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EX-31.1 - EX-31.1 - FERRO CORPc214-20150930xex311.htm
EX-31.2 - EX-31.2 - FERRO CORPc214-20150930xex312.htm
EX-32.2 - EX-32.2 - FERRO CORPc214-20150930xex322.htm
EX-32.1 - EX-32.1 - FERRO CORPc214-20150930xex321.htm

Bel

 

 

 

 

 

 

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, 2015

 

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, 2015, there were 86,699,696 shares of Ferro Common Stock, par value $1.00, outstanding.

 

 

 

 

 

 

 

 

 

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,

 

 

2015

 

2014

 

2015

 

2014

 

 

(Dollars in thousands, except per share amounts)

Net sales

 

$

279,365 

 

$

275,754 

 

$

810,351 

 

$

850,698 

Cost of sales

 

 

202,337 

 

 

202,950 

 

 

585,048 

 

 

624,487 

Gross profit

 

 

77,028 

 

 

72,804 

 

 

225,303 

 

 

226,211 

Selling, general and administrative expenses

 

 

48,417 

 

 

51,716 

 

 

150,568 

 

 

152,345 

Restructuring and impairment charges

 

 

3,844 

 

 

1,521 

 

 

5,469 

 

 

7,829 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

3,877 

 

 

3,635 

 

 

10,137 

 

 

12,819 

Interest earned

 

 

(97)

 

 

(23)

 

 

(191)

 

 

(52)

Loss on debt extinguishment

 

 

 —

 

 

14,352 

 

 

 —

 

 

14,352 

Foreign currency losses (gains), net

 

 

1,203 

 

 

(330)

 

 

5,758 

 

 

1,043 

Miscellaneous expense (income), net

 

 

467 

 

 

(180)

 

 

705 

 

 

4,038 

Income before income taxes

 

 

19,317 

 

 

2,113 

 

 

52,857 

 

 

33,837 

Income tax expense

 

 

3,792 

 

 

4,680 

 

 

11,930 

 

 

12,347 

Income (loss) from continuing operations

 

 

15,525 

 

 

(2,567)

 

 

40,927 

 

 

21,490 

(Loss) income from discontinued operations, net of income taxes

 

 

(19,086)

 

 

50,124 

 

 

(28,688)

 

 

53,188 

Net (loss) income

 

 

(3,561)

 

 

47,557 

 

 

12,239 

 

 

74,678 

Less: Net income (loss) attributable to noncontrolling interests

 

 

498 

 

 

92 

 

 

(1,271)

 

 

49 

Net (loss) income attributable to Ferro Corporation common shareholders

 

$

(4,059)

 

$

47,465 

 

$

13,510 

 

$

74,629 

Earnings (loss) per share attributable to Ferro Corporation common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.17 

 

$

(0.03)

 

$

0.48 

 

$

0.25 

Discontinued operations

 

 

(0.22)

 

 

0.58 

 

 

(0.33)

 

 

0.61 

 

 

$

(0.05)

 

$

0.55 

 

$

0.15 

 

$

0.86 

Diluted earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.17 

 

$

(0.03)

 

$

0.48 

 

$

0.24 

Discontinued operations

 

 

(0.22)

 

 

0.58 

 

 

(0.32)

 

 

0.60 

 

 

$

(0.05)

 

$

0.55 

 

$

0.16 

 

$

0.84 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(Dollars in thousands)

Net (loss) income

 

$

(3,561)

 

$

47,557 

 

$

12,239 

 

$

74,678 

Other comprehensive loss, net of income tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(5,301)

 

 

(12,242)

 

 

(33,690)

 

 

(12,732)

Postretirement benefit liabilities loss

 

 

(4)

 

 

(44)

 

 

(6)

 

 

(94)

Other comprehensive loss, net of income tax

 

 

(5,305)

 

 

(12,286)

 

 

(33,696)

 

 

(12,826)

Total comprehensive (loss) income

 

 

(8,866)

 

 

35,271 

 

 

(21,457)

 

 

61,852 

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

376 

 

 

159 

 

 

(2,532)

 

 

(391)

Comprehensive (loss) income attributable to Ferro Corporation

 

$

(9,242)

 

