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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One) |
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x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2020 |
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or
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from _________ to __________ |
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Commission File Number 1-584
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FERRO CORPORATION
(Exact name of registrant as specified in its charter)
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OH (State or other jurisdiction of incorporation or organization) |
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34-0217820 (I.R.S. Employer Identification No.) |
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6060 Parkland Boulevard Suite 250 Mayfield Heights, OH (Address of principal executive offices) |
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44124 (Zip Code) |
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216-875-5600 (Registrant’s telephone number, including area code) |
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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 x NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES x NO o
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.
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Large Accelerated Filer |
x |
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Accelerated Filer |
o |
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Non-accelerated Filer |
o |
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Smaller Reporting Company |
o |
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Emerging Growth Company |
o |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, par value $1.00 |
FOE |
NYSE |
At June 30, 2020, there were 82,250,817 shares of Ferro Common Stock, par value $1.00, outstanding.
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TABLE OF CONTENTS
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Page |
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3 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
38 |
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39 |
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40 |
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40 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
41 |
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41 |
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41 |
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41 |
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41 |
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Exhibit 31.1 |
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Exhibit 31.2 |
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Exhibit 32.1 |
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Exhibit 32.2 |
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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(Dollars in thousands, except per share amounts) |
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2020 |
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2019 |
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2020 |
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2019 |
||||
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Net sales |
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$ |
204,801 |
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$ |
260,958 |
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$ |
457,127 |
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$ |
524,340 |
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Cost of sales |
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141,057 |
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181,828 |
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312,645 |
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367,351 |
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Gross profit |
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63,744 |
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79,130 |
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144,482 |
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156,989 |
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Selling, general and administrative expenses |
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50,541 |
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53,249 |
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106,587 |
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110,180 |
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Restructuring and impairment charges |
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8,619 |
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4,057 |
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9,784 |
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5,797 |
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Other expense (income): |
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Interest expense |
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6,177 |
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6,281 |
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11,707 |
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12,576 |
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Interest earned |
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(307) |
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(832) |
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(561) |
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(1,643) |
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Foreign currency losses (gains), net |
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1,143 |
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2,043 |
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(172) |
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4,007 |
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Miscellaneous expense (income), net |
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(703) |
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318 |
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(2,166) |
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364 |
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Income (loss) before income taxes |
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(1,726) |
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14,014 |
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19,303 |
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25,708 |
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Income tax expense |
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200 |
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2,653 |
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5,317 |
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5,546 |
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Income (loss) from continuing operations |
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(1,926) |
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11,361 |
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13,986 |
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20,162 |
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Income (loss) from discontinued operations, net of income taxes |
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(3,238) |
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(252) |
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(3,017) |
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4,825 |
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Net income (loss) |
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(5,164) |
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|
11,109 |
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10,969 |
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24,987 |
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Less: Net income attributable to noncontrolling interests |
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|
376 |
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238 |
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|
386 |
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|
512 |
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Net income (loss) attributable to Ferro Corporation common shareholders |
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$ |
(5,540) |
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$ |
10,871 |
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$ |
10,583 |
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$ |
24,475 |
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Earnings (loss) per share attributable to Ferro Corporation common shareholders: |
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Basic earnings (loss): |
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Continuing operations |
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$ |
(0.03) |
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$ |
0.13 |
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$ |
0.17 |
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$ |
0.24 |
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Discontinued operations |
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(0.04) |
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— |
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(0.04) |
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0.06 |
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$ |
(0.07) |
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$ |
0.13 |
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$ |
0.13 |
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$ |
0.30 |
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Diluted earnings (loss): |
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Continuing operations |
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$ |
(0.03) |
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$ |
0.13 |
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$ |
0.16 |
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$ |
0.23 |
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Discontinued operations |
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(0.04) |
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— |
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(0.04) |
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0.06 |
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$ |
(0.07) |
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$ |
0.13 |
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$ |
0.12 |
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$ |
0.29 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
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Three Months Ended |
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Six Months Ended |
||||||||
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June 30, |
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June 30, |
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(Dollars in thousands) |
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2020 |
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2019 |
|
2020 |
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2019 |
||||
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Net income (loss) |
|
$ |
(5,164) |
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$ |
11,109 |
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$ |
10,969 |
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$ |
24,987 |
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Other comprehensive income (loss), net of income tax: |
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Foreign currency translation income (loss) |
|
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3,857 |
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3,873 |
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(14,509) |
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7,381 |
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Cash flow hedging instruments, unrealized loss |
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(1,560) |
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(7,349) |
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(10,600) |
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(11,663) |
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Other comprehensive income (loss), net of income tax |
|
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2,297 |
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(3,476) |
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|
(25,109) |
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|
(4,282) |
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Total comprehensive income (loss) |
|
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(2,867) |
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7,633 |
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(14,140) |
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|
20,705 |
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Less: Comprehensive income attributable to noncontrolling interests |
|
|
340 |
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|
122 |
|
|
256 |
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|
502 |
|
Comprehensive income (loss) attributable to Ferro Corporation |
|
$ |
(3,207) |
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$ |
7,511 |
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$ |
(14,396) |
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$ |
20,203 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
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|
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June 30, |
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December 31, |
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|
(Dollars in thousands) |
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2020 |
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2019 |
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|
ASSETS |
||||||
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Current assets |
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Cash and cash equivalents |
|
$ |
62,031 |
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$ |
96,202 |
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Accounts receivable, net |
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|
133,349 |
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|
139,333 |
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Inventories |
|
|
290,659 |
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|
264,476 |
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Other receivables |
|
|
71,913 |
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|
69,365 |
|
Other current assets |
|
|
19,072 |
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|
22,373 |
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Current assets held-for-sale |
|
|
279,576 |
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|
291,420 |
|
Total current assets |
|
|
856,600 |
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|
883,169 |
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Other assets |
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|
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|
Property, plant and equipment, net |
|
|
296,290 |
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|
302,672 |
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Goodwill |
|
|
171,545 |
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|
172,209 |
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Intangible assets, net |
|
|
122,024 |
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|
127,815 |
|
Deferred income taxes |
|
|
101,114 |
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|
98,714 |
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Operating leased assets |
|
|
15,042 |
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|
20,088 |
|
Other non-current assets |
|
|
75,211 |
|
|
72,023 |
|
Non-current assets held-for-sale |
|
|
157,389 |
|
|
157,931 |
|
Total assets |
|
$ |
1,795,215 |
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$ |
1,834,621 |
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LIABILITIES AND EQUITY |
||||||
|
Current liabilities |
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt |
|
$ |
20,379 |
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$ |
8,703 |
|
Accounts payable |
|
|
117,856 |
|
|
138,799 |
|
Accrued payrolls |
|
|
27,799 |
|
|
27,447 |
|
Accrued expenses and other current liabilities |
|
|
76,685 |
|
|
73,016 |
|
Current liabilities held-for-sale |
|
|
103,466 |
|
|
133,780 |
|
Total current liabilities |
|
|
346,185 |
|
|
381,745 |
|
Other liabilities |
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
|
810,793 |
|
|
798,862 |
|
Postretirement and pension liabilities |
|
|
168,643 |
|
|
174,021 |
|
Operating leased non-current liabilities |
|
|
9,716 |
|
|
14,474 |
|
Other non-current liabilities |
|
|
60,037 |
|
|
56,976 |
|
Non-current liabilities held-for-sale |
|
|
39,186 |
|
|
38,341 |
|
Total liabilities |
|
|
1,434,560 |
|
|
1,464,419 |
|
Equity |
|
|
|
|
|
|
|
Ferro Corporation shareholders’ equity: |
|
|
|
|
|
|
|
Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 82.3 million and 82.0 million shares outstanding at June 30, 2020, and December 31, 2019, respectively |
|
|
93,436 |
|
|
93,436 |
|
Paid-in capital |
|
|
293,645 |
|
|
294,543 |
|
Retained earnings |
|
|
272,599 |
|
|
262,016 |
|
Accumulated other comprehensive loss |
|
|
(134,355) |
|
|
(109,376) |
|
Common shares in treasury, at cost |
|
|
(174,752) |
|
|
(180,243) |
|
Total Ferro Corporation shareholders’ equity |
|
|
350,573 |
|
|
360,376 |
|
Noncontrolling interests |
|
|
10,082 |
|
|
9,826 |
|
Total equity |
|
|
360,655 |
|
|
370,202 |
|
Total liabilities and equity |
|
$ |
1,795,215 |
|
$ |
1,834,621 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Equity
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ferro Corporation Shareholders |
|
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|
|||||||||||||||
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Common Shares |
|
|
|
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|
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Accumulated |
|
|
|
|
|||||||||
|
|
|
in Treasury |
|
|
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|
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Other |
|
Non- |
|
|
|||||||||
|
|
|
|
|
|
|
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
controlling |
|
Total |
||||||
|
(In thousands) |
|
Shares |
|
Amount |
|
Stock |
|
Capital |
|
Earnings |
|
Loss |
|
Interests |
|
Equity |
|||||||
|
Balances at December 31, 2019 |
|
11,431 |
|
$ |
(180,243) |
|
$ |
93,436 |
|
$ |
294,543 |
|
$ |
262,016 |
|
$ |
(109,376) |
|
$ |
9,826 |
|
$ |
370,202 |
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
16,123 |
|
|
— |
|
|
10 |
|
|
16,133 |
|
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(27,312) |
|
|
(94) |
|
|
(27,406) |
|
Stock-based compensation transactions |
|
(238) |
|
|
5,332 |
|
|
— |
|
|
(2,723) |
|
|
— |
|
|
— |
|
|
— |
|
|
2,609 |
|
Balances at March 31, 2020 |
|
11,193 |
|
|
(174,911) |
|
|
93,436 |
|
|
291,820 |
|
|
278,139 |
|
|
(136,688) |
|
|
9,742 |
|
|
361,538 |
|
Net income (loss) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(5,540) |
|
|
— |
|
|
376 |
|
|
(5,164) |
|
Other comprehensive income (loss) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,333 |
|
|
(36) |
|
|
2,297 |
|
Stock-based compensation transactions |
|
(8) |
|
|
159 |
|
|
— |
|
|
1,825 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,984 |
|
Balances at June 30, 2020 |
|
11,185 |
|
$ |
(174,752) |
|
$ |
93,436 |
|
$ |
293,645 |
|
$ |
272,599 |
|
$ |
(134,355) |
|
$ |
10,082 |
|
$ |
360,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ferro Corporation Shareholders |
|
|
|
|
|
|
|||||||||||||||
|
|
|
Common Shares |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|||||
|
|
|
in Treasury |
|
|
|
|
|
|
|
|
|
Other |
|
Non- |
|
|
|
||||||
|
|
|
|
|
|
|
|
Common |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
controlling |
|
Total |
||||||
|
(In thousands) |
|
Shares |
|
Amount |
|
Stock |
|
Capital |
|
Earnings |
|
Loss |
|
Interests |
|
Equity |
|||||||
|
Balances at December 31, 2018 |
|
10,433 |
|
$ |
(165,545) |
|
$ |
93,436 |
|
$ |
298,123 |
|
$ |
255,978 |
|
$ |
(105,361) |
|
$ |
9,218 |
|
$ |
385,849 |
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
13,604 |
|
|
— |
|
|
274 |
|
|
13,878 |
|
Other comprehensive income (loss) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(912) |
|
|
106 |
|
|
(806) |
|
Purchase of treasury stock |
|
1,441 |
|
|
(25,000) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(25,000) |
|
Stock-based compensation transactions |
|
(370) |
|
|
8,422 |
|
|
— |
|
|
(6,446) |
|
|
— |
|
|
— |
|
|
— |
|
|
1,976 |
|
Balances at March 31, 2019 |
|
11,504 |
|
|
(182,123) |
|
|
93,436 |
|
|
291,677 |
|
|
269,582 |
|
|
(106,273) |
|
|
9,598 |
|
|
375,897 |
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
10,871 |
|
|
— |
|
|
238 |
|
|
11,109 |
|
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,360) |
|
|
(116) |
|
|
(3,476) |
|
Stock-based compensation transactions |
|
(1) |
|
|
37 |
|
|
— |
|
|
2,181 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,218 |
|
Distributions to noncontrolling interests |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(654) |
|
|
(654) |
|
Balances at June 30, 2019 |
|
11,503 |
|
$ |
(182,086) |
|
$ |
93,436 |
|
$ |
293,858 |
|
$ |
280,453 |
|
$ |
(109,633) |
|
$ |
9,066 |
|
$ |
385,094 |
See accompanying notes to condensed consolidated financial statements.
Ferro Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||
|
|
|
June 30, |
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
$ |
(104,561) |
|
$ |
(78,949) |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
Capital expenditures for property, plant and equipment and other long-lived assets |
|
|
(14,982) |
|
|
(37,634) |
|
Collections of financing receivables |
|
|
62,580 |
|
|
41,271 |
|
Business acquisitions, net of cash acquired |
|
|
— |
|
|
(251) |
|
Other investing activities |
|
|
778 |
|
|
1,898 |
|
Net cash provided by investing activities |
|
|
48,376 |
|
|
5,284 |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
Net borrowings under loans payable |
|
|
11,420 |
|
|
7,528 |
|
Principal payments on term loan facility - Amended Credit Facility |
|
|
(4,100) |
|
|
(4,100) |
|
Proceeds from revolving credit facility - Amended Credit Facility |
|
|
360,000 |
|
|
165,420 |
|
Principal payments on revolving credit facility - Amended Credit Facility |
|
|
(343,383) |
|
|
(122,943) |
|
Purchase of treasury stock |
|
|
— |
|
|
(25,000) |
|
Other financing activities |
|
|
(1,418) |
|
|
(568) |
|
Net cash provided by financing activities |
|
|
22,519 |
|
|
20,337 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(505) |
|
|
338 |
|
Decrease in cash and cash equivalents |
|
|
(34,171) |
|
|
(52,990) |
|
Cash and cash equivalents at beginning of period |
|
|
104,402 |
|
|
104,301 |
|
Cash and cash equivalents at end of period |
|
|
70,231 |
|
|
51,311 |
|
Less: Cash and cash equivalents of discontinued operations at end of period |
|
|
8,200 |
|
|
8,200 |
|
Cash and cash equivalents of continuing operations at end of period |
|
$ |
62,031 |
|
$ |
43,111 |
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest |
|
$ |
16,736 |
|
$ |
16,957 |
|
Income taxes |
|
$ |
7,722 |
|
$ |
8,251 |
See accompanying notes to condensed consolidated financial statements.
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, 2019.
We produce our products primarily in the Europe, Middle East and Africa (“EMEA”) region, the United States (“U.S.”), the Asia Pacific region, and Latin America.
Operating results for the three and six months ended June 30, 2020, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2020.
During the fourth quarter of 2019, substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets. As further discussed in Note 4, we entered into a definitive agreement to sell our Tile Coatings business, which has historically been included in the Performance Coatings reportable segment. Therefore, the associated operating results, net of income tax, have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Throughout this Quarterly Report on Form 10-Q, with the exception of the statements of cash flows and unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
Subsequent to the treatment of the Tile Coatings business as discontinued operations, the remaining businesses within Performance Coatings were included within the Performance Colors and Glass reportable segment, which as of January 1, 2020, was renamed Functional Coatings.
Certain reclassifications have been made to the prior year financial statements to conform to current year classifications. The reclassification relates to the balance sheet presentation of assets and liabilities as held for sale and statement of operations presentation of results classified as discontinued operations in relation to the Tile Coatings business transaction.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Standards
This section provides a description of new accounting pronouncements ("Accounting Standard Update" or "ASU") issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company.
New Accounting Standards Not Yet Adopted
We are currently evaluating the impact on our financial statements of the following ASUs:
|
|
|
|
|
|
|
|
|
Standard |
|
Description |
|
ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, issued March, 2020 |
|
Provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU are effective for all entities through December 31, 2022. |
|
ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, issued August, 2018 |
|
Modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for fiscal years beginning after December 15, 2020 and is to be applied using a retrospective approach for all periods presented. Early adoption is permitted. |
No other new accounting pronouncements issued had, or are expected to have, a material impact on the Company’s consolidated financial statements.
