase in net sales was driven by
favorabl
e foreign currency impacts of $7.6
million,
sales from
acquisitions
of $6.2
million,
favorable volume and mix of $2.3
million
and
higher product pr
icing of $0.8
million. Gross profit increased from the prior-year same period, primarily due to
favorable
foreign currency impacts of $2.7 million,
favor
able manufacturing costs of $1.9
million
, higher sales volumes and mix of $1.3 million,
gross profit from
ac
quisitions of
$1.0 million
,
an
d higher product pricing of $0.8
million
, partially offset by
higher
raw material costs of
$1
.9 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
|
$
|
61,344
|
|
$
|
44,586
|
|
$
|
16,758
|
|
37.6
|
%
|
United States
|
|
|
37,091
|
|
|
39,104
|
|
|
(2,013)
|
|
(5.1)
|
%
|
Asia Pacific
|
|
|
16,515
|
|
|
14,633
|
|
|
1,882
|
|
12.9
|
%
|
Latin America
|
|
|
5,555
|
|
|
5,195
|
|
|
360
|
|
6.9
|
%
|
Total
|
|
$
|
120,505
|
|
$
|
103,518
|
|
$
|
16,987
|
|
16.4
|
%
|
The net sales increase of $17.0
million
was driven by higher sales from
EMEA
, Asia Pacific and Latin America, partially
offset by a decrease in sales from
the United States
. T
he increase in sales from EMEA
was primarily attributable to $5.0
million in sales from acquisi
tions and higher sa
les of
decoration products and electronic products of $4
.4 million
and $3.9 million, respectively
. The increase from Asia Pacific was
primarily
due to an increase in sales of automobile products. Sales from Latin America remained relatively flat.
The decrease in sales from the United States was primarily attributable
to
lower sales of
automobile
products
, partially
mitigated by an increase
in
sales from Dip-Tech
of $0.8 million.
Color Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Change due to
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
Volume /
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
Price
|
|
Mix
|
|
Currency
|
|
Acquisitions
|
|
Other
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales
|
|
$
|
100,379
|
|
|
$
|
90,472
|
|
|
$
|
9,907
|
|
11.0
|
%
|
|
$
|
3,185
|
|
$
|
1,089
|
|
$
|
5,634
|
|
$
|
—
|
|
$
|
—
|
Segment gross profit
|
|
|
32,149
|
|
|
|
28,182
|
|
|
|
3,967
|
|
14.1
|
%
|
|
|
3,185
|
|
|
1,724
|
|
|
1,584
|
|
|
—
|
|
|
(2,527)
|
Gross profit as a % of segment net sales
|
|
|
32.0
|
%
|
|
|
31.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
increased
compared with the prior-year same period
, primarily due to
higher sales of pigments and s
urface technology products of $7.0
million
and $3.1
million, respectively.
The increase in n
et sales
was driven by
favorable
foreign currency impacts of $5.6
million
, higher product pricing of $3.2
million
and
higher volumes and
mix of $1.1
milli
on.
Gross profit increased from the prior-year same period, primarily due to
higher product pricing of $3.2 million,
favorab
le sales volumes and mix of $1.7 million, favorable
foreign currency impacts of $1.6 million and
l
ower manufacturin
g costs of $1.1
milli
on
, partially offset by
higher raw material costs of $3.6
million
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
% Change
|
|
|
(Dollars in thousands)
|
|
|
|
Segment net sales by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
41,626
|
|
$
|
38,518
|
|
$
|
3,108
|
|
8.1
|
%
|
EMEA
|
|
|
40,483
|
|
|
35,177
|
|
|
5,306
|
|
15.1
|
%
|
Asia Pacific
|
|
|
9,938
|
|
|
8,258
|
|
|
1,680
|
|
20.3
|
%
|
Latin America
|
|
|
8,332
|
|
|
8,519
|
|
|
(187)
|
|
(2.2)
|
%
|
Total
|
|
$
|
100,379
|
|
$
|
90,472
|
|
$
|
9,907
|
|
11.0
|
%
|
The net sales increase of $9
.9 million was driven
by higher sales from EMEA
, United States, and Asia Pacific.