$

35,112 

 

$

(18,925)

 

$

62,243 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2015

 

2014

 

 

(Dollars in thousands)

ASSETS

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,493 

 

$

140,500 

Accounts receivable, net

 

 

252,095 

 

 

236,749 

Inventories

 

 

193,051 

 

 

158,368 

Deferred income taxes

 

 

9,051 

 

 

7,532 

Other receivables

 

 

36,086 

 

 

25,635 

Other current assets

 

 

15,054 

 

 

17,912 

Current assets held-for-sale

 

 

16,844 

 

 

27,087 

Total current assets

 

 

591,674 

 

 

613,783 

Other assets

 

 

 

 

 

 

Property, plant and equipment, net

 

 

258,870 

 

 

212,642 

Goodwill

 

 

126,923 

 

 

93,733 

Intangible assets, net

 

 

87,070 

 

 

57,309 

Deferred income taxes

 

 

43,469 

 

 

39,712 

Other non-current assets

 

 

63,017 

 

 

60,982 

Non-current assets held-for-sale

 

 

23,728 

 

 

18,737 

Total assets

 

$

1,194,751 

 

$

1,096,898 

LIABILITIES AND EQUITY

Current liabilities

 

 

 

 

 

 

Loans payable and current portion of long-term debt

 

$

9,788 

 

$

8,382 

Accounts payable

 

 

130,092 

 

 

129,236 

Accrued payrolls

 

 

28,656 

 

 

36,051 

Accrued expenses and other current liabilities

 

 

62,021 

 

 

53,133 

Current liabilities held-for-sale

 

 

6,067 

 

 

10,016 

Total current liabilities

 

 

236,624 

 

 

236,818 

Other liabilities

 

 

 

 

 

 

Long-term debt, less current portion

 

 

416,491 

 

 

303,629 

Postretirement and pension liabilities

 

 

154,341 

 

 

167,772 

Other non-current liabilities

 

 

72,917 

 

 

50,359 

Non-current liabilities held-for-sale

 

 

2,134 

 

 

2,304 

Total liabilities

 

 

882,507 

 

 

760,882 

Equity

 

 

 

 

 

 

Ferro Corporation shareholders’ equity:

 

 

 

 

 

 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 86.7 million and 87.0 million shares outstanding at September 30, 2015, and December 31, 2014, respectively

 

 

93,436 

 

 

93,436 

Paid-in capital

 

 

314,603 

 

 

317,404 

Retained earnings

 

 

84,917 

 

 

71,407 

Accumulated other comprehensive loss

 

 

(54,240)

 

 

(21,805)

Common shares in treasury, at cost

 

 

(134,704)

 

 

(136,058)

Total Ferro Corporation shareholders’ equity

 

 

304,012 

 

 

324,384 

Noncontrolling interests

 

 

8,232 

 

 

11,632 

Total equity

 

 

312,244 

 

 

336,016 

Total liabilities and equity

 

$

1,194,751 

 

$

1,096,898 

 

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

 

 

(Dollars in thousands)

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 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2014

 

6,445 

 

 

(136,058)

 

 

93,436 

 

 

317,404 

 

 

71,407 

 

 

(21,805)

 

 

11,632 

 

 

336,016 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,510 

 

 

 —

 

 

(1,271)

 

 

12,239 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(32,435)

 

 

(1,261)

 

 

(33,696)

Purchase of treasury stock

 

580 

 

 

(6,998)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,998)

Stock-based compensation transactions

 

(290)

 

 

8,352 

 

 

 —

 

 

(2,801)

 

 

 —

 

 

 —

 

 

 —

 

 

5,551 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(868)

 

 

(868)

Balances at September 30, 2015

 

6,735 

 

$

(134,704)

 

$

93,436 

 

$

314,603 

 

$

84,917 

 

$

(54,240)

 

$

8,232 

 

$

312,244 

 

See accompanying notes to condensed consolidated financial statements.

