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rti8Mag

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 March 31, 2018



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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

 

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company



 

 

Emerging growth company

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  



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

At March 31, 2018, there were 84,395,966 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



 

March 31,



 

2018

 

2017



 

(Dollars in thousands, except per share amounts)

Net sales

 

$

405,532 

 

$

320,555 

Cost of sales

 

 

286,846 

 

 

221,761 

Gross profit

 

 

118,686 

 

 

98,794 

Selling, general and administrative expenses

 

 

73,092 

 

 

59,446 

Restructuring and impairment charges

 

 

4,106 

 

 

3,018 

Other expense (income):

 

 

 

 

 

 

Interest expense

 

 

7,962 

 

 

6,224 

Interest earned

 

 

(201)

 

 

(180)

Foreign currency loss (gain), net

 

 

1,840 

 

 

(314)

Loss on extinguishment of debt

 

 

 —

 

 

3,905 

Miscellaneous expense (income), net

 

 

775 

 

 

(2,564)

Income before income taxes

 

 

31,112 

 

 

29,259 

Income tax expense

 

 

7,514 

 

 

7,138 

Net income

 

 

23,598 

 

 

22,121 

Less: Net income attributable to noncontrolling interests

 

 

207 

 

 

223 

Net income attributable to Ferro Corporation common shareholders

 

$

23,391 

 

$

21,898 

Earnings per share attributable to Ferro Corporation common shareholders:

 

 

 

 

 

 

Basic earnings per share

 

$

0.28 

 

$

0.26 

Diluted earnings per share

 

$

0.27 

 

$

0.26 











See accompanying notes to condensed consolidated financial statements.



 

3


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income











 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017



 

(Dollars in thousands)

Net income

 

$

23,598 

 

$

22,121 

Other comprehensive income, net of income tax:

 

 

 

 

 

 

Foreign currency translation income

 

 

5,787 

 

 

7,211 

Cash flow hedging instruments, unrealized gain

 

 

1,314 

 

 

 —

Postretirement benefit liabilities gain (loss)

 

 

 

 

(4)

Other comprehensive income, net of income tax

 

 

7,108 

 

 

7,207 

Total comprehensive income

 

 

30,706 

 

 

29,328 

Less: Comprehensive income attributable to noncontrolling interests

 

 

335 

 

 

263 

Comprehensive income attributable to Ferro Corporation

 

$

30,371 

 

$

29,065 



See accompanying notes to condensed consolidated financial statements.



 

4


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

(Dollars in thousands)

ASSETS

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

53,296 

 

$

63,551 

Accounts receivable, net

 

 

393,236 

 

 

354,416 

Inventories

 

 

358,083 

 

 

324,180 

Other receivables

 

 

66,117 

 

 

67,137 

Other current assets

 

 

16,154 

 

 

16,448 

Total current assets

 

 

886,886 

 

 

825,732 

Other assets

 

 

 

 

 

 

Property, plant and equipment, net

 

 

325,740 

 

 

321,742 

Goodwill

 

 

198,538 

 

 

195,369 

Intangible assets, net

 

 

187,693 

 

 

187,616 

Deferred income taxes

 

 

117,425 

 

 

108,025 

Other non-current assets

 

 

45,495 

 

 

43,718 

Total assets

 

$

1,761,777 

 

$

1,682,202 

LIABILITIES AND EQUITY

Current liabilities

 

 

 

 

 

 

Loans payable and current portion of long-term debt

 

$

35,549 

 

$

25,136 

Accounts payable

 

 

204,262 

 

 

211,711 

Accrued payrolls

 

 

38,975 

 

 

48,201 

Accrued expenses and other current liabilities

 

 

75,026 

 

 

70,151 

Total current liabilities

 

 

353,812 

 

 

355,199 

Other liabilities

 

 

 

 

 

 

Long-term debt, less current portion

 

 

773,218 

 

 

726,491 

Postretirement and pension liabilities

 

 

167,672 

 

 

166,680 

Other non-current liabilities

 

 

75,764 

 

 

77,152 

Total liabilities

 

 

1,370,466 

 

 

1,325,522 

Equity

 

 

 

 

 

 

Ferro Corporation shareholders’ equity:

 

 

 

 

 

 

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 84.4 million and 84.0 million shares outstanding at March 31, 2018, and December 31, 2017, respectively

 

 

93,436 

 

 

93,436 

Paid-in capital

 

 

295,961 

 

