UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q







or





Commission File Number 1-584

FERRO CORPORATION

(Exact name of registrant as specified in its charter)









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



Indicate by check mark whether the registrant has submitted electronically 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 ☒ NO ☐



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



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



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

At October 31, 2018, there were 83,262,093 shares of Ferro Common Stock, par value $1.00, outstanding.





 

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TABLE OF CONTENTS







 

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PART I — FINANCIAL INFORMATION



Item 1.  Financial Statements (Unaudited)



Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Operations















See accompanying notes to condensed consolidated financial statements.



 

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Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income











See accompanying notes to condensed consolidated financial statements.



 

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Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets







See accompanying notes to condensed consolidated financial statements.



 

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Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Equity







See accompanying notes to condensed consolidated financial statements.



 

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Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows







 

See accompanying notes to condensed consolidated financial statements.



 

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Ferro Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements



1.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Ferro Corporation (“Ferro,” “we,” “us” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q, and Article 10 of Regulation S-X. These statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2017.



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



Operating results for the three and nine months ended September 30, 2018, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2018.  



2.    Recent Accounting Pronouncements

Recently Adopted Accounting Standards

On April 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  ASU 2017-12 provides guidance to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The adoption of this ASU did not have an impact to the opening balance of Retained earnings. We will apply the guidance of this ASU to applicable future transactions.

On April 1, 2018, we adopted FASB ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2018-03 provides targeted improvements to address certain aspects of recognition, measurement presentation, and disclosure of financial instruments. The adoption of ASU 2018-03 did not have a material impact on the Company’s condensed consolidated financial statements.

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

On January 1, 2018, we adopted FASB ASU 2017-07, Compensation – Retirement Benefits: (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.  ASU 2017-07 requires that an employer report the service cost component in the same line item as other compensation costs arising from services rendered during the period. The other components of net benefit costs are to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This ASU also allows only the service cost component of net benefit costs to be eligible for capitalization. We adopted this ASU using the retrospective approach for the presentation of the service cost component and the other components of the net periodic pension (credit) cost and net periodic postretirement benefit cost in the income statement. This resulted in the reclassification of income of $0.5 million and $1.4 million from Selling, general and administrative expenses to Other income, expense in our condensed consolidated statement of operations for the three and nine months ended September 30, 2018, respectively. The Company used a practical expedient where the amount disclosed in our Retirement Benefits footnote for the prior

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year comparative period was the basis for the estimation for applying the retrospective presentation requirements. Other than this reclassification, the adoption of ASU 2017-07 did not have an impact on the Company’s condensed consolidated financial statements.

On January 1, 2018, we adopted FASB ASU 2017-01, Business Combinations: (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 is intended to clarify the definition of a business with the objective of adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or dispositions) of assets or businesses. We will apply the guidance of this ASU to applicable future transactions. The adoption of ASU 2017-01 did not have a material impact on the Company’s condensed consolidated financial statements.

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

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



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



New Accounting Standards

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This pronouncement is effective for fiscal years beginning after December 15, 2020. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements. 

In August 2018, the FASB issued ASU 2018-13,  Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.  ASU 2018-13 modifies the disclosure requirements on fair value measurements. This pronouncement is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of assessing the impact that the adoption of this ASU will have on our consolidated financial statements. 

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

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



In February 2016, the FASB issued ASU 2016-02, Leases: (Topic 842).  ASU 2016-02 requires companies to recognize a lease liability and asset on the balance sheet for operating leases with a term greater than one year. In July 2018, the FASB issued ASU 2018-11, Targeted Improvements.  This ASU provides an additional transition method to adopt the new leasing standard. Under this new transition method, an entity initially applies the new leasing standard using a cumulative-effect adjustment to the opening balance of retained earnings but will continue to report comparative periods under existing guidance in accordance with ASC 840, Leases. The amendments in ASU 2018-11 are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company has elected to adopt ASU 2016-02 using this new transition method. The Company is in the process of assessing the impact the adoption of this ASU will have on our consolidated financial statements.



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



3.    Revenue



Revenue Recognition



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



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



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



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



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Revenues disaggregated by geography and reportable segment  for the three months ended September 30, 2018, follow:







Revenues disaggregated by geography and reportable segment for the three months ended September 30, 2017, follow:







Revenues disaggregated by geography and reportable segment for the nine months ended September 30, 2018, follow:







Revenues disaggregated by geography and reportable segment for the nine months ended September 30, 2017, follow:









Practical Expedients and Exemptions



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



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



We generally expense sales commissions when incurred because the amortization period is one year or less. These costs are recorded within Selling, general and administrative expenses.



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4.    Acquisitions

UWiZ Technology Co., Ltd.

On September 25, 2018, the Company acquired 100% of the equity interests of UWiZ Technology Co., Ltd. (“UWiZ”) for TWD823.4 million (approximately $26.9 million) in cash.  The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of September 30, 2018, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $12.5 million of net working capital, $7.1 million of goodwill, $6.6 million of amortizable intangible assets, $2.4 million of personal and real property and $1.7 million of deferred tax liability on the condensed consolidated balance sheet.    

Ernst Diegel GmbH

On August 31, 2018, the Company acquired 100% of the equity interests of Ernst Diegel GmbH (“Diegel”), including the real property of a related party, for €12.1 million (approximately $14.0 million) in cash.  The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of September 30, 2018, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $7.0 million of personal and real property, $4.8 million of net working capital, $2.8 million of goodwill, $2.6 million of deferred tax liability and $2.0 million of amortizable intangible assets on the condensed consolidated balance sheet.    

MRA Laboratories, Inc.

On July 12, 2018, the Company acquired 100% of the equity interests of MRA Laboratories, Inc. (“MRA”) for $15.7 million in cash.  The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. As of September 30, 2018, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $6.9 million of goodwill, $6.7 million of amortizable intangible assets,  $3.4 million of net working capital,  $1.6 million of deferred tax liability and $0.3 million of personal and real property on the condensed consolidated balance sheet. 

