Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - FERRO CORPFinancial_Report.xls
EX-32.1 - EX-32.1 - FERRO CORPfoe-20140930ex3217c2d91.htm
EX-31.2 - EX-31.2 - FERRO CORPfoe-20140930ex312cf500d.htm
EX-31.1 - EX-31.1 - FERRO CORPfoe-20140930ex3111f0c4e.htm
EX-32.2 - EX-32.2 - FERRO CORPfoe-20140930ex3229af3db.htm

 

 

 

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

FORM 10-Q

 

 

 

 

 

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

 

or

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

 

Commission File Number 1-584

 

 

 

FERRO CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

 

 

 

 

Ohio

(State or other jurisdiction of

incorporation or organization)

 

34-0217820

(I.R.S. Employer Identification No.)

 

 

 

 

 

 

 

6060 Parkland Boulevard

Suite 250

Mayfield Heights, OH

(Address of principal executive offices)

 

44124

(Zip Code)

 

 

 

 

 

 

 

216-875-5600

(Registrant’s telephone number, including area code)

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES NO

At September 30, 2014, there were 86,985,899 shares of Ferro Common Stock, par value $1.00, outstanding.

 

 

 

 

 

 

 


 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

Page

PART I 

Item 1. Financial Statements (Unaudited) 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

22 

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

42 

Item 4. Controls and Procedures 

43 

PART II 

Item 1. Legal Proceedings 

44 

Item 1A. Risk Factors 

44 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

44 

Item 3. Defaults Upon Senior Securities 

44 

Item 4. Mine Safety Disclosures 

44 

Item 5. Other Information 

44 

Item 6. Exhibits 

44 

 

 

Exhibit 10.1

 

Exhibit 31.1

 

Exhibit 31.2

 

Exhibit 32.1

 

Exhibit 32.2

 

EX-101 Instance Document

 

EX-101 Schema Document

 

EX-101 Calculation Linkbase Document

 

EX-101 Labels Linkbase Document

 

EX-101 Presentation Linkbase Document

 

EX-101 Definition Linkbase Document

 

 

 

 

 

2


 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements (Unaudited)

 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

275,754 

 

$

298,083 

 

$

850,698 

 

$

912,738 

Cost of sales

 

 

202,950 

 

 

225,980 

 

 

624,487 

 

 

701,740 

Gross profit

 

 

72,804 

 

 

72,103 

 

 

226,211 

 

 

210,998 

Selling, general and administrative expenses

 

 

51,716 

 

 

52,589 

 

 

152,345 

 

 

165,471 

Restructuring and impairment charges

 

 

1,521 

 

 

3,562 

 

 

7,829 

 

 

26,086 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

3,635 

 

 

5,039 

 

 

12,819 

 

 

15,343 

Interest earned

 

 

(23)

 

 

(48)

 

 

(52)

 

 

(171)

Loss on extinguishment of debt

 

 

14,352 

 

 

 —

 

 

14,352 

 

 

 —

Foreign currency (gains) losses, net

 

 

(330)

 

 

1,305 

 

 

1,043 

 

 

4,086 

Miscellaneous (income) expense, net

 

 

(180)

 

 

(470)

 

 

4,038 

 

 

(10,178)

Income before income taxes

 

 

2,113 

 

 

10,126 

 

 

33,837 

 

 

10,361 

Income tax expense

 

 

4,680 

 

 

312 

 

 

12,347 

 

 

3,559 

(Loss) income from continuing operations

 

 

(2,567)

 

 

9,814 

 

 

21,490 

 

 

6,802 

Income from discontinued operations, net of taxes

 

 

50,124 

 

 

3,230 

 

 

53,188 

 

 

4,780 

Net income

 

 

47,557 

 

 

13,044 

 

 

74,678 

 

 

11,582 

Less: Net income attributable to noncontrolling interests

 

 

92 

 

 

392 

 

 

49 

 

 

177 

Net income attributable to Ferro Corporation common shareholders

 

$

47,465 

 

$

12,652 

 

$

74,629 

 

$

11,405 

(Loss) earnings per share attributable to Ferro Corporation common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.03)

 

$

0.11 

 

$

0.25 

 

$

0.08 

Discontinued operations

 

 