 

302,158 

Retained earnings

 

 

199,276 

 

 

171,744 

Accumulated other comprehensive loss

 

 

(68,488)

 

 

(75,468)

Common shares in treasury, at cost

 

 

(138,847)

 

 

(147,056)

Total Ferro Corporation shareholders’ equity

 

 

381,338 

 

 

344,814 

Noncontrolling interests

 

 

9,973 

 

 

11,866 

Total equity

 

 

391,311 

 

 

356,680 

Total liabilities and equity

 

$

1,761,777 

 

$

1,682,202 



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



 

(In thousands)

Balances at December 31, 2016

 

9,996 

 

$

(160,936)

 

$

93,436 

 

$

306,566 

 

$

114,690 

 

$

(106,643)

 

$

7,919 

 

$

255,032 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

21,898 

 

 

 —

 

 

223 

 

 

22,121 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,167 

 

 

40 

 

 

7,207 

Stock-based compensation transactions

 

(195)

 

 

5,229 

 

 

 —

 

 

(3,262)

 

 

 —

 

 

 —

 

 

 —

 

 

1,967 

Balances at March 31, 2017

 

9,801 

 

 

(155,707)

 

 

93,436 

 

 

303,304 

 

 

136,588 

 

 

(99,476)

 

 

8,182 

 

 

286,327 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2017

 

9,386 

 

 

(147,056)

 

 

93,436 

 

 

302,158 

 

 

171,744 

 

 

(75,468)

 

 

11,866 

 

 

356,680 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

23,391 

 

 

 —

 

 

207 

 

 

23,598 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,980 

 

 

128 

 

 

7,108 

Stock-based compensation transactions

 

(349)

 

 

8,209 

 

 

 —

 

 

(6,986)

 

 

 —

 

 

 —

 

 

 —

 

 

1,223 

Change in ownership interest

 

 —

 

 

 —

 

 

 —

 

 

789 

 

 

 —

 

 

 —

 

 

(2,228)

 

 

(1,439)

Adjustment for accounting standards update 2016-16

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,141 

 

 

 —

 

 

 —

 

 

4,141 

Balances at March 31, 2018

 

9,037 

 

$

(138,847)

 

$

93,436 

 

$

295,961 

 

$

199,276 

 

$

(68,488)

 

$

9,973 

 

$

391,311 



See accompanying notes to condensed consolidated financial statements.



 

6


 

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows







 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

March 31,



 

2018

 

2017



 

(Dollars in thousands)

Cash flows from operating activities

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(34,285)

 

$

1,630 

Cash flows from investing activities

 

 

 

 

 

 

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

 

 

(20,682)

 

 

(6,766)

Business acquisitions, net of cash acquired

 

 

(2,352)

 

 

 —

Other investing

 

 

22 

 

 

Net cash used in investing activities

 

 

(23,012)

 

 

(6,764)

Cash flows from financing activities

 

 

 

 

 

 

Net borrowings (repayments) under loans payable

 

 

9,742 

 

 

(3,985)

Proceeds from revolving credit facility, maturing 2019

 

 

 —

 

 

15,628 

Principal payments on revolving credit facility, maturing 2019

 

 

 —

 

 

(327,183)

Proceeds from term loan facility, maturing 2024

 

 

 —

 

 

623,827 

Principal payments on term loan facility, maturing 2021

 

 

 —

 

 

(243,250)

Principal payments on term loan facility, maturing 2024

 

 

(1,664)

 

 

 —

Proceeds from revolving credit facility, maturing 2022

 

 

119,550 

 

 

 —

Principal payments on revolving credit facility, maturing 2022

 

 

(79,367)

 

 

 —

Payment of debt issuance costs

 

 

 —

 

 

(12,712)

Acquisition related contingent consideration payment

 

 

(348)

 

 

 —

Other financing activities

 

 

(2,133)

 

 

(390)

Net cash provided by financing activities

 

 

45,780 

 

 

51,935 

Effect of exchange rate changes on cash and cash equivalents

 

 

1,262 

 

 

446 

(Decrease) increase in cash and cash equivalents

 

 

(10,255)

 

 

47,247 

Cash and cash equivalents at beginning of period

 

 

63,551 

 

 

45,582 

Cash and cash equivalents at end of period

 

$

53,296 

 

$

92,829 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

7,314 

 

$

6,535 

Income taxes

 

$

4,575 

 

$

4,097 



 

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, 2017.