PT Ferro Materials Utama

On June 29, 2018, the Company acquired 66% of the equity interests of PT Ferro Materials Utama (“FMU”) for $2.7 million in cash, in addition to the forgiveness of debt of $9.2 million, bringing our total ownership to 100%. The Company previously recorded its investment in FMU as an equity method investment, and following this transaction, the Company fully consolidates FMU. Due to the change of control that occurred, the Company recorded a gain on purchase of $2.6 million, which is recorded in Miscellaneous expense (income), net, related to the difference between the Company’s carrying value and fair value of the previously held equity method investment during the second quarter of 2018.  

Endeka Group

On November 1, 2017, the Company acquired 100% of the equity interests of Endeka Group (“Endeka”), a global producer of high-value coatings and key raw materials for the ceramic tile market, for €72.8 million (approximately $84.8 million), including the assumption of debt of €13.1 million (approximately $15.3 million). The Company incurred acquisition costs for the nine months ended September 30, 2018, of $0.5 million, which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations. The acquired business contributed net sales of $25.6 million and $86.8 million for the three and nine months ended September 30, 2018, respectively, and net income attributable to Ferro Corporation of $0.6 million and $9.4 million for the three and nine months ended September 30, 2018, respectively. 



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The information included herein has been prepared based on the preliminary allocation of the purchase price using estimates of the fair value and useful lives of the assets acquired and liabilities assumed, which were determined with the assistance of third parties who performed independent valuations using discounted cash flow and comparative market approaches, and estimates made by management. During the first half of 2018, the Company adjusted the net working capital on the opening balance sheet and as such, the carrying amount of the personal and real property decreased $4.1 million. As of September 30, 2018, the purchase price allocation is subject to further adjustment until all information is fully evaluated by the Company. The Company preliminarily recorded $44.1 million of net working capital, $24.1 million of deferred tax assets, $17.7 million of personal and real property and $1.1 million of noncontrolling interest on the condensed consolidated balance sheet. 

Gardenia Quimica S.A.

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

Dip Tech Ltd.

On August 2, 2017, the Company acquired 100% of the equity interests of Dip Tech Ltd. (“Dip-Tech”), a leading provider of digital printing solutions for glass coatings, for $77.0 million. Dip-Tech is headquartered in Kfar Saba, Israel. The purchase price consideration consisted of cash paid at closing of $60.1 million, net of the net working capital adjustment, and contingent consideration of $16.9 million. The Company incurred acquisition costs of $0.1 million and $2.1 million for the nine months ended September 30,  2018 and 2017, respectively, which is included in Selling, general and administrative expenses in our condensed consolidated statements of operations. The acquired business contributed net sales of $7.7 million and $18.6 million for the three and nine months ended September 30, 2018, respectively, and net loss attributable to Ferro Corporation of $0.7 million and $4.7 million for the three and nine months ended September 30, 2018, respectively.  The acquired business contributed net sales of $6.4 million for the three and nine months ended September 30, 2017, and net loss attributable to Ferro Corporation of $1.1 million for the three and nine months ended September 30, 2017.    The net loss attributable to Ferro Corporation was driven by acquired intangible asset amortization costs of $0.9 million and $2.9 million for the three and nine months ended September 30, 2018, respectively and $0.6 million for the three and nine months ended September 30, 2017.  Dip-Tech incurred research and development costs of $1.3 million and $4.6 million for the three and nine months ended September 30, 2018, respectively and $1.1 million for the three and nine months ended September 30, 2017.

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

Smalti per Ceramiche, s.r.l

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

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

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Company recorded $6.1 million of personal and real property, $6.0 million of amortizable intangible assets, $5.2 million of goodwill, $5.0 million of net working capital and $2.0 million of a deferred tax liability on the condensed consolidated balance sheet.    





5.    Inventories







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 $0.5 million and $0.3 million for the three months ended September 30, 2018 and 2017, respectively, and were $1.3 million and $0.8 million for the nine months ended September 30, 2018 and 2017, respectively. We had on-hand precious metals owned by participants in our precious metals consignment program of $47.1 million at September 30, 2018, and $37.7  million at December 31, 2017, measured at fair value based on market prices for identical assets.  



6.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $520.9 million at September 30, 2018, and $502.9 million at December 31, 2017. Unpaid capital expenditure liabilities, which are non-cash investing activities, were $7.7 million at September 30, 2018, and $3.2 million at September 30, 2017. 









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7.   Goodwill and Other Intangible Assets 

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





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

(2) During the second quarter of 2018, the Company recorded goodwill related to the FMU acquisition. 

(3) During the third quarter of 2018, the Company recorded goodwill related to the MRA acquisition.  Refer to Note 4 for additional details.

(4) During the third quarter of 2018, the Company recorded goodwill related to the UWiZ and Diegel acquisition. Refer to Note 4 for additional details.









Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying value. As of September 30, 2018, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.

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Amortizable intangible assets consisted of the following:





Indefinite-lived intangible assets consisted of the following:











































8.    Debt

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





Long-term debt consisted of the following:





(1)  The carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs of $5.1 million at September 30, 2018, and $7.5 million at December 31, 2017.

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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”), (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars and borrowed by the Company’s existing credit facility and 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 2023, a $355 million secured term loan facility with a maturity of February 2024, a $235 million secured term loan facility with a maturity of February 2024 and a $230 million secured term loan facility with a maturity of February 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. 

At September 30, 2018, the Company had borrowed $353.2 million under the Tranche B-1 Loans at an interest rate of 4.64%,  $233.8 million under the Tranche B-2 Loans at an interest rate of 4.64%, and $228.9 million under the Tranche B-3 Loans at an interest rate of 4.64%. At September 30, 2018, there were no additional borrowings available under the Tranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans.  