0.58 

 

 

0.04 

 

 

0.61 

 

 

0.06 

 

 

$

0.55 

 

$

0.15 

 

$

0.86 

 

$

0.14 

Diluted (loss) earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.03)

 

$

0.11 

 

$

0.24 

 

$

0.08 

Discontinued operations

 

 

0.58 

 

 

0.04 

 

 

0.60 

 

 

0.05 

 

 

$

0.55 

 

$

0.15 

 

$

0.84 

 

$

0.13 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2014

 

2013

 

2014

 

2013

 

 

(Dollars in thousands)

Net income

 

$

47,557 

 

$

13,044 

 

$

74,678 

 

$

11,582 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(12,242)

 

 

4,226 

 

 

(12,732)

 

 

(3,820)

Postretirement benefit liabilities loss

 

 

(44)

 

 

(34)

 

 

(94)

 

 

(171)

Other comprehensive (loss) income, net of tax

 

 

(12,286)

 

 

4,192 

 

 

(12,826)

 

 

(3,991)

Total comprehensive income

 

 

35,271 

 

 

17,236 

 

 

61,852 

 

 

7,591 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

159 

 

 

415 

 

 

(391)

 

 

323 

Comprehensive income attributable to Ferro Corporation

 

$

35,112 

 

$

16,821 

 

$

62,243 

 

$

7,268 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

 

 

(Dollars in thousands)

ASSETS

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

95,286 

 

$

28,328 

Accounts receivable, net

 

 

229,942 

 

 

238,278 

Inventories

 

 

157,764 

 

 

144,780 

Deferred income taxes

 

 

6,775 

 

 

6,511 

Other receivables

 

 

20,600 

 

 

19,963 

Other current assets

 

 

22,527 

 

 

16,214 

Current assets held-for-sale

 

 

86,480 

 

 

101,315 

Total current assets

 

 

619,374 

 

 

555,389 

Other assets

 

 

 

 

 

 

Property, plant and equipment, net

 

 

201,820 

 

 

225,255 

Goodwill

 

 

62,443 

 

 

63,473 

Amortizable intangible assets, net

 

 

17,710 

 

 

13,027 

Deferred income taxes

 

 

17,793 

 

 

19,283 

Other non-current assets

 

 

61,139 

 

 

59,663 

Non-current assets held-for-sale

 

 

54,530 

 

 

72,102 

Total assets

 

$

1,034,809 

 

$

1,008,192 

LIABILITIES AND EQUITY

Current liabilities

 

 

 

 

 

 

Loans payable and current portion of long-term debt

 

$

8,402 

 

$

44,729 

Accounts payable

 

 

134,937 

 

 

120,641 

Accrued payrolls

 

 

34,313 

 

 

42,320 

Accrued expenses and other current liabilities

 

 

66,504 

 

 

66,026 

Current liabilities held-for-sale

 

 

30,303 

 

 

40,015 

Total current liabilities

 

 

274,459 

 

 

313,731 

Other liabilities

 

 

 

 

 

 

Long-term debt, less current portion

 

 

300,772 

 

 

267,469 

Postretirement and pension liabilities

 

 

85,174 

 

 

119,600 

Other non-current liabilities

 

 

30,393 

 

 

30,656 

Non-current liabilities held-for-sale

 

 

2,863 

 

 

2,893 

Total liabilities

 

 

693,661 

 

 

734,349 

Equity

 

 

 

 

 

 

Ferro Corporation shareholders’ equity:

 

 

 

 

 

 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 86.9 million and 86.7 million shares outstanding at September 30, 2014, and December 31, 2013, respectively

 

 

93,436 

 

 

93,436 

Paid-in capital

 

 

316,133 

 

 

318,055 

Retained earnings (deficit)

 

 

59,965 

 

 

(14,664)

Accumulated other comprehensive (loss) income

 

 

(3,893)

 

 

8,493 

Common shares in treasury, at cost

 

 

(136,221)

 

 

(143,802)

Total Ferro Corporation shareholders’ equity

 

 

329,420 

 

 

261,518 

Noncontrolling interests

 

 

11,728 

 

 

12,325 

Total equity

 

 

341,148 

 

 

273,843 

Total liabilities and equity

 

$

1,034,809 

 

$

1,008,192 

 

See accompanying notes to condensed consolidated financial statements.