We produce our products primarily in the Europe-Middle East (“EMEA”) region, the United States, the Asia Pacific region, and Latin America.



Operating results for the three months ended March 31, 2018, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2018.  



2.    Recent Accounting Pronouncements

Recently Adopted Accounting Standards

On January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation: (Topic 718): Scope of Modification Accounting.  ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This new guidance would only impact our consolidated financial statements if, in the future, we modified the terms of any of our share-based awards. We will apply the guidance of this ASU to applicable transactions after the adoption date. The adoption of ASU 2017-09 did not have a material impact on the Company’s condensed consolidated financial statements as of, and for the quarter ended, March 31, 2018.

On January 1, 2018, we adopted FASB ASU 2017-07, Compensation – Retirement Benefits: (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.  ASU 2017-07 requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered during the period. The other components of net benefit costs are to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU also allows only the service cost component of net benefit costs to be eligible for capitalization. We adopted this new standard using the retrospective approach for the presentation of the service cost component and the other components of the net periodic pension (credit) cost and net periodic postretirement benefit cost in the income statement. This resulted in the reclassification of income of $0.5 million from Selling, general and administrative expenses to Other income, expense, net in our condensed consolidated statement of operations for the three months ended March 31, 2017. The Company used a practical expedient where the amount disclosed in our Retirement Benefits footnote for the prior year comparative period was the basis for the estimation for applying the retrospective presentation requirements. Other than this reclassification, the adoption of ASU 2017-07 did not have an impact on the Company’s condensed consolidated financial statements as of and for the quarter ended March 31, 2018.  

On January 1, 2018, we adopted FASB ASU 2017-01, Business Combinations: (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 is intended to clarify the definition of a business with the objective of adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. We will apply the guidance of this

8


 

ASU to applicable transactions after the adoption date. The adoption of ASU 2017-01 did not have a material impact on the Company’s condensed consolidated financial statements as of, and for the quarter ended, March 31, 2018.

On January 1, 2018, we adopted FASB ASU 2016-16, Income Taxes: (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.  ASU 2016-16 is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory and requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. We adopted this new standard using the modified retrospective method.  The impact of adopting this guidance on the Company’s condensed consolidated financial statements resulted in an increase to  Retained earnings of $4.1 million and Deferred income taxes of $4.7 million and a decrease to Other receivables of $0.6 million.

On January 1, 2018, we adopted FASB ASU 2016-15, Statement of Cash Flow: (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  ASU 2016-15 is intended to address eight specific cash flow issues with the objective of reducing the existing diversity in practice.  Adoption of ASU 20161-15 did not have a material effect on our condensed consolidated financial statements.



On January 1, 2018, we adopted FASB ASU 2014-09, Revenue from Contracts with Customers: (Topic 606) (“ASC 606”). This ASU replaces nearly all existing U.S. GAAP guidance on revenue recognition. The standard prescribes a five-step model for recognizing revenue, the application of which require significant judgment.  We have completed our assessment and review of specific contracts and have adopted this new standard using the modified retrospective method with no impact to the opening retained earnings balance. We expect the impact of the adoption of this new standard will not have a material effect on our consolidated financial statements on an ongoing basis.



New Accounting Standards

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2018-03 provides targeted improvements to address certain aspects of recognition measurement presentation, and disclosure of financial instruments. This pronouncement is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification from Accumulated Other Comprehensive (Loss) Income to Retained Earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and requires certain disclosures about stranded tax effects. This pronouncement is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements. 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  ASU 2017-12 provides guidance to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This pronouncement is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other: (Topic 350): Simplifying the Test for Goodwill Impairment.  ASU 2017-04 is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the current goodwill impairment test. This pronouncement is effective for the annual or any interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements.



9


 

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



No other new accounting pronouncements issued had, or are expected to have, a material impact on the Company’s consolidated financial statements.



3.   Revenue



Revenue Recognition



Under ASC 606, revenues are recognized when control of the promised goods is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods.  In order to achieve that core principle, the Company applies the following five-step approach: 1) identify the contract with a customer, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when a performance obligation is satisfied.