Interest Rate – Revolving Credit Line:  The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin.  The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding (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.

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At September 30, 2018, there were $111.9 million borrowings under the revolving credit line at an interest rate of 2.59%. After reductions for outstanding letters of credit secured by these facilities, we had $383.4 million of additional borrowings available under the revolving credit facilities at September 30, 2018.

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 September 30, 2018, we were in compliance with the covenants of the Amended Credit Facility.

Credit Facility

On February 14, 2017, the Company entered into a credit facility (the “Credit Facility”) with a group of lenders to refinance its then outstanding credit facility debt and to provide liquidity for ongoing working capital requirements and general corporate purposes. The Credit Facility 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 discussion of the Company’s Credit Facility, refer to Note 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

In conjunction with the refinancing of the Credit Facility, we recorded a charge of $3.2 million in connection with the write-off of unamortized issuance costs, which is recorded within Loss on extinguishment of debt in our condensed consolidated statement of operations for the nine months ended September 30, 2018.



2014 Credit Facility

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

In conjunction with the refinancing of the 2014 Credit Facility, we recorded a charge of $3.9 million in connection with the write-off of unamortized issuance costs, which is recorded within Loss on extinguishment of debt in our condensed consolidated statement of operations for the nine months ended September 30, 2017.

Other Financing Arrangements

We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $40.3 million and $64.5 million at September 30, 2018, and December 31, 2017, respectively. The unused portions of these lines provided additional liquidity of $31.4 million at September 30, 2018, and $39.4 million at December 31, 2017.





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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:











(1) The carrying values of the term loan facility are net of unamortized debt issuance costs of $5.1  million and $7.5 million for the period ended September 30, 2018, and December 31, 2017, respectively.  



The fair values of cash and cash equivalents are based on the fair values of identical assets. The fair values of loans payable are based on the present value of expected future cash flows and approximate their carrying amounts due to the short periods to maturity.  The fair value of the term loan facility is based on market price information and is measured using the last available bid price of the instrument on a secondary market.  The revolving credit facility and other long-term notes payable are based on the present value of expected future cash flows and interest rates that would be currently available to the Company for issuance of similar types of debt instruments with similar terms and remaining maturities adjusted for the Company's performance risk.  The fair values of our interest rate swaps 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 investment in certain foreign subsidiaries and on certain existing assets and liabilities.  However,

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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 effective portion of the gain or loss on the derivative is recorded in 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 2017, the Company entered into interest rate swap agreements that converted $150 million and €90 million of our term loans from variable interest rates to fixed interest rates. These swaps qualified for, and were designated as, cash flow hedges. This interest rate swap agreement was terminated in the second quarter of 2018 in connection with the refinancing of the Credit Facility.  

During the second quarter of 2018, the Company entered into variable to fixed interest rate swaps with a maturity date of February 28, 2024. The notional amount is $318.4 million at September 30, 2018. These swaps are hedging risk associated with the Tranche B-1 Loans. These interest rate swaps are designated as cash flow hedges. As of September 30, 2018, the Company expects it will reclassify net losses of approximately $0.7 million, currently recorded in AOCL, into 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 US dollar denominated, variable rate debt obligation into a  euro fixed rate obligation using a receive-float, pay fixed cross currency swaps in the second quarter of 2018. These swaps are hedging risk associated with the Tranche B-3 Loans. These cross currency swaps are designated as cash flow hedges. The notional amount is $228.9 million at September 30, 2018, with a maturity date of February 28, 2024. As of September 30, 2018, the Company expects it will reclassify net gains of approximately $5.9 million, currently recorded in AOCL, into 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 gain recognized in AOCL and the amount of (loss) gain reclassified into earnings for the three months ended September 30, 2018 and 2017, follow:



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The amount of gain recognized in AOCL and the amount of (loss) gain reclassified into earnings for the nine months ended September 30, 2018 and 2017, follow:



Net investment hedge. To help protect the value of the Company’s net investment in European operations against adverse changes in exchange rates, the Company uses non-derivative financial instruments, such as its foreign currency denominated debt, as economic hedges of its net investments in certain foreign subsidiaries. Net investment hedges that use foreign currency denominated debt to hedge net investments are not impacted by ASC Topic 820, Fair Value Measurements, as the debt used as a hedging instrument is marked to a value with respect to changes in spot foreign currency exchange rates and not with respect to other factors that may impact fair value.

In the second quarter of 2017, the Company designated a portion of its Euro denominated debt as a net investment hedge for accounting purposes. This net investment hedge was terminated in the second quarter of 2018.

In the second quarter of 2018, the Company entered into cross currency swap agreements where we pay variable rate interest in Euros and receive variable rate interest in US dollars. The notional amount is $116.9 million at September 30, 2018. These swaps are hedging risk associated with the Tranche B-2 Loans. These cross currency swaps are designated as net investment hedges with the spot method of accounting applied. The effective portions of net investment hedges are recorded in AOCL as a part of the cumulative translation adjustment. 

The amount of gain (loss) 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 September 30, 2018 and 2017, follow:





The amount of gain (loss) 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 nine months ended September 30, 2018 and 2017, follow:





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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 $1.3 million and $2.7 million in the three and nine months ended September 30, 2018, respectively, and net losses of $1.4 million and $4.1 million in the three and nine months ended September 30, 2017, 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 $371.1 million at September 30, 2018, and $238.5 million at December 31, 2017.

The following table presents the effect on our condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, respectively, of our foreign currency forward contracts:











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.

































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10.    Income Taxes

Income tax expense for the nine months ended September 30, 2018, was $29.2 million, or 29.6% of pre-tax income. Income tax expense for the nine months ended September 30, 2017, was $23.2 million, or 25.9% of pre-tax income.  The tax expense for the nine months ended September 30, 2018, 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 and discrete items recorded in the third quarter.  The discrete items recorded in the third quarter primarily include a reduction to the tax expense related to the provision to return adjustments and an increase from the impact of resolving a foreign tax audit.  The tax expense for the nine months ended September 30, 2017, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35% primarily as a result of foreign statutory rate differences.