 

 

5


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferro Corporation Shareholders

 

 

 

 

 

 

 

 

Common Shares

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

in Treasury

 

 

 

 

 

 

 

Retained

 

Other

 

Non-

 

 

 

 

 

 

 

 

 

 

Common

 

Paid-in

 

Earnings

 

Comprehensive

 

controlling

 

Total

 

 

Shares

 

Amount

 

Stock

 

Capital

 

(Deficit)

 

Income (Loss)

 

Interests

 

Equity

 

 

(In thousands)

Balances at December 31, 2012

 

6,962 

 

$

(151,605)

 

$

93,436 

 

$

321,652 

 

$

(86,606)

 

$

16,650 

 

$

13,147 

 

$

206,674 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

11,405 

 

 

 —

 

 

177 

 

 

11,582 

Other comprehensive (loss) income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,137)

 

 

146 

 

 

(3,991)

Stock-based compensation transactions

 

(129)

 

 

3,997 

 

 

 —

 

 

(1,436)

 

 

 —

 

 

 —

 

 

 —

 

 

2,561 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(125)

 

 

(125)

Balances at September 30, 2013

 

6,833 

 

 

(147,608)

 

 

93,436 

 

 

320,216 

 

 

(75,201)

 

 

12,513 

 

 

13,345 

 

 

216,701 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2013

 

6,730 

 

 

(143,802)

 

 

93,436 

 

 

318,055 

 

 

(14,664)

 

 

8,493 

 

 

12,325 

 

 

273,843 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

74,629 

 

 

 —

 

 

49 

 

 

74,678 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12,386)

 

 

(440)

 

 

(12,826)

Stock-based compensation transactions

 

 —

 

 

7,581 

 

 

 —

 

 

(1,922)

 

 

 —

 

 

 —

 

 

 —

 

 

5,659 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(206)

 

 

(206)

Balances at September 30, 2014

 

6,730 

 

$

(136,221)

 

$

93,436 

 

$

316,133 

 

$

59,965 

 

$

(3,893)

 

$

11,728 

 

$

341,148 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2014

 

2013

 

 

(Dollars in thousands)

Cash flows from operating activities

 

 

 

 

 

 

Net cash provided by operating activities

 

$

41,900 

 

$

3,003 

Cash flows from investing activities

 

 

 

 

 

 

Capital expenditures for property, plant and equipment and other long lived assets

 

 

(40,996)

 

 

(21,187)

Proceeds from sale of businesses, net

 

 

88,337 

 

 

16,912 

Proceeds from sale of assets

 

 

5,911 

 

 

16,034 

Acquisition of Turkey commercial assets

 

 

(6,726)

 

 

 —

Other investing activities

 

 

 —

 

 

1,119 

Net cash provided by investing activities

 

 

46,526 

 

 

12,878 

Cash flows from financing activities

 

 

 

 

 

 

Net (repayments) borrowings under loans payable (1)

 

 

(42,529)

 

 

9,223 

Proceeds from revolving credit facility

 

 

377,844 

 

 

368,317 

Proceeds from term loan facility

 

 

300,000 

 

 

 —

Principal payments on revolving credit facility

 

 

(387,049)

 

 

(351,404)

Extinguishment of convertible senior notes

 

 

 —

 

 

(35,066)

Repayment of 7.875% Senior Notes

 

 

(260,451)

 

 

 —

Payment of debt issuance costs

 

 

(6,834)

 

 

 —

Other financing activities

 

 

54 

 

 

(734)

Net cash used for financing activities

 

 

(18,965)

 

 

(9,664)

Effect of exchange rate changes on cash and cash equivalents

 

 

(2,503)

 

 

60 

Increase in cash and cash equivalents

 

 

66,958 

 

 

6,277 

Cash and cash equivalents at beginning of period

 

 

28,328 

 

 

29,576 

Cash and cash equivalents at end of period

 

$

95,286 

 

$

35,853 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

23,863 

 

$

25,484 

Income taxes

 

$

4,329 

 

$

2,905 

 

(1) Includes cash flows related to our domestic accounts receivable program, international accounts receivable sales programs as well as loans payable to banks.