The Company considers confirmed customer purchase orders, which in some cases are governed by master sales agreements, to be the contracts, from an accounting perspective, with customers.  Under our standard contracts, the only performance obligation is the delivery of manufactured goods and the performance obligation is satisfied at a point in time, when the Company transfers control of the manufactured goodsThe Company may receive orders for products to be delivered over multiple dates that may extend across several reporting periods.  The Company invoices for each order and recognizes revenues for each distinct product upon shipment, once transfer of control has occurred.  Payment terms are standard for the industry and jurisdiction in which we operate.  In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled.  Discounts or rebates are specifically stated in customer contracts or invoices, and are recorded as a reduction of revenue in the period the related revenue is recognized.  The product price as specified on the customer confirmed orders is considered the standalone selling price.  The Company allocates the transaction price to each distinct product based on its relative standalone selling price.  Revenue is recognized when control of the product is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which generally occurs at shipment. We review all material contracts to determine transfer of control based upon the business practices and legal requirements of each country.



The amount of shipping and handling fees invoiced to our customers at the time our product is shipped is included in net sales as we are the principle in those activities.  Sales, valued-added and other taxes collected from our customers and remitted to governmental authorities are excluded from net sales. 



There were no changes in amounts previously reported in the Company’s condensed consolidated financial statements due to adoption of ASC 606.



10


 









Revenues disaggregated by geography and reportable segment for the three months ending March 31, 2018, follow:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

EMEA

 

United States

 

Asia Pacific

 

Latin America

 

Total



 

(Dollars in thousands)

Performance Coatings

 

$

119,116 

 

$

12,819 

 

$

25,947 

 

$

26,766 

 

$

184,648 

Performance Colors and Glass

 

 

61,344 

 

 

37,091 

 

 

16,515 

 

 

5,555 

 

 

120,505 

Color Solutions

 

 

40,483 

 

 

41,626 

 

 

9,938 

 

 

8,332 

 

 

100,379 

   Total net sales

 

$

220,943 

 

$

91,536 

 

$

52,400 

 

$

40,653 

 

$

405,532 



Revenues disaggregated by geography and reportable segment for the three months ending March 31, 2017, follow:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

EMEA

 

United States

 

Asia Pacific

 

Latin America

 

Total



 

(Dollars in thousands)

Performance Coatings

 

$

69,160 

 

$

10,758 

 

$

21,317 

 

$

25,330 

 

$

126,565 

Performance Colors and Glass

 

 

44,586 

 

 

39,104 

 

 

14,633 

 

 

5,195 

 

 

103,518 

Color Solutions

 

 

35,177 

 

 

38,518 

 

 

8,258 

 

 

8,519 

 

 

90,472 

   Total net sales

 

$

148,923 

 

$

88,380 

 

$

44,208 

 

$

39,044 

 

$

320,555 





Practical Expedients and Exemptions



All material contracts have an original duration of one year or less and, as such, the Company uses the practical expedient applicable to such contracts, and has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period, or when the Company expects to recognize this revenue.



When the period of time between the transfer of control of the goods and the time the customer pays for the goods is one year or less, the Company uses the practical expedient allowed by ASC 606 that provides relief from adjusting the amount of promised consideration for the effects of a financing component.



We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within SG&A expenses.





4.    Acquisitions

Endeka Group

On November 1, 2017, the Company acquired 100% of the equity interests of Endeka Group (“Endeka”), a global producer of high-value coatings and key raw materials for the ceramic tile market, for €72.8 million (approximately $84.8 million), including the assumption of debt of 13.1 million (approximately $15.3 million). The Company incurred acquisition costs for the three months ended March 31, 2018, of $0.5 million, which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations. The acquired business contributed net sales of $30.7 million for the three months ended March 31, 2018, and net income attributable to Ferro Corporation of $4.0 million for the three months ended March 31, 2018



The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. During the first quarter of 2018, the Company adjusted the net working capital on the opening balance sheet and as such, the carrying amount of the personal and real property decreased $6.0 million. As of March 31, 2018, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $46.0 million of net working

11


 

capital, $24.1 million of deferred tax assets, $15.8 million of personal and real property and $1.1 million of noncontrolling interest on the condensed consolidated balance sheet. 

Gardenia Quimica S.A.

On August 3, 2017, the Company acquired a majority interest in Gardenia Quimica S.A. (“Gardenia”) for $3.0 million. The Company previously owned 46% of Gardenia and recorded it as an equity method investment. Following  this transaction, the Company owned 83.5% and fully consolidates Gardenia. Due to the change of control that occurred, the Company recorded a gain on purchase of $2.6 million related to the difference between the Company’s carrying value and fair value of the previously held equity method investment during the third quarter of 2017.  On March 1, 2018, the Company acquired the remaining equity interest in Gardenia for $1.4 million.