We have recognized the provisional tax impacts related to the 2017 Tax Cut and Jobs Act (the “Tax Act”) under the guidance of the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”).  The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.  The Company’s preliminary determinations related to the estimable impacts of the Tax Act that are effective for the year ended December 31, 2017 have not changed in the current quarter.



The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) on the Company for 2018.  For the current quarter the company has made reasonable estimates of GILTI and FDII, as well as the impact of changes to valuation allowances related to certain positions.  The combined provisional net impact of these items are not anticipated to be material to the tax rate in 2018.  The Company has not recorded any potential deferred tax effects related to GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.





11.    Contingent Liabilities

We have recorded environmental liabilities of $6.9  million at September 30, 2018, and $6.7 million at December 31, 2017, for costs associated with the remediation of certain of our properties that have been contaminated. The liability at September 30, 2018, and December 31, 2017, was primarily comprised of liabilities related to a non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product lines in 2013. The costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring and the ultimate cost of required remediation. During the third quarter of 2018, the Company incurred a $1.5 million environmental liability related to acquired subsidiaries.



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.  In March 2018, the defendants, including the Company, filed a motion to dismiss the complaint, which was heard by the court in June 2018.  The Company currently does not expect the outcome of this proceeding 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 this proceeding due to the unpredictable nature of litigation.



In addition to the proceeding 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

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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 (credit) cost of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the three months ended September 30, 2018 and 2017, respectively, follow:









Net periodic benefit (credit) cost for the nine months ended September 30, 2018 and 2017, respectively, follow:









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, subject to shareholder approval. 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 2013 Omnibus Incentive Plan (the “Previous Plan”), was replaced by the 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 nine months of 2018, our Board of Directors granted 0.2 million stock options, 0.1 million performance share units, and 0.1 million restricted stock units.    

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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 nine months ended September 30, 2018:







The weighted average grant date fair value of our performance share units granted in the nine months ended September 30, 2018, was $22.92. 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 per unit for grants made during the nine months ended September 30, 2018,  was $22.27. 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 $1.4 million and $5.2 million for the three and nine months ended September 30, 2018, respectively, and $1.5 million and $6.9 million for three and nine months ended September 30, 2017. At September 30, 2018, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $7.7 million and is expected to be recognized over the remaining vesting period of the respective grants, through the first quarter of 2021.





14.    Restructuring and Optimization Programs

Total restructuring and impairment charges were $2.6 million and $10.4 million for the three and nine months ended September 30, 2018, respectively, and $1.5 million and $7.7 million for the three and nine months ended September 30, 2017, respectively. Included in the charges for the nine months ended September 30, 2017, was an impairment charge of $1.5 million related to an equity method investment. The remainder of the charges primarily relate to costs associated with integration of our recent acquisitions and optimization programs, and are further summarized below.









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.



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15.    Earnings Per Share

Details of the calculation of basic and diluted earnings per share are shown below:







The number of anti-dilutive or unearned shares was 1.7 million and 1.7 million for the three and nine months ended September 30, 2018, respectively, and 1.6 million and 1.8 million for the three and nine months ended September 30, 2017.  These shares were excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.



16.    Share Repurchase Program

The Company’s Board of Directors has approved $50 million of a share repurchase program, under which the Company is authorized to repurchase 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 program does not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.



For the nine months ended September 30, 2018, the Company repurchased 807,816 shares of common stock at an average price of $21.04 per share for a total cost of $17.0 million.  As of September 30, 2018, $33.0 million could still be purchased under the program.





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17.    Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows:



































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18.    Reporting for Segments 

Net sales to external customers by segment are presented in the table below. Sales between segments were not material.







Each segment’s gross profit and reconciliations to income before income taxes are presented in the table below:

























































19.    Subsequent Events

On October 1, 2018, the Company acquired 100% of the equity interests of Quimicer, S.A. for €27.8 million (approximately $32.2 million), excluding customary adjustments and fees. 

        The operating results related to the Quimicer, S.A. acquisition will be included in the Company’s condensed consolidated financial statements commencing on the date of the acquisition. 

        Due to the timing of the acquisition, the Company’s initial purchase price accounting was incomplete at the time these financial statements were issued.  As such, the Company cannot disclose the allocation of the acquisition price to acquired assets and liabilities and the related disclosures at this time. 

In October 2018, the Company’s Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase up to an additional $50 million of the Company’s outstanding common stock on the open market, including through Rule 10b5-1 plans, in privately negotiated transactions, or otherwise.







































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

Overview

Net sales for the three months ended September 30, 2018, increased by $45.2 million, or 12.9%, compared with the prior-year same period.  The increase in net sales was driven by higher sales in Performance Coatings, Performance Colors and Glass and Color Solutions of $29.7 million, $12.7 million and $2.8 million, respectively.  During the three months ended September 30, 2018, gross profit increased $1.9 million, or 1.8%, compared with the prior-year same period; as a percentage of net sales, it decreased approximately 290 basis points to 26.7%.  Our total gross profit for the third quarter of 2018 was $105.5 million, compared with $103.6 million for the three months ended September 30, 2017.  The increase in gross profit was attributable to increases in Performance Colors and Glass and Performance Coatings of $2.2 million and  $0.8 million, respectively, partially offset by a decrease in Color Solutions of $0.9 million.

For the three months ended September 30, 2018, selling, general and administrative (“SG&A”) expenses decreased $1.6 million, or 2.4%, compared with the prior-year same period. As a percentage of net sales, it decreased approximately 260 basis points to 16.3%.    The lower SG&A expenses compared to the prior-year same period are primarily driven by a decrease in incentive compensation, partially offset by greater expenses associated with businesses acquired within the last year. 