3. Revenue
Revenues disaggregated by geography and reportable segment for the three months ended June 30, 2020, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
EMEA |
|
United States |
|
Asia Pacific |
|
Latin America |
|
Total |
|||||
|
Functional Coatings |
|
|
51,071 |
|
|
52,194 |
|
|
21,733 |
|
|
6,674 |
|
|
131,672 |
|
Color Solutions |
|
|
27,874 |
|
|
30,520 |
|
|
9,110 |
|
|
5,625 |
|
|
73,129 |
|
Total net sales |
|
$ |
78,945 |
|
$ |
82,714 |
|
$ |
30,843 |
|
$ |
12,299 |
|
$ |
204,801 |
Revenues disaggregated by geography and reportable segment for the three months ended June 30, 2019, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
EMEA |
|
United States |
|
Asia Pacific |
|
Latin America |
|
Total |
|||||
|
Functional Coatings |
|
|
74,997 |
|
|
50,938 |
|
|
24,700 |
|
|
13,057 |
|
|
163,692 |
|
Color Solutions |
|
|
37,044 |
|
|
43,142 |
|
|
9,011 |
|
|
8,069 |
|
|
97,266 |
|
Total net sales |
|
$ |
112,041 |
|
$ |
94,080 |
|
$ |
33,711 |
|
$ |
21,126 |
|
$ |
260,958 |
Revenues disaggregated by geography and reportable segment for the six months ended June 30, 2020, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
EMEA |
|
United States |
|
Asia Pacific |
|
Latin America |
|
Total |
|||||
|
Functional Coatings |
|
$ |
126,928 |
|
$ |
98,888 |
|
$ |
43,489 |
|
$ |
17,802 |
|
$ |
287,107 |
|
Color Solutions |
|
|
65,763 |
|
|
71,679 |
|
|
18,406 |
|
|
14,172 |
|
|
170,020 |
|
Total net sales |
|
$ |
192,691 |
|
$ |
170,567 |
|
$ |
61,895 |
|
$ |
31,974 |
|
$ |
457,127 |
Revenues disaggregated by geography and reportable segment for the six months ended June 30, 2019, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
EMEA |
|
United States |
|
Asia Pacific |
|
Latin America |
|
Total |
|||||
|
Functional Coatings |
|
$ |
153,262 |
|
$ |
102,917 |
|
$ |
47,598 |
|
$ |
26,941 |
|
$ |
330,718 |
|
Color Solutions |
|
|
72,611 |
|
|
86,741 |
|
|
17,836 |
|
|
16,434 |
|
|
193,622 |
|
Total net sales |
|
$ |
225,873 |
|
$ |
189,658 |
|
$ |
65,434 |
|
$ |
43,375 |
|
$ |
524,340 |
4. Discontinued Operations
During the fourth quarter of 2019, substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets. We entered into a definitive agreement to sell our Tile Coatings business, which has historically been a part of our Performance Coatings reportable segment. Therefore, the associated operating results, net of income tax, have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented.
The table below summarizes results for the Tile Coatings business for the three and six months ended June 30, 2020 and 2019 which are reflected in our consolidated statements of operations as discontinued operations. Interest expense has been allocated to the discontinued operations based on the ratio of net assets of the business to consolidated net assets excluding debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Net sales |
|
$ |
75,254 |
|
$ |
132,944 |
|
$ |
190,004 |
|
$ |
257,110 |
|
Cost of sales |
|
|
59,073 |
|
|
103,816 |
|
|
145,975 |
|
|
203,985 |
|
Gross profit |
|
|
16,181 |
|
|
29,128 |
|
|
44,029 |
|
|
53,125 |
|
Selling, general and administrative expenses |
|
|
15,542 |
|
|
18,396 |
|
|
34,350 |
|
|
33,545 |
|
Restructuring and impairment charges |
|
|
1,758 |
|
|
6,203 |
|
|
2,037 |
|
|
6,590 |
|
Interest expense |
|
|
2,517 |
|
|
2,969 |
|
|
4,748 |
|
|
5,958 |
|
Interest earned |
|
|
(129) |
|
|
(52) |
|
|
(153) |
|
|
(67) |
|
Foreign currency losses (gains), net |
|
|
(804) |
|
|
(663) |
|
|
4,961 |
|
|
(1,889) |
|
Miscellaneous expense, net |
|
|
705 |
|
|
41 |
|
|
1,247 |
|
|
270 |
|
Income (loss) from discontinued operations before income taxes |
|
|
(3,408) |
|
|
2,234 |
|
|
(3,161) |
|
|
8,718 |
|
Income tax expense (benefit) |
|
|
(170) |
|
|
2,486 |
|
|
(144) |
|
|
3,893 |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
(3,238) |
|
|
(252) |
|
|
(3,017) |
|
|
4,825 |
|
Less: Net income attributable to noncontrolling interests |
|
|
67 |
|
|
45 |
|
|
44 |
|
|
150 |
|
Net income (loss) attributable to Tile Coatings business |
|
$ |
(3,305) |
|
$ |
(297) |
|
$ |
(3,061) |
|
$ |
4,675 |
The following table summarizes the assets and liabilities which are classified as held-for-sale at June 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Cash and cash equivalents |
|
$ |
8,200 |
|
$ |
8,200 |
|
Accounts receivable, net |
|
|
142,334 |
|
|
156,645 |
|
Inventories |
|
|
101,084 |
|
|
101,127 |
|
Other receivables |
|
|
24,884 |
|
|
22,442 |
|
Other current assets |
|
|
3,074 |
|
|
3,006 |
|
Current assets held-for-sale |
|
|
279,576 |
|
|
291,420 |
|
Property, plant and equipment, net |
|
|
97,130 |
|
|
96,762 |
|
Goodwill |
|
|
3 |
|
|
3 |
|
Amortizable intangible assets, net |
|
|
39,720 |
|
|
39,692 |
|
Deferred income taxes |
|
|
14,034 |
|
|
14,425 |
|
Other non-current assets |
|
|
6,502 |
|
|
7,049 |
|
Non-current assets held-for-sale |
|
|
157,389 |
|
|
157,931 |
|
Total assets held-for-sale |
|
$ |
436,965 |
|
$ |
449,351 |
|
|
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt |
|
$ |
3,118 |
|
$ |
3,678 |
|
Accounts payable |
|
|
68,001 |
|
|
96,998 |
|
Accrued payrolls |
|
|
6,740 |
|
|
4,838 |
|
Accrued expenses and other current liabilities |
|
|
25,607 |
|
|
28,266 |
|
Current liabilities held-for-sale |
|
|
103,466 |
|
|
133,780 |
|
Long-term debt, less current portion |
|
|
25,755 |
|
|
25,805 |
|
Postretirement and pension liabilities |
|
|
8,002 |
|
|
7,473 |
|
Other non-current liabilities |
|
|
5,429 |
|
|
5,063 |
|
Non-current liabilities held-for-sale |
|
|
39,186 |
|
|
38,341 |
|
Total liabilities held-for-sale |
|
$ |
142,652 |
|
$ |
172,121 |
The following table summarizes cash flow data relating to discontinued operations for the six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||
|
|
|
June 30, |
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Depreciation |
|
$ |
— |
|
$ |
5,833 |
|
Amortization of intangible assets |
|
|
— |
|
|
1,594 |
|
Capital expenditures |
|
|
(1,909) |
|
|
(7,502) |
|
Non-cash operating activities - goodwill impairment |
|
|
— |
|
|
5,963 |
|
Non-cash operating activities - restructuring and impairment charges |
|
|
1,070 |
|
|
115 |
|
Non-cash investing activities - capital expenditures, consisting of unpaid capital expenditure liabilities at period end |
|
|
507 |
|
|
1,322 |
5. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Raw materials |
|
$ |
88,658 |
|
$ |
80,176 |
|
Work in process |
|
|
50,247 |
|
|
49,717 |
|
Finished goods |
|
|
151,754 |
|
|
134,583 |
|
Total inventories |
|
$ |
290,659 |
|
$ |
264,476 |
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 $0.6 million for the three months ended June 30, 2020 and 2019, and were $1.7 million for the six months ended June 30, 2020 and 2019. We had on-hand precious metals owned by participants in our precious metals consignment program of $77.3 million at June 30, 2020, and $66.2 million at December 31, 2019, 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 $420.6 million at June 30, 2020 and $413.8 million at December 31, 2019. As discussed in Note 4, the assets of our Tile Coatings business were classified as held-for-sale under ASC Topic 360; Property, Plant, and Equipment. As such, additional accumulated depreciation of $137.8 million at June 30, 2020 and $136.7 million at December 31, 2019 were classified as Non-current assets held for sale.
Unpaid capital expenditure liabilities, which are non-cash investing activities, were $0.3 million at June 30, 2020 and $0.9 million at June 30, 2019.
7. Goodwill and Other Intangible Assets
Details and activity in the Company’s goodwill by segment follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
|
|
Functional |
|
Color |
|
|
|||
|
(Dollars in thousands) |
|
Coatings |
|
Solutions |
|
Total |
|||
|
Goodwill, net at December 31, 2019 |
|
$ |
121,902 |
|
$ |
50,307 |
|
$ |
172,209 |
|
Foreign currency adjustments |
|
|
(655) |
|
|
(9) |
|
|
(664) |
|
Goodwill, net at June 30, 2020 |
|
$ |
121,247 |
|
$ |
50,298 |
|
$ |
171,545 |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Goodwill, gross |
|
$ |
230,012 |
|
$ |
230,676 |
|
Accumulated impairment |
|
|
(58,467) |
|
|
(58,467) |
|
Goodwill, net |
|
$ |
171,545 |
|
$ |
172,209 |
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 June 30, 2020, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.
Amortizable intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Gross amortizable intangible assets: |
|
|
|
|
|
|
|
Patents |
|
$ |
5,424 |
|
$ |
5,434 |
|
Land rights |
|
|
2,859 |
|
|
2,900 |
|
Technology/know-how and other |
|
|
114,480 |
|
|
112,940 |
|
Customer relationships |
|
|
66,022 |
|
|
66,454 |
|
Total gross amortizable intangible assets |
|
|
188,785 |
|
|
187,728 |
|
Accumulated amortization: |
|
|
|
|
|
|
|
Patents |
|
|
(5,403) |
|
|
(5,413) |
|
Land rights |
|
|
(1,398) |
|
|
(1,378) |
|
Technology/know-how and other |
|
|
(57,011) |
|
|
(50,973) |
|
Customer relationships |
|
|
(15,642) |
|
|
(14,831) |
|
Total accumulated amortization |
|
|
(79,454) |
|
|
(72,595) |
|
Amortizable intangible assets, net |
|
$ |
109,331 |
|
$ |
115,133 |
Indefinite-lived intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Indefinite-lived intangibles assets: |
|
|
|
|
|
|
|
Trade names and trademarks |
|
$ |
12,693 |
|
$ |
12,682 |
8. Debt
Loans payable and current portion of long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Loans payable |
|
$ |
11,602 |
|
$ |
— |
|
Current portion of long-term debt |
|
|
8,777 |
|
|
8,703 |
|
Current portion of long-term debt |
|
$ |
20,379 |
|
$ |
8,703 |
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Term loan facility, net of unamortized issuance costs, maturing 2024(1) |
|
$ |
797,236 |
|
$ |
801,764 |
|
Revolving credit facility |
|
|
16,617 |
|
|
— |
|
Capital lease obligations |
|
|
2,292 |
|
|
2,305 |
|
Other notes |
|
|
3,425 |
|
|
3,496 |
|
Total long-term debt |
|
|
819,570 |
|
|
807,565 |
|
Current portion of long-term debt |
|
|
(8,777) |
|
|
(8,703) |
|
Long-term debt, less current portion |
|
$ |
810,793 |
|
$ |
798,862 |
(1)The carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs of $4.3 million at June 30, 2020, and $3.9 million at December 31, 2019.
Amended Credit Facility
On April 25, 2018, the Company entered into an amendment (the “Amended Credit Facility”) to its existing credit facility (the “Credit Facility”), which Amended Credit Facility (a) provided a new revolving facility (the “2018 Revolving Facility”), which replaced the Company’s existing revolving facility, (b) repriced the (“Tranche B-1 Loans”), and (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars. On May 4, 2020, the Company entered into an amendment (Third Amendment to Credit Agreement) to the Amended Credit Facility, which added an approval to Section 7.2.8 Permitted Dispositions for the Tile Coatings Business Disposition. The Amended Credit Facility will be used for ongoing working capital requirements and general corporate purposes. The Tranche B-2 Loans are borrowed by the Company and the Tranche B-3 Loans are borrowed on a joint and several basis by Ferro GmbH and Ferro Europe Holdings LLC.
The Amended Credit Facility consists of a $500 million secured revolving line of credit with a maturity of February 14, 2023, a $355 million secured term loan facility with a maturity of February 14, 2024, a $235 million secured term loan facility with a maturity of February 14, 2024 and a $230 million secured term loan facility with a maturity of February 14, 2024. 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 in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Amended Credit Facility, which prepayment will be applied first to the term loans until they are paid in full, and then to the revolving loans.
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 Amended 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. The Tranche B-3 Loans are guaranteed by the Company, the U.S. subsidiary guarantors and a cross-guaranty by the borrowers of the Tranche B-3 Loans and are secured by the collateral securing the revolving loans and the other term loans, in addition to a pledge of the equity interests of Ferro GmbH.
Interest Rate – Term Loans: The interest rates applicable to the 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 base rate for term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans is 1.25%.
The LIBOR rate for term loans shall not be less than 0.0% and the applicable margin for LIBOR rate term loans is 2.25%.
For LIBOR 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 for the corresponding duration.
At June 30, 2020, the Company had borrowed $347.0 million under the Tranche B-1 Loans at an interest rate of 2.56%, $229.7 million under the Tranche B-2 Loans at an interest rate of 2.56%, and $224.8 million under the Tranche B-3 Loans at an interest rate of 2.56%. At June 30, 2020, there were no additional borrowings available under the Tranche B-1 Loans, Tranche B-2 Loans, or Tranche B-3 Loans. In connection with these borrowings, we entered into swap agreements in the second quarter of 2018. At June 30, 2020, the effective interest rate for the Tranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans, after adjusting for the interest rate swap, was 4.94%, 2.14%, and 2.48%, respectively.
Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the 2018 Revolving Credit Facility 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 (as defined in the Amended Credit Agreement) at such time to (b) the Company’s consolidated EBITDA (as defined in the Amended Credit Agreement) 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) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans will vary between 0.50% to 1.50%.
The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.50% and 2.50%.
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 June 30, 2020, there were $16.6 million of borrowings under the 2018 Revolving Credit Facility. After reductions for outstanding letters of credit secured by these facilities, we had $479.2 million of additional borrowings available under the revolving credit facilities at June 30, 2020.
The Amended 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 Amended 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 2018 Revolving 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 Amended Credit Facility agreement may be accelerated and become immediately due and payable. At June 30, 2020, we were in compliance with the covenants of the Amended Credit Facility.
Credit Facility
On February 14, 2017, the Company entered into 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 consisted 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. For further discussion of the Company’s Credit Facility, refer to Note 9 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
International Receivable Sales Programs
We have several international programs to sell without recourse trade accounts receivable to financial institutions. These transactions are treated as a sale and are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. The Company continues to service the receivables sold in exchange for a fee. The servicing fee for the three and six months ended June 30, 2020 and 2019, was immaterial. The program, whose maximum capacity is €100 million, is scheduled to expire on December 31, 2023. Generally, at the transfer date, the Company receives cash equal to approximately 65% of the value of the sold receivable. Cash proceeds at the transfer date from these arrangements are reflected in operating activities in our consolidated statement of cash flows. The proceeds from the deferred purchase price are reflected in investing activities.
The outstanding principal amount of receivables sold under this program, for which cash has been collected but not yet remitted, was $14.8 million at June 30, 2020 and $19.3 million at December 31, 2019. The carrying amount of deferred purchase price was $7.2 million at June 30, 2020 and $6.6 million at December 31, 2019 and is recorded in Other receivables. Trade accounts receivable collected to be remitted were $9.4 million at June 30, 2020 and $12.8 million at December 31, 2019 and is recorded in Accrued expenses and other current liabilities. As discussed in Note 4, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business. As such, our Tile Coatings business was classified as held-for-sale. At June 30, 2020 and December 31, 2019, $40.4 million and $52.6 million, respectively, of the outstanding principal amount of receivables sold under this program pertained to the Tile Coatings business. The carrying amount of the deferred purchase price at June 30, 2020 and December 31, 2019 was $22.7 million and $20.5 million, respectively. Both are recorded in Current assets held-for-sale in our consolidated balance sheets.
Activity from these programs for the six months ended June 30, 2020 and 2019 is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||
|
|
|
June 30, |
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Trade accounts receivable sold to financial institutions |
|
$ |
91,048 |
|
$ |
20,337 |
|
Cash proceeds from financial institutions (1) |
|
|
58,794 |
|
|
12,634 |
(1)In the six months ended June 30, 2020 and 2019, our Tile Coatings business received cash proceeds from financial institutions of $47.3 million and $67.6 million, respectively. Refer to Note 4 for additional discussion of the Tile Coatings business and its classification as discontinued operations.