Dip Tech Ltd.

On August 2, 2017, the Company acquired 100% of the equity interests of Dip Tech Ltd. (“Dip-Tech”), a leading provider of digital printing solutions for glass coatings, for $77.0 million. Dip-Tech is headquartered in Kfar Saba, Israel. The purchase price consideration consisted of cash paid at closing of $60.1 million, net of the net working capital adjustment, and contingent consideration of $16.9 million. The Company incurred acquisition costs for the three months ended March 31,  2018, of $0.1 million, which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations. The acquired business contributed net sales of $3.9 million for the three months ended March 31, 2018, and net loss attributable to Ferro Corporation of $2.4 million for the three months ended March 31, 2018.  The net loss attributable to Ferro Corporation was driven by the amortization of acquired intangible asset amortization costs of $1.0 million for the three months ended March 31, 2018.  Dip-Tech incurred research and development costs of $1.5 million for the three months ended March 31, 2018.

The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of March 31, 2018, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $41.2 million of amortizable intangible assets, $33.5 million of goodwill, $7.2 million of a deferred tax liability, $5.1 million of indefinite-lived intangible assets, $3.2 million of personal and real property and $1.2 million of net working capital on the condensed consolidated balance sheet.    

Smalti per Ceramiche, s.r.l

On April 24, 2017, the Company acquired 100% of the equity interests of S.P.C. Group s.r.l., and 100% of the equity interests of Smalti per Ceramiche, s.r.l. (“SPC”), for 18.7 million (approximately $20.3 million), including the assumption of debt of 5.7 million (approximately $6.2 million). SPC is a high-end tile coatings manufacturer based in Italy focused on fast-growing specialty products. SPC’s products, strong technology, design capabilities, and customer-centric business model are complementary to our Performance Coatings segment, and position us for continued growth in the high-end tile markets. 

The information included herein has been prepared based on the allocation of the purchase price using the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. The Company recorded $6.1 million of personal and real property, $6.0 million of amortizable intangible assets, $5.2 million of goodwill, $5.0 million of net working capital and $2.0 million of a deferred tax liability on the condensed consolidated balance sheet.    



12


 



5.    Inventories







 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

(Dollars in thousands)

Raw materials

 

$

121,840 

 

$

112,300 

Work in process

 

 

54,626 

 

 

39,454 

Finished goods

 

 

181,617 

 

 

172,426 

Total inventories

 

$

358,083 

 

$

324,180 



In the production of some of our products, we use precious metals, which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $0.4 million and $0.2 million for the three months ended March 31, 2018 and 2017, respectively. We had on-hand precious metals owned by participants in our precious metals consignment program of $39.6 million at March 31, 2018, and $37.7  million at December 31, 2017, measured at fair value based on market prices for identical assets.  



6.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $522.0 million at March 31, 2018, and $502.9 million at December 31, 2017. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $4.8 million at March 31, 2018, and $2.5 million at March 31, 2017









7.   Goodwill and Other Intangible Assets 

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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Performance

 

 



 

Performance

 

Color

 

Colors and

 

 



 

Coatings

 

Solutions

 

Glass

 

Total



 

(Dollars in thousands)

Goodwill, net at December 31, 2017

 

$

38,236 

 

$

42,535 

 

$

114,598 

 

$

195,369 

Acquisitions

 

 

 —

 

 

 —

 

 

1,291 

(1)

 

1,291 

Foreign currency adjustments

 

 

803 

 

 

309 

 

 

766 

 

 

1,878 

Goodwill, net at March 31, 2018

 

$

39,039 

 

$

42,844 

 

$

116,655 

 

$

198,538 



(1) During the first quarter of 2018, the Company recorded a purchase price adjustment within the measurement period for goodwill related to the Dip-Tech acquisition.







 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

(Dollars in thousands)

Goodwill, gross

 

$

257,005 

 

$

253,836 

Accumulated impairment

 

 

(58,467)

 

 

(58,467)

Goodwill, net

 

$

198,538 

 

$

195,369 



Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying value. As of March 31, 2018, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.