For the three months ended September 30, 2018, net income was $16.1 million, compared with net income of $23.0 million for the prior-year same period, and net income attributable to common shareholders was $16.1 million, compared with net income attributable to common shareholders of $22.8 million for the prior-year same period.



Outlook 

We expect to continue to execute the dynamic innovation and optimization phase of our value creation strategy and remain focused on driving toward our Vision 2020 goals. We expect organic growth to be driven by sales of new products and technical services oriented to the higher end of our target markets. We expect to invest approximately $100 million to $150 million per year in strategic investments, while we remain focused on integrating recent acquisitions and achieving identified synergies. We also are implementing and executing optimization programs to improve efficiency and upgrade operations throughout our business.

 

The Company expects gross margins to rebound in the fourth quarter, as raw material prices decrease and Ferro pricing is expected to more than offset raw material headwinds for the first time since early 2017. Management believes that actions taken in the third quarter of 2018 reinforced the Company’s ability to deliver its Vision 2020 goals, even if macroeconomic circumstances become more challenging.



Foreign currency rates may continue to be volatile through the fourth quarter of 2018 and changes in interest rates could adversely impact reported results.  We expect cash flow from operating activities to be positive for 2018, providing additional liquidity.



Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2017.



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Results of Operations - Consolidated

Comparison of the three months ended September 30, 2018 and 2017 

For the three months ended September 30, 2018, net income was $16.1 million, compared with net income of $23.0 million for the three months ended September 30, 2017. For the three months ended September 30, 2018, net income attributable to common shareholders was $16.1 million, or earnings per share of $0.19, compared with net income attributable to common shareholders of $22.8 million, or earnings per share of $0.27, for the three months ended September 30, 2017.



Net Sales







Net sales increased by  $45.2 million, or 12.9%, for the three months ended September 30, 2018,  compared with the prior-year same period, driven by higher sales in Performance Coatings, Performance Colors and Glass and Color Solutions of $29.7 million, $12.7 million and $2.8 million, respectively. The increase in net sales was driven in part by acquisitions, including Endeka, which contributed sales of $25.6 million, and was acquired after the third quarter of 2017.  The increase in net sales was also driven by organic growth, with Performance Colors and Glass growing $9.3 million, Performance Coatings growing $3.0 million and Color Solutions growing $1.8 million.



Gross Profit



Gross profit increased $1.9 million, or 1.8%, for the three months ended September 30, 2018, compared with the prior-year same period, and as a percentage of net sales, it decreased 290 basis points to  26.7%.  The increase in gross profit was attributable to increases in Performance Colors and Glass and Performance Coatings of $2.2 million and $0.8 million, respectively, partially offset by a decrease in Color Solutions of $0.9 million. The increase in gross profit was driven by favorable product pricing of $8.9 million, higher sales volumes and mix of $5.5 million and gross  profit from acquisitions of $5.1 million, partially offset by higher raw material costs of $10.8 million, higher manufacturing costs of $4.5 million and unfavorable foreign currency impacts of $2.1 million.    

Geographic Revenues



The following table presents our sales on the basis of where sales originated.







The increase in net sales of $45.2 million, compared with the prior-year same period, was driven by an increase in sales from EMEA, the United States and Asia Pacific. The increase in sales from EMEA was attributable to higher sales in Performance Coatings and Performance Colors and Glass of $26.4 million and $3.4 million, respectively, partially offset by a decrease in sales in Color Solutions of $0.1 million.  The increase in sales from Asia Pacific was attributable to higher sales in Performance Coatings, 

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Performance Colors and Glass and Color Solutions of $3.7 million, $1.9 million and $0.2 million, respectively.  The increase in sales from the United States was attributable to higher sales in Performance Colors and Glass, Color Solutions and Performance Coatings of $7.3 million $2.5 million and $0.8 million, respectively. The decrease in sales from Latin America was attributable to lower sales in Performance Coatings of $1.1 million, partially mitigated by an increase in sales from Performance Colors and Glass and Color Solutions of $0.2 million and $0.2 million, respectively. 



The following table presents our sales on the basis of where sold products were shipped. 











Selling, General and Administrative Expenses

The following table includes SG&A components with significant changes between 2018 and 2017.

 





SG&A expenses were $1.6 million lower in the three months ended September 30, 2018,  compared with the prior-year same period. The lower SG&A expenses compared to the prior-year same period are primarily driven by a decrease in incentive compensation, partially offset by greater expenses associated with businesses acquired within the last year.



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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.









Restructuring and Impairment Charges







Restructuring and impairment charges increased in the third quarter of 2018 compared with the prior-year same period. The increase primarily relates to costs associated with integration of our recent acquisitions and optimization programs.



Interest Expense



Interest expense increased in the third quarter of 2018 compared with the prior-year same period. The increase in interest expense was due to an increase in the average long-term debt balance during the three months ended September 30, 2018, compared with the prior-year same period and an increase in LIBOR, offset by the decrease in the applicable margin rate from borrowing from the Amended Credit Facility.



Income Tax Expense



During the third quarter of 2018, income tax expense was $11.4 million, or 41.3% of pre-tax income.  In the third quarter of 2017, we recorded tax expense of $7.4 million, or 24.3% of pre-tax income. The tax expense in the third quarter of 2018, 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 and discrete items recorded in the period. The discrete items recorded in the quarter primarily include a reduction to the tax expense related to the provision to return adjustments and an increase from the impact of resolving a foreign tax audit. The tax expense for the third quarter of 2017, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35% primarily as a result of foreign statutory rate differences.



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We have recognized the provisional tax impacts related to the 2017 Tax Cut and Jobs Act (the “Tax Act”) under the guidance of the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”).  The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.  The Company’s preliminary determinations related to the estimable impacts of the Tax Act that are effective for the year ended December 31, 2017 have not changed in the current quarter.