 

 

6


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30,

 

 

2015

 

2014

 

 

(Dollars in thousands)

Cash flows from operating activities

 

 

 

 

 

 

Net cash provided by operating activities

 

$

31,498 

 

$

41,900 

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

(36,251)

 

 

(40,996)

Proceeds from sale of businesses, net

 

 

 —

 

 

88,337 

Proceeds from sale of assets

 

 

144 

 

 

5,911 

Business acquisitions, net of cash acquired

 

 

(166,997)

 

 

(6,726)

Net cash (used in) provided by investing activities

 

 

(203,104)

 

 

46,526 

Cash flows from financing activities

 

 

 

 

 

 

Net borrowings (repayments) under loans payable (1)

 

 

1,791 

 

 

(42,529)

Proceeds from revolving credit facility

 

 

146,773 

 

 

377,844 

Principal payments on term loan facility

 

 

(2,250)

 

 

 —

Principal payments on revolving credit facility

 

 

(30,737)

 

 

(387,049)

Proceeds from term loan facility

 

 

 —

 

 

300,000 

Repayment of 7.875% Senior Notes

 

 

 —

 

 

(260,451)

Payment of debt issuance costs

 

 

 —

 

 

(6,834)

Purchase of treasury stock

 

 

(6,998)

 

 

 —

Other financing activities

 

 

(1,160)

 

 

54 

Net cash provided by (used in) financing activities

 

 

107,419 

 

 

(18,965)

Effect of exchange rate changes on cash and cash equivalents

 

 

(6,820)

 

 

(2,503)

(Decrease) increase in cash and cash equivalents

 

 

(71,007)

 

 

66,958 

Cash and cash equivalents at beginning of period

 

 

140,500 

 

 

28,328 

Cash and cash equivalents at end of period

 

$

69,493 

 

$

95,286 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

11,141 

 

$

23,863 

Income taxes

 

$

17,504 

 

$

4,329 

 

(1) Includes cash flows related to our domestic accounts receivable program and 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, 2014.

 

The Company owns 51% of an operating affiliate in Venezuela that is a consolidated subsidiary of Ferro. During the first quarter of 2015, the Ministry of Economy, Finance, and Public Banking, and the Central Bank of Venezuela published a new exchange rate, the Foreign Exchange Marginal System (“SIMADI”). We concluded in March 2015 that SIMADI was the most relevant exchange mechanism available, and began using SIMADI to translate the local currency financial statements.  As a result of the revaluation, we recognized a $1.9 million foreign currency loss and a $2.6 million loss due to lower of cost or market charges against our inventory, prior to the adjustment for losses allocated to our noncontrolling interest partner, which is recorded within Foreign currency losses (gains), net and Cost of sales, respectively, within our condensed consolidated statement of operations for the nine months ended September 30, 2015. We had $3.1 million of assets and $2.0 million of liabilities that are included in the condensed consolidated balance sheet at September 30, 2015.

 

 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, which we concluded to be SICAD I in the first quarter of 2014.  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 losses (gains), net within our condensed consolidated statement of operations for the nine months ended September 30, 2014. 

 

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.  As further discussed in Note 3, the Specialty Plastics sale closed on July 1, 2014, and the North America-based Polymer Additives sale closed on December 19, 2014.  Therefore, the Specialty Plastics and North America-based Polymer Additives operating results, net of tax, have been classified as discontinued operations for the three and nine months ended September 30, 2014.  We have classified the Europe-based Polymer Additives assets and liabilities as held-for-sale in the accompanying condensed consolidated balance sheets and have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.

 

Operating results for the three and nine months ended September 30, 2015, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2015.  

 

 

2.    Recent Accounting Pronouncements

Accounting Standards Adopted in the period ended September 30, 2015

On January 1, 2015, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 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

8


 

(or will have) a major effect on an entity’s operations and financial results, and changes the criteria and enhances disclosures for reporting discontinued operations. The adoption of this pronouncement did not have a material effect on our condensed consolidated financial statements.

On January 1, 2015, we adopted FASB 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. The adoption of this pronouncement did not have a material effect on our condensed consolidated financial statements.

On January 1, 2015, we adopted FASB ASU No. 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination. ASU 2014-18 is an accounting alternative which applies when an entity is required to recognize or otherwise consider the fair value of intangible assets as a result of specific transaction. The adoption of this pronouncement did not have a material effect on our condensed consolidated financial statements.

 

New Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which will require significant judgment. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.