See accompanying notes to condensed consolidated financial statements.

 

 

7


 

Ferro Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

1.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

The Company owns 51% of an operating affiliate in Venezuela that is accounted for as a fully consolidated subsidiary of Ferro and had $7.8 million of assets and $3.2 million of liabilities that are included in the condensed consolidated balance sheets at September 30, 2014.  In the first quarter of 2014, the Venezuelan government expanded and introduced alternative market mechanisms for monetary exchange between the local currency, the Bolivar, and the United States Dollar. As a result of changes in the political and economic environment in the country, we began to remeasure the monetary assets and liabilities of the entity utilizing the most relevant exchange mechanism available.  The impact of the remeasurement in the first quarter of 2014, prior to adjustment for losses allocated to our noncontrolling interest partner was a loss of $1.6 million, which is recorded within foreign currency (gains) losses, net within our condensed consolidated statement of operations for the nine months ended September 30, 2014.  In the event that other markets become more relevant in future periods, additional losses or gains on remeasurement could occur.

 

During the second quarter of 2014, substantially all of the assets and liabilities of the Specialty Plastics and Polymer Additives reportable segments were classified as held-for-sale in the accompanying condensed consolidated balance sheets. As further discussed in Note 4, the Specialty Plastics sale closed on July 1, 2014. Therefore, the Specialty Plastics and Polymer Additives operating results, net of tax, and assets and liabilities have been classified as discontinued operations in the accompanying condensed consolidated statements of operations, balance sheets and these notes for all periods presented. Refer to Note 12 for further details.

 

Operating results for the three and nine months ended  September 30, 2014, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2014.  

 

 

2.    Recent Accounting Pronouncements

Accounting Standards Adopted in the period ended September 30, 2014 

On January 1, 2014, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2013-05, Parent’s Accounting for the Cumulative Translation Adjustments upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investments in a Foreign Entity, which is codified in ASC Topic 830, Foreign Currency Matters. This pronouncement clarifies the application of Subtopic 810-10, Consolidation—Overall, and Subtopic 830-30, Foreign Currency Matters—Translation of Financial Statements, related to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a foreign entity, and the treatment of business combinations achieved in stages involving a foreign entity. The adoption of this pronouncement did not have a material effect on our condensed consolidated financial statements.

New Accounting Standards

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,  which is codified in ASC Topic 205, Presentation of Financial Statements, and ASC Topic 360, Property, Plant, and Equipment. This pronouncement changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, and

8


 

changes the criteria and enhances disclosures for reporting discontinued operations. The pronouncement is to be applied prospectively, and is effective for our fiscal year that begins January 1, 2015. We do not expect that the adoption of this pronouncement will have a material effect on our consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2014-09, “Revenue from Contracts with Customers: Topic 606”. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. This standard is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is in the process of assessing the impact the adoption of this ASU will have on our consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. The Company is in the process of determining the impact of this ASU on our consolidated financial statements.

 

 

3.    Inventories

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

 

 

(Dollars in thousands)

Raw materials

 

$

44,990 

 

$

45,542 

Work in process

 

 

32,960 

 

 

29,436 

Finished goods

 

 

79,814 

 

 

69,802 

Total inventories

 

$

157,764 

 

$

144,780 

 

In the production of some of our products, we use precious metals, some of which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $0.2 million and $0.7 million for the three months ended September 30, 2014 and 2013, respectively, and were $0.7 million and $2.5 million for the nine months ended September 30, 2014 and 2013, respectively. We had on hand precious metals owned by participants in our precious metals consignment program of $25.3 million at September 30, 2014, and $30.8 million at December 31, 2013, measured at fair value based on market prices for identical assets and net of credits.

 

 

4.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $415.1 million at September 30, 2014, and $408.5 million at December 31, 2013. The December 31, 2013, amount has been adjusted to appropriately reflect all balances that are classified as held-for-sale as of September 30, 2014. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $7.9 million at September 30, 2014, and $6.6 million at September 30, 2013

 

During the first quarter of 2013, we sold assets related to our solar pastes product line. The consideration for the assets sold was $10.9 million, and resulted in a gain on the transaction of $9.0 million which is included within miscellaneous (income) expense, net  within the condensed consolidated statement of operations for the nine months ended September 30, 2013.

