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EX-32.2 - EX-32.2 - FERRO CORPc214-20160930xex32_2.htm
EX-32.1 - EX-32.1 - FERRO CORPc214-20160930xex32_1.htm
EX-31.2 - EX-31.2 - FERRO CORPc214-20160930xex31_2.htm
EX-31.1 - EX-31.1 - FERRO CORPc214-20160930xex31_1.htm
EX-10.2 - EX-10.2 - FERRO CORPc214-20160930xex10_2.htm

8Mag

Mag

 

 

 

 

 





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, 2016



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, 2016, there were 83,385,550 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,



 

2016

 

2015

 

2016

 

2015



 

(Dollars in thousands, except per share amounts)

Net sales

 

$

288,527 

 

$

279,365 

 

$

863,955 

 

$

810,351 

Cost of sales

 

 

199,546 

 

 

202,337 

 

 

592,372 

 

 

585,048 

Gross profit

 

 

88,981 

 

 

77,028 

 

 

271,583 

 

 

225,303 

Selling, general and administrative expenses

 

 

55,588 

 

 

48,417 

 

 

166,105 

 

 

150,568 

Restructuring and impairment charges

 

 

26 

 

 

3,844 

 

 

1,694 

 

 

5,469 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

5,304 

 

 

3,877 

 

 

15,579 

 

 

10,137 

Interest earned

 

 

(214)

 

 

(97)

 

 

(414)

 

 

(191)

Foreign currency losses, net

 

 

867 

 

 

1,203 

 

 

2,867 

 

 

5,758 

Miscellaneous expense (income), net

 

 

705 

 

 

467 

 

 

(2,079)

 

 

705 

Income before income taxes

 

 

26,705 

 

 

19,317 

 

 

87,831 

 

 

52,857 

Income tax expense

 

 

6,157 

 

 

3,792 

 

 

22,659 

 

 

11,930 

Income from continuing operations

 

 

20,548 

 

 

15,525 

 

 

65,172 

 

 

40,927 

(Loss) from discontinued operations, net of income taxes

 

 

(29,222)

 

 

(19,086)

 

 

(64,464)

 

 

(28,688)

Net (loss) income

 

 

(8,674)

 

 

(3,561)

 

 

708 

 

 

12,239 

Less: Net income (loss) attributable to noncontrolling interests

 

 

210 

 

 

498 

 

 

589 

 

 

(1,271)

Net (loss) income attributable to Ferro Corporation common shareholders

 

$

(8,884)

 

$

(4,059)

 

$

119 

 

$

13,510 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.24 

 

$

0.17 

 

$

0.78 

 

$

0.48 

Discontinued operations

 

 

(0.35)

 

 

(0.22)

 

 

(0.77)

 

 

(0.33)



 

$

(0.11)

 

$

(0.05)

 

$

0.01 

 

$

0.15 

Diluted earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.24 

 

$

0.17 

 

$

0.77 

 

$

0.48 

Discontinued operations

 

 

(0.35)

 

 

(0.22)

 

 

(0.77)

 

 

(0.32)



 

$

(0.11)

 

$

(0.05)

 

$

 —

 

$

0.16 











See accompanying notes to condensed consolidated financial statements.



 

3


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss)











 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2016

 

2015

 

2016

 

2015



 

(Dollars in thousands)

Net (loss) income

 

$

(8,674)

 

$

(3,561)

 

$

708 

 

$

12,239 

Other comprehensive income (loss), net of income tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation income (loss)

 

 

1,565 

 

 

(5,301)

 

 

(3,382)

 

 

(33,690)

Reclassification adjustment for foreign currency translation included in net (loss) income

 

 

1,115 

 

 

 —

 

 

1,115 

 

 

 —

Postretirement benefit liabilities (loss) gain

 

 

(2)

 

 

(4)

 

 

293 

 

 

(6)

Other comprehensive income (loss), net of income tax

 

 

2,678 

 

 

(5,305)

 

 

(1,974)

 

 

(33,696)

Total comprehensive (loss)

 

 

(5,996)

 

 

(8,866)

 

 

(1,266)

 

 

(21,457)

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

191 

 

 

376 

 

 

450 

 

 

(2,532)

Comprehensive (loss) attributable to Ferro Corporation

 

$

(6,187)

 

$

(9,242)

 

$

(1,716)

 

$

(18,925)



See accompanying notes to condensed consolidated financial statements.