 

In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items: Subtopic 225-20. ASU 2015-01 eliminates the concept of extraordinary items.  This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.  ASU 2015-01 may be applied prospectively or retrospectively to all prior periods presented in the financial statements.  We do not expect the adoption of this pronouncement will have a material effect on our condensed consolidated financial statements.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis: Topic 810. This pronouncement makes amendments to the current consolidation guidance. ASU 2015-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.  ASU 2015-02 may be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or may be applied retrospectively. We do not expect the adoption of this pronouncement will have a material effect on our condensed consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest: Subtopic 835-30: Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 makes amendments to the presentation of debt issuance costs.  This pronouncement is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.  Early adoption is permitted.  ASU 2015-03 should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory: Topic 330: Simplifying the Measurement of Inventory.  ASU 2015-11 requires an entity to measure in scope inventory at the lower of cost and net realizable value.  This pronouncement is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  Early adoption is permitted.  ASU 2015-11 should be applied on a prospective basis.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.

 

In September 2015, the FASB issued ASU 2015-16, Business Combination: Topic 805: Simplifying the Accounting for Measurement-Period Adjustments.  ASU 2015-16 requires an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustments are determined and also record the effect on earnings. 

9


 

This pronouncement is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  Early adoption is permitted.  ASU 2015-16 should be applied on a prospective basis.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.

 

3.    Discontinued Operations

 

During the third quarter of 2014, we sold substantially all of the assets related to our Specialty Plastics business for a cash purchase price of $91.0 million. The transaction resulted in net proceeds of $88.3 million after expenses, and a gain of approximately $54.9 million. We have classified the Specialty Plastics operating results, net of income tax, as discontinued operations for the three and nine months ended September 30, 2014.

 

During the second quarter of 2014, we commenced a process to market for sale all of the assets within our Polymer Additives business.  We determined that the criteria to classify these assets as held-for-sale under ASC Topic 360, Property, Plant and Equipment, have been met.  For purposes of applying the guidance within ASC 360, the assets have been categorized into two disposal groups: (1) our Europe-based Polymer Additives assets, including the Antwerp, Belgium dibenzoates manufacturing assets, and related Polymer Additives European headquarters and lab facilities and (2) the remainder of the Polymer Additives assets, our North America-based Polymer Additives business.  During the fourth quarter of 2014, we sold substantially all of the assets related to our North America-based Polymer Additives business for a cash purchase price of $153.5 million.  The transaction resulted in net proceeds of $149.5 million after expenses, and a gain of approximately $72.7 million.  We have classified the operating results, net of income tax, as discontinued operations for the three and nine months ended September 30, 2014.  We have classified the Europe-based Polymer Additives assets and liabilities as held-for-sale in the accompanying condensed consolidated balance sheets and have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.

 

The table below summarizes results for Polymer Additives and Specialty Plastics, for the three and nine months ended September 30, 2015 and 2014, which are reflected in our condensed consolidated statements of operations as discontinued operations.  Interest expense has been allocated to the discontinued operations based on the ratio of net assets of each business to consolidated net assets excluding debt.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

(Dollars in thousands)

Net sales

 

$

7,493 

 

$

65,948 

 

$

27,229 

 

$

288,422 

Cost of sales

 

 

13,231 

 

 

56,259 

 

 

39,689 

 

 

245,059 

Gross (loss) profit

 

 

(5,738)

 

 

9,689 

 

 

(12,460)

 

 

43,363 

Selling, general and administrative expenses

 

 

1,156 

 

 

1,851 

 

 

3,384 

 

 

14,496 

Restructuring and impairment charges

 

 

11,792 

 

 

7,210 

 

 

11,792 

 

 

21,574 

Interest expense

 

 

237 

 

 

921 

 

 

557 

 

 

3,827 

Gain on sale of business, net

 

 

 —

 

 

(53,826)

 

 

 —

 

 

(53,826)

Miscellaneous expense, net

 

 

163 

 

 

190 

 

 

495 

 

 

326 

(Loss) income from discontinued operations before income taxes

 

 

(19,086)

 

 

53,343 

 

 

(28,688)

 

 

56,966 

Income tax expense

 

 