 

9


 

During the fourth quarter of 2013, we tested certain property, plant and equipment held for use for impairment under ASC Topic 360, Property, Plant and Equipment.  Triggered by a change in expected use of one of our Performance Coatings operating facilities in Suzhou, China in the fourth quarter of 2013, we performed the two step impairment analysis as prescribed by ASC Topic 360.  As that analysis indicated that the carrying value of those assets was no longer recoverable, we estimated the fair value of the assets within the asset group using adjusted market prices for similar assets, a Level 3 classification in the fair value hierarchy.  As a result of the analysis, assets held for use with a carrying value of $20.5 million were written down to $13.0 million.  The impairment charge of $7.5 million is included in restructuring and impairment charges in our statements of operations for the year-ended December 31, 2013.

 

During the second quarter of 2014, we sold non-operating real estate assets located in South Plainfield, New Jersey and in Criciuma, Brazil for gains of $1.2 million and $0.4 million, respectively.  The gains on sale were offset by losses associated with the write-off of tenant improvements and the loss on sale of our corporate related real estate of $1.3 million and $3.5 million, respectively.  The net loss of $3.3 million related to these transactions is recorded in miscellaneous (income) expense, net within our condensed consolidated statements of operations for the nine months ended September 30, 2014.

 

As further discussed in Note 12 - Discontinued Operations, during the second quarter of 2014, the assets located at our Antwerp, Belgium manufacturing facility were classified as held-for-sale under ASC Topic 360, Property, Plant and Equipment.   As such, these assets were tested for impairment comparing the fair value of the assets less costs to sell to the carrying value.  The fair value was determined using both the market approach and income approach, utilizing Level 3 measurements within the fair value hierarchy, which indicated the fair value less costs to sell is less than the carrying value.  As a result of the analysis, assets held-for-sale with a carrying value of $61.5 million were written down to $47.1 million.  During the third quarter of 2014, we recorded an impairment charge of approximately $7.2 million, which represents the additional capital expenditures during the quarter related to the construction of the facility.  The additional reduction in fair value from $47.1 million in the prior period to $38.3 million at September 30, 2014 is attributable to the change in operational working capital during the period. The impairment charges of $7.2 million and $21.6 million are included in income from discontinued operations, net of taxes in our condensed consolidated statements of operations for the three and nine months ended September 30, 2014, respectively.

 

The following table presents information about the Company's impairment charges on assets that were measured on a fair value basis for the nine months ended September 30, 2014 and for the year ended December 31, 2013.  The table also indicates the fair value hierarchy of the valuation techniques used by the Company to determine the fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

Total

Description

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(Losses)

 

 

(Dollars in thousands)

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

38,302 

 

$

38,302 

 

$

(21,566)

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

Assets held for use

 

$

 —

 

$

 —

 

$

13,000 

 

$

13,000 

 

$

(7,484)

 

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

The following table provides quantitative information about the significant unobservable inputs used by the Company to determine the fair value of non-recurring items (in thousands):

10


 

 

Quantitative Information about Level 3 Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

Valuation Technique

 

Unobservable input

 

Range

September 30, 2014

 

 

 

 

 

 

 

 

 

Impairment of assets held for sale

 

$

38,302 

 

Discounted Cash Flow

 

Discount Rate

 

15% - 20%

 

 

 

 

 

Market Comparable

 

Market Comparable Values

 

N/A

December 31, 2013

 

 

 

 

 

 

 

 

 

Impairment of assets held for use

 

$

13,000 

 

Income Capitalization

 

Market Capitalization Rate

 

10%

 

 

 

 

 

Market Comparable (A)

 

Market Comparable Values

 

N/A

 

(A)

Fair value measurements based on adjusted market prices were developed by a third-party source using comparable sales values adjusted for the date of sale, age, condition, size, location, physical characteristics and circumstances influencing the sale, subject to the Company's corroboration for reasonableness. The Company does not have access to certain unobservable inputs used by this third party to determine the estimated fair value.