13


 

Amortizable intangible assets consisted of the following:





 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

(Dollars in thousands)

Gross amortizable intangible assets:

 

 

 

 

 

 

Patents

 

$

5,610 

 

$

5,279 

Land rights

 

 

5,061 

 

 

4,947 

Technology/know-how and other

 

 

129,984 

 

 

131,070 

Customer relationships

 

 

95,972 

 

 

93,500 

     Total gross amortizable intangible assets

 

 

236,627 

 

 

234,796 

Accumulated amortization:

 

 

 

 

 

 

Patents

 

 

(5,566)

 

 

(5,226)

Land rights

 

 

(2,957)

 

 

(2,883)

Technology/know-how and other

 

 

(45,048)

 

 

(45,214)

Customer relationships

 

 

(12,873)

 

 

(11,114)

     Total accumulated amortization

 

 

(66,444)

 

 

(64,437)

            Amortizable intangible assets, net

 

$

170,183 

 

$

170,359 



Indefinite-lived intangible assets consisted of the following:





 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

(Dollars in thousands)

Indefinite-lived intangibles assets:

 

 

 

 

 

 

Trade names and trademarks

 

$

17,510 

 

$

17,257 















8.    Debt

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





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

(Dollars in thousands)

Loans payable

 

$

27,022 

 

$

16,360 

Current portion of long-term debt

 

 

8,527 

 

 

8,776 

Loans payable and current portion of long-term debt

 

$

35,549 

 

$

25,136 



Long-term debt consisted of the following:





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2018

 

2017



 

(Dollars in thousands)



 

 

 

 

 

 

Term loan facility, net of unamortized issuance costs, maturing 2024(1)

 

$

651,780 

 

$

645,242 

Revolving credit facility, maturing 2022

 

 

118,183 

 

 

78,000 

Capital lease obligations

 

 

4,776 

 

 

4,913 

Other notes

 

 

7,006 

 

 

7,112 

Total long-term debt

 

 

781,745 

 

 

735,267 

Current portion of long-term debt

 

 

(8,527)

 

 

(8,776)

Long-term debt, less current portion

 

$

773,218 

 

$

726,491 



(1)  The carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs of $7.2 million at March 31, 2018, and $7.5 million at December 31, 2017.

14


 

2017 Credit Facility

On February 14, 2017, the Company entered into a new credit facility (the “Credit Facility”) with a group of lenders to refinance its then outstanding credit facility debt and to provide liquidity for ongoing working capital requirements and general corporate purposes.

The Credit Facility consists of a $400 million secured revolving line of credit with a term of five years, a $357.5 million secured term loan facility with a term of seven years and a €250 million secured Euro term loan facility with a term of seven years. The term loans are payable in equal quarterly installments in an amount equal to 0.25% of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof.  In addition, the Company is required, on an annual basis, to make a prepayment of term loans until they are fully paid and then to the revolving loans in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Credit Facility.

Subject to the satisfaction of certain conditions, the Company can request additional commitments under the revolving line of credit or term loans in the aggregate principal amount of up to $250 million to the extent that existing or new lenders agree to provide such additional commitments and/or term loans. The Company can also raise certain additional debt or credit facilities subject to satisfaction of certain covenant levels.

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

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

·

The base rate for U.S. term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) syndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%.  The applicable margin for base rate loans is 1.50%.

·

The LIBOR rate for U.S. term loans shall not be less than 0.75% and the applicable margin for LIBOR rate U.S. term loans is 2.50%.

·

The EURIBOR rate for Euro term loans shall not be less than 0% and the applicable margin for EURIBOR rate loans is 2.75%.

·

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

At March 31, 2018, the Company had borrowed $353.9 million under the secured term loan facility at an interest rate of 4.38% and €247.5 million (approximately $305.1 million) under the secured Euro term loan facility at an interest rate of 2.75%. At March 31, 2018,  there were no additional borrowings available under the term loan facilities. We entered into interest rate swap agreements in the second quarter of 2017.  These swaps converted $150 million and €90 million of our term loans from variable interest rates to fixed interest rates. At March 31, 2018, the effective interest rate for the term loan facilities after adjusting for the interest rate swap was 4.27% for the secured term loan facility and 3.00% for the Euro term loan facility.

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

·

The base rate for revolving loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) syndication agent’s prime rate or (iii) the daily LIBOR rate plus 1.00%.  The applicable margin for base rate loans will vary between 0.75% and 1.75%.

·

The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.75% and 2.75%.

15


 

·

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

At March 31, 2018,  there were $118.2 million borrowings under the revolving credit line at an interest rate of 4.04%. After reductions for outstanding letters of credit secured by these facilities, we had $277.2 million of additional borrowings available under the revolving credit facilities at March 31, 2018.