 

4


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets







 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)

ASSETS

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,556 

 

$

58,380 

Accounts receivable, net

 

 

282,827 

 

 

231,970 

Inventories

 

 

211,261 

 

 

184,854 

Deferred income taxes

 

 

 —

 

 

12,088 

Other receivables

 

 

36,360 

 

 

34,088 

Other current assets

 

 

8,013 

 

 

15,695 

Current assets held-for-sale

 

 

 —

 

 

16,215 

Total current assets

 

 

579,017 

 

 

553,290 

Other assets

 

 

 

 

 

 

Property, plant and equipment, net

 

 

249,497 

 

 

260,429 

Goodwill

 

 

142,880 

 

 

145,669 

Intangible assets, net

 

 

112,021 

 

 

106,633 

Deferred income taxes

 

 

99,326 

 

 

87,385 

Other non-current assets

 

 

50,247 

 

 

48,767 

Non-current assets held-for-sale

 

 

 —

 

 

23,178 

Total assets

 

$

1,232,988 

 

$

1,225,351 

LIABILITIES AND EQUITY

Current liabilities

 

 

 

 

 

 

Loans payable and current portion of long-term debt

 

$

10,221 

 

$

7,446 

Accounts payable

 

 

123,325 

 

 

120,380 

Accrued payrolls

 

 

32,255 

 

 

28,584 

Accrued expenses and other current liabilities

 

 

60,708 

 

 

54,664 

Current liabilities held-for-sale

 

 

 —

 

 

7,156 

Total current liabilities

 

 

226,509 

 

 

218,230 

Other liabilities

 

 

 

 

 

 

Long-term debt, less current portion

 

 

477,100 

 

 

466,108 

Postretirement and pension liabilities

 

 

147,682 

 

 

148,249 

Other non-current liabilities

 

 

65,533 

 

 

66,990 

Non-current liabilities held-for-sale

 

 

 —

 

 

1,493 

Total liabilities

 

 

916,824 

 

 

901,070 

Equity

 

 

 

 

 

 

Ferro Corporation shareholders’ equity:

 

 

 

 

 

 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 83.4 million and 84.0 million shares outstanding at September 30, 2016, and December 31, 2015, respectively

 

 

93,436 

 

 

93,436 

Paid-in capital

 

 

304,839 

 

 

314,854 

Retained earnings

 

 

135,626 

 

 

135,507 

Accumulated other comprehensive loss

 

 

(63,153)

 

 

(61,318)

Common shares in treasury, at cost

 

 

(162,354)

 

 

(166,020)

Total Ferro Corporation shareholders’ equity

 

 

308,394 

 

 

316,459 

Noncontrolling interests

 

 

7,770 

 

 

7,822 

Total equity

 

 

316,164 

 

 

324,281 

Total liabilities and equity

 

$

1,232,988 

 

$

1,225,351 



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

 

 

 

 

 

 

 

 

 

Other

 

Non-

 

 

 



 

 

 

 

 

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

controlling

 

Total



 

Shares

 

Amount

 

Stock

 

Capital

 

Earnings

 

(Loss)

 

Interests

 

Equity



 

(Dollars in thousands)

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 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2015

 

9,431 

 

 

(166,020)

 

 

93,436 

 

 

314,854 

 

 

135,507 

 

 

(61,318)

 

 

7,822 

 

 

324,281 

Net  income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

119 

 

 

 —

 

 

589 

 

 

708 

Other comprehensive (loss)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,835)

 

 

(139)

 

 

(1,974)

Purchase of treasury stock

 

1,175 

 

 

(11,429)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,429)

Stock-based compensation transactions

 

(556)

 

 

15,095 

 

 

 —

 

 

(10,015)

 

 

 —

 

 

 —

 

 

 —

 

 

5,080 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(502)

 

 

(502)

Balances at September 30, 2016

 

10,050 

 

$

(162,354)

 

$

93,436 

 

$

304,839 

 

$

135,626 

 

$

(63,153)

 

$

7,770 

 

$

316,164 



See accompanying notes to condensed consolidated financial statements.