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 $28.1 million at June 30, 2020 and December 31, 2019. The unused portions of these lines provided additional liquidity of $13.4 million and $25.0 million at June 30, 2020 and December 31, 2019, respectively.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 |
|||||||||||||
|
|
|
Carrying |
|
Fair Value |
|||||||||||
|
(Dollars in thousands) |
|
Amount |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|||||
|
Cash and cash equivalents |
|
$ |
62,031 |
|
$ |
62,031 |
|
$ |
62,031 |
|
$ |
— |
|
$ |
— |
|
Loans payable |
|
|
(11,602) |
|
|
(11,602) |
|
|
— |
|
|
(11,602) |
|
|
— |
|
Term loan facility - Amended Credit Facility (1) |
|
|
(797,236) |
|
|
(775,050) |
|
|
— |
|
|
(775,050) |
|
|
— |
|
Revolving credit facility |
|
|
(16,617) |
|
|
(17,484) |
|
|
— |
|
|
(17,484) |
|
|
— |
|
Other long-term notes payable |
|
|
(3,425) |
|
|
(1,442) |
|
|
— |
|
|
(1,442) |
|
|
— |
|
Cross currency swaps |
|
|
21,246 |
|
|
21,246 |
|
|
— |
|
|
21,246 |
|
|
— |
|
Interest rate swaps |
|
|
(27,517) |
|
|
(27,517) |
|
|
— |
|
|
(27,517) |
|
|
— |
|
Foreign currency forward contracts, net |
|
|
1,696 |
|
|
1,696 |
|
|
— |
|
|
1,696 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|||||||||||||
|
|
|
Carrying |
|
Fair Value |
|||||||||||
|
(Dollars in thousands) |
|
Amount |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|||||
|
Cash and cash equivalents |
|
$ |
96,202 |
|
$ |
96,202 |
|
$ |
96,202 |
|
$ |
— |
|
$ |
— |
|
Term loan facility - Amended Credit Facility (1) |
|
|
(801,764) |
|
|
(799,750) |
|
|
— |
|
|
(799,750) |
|
|
— |
|
Other long-term notes payable |
|
|
(3,496) |
|
|
(1,557) |
|
|
— |
|
|
(1,557) |
|
|
— |
|
Cross currency swaps |
|
|
22,111 |
|
|
22,111 |
|
|
— |
|
|
22,111 |
|
|
— |
|
Interest rate swaps |
|
|
(14,698) |
|
|
(14,698) |
|
|
— |
|
|
(14,698) |
|
|
— |
|
Foreign currency forward contracts, net |
|
|
601 |
|
|
601 |
|
|
— |
|
|
601 |
|
|
— |
(1)The carrying value of the term loan facility is net of unamortized debt issuance costs of $4.3 million and $3.9 million for the period ended June 30, 2020, and December 31, 2019, respectively.
The fair values of cash and cash equivalents are based on the fair values of identical assets. The fair value of loans payable is 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 and cross currency 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 investments 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
Cash Flow Hedges. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is recorded as a component of Accumulated other comprehensive loss (“AOCL”) and reclassified into earnings in the same period during which the hedged transaction affects earnings.
The Company utilizes interest rate swaps to limit exposure to market fluctuations on floating-rate debt.
During the second quarter of 2018, the Company entered into variable to fixed interest rate swaps with a maturity date of February 14, 2024. The notional amount is $312.8 million at June 30, 2020. These swaps are hedging risk associated with the Tranche B-1 Loans. These interest rate swaps are designated as cash flow hedges. As of June 30, 2020, the Company expects it will reclassify net losses of approximately $8.2 million, currently recorded in AOCL, into interest expense in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
The Company has converted a U.S. dollar denominated, variable rate debt obligation into a Euro fixed rate obligation using receive-float, pay-fixed cross currency swaps in the second quarter of 2018. These swaps are hedging currency and interest rate risk associated with the Tranche B-3 Loans. These cross currency swaps are designated as cash flow hedges. The notional amount is $224.8 million at June 30, 2020, with a maturity date of February 14, 2024. As of June 30, 2020, the Company expects it will reclassify net gains of approximately $0.8 million, currently recorded in AOCL, into interest expense in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
The amount of loss recognized in AOCL and the amount of loss (gain) reclassified into earnings for the three months ended June 30, 2020 and 2019, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss (Gain) |
|
|
||||
|
|
|
Amount of Loss |
|
Reclassified from |
|
Location of Gain (Loss) |
||||||||
|
|
|
Recognized in AOCL |
|
AOCL into Income |
|
Reclassified from |
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
AOCL into Income |
||||
|
Interest rate swaps |
|
$ |
(1,934) |
|
$ |
(6,813) |
|
$ |
(824) |
|
$ |
36 |
|
Interest expense |
|
Cross currency swaps |
|
|
(3,902) |
|
|
(4,708) |
|
|
851 |
|
|
1,528 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
$ |
27 |
|
$ |
1,564 |
|
Total Interest expense |
|
Cross currency swaps |
|
|
|
|
|
|
|
|
(4,204) |
|
|
(3,166) |
|
Foreign currency losses, net |
|
|
|
|
|
|
|
|
|
$ |
(4,204) |
|
$ |
(3,166) |
|
Total Foreign currency losses, net |
The amount of gain (loss) recognized in AOCL and the amount of loss (gain) reclassified into earnings for the six months ended June 30, 2020 and 2019, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss (Gain) |
|
|
||||
|
|
|
Amount of Gain (Loss) |
|
Reclassified from |
|
Location of Gain (Loss) |
||||||||
|
|
|
Recognized in AOCL |
|
AOCL into Income |
|
Reclassified from |
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
AOCL into Income |
||||
|
Interest rate swaps |
|
$ |
(14,808) |
|
$ |
(10,920) |
|
$ |
(1,322) |
|
$ |
214 |
|
Interest expense |
|
Cross currency swaps |
|
|
1,356 |
|
|
372 |
|
|
2,019 |
|
|
3,160 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
$ |
697 |
|
$ |
3,374 |
|
Total Interest expense |
|
Cross currency swap |
|
|
|
|
|
|
|
|
(582) |
|
|
1,778 |
|
Foreign currency losses, net |
|
|
|
|
|
|
|
|
|
$ |
(582) |
|
$ |
1,778 |
|
Total Foreign currency losses, net |
The total amounts of expense and the respective line items in which the effect of cash flow hedges is presented in the condensed consolidated statement of operations for the three and six months ended June 30, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Interest expense |
|
$ |
6,177 |
|
$ |
6,281 |
|
$ |
11,707 |
|
$ |
12,576 |
|
Foreign currency losses, net |
|
|
1,143 |
|
|
2,043 |
|
|
(172) |
|
|
4,007 |
Net Investment Hedges. For derivatives that are designated and qualify as net investment hedges, the gain or loss on the derivative is reported as a component of the currency translation adjustment in AOCL. These cross currency swaps are designated as hedges of our net investment in European operations. Time value is excluded from the assessment of effectiveness and the amount of interest paid or received on the swaps will be recognized as an adjustment to interest expense in earnings over the life of the swaps.
In the second quarter of 2018, the Company entered into cross currency swap agreements under which we pay variable rate interest in Euros and receive variable rate interest in U.S. dollars. The notional amount is €95.7 million at June 30, 2020, with a maturity date of February 14, 2024. These swaps are hedging risk associated with the net investment in Euro denominated operations due to fluctuating exchange rates and are designated as net investment hedges. The changes in the fair value of these designated cross-currency swaps will be recognized in AOCL.
The amount of loss on net investment hedges recognized in AOCL, the amount reclassified into earnings and the amount of gain recognized in income on derivative (amount excluded from effectiveness testing) for the three months ended June 30, 2020 and 2019, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
||||||||
|
|
|
|
|
Amount of Gain |
|
Recognized in Income on |
|
|
||||||||||||
|
|
|
Amount of Loss |
|
Reclassified from |
|
Derivative (Amount Excluded |
|
Location of Gain |
||||||||||||
|
|
|
Recognized in AOCL |
|
AOCL into Income |
|
from Effectiveness Testing) |
|
in Earnings |
||||||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
||||||
|
Cross currency swaps |
|
$ |
(1,569) |
|
$ |
(1,260) |
|
$ |
— |
|
$ |
— |
|
$ |
612 |
|
$ |
949 |
|
Interest expense |
The amount of gain on net investment hedges recognized in AOCL, the amount reclassified into earnings and the amount of gain recognized in income on derivative (amount excluded from effectiveness testing) for the six months ended June 30, 2020 and 2019, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
|
||||||||
|
|
|
|
|
|
|
|
|
Amount of Gain |
|
Recognized in Income on |
|
|
||||||||
|
|
|
Amount of Gain |
|
Reclassified from |
|
Derivative (Amount Excluded |
|
Location of Gain |
||||||||||||
|
|
|
Recognized in AOCL |
|
AOCL into Income |
|
from Effectiveness Testing) |
|
in Earnings |
||||||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
||||||
|
Cross currency swaps |
|
$ |
1,090 |
|
$ |
2,477 |
|
$ |
— |
|
$ |
— |
|
$ |
1,392 |
|
$ |
1,950 |
|
Interest expense |
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 losses, net in the condensed consolidated statements of operations. We recognized net gains of $0.1 million and $0.4 million in the three and six months ended June 30, 2020, respectively, and net loss of $1.5 million and net gains of less than $0.1 million in the three and six months ended June 30, 2019, respectively, 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 $646.2 million at June 30, 2020 and $625.9 million at December 31, 2019.
The following table presents the effect on our condensed consolidated statements of operations for the three and six months ended June 30, 2020 and 2019, respectively, of our foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) |
|
Amount of Gain |
|
|
||||||||
|
|
|
Recognized in Earnings |
|
Recognized in Earnings |
|
|
||||||||
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
Location of Gain (Loss) in Earnings |
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
|
||||
|
Foreign currency forward contracts |
|
$ |
142 |
|
$ |
(1,497) |
|
$ |
410 |
|
$ |
27 |
|
Foreign currency losses, net |
Location and Fair Value Amount of Derivative Instruments
The following table presents the fair values of our derivative instruments on our condensed consolidated balance sheets. All derivatives are reported on a gross basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
Balance Sheet Location |
||
|
Asset derivatives: |
|
|
|
|
|
|
|
|
|
Cross currency swaps |
|
$ |
1,923 |
|
$ |
6,711 |
|
Other current assets |
|
Cross currency swaps |
|
|
19,323 |
|
|
15,400 |
|
Other non-current assets |
|
Foreign currency forward contracts |
|
|
2,539 |
|
|
1,474 |
|
Other current assets |
|
Liability derivatives: |
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
(8,186) |
|
$ |
(3,723) |
|
Accrued expenses and other current liabilities |
|
Interest rate swaps |
|
|
(19,331) |
|
|
(10,975) |
|
Other non-current liabilities |
|
Foreign currency forward contracts |
|
|
(843) |
|
|
(873) |
|
Accrued expenses and other current liabilities |
10. Income Taxes
Income tax expense for the six months ended June 30, 2020 was $5.3 million, or 27.5% of pre-tax income. Income tax expense for the six months ended June 30, 2019 was $5.5 million, or 21.6% of pre-tax income. The tax expense during the six months ended June 30, 2020 and June 30, 2019, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences.
11. Contingent Liabilities
We have recorded environmental liabilities of $5.8 million at June 30, 2020 and $7.2 million at December 31, 2019, for costs associated with the remediation of certain of our current or former properties that have been contaminated. The balance at June 30, 2020 and December 31, 2019, were primarily comprised of liabilities related to a non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product line in 2013. These costs include, but are not limited to, legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring, and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring, the ultimate cost of required remediation, and other circumstances.
In November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane. The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages. The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to liability for the plaintiff’s claims, and is vigorously defending this proceeding. Since December 2018, additional complaints were filed in the same court by 25 other New York municipal water suppliers and in New York State Supreme Court by one water supplier against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.
In 2013, the Supreme Court in Argentina ruled favorably related to certain export taxes associated with a divested operation. The liability recorded at June 30, 2020 and December 31, 2019 is $0.5 million and $0.6 million, respectively.
In addition to the proceedings described above, the Company and its consolidated subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses. The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.
12. Retirement Benefits
Net periodic benefit cost (credit) of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the three months ended June 30, 2020 and 2019, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans |
|
Non-U.S. Pension Plans |
|
Other Benefit Plans |
||||||||||||
|
|
|
Three Months Ended June 30, |
||||||||||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||||
|
Service cost |
|
$ |
3 |
|
$ |
3 |
|
$ |
294 |
|
$ |
330 |
|
$ |
— |
|
$ |
1 |
|
Interest cost |
|
|
2,388 |
|
|
2,963 |
|
|
343 |
|
|
479 |
|
|
133 |
|
|
175 |
|
Expected return on plan assets |
|
|
(3,708) |
|
|
(3,153) |
|
|
(116) |
|
|
(170) |
|
|
— |
|
|
— |
|
Amortization of prior service cost |
|
|
— |
|
|
— |
|
|
(4) |
|
|
(14) |
|
|
— |
|
|
— |
|
Net periodic benefit (credit) cost |
|
$ |
(1,317) |
|
$ |
(187) |
|
$ |
517 |
|
$ |
625 |
|
$ |
133 |
|
$ |
176 |
Net periodic benefit (credit) cost for the six months ended June 30, 2020 and 2019, respectively, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans |
|
Non-U.S. Pension Plans |
|
Other Benefit Plans |
||||||||||||
|
|
|
Six Months Ended June 30, |
||||||||||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||||
|
Service cost |
|
$ |
6 |
|
$ |
5 |
|
$ |
579 |
|
$ |
611 |
|
$ |
1 |
|
$ |
1 |
|
Interest cost |
|
|
4,775 |
|
|
5,926 |
|
|
673 |
|
|
948 |
|
|
265 |
|
|
351 |
|
Expected return on plan assets |
|
|
(7,416) |
|
|
(6,305) |
|
|
(228) |
|
|
(336) |
|
|
— |
|
|
— |
|
Amortization of prior service cost |
|
|
— |
|
|
— |
|
|
(9) |
|
|
(9) |
|
|
— |
|
|
— |
|
Net periodic benefit (credit) cost |
|
$ |
(2,635) |
|
$ |
(374) |
|
$ |
1,015 |
|
$ |
1,214 |
|
$ |
266 |
|
$ |
352 |
Interest cost, expected return on plan assets and amortization of prior service cost are recorded in Miscellaneous expense (income), net on the condensed consolidated statement of operations.
13. Stock-Based Compensation
On May 3, 2018, our shareholders approved the 2018 Omnibus Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 22, 2018. The Plan’s purpose is to promote the Company’s long-term financial interests and growth by attracting, retaining and motivating high-quality key employees and directors, motivating such employees and directors to achieve the Company’s short- and long-range performance goals and objectives, and thereby align their interests with those of the Company’s shareholders. The Plan reserves 4,500,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restricted awards, performance awards, other common stock-based awards, and dividend equivalent rights.
The Plan replaced the 2013 Omnibus Incentive Plan (the “Previous Plan”), and no future grants may be made under the Previous Plan. However, any outstanding awards or grants made under the Previous Plan will continue until the end of their specified terms.
In the first half of 2020, our Board of Directors granted 0.3 million stock options, 0.2 million performance share units, and 0.2 million restricted stock units under the Plan.
We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. The following table details the weighted-average grant-date fair values and the assumptions used for estimating the fair values of stock option grants made during the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
||
|
Weighted-average grant-date fair value |
|
$ |
5.28 |
|
|
Expected life, in years |
|
|
5.2 |
|
|
Risk-free interest rate |
|
|
1.4 |
% |
|
Expected volatility |
|
|
35.1 |
% |
The weighted average grant date fair value of our performance share units granted in the six months ended June 30, 2020, was $14.64. We measure the fair value of performance share units based on the closing market price of our common stock on the date of the grant. These shares are evaluated each reporting period for respective attainment rates against the performance criteria.
The weighted-average grant date fair value of our restricted share units granted in the six months ended June 30, 2020, was $14.64. We measure the fair value of restricted share units based on the closing market price of our common stock on the date of the grant. The restricted share units vest over three years.
We recognized stock-based compensation expense of $2.7 million and $5.5 million for the three and six months ended June 30, 2020, respectively, and $2.9 million and $5.6 million and for the three and six months ended June 30, 2019, respectively. At June 30, 2020, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $11.6 million and is expected to be recognized over the remaining vesting period of the respective grants, through the second quarter of 2023.
14. Restructuring and Optimization Programs
Total restructuring charges were $8.6 million and $9.8 million for the three and six months ended June 30, 2020, respectively, and $4.1 million and $5.8 million for the three and six months ended June 30, 2019, respectively. As discussed in Note 4, our Tile Coatings business was classified as held-for-sale during the fourth quarter of 2019. As such, there were additional restructuring charges of $1.7 million and $2.0 million for the three and six months ended June 30, 2020, respectively, and $6.2 million and $6.6 million for the three and six months ended June 30, 2019, respectively classified as Net income from discontinued operations, net of income taxes.
Americas Manufacturing Optimization Plan
In the second quarter of 2019, we developed our Americas Manufacturing optimization plan and initiated a program across the organization with the objective of realigning the business and lowering our cost structure. The Americas Manufacturing Optimization plan is focused on the construction of a new manufacturing center of excellence located in Villagran, Mexico. We are in the process of consolidating two plants located in the United States and two sites in Latin America into the expanded Villagran location. As a result of these actions, the Company expects to incur total charges of approximately $8.7 million, substantially all of which will be for severance costs expected. The remaining activities of the program are expected to be recognized within the next 12 months. Charges associated with the program were $0.8 million and $1.0 million for the three and six months ended June 30, 2020, respectively, and $3.5 million and $3.9 million for the three and six months ended June 30, 2019, respectively.
Global Optimization Plan
The program involves our global operations and certain functions and initiatives to increase operational efficiencies, some of which is associated with integration of our recent acquisitions. Actions associated with the Global Optimization plan were substantially completed during 2020, and as such, we do not anticipate material charges related to this plan for the remainder of 2020. Charges associated with the program were $7.8 million and $8.8 million for the three and six months ended June 30, 2020, respectively, and $0.6 million and $1.9 million for the three and six months ended June 30, 2019, respectively.