The Credit Facility contains customary restrictive covenants including, but not limited to, limitations on use of loan proceeds, limitations on the Company’s ability to pay dividends and repurchase stock, limitations on acquisitions and dispositions, and limitations on certain types of investments. The Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company.

Specific to the revolving credit facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio.  If an event of default occurs, all amounts outstanding under the Credit Facility may be accelerated and become immediately due and payable.  At March 31, 2018, we were in compliance with the covenants of the Credit Facility.



2014 Credit Facility

In 2014, the Company entered into a credit facility that was amended on January 25, 2016, and August 29, 2016, resulting in a  $400 million secured revolving line of credit with a term of five years and a $300 million secured term loan facility with a term of seven years from the original issuance date (the “Previous Credit Facility”) with a group of lenders that was replaced on February 14, 2017, by the Credit Facility (as defined above).  For discussion of the Company’s Previous Credit Facility, refer to Note 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

In conjunction with the refinancing of the Previous Credit Facility, we recorded a charge of $3.9 million in connection with the write-off of unamortized issuance costs, which is recorded within Loss on extinguishment of debt in our condensed consolidated statement of operations for the three months ended March 31, 2017.



Other Financing Arrangements

We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $45.6 million and $64.5 million at March 31, 2018, and December 31, 2017, respectively. The unused portions of these lines provided additional liquidity of $13.1 million at March 31, 2018, and $39.4 million at December 31, 2017.





9.    Financial Instruments

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







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2018



 

Carrying

 

Fair Value



 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3



 

(Dollars in thousands)

Cash and cash equivalents

 

$

53,296 

 

$

53,296 

 

$

53,296 

 

$

 —

 

$

 —

Loans payable

 

 

(27,022)

 

 

(27,022)

 

 

 —

 

 

(27,022)

 

 

 —

Term loan facility, maturing 2024(1)

 

 

(651,780)

 

 

(653,410)

 

 

 —

 

 

(653,410)

 

 

 —

Revolving credit facility, maturing 2022

 

 

(118,183)

 

 

(119,312)

 

 

 —

 

 

(119,312)

 

 

 —

Other long-term notes payable

 

 

(7,006)

 

 

(4,526)

 

 

 —

 

 

(4,526)

 

 

 —

Interest rate swaps - asset

 

 

3,392 

 

 

3,392 

 

 

 —

 

 

3,392 

 

 

 —

Interest rate swaps - liability

 

 

(191)

 

 

(191)

 

 

 —

 

 

(191)

 

 

 —

Foreign currency forward contracts, net

 

 

460 

 

 

460 

 

 

 —

 

 

460 

 

 

 —



16


 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

December 31, 2017



 

Carrying

 

Fair Value



 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3



 

(Dollars in thousands)

Cash and cash equivalents

 

$

63,551 

 

$

63,551 

 

$

63,551 

 

$

 —

 

$

 —

Loans payable

 

 

(16,360)

 

 

(16,360)

 

 

 —

 

 

(16,360)

 

 

 —

Term loan facility, maturing 2024(1)

 

 

(645,242)

 

 

(646,979)

 

 

 —

 

 

(646,979)

 

 

 —

Revolving credit facility, maturing 2022

 

 

(78,000)

 

 

(79,295)

 

 

 —

 

 

(79,295)

 

 

 —

Other long-term notes payable

 

 

(7,112)

 

 

(3,973)

 

 

 —

 

 

(3,973)

 

 

 —

Interest rate swaps - asset

 

 

1,616 

 

 

1,616 

 

 

 —

 

 

1,616 

 

 

 —

Interest rate swaps - liability

 

 

(124)

 

 

(124)

 

 

 —

 

 

(124)

 

 

 —

Foreign currency forward contracts, net

 

 

(469)

 

 

(469)

 

 

 —

 

 

(469)

 

 

 —



(1) The carrying values of the term loan facility are net of unamortized debt issuance costs of $7.2 million and $7.5 million for the period ended March 31, 2018, and December 31, 2017, respectively.  



The fair values of cash and cash equivalents are based on the fair values of identical assets. The fair values of loans payable are based on the present value of expected future cash flows and approximate their carrying amounts due to the short periods to maturity.  The fair value of the term loan facility is based on market price information and is measured using the last available bid price of the instrument on a secondary market.  The revolving credit facility and other long-term notes payable are based on the present value of expected future cash flows and interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities adjusted for the Company's performance risk.  The fair values of our interest rate swaps are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The fair values of the foreign currency forward contracts are based on market prices for comparable contracts.