The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) on the Company for 2018.  For the current quarter the company has made reasonable estimates of GILTI and FDII, as well as the impact of changes to valuation allowances related to certain positions.  The combined provisional net impact of these items are not anticipated to be material to the tax rate in 2018.  The Company has not recorded any potential deferred tax effects related to GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.



Results of Operations - Segment Information

Comparison of the three months ended September 30, 2018 and 2017 

Performance Coatings









       Net sales increased in Performance Coatings compared with the prior-year same period, primarily driven by sales from Endeka of $25.3 million and FMU of $1.0 million, each of which was acquired after the third quarter of 2017, and increases in sales of frits and glazes and digital inks of $2.8 million and $0.8 million, respectively. The increase in net sales was driven by sales from acquisitions of $26.7 million, higher product pricing of $5.7 million and favorable volume and mix of $4.0 million, partially offset by unfavorable foreign currency impacts of $6.8 million. Gross profit increased $0.8 million from the prior-year same period, primarily driven by favorable product pricing impacts of $5.7 million, gross profit from acquisitions of $4.2 million and higher sales volume and mix of $0.5 million, partially offset by higher raw material costs of $8.1 million, unfavorable foreign currency impacts of $1.1 million and higher manufacturing costs of $0.4 million.









The net sales increase of $29.7 million was driven by increases in sales in EMEA, Asia Pacific, and the United States, partially offset by a decrease in sales in Latin America. The increase in sales from EMEA was primarily attributable to sales from Endeka and 

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Gardenia, which contributed $24.7 million and $0.4 million, respectively, and higher sales of frits and glazes and porcelain enamel of $2.9 million and $0.6 million, respectively, partially offset by a decrease in sales of colors of $2.7 million. The increase in sales from Asia Pacific was driven by higher sales of frits and glazes and digital inks of $1.4 million and $0.7 million, respectively, and sales from FMU and Endeka, which contributed $1.0 million and $0.7 million, respectively.  The increase in sales from the United States was fully attributable to higher sales of porcelain enamel. The decrease in sales from Latin America was primarily driven by lower sales of frits and glazes and porcelain enamel of $1.5 million and $0.8 million, respectively, partially mitigated by an increase in sales of digital inks and opacifiers of $0.6 million and $0.6 million, respectively.  

Performance Colors and Glass







       Net sales increased compared with the prior-year same period, primarily driven by organic sales of $9.3 million and $1.3 million in sales from Dip-Tech, which was acquired in the third quarter of 2017, and $1.3 million in sales from MRA,  which was acquired in the third quarter of 2018. The increase in net sales was driven by  favorable volume and mix of $10.2 million, sales from acquisitions of $3.4 million and higher product pricing of $1.1 million, partially offset by unfavorable  foreign currency impacts of $2.0 million. Gross profit increased from the prior-year same period, primarily due to favorable volume and mix of $2.3 million, higher product pricing of $1.1 million and higher gross profit from acquisitions of $0.8 million, partially offset by higher raw material costs of $1.0 million, unfavorable foreign currency impacts of $0.6 million and unfavorable manufacturing costs of $0.3 million.







The net sales increase of $12.7 million was driven by higher sales from all regions.  The increase in sales from the United States was primarily attributable to an increase in sales of electronics products and decoration products of $3.9 million of $1.0 million, respectively, and increased sales from Dip-Tech and MRA of $1.3 million and $1.3 million, respectively, partially offset by lower sales of industrial products. The increase in sales from EMEA was primarily attributable to higher sales of electronic products and decorations products of $3.4 million and $1.5 million, respectively, partially offset by lower sales from Dip-Tech of $1.1 million. The increase from Asia Pacific was primarily due to an increase in sales of automobile products of $1.2 million and sales from Dip-Tech of $1.0 million. Sales from Latin America remained relatively flat. 

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Color Solutions







Net sales increased compared with the prior-year same period, primarily due to higher sales of surface technology products and sales from Diegel of $1.9 million and $1.0 million, respectively. The increase in net sales was driven by higher product pricing of $2.1 million, higher volume and mix of $1.1 million, and sales from acquisitions of $1.0 million, partially offset by unfavorable foreign currency impacts of $1.4 million. Gross profit decreased from the prior-year same period, primarily due higher manufacturing costs of $3.8 million, higher raw material costs of $1.7 million and unfavorable foreign currency impacts of $0.4 million, partially mitigated by favorable sales volume and mix of $2.8 million, higher product pricing of $2.1 million and gross profit from acquisitions of $0.2 million. 





The net sales increase of $2.8 million was driven by higher sales from the United States. The increase in sales from the United States was primarily driven by higher sales of surface technology and pigment products of $1.9 million and $0.5 million, respectively.  Sales from Asia Pacific and Latin America remained primarily flat. The decrease in sales in EMEA was primarily attributable to lower sales of pigment products of $1.1 million, partially mitigated by sales from Diegel of $0.9 million. 



Comparison of the nine months ended September 30, 2018 and 2017 

For the nine  months ended September 30, 2018,  net income was $69.6 million, compared with net income of $66.3 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, net income attributable to common shareholders was $69.1 million, or earnings per share of $0.82, compared with net income attributable to common shareholders of $65.7 million, or earnings per share of $0.79, for the nine months ended September 30, 2017.



Net Sales







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Net sales increased by $197.7 million, or 19.4%, in the nine months ended September 30, 2018, compared with the prior-year same period, driven by higher sales in Performance Coatings, Performance Colors and Glass and Color Solutions of $129.5 million, $49.1 million and $19.2 million, respectively. The increase in net sales was driven by Endeka, which contributed sales of $86.8 million, and Dip-Tech, which contributed sales of $12.2 million.  The increase in net sales was also driven by organic growth, with Performance Coatings growing $32.1 million, Performance Colors and Glass growing $30.5 million and Color Solutions growing $18.2 million. 