The charges associated with these programs are further summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
Other |
|
|
|||
|
(Dollars in thousands) |
|
Severance |
|
Costs |
|
Total |
|||
|
Balances at December 31, 2019 |
|
$ |
747 |
|
$ |
1,492 |
|
$ |
2,239 |
|
Restructuring charges |
|
|
7,832 |
|
|
1,952 |
|
|
9,784 |
|
Cash payments |
|
|
(872) |
|
|
(1,996) |
|
|
(2,868) |
|
Non-cash items |
|
|
(9) |
|
|
(7) |
|
|
(16) |
|
Balances at June 30, 2020 |
|
$ |
7,698 |
|
$ |
1,441 |
|
$ |
9,139 |
We expect to make cash payments to settle the remaining liability for employee severance benefits and other costs over the next twelve months, except where legal or contractual obligations would require it to extend beyond that period.
15. Leases
The Company has leases for equipment, office space, plant sites and distribution centers. Certain of these leases include options to extend the lease and some include options to terminate the lease early. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.
There are no leases that have not yet commenced that create significant rights and obligations for the Company.
The components of lease cost are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
||||||||
|
|
|
June 30, |
|
June 30, |
|
|
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
|
Income Statement Location |
||||
|
Operating lease cost(1) |
|
$ |
1,204 |
|
$ |
1,286 |
|
$ |
2,463 |
|
$ |
2,646 |
|
Selling, general and administrative expenses |
|
Operating lease cost(2) |
|
|
1,606 |
|
|
2,292 |
|
|
3,737 |
|
|
4,526 |
|
Cost of sales |
|
Finance lease cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
|
64 |
|
|
62 |
|
|
136 |
|
|
113 |
|
Cost of sales |
|
Interest of lease liabilities |
|
|
7 |
|
|
3 |
|
|
14 |
|
|
6 |
|
Interest expense |
|
Net lease cost |
|
$ |
2,881 |
|
$ |
3,643 |
|
$ |
6,350 |
|
$ |
7,291 |
|
|
(1)Included in operating lease cost is $0.2 million and $0.4 million of short-term lease costs for the three and six months ended June 30, 2020, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2019 and $0.1 million and $0.2 million of variable lease costs for the three and six months ended June 30, 2020 and June 30, 2019, respectively.
(2)Included in operating lease cost is $0.7 million and $1.3 million of short-term lease costs for the three and six months ended June 30, 2020 and June 30, 2019, respectively, and $0.1 million and $0.4 million of variable lease costs for the three and six months ended June 30, 2020, respectively, and $0.3 million and $0.5 million of variable lease costs for the three and six months ended June 30, 2019, respectively.
Supplemental balance sheet information related to leases is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
Balance Sheet Location |
||
|
Assets |
|
|
|
|
|
|
|
|
|
Operating leased assets |
|
$ |
15,042 |
|
$ |
20,088 |
|
Operating leased assets |
|
Finance leased assets (1) |
|
|
795 |
|
|
859 |
|
Property, plant and equipment, net |
|
Total leased assets |
|
$ |
15,837 |
|
$ |
20,947 |
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
Operating |
|
$ |
5,349 |
|
$ |
6,515 |
|
Accrued expenses and other current liabilities |
|
Finance |
|
|
512 |
|
|
438 |
|
Loans payable and current portion of long-term debt |
|
Noncurrent |
|
|
|
|
|
|
|
|
|
Operating |
|
|
9,716 |
|
|
14,474 |
|
Operating lease non-current liabilities |
|
Finance |
|
|
1,780 |
|
|
1,867 |
|
Long-term debt, less current portion |
|
Total lease liabilities |
|
$ |
17,357 |
|
$ |
23,294 |
|
|
(1)Finance leases are net of accumulated depreciation of $3.4 million and $3.4 million for June 30, 2020 and December 31, 2019, respectively.
Supplemental cash flow information related to leases are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows from finance leases |
|
$ |
7 |
|
$ |
3 |
|
$ |
14 |
|
$ |
6 |
|
Operating cash flows from operating leases |
|
|
1,808 |
|
|
2,409 |
|
|
3,827 |
|
|
4,669 |
|
Financing cash flows from finance leases |
|
|
77 |
|
|
57 |
|
|
142 |
|
|
102 |
|
Leased assets obtained in exchange for new finance lease liabilities |
|
|
51 |
|
|
89 |
|
|
155 |
|
|
218 |
|
Leased assets obtained in exchange for new operating lease liabilities |
|
|
1,063 |
|
|
184 |
|
|
2,562 |
|
|
24,219 |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
2020 |
|
Weighted-average remaining lease term (years) |
|
|
|
|
Operating leases |
|
|
3.9 |
|
Finance leases |
|
|
5.5 |
|
Weighted-average discount rate |
|
|
|
|
Operating leases |
|
|
4.2% |
|
Finance leases |
|
|
5.2% |
Maturities of lease liabilities are shown below as of June 30, 2020:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Finance
|
|
Operating
|
||
|
Remaining in 2020 |
|
$ |
316 |
|
$ |
3,488 |
|
2021 |
|
|
565 |
|
|
5,518 |
|
2022 |
|
|
545 |
|
|
3,314 |
|
2023 |
|
|
476 |
|
|
1,793 |
|
2024 |
|
|
372 |
|
|
866 |
|
2025 |
|
|
290 |
|
|
644 |
|
Thereafter |
|
|
418 |
|
|
1,688 |
|
Net minimum lease payments |
|
$ |
2,982 |
|
$ |
17,311 |
|
Less: interest |
|
|
690 |
|
|
2,246 |
|
Present value of lease liabilities |
|
$ |
2,292 |
|
$ |
15,065 |
16. Earnings Per Share
Details of the calculation of basic and diluted earnings per share are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(Dollars in thousands, except per share amounts) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Basic earnings (loss) per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(1,926) |
|
$ |
11,361 |
|
$ |
13,986 |
|
$ |
20,162 |
|
Less: Net income attributable to noncontrolling interests from continuing operations |
|
|
309 |
|
|
193 |
|
|
342 |
|
|
362 |
|
Net income (loss) attributable to Ferro Corporation from continuing operations |
|
|
(2,235) |
|
|
11,168 |
|
|
13,644 |
|
|
19,800 |
|
Income (loss) from discontinued operations, net of income taxes |
|
|
(3,238) |
|
|
(252) |
|
|
(3,017) |
|
|
4,825 |
|
Less: Net income attributable to noncontrolling interests from discontinued operations |
|
|
67 |
|
|
45 |
|
|
44 |
|
|
150 |
|
Net income (loss) attributable to Ferro Corporation from discontinued operations |
|
|
(3,305) |
|
|
(297) |
|
|
(3,061) |
|
|
4,675 |
|
Total |
|
$ |
(5,540) |
|
$ |
10,871 |
|
$ |
10,583 |
|
$ |
24,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
82,246 |
|
|
81,932 |
|
|
82,171 |
|
|
82,206 |
|
Basic earnings (loss) per share from continuing operations attributable to Ferro Corporation common shareholders |
|
$ |
(0.03) |
|
$ |
0.13 |
|
$ |
0.17 |
|
$ |
0.24 |
|
Diluted earnings (loss) per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Ferro Corporation from continuing operations |
|
$ |
(2,235) |
|
$ |
11,168 |
|
$ |
13,644 |
|
$ |
19,800 |
|
Net income (loss) attributable to Ferro Corporation from discontinued operations |
|
|
(3,305) |
|
|
(297) |
|
|
(3,061) |
|
|
4,675 |
|
Total |
|
$ |
(5,540) |
|
$ |
10,871 |
|
$ |
10,583 |
|
$ |
24,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
82,246 |
|
|
81,932 |
|
|
82,171 |
|
|
82,206 |
|
Assumed exercise of stock options |
|
|
543 |
|
|
502 |
|
|
799 |
|
|
551 |
|
Assumed satisfaction of restricted stock unit conditions |
|
|
93 |
|
|
157 |
|
|
109 |
|
|
208 |
|
Assumed satisfaction of performance share unit conditions |
|
|
45 |
|
|
87 |
|
|
200 |
|
|
90 |
|
Weighted-average diluted shares outstanding |
|
|
82,927 |
|
|
82,678 |
|
|
83,279 |
|
|
83,055 |
|
Diluted earnings (loss) per share from continuing operations attributable to Ferro Corporation common shareholders |
|
$ |
(0.03) |
|
$ |
0.13 |
|
$ |
0.16 |
|
$ |
0.23 |
The number of anti-dilutive shares were 2.7 million and 2.3 million for the three and six months ended June 30, 2020, respectively, and 2.3 million and 2.2 million for the three and six months ended June 30, 2019, respectively. These shares are excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.
17. Share Repurchase Program
The Company’s Board of Directors has approved a share repurchase program under which the Company is authorized to repurchase up to $150 million of the Company’s outstanding shares of common stock on the open market, including through a Rule 10b5-1 plan, or in privately negotiated transactions.
The timing and amount of shares to be repurchased will be determined by the Company, based on evaluation of market and business conditions, share price, and other factors. The share repurchase programs do not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.
As of June 30, 2020, $46.2 million remains authorized under the program for the repurchase of common stock.
18. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss by component, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|||||||||||
|
|
|
Postretirement |
|
Foreign |
|
Net Gain (Loss) |
|
|
||||
|
|
|
Benefit Liability |
|
Currency |
|
on Cash Flow |
|
|
||||
|
(Dollars in thousands) |
|
Adjustments |
|
Items |
|
Hedges |
|
Total |
||||
|
Balances at March 31, 2019 |
|
$ |
1,126 |
|
$ |
(99,788) |
|
$ |
(7,611) |
|
$ |
(106,273) |
|
Other comprehensive income (loss) before reclassifications, before tax |
|
|
— |
|
|
3,478 |
|
|
(11,521) |
|
|
(8,043) |
|
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge income, before tax |
|
|
— |
|
|
— |
|
|
1,602 |
|
|
1,602 |
|
Current period other comprehensive income (loss), before tax |
|
|
— |
|
|
3,478 |
|
|
(9,919) |
|
|
(6,441) |
|
Tax effect |
|
|
— |
|
|
(511) |
|
|
(2,570) |
|
|
(3,081) |
|
Current period other comprehensive income (loss), net of tax |
|
|
— |
|
|
3,989 |
|
|
(7,349) |
|
|
(3,360) |
|
Balances at June 30, 2019 |
|
$ |
1,126 |
|
$ |
(95,799) |
|
$ |
(14,960) |
|
$ |
(109,633) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2020 |
|
$ |
1,206 |
|
$ |
(115,847) |
|
$ |
(22,047) |
|
$ |
(136,688) |
|
Other comprehensive income (loss) before reclassifications, before tax |
|
|
— |
|
|
3,388 |
|
|
(5,836) |
|
|
(2,448) |
|
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge income, before tax |
|
|
— |
|
|
— |
|
|
4,177 |
|
|
4,177 |
|
Current period other comprehensive income (loss), before tax |
|
|
— |
|
|
3,388 |
|
|
(1,659) |
|
|
1,729 |
|
Tax effect |
|
|
— |
|
|
(505) |
|
|
(99) |
|
|
(604) |
|
Current period other comprehensive income (loss), net of tax |
|
|
— |
|
|
3,893 |
|
|
(1,560) |
|
|
2,333 |
|
Balances at June 30, 2020 |
|
$ |
1,206 |
|
$ |
(111,954) |
|
$ |
(23,607) |
|
$ |
(134,355) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|||||||||||
|
|
|
Postretirement |
|
Foreign |
|
|
Net Loss |
|
|
|
||
|
|
|
Benefit Liability |
|
Currency |
|
|
on Cash |
|
|
|
||
|
(Dollars in thousands) |
|
Adjustments |
|
Items |
|
|
Flow Hedges |
|
Total |
|||
|
Balances at December 31, 2018 |
|
$ |
1,126 |
|
$ |
(103,190) |
|
$ |
(3,297) |
|
$ |
(105,361) |
|
Other comprehensive income (loss) before reclassifications, before tax |
|
|
— |
|
|
7,514 |
|
|
(10,548) |
|
|
(3,034) |
|
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge loss, before tax |
|
|
— |
|
|
— |
|
|
(5,152) |
|
|
(5,152) |
|
Current period other comprehensive income (loss), before tax |
|
|
— |
|
|
7,514 |
|
|
(15,700) |
|
|
(8,186) |
|
Tax effect |
|
|
— |
|
|
123 |
|
|
(4,037) |
|
|
(3,914) |
|
Current period other comprehensive income (loss), net of tax |
|
|
— |
|
|
7,391 |
|
|
(11,663) |
|
|
(4,272) |
|
Balances at June 30, 2019 |
|
$ |
1,126 |
|
$ |
(95,799) |
|
$ |
(14,960) |
|
$ |
(109,633) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2019 |
|
$ |
1,206 |
|
$ |
(97,575) |
|
$ |
(13,007) |
|
$ |
(109,376) |
|
Other comprehensive loss before reclassifications, before tax |
|
|
— |
|
|
(14,449) |
|
|
(13,452) |
|
|
(27,901) |
|
Reclassification to earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge loss, before tax |
|
|
— |
|
|
— |
|
|
(115) |
|
|
(115) |
|
Current period other comprehensive loss, before tax |
|
|
— |
|
|
(14,449) |
|
|
(13,567) |
|
|
(28,016) |
|
Tax effect |
|
|
— |
|
|
(70) |
|
|
(2,967) |
|
|
(3,037) |
|
Current period other comprehensive loss, net of tax |
|
|
— |
|
|
(14,379) |
|
|
(10,600) |
|
|
(24,979) |
|
Balances at June 30, 2020 |
|
$ |
1,206 |
|
$ |
(111,954) |
|
$ |
(23,607) |
|
$ |
(134,355) |
19. Reporting for Segments
As discussed in Note 4, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business which has historically been the majority of our Performance Coatings reportable segment. Substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets and results are included within discontinued operation in the consolidated statement of operations for all periods presented. The retained assets, liabilities and operations of the Performance Coatings reportable segment are reflected within our Functional Coatings reportable segment.
Net sales to external customers by segment are presented in the table below. Sales between segments were not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Functional Coatings |
|
$ |
131,672 |
|
$ |
163,692 |
|
$ |
287,107 |
|
$ |
330,718 |
|
Color Solutions |
|
|
73,129 |
|
|
97,266 |
|
|
170,020 |
|
|
193,622 |
|
Total net sales |
|
$ |
204,801 |
|
$ |
260,958 |
|
$ |
457,127 |
|
$ |
524,340 |
Each segment’s gross profit and reconciliation to income before income taxes are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
|
|
June 30, |
|
June 30, |
||||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
||||
|
Functional Coatings |
|
$ |
36,119 |
|
$ |
49,307 |
|
$ |
83,936 |
|
$ |
97,537 |
|
Color Solutions |
|
|
26,985 |
|
|
29,702 |
|
|
60,772 |
|
|
58,098 |
|
Other cost of sales |
|
|
640 |
|
|
121 |
|
|
(226) |
|
|
1,354 |
|
Total gross profit |
|
|
63,744 |
|
|
79,130 |
|
|
144,482 |
|
|
156,989 |
|
Selling, general and administrative expenses |
|
|
50,541 |
|
|
53,249 |
|
|
106,587 |
|
|
110,180 |
|
Restructuring and impairment charges |
|
|
8,619 |
|
|
4,057 |
|
|
9,784 |
|
|
5,797 |
|
Other expense, net |
|
|
6,310 |
|
|
7,810 |
|
|
8,808 |
|
|
15,304 |
|
Income before income taxes |
|
$ |
(1,726) |
|
$ |
14,014 |
|
$ |
19,303 |
|
$ |
25,708 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net sales for the three months ended June 30, 2020, decreased by $56.2 million, or 21.5%, compared with the prior-year same period. Net sales decreased by $32.0 million in Functional Coatings and $24.2 million in Color Solutions. During the three months ended June 30, 2020, gross profit decreased $15.4 million, or 19.4%, compared with the prior-year same period; as a percentage of net sales, it increased approximately 80 basis points to 31.1%. Our total gross profit for the second quarter of 2020 was $63.7 million, compared with $79.1 million for the three months ended June 30, 2019. The decrease in gross profit was attributable to lower gross profit in Functional Coatings of $13.2 million and Color Solutions of $2.7 million.
For the three months ended June 30, 2020, selling, general and administrative (“SG&A”) expenses decreased $2.7 million, or 5.1%, compared with the prior-year same period. As a percentage of net sales, it increased approximately 430 basis points to 24.7%.
For the three months ended June 30, 2020, net loss was $5.2 million, compared with net income of $11.1 million for the prior-year same period, and net loss attributable to common shareholders was $5.5 million, compared with net income attributable to common shareholders of $10.9 million for the prior-year same period. Loss from continuing operations was $1.9 million for the three months ended June 30, 2020, compared with income of $11.4 million in 2019.
Outlook
While the novel coronavirus (“COVID-19”) pandemic impacted macroeconomic conditions around the globe in the second quarter of 2020, the low point of demand for Ferro’s products appears to have been earlier in the quarter, as demand increased in the latter part of the quarter. Currently, we see signs that the favorable trajectory of increasing demand for our products will continue into the third quarter.
Certain characteristics of our business should position the Company well for the current economic environment. Ferro has market leadership positions in a diverse portfolio of products, and many of our products and services support niche markets in “critical” or “essential” industries such as healthcare, food and beverage, energy, information technology and defense, which generally have continued to operate during the pandemic. These characteristics, together with improved economic activity in other industries we serve, should enable the Company to continue to increase sales and to maintain certain of the margin tailwinds achieved in the first half of 2020, even if demand for some products and services continues to be suppressed due to macro-economic uncertainty.