 

6


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows







 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2016

 

2015



 

(Dollars in thousands)

Cash flows from operating activities

 

 

 

 

 

 

Net cash provided by operating activities

 

$

6,742 

 

$

31,498 

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

(18,217)

 

 

(36,251)

Proceeds from sale of assets

 

 

3,598 

 

 

144 

Business acquisitions, net of cash acquired

 

 

(11,417)

 

 

(166,997)

Net cash (used in) investing activities

 

 

(26,036)

 

 

(203,104)

Cash flows from financing activities

 

 

 

 

 

 

Net borrowings under loans payable

 

 

2,606 

 

 

1,791 

Proceeds from revolving credit facility

 

 

212,906 

 

 

146,773 

Principal payments on revolving credit facility

 

 

(149,696)

 

 

(30,737)

Principal payments on term loan facility

 

 

(52,250)

 

 

(2,250)

Payment of debt issuance costs

 

 

(661)

 

 

 —

Purchase of treasury stock

 

 

(11,429)

 

 

(6,998)

Other financing activities

 

 

416 

 

 

(1,160)

Net cash provided by financing activities

 

 

1,892 

 

 

107,419 

Effect of exchange rate changes on cash and cash equivalents

 

 

(422)

 

 

(6,820)

(Decrease) in cash and cash equivalents

 

 

(17,824)

 

 

(71,007)

Cash and cash equivalents at beginning of period

 

 

58,380 

 

 

140,500 

Cash and cash equivalents at end of period

 

$

40,556 

 

$

69,493 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

15,032 

 

$

11,141 

Income taxes

 

$

12,929 

 

$

17,504 



 

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, 2015.



The Company owned 51% of an operating affiliate in Venezuela that was a consolidated subsidiary of Ferro.  During the fourth quarter of 2015, we sold our interest in the operating affiliate in Venezuela for a cash purchase price of $0.5 million. 



During the second quarter of 2014, all of the assets and liabilities of the Europe-based Polymer Additives business were classified as held-for-sale.  As further discussed in Note 3, in the third quarter of 2016, we completed the disposition of the Europe-based Polymer Additives business and have classified the related operating results, net of income tax, as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented.



Operating results for the three and nine months ended September 30, 2016, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2016.  





2.    Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes: Topic 740: Balance Sheet Classification of Deferred Taxes.  ASU 2015-17 requires deferred tax assets and liabilities to be classified as noncurrent in a classified statement of financial position.  During the second quarter of 2016, we elected to prospectively adopt ASU 2015-17, thus reclassifying current deferred tax assets to noncurrent on the accompanying condensed consolidated balance sheets.  The prior reporting period was not retrospectively adjusted.  Other than this reclassification, the adoption of ASU 2015-17 did not have an impact on the Company’s condensed consolidated financial statements.



New Accounting Standards

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow: Topic 230: Classification of Certain Cash Receipts and Cash Payments.  ASU 2016-15 is intended to address eight specific cash flow issues with the objective of reducing the existing diversity in practice.  This pronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.



In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Topic 718: Improvements to Employee Share-Based Payment Accounting.  ASU 2016-09 is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  This pronouncement is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.

8


 



In February 2016, the FASB issued ASU 2016-02, Leases: Topic 842.  ASU 2016-02 requires companies to recognize a lease liability and asset on the balance sheet for operating leases with a term greater than one year.  This pronouncement is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted.  The Company is in the process of assessing the impact the adoption of this ASU will have on our condensed consolidated financial statements.



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



No other new accounting pronouncements issued or with effective dates during fiscal 2016 had or are expected to have a material impact of the Company’s condensed consolidated financial statements.