The higher sales from EMEA
and Asia Pacific were
driven by
sales of pigment products
. The increase in sales from the United States
was primarily driven by sales of $3.2 million of
sur
face technology products
.
Summary of Cash Flows for the
three
months ended March 2018
and
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
|
(Dollars in thousands)
|
Net cash (used in) provided by operating activities
|
|
$
|
(34,285)
|
|
$
|
1,630
|
|
$
|
(35,915)
|
Net cash used in investing activities
|
|
|
(23,012)
|
|
|
(6,764)
|
|
|
(16,248)
|
Net cash provided by financing activities
|
|
|
45,780
|
|
|
51,935
|
|
|
(6,155)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,262
|
|
|
446
|
|
|
816
|
(Decrease) increase in cash and cash equivalents
|
|
$
|
(10,255)
|
|
$
|
47,247
|
|
$
|
(57,502)
|
The following table includes d
etails of net cash
(used in)
provided by ope
rating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
2018
|
|
2017
|
|
$ Change
|
|
|
(Dollars in thousands)
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,598
|
|
$
|
22,121
|
|
$
|
1,477
|
Gain on sale of assets and business
|
|
|
229
|
|
|
419
|
|
|
(190)
|
Depreciation and amortization
|
|
|
13,392
|
|
|
11,375
|
|
|
2,017
|
Interest amortization
|
|
|
870
|
|
|
479
|
|
|
391
|
Restructuring and impairment
|
|
|
2,429
|
|
|
2,828
|
|
|
(399)
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
3,905
|
|
|
(3,905)
|
Accounts receivable
|
|
|
(32,657)
|
|
|
(26,619)
|
|
|
(6,038)
|
Inventories
|
|
|
(28,820)
|
|
|
(17,114)
|
|
|
(11,706)
|
Accounts payable
|
|
|
(7,139)
|
|
|
8,188
|
|
|
(15,327)
|
Other current assets and liabilities, net
|
|
|
(6,735)
|
|
|
(3,265)
|
|
|
(3,470)
|
Other adjustments, net
|
|
|
548
|
|
|
(687)
|
|
|
1,235
|
Net cash (used in) provided by operating activities
|
|
$
|
(34,285)
|
|
$
|
1,630
|
|
$
|
(35,915)
|
Cash flows from
operating activities.
Cash fl
ows provided by
operating activities
de
creased
$35.9
million in the first three months of 2018
compared with the prior-year same period
. The decrease
was
primarily
due to
higher
cash outflows
for net working capital of $33.1
million and
other current assets and liabilities
of
$3.5
million
.
Cash flows from investing activities.
Cash flows used in i
nvesting activities increased
$16
.2 million in the first three months of 2018
compared with the
prior-year same period.
The increase was primarily due to higher cash outflows
for capital expenditures of $13
.9 million, and
higher cash outflows for business acquisitions, net of cash acq
uired of $2.4
million.
Cash flows from financing activities.
Cash flows provided by fin
ancing activities de
creased
$6.2
million in the first three
month
s of 2018
compared with the prior-year same period
. As further disc
ussed in Note 8, during the three months ended March 31
, 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.
Further, compared to the prior-
year same period, net borrowings
unde
r loans payable was $13.7
million higher
, partially offset by
payment of
debt issuance costs related to the Credit Facility
, during the three months ended March 31, 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 E
uro 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 co
mmitments and/or term loans. The Company can also raise
certain additional debt
or credit facilities
subject to satisfaction of certain covenant levels.
Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the 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 March 31, 2018
, the Company had
borrowed
$353
.
9
million
under the
secu
red
term loan facility at an interest rate
of 4.38
% and €
247
.5 million (approximately $305.1
million) under the secured E
uro term loan facility at an interest rate of 2.75%.