Ferro also continues to execute its strategic priorities, which include advancing our optimization initiatives, preparing for and completing the sale of the Tile Coatings business and continuing to develop innovative products that our customers need.
We anticipate continued uncertainty in macroeconomic conditions going forward. This uncertainty may result in volatility in demand in our end markets, foreign exchange rates and in interest rates, which could impact our reported results through the course of 2020.
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has spread through Asia, Europe, the Middle East and North and South America, all regions in which we have operations. In response, government authorities have issued an evolving set of mandates, including requirements to shelter-in-place, curtail business operations, restrict travel, and avoid physical interaction. These mandates and the continued spread of COVID-19 have disrupted normal business activities in many segments of the global economy, resulting in weakened economic conditions. More recently, government mandates have been lifted by certain public authorities and economic conditions have improved in certain sectors of the economy relative to early in the second quarter. Certain regions of the world have experienced increasing numbers of COVID-19 cases, however, and if this continues and if public authorities intensify efforts to contain the spread of COVID-19, normal business activity may be further disrupted and economic conditions could weaken.
We continue to monitor the impact of the outbreak of COVID-19 on our business, including how it may impact our customers, employees, supply chain and distribution network and to take action, as appropriate, to address these circumstances.
Our manufacturing facilities generally have continued to operate since the pandemic was declared in early March 2020, with most sites experiencing only relatively brief or no suspensions of activity. While COVID-19 did not have a significant effect on our reported results for the first quarter of 2020, it had a more pronounced effect on our business during the second quarter, primarily as a result of reduced demand in certain of our end markets, such as the automotive sector. In more recent weeks, the momentum in our business has turned markedly more favorable, with improved demand relative to early in the second quarter from many of our customers across multiple product lines. Having said that, if certain regions of the world experience increasing numbers of COVID-19 cases, we may be required to take further actions to comply with mandates of national, state or local authorities, and we may take additional actions that we determine to be in the best interests of our employees, customers, suppliers and other stakeholders, which could disrupt or restrict our ability to operate our facilities and travel to our domestic and international sites. The extent to which our operations may be impacted by COVID-19 in the second half of 2020 depends on a variety of factors, including the duration, severity, and scope of the pandemic, which remain uncertain.
We believe we are well positioned from a liquidity perspective to manage through the effects of the COVID-19 pandemic. As of June 30, 2020, we had liquidity of approximately $548.2 million, consisting of cash and availability under our various credit facilities, primarily our revolving credit facility. We are in compliance with the covenants under our various credit facilities and expect to remain in compliance. We will continue to evaluate and take action to preserve liquidity and generate cash flow during the crisis, including by limiting capital expenditures and discretionary spending, as appropriate and where possible.
Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of the Annual Report on Form 10-K for the year ended December 31, 2019.
Results of Operations - Consolidated
Comparison of the three months ended June 30, 2020 and 2019
For the three months ended June 30, 2020, net loss from continuing operations was $1.9 million, compared with net income of $11.4 million for the three months ended June 30, 2019. For the three months ended June 30, 2020, net loss attributable to common shareholders was $5.5 million, or loss per share of $0.07, compared with net income attributable to common shareholders of $10.9 million, or earnings per share of $0.13, for the three months ended June 30, 2019.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||||
|
|
|
June 30, |
|
|
|
|
|
|
||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||||
|
Net sales |
|
$ |
204,801 |
|
|
$ |
260,958 |
|
|
$ |
(56,157) |
|
(21.5) |
% |
|
Cost of sales |
|
|
141,057 |
|
|
|
181,828 |
|
|
|
(40,771) |
|
(22.4) |
% |
|
Gross profit |
|
$ |
63,744 |
|
|
$ |
79,130 |
|
|
$ |
(15,386) |
|
(19.4) |
% |
|
Gross profit as a % of net sales |
|
|
31.1 |
% |
|
|
30.3 |
% |
|
|
|
|
|
|
Net sales decreased by $56.2 million, or 21.5%, for the three months ended June 30, 2020, compared with the prior-year same period, driven by lower sales in Functional Coatings and Color Solutions of $32.0 million and $24.2 million, respectively. The decrease in net sales was driven by lower volume and mix of $50.4 million and unfavorable foreign currency impacts of $6.5 million, partially mitigated by higher product pricing of $0.7 million.
Gross Profit
Gross profit decreased $15.4 million, or 19.4%, for the three months ended June 30, 2020, compared with the prior-year same period, and as a percentage of net sales, it increased 80 basis points to 31.1%. The decrease in gross profit was attributable to lower gross profit in Functional Coatings and Color Solutions of $13.2 million and $2.7 million, respectively. The decrease in gross profit was driven by lower sales volumes and mix of $19.9 million and unfavorable foreign currency impacts of $1.7 million, partially mitigated by lower raw material costs of $5.3 million, favorable product pricing of $0.7 million and lower manufacturing costs of $0.2 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Geographic Revenues on a sales origination basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA |
|
$ |
78,945 |
|
$ |
112,041 |
|
$ |
(33,096) |
|
(29.5) |
% |
|
United States |
|
|
82,714 |
|
|
94,080 |
|
|
(11,366) |
|
(12.1) |
% |
|
Asia Pacific |
|
|
30,843 |
|
|
33,711 |
|
|
(2,868) |
|
(8.5) |
% |
|
Latin America |
|
|
12,299 |
|
|
21,126 |
|
|
(8,827) |
|
(41.8) |
% |
|
Net sales |
|
$ |
204,801 |
|
$ |
260,958 |
|
$ |
(56,157) |
|
(21.5) |
% |
The decline in net sales of $56.2 million, compared with the prior-year same period, was driven by a decrease in sales from all regions. The decrease in sales from EMEA was attributable to lower sales in Functional Coatings and Color Solutions of $23.9 million and $9.2 million, respectively. The decrease in sales from the United States was attributable to lower sales in Color Solutions of $12.6 million, partially offset by an increase in sales in Functional Coatings of $1.2 million. The decrease in sales from Latin America was attributable to lower sales in Functional Coatings and Color Solutions of $6.4 million and $2.4 million, respectively. The decrease in sales from Asia Pacific was primarily attributable to lower sales in Functional Coatings of $3.0 million.
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Personnel expenses (excluding R&D personnel expenses) |
|
$ |
19,779 |
|
$ |
22,832 |
|
$ |
(3,053) |
|
(13.4) |
% |
|
Research and development expenses |
|
|
8,331 |
|
|
10,196 |
|
|
(1,865) |
|
(18.3) |
% |
|
Business development |
|
|
5,303 |
|
|
3,996 |
|
|
1,307 |
|
32.7 |
% |
|
Incentive compensation |
|
|
1,971 |
|
|
(85) |
|
|
2,056 |
|
NM |
% |
|
Stock-based compensation |
|
|
2,183 |
|
|
2,876 |
|
|
(693) |
|
(24.1) |
% |
|
Intangible asset amortization |
|
|
1,411 |
|
|
2,211 |
|
|
(800) |
|
(36.2) |
% |
|
Pension and other postretirement benefits |
|
|
183 |
|
|
271 |
|
|
(88) |
|
(32.5) |
% |
|
Bad debt |
|
|
(40) |
|
|
248 |
|
|
(288) |
|
(116.1) |
% |
|
All other expenses |
|
|
11,420 |
|
|
10,704 |
|
|
716 |
|
6.7 |
% |
|
Selling, general and administrative expenses |
|
$ |
50,541 |
|
$ |
53,249 |
|
$ |
(2,708) |
|
(5.1) |
% |
SG&A expenses were $2.7 million lower in the three months ended June 30, 2020, compared with the prior-year same period. The lower SG&A expenses compared to the prior-year same period are primarily driven by lower personnel costs and research and development expenses, partially offset by higher incentive compensation.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Strategic services |
|
$ |
21,495 |
|
$ |
26,588 |
|
$ |
(5,093) |
|
(19.2) |
% |
|
Functional services |
|
|
24,892 |
|
|
23,870 |
|
|
1,022 |
|
4.3 |
% |
|
Incentive compensation |
|
|
1,971 |
|
|
(85) |
|
|
2,056 |
|
NM |
% |
|
Stock-based compensation |
|
|
2,183 |
|
|
2,876 |
|
|
(693) |
|
(24.1) |
% |
|
Selling, general and administrative expenses |
|
$ |
50,541 |
|
$ |
53,249 |
|
$ |
(2,708) |
|
(5.1) |
% |
Restructuring and Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Employee severance |
|
$ |
7,174 |
|
$ |
2,822 |
|
$ |
4,352 |
|
154.2 |
% |
|
Other restructuring costs |
|
|
1,445 |
|
|
1,235 |
|
|
210 |
|
17.0 |
% |
|
Restructuring and impairment charges |
|
$ |
8,619 |
|
$ |
4,057 |
|
$ |
4,562 |
|
112.4 |
% |
Restructuring and impairment charges increased in the second quarter of 2020 compared with the prior-year same period. The increase primarily relates to costs associated with our Global Optimization Plan, compared with the prior-year same period. Refer to Note 14 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of our optimization plans and related costs.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Interest expense |
|
$ |
6,383 |
|
$ |
6,397 |
|
$ |
(14) |
|
(0.2) |
% |
|
Amortization of bank fees |
|
|
866 |
|
|
912 |
|
|
(46) |
|
(5.0) |
% |
|
Interest swap amortization |
|
|
(316) |
|
|
(316) |
|
|
— |
|
— |
% |
|
Interest capitalization |
|
|
(756) |
|
|
(712) |
|
|
(44) |
|
6.2 |
% |
|
Interest expense |
|
$ |
6,177 |
|
$ |
6,281 |
|
$ |
(104) |
|
(1.7) |
% |
Interest expense decreased in the second quarter of 2020 compared with the prior-year same period. The decrease in interest expense was due to a decrease in the average interest rate, partially offset by an increase in the average long-term debt balance during the second quarter of 2020 compared with the prior-year same period.
Income Tax Expense
Income tax expense for the three months ended June 30, 2020 was $0.2 million, or (11.6%) of pre-tax loss. Income tax expense for the three months ended June 30, 2019 was $2.7 million, or 18.9% of pre-tax income. The tax expense during the three months ended June 30, 2020, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 21% primarily as a result of tax rate changes enacted during the period. The tax expense during the three months ended June 30, 2019, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 21% primarily as a result of tax credits.
Results of Operations - Segment Information
Comparison of the three months ended June 30, 2020 and 2019
Functional Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
Change due to |
|||||||||||||||
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
Volume / |
|
|
|
|
|
|
|||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
|
Price |
|
Mix |
|
Currency |
|
Other |
||||||||||
|
Segment net sales |
|
$ |
131,672 |
|
|
$ |
163,692 |
|
|
$ |
(32,020) |
|
(19.6) |
% |
|
$ |
610 |
|
$ |
(27,963) |
|
$ |
(4,667) |
|
$ |
— |
|
Segment gross profit |
|
|
36,119 |
|
|
|
49,307 |
|
|
|
(13,188) |
|
(26.7) |
% |
|
|
610 |
|
|
(9,000) |
|
|
(1,385) |
|
|
(3,413) |
|
Gross profit as a % of segment net sales |
|
|
27.4 |
% |
|
|
30.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales decreased compared with the prior-year same period, primarily driven by lower sales in decoration, automotive, porcelain enamel and industrial products of $12.2 million, $11.9 million, $10.0 million and $6.9 million, respectively, partially mitigated by increased sales in electronic products of $9.0 million. The decrease in net sales was driven by unfavorable volume and mix of $27.9 million and unfavorable foreign currency impacts of $4.7 million, partially mitigated by higher product pricing of $0.6 million. Gross profit decreased from the prior-year same period primarily due to unfavorable volume and mix of $9.0 million, unfavorable manufacturing costs of $5.9 million and unfavorable foreign currency impacts of $1.4 million, partially mitigated by favorable raw material costs of $2.5 million and higher product pricing of $0.6 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA |
|
$ |
51,071 |
|
$ |
74,997 |
|
$ |
(23,926) |
|
(31.9) |
% |
|
United States |
|
|
52,194 |
|
|
50,938 |
|
|
1,256 |
|
2.5 |
% |
|
Asia Pacific |
|
|
21,733 |
|
|
24,700 |
|
|
(2,967) |
|
(12.0) |
% |
|
Latin America |
|
|
6,674 |
|
|
13,057 |
|
|
(6,383) |
|
(48.9) |
% |
|
Total |
|
$ |
131,672 |
|
$ |
163,692 |
|
$ |
(32,020) |
|
(19.6) |
% |
The net sales decrease of $32.0 million was driven by lower sales from EMEA, Latin America and Asia Pacific, partially mitigated by higher sales from the United States. The decrease in sales from EMEA was primarily attributable to lower sales of decoration, industrial, automotive, porcelain enamel, and electronic products of $8.1 million, $6.2 million, $5.1 million, $3.7 million and $0.8 million, respectively. The decrease in sales from Latin America was primarily attributable to lower sales of porcelain enamel, automotive, industrial and decoration products of $4.0 million, $1.3 million, $0.7 million and $0.4 million, respectively. The decrease in sales from Asia Pacific was primarily attributable to lower sales in automotive, decoration and porcelain enamel products of $2.0 million, $1.7 million and $0.5 million, respectively, partially mitigated by increased sales of industrial products of $1.2 million. The increase in sales from the United States was primarily attributable to an increase in sales of electronic products of $9.8 million, partially offset by lower sales of automotive, decoration, porcelain enamel and industrial products of $3.5 million, $2.0 million, $1.8 million and $1.3 million, respectively.
Color Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
Change due to |
|||||||||||||||
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
Volume / |
|
|
|
|
|
|
|||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
|
Price |
|
Mix |
|
Currency |
|
Other |
||||||||||
|
Segment net sales |
|
$ |
73,129 |
|
|
$ |
97,266 |
|
|
$ |
(24,137) |
|
(24.8) |
% |
|
$ |
91 |
|
$ |
(22,456) |
|
$ |
(1,772) |
|
$ |
— |
|
Segment gross profit |
|
|
26,985 |
|
|
|
29,702 |
|
|
|
(2,717) |
|
(9.1) |
% |
|
|
91 |
|
|
(11,385) |
|
|
(360) |
|
|
8,937 |
|
Gross profit as a % of segment net sales |
|
|
36.9 |
% |
|
|
30.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales decreased compared with the prior-year same period, primarily due to lower sales of pigment, surface technology and dispersions and colorants products of $14.7 million, $7.8 million and $1.6 million, respectively. The decrease in net sales was driven by unfavorable sales volume and mix of $22.5 million and unfavorable foreign currency impacts of $1.8 million. Gross profit decreased from the prior-year same period, primarily due to unfavorable sales volume and mix of $11.4 million and unfavorable foreign currency impacts of $0.4 million, partially mitigated by lower manufacturing costs of $6.1 million and lower raw material costs of $2.8 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
30,520 |
|
$ |
43,142 |
|
$ |
(12,622) |
|
(29.3) |
% |
|
EMEA |
|
|
27,874 |
|
|
37,044 |
|
|
(9,170) |
|
(24.8) |
% |
|
Asia Pacific |
|
|
9,110 |
|
|
9,011 |
|
|
99 |
|
1.1 |
% |
|
Latin America |
|
|
5,625 |
|
|
8,069 |
|
|
(2,444) |
|
(30.3) |
% |
|
Total |
|
$ |
73,129 |
|
$ |
97,266 |
|
$ |
(24,137) |
|
(24.8) |
% |
The net sales decrease of $24.1 million was driven by lower sales from the United States, EMEA and Latin America. The decrease in sales from the United States was primarily driven by lower sales of surface technology and pigment products of $8.6 million and $3.7 million, respectively. The decrease in sales from EMEA was primarily attributable to lower sales of pigment and dispersions and colorants products of $8.0 million and $1.2 million, respectively. The decrease in sales from Latin America was primarily attributable to lower sales of pigment products of $2.4 million.
Comparison of the six months ended June 30, 2020 and 2019
For the six months ended June 30, 2020, net income from continuing operations was $14.0 million, compared with $20.2 million for the six months ended June 30, 2019. For the six months ended June 30, 2020, net income attributable to common shareholders was $10.6 million, or earnings per share of $0.13, compared with net income attributable to common shareholders of $24.5 million, or earnings per share of $0.30, for the six months ended June 30, 2019.
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
||||||
|
|
|
June 30, |
|
|
|
|
|
|
||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||||
|
Net sales |
|
$ |
457,127 |
|
|
$ |
524,340 |
|
|
$ |
(67,213) |
|
(12.8) |
% |
|
Cost of sales |
|
|
312,645 |
|
|
|
367,351 |
|
|
|
(54,706) |
|
(14.9) |
% |
|
Gross profit |
|
$ |
144,482 |
|
|
$ |
156,989 |
|
|
$ |
(12,507) |
|
(8.0) |
% |
|
Gross profit as a % of net sales |
|
|
31.6 |
% |
|
|
29.9 |
% |
|
|
|
|
|
|
Net sales decreased by $67.2 million, or 12.8%, for the six months ended June 30, 2020, compared with the prior-year same period, driven by lower sales in Functional Coatings and Color Solutions of $43.6 million and $23.6 million, respectively. The decrease in net sales was driven by unfavorable volume and mix of $56.6 million and unfavorable foreign currency impacts of $11.4 million, partially mitigated by higher product pricing of $0.8 million.