 

 

5.    Debt

Loans payable and current portion of long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

 

 

(Dollars in thousands)

Loans payable

 

$

4,221 

 

$

2,561 

Domestic accounts receivable asset securitization program

 

 

 —

 

 

41,000 

Current portion of long-term debt

 

 

4,181 

 

 

1,168 

Loans payable and current portion of long-term debt

 

$

8,402 

 

$

44,729 

 

Long-term debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2014

 

2013

 

 

(Dollars in thousands)

7.875% Senior Notes

 

$

 —

 

$

250,000 

Revolving credit facility

 

 

 —

 

 

9,204 

Term loan facility

 

 

300,000 

 

 

 —

Capital lease obligations

 

 

4,453 

 

 

5,816 

Other notes

 

 

500 

 

 

3,617 

Total long-term debt

 

 

304,953 

 

 

268,637 

Current portion of long-term debt

 

 

(4,181)

 

 

(1,168)

Long-term debt, less current portion

 

$

300,772 

 

$

267,469 

 

11


 

Receivable Sales Programs

We had an asset securitization program for Ferro’s U.S. trade accounts receivable where we sold undivided variable percentage interests in our domestic receivables to various purchasers, and could obtain up to $50 million in the form of cash or letters of credit. Advances received under this program were accounted for as borrowings secured by the receivables and are included in net cash provided by financing activities. The purchasers had no recourse to Ferro’s other assets for failure of payment of the receivables as a result of the lack of creditworthiness, or financial inability to pay, of the related obligor.  In May 2014, the program expired and amounts outstanding were repaid at that time.

In 2011, we entered into several international programs to sell with recourse trade accounts receivable to financial institutions. Advances received under these programs are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. During the fourth quarter of 2013, the international factoring programs expired and were not renewed.

New Credit Facility

On July 31, 2014, the Company entered into a new credit facility (the “New Credit Facility”) with a group of lenders to refinance the majority of its then outstanding debt.  The New Credit Facility consists of a $200 million secured revolving line of credit with a term of five years and a $300 million secured term loan facility with a term of seven years. The New Credit Facility replaces the prior $250 million revolving credit facility (described below) and provided funding to repurchase the 7.875% Senior Notes (described below). Subject to certain conditions, the Company can request up to $200 million of additional commitments under the New Credit Facility, though the lenders are not required to provide such additional commitments. In addition, up to $100 million of the revolving line of credit will be available to certain of the Company’s subsidiaries in the form of revolving loans denominated in Euros.

Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the New Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of most of the Company’s U.S. subsidiaries and 65% of most of the stock of the Company’s first tier foreign subsidiaries.

Interest Rate – Term Loan:  The interest rates applicable to the term loans will be, at the Company’s option, equal to either a base rate or a London Interbank Offered Rate (“LIBOR”) rate plus, in both cases, an applicable margin. 

·

The base rate will be the highest of (i) the federal funds rate plus 0.50%, (ii) PNC’s prime rate or (iii) the daily LIBOR rate plus 1.00%

·

The applicable margin for base rate loans is 2.25%.  

·

The LIBOR rate will be set as quoted by Bloomberg and shall not be less than 0.75%.

·

The applicable margin for LIBOR rate loans is 3.25%.

·

For LIBOR rate loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration. 

At September 30, 2014, the Company had borrowed $300 million under the term loan facility at an annual rate of 4.0%.  There were no additional borrowings available under the 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 an applicable variable margin.  The variable margin will be based on the ratio of (a) the Company’s total consolidated debt outstanding at such time to (b) the Company’s consolidated EBITDA computed for the period of four consecutive fiscal quarters most recently ended. 

·

The base rate will be the highest of (i) the federal funds rate plus 0.50%, (ii) PNC’s prime rate or (iii) the daily LIBOR rate plus 1.00%

·

The applicable margin for base rate loans will vary between 1.50% and 2.00%.

·

The LIBOR rate will be set as quoted by Bloomberg for U.S. Dollars.

·

The applicable margin for LIBOR Rate Loans will vary between 2.50% and 3.00%.

·

For LIBOR rate loans, the Company may choose to set the duration on individual borrowings for periods of one, two, three or six months, with the interest rate based on the applicable LIBOR rate for the corresponding duration.

12


 

At September 30, 2014, there were no borrowings under the revolving credit line. After reductions for outstanding letters of credit secured by these facilities, we had $194.7 million of additional borrowings available at September 30, 2014.