At March 31, 2018
, there were no additional borrowings available under the term loan facilities.
We entered into interest rate swap agreements in the second
quarter of 2017. These swaps converted $150 million and
€90 million of our term loans from variable interest rates to fixed interest rates. At March 31, 2018, the effective interest rate for the term loan facilities after adjusting for the interest rate swap was 4.27% for the secured term loan facility and 3.00% for
the Euro term loan facility.
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 March 31, 2018
,
there were
$118.2
million
borrowings under the revolving credit line
at an interest rate
of
4.04
%
. After
reductions for outstanding letters of credit secured by these facilities, we
had
$
277.2
million
of additional
borrowings available under the rev
olving credit facilities at
March 31, 2018
.
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 outsta
nding under the Credit Facility
may be accelerated and become immed
iatel
y due and payable. At March 31, 2018
, 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 $0.4
million
and $0.2 million
for the
three months ended
March 31, 2018
and
2017
, respectively
.
We had on hand precious metals owned by participants in our precious metals program of
$39.6
million at
March 31, 2018
, and
$37.7
million at
December 31, 2017
, measured at fair value based on market prices for ide
ntical assets
.
The consignment agreements under our precious metals program involve short-term commitments that typically mature within 30 to 90 days of each transaction and are typically renewed on an ongoing basis. As a result, the Company relies on the continued willingness of financial institutions to participate in these arrangements to maintain this source of liquidity. On occasion, we have been required to deliver cash collateral. While no deposits were outstanding at
March 31, 2018
, or
December 31, 2017
,
we may be required to furnish cash collateral in the future based on the quantity and market value of the precious metals under consignment and the amount of collateral-free lines provided by the financial institutions. The amount of cash collateral required is subject to review by the financial institutions and can be changed at any time at their discretion, based in part on their assessment of our creditworthiness.
Bank Guarantees and Standby Letters of Credit.
At
March 31, 2018
, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled
$8.5
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
$45.6
million and $64.5
million at
March 31, 2018
, and December 31, 2017
, respectively. We had
$13.1
million and $39.4
million
of additional borrowings available under these lines at
March 31, 2018
, and December 31, 2017
, respectively.
Liquidity Requirements
Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under the revolving credit facility, and cash flows from operating activities. As of
March 31, 2018
,
we had
$53.3
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 financi
ng arrangements. Cash flows (used in) provided by
operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. We had additional borrowing capacity of
$290.3
million
at
March 31, 2018
, and
$356.7
million at
December 31, 2017
, 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 C
redit
F
acility restrict
s
the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.
As of
March 31, 2018
,
we were in compliance with our maximum leverage ratio covenant of 4.
25x as our actual ratio was 2.79
x
, providing $94.2
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
$18
0 million for
rolling four quarters, based on reasonably consistent net debt levels with those as of
March 31, 2018
, we could become unable to maintain compliance with our leverage ratio covenant.
In such case, our lenders could demand immediate payment of outstanding amounts and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all.
Difficulties experienced in global capital markets could affect the ability or willingness of counterparties to perform under our various lines of credit, forward contracts, and precious metals program. These counterparties are major, reputable, multinational institutions, all having investment-grade credit ratings. Accordingly, we do not anticipate counterparty default. However, an interruption in access to external financing could adversely affect our business prospects and financial condition.
We assess on an ongoing basis our portfolio of businesses, as well as our financial and capital structure, to ensure that we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate the possible divestiture of businesses that are not critical to our core strategic objectives and, where appropriate, pursue the sale 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
entered into a
material
definitive agreement or
closed on
those transactions.
Critical Accounting Policies and Their Application
There were no material changes to our critical accounting policies described in “Critical Accounting Policies” within Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Impact of Newly Issued Accounting Pronouncements
Refer to Note 2 to the condensed consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of accounting standards we recently 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, 2017
.