Gross Profit



Gross profit increased $40.1 million, or 12.9%, in the nine months ended September 30, 2018, compared with the prior-year same period, and as a percentage of net sales, it decreased 170 basis points to 28.8%.  The increase in gross profit was attributable to increases across all segments, with increases in Performance Coatings, Performance Colors and Glass and Color Solutions of $21.1 million, $13.4 million and $6.2 million, respectively.  The increase in gross profit was driven by favorable product pricing of $33.0 million, gross profit from acquisitions of $28.4 million, higher sales volumes and mix of $11.6 million, favorable foreign currency impacts of $8.6 million and lower manufacturing costs of $2.3 million, partially offset by higher raw material costs of $43.1 million.    

Geographic Revenues



The following table presents our sales on the basis of where sales originated.









The increase in net sales of $197.7 million, compared with the prior-year same period, was driven by an increase in sales from all regions. The increase in sales from EMEA was primarily attributable to higher sales in Performance Coatings, Performance Colors and Glass and Color Solutions of $113.6 million, $36.2 million and $6.4 million, respectively. The increase in sales from Asia Pacific was primarily attributable to higher sales in Performance Coatings, Performance Colors and Glass and Color Solutions of $14.3 million, $6.1 million and $3.6 million, respectively. The increase in sales from the United States was attributable to higher sales in Color Solutions, Performance Colors and Glass and Performance Coatings of $7.7 million, $5.9 million and $3.0 million, respectively.  The increase in sales from Latin America was attributable to higher sales in Color Solutions and Performance Colors and Glass of $1.4 million and $0.9 million, respectively, partially offset by a decrease in sales in Performance Coatings of $1.4 million.    



The following table presents our sales on the basis of where sold products were shipped.





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Selling, General and Administrative Expenses

The following table includes SG&A components with significant changes between 2018 and 2017.











SG&A expenses were $19.2 million higher in the nine months ended September 30, 2018, compared with the prior-year same period.  The higher SG&A expenses compared with the prior-year same period are primarily driven by businesses acquired within the last year, primarily related to personnel expenses and research and development expenses.



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.











Restructuring and Impairment Charges





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Restructuring and impairment charges increased in the nine months ended September 30, 2018 compared with the prior-year same period. The increase primarily relates to costs associated with integration of our recent acquisitions and optimization programs. 



Interest Expense





Interest expense increased in the nine months ended September 30, 2018 compared with the prior-year same period. The increase in interest expense was due to an increase in the average long-term debt balance during the nine months ended September 30, 2018, compared with the prior-year same period. Also, interest expense increased due to the increase in LIBOR, offset by the decrease in the applicable margin rate from borrowings from the Amended Credit Facility.



Income Tax Expense



During the nine months ended September 30, 2018, income tax expense was $29.2 million, or 29.6% of pre-tax income.  In the nine months ended September 30, 2017, we recorded tax expense of $23.2 million, or 25.9% of pre-tax income. The tax expense nine months ended September 30, 2018, 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 and discrete items recorded in the third quarter.  The discrete items recorded in the third quarter primarily include a reduction to the tax expense related to the provision to return adjustments and an increase from the impact of resolving a foreign tax audit. The tax expense for the nine months ended September 30, 2017, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 35% primarily as a result of foreign statutory rate differences.



 We have recognized the provisional tax impacts related to the 2017 Tax Cut and Jobs Act (the “Tax Act”) under the guidance of the SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”).  The ultimate impact may differ from these provisional amounts due to additional analysis, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act.  The Company’s preliminary determinations related to the estimable impacts of the Tax Act that are effective for the year ended December 31, 2017 have not changed in the current quarter.



The Company continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and the foreign-derived intangible income (“FDII”) on the Company for 2018.  For the current quarter the company has made reasonable estimates of GILTI and FDII, as well as the impact of changes to valuation allowances related to certain positions.  The combined provisional net impact of these items are not anticipated to be material to the tax rate in 2018.  The Company has not recorded any potential deferred tax effects related to GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.



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Results of Operations - Segment Information

Comparison of the nine months ended September 30, 2018 and 2017 

Performance Coatings









Net sales increased in Performance Coatings compared with the prior-year same period, primarily driven by sales from Endeka of $82.9 million, SPC of $10.1 million and Gardenia of $3.3 million, and increases in sales of frits and glazes, porcelain enamel and digital inks of $15.9 million, $8.3 million and $7.7 million, respectively. The increase in net sales was driven by sales from acquisitions of $97.3 million, higher product pricing of $21.4 million, favorable foreign currency impacts of $5.7 million, and favorable volume and mix of $5.1 million. Gross profit increased $21.1 million from the prior-year same period, primarily driven by gross  profit from acquisitions of $24.0 million, favorable product pricing impacts of $21.4 million, favorable foreign currency impacts of $3.4 million, lower manufacturing costs of $1.1 million and higher sales volume and mix of $0.6 million, partially offset by higher raw material costs of $29.3 million.







The net sales increase of $129.5 million was primarily driven by increases in sales from EMEA and Asia Pacific. The increase in sales from EMEA was primarily attributable to sales from acquisitions which contributed $94.0 million and higher sales of all product lines. The increase in sales from Asia Pacific was driven by sales from acquisitions which contributed $3.4 million and higher sales of frits and glazes, digital inks and porcelain enamel of $6.6 million, $2.8 million and $1.5 million, respectively.  The increase in sales from the United States was fully attributable to higher sales of porcelain enamel. The decrease in sales from Latin America was driven by lower sales of porcelain enamel and frits and glazes, partially offset by higher sales of digital inks.  