Gross Profit
Gross profit decreased $12.5 million, or 8.0%, for the six months ended June 30, 2020, compared with the prior-year same period, and as a percentage of net sales, it increased approximately 170 basis points to 31.6%. The decrease in gross profit was primarily attributable to a decrease in Functional Coatings of $13.6 million, partially offset by an increase in Color Solutions of $2.7 million. The decrease in gross profit was primarily driven by unfavorable sales volume and mix of $25.9 million and unfavorable foreign currency impacts of $3.0 million, partially mitigated by lower raw material costs of $9.8 million, lower manufacturing costs of $5.8 million and higher product pricing of $0.8 million.
Geographic Revenues
The following table presents our sales on the basis of where sales originated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Geographic Revenues on a sales origination basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA |
|
$ |
192,691 |
|
$ |
225,873 |
|
$ |
(33,182) |
|
(14.7) |
% |
|
United States |
|
|
170,567 |
|
|
189,658 |
|
|
(19,091) |
|
(10.1) |
% |
|
Asia Pacific |
|
|
61,895 |
|
|
65,434 |
|
|
(3,539) |
|
(5.4) |
% |
|
Latin America |
|
|
31,974 |
|
|
43,375 |
|
|
(11,401) |
|
(26.3) |
% |
|
Net sales |
|
$ |
457,127 |
|
$ |
524,340 |
|
$ |
(67,213) |
|
(12.8) |
% |
The decline in net sales of $67.2 million, compared with the prior-year same period, was driven by a decrease in sales from all regions. The decrease in sales from EMEA was attributable to lower sales in Functional Coatings and Color Solutions of $26.3 million and $6.9 million, respectively. The decrease in sales from the United States was attributable to lower sales in Color Solutions and Functional Coatings of $15.1 million and $4.0 million, respectively. The decrease in sales from Latin America was attributable to lower sales in Functional Coatings and Color Solutions of $9.1 million and $2.3 million, respectively. The decrease in sales from Asia Pacific was attributable to lower sales in Functional Coatings of $4.1 million, partially offset by higher sales in Color Solutions of $0.6 million.
Selling, General and Administrative Expenses
The following table includes SG&A components with significant changes between 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Personnel expenses (excluding R&D personnel expenses) |
|
$ |
42,528 |
|
$ |
49,011 |
|
$ |
(6,483) |
|
(13.2) |
% |
|
Research and development expenses |
|
|
18,418 |
|
|
21,176 |
|
|
(2,758) |
|
(13.0) |
% |
|
Business development |
|
|
5,838 |
|
|
5,854 |
|
|
(16) |
|
(0.3) |
% |
|
Incentive compensation |
|
|
4,091 |
|
|
1,203 |
|
|
2,888 |
|
240.1 |
% |
|
Stock-based compensation |
|
|
4,942 |
|
|
5,645 |
|
|
(703) |
|
(12.5) |
% |
|
Intangible asset amortization |
|
|
3,089 |
|
|
4,554 |
|
|
(1,465) |
|
(32.2) |
% |
|
Pension and other postretirement benefits |
|
|
341 |
|
|
516 |
|
|
(175) |
|
(33.9) |
% |
|
Bad debt |
|
|
96 |
|
|
254 |
|
|
(158) |
|
(62.2) |
% |
|
All other expenses |
|
|
27,244 |
|
|
21,967 |
|
|
5,277 |
|
24.0 |
% |
|
Selling, general and administrative expenses |
|
$ |
106,587 |
|
$ |
110,180 |
|
$ |
(3,593) |
|
(3.3) |
% |
SG&A expenses were $3.6 million lower in the six months ended June 30, 2020, compared with the prior-year same period. The lower SG&A expenses compared to the prior-year same period are primarily driven by lower personnel expenses and research and development expenses, partially offset by higher incentive compensation.
The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A costs as functional services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Strategic services |
|
$ |
47,111 |
|
$ |
54,847 |
|
$ |
(7,736) |
|
(14.1) |
% |
|
Functional services |
|
|
50,443 |
|
|
48,485 |
|
|
1,958 |
|
4.0 |
% |
|
Incentive compensation |
|
|
4,091 |
|
|
1,203 |
|
|
2,888 |
|
240.1 |
% |
|
Stock-based compensation |
|
|
4,942 |
|
|
5,645 |
|
|
(703) |
|
(12.5) |
% |
|
Selling, general and administrative expenses |
|
$ |
106,587 |
|
$ |
110,180 |
|
$ |
(3,593) |
|
(3.3) |
% |
Restructuring and Impairment Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Employee severance |
|
$ |
7,832 |
|
$ |
3,842 |
|
$ |
3,990 |
|
103.9 |
% |
|
Other restructuring costs |
|
|
1,952 |
|
|
1,955 |
|
|
(3) |
|
(0.2) |
% |
|
Restructuring and impairment charges |
|
$ |
9,784 |
|
$ |
5,797 |
|
$ |
3,987 |
|
68.8 |
% |
Restructuring and impairment charges increased in the six months ended June 30, 2020, compared with the prior-year same period. The increase primarily relates to costs associated with our Global Optimization Plan, compared with the prior-year same period. Refer to Note 14 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of our optimization plans and related costs.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Interest expense |
|
$ |
12,229 |
|
$ |
12,744 |
|
$ |
(515) |
|
(4.0) |
% |
|
Amortization of bank fees |
|
|
1,795 |
|
|
1,812 |
|
|
(17) |
|
(0.9) |
% |
|
Interest swap amortization |
|
|
(632) |
|
|
(632) |
|
|
— |
|
— |
% |
|
Interest capitalization |
|
|
(1,685) |
|
|
(1,348) |
|
|
(337) |
|
25.0 |
% |
|
Interest expense |
|
$ |
11,707 |
|
$ |
12,576 |
|
$ |
(869) |
|
(6.9) |
% |
Interest expense decreased in the six months ended June 30, 2020, compared with the prior-year same period. The decrease in interest expense was due to a decrease in the average interest rate and an increase in capitalized interest, partially offset by an increase in the average long-term debt balance during the six months ended June 30, 2020, compared with the prior-year same period.
Income Tax Expense
Income tax expense for the six months ended June 30, 2020 was $5.3 million, or 27.5% of pre-tax income. Income tax expense for the six months ended June 30, 2019 was $5.5 million, or 21.6% of pre-tax income. The tax expense for the six months ended June 30, 2020 and June 30, 2019, as a percentage of pre-tax income, is higher than the U.S. federal statutory income tax rate of 21% primarily as a result of foreign statutory rate differences.
Results of Operations - Segment Information
Comparison of the six months ended June 30, 2020 and 2019
Functional Coatings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
Change due to |
|||||||||||||||
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
Volume / |
|
|
|
|
|
|
|||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
|
Price |
|
Mix |
|
Currency |
|
Other |
||||||||||
|
Segment net sales |
|
$ |
287,107 |
|
|
$ |
330,718 |
|
|
$ |
(43,611) |
|
(13.2) |
% |
|
$ |
567 |
|
$ |
(35,986) |
|
$ |
(8,192) |
|
$ |
— |
|
Segment gross profit |
|
|
83,936 |
|
|
|
97,537 |
|
|
|
(13,601) |
|
(13.9) |
% |
|
|
567 |
|
|
(12,434) |
|
|
(2,423) |
|
|
689 |
|
Gross profit as a % of segment net sales |
|
|
29.2 |
% |
|
|
29.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales decreased compared with the prior-year same period, primarily driven by lower sales in porcelain enamel, automotive, decoration and industrial products of $15.9 million, $15.1 million, $12.1 million and $11.9 million, respectively, partially mitigated by higher sales in electronic products of $11.4 million. The decrease in net sales was driven by unfavorable volume and mix of $36.0 million and foreign currency impacts of $8.2 million, partially mitigated by increased product pricing of $0.6 million. Gross profit decreased from the prior-year same period primarily due to unfavorable volume and mix of $12.4 million, unfavorable manufacturing costs of $4.7 million and unfavorable foreign currency impacts of $2.4 million, partially offset by favorable raw material costs of $5.3 million and increased product pricing of $0.6 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA |
|
$ |
126,928 |
|
$ |
153,262 |
|
$ |
(26,334) |
|
(17.2) |
% |
|
United States |
|
|
98,888 |
|
|
102,917 |
|
|
(4,029) |
|
(3.9) |
% |
|
Asia Pacific |
|
|
43,489 |
|
|
47,598 |
|
|
(4,109) |
|
(8.6) |
% |
|
Latin America |
|
|
17,802 |
|
|
26,941 |
|
|
(9,139) |
|
(33.9) |
% |
|
Total |
|
$ |
287,107 |
|
$ |
330,718 |
|
$ |
(43,611) |
|
(13.2) |
% |
The net sales decrease of $43.6 million was primarily driven by lower sales from all regions. The decrease in sales from EMEA was primarily attributable to lower sales of industrial, decoration, automotive and porcelain enamel products of $10.5 million, $7.6 million, $6.1 million and $4.7 million, respectively, partially mitigated by higher sales of electronic products of $2.6 million. The decrease in sales from Latin America was primarily attributable to lower sales of porcelain enamel, automotive, industrial and decoration products of $6.5 million, $1.4 million, $0.7 million and $0.5 million, respectively. The decrease in sales from Asia Pacific was primarily attributable to decreased sales of automotive, decoration porcelain enamel products of $2.5 million, $1.9 million and $1.4 million, respectively, partially mitigated by higher sales of industrial products of $1.7 million. The decrease in sales from the United States was primarily attributable to lower sales of automotive, porcelain enamel, industrial and decoration products of $5.0 million, $3.3 million, $2.4 million and $2.1million, respectively, partially mitigated by higher sales of electronic products of $8.8 million.
Color Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
|
|
Change due to |
|||||||||||||||
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
Volume / |
|
|
|
|
|
|
|||||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
|
Price |
|
Mix |
|
Currency |
|
Other |
||||||||||
|
Segment net sales |
|
$ |
170,020 |
|
|
$ |
193,622 |
|
|
$ |
(23,602) |
|
(12.2) |
% |
|
$ |
260 |
|
$ |
(20,605) |
|
$ |
(3,257) |
|
$ |
— |
|
Segment gross profit |
|
|
60,772 |
|
|
|
58,098 |
|
|
|
2,674 |
|
4.6 |
% |
|
|
260 |
|
|
(12,009) |
|
|
(550) |
|
|
14,973 |
|
Gross profit as a % of segment net sales |
|
|
35.7 |
% |
|
|
30.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales decreased compared with the prior-year same period, primarily driven by lower sales of surface technology, pigment and dispersions and colorants products of $14.2 million, $7.6 million and of $1.8 million, respectively. The decrease in net sales was driven by unfavorable volume and mix of $20.6 million and unfavorable foreign currency impacts of $3.3 million, partially mitigated by increased product pricing of $0.3 million. Gross profit increased from the prior-year same period, primarily due to favorable manufacturing costs of $10.4 million, favorable raw material costs of $4.6 million and increased product pricing of $0.3 million, partially offset by unfavorable sales volume and mix of $12.0 million and unfavorable foreign currency impacts of $0.6 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
||||
|
|
|
June 30, |
|
|
|
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|
% Change |
||||
|
Segment net sales by Region |
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
71,679 |
|
$ |
86,741 |
|
$ |
(15,062) |
|
(17.4) |
% |
|
EMEA |
|
|
65,763 |
|
|
72,611 |
|
|
(6,848) |
|
(9.4) |
% |
|
Asia Pacific |
|
|
18,406 |
|
|
17,836 |
|
|
570 |
|
3.2 |
% |
|
Latin America |
|
|
14,172 |
|
|
16,434 |
|
|
(2,262) |
|
(13.8) |
% |
|
Total |
|
$ |
170,020 |
|
$ |
193,622 |
|
$ |
(23,602) |
|
(12.2) |
% |
The net sales decrease of $23.6 million was driven by lower sales from the United States, EMEA and Latin America, partially offset by higher sales from Asia Pacific. The decrease in sales from the United States was primarily driven by lower sales of surface technology, pigment and dispersions and colorants products of $14.6 million, $0.3 million and $0.2 million, respectively. The decrease in sales from EMEA was primarily attributable to lower sales of pigment and dispersions and colorants products of $5.4 million and $1.4 million, respectively. The decrease in sales from Latin America was attributable to lower sales of pigment products.
Summary of Cash Flows for the six months ended June 30, 2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
||||
|
|
|
June 30, |
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|||
|
Net cash used in operating activities |
|
$ |
(104,561) |
|
$ |
(78,949) |
|
$ |
(25,612) |
|
Net cash provided by investing activities |
|
|
48,376 |
|
|
5,284 |
|
|
43,092 |
|
Net cash provided by financing activities |
|
|
22,519 |
|
|
20,337 |
|
|
2,182 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(505) |
|
|
338 |
|
|
(843) |
|
Decrease in cash and cash equivalents |
|
$ |
(34,171) |
|
$ |
(52,990) |
|
$ |
18,819 |
The following table includes details of net cash provided by operating activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
||||
|
|
|
June 30, |
|
|
|
||||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
|
$ Change |
|||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,969 |
|
$ |
24,987 |
|
$ |
(14,018) |
|
Loss (gain) on sale of assets |
|
|
506 |
|
|
(1,219) |
|
|
1,725 |
|
Depreciation and amortization |
|
|
20,854 |
|
|
28,350 |
|
|
(7,496) |
|
Interest amortization |
|
|
1,795 |
|
|
1,812 |
|
|
(17) |
|
Restructuring and impairment |
|
|
6,916 |
|
|
6,758 |
|
|
158 |
|
Accounts receivable |
|
|
(51,017) |
|
|
(70,830) |
|
|
19,813 |
|
Inventories |
|
|
(34,771) |
|
|
(15,101) |
|
|
(19,670) |
|
Accounts payable |
|
|
(45,089) |
|
|
(58,472) |
|
|
13,383 |
|
Other current asset, liabilities and adjustments, net |
|
|
(14,724) |
|
|
4,766 |
|
|
(19,490) |
|
Net cash used in operating activities |
|
$ |
(104,561) |
|
$ |
(78,949) |
|
$ |
(25,612) |
Cash flows from operating activities. Cash flows from operating activities decreased $25.6 million during the six months ended June 30, 2020 compared with the prior-year same period. The decrease in cash from operating activities was primarily due to a decrease in net income of $14.0 million, a decrease in depreciation and amortization of $7.5 million and a decrease in retirement benefits obligations of $6.9 million, partially mitigated by lower cash outflows for net working capital of $13.5 million.
Cash flows used in investing activities. Cash flows from investing activities increased $43.1 million during the six months ended June 30, 2020 compared with the prior-year same period. The increase in cash from investing activities was primarily due to lower cash outflows for capital expenditures of $22.7 million and higher collections of financing receivables from the international receivable sales program (Note 8) of $21.3 million in the six months ended June 30, 2020, compared to the prior-year same period.
Cash flows from financing activities. Cash flows from financing activities increased $2.2 million during the six months ended June 30, 2020 compared with the prior-year same period. Compared to the prior-year same period, cash outflows for the purchase of treasury stock were lower by $25.0 million and net proceeds from loans payable increased by $3.9 million, partially offset by lower net proceeds from the revolving credit facility of $25.9 million.
Capital Resources and Liquidity
Refer to Note 8 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of major debt instruments that were outstanding during 2020.
Off Balance Sheet Arrangements
Consignment and Customer Arrangements for Precious Metals. We use precious metals, primarily silver, in the production of some of our products. We obtain precious metals from financial institutions under consignment agreements. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign and the period of consignment. These fees were $0.6 million for the three months ended June 30, 2020 and 2019 and were $1.7 million for the six months ended June 30, 2020 and 2019. We had on hand precious metals owned by participants in our precious metals program of $77.3 million at June 30, 2020, and $66.2 million at December 31, 2019, measured at fair value based on market prices for identical assets.
The consignment agreements under our precious metals program involve short-term commitments that typically mature within 30 to 90 days of each transaction and are typically renewed on an ongoing basis. As a result, the Company relies on the continued willingness of financial institutions to participate in these arrangements to maintain this source of liquidity. On occasion, we have been required to deliver cash collateral. While no deposits were outstanding at June 30, 2020, or December 31, 2019, we may be required to furnish cash collateral in the future based on the quantity and market value of the precious metals under consignment and the amount of collateral-free lines provided by the financial institutions. The amount of cash collateral required is subject to review by the financial institutions and can be changed at any time at their discretion, based in part on their assessment of our creditworthiness.
Bank Guarantees and Standby Letters of Credit.
At June 30, 2020, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $4.2 million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.
Liquidity Requirements
Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under the revolving credit facility, and cash flows from operating activities. As of June 30, 2020, we had $70.2 million of cash and cash equivalents. The majority of our cash and cash equivalents were held by foreign subsidiaries. Cash generated in the U.S. is generally used to pay down amounts outstanding under our revolving credit facility and for general corporate purposes, including acquisitions. If needed, we could repatriate the majority of cash held by foreign subsidiaries without the need to accrue and pay U.S. income taxes. We do not anticipate a liquidity need requiring such repatriation of these funds to the U.S.
During the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business, which has historically been a part of our Performance Coatings reportable segment. We expect to use the proceeds of the sale to settle long-term obligations.