The New 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 New Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.

    Specific to the revolving credit facility, the Company is subject to financial covenants regarding the Company’s outstanding net indebtedness and interest coverage ratios.

If an event of default occurs, all amounts outstanding under the New Credit Facility may be accelerated and become immediately due and payable.  At September 30, 2014, we were in compliance with the covenants of the New Credit Facility.

7.875% Senior Notes

In 2010, we issued $250 million of 7.875% Senior Notes due 2018 (the “Senior Notes”). The Senior Notes were issued at par and bore interest at a rate of 7.875% per year, payable semi-annually in arrears on February 15 and August 15 of each year.  In July 2014, the Company commenced a tender offer for any and all of its outstanding Senior Notes at a price of $1,043 per $1,000 principal amount of Senior Notes.  Approximately $143 million of the Senior Notes were purchased through the tender offer and the remaining $107 million were redeemed in the third quarter of 2014, at prices ranging from 100% to 103.938% of the principal amount, in accordance with the debt agreement.  The redemption utilized proceeds from our new credit facility, as discussed above, and the proceeds from the sale of the Specialty Plastics business, as discussed in Note 4.

In conjunction with the redemption of the Senior Notes, we recorded a charge of $13.5 million, which is comprised of a repurchase premium of $10.5 million and the write-off of unamortized issuance costs of $3.0 million. This charge is included within loss on extinguishment of debt in the condensed consolidated statements of operations for the three and nine months ended September 30, 2014, respectively.

Revolving Credit Facility

In 2010, we entered into the Third Amended and Restated Credit Agreement with a group of lenders for a five-year, $350 million multi-currency senior revolving credit facility (the “2010 Credit Facility”), which was amended in March of 2013  (the "2013 Amended Credit Facility") to provide additional operating flexibility.   In August 2014, the 2013 Amended Credit Facility was terminated and repaid, using proceeds from the new credit facility, as discussed above. In conjunction with the termination, the Company recorded a charge of $0.9 million related to the write-off of unamortized issuance costs, which is included within loss on extinguishment of debt in our condensed consolidated statements of operations for the three and nine months ended September 30, 2014,  respectively. 

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 $12.6 million and $17.1 million at September 30, 2014 and December 31, 2013, respectively. The unused portions of these lines provided additional liquidity of $10.6 million at September 30, 2014, and $10.1 million at December 31, 2013.

 

 

13


 

6.    Financial Instruments

The following financial instrument assets (liabilities) are presented at their respective carrying amount, fair value and classification within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

Carrying

 

Fair Value

 

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

(Dollars in thousands)

Cash and cash equivalents

 

$

95,286 

 

$

95,286 

 

$

95,286 

 

$

 —

 

$

 —

Loans payable

 

 

(4,221)

 

 

(4,221)

 

 

 —

 

 

(4,221)

 

 

 —

Term loan facility

 

 

(300,000)

 

 

(303,504)

 

 

 —

 

 

(303,504)

 

 

 —

Other long-term notes payable

 

 

(4,681)

 

 

(3,867)

 

 

 —

 

 

(3,867)

 

 

 —

Foreign currency forward contracts, net

 

 

7,808 

 

 

7,808 

 

 

 —

 

 

7,808 

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

Carrying

 

Fair Value

 

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

(Dollars in thousands)

Cash and cash equivalents

 

$

28,328 

 

$

28,328 

 

$

28,328 

 

$

 —

 

$

 —

Loans payable

 

 

(43,561)

 

 

(43,561)

 

 

 —

 

 

(43,561)

 

 

 —

7.875% Senior Notes

 

 

(250,000)

 

 

(266,250)

 

 

(266,250)

 

 

 —

 

 

 —

Revolving credit facility

 

 

(9,204)

 

 

(9,496)

 

 

 —

 

 

(9,496)

 

 

 —

Other long-term notes payable

 

 

(3,617)

 

 

(2,988)

 

 

 —

 

 

(2,988)

 

 

 —

Foreign currency forward contracts, net

 

 

(2,255)

 

 

(2,255)

 

 

 —

 

 

(2,255)

 

 

 —

 

The fair values of cash and cash equivalents are based on the fair values of identical assets. The fair values of loans payable are based on the present value of expected future cash flows and approximate their carrying amounts due to the short periods to maturity.  The fair values of the revolving credit facility and the term loan facility are based on the present value of expected future cash flows and interest rates that would be currently available to the company for issuance of similar types of debt instruments with similar terms and remaining maturities adjusted for the Company's non-performance risk.