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Performance Colors and Glass









Net sales increased compared with the prior-year same period, primarily driven by $12.2 million in sales from Dip-Tech, and $3.9 million in sales from Endeka. The increase in net sales was driven by sales from acquisitions of $18.6 million, favorable volume and mix of $17.9 million, favorable foreign currency impacts of $9.2 million and higher product pricing of $3.3 million. Gross profit increased from the prior-year same period, primarily due to gross profit from acquisitions of $4.2 million, favorable manufacturing costs of $3.5 million, favorable  foreign currency impacts of $3.3 million, higher sales volume and mix of $3.5 million and higher product pricing of $3.3 million, partially offset by  higher raw material costs of $4.4 million.





The net sales increase of $49.1 million was driven by higher sales from EMEA, Asia Pacific, the United States and Latin America. The increase in sales from EMEA was primarily attributable to $10.6 million in sales from acquisitions and higher sales from all product groups. The increase from Asia Pacific was primarily due to an increase in sales of automobile products of $4.6 million and sales from Dip-Tech of $1.4 million.  The increase in sales from the United States was primarily attributable an increase in sales from acquisitions of $5.6 million and to higher sales in electronics, partially offset by lower sales of automobile products and industrial products. The increase in sales from Latin America was primarily attributable to sales in automobile products and industrial products, partially offset by lower sales of decoration products.

Color Solutions







Net sales increased compared with the prior-year same period, primarily due to higher sales of pigments and surface technology products of $10.4 million and $8.2 million, respectively.  The increase in net sales was driven by higher product pricing of $8.3 million, favorable foreign currency impacts of $6.8 million, higher volume and mix of $3.1 million and sales from acquisitions of $1.0

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million. Gross profit increased from the prior-year same period, primarily due to higher product pricing of $8.3 million, favorable sales volume and mix of $7.6 million,  favorable foreign currency impacts of $1.9 million and gross profit from acquisitions of $0.2 million, partially offset by higher raw material costs of $9.4 million and higher manufacturing costs of $2.3 million.





The net sales increase of $19.2 million was driven by higher sales from all regions. The higher sales from EMEA, Asia Pacific and Latin America were driven by sales of pigment products.  The increase in sales from the United States was primarily driven by sales of surface technology products.





Summary of Cash Flows for the nine months ended September 2018 and 2017 







The following table includes details of net cash provided by operating activities.







Cash flows from operating activities. Cash flows provided by operating activities increased $1.0 million in the first nine months of 2018 compared with the prior-year same period. The increase was primarily due to  an increase in net income of $3.3 million and other non-cash items, partially offset by higher cash outflows for net working capital of $8.4 million.

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Cash flows used in investing activities. Cash flows used in investing activities increased $12.7 million in the first nine months of 2018 compared with the prior-year same period. The increase was primarily due to higher cash outflows for capital expenditures of $34.0 million, partially offset by lower cash outflows for business acquisitions, net of cash acquired of $24.1 million.



Cash flows from financing activities. Cash flows provided by financing activities increased $73.2 million in the first nine months of 2018 compared with the prior-year same period.    As further discussed in Note 8, during the nine months ended September 30, 2018, we paid off our Credit Facility and entered into our Amended Credit Facility, consisting of a $500 million secured revolving line of credit and $820 million secured term loan facilities. Further, compared to the prior-year same period, purchase of treasury stock increased in the nine months ended by $17.0 million.





Capital Resources and Liquidity

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”), (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars and borrowed by the Company’s existing credit facility and 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 2023, a $355 million secured term loan facility with a maturity of February 2024, a $235 million secured term loan facility with a maturity of February 2024 and a $230 million secured term loan facility with a maturity of February 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. 

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At September 30, 2018, the Company had borrowed $353.2 million under the Tranche B-1 Loans at an interest rate of 4.64%, $233.8 million under the Tranche B-2 Loans at an interest rate of 4.64%, and $228.9 million under the Tranche B-3 Loans at an interest rate of 4.64%. At September 30, 2018, there were no additional borrowings available under the Tranche B-1 Loans, Tranche B-2 Loans and Tranche B-3 Loans.

Interest Rate – Revolving Credit Line:  The interest rates applicable to loans under the revolving credit line will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin.  The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding (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.

At September 30, 2018, there were $111.9 million borrowings under the revolving credit line at an interest rate of 2.59%. After reductions for outstanding letters of credit secured by these facilities, we had $383.4 million of additional borrowings available under the revolving credit facilities at September 30, 2018.

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 September 30, 2018, we were in compliance with the covenants of the Amended Credit Facility.



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 $0.5 million and $0.3 million for the three months ended September 30, 2018 and 2017 respectively.  We had on hand precious metals owned by participants in our precious metals program of $47.1 million at September 30, 2018, and $37.7 million at December 31, 2017, 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 September 30, 2018, or December 31, 2017,  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.

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Bank Guarantees and Standby Letters of Credit. 

At September 30, 2018, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $8.0 million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.

Other Financing Arrangements

We maintain other lines of credit to provide global flexibility for Ferro’s short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $40.3 million and $64.5 million at September 30, 2018, and December 31, 2017, respectively. We had $31.4 million and $39.4 million of additional borrowings available under these lines at September 30, 2018, and December 31, 2017, respectively.

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 September 30, 2018,  we had $126.3 million of cash and cash equivalents. 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.

Our liquidity requirements and uses primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures, acquisition costs, capital investments, 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. We had additional borrowing capacity of $414.7 million at September 30, 2018, and $356.7 million at December 31, 2017, available under our various credit facilities, primarily the 2018 Revolving 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 September 30, 2018,  we were in compliance with our maximum leverage ratio covenant of 4.25x as our actual ratio was 2.93x,  providing $89.7 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 falls below approximately $197 million for rolling four quarters, based on reasonably consistent net debt levels with those as of September 30, 2018, 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.



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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, 2017.

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 I of our Annual Report on Form 10-K for the year ended December 31, 2017.