3.    Discontinued Operations



During the second quarter of 2014, we commenced a process to market for sale all of the assets within our Europe-based Polymer Additives business, including the Antwerp, Belgium dibenzoates manufacturing assets, and related Polymer Additives European headquarters and lab facilities.  We determined that the criteria to classify these assets as held-for-sale under ASC Topic 360, Property, Plant and Equipment, were met.  On August 22, 2016, the Company completed the disposition of the Europe-based Polymer Additives business to Plahoma Two AG, an affiliate of the LIVIA Group.  The Company made a capital contribution of €12 million (approximately $13.6 million) to its subsidiaries that owned the assets prior to the close of the sale.  In August 2016, prior to the sale, an impairment charge of $26.8 million was recorded under ASC Topic 360 Property, Plant and Equipment.  The charge was calculated as the difference of the executed transaction price and the carrying value of the assets. The impairment charge included $1.1 million associated with the reclassification of foreign currency translation loss from Accumulated other comprehensive loss (Note 17).    The Europe-based Polymer Additives operating results, net of income tax, are classified as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented and the assets and liabilities are classified as held-for-sale in the accompanying condensed consolidated balance sheets at December 31, 2015 as the criteria to do so under ASC Topic 360, Property, Plant and Equipment were met as the respective periods.  



The table below summarizes results for the Europe-based Polymer Additives assets, for the three and nine months ended September 30, 2016 and 2015, which are reflected in our condensed consolidated statements of operations as discontinued operations.  Interest expense has been allocated to the discontinued operations based on the ratio of net assets of each business to consolidated net assets excluding debt.







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2016

 

2015

 

2016

 

2015



 

(Dollars in thousands)

Net sales

 

$

3,831 

 

$

7,493 

 

$

18,481 

 

$

27,229 

Cost of sales

 

 

5,654 

 

 

13,231 

 

 

28,473 

 

 

39,689 

Gross loss

 

 

(1,823)

 

 

(5,738)

 

 

(9,992)

 

 

(12,460)

Selling, general and administrative expenses

 

 

588 

 

 

1,156 

 

 

3,094 

 

 

3,384 

Restructuring and impairment charges

 

 

26,843 

 

 

11,792 

 

 

50,902 

 

 

11,792 

Interest expense

 

 

49 

 

 

237 

 

 

325 

 

 

557 

Miscellaneous (income) expense

 

 

(4)

 

 

163 

 

 

(392)

 

 

495 

(Loss) from discontinued operations before income taxes

 

 

(29,299)

 

 

(19,086)

 

 

(63,921)

 

 

(28,688)

Income tax (benefit) expense

 

 

(77)

 

 

 —

 

 

543 

 

 

 —

(Loss) from discontinued operations, net of income taxes

 

$

(29,222)

 

$

(19,086)

 

$

(64,464)

 

$

(28,688)



9


 



The following table summarizes the assets and liabilities that are classified as held-for-sale at September 30, 2016, and December 31, 2015:





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30, 2016

 

December 31, 2015



 

(Dollars in thousands)

Accounts receivable, net

 

$

 —

 

$

4,028 

Inventories

 

 

 —

 

 

9,733 

Other current assets

 

 

 —

 

 

2,454 

Current assets held-for-sale

 

 

 —

 

 

16,215 

Property, plant and equipment, net

 

 

 —

 

 

22,973 

Other non-current assets

 

 

 —

 

 

205 

Total assets held-for-sale

 

$

 —

 

$

39,393 



 

 

 

 

 

 

Accounts payable

 

$

 —

 

$

5,736 

Accrued expenses and other current liabilities

 

 

 —

 

 

1,420 

Current liabilities held-for-sale

 

 

 —

 

 

7,156 

Other non-current liabilities

 

 

 —

 

 

1,493 

Total liabilities held-for-sale

 

$

 —

 

$

8,649 







4.    Acquisitions



Delta Performance Products



On August 1, 2016, the Company acquired certain assets of Delta Performance Products, LLC, for a cash purchase price of $4.4 million.  The Company preliminarily recorded $3.2 million of amortizable intangible assets, $1.8 million of goodwill, $1.2 million of a deferred tax liability related to the amortizable intangible assets, and $0.6 million of net working capital on the condensed consolidated balance sheet.



Pinturas

On June 1, 2016, the Company acquired 100% of the equity of privately held Pinturas Benicarló, S.L. (“Pinturas”) for €16.5 million in cash (approximately $18.4 million). The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of September 30, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $8.5 million of amortizable intangible assets, $3.8 million of goodwill, $0.7 million of personal and real property, $2.6 million of a deferred tax liability related to the amortizable intangible assets, and $8.0 million of net working capital on the condensed consolidated balance sheet. 