Foreign currency forward contracts.  We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges. Gains and losses on these foreign currency forward contracts are netted with gains and losses from currency fluctuations on transactions arising from international trade and reported as foreign currency (gains) losses, net in the condensed consolidated statements of operations. We recognized net foreign currency gains of $0.3 million and net foreign currency losses of $1.0 million in the three and nine months ended September 30, 2014, respectively, which are primarily comprised of the foreign exchange impact on transactions in countries where it is not economically feasible for us to enter into hedging arrangements and hedging inefficiencies, such as timing of transactions. We recognized net gains of $8.7 million and net gains of $11.0 million in the three and nine months ended September 30, 2014, respectively, arising from the change in fair value of our financial instruments, which offset the related net gains and losses on international trade transactions. The fair values of these contracts are based on market prices for comparable contracts. The notional amount of foreign currency forward contracts was $259.5 million at September 30, 2014, and $244.9 million at December 31, 2013.

The following table presents the effect on our condensed consolidated statements of operations for the three months ended September 30, 2014 and 2013, respectively, of our foreign currency forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain (Loss)

 

 

 

 

Recognized in Earnings

 

 

 

 

Three Months Ended

 

 

 

 

September 30,

 

 

 

 

2014

 

2013

 

Location of Gain (Loss) in Earnings

 

 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

8,660 

 

$

(2,652)

 

Foreign currency (gains) losses, net

 

14


 

The following table presents the effect on our condensed consolidated statements of operations for the nine months ended September 30, 2014 and 2013, respectively, of our foreign currency forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain (Loss)

 

 

 

 

Recognized in Earnings

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

 

2014

 

2013

 

Location of Gain (Loss) in Earnings

 

 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

10,967 

 

$

(6,652)

 

Foreign currency (gains) losses, net

 

The following table presents the fair values on our condensed consolidated balance sheets of foreign currency forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

2014

 

2013

 

Balance Sheet Location

 

 

(Dollars in thousands)

 

 

Asset derivatives:

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

8,050 

 

$

186 

 

Other current assets

Liability derivatives:

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(242)

 

$

(2,441)

 

Accrued expenses and other current liabilities

 

 

 

 

 

 

 

7.    Income Taxes

  During the first nine months of 2014, income tax expense related to continuing operations was $12.3 million, compared with $3.6 million in the prior-year same period.  The 2014 and 2013 year-to-date income tax expense related to continuing operations compared to pre-tax income from continuing operations was not significantly different than that which would have resulted from applying the Company’s statutory income tax rate.

 

 

8.    Contingent Liabilities

We have recorded environmental liabilities of $9.4 million at September 30, 2014, and $9.7 million at December 31, 2013, for costs associated with the remediation of certain of our properties that have been contaminated. The balance at September 30, 2014, and December 31, 2013, 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 the fourth quarter of 2013. The costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring and the ultimate cost of required remediation.

In the fourth quarter of 2013, the Supreme Court in Argentina ruled unfavorably related to certain export taxes associated with a divested operation.  As a result of this ruling, we have recorded a $6.8 million liability as of September 30, 2014, and December 31, 2013.

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.

 

9.    Retirement Benefits

15


 

Net periodic benefit (credit) cost of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the three months ended September 30, 2014 and 2013, respectively, follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Pension Plans

 

Non-U.S. Pension Plans

 

Other Benefit Plans

 

 

Three Months Ended September 30,

 

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

 

(Dollars in thousands)

Service cost

 

$

 

$

 

$

443 

 

$

519 

 

$

 —

 

$

 —

Interest cost

 

 

4,924 

 

 

4,485 

 

 

1,259 

 

 

1,224 

 

 

301 

 

 

285 

Expected return on plan assets

 

 

(7,034)

 

 

(6,181)

 

 

(776)

 

 

(742)

 

 

 —