Derivative Instruments



The Company may use derivative instruments to partially offset its business exposure to foreign currency and interest rate risk on expected future cash flows, on net investment in certain foreign subsidiaries and on certain existing assets and liabilities.  However, the Company may choose not to hedge in countries where it is not economically feasible to enter into hedging arrangements or where hedging inefficiencies exist, such as timing of transactions

Derivatives Designated as Hedging Instruments

Interest rate swaps. To reduce our exposure to interest rate changes on our variable-rate debt, we entered into interest rate swap agreements in the second quarter of 2017.  These swaps converted $150 million and €90 million of our term loans from variable interest rates to fixed interest rates.  These swaps qualify and were designated as cash flow hedges.  The effective portions of cash flow hedges are recorded in accumulated other comprehensive loss (“AOCL”) and are reclassified into earnings in the same period the underlying hedged items impact earnings.  The ineffective portions of cash flow hedges is recognized immediately into earnings. The Company did not have any ineffectiveness related to the interest rate swaps during the three months ended March 31, 2018.    

The amount of gain recognized in AOCL and the amount of loss reclassified into earnings for the three months ended March 31, 2018, follow:





 

 

 

 

 

 

 

 



 

Amount of Gain

 

Amount of Loss Reclassified



 

Recognized in AOCL -

 

from AOCL into



 

 

Effective Portion

 

 

 

Income - Effective Portion

 



 

2018

 

 

2018

 



 

(Dollars in thousands)

Interest rate swap

 

$

1,709 

 

 

$

(136)

 

Net investment hedge. To help protect the value of the Company’s net investment in European operations against adverse changes in exchange rates, the Company uses non-derivative financial instruments, such as its foreign currency denominated debt, as economic

17


 

hedges of its net investments in certain foreign subsidiaries. Net investment hedges that use foreign currency denominated debt to hedge net investments are not impacted by ASC Topic 820, Fair Value Measurements, as the debt used as a hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value. The effective portions of net investment hedges are recorded in AOCL as a part of the cumulative translation adjustment.  The ineffective portions of net investment hedges are recognized immediately into earnings.

 Effective May 1, 2017, the Company designated a portion of its Euro denominated debt as a net investment hedge for accounting purposes.  The fair value of the net investment hedge is 19.6 million at March 31, 2018.  The Company did not have any ineffectiveness related to net investment hedges during the three months ended March 31, 2018

The amount of loss recognized in AOCL and the amount of loss reclassified into earnings  for the three months ended March 31, 2018, follow:





 

 

 

 

 

 

 

 



 

Amount of Loss

 

Amount of Loss Reclassified



 

Recognized in AOCL  -

 

from  AOCL into



 

 

Effective Portion

 

 

 

Income - Effective Portion

 



 

2018

 

 

2018

 



 

(Dollars in thousands)

Net investment hedge

 

$

(860)

 

 

$

 —

 



Derivatives Not Designated as Hedging Instruments

Foreign currency forward contracts.  We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges. Gains and losses on these foreign currency forward contracts are netted with gains and losses from currency fluctuations on transactions arising from international trade and reported as Foreign currency loss (gain), net in the condensed consolidated statements of operations. We recognized net gains of $0.4 million in the three months ended March 31, 2018, and net gains of $0.2 million in the three months ended March 31, 2017,  arising from the change in fair value of our financial instruments, which partially offset the related net gains and losses on international trade transactions. The notional amount of foreign currency forward contracts was $302.3 million at March 31, 2018, and $238.5 million at December 31, 2017.

The following table presents the effect on our condensed consolidated statements of operations for the three months ended March 31, 2018 and 2017, respectively, of our foreign currency forward contracts:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

Amount of Gain

 

 



 

Recognized in Earnings

 

 



 

Three Months Ended

 

 



 

March 31,

 

 



 

2018

 

2017

 

Location of Gain in Earnings



 

(Dollars in thousands)

 

 

Foreign currency forward contracts

 

$

391 

 

$

243 

 

Foreign currency loss (gain), net



18


 



Location and Fair Value Amount of Derivative Instruments



The following table presents the fair values on our condensed consolidated balance sheets of derivative instruments:







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



 

March 31,

 

December 31,