Ferer



On January 5, 2016, the Company completed the purchase of 100% of the equity of privately held Istanbul-based Ferer Dis Ticaret Ve Kimyasallar Anonim Sirketi A.S. (“Ferer”) on a cash-free and debt-free basis for approximately $9.4 million in cash, subject to customary working capital and other adjustments. The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of September 30, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $3.3 million of amortizable intangible assets, $4.5 million of goodwill, $0.6 million of personal and real property, $0.7 million of a deferred tax liability related to the amortizable intangible assets, and $1.7 million of net working capital on the condensed consolidated balance sheet. 



10


 

Al Salomi

On November 17, 2015, the Company acquired 100% of the equity of Egypt-based tile coatings manufacturer Al Salomi for Frits and Glazes (“Al Salomi”) for Egyptian Pound (“EGP”) 307 million (approximately $38.2 million), including the assumption of debt.  The acquired business contributed net sales of $6.2 million and $18.2 million for the three and nine months ended September 30, 2016 and net income attributable to Ferro Corporation of $0.6 million and $2.8 million for the three and nine months ended September 30, 2016. 

The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management. As of September 30, 2016, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $15.0 million of amortizable intangible assets, $14.3 million of goodwill, $10.7 million of personal and real property, $4.8 million of a deferred tax liability related to the amortizable intangible assets, and $3.0 million of net working capital on the condensed consolidated balance sheet. 



Nubiola



On July 7, 2015, the Company acquired the entire share capital of Corporación Química Vhem, S.L., Dibon USA, LLC and Ivory Corporation, S.A. (together with their direct and indirect subsidiaries, “Nubiola”) on a cash-free and debt-free basis for €167 million (approximately $184.2 million).  The acquisition was funded with excess cash and borrowings under the Company’s existing revolving credit facility.  See Note 8 for additional detail on the revolving credit facility. During the second quarter of 2016, the Company finalized a  purchase price adjustment for the settlement of an escrow that reduced the fair value of net assets acquired to $168.1 million.  As a result of the purchase price adjustment, the carrying amount of goodwill decreased by $11.7 million, amortizable intangible assets decreased $6.4 million and the related deferred tax liability decreased $1.9 million. The impact of the change on the condensed consolidated statements of operations was not material. 

The information included herein has been prepared based on the allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches and estimates made by management.

The following table summarizes the purchase price allocations:





 

 

 



 

July 7, 2015



 

(Dollars in thousands)

Net working capital (1) 

 

$

46,642 

Cash and equivalents

 

 

19,966 

Personal property

 

 

39,444 

Real property

 

 

28,510 

Intangible assets

 

 

26,757 

Other assets and liabilities

 

 

(20,733)

Goodwill

 

 

27,498 

Net assets acquired

 

$

168,084 

(1)

Net working capital is defined as current assets, less cash, less current liabilities.

 

The acquired business contributed net sales of $33.0 million and $97.2 million for the three and nine months ended September 30, 2016, and net income attributable to Ferro Corporation of $7.2 million and $21.4 million for the three and nine months ended September 30, 2016. 

The fair value of the receivables acquired is $24.5 million, with a gross contractual amount of $25.2 million.  The Company recorded acquired intangible assets subject to amortization of $21.1 million, which is comprised of $5.4 million of customer relationships and $15.7 million of technology/know-how, which will be amortized over 20 years and 15 years, respectively.  The Company recorded acquired indefinite-lived intangible assets of $5.6 million related to trade names and trademarks.  Goodwill is

11


 

calculated as the excess of the purchase price over the fair values of the assets acquired and the liabilities assumed in the acquisition and is a result of anticipated synergies. Goodwill is not deductible for tax purposes. 