 —

 

 

3,219 

 

 

 —

 

 

3,778 

(Loss) income from discontinued operations, net of income taxes

 

$

(19,086)

 

$

50,124 

 

$

(28,688)

 

$

53,188 

 

 

 

 

 

 

 

 

10


 

The following table summarizes the assets and liabilities which are classified as held-for-sale at September 30, 2015, and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

(Dollars in thousands)

Accounts receivable, net

 

$

5,603 

 

$

5,959 

Inventories

 

 

8,513 

 

 

19,217 

Other current assets

 

 

2,728 

 

 

1,911 

Current assets held-for-sale

 

 

16,844 

 

 

27,087 

Property, plant and equipment, net

 

 

23,180 

 

 

18,174 

Other non-current assets

 

 

548 

 

 

563 

Total assets held-for-sale

 

 

40,572 

 

 

45,824 

Accounts payable

 

 

4,556 

 

 

8,181 

Accrued expenses and other current liabilities

 

 

1,511 

 

 

1,835 

Current liabilities held-for-sale

 

 

6,067 

 

 

10,016 

Other non-current liabilities

 

 

2,134 

 

 

2,304 

Total liabilities held-for-sale

 

$

8,201 

 

$

12,320 

 

Included within non-current assets is a deferred tax asset of $22.4 million at September 30, 2015, and $14.1 million at December 31, 2014, which were completely reserved for at both periods.

 

4.    Acquisitions

 

On July 7, 2015, the Company acquired the entire share capital of Corporación Química Vhem, S.L., Dibon USA, LLC and Ivory Corporation, S.A. (together with their direct and indirect subsidiaries, “Nubiola”) on a cash-free and debt-free basis for €165 million (approximately $181.6 million).  The acquisition was funded with excess cash and borrowings under the Company’s existing revolving credit facility.  See footnote 8 for additional detail on the revolving credit facility.  Nubiola is a worldwide producer of specialty inorganic pigments and the world’s largest producer of Ultramarine Blue. Nubiola also produces specialty Iron Oxides, Chrome Oxide Greens and Corrosion Inhibitors. Nubiola has production facilities in Spain, Colombia, Romania, and India and a joint venture in China. 

The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of September 30, 2015, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company.

The following table summarizes the preliminary purchase price allocations:

 

 

 

 

 

 

 

July 7, 2015

 

 

(Dollars in thousands)

Net working capital (1) 

 

$

47,341 

Cash and equivalents

 

 

19,966 

Personal property

 

 

39,444 

Real property

 

 

30,277 

Intangibles

 

 

31,280 

Other assets and liabilities

 

 

(21,012)

Goodwill

 

 

34,254 

Net assets acquired

 

$

181,550 

(1)

Net working capital is defined as current assets, less cash, less current liabilities, and includes an estimate of potential transactional adjustments.

 

 

11


 

The acquired business contributed net sales of $30.3 million and net loss attributable to Ferro Corporation of $3.1 million for the period from July 7, 2015, to September 30, 2015.  The Company incurred acquisition related costs of $2.0 million and $4.3 million for the three and nine months ended September 30, 2015, respectively, which is recorded within Selling, general and administrative expenses, within our condensed consolidated statements of operations. 

The estimated fair value of the receivables acquired is $24.5 million, with a gross contractual amount of $25.2 million.  The Company preliminarily recorded acquired intangible assets subject to amortization of $25.2 million, which is comprised of $8.5 million of customer relationships and $16.7 million of technology/know-how, which will be amortized over 20 years and 15 years, respectively.  The Company preliminarily recorded acquired indefinite-lived intangible assets of $6.1 million related to trade names and trademarks.  Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition and is a result of anticipated synergies.  Goodwill is not expected to be deductible for tax purposes.    