Our liquidity requirements and uses primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures, acquisition costs, capital investments, strategic optimization plans, precious metals cash collateral requirements, and postretirement obligations. We expect to meet these requirements in the long term through cash provided by operating activities and availability under existing credit facilities or other financing arrangements. Cash flows provided by operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. As of June 30, 2020, we had liquidity of approximately $548.2 million, consisting of cash and availability under our various credit facilities, primarily our revolving credit facility.
The 2018 Revolving Facility subjects us to a customary financial covenant regarding the Company’s maximum leverage ratio. This covenant under our Amended Credit Facility restricts the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.
As of June 30, 2020, we were in compliance with our maximum leverage ratio covenant of 4.00x as our actual ratio was 3.03, providing $66.3 million of EBITDA cushion on the leverage ratio, as defined within the Amended Credit Facility. To the extent that economic conditions in key markets deteriorate or we are unable to meet our business projections and EBITDA, as defined within the Amended Credit Facility, falls below approximately $265 million for the most recently ended trailing four quarters, based on reasonably consistent net debt levels with those as of June 30, 2020, we could become unable to maintain compliance with our leverage ratio covenant. In such case, our lenders could demand immediate payment of outstanding amounts and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all.
Difficulties experienced in global capital markets could affect the ability or willingness of counterparties to perform under our various lines of credit, forward contracts, and precious metals program. These counterparties are major, reputable, multinational institutions, all having investment-grade credit ratings. Accordingly, we do not anticipate counterparty default. However, an interruption in access to external financing could adversely affect our business prospects and financial condition.
We assess on an ongoing basis our portfolio of businesses, as well as our financial and capital structure, to ensure that we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate the possible divestiture of businesses that are not critical to our core strategic objectives and, where appropriate, pursue the sale of such businesses and assets. We also evaluate and pursue acquisition opportunities that we believe will enhance our strategic position. Generally, we publicly announce divestiture and acquisition transactions only when we have entered into a material definitive agreement or closed on those transactions.
Critical Accounting Policies and Their Application
There were no material changes to our critical accounting policies described in “Critical Accounting Policies” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.
Impact of Newly Issued Accounting Pronouncements
Refer to Note 2 to the condensed consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of accounting standards we recently adopted or will be required to adopt.
Risk Factors
Certain statements contained here and in future filings with the SEC reflect the Company’s expectations with respect to future performance and constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Company’s operations and business environment, which are difficult to predict and are beyond the control of the Company. Factors that could adversely affect our future financial performance include those described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to instruments that are sensitive to fluctuations in interest rates and foreign currency exchange rates.
Our exposure to interest rate risk arises from our debt portfolio. We manage this risk by controlling the mix of fixed-rate versus variable-rate debt after considering the interest rate environment and expected future cash flows. To reduce our exposure to interest rate changes on variable-rate debt, we have entered into interest rate swap agreements. These swaps effectively convert a portion of our variable-rate debt to a fixed rate. Our objective is to limit variability in earnings, cash flows and overall borrowing costs caused by changes in interest rates, while preserving operating flexibility.
We operate internationally and enter into transactions denominated in foreign currencies. These transactions expose us to gains and losses arising from exchange rate movements between the dates foreign currencies are recorded and the dates they are settled. We manage this risk by entering into forward currency contracts in an effort to substantially offset these gains and losses.
The notional amounts, carrying amounts of assets (liabilities), and fair values associated with our exposure to these market risks and sensitivity analysis about potential gains (losses) resulting from hypothetical changes in market rates are presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
||
|
(Dollars in thousands) |
|
2020 |
|
2019 |
||
|
Variable-rate debt: |
|
|
|
|
|
|
|
Carrying amount(1) |
|
$ |
825,455 |
|
$ |
801,764 |
|
Fair value |
|
|
804,136 |
|
|
799,750 |
|
Increase in annual interest expense from 1% increase in interest rates |
|
|
2,924 |
|
|
2,656 |
|
Decrease in annual interest expense from 1% decrease in interest rates |
|
|
(2,924) |
|
|
(2,656) |
|
Fixed-rate debt: |
|
|
|
|
|
|
|
Carrying amount |
|
|
3,425 |
|
|
3,496 |
|
Fair value |
|
|
1,442 |
|
|
1,557 |
|
Change in fair value from 1% increase in interest rates |
|
|
NM |
|
|
NM |
|
Change in fair value from 1% decrease in interest rates |
|
|
NM |
|
|
NM |
|
Interest rate swaps: |
|
|
|
|
|
|
|
Notional amount |
|
|
312,816 |
|
|
314,412 |
|
Carrying amount and fair value |
|
|
(27,517) |
|
|
(14,698) |
|
Change in fair value from 1% increase in interest rates |
|
|
9,068 |
|
|
11,399 |
|
Change in fair value from 1% decrease in interest rates |
|
|
(4,815) |
|
|
(10,676) |
|
Cross currency swaps: |
|
|
|
|
|
|
|
Notional amount |
|
|
339,681 |
|
|
341,419 |
|
Carrying amount and fair value |
|
|
21,246 |
|
|
22,111 |
|
Change in fair value from 10% appreciation of U.S. dollar |
|
|
(34,553) |
|
|
(34,795) |
|
Change in fair value from 10% depreciation of U.S. dollar |
|
|
34,553 |
|
|
34,795 |
|
Foreign currency forward contracts: |
|
|
|
|
|
|
|
Notional amount |
|
|
646,218 |
|
|
625,908 |
|
Carrying amount and fair value |
|
|
1,696 |
|
|
601 |
|
Change in fair value from 10% appreciation of U.S. dollar |
|
|
6,273 |
|
|
3,540 |
|
Change in fair value from 10% depreciation of U.S. dollar |
|
|
(7,667) |
|
|
(4,144) |
(1)The carrying value of the term loan facility is net of unamortized debt issuance costs of $4.3 million and $3.9 million for the period ended June 30, 2020 and December 31, 2019, respectively.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Ferro is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) of the Exchange Act, Ferro has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of June 30, 2020, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the disclosure controls and procedures were effective as of June 30, 2020.
Changes in Internal Control over Financial Reporting
During the second quarter of 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not observed any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
In November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane. The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages. The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to liability for the plaintiff’s claims, and is vigorously defending this proceeding. Since December 2018, additional complaints were filed in the same court by 25 other New York water suppliers against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. An additional complaint also was filed by the Hicksville Water District against the Company and others in New York State Supreme Court making substantially similar allegations and seeking damages of $900 million. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.
In addition to the proceedings described above, the Company and its consolidated subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses. The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.
Item 1A. Risk Factors
Reference is made to Part 1, Item 1A. “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The risk factor set forth below updates, and should be read together with, such risk factors. Furthermore, the impact of the novel coronavirus (“COVID-19”) may exacerbate the risks discussed therein, any of which could have a material effect on the Company.
COVID-19 has spread around the world, including in Asia, Europe, the Middle East, and North and South America, all of which are regions in which Ferro has operations. The spread of COVID-19 has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. The measures taken by the authorities have impacted and may further impact certain of our workforce and operations, the operations of our customers, and those of our vendors and suppliers. There is considerable uncertainty regarding measures that authorities may implement in the future, which may restrict our operations and those of our suppliers and customers and disrupt logistics and other supply and distribution service providers. The spread of COVID-19 has caused us to modify certain of our business practices with respect to certain products (including site operations, employee workplace practices, travel, and participation in meetings, events, and conferences), and we may take further actions as required or recommended by authorities or deemed to be in the best interests of our employees and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely affected. These circumstances could negatively impact our business, results of operations, financial condition and cash flows.
The degree to which COVID-19 will impact our results depends on many factors, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, actions to contain the virus or limit its impact, and the speed and extent to which normal economic and operating conditions resume. Even after the COVID-19 outbreak has subsided, we may experience material adverse impacts to our business as a result of the economic impact and any recession or other macroeconomic weakness that may occur.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Board of Directors has not declared any dividends on common stock during 2020 or 2019. The Company’s Amended Credit Facility restricts the amount of dividends we can pay on our common stock. Any future dividends declared would be at the discretion of our Board of Directors and would depend on our financial condition, results of operations, cash flows, contractual obligations, the terms our financing agreements at the time a dividend is considered, and other relevant factors.
The following table summarizes purchases of our common stock by the Company and affiliated purchasers during the three months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount of |
|
Maximum Dollar |
|||
|
|
|
|
|
|
|
Shares Purchased |
|
Amount that May |
|||
|
|
|
Total Number |
|
|
|
as Part of Publicly |
|
Yet Be Purchased |
|||
|
|
|
of Shares |
|
Average Price |
|
Announced Plans |
|
Under the Plans |
|||
|
(Dollars in thousands, except for per share amounts) |
|
Purchased |
|
Paid per Share |
|
or Programs |
|
or Programs |
|||
|
April 1, 2020 to April 30, 2020 |
|
— |
|
$ |
— |
|
$ |
— |
|
$ |
46,192,535 |
|
May 1, 2020 to May 31, 2020 |
|
— |
|
$ |
— |
|
$ |
— |
|
$ |
46,192,535 |
|
June 1, 2020 to June 30, 2020 |
|
— |
|
$ |
— |
|
$ |
— |
|
$ |
46,192,535 |
|
Total |
|
— |
|
|
|
|
$ |
— |
|
|
|
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The exhibits listed in the attached Exhibit Index are the exhibits required by Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
FERRO CORPORATION (Registrant) |
|
|
|
|
|
Date: |
August 4, 2020 |
|
|
|
|
/s/ Peter T. Thomas |
|
|
|
Peter T. Thomas |
|
|
|
Chairman, President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
Date: |
August 4, 2020 |
|
|
|
|
/s/ Benjamin J. Schlater |
|
|
|
Benjamin J. Schlater |
|
|
|
Group Vice President and Chief Financial Officer (Principal Financial Officer) |
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated here by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934.
Exhibit:
|
|
|
|
|
3 |
Articles of incorporation and by-laws: |
|
|
3.1 |
||
|
3.2 |
||
|
3.3 |
||
|
3.4 |
||
|
3.5 |
||
|
3.6 |
||
|
10 |
Material Contracts: |
|
|
10.1 |
||
|
31 |
Certifications: |
|
|
31.1 |
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
31.2 |
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
32.1 |
Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350. |
|
|
32.2 |
Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350. |
|
|
101 |
Inline XBRL Documents: |
|
|
101.INS |
Inline XBRL Instance Document |
|
|
101.SCH |
Inline XBRL Schema Document |
|
|
101.CAL |
Inline XBRL Calculation Linkbase Document |
|
|
101.LAB |
Inline XBRL Labels Linkbase Document |
|
|
101.PRE |
Inline XBRL Presentation Linkbase Document |
|
|
101.DEF |
Inline XBRL Definition Linkbase Document |
|
|
104 |
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL and contained in Exhibit 101. |
|
43
EXHIBIT 10.1
ThIRD amendment to CREDIT AGREEMENT
This Third Amendment dated as of May 4, 2020 to Credit Agreement (this “Amendment”) is entered into by and among Ferro Corporation, an Ohio corporation (the “Company”), the Subsidiaries of the Company listed on the signature pages hereto (the “U.S. Obligors”), the several banks and other financial institutions or entities as Lenders constituting at least the Required Lenders under the Existing Credit Agreement (as defined below) and PNC Bank, National Association (“PNC”), as administrative agent (in such capacity, the “Administrative Agent”) and collateral agent (in such capacity, the “Collateral Agent”). Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Existing Credit Agreement referred to below.
W I T N E S S E T H:
WHEREAS, the Company, certain Subsidiaries of the Company from time to time party thereto, the Lenders from time to time party thereto, the Administrative Agent, the Collateral Agent, the Issuers and the Syndication Agent have entered into the Credit Agreement, dated as of February 14, 2017 (together with all exhibits and schedules attached thereto, as amended by the First Amendment to Credit Agreement, dated as of April 25, 2018, as further amended by the Second Amendment to Credit Agreement, dated as of November 5, 2018, and as further amended, restated, amended and restated, supplemented or otherwise modified prior to the date hereof, the “Existing Credit Agreement” as amended by this Amendment, the “Credit Agreement”);
WHEREAS, the Company has requested, pursuant to Section 10.1 of the Existing Credit Agreement, that the Existing Credit Agreement be amended to, among other things, permit the Disposition by the Company of its tile coating business to Pigments Spain, S.L. (the “Purchaser”) pursuant to that certain Asset and Stock Purchase Agreement, dated as of December 15, 2019, between the Company and the Purchaser;
WHEREAS, each Lender that executes and delivers a signature page to this amendment (a “Lender Consent”) (each Revolving Lender consenting to the amendments set forth herein, a “Consenting Revolving Lender” and each Term Loan Lender consenting to the amendments set forth herein, a “Consenting Term Loan Lender”) will be deemed to have agreed to the terms of this Amendment and consent to the Disposition of the Tile Coating Business subject to the terms and conditions set forth in this Amendment;
WHEREAS, each U.S. Obligor party hereto (collectively, the “Reaffirming Parties”, and each, a “Reaffirming Party”) expects to realize substantial direct and indirect benefits as a result of this Amendment becoming effective and the consummation of the transactions contemplated hereby and agrees to reaffirm its obligations pursuant to the Credit Agreement, the Security Documents, and the other Loan Documents to which it is a party; and
NOW, THEREFORE, in consideration of the covenants and agreements contained herein, as well as other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
|
|
(a) Section 1.1 of the Existing Credit Agreement shall hereby be amended by adding the following definitions in appropriate alphabetical order: |
“BHC Act Affiliate” means an “affiliate” (as such term is defined under, and interpreted in accordance with, 12 U.S.C. 1841(k)) of a party.
“Beneficial Ownership Certification” means a certification regarding beneficial ownership as required by the Beneficial Ownership Regulation.
“Beneficial Ownership Regulation” means 31 C.F.R. § 1010.230.
“Covered Entity” means (i) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b); (ii) a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or (iii) a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).
“Covered Party” is defined in Section 10.27.
“Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.
“QFC” has the meaning assigned to the term “qualified financial contract” in, and shall be interpreted in accordance with, 12 U.S.C. 5390(c)(8)(D).
“QFC Credit Support” is defined in Section 10.27.
“Supported QFC” is defined in in Section 10.27.
“Tile Coatings Business Disposition” means the Disposition by the Company of its tile coating business to Pigments Spain, S.L. pursuant to that certain Asset and Stock Purchase Agreement, dated as of December 15, 2019, between the Company and Pigments Spain, S.L., and as in effect on May 4, 2020.
“U.S. Special Resolution Regimes” is defined in in Section 10.27.
|
|
(b) Section 1.1 of the Existing Credit Agreement shall hereby be amended by amending and restating the definition of “Net Disposition Proceeds” in its entirety as follows” |
“Net Disposition Proceeds” means, with respect to any Disposition by the Company, its U.S. Subsidiaries or any Subsidiary Guarantor pursuant to clauses (c) and (j) of Section 7.2.8 and any cash payment received in respect of promissory notes or other non-cash consideration delivered to the Company or such Subsidiary in respect thereof, the excess of (a) the gross cash proceeds received by the Company or such Subsidiary over (b) the sum of (i) all reasonable and customary legal, investment banking, brokerage and accounting fees and expenses incurred in connection with such Disposition, (ii) all taxes actually paid or accrued by the Company to be payable in cash in connection with such Disposition, (iii) all pension obligations retained by the Company in connection with such Disposition and (iv) payments made by the Company or such Subsidiary to retire Indebtedness (other than the Credit Extensions) where payment of such Indebtedness is required in connection with such Disposition; provided, that if the amount of any accrued taxes pursuant to clause (ii) exceeds the amount of taxes actually required to be paid in cash in respect of such Disposition, the aggregate amount of such excess shall constitute Net Disposition Proceeds.”
|
|
(c) Section 1.1 of the Existing Credit Agreement shall hereby be amended by amending and restating the definition of “Patriot Act Disclosures” in its entirety as follows: |
“Patriot Act Disclosures” means all documentation and other information which a Lender, if subject to the Patriot Act and/or the Beneficial Ownership Regulation, is required to provide pursuant to the applicable section of the Patriot Act or the Beneficial Ownership Regulation, as applicable, and which required documentation and information the Administrative Agent reasonably requests in order to comply with their ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Patriot Act and the Beneficial Ownership Regulation. For the avoidance of doubt, any requirement to deliver a Beneficial Ownership Certification or to provide notices or information with respect thereto shall apply only to any Borrower that qualifies as a “legal entity customer” under the Beneficial Ownership Regulation.”
|
|
(d) Article I of the Existing Credit Agreement is hereby amended by adding a new Section 1.8 (Divisions) after Section 1.7, which shall read as follows: |
“SECTION 1.8Divisions. For all purposes under the Loan Documents, in connection with any division or plan of division under Delaware law (or any comparable event under a different jurisdiction’s laws): (a) if any asset, right, obligation or liability of any Person becomes the asset, right, obligation or liability of a different Person, then it shall be deemed to have been transferred from the original Person to the subsequent Person, and (b) if any new Person comes into existence, such new Person shall be deemed to have been organized on the first date of its existence by the holders of its equity interests at such time.”
|
|
(e) Section 3.1.1(g) of the Existing Credit Agreement shall hereby be amended and restated in its entirety as follows: |
“(g)With respect to Net Disposition Proceeds and Net Casualty Proceeds, within ten Business Days following receipt by the Company or any Subsidiary of any Net Disposition Proceeds resulting from Dispositions made pursuant to Section 7.2.8(c), Section 7.2.8(j) or any Net Casualty Proceeds in excess of a cumulative amount of $1,000,000 in any Fiscal Year, the Company shall deliver to the Administrative Agent a calculation of the amount of such proceeds and the Company shall make, or cause to be made, a mandatory prepayment of the Loans as set forth in Section 3.1.2 in an amount equal to the Applicable Net Proceeds Percentage of such Net Disposition Proceeds or Net Casualty Proceeds; provided, that upon written notice by the Company to the Administrative Agent not more than ten Business Days following receipt of any Net Disposition Proceeds resulting from a Disposition or series of related Dispositions or receipt of any Net Casualty Proceeds (in each case, so long as no Event of Default has occurred and is continuing), such proceeds may be retained by the Company and its Subsidiaries (which retained proceeds (i) shall be excluded from the prepayment requirements of this clause and (ii) may, in the Company’s discretion, be used to repay the outstanding Revolving Loans without a corresponding permanent reduction of the Revolving Loan Commitment Amount pending reinvestment in accordance with the terms hereof) if:
(i)the Company informs the Administrative Agent in such notice of its good faith intention to apply (or cause one or more of its Subsidiaries to apply) such Net Disposition Proceeds or Net Casualty Proceeds to the acquisition of other assets or properties; and
(ii)within one year calendar following the date of receipt of such Net Disposition Proceeds or such Net Casualty Proceeds, such proceeds are applied or committed to such application.