The following unaudited pro forma information represents the consolidated results of the Company as if the Nubiola acquisition occurred as of January 1, 2015:  





 

 

 

 

 

 



 

 

 

 

 



 

Three months ended September 30, 2015

 

Nine months ended September 30, 2015



 

(unaudited)



 

(In thousands, except per share amounts)



 

 

 

 

 

 

Net sales

 

$

279,365 

 

$

902,092 

Net income attributable to Ferro Corporation common shareholders

 

$

17,731 

 

$

48,658 

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

 

$

0.20 

 

$

0.55 

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

 

$

0.20 

 

$

0.55 



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

·

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

·

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

·

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









Thermark

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





5.    Inventories







 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)

Raw materials

 

$

63,754 

 

$

56,291 

Work in process

 

 

35,895 

 

 

33,099 

Finished goods

 

 

111,612 

 

 

95,464 

Total inventories

 

$

211,261 

 

$

184,854 



12


 

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, 2016 and 2015, and were $0.6 million for the nine months ended September 30, 2016 and 2015. We had on-hand precious metals owned by participants in our precious metals consignment program of $26.8 million at September 30, 2016, and $20.5 million at December 31, 2015, measured at fair value based on market prices for identical assets and net of credits.





6.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $447.0 million at September 30, 2016, and $421.3 million at December 31, 2015. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $2.4 million at September 30, 2016, and $3.4 million at September 30, 2015



As discussed in Note 3 - Discontinued Operations, our Europe-based Polymer Additives assets have been classified as held-for-sale under ASC Topic 360, Property, Plant and Equipment until the ultimate sale of the business in August 2016. As such, at each historical reporting date, these assets were tested for impairment comparing the fair value of the assets less costs to sell to the carrying value.  The fair value was determined using both the 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 during the first quarter of 2016, resulting in an impairment charge of $24.1 million, representing the remaining carrying value of long-lived assets at that reporting date.  During the third quarter of 2016, prior to the sale, an impairment charge of $26.8 million, representing net working capital, was recorded under ASC Topic 360 Property, Plant and Equipment. The impairment charges of $26.8 million and $50.9 million are included in Loss from discontinued operations, net of income taxes in our condensed consolidated statements of operations for the three and nine months ended September 30, 2016, respectively.    



During the third quarter of 2015, we recorded an impairment charge of $11.8 million, which represented additional capital expenditures related to the construction of the facility.  The impairment charge of $11.8 million is included in Loss from discontinued operations, net of income taxes in our condensed consolidated statements of operations for the three and nine months ended September 30, 2015.



The following table presents information about the Company's impairment charges on assets that were measured on a fair value basis for the nine months ended September 30, 2016, and for the year ended December 31, 2015.  The table also indicates the level within the fair value hierarchy of the valuation techniques used by the Company to determine the fair value:    







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Fair Value Measurements Using

 

Total

Description

 

Level 1

 

Level 2

 

Level 3

 

Total

 

(Losses)



 

(Dollars in thousands)

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

(50,902)

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

$

 —

 

$

 —

 

$

33,711 

 

$

33,711 

 

$

(11,792)



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



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

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

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





13


 

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)

Goodwill, net at December 31, 2015

 

$

43,484 

 

$

48,794 

 

$

53,391 

 

$

145,669 

Acquisitions

 

 

 —

 

 

(9,825)

(3), (4)

 

8,286 

(1), (2)

 

(1,539)

Foreign currency adjustments

 

 

(1,010)

 

 

156 

 

 

(396)

 

 

(1,250)

Goodwill, net at September 30, 2016

 

$

42,474 

 

$

39,125 

 

$

61,281 

 

$

142,880 



(1)

During the first quarter of 2016, the Company recorded goodwill related to the Ferer acquisition.  Refer to Note 4 for additional details.

(2)

During the second quarter of 2016, the Company recorded goodwill related to the Pinturas acquisition.  Refer to Note 4 for additional details.

(3)

During the second quarter of 2016, the Company recorded a purchase price adjustment within the measurement period for goodwill related to the Nubiola acquisition.  Refer to Note 4 for additional details.

(4)

During the third quarter of 2016, the Company recorded goodwill related to the Delta Performance  Products acquisition.  Refer to Note 4 for additional details.