The following unaudited pro froma information represents the consolidated results of the Company as if the Nubiola acquisition occurred as of January 1, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

 

2015

 

2014

 

 

2015

 

2014

 

 

(unaudited)

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

279,365 

 

$

310,528 

 

 

$

902,092 

 

$

960,007 

 

Net income available to Ferro Corporation common shareholders

 

$

17,731 

 

$

1,326 

 

 

$

48,350 

 

$

35,334 

 

Net earnings per share attributable to Ferro Corporation common shareholders - Basic

 

$

0.20 

 

$

0.02 

 

 

$

0.55 

 

$

0.41 

 

Net earnings per share attributable to Ferro Corporation common shareholders - Diluted

 

$

0.20 

 

$

0.02 

 

 

$

0.55 

 

$

0.40 

 

 

The unaudited pro forma information has been adjusted with the respect to certain aspects of the acquisition to reflect the following:

·

Additional depreciation and amortization expenses that would have been recognized assuming fair value adjustments to the existing Nubiola assets acquired, including intangible assets and fixed assets.

·

Elimination of revenue and costs of goods sold for sales from Nubiola to the Company, which would be eliminated as intercompany transactions for Nubiola and the Company on a consolidated basis.

·

Increased interest expense due to additional borrowings to fund the acquisition.

·

Acquisition-related costs, which were included in the Company’s results.

·

Adjustments for the income tax effect of the pro forma adjustments related to the acquisition.

 

In February 2015, the Company acquired TherMark Holdings, Inc., a leader in laser marking technology, for a cash purchase price of $5.5 million.  The Company recorded $4.6 million of amortizable intangible assets, $2.5 million of goodwill, $1.7 million of a deferred tax liability related to the amortizable intangible assets, and $0.1 million of net working capital on the condensed consolidated balance sheet.    

In December 2014, Ferro Coatings Italy S.R.L., a 100% owned subsidiary of Ferro, acquired 100% of the outstanding common shares and voting interest of Vetriceramici S.p.A. (“Vetriceramici”) for a purchase price of €87.2 million in cash, or $108.9 million, based on the exchange rate on the closing date of December 1, 2014. Vetriceramici is an Italian manufacturing, marketing and distribution group that offers a range of products to its customers for the production of ceramic tiles, with some diversification in the glass sector.  We expect to achieve synergies and cost reductions by eliminating redundant processes and facilities.  The results of operations for this business have been included in the condensed consolidated financial statements since the date of acquisition.

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

12


 

who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of September 30, 2015, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company.

 

 

 

 

 

 

 

 

 

 

 

December 1, 2014

 

 

(Dollars in thousands)

Net working capital (2) 

 

$

27,055 

Real property

 

 

8,291 

Personal property

 

 

12,204 

Other assets and liabilities

 

 

(13,169)

Intangibles

 

 

42,060 

Goodwill

 

 

32,431 

Net assets acquired

 

$

108,872 

(2)

Net working capital is defined as current assets less current liabilities, and includes an estimate of potential transactional adjustments.

The estimated fair value of the receivables acquired is $26.0 million, with a gross contractual amount of $27.0 million. The Company preliminarily recorded acquired intangible assets subject to amortization of $37.9 million, which is comprised of $27.8 million of customer relationships and $10.1 million of technology/know-how, which will be amortized over 20 and 10 years, respectively.  The Company preliminarily recorded acquired indefinite-lived intangible assets of $4.2 million related to trade names and trademarks.

Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition and is a result of anticipated synergies. Goodwill has been allocated to the Performance Coatings and Performance Colors and Glass segments of $31.4 million and $1.0 million, respectively.  The amount of goodwill that is expected to be deductible for tax purposes is $12.4 million.

In July 2014, the Company acquired certain commercial assets of a reseller of our porcelain enamel products in Turkey for a cash purchase price of $6.7 million, which is recorded in Intangible assets, net on the consolidated balance sheets.

 

 

5.    Inventories

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2015

 

2014

 

 

(Dollars in thousands)

Raw materials

 

$

55,955 

 

$

46,605 

Work in process

 

 

38,437 

 

 

32,356 

Finished goods

 

 

98,659 

 

 

79,407 

Total inventories

 

$

193,051 

 

$

158,368 

 

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 for the three months ended September 30, 2015 and 2014, and were $0.6 million and $0.7 million for the nine months ended September 30, 2015 and 2014 respectively. We had on-hand precious metals owned by participants in our precious metals consignment program of $23.2 million at September 30, 2015, and $26.6 million at December 31, 2014, measured at fair value based on market prices for identical assets and net of credits.