The amount of such retained Net Disposition Proceeds or retained Net Casualty Proceeds unused or uncommitted after such one-year period shall be applied to prepay the Loans as set forth in Section 3.1.2. Notwithstanding the foregoing, in the event that the application of Net Disposition Proceeds or Net Casualty Proceeds by any Foreign Subsidiary to repay the Loans as required by this clause would result in a materially increased Tax liability for the Company (as reasonably
determined by the Company in consultation with the Administrative Agent), such Foreign Subsidiary shall not be required to apply such Net Disposition Proceeds or such Net Casualty Proceeds to prepay the Loans.”
|
|
(f) Section 6.13 of the Existing Credit Agreement shall be amended by adding the following sentence at the end of the section: |
“The information included in the Beneficial Ownership Certification is true and correct in all respects.”
|
|
(g) Section 7.1.1(i) of the Existing Credit Agreement shall hereby be amended by removing the word “and”. |
|
|
(h) Section 7.1.1.(j) of the Existing Credit Agreement shall hereby be amended by replacing the period at the end of the clause with “; and” |
|
|
(i) Section 7.1.1 of the Existing Credit Agreement shall hereby be amended by adding a clause (k) that shall read: |
“(k) promptly notify the Agents of any change in the information provided in the Beneficial Ownership Certification that would result in a change to the list of beneficial owners identified in parts (c) or (d) of such certification.”
|
|
(j) Section 7.2.8(h) of the Existing Credit Agreement shall hereby be amended by removing the word “and”. |
|
|
(k) Section 7.2.8(i) of the Existing Credit Agreement shall hereby be amended by replacing the period at the end of the clause with “; and”. |
|
|
(l) Section 7.2.8 of the Existing Credit Agreement shall hereby be amended by adding a clause (j) that shall read: |
“(j)the Tile Coatings Business Disposition so long as (i) the consideration received in connection with such Disposition consists of not less than 75% in cash (including cash equivalents) and (ii) the Net Disposition Proceeds from such Disposition are applied pursuant to Sections 3.1.1 and 3.1.2.”
|
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(m) Section 10.8 of the Existing Credit Agreement shall be amended by adding the following sentence at the end of the section: |
“The words “execution,” “signed,” “signature,” “delivery,” and words of like import in or relating to this Agreement and any other Loan Document (including, without limitation, any Assignment Agreement) to be signed in connection with this Agreement, the other Loan Documents and the transactions contemplated hereby and thereby shall be deemed to include electronic signatures, deliveries or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature, physical delivery thereof or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act; provided that nothing herein shall require the Administrative Agent to accept electronic signatures in any form or format without its prior written consent.”
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(n) Article X of the Existing Credit Agreement is hereby amended by adding a new Section 10.27 (Acknowledgement and Consent Regarding Any Supported QFCs) after Section 10.26, which shall read as follows: |
. To the extent that the Loan Documents provide support, through a guarantee or otherwise, for Swap Agreements or any other agreement or instrument that is a QFC (such support, “QFC Credit Support” and, each such QFC, a “Supported QFC”), the parties acknowledge and agree as follows with respect to the resolution power of the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (together with the regulations promulgated thereunder, the “U.S. Special Resolution Regimes”) in respect of such Supported QFC and QFC Credit Support (with the provisions below applicable notwithstanding that the Loan Documents and any Supported QFC may in fact be stated to be governed by the laws of the State of New York and/or of the United States or any other state of the United States). In the event a Covered Entity that is party to a Supported QFC (each, a “Covered Party”) becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer of such Supported QFC and the benefit of such QFC Credit Support (and any interest and obligation in or under such Supported QFC and such QFC Credit Support, and any rights in property securing such Supported QFC or such QFC Credit Support) from such Covered Party will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if the Supported QFC and such QFC Credit Support (and any such interest, obligation and rights in property) were governed by the laws of the United States or a state of the United States. In the event a Covered Party or a BHC Act Affiliate of a Covered Party becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under the Loan Documents that might otherwise apply to such Supported QFC or any QFC Credit Support that may be exercised against such Covered Party are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if the Supported QFC and the Loan Documents were governed by the laws of the United States or a state of the United States. Without limitation of the foregoing, it is understood and agreed that rights and remedies of the parties with respect to a Defaulting Lender shall in no event affect the rights of any Covered Party with respect to a Supported QFC or any QFC Credit Support.”
The effectiveness of this Amendment is subject to the satisfaction (or written waiver) of the following conditions (the date of satisfaction of such conditions being referred to herein as the “Third Amendment Effective Date”):
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2.1. This Amendment shall have been duly executed by the Company, the Lenders constituting at least the Required Lenders under the Existing Credit Agreement (through the execution and delivery of a Lender Consent), and the Administrative Agent, and delivered to the Administrative Agent; |
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2.2. All payments and expenses required to be paid hereunder or pursuant to that certain Engagement Letter, dated as of March 31, 2020, by and between the Borrower, PNC Capital Markets LLC and Deutsche Bank Securities Inc. shall have been paid in full in cash or will be paid in full in cash on the Third Amendment Effective Date, including, without limitation, all reasonable and documented out-of-pocket expenses incurred by PNC Capital Markets LLC, Deutsche Bank Securities Inc., the Administrative Agent and their respective Affiliates in connection with the execution and delivery of this Amendment, in each case to the extent required by Section 10.3 of the Credit Agreement; |
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2.3. Substantially concurrently with the Third Amendment Effective Date, the Borrower shall have paid to the Administrative Agent (i) for the account of each Consenting Revolving Lender, a non-refundable payment in an amount equal to $5,000, which payment shall be earned, due and payable on the Third Amendment Effective Date and (ii) for the account of each Consenting Term Loan Lender, a non-refundable one-time payment
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in an amount equal to 0.125% of the aggregate principal amount of such Consenting Term Loan Lender’s outstanding Term Loans, which payment shall be earned, due and payable on the Third Amendment Effective Date; |
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2.4. The Administrative Agent shall have received with respect to the Company (i) a copy of a good standing certificate, dated a date reasonably close to the Third Amendment Effective Date, for the Company and (ii) a certificate, dated as of the Third Amendment Effective Date, duly executed and delivered by the Company’s Secretary or Assistant Secretary, any director, managing member or general partner, as applicable, as to (A) resolutions of the Company’s board of directors then in full force and effect authorizing the execution, delivery and performance of this Amendment and any related Loan Documents and the transactions contemplated hereby and thereby, (B) the incumbency and signatures of those of its officers, directors, managing member or general partner, as applicable, authorized to act with respect to this Amendment and each Loan Document to be executed by the Company, and (C) the full force and validity of each Organic Document of the Company (and copies of all amendments thereof, if any, since the First Amendment Effective Date), upon which certificates each Secured Party may conclusively rely until it shall have received a further certificate of the Secretary, Assistant Secretary, any director, managing member or general partner, as applicable, of any such Person canceling or amending the prior certificate of the Company; |
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2.5. No Default or Event of Default has occurred and is continuing on the Third Amendment Effective Date both before and immediately after giving effect to this Amendment; and |
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2.6. The representations and warranties set forth in each Loan Document shall, in each case, be true and correct in all material respects (or in all respects if qualified by materiality or Material Adverse Effect) with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct in all material respects (or in all respects if qualified by materiality or Material Adverse Effect) as of such earlier date). |
To induce the other parties hereto to enter into this Amendment, the Company and the U.S. Obligors represent and warrant to each of the Lenders, the Administrative Agent and the Collateral Agent that, as of the Third Amendment Effective Date:
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3.1. This Amendment has been duly authorized, executed and delivered by the Company and the U.S. Obligors, and this Amendment and the Credit Agreement (after giving effect to this Amendment) constitute the Company’s and each U.S. Obligor’s, as applicable, legal, valid and binding obligation, enforceable against it in accordance with its terms, (except in any case, as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general principles of equity, regardless of whether considered in a proceeding in equity or at law); |
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3.2. The representations and warranties set forth in the Credit Agreement and each other Loan Document are, in each case after giving effect to this Amendment, true and correct in all material respects (or in all respects if qualified by materiality or Material Adverse Effect) on and as of the date hereof and the Third Amendment Effective Date, unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct in all material respects (or in all respects if qualified by materiality or Material Adverse Effect) as of such earlier date; |
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3.3. No Default or Event of Default has occurred and is continuing; and |
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3.4. The execution, delivery and performance by the Company and each U.S. Obligor of this Amendment and the other Loan Documents to which it is a party do not (x) contravene (A) the Company’s or any U.S. Obligors’ Organic Documents, (B) any court decree or order binding on or affecting the Company or any U.S. Obligor or (C) any law or governmental regulation binding on or affecting the company or any U.S. Obligor or (y) result in (A) or require the creation or imposition of, any Lien on the Company’s or any U.S. Obligor’s properties
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(except as permitted by the Credit Agreement) or (B) a default under any contractual restriction binding on or affecting the Company or any U.S. Obligor. |
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Article IV
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Except as specifically amended herein or contemplated hereby, all Loan Documents shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Except as specifically amended herein or contemplated hereby, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any Lender or the Administrative Agent under any of the Loan Documents, nor constitute a waiver of any provision of the Loan Documents or in any way limit, impair or otherwise affect the rights and remedies of the Lenders or the Administrative Agent under the Loan Documents. The Company and each U.S. Obligor acknowledges and agrees that, on and after the Third Amendment Effective Date, this Amendment and each of the other Loan Documents to be executed and delivered by the Company and the U.S. Obligors in connection herewith shall constitute a Loan Document for all purposes of the Credit Agreement. On and after the Third Amendment Effective Date, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import referring to the Existing Credit Agreement, and each reference in the other Loan Documents to “Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Existing Credit Agreement shall mean and be a reference to the Credit Agreement, and this Amendment and the Credit Agreement shall be read together and construed as a single instrument. Nothing herein shall be deemed to entitle any Borrower to a further consent to, or a further waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances.
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Article V
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5.1. Indemnification. The Company hereby confirms that the indemnification provisions set forth in Section 10.4 of the Credit Agreement shall apply to this Amendment and the transactions contemplated hereby. |
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5.2. Amendments; Execution in Counterparts; Severability. |
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(a) This Amendment may not be amended nor may any provision hereof be waived except pursuant to a writing signed by the Company, the Lenders party hereto and the Administrative Agent, in each case to the extent required by the Credit Agreement; and |
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(b) To the extent any provision of this Amendment is prohibited by or invalid under the applicable law of any jurisdiction, such provision shall be ineffective only to the extent of such prohibition or invalidity and only in such jurisdiction, without prohibiting or invalidating such provision in any other jurisdiction or the remaining provisions of this Amendment in any jurisdiction. |
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5.3. Reaffirmation. Each Reaffirming Party, as party to the Credit Agreement, the Subsidiary Guaranty, the Security Documents and the other Loan Documents (in each case, to which such Reaffirming Party is a party) and as amended, supplemented or otherwise modified from time to time, hereby (i) acknowledges and agrees that all of its obligations under the Credit Agreement, the Security Documents and the other Loan Documents to which it is a party are reaffirmed and remain in full force and effect on a continuous basis, (ii) ratifies and reaffirms (A) each Lien granted by it to the Collateral Agent for the benefit of the Secured Parties, (B) any guaranties made by it pursuant to the Subsidiary Guaranty, the Credit Agreement and the other Loan Documents and (C) the validity and enforceability of all of such Liens and security interests heretofore granted, pursuant to and in connection with the Subsidiary Guaranty, the Security Documents or any other Loan Document to Collateral Agent, on behalf and for the benefit of each Secured Party, as collateral security for the obligations under the Loan Documents in accordance with their respective terms and (iii) acknowledges and agrees that the grants of security interests by the Company and the U.S. Obligors contained in the Security Agreement and any other Security Document shall remain, in full force and effect after giving effect to this Amendment. Nothing contained in this Amendment shall be construed as substitution or novation of the obligations outstanding under the Credit
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Agreement or the other Loan Documents, which shall remain in full force and effect, except to any extent modified hereby. |
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5.4. Administrative Agent. The Company acknowledges and agrees that PNC, in its capacity as administrative agent under the Credit Agreement, will continue to serve as Administrative Agent under this Amendment and under the Credit Agreement. |
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5.5. Governing Law; Waiver of Jury Trial; Jurisdiction. This Amendment shall be construed in accordance with and governed by the law of the State of New York. Each party hereto agrees that the provisions of Sections 10.9, 10.13 and 10.14 of the Credit Agreement are incorporated herein by reference, mutatis mutandis. |
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5.6. Cross-References. References in this Amendment to any Article or Section are, unless otherwise specified, to such Article or Section of this Amendment. |
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5.7. Loan Document Pursuant to Credit Agreement. This Amendment is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with all of the terms and provisions of the Credit Agreement, as amended hereby, including Article X thereof. |
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5.8. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. |
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5.9. Headings. Section headings in this Amendment are included herein for convenience of reference only, are not part of this Amendment and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. |
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5.10. Counterparts. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Signatures delivered by facsimile or PDF or other electronic means shall have the same force and effect as manual signatures delivered in person. The words “execution”, “signed”, “signature,” and words of like import in this Amendment shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature of the use of paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law or regulation, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act. |
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers as of the day and year first above written.
FERRO CORPORATION
By: /s/ Benjamin J. Schlater
Name: Benjamin J. Schlater
Title: Group VP & CFO
FERRO EUROPE HOLDINGS LLC
By: /s/ Richard Shuttie
Name: Richard Shuttie
Title: Managing Director
FERRO ELECTRONIC MATERIALS INC.
By: /s/ Richard Shuttie
Name: Richard Shuttie
Title: Director, President & Treasurer
FERRO INTERNATIONAL SERVICES INC.
By: /s/ Richard Shuttie
Name: Richard Shuttie
Title: Director, President & Treasurer
CATAPHOTE CONTRACTING COMPANY
By: /s/ Richard Shuttie
Name: Richard Shuttie
Title: Director, President & Treasurer
THE FERRO ENAMEL SUPPLY COMPANY
By: /s/ Richard Shuttie
Name: Richard Shuttie
Title: Director, President & Treasurer
FERRO FAR EAST, INC.
By: /s/ Richard Shuttie
Name: Richard Shuttie
Title: Director, President & Treasurer
PNC BANK, NATIONAL ASSOCIATION, as Administrative Agent, Collateral Agent, an Issuer and a Lender
By: /s/ Scott A. Nolan
Name: Scott A. Nolan
Title: Senior Vice President
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Peter T. Thomas, certify that:
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1. |
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I have reviewed this report on Form 10-Q of Ferro Corporation; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles; |
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c. |
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Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. |
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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a. |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b. |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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/s/ Peter T. Thomas |
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Peter T. Thomas |
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Chairman, President and Chief Executive Officer |
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(Principal Executive Officer) |
Date: August 4, 2020
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Benjamin J. Schlater, certify that:
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1. |
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I have reviewed this report on Form 10-Q of Ferro Corporation; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
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The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles; |
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c. |
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Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
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Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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5. |
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The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
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a. |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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b. |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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/s/ Benjamin J. Schlater |
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Benjamin J. Schlater |
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Group Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
Date: August 4, 2020
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350
In connection with the Form 10-Q (the “Report”) of Ferro Corporation (the “Company”) for the period ending June 30, 2020, I, Peter T. Thomas, Chairman, President and Chief Executive Officer of the Company, certify that:
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(1) |
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ Peter T. Thomas |
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Peter T. Thomas |
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Chairman, President and Chief Executive Officer (Principal Executive Officer) |
Date: August 4, 2020
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
In connection with the Form 10-Q (the “Report”) of Ferro Corporation (the “Company”) for the period ending June 30, 2020, I, Benjamin J. Schlater, Group Vice President and Chief Financial Officer of the Company, certify that:
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(1) |
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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(2) |
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ Benjamin J. Schlater |
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Benjamin J. Schlater |
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Group Vice President and Chief Financial Officer |
Date: August 4, 2020