 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)

Goodwill, gross

 

$

188,149 

 

$

190,938 

Accumulated impairment losses

 

 

(45,269)

 

 

(45,269)

Goodwill, net

 

$

142,880 

 

$

145,669 



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

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

14


 

Amortizable intangible assets consisted of the following:





 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)

Gross amortizable intangible assets:

 

 

 

 

 

 

Patents

 

$

5,251 

 

$

5,229 

Land rights

 

 

4,865 

 

 

4,947 

Technology/know-how and other

 

 

83,213 

 

 

66,558 

Customer relationships

 

 

55,044 

 

 

46,320 

     Total gross amortizable intangible assets

 

 

148,373 

 

 

123,054 

Accumulated amortization:

 

 

 

 

 

 

Patents

 

 

(5,040)

 

 

(4,880)

Land rights

 

 

(2,719)

 

 

(2,671)

Technology/know-how and other

 

 

(33,911)

 

 

(16,473)

Customer relationships

 

 

(4,269)

 

 

(2,234)

     Total accumulated amortization

 

 

(45,939)

 

 

(26,258)

            Amortizable intangible assets, net

 

$

102,434 

 

$

96,796 



Indefinite-lived intangible assets consisted of the following:





 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)

Indefinite-lived intangibles assets:

 

 

 

 

 

 

Trade names and trademarks

 

$

9,587 

 

$

9,837 





























8.    Debt

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





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)

Loans payable

 

$

6,033 

 

$

2,749 

Current portion of long-term debt

 

 

4,188 

 

 

4,697 

Loans payable and current portion of long-term debt

 

$

10,221 

 

$

7,446 



Long-term debt consisted of the following:





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

(Dollars in thousands)



 

 

 

 

 

 

Term loan facility, net of unamortized issuance costs

 

$

240,078 

 

$

291,717 

Revolving credit facility

 

 

233,210 

 

 

170,000 

Capital lease obligations

 

 

3,839 

 

 

4,478 

Other notes

 

 

4,161 

 

 

4,610 

Total long-term debt

 

 

481,288 

 

 

470,805 

Current portion of long-term debt

 

 

(4,188)

 

 

(4,697)

Long-term debt, less current portion

 

$

477,100 

 

$

466,108 



15


 

Credit Facility

On July 31, 2014, the Company entered into a credit facility (the “Credit Facility”) with a group of lenders to refinance the majority of its then outstanding debt.  The Credit Facility consisted of a $200 million secured revolving line of credit with a term of five years and a $300 million secured term loan facility with a term of seven years. On January 25, 2016, the Company amended the Credit Facility by entering into the Incremental Assumption Agreement (the “Incremental Agreement”) to increase the revolving line of credit commitment amount from $200 million to $300 million.  The Company then used a portion of the increase in the revolving line of credit to repay $50 million of the term loan facility. The Credit Facility was amended and a portion of the outstanding term loan was repaid to increase the amount of total liquidity available under the Credit Facility and reduce the total cost of borrowings. On August 29, 2016, the Company amended the Credit Facility by entering into the Second Incremental Assumption Agreement (the “Second Incremental Agreement”) to increase the revolving line of credit commitment amount to $400 million. The increase in the revolving line of credit commitment will be used for general corporate purposes, including acquisitions.

Principal payments on the term loan facility of $0.75 million quarterly, are payable commencing December 31, 2014, with the remaining balance due on the maturity date.  At September 30, 2016,  after taking into account all prior quarterly payments and the $50 million prepayment that was made in January 2016, the Company had borrowed $244.0 million under the term loan facility at an annual rate of 4.0%.  There are no additional borrowings available under the term loan facility. 

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

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

·

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

·

The applicable margin for base rate loans is 2.25%.  

·

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

·

The applicable margin for LIBOR rate loans is 3.25%.

·

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



Interest Rate – Revolving Credit Line:  The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus an applicable variable margin.  The variable margin will be based on the ratio of (a) the Company’s total consolidated debt outstanding at such time to (b) the Company’s consolidated EBITDA computed for the period of four consecutive fiscal quarters most recently ended. 

·

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

·

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

·

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

·

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

·

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



At September 30, 2016, the Company had borrowed $233.2 million under the revolving credit facilities at an annual weighted average interest rate of 3.5%.  The borrowing on the revolving credit facilities was used to fund the acquisitions, the share repurchase programs, and for other general business purposes.   After reductions for outstanding letters of credit secured by these facilities, we had $162.4 million of additional borrowings available under the revolving credit facilities at September 30, 2016.