 

 

 

 

 

13


 

6.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $445.5 million at September 30, 2015, and $442.4 million at December 31, 2014. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $3.4 million at September 30, 2015, and $7.9 million at September 30, 2014

 

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

 

As discussed in Note 3 - Discontinued Operations, during the second quarter of 2014, our Europe-based Polymer Additives assets 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 was less than the carrying value.  As a result of the analysis, the assets had a carrying value that exceeded fair value, resulting in an impairment charge of $14.4 million. During third quarter of 2014, we recorded an impairment charge of approximately $7.2 million, which represents the additional capital expenditures related to the construction of the facility.  The impairment charges of $7.2 million and $21.6 million are included in (Loss) income from discontinued operations, net of income taxes in our condensed consolidated statements of operations for the three and nine months ended September 30, 2014, respectively. 

 

During the third quarter of 2015, we recorded an impairment charge of $11.8 million, which represents the additional capital expenditures related to the construction of the facility.  The impairment charge of $11.8 million is included in (Loss) income from discontinued operations, net of income taxes for the three and nine months ended September 30, 2015.  Though the sale process of these assets has taken longer than initially expected, we continue to believe that it is probable that we will sell the Europe-based Polymer Additives assets within a year.

 

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, 2015 and for the year ended December 31, 2014.  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, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

33,711 

 

$

33,711 

 

$

(11,792)

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

37,400 

 

$

37,400 

 

$

(21,566)

 

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.

 

 

 

 

 

 

 

 

14


 

 

 

7.   Goodwill and Other Intangible Assets

Details and activity in the Company’s goodwill by segment follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pigments,

 

Performance

 

 

 

 

Performance

 

Powders and

 

Colors and

 

 

 

 

Coatings

 

Oxides

 

Glass

 

Total

 

 

(Dollars in thousands)

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

$

76,860 

 

$

9,676 

 

$

52,466 

 

$

139,002 

Accumulated impairment losses

 

 

(45,269)

 

 

 —

 

 

 —

 

 

(45,269)

 

 

 

31,591 

 

 

9,676 

 

 

52,466 

 

 

93,733 

Acquisitions

 

 

 —

 

 

33,985 

(1)

 

2,477 

(2)

 

36,462 

Other adjustments 

 

 

(462)

 

 

 —

 

 

 —

 

 

(462)

Foreign currency adjustments

 

 

(1,819)

 

 

67 

 

 

(1,058)

 

 

(2,810)

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Gross goodwill

 

 

74,579 

 

 

43,728 

 

 

53,885 

 

 

172,192 

Accumulated impairment losses

 

 

(45,269)

 

 

 —

 

 

 —

 

 

(45,269)

 

 

$

29,310 

 

$

43,728 

 

$

53,885 

 

$

126,923 

 

(1) During the third quarter of 2015, the Company recorded goodwill related to the Nubiola acquisition.  Refer to footnote 4 for additional details.

(2) During the first quarter of 2015, the Company recorded goodwill related to the TherMark acquisition.  Refer to footnote 4 for additional details.

Goodwill is calculated as the excess of the purchase price over the estimated fair values of the assets acquired and the liabilities assumed in the acquisition.

Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  As of September 30, 2015, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

2015

 

2014

 

 

 

 

 

(Dollars in thousands)

Gross amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Patents

 

 

 

 

$

5,276 

 

$

5,404 

Land rights

 

 

 

 

 

5,015 

 

 

5,091 

Technological know-how and other

 

 

 

 

 

43,870 

 

 

25,787 

Customer relationships

 

 

 

 

 

39,517 

 

 

32,591 

     Total gross amortizable intangible assets

 

 

 

 

 

93,678 

 

 

68,873 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

Patents

 

 

 

 

 

(4,880)

 

 

(4,866)

Land rights

 

 

 

 

 

(2,669)

 

 

(2,614)

Technological know-how and other

 

 

 

 

 

(7,324)

 

 

(7,766)

Customer relationships

 

 

 

 

 

(1,706)

 

 

(382)

     Total accumulated amortization

 

 

 

 

 

(16,579)

 

 

(15,628)

            Amortizable intangible assets, net

 

 

 

 

$

77,099