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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission File Number 1-584

FERRO CORPORATION

(Exact name of registrant as specified in its charter)

OH

(State or other jurisdiction of

incorporation or organization)

34-0217820

(I.R.S. Employer Identification No.)

6060 Parkland Boulevard

Suite 250

Mayfield Heights, OH

(Address of principal executive offices)

44124

(Zip Code)

216-875-5600

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO o

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

Large Accelerated Filer

x

Accelerated Filer

o

Non-accelerated Filer

o

Smaller Reporting Company

o

Emerging Growth Company

o

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

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.00

FOE

NYSE

At September 30, 2020, there were 82,290,617 shares of Ferro Common Stock, par value $1.00, outstanding.


Table of Contents

TABLE OF CONTENTS

Page

PART I

Item 1. Financial Statements (Unaudited)

3

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

26

Item 3. Quantitative and Qualitative Disclosures about Market Risk

38

Item 4. Controls and Procedures

39

PART II

Item 1. Legal Proceedings

40

Item 1A. Risk Factors

40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3. Defaults Upon Senior Securities

41

Item 4. Mine Safety Disclosures

41

Item 5. Other Information

41

Item 6. Exhibits

41

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands, except per share amounts)

2020

2019

2020

2019

Net sales

$

241,877

$

245,339

$

699,004

$

769,679

Cost of sales

171,711

169,277

484,356

536,628

Gross profit

70,166

76,062

214,648

233,051

Selling, general and administrative expenses

47,820

47,543

154,407

157,723

Restructuring and impairment charges

2,447

2,065

12,231

7,862

Other expense (income):

Interest expense

4,767

6,002

16,474

18,578

Interest earned

(474)

(813)

(1,035)

(2,456)

Foreign currency losses, net

1,450

3,655

1,278

7,662

Miscellaneous expense (income), net

(438)

(2,467)

(2,604)

(2,103)

Income before income taxes

14,594

20,077

33,897

45,785

Income tax expense

5,047

3,347

10,364

8,893

Income from continuing operations

9,547

16,730

23,533

36,892

Income (loss) from discontinued operations, net of income taxes

5,367

(3,520)

2,350

1,305

Net income

14,914

13,210

25,883

38,197

Less: Net income attributable to noncontrolling interests

440

390

826

902

Net income attributable to Ferro Corporation common shareholders

$

14,474

$

12,820

$

25,057

$

37,295

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

Basic earnings (loss):

Continuing operations

$

0.11

$

0.20

$

0.28

$

0.44

Discontinued operations

0.07

(0.04)

0.03

0.01

$

0.18

$

0.16

$

0.31

$

0.45

Diluted earnings (loss):

Continuing operations

$

0.11

$

0.20

$

0.27

$

0.44

Discontinued operations

0.06

(0.04)

0.03

0.01

$

0.17

$

0.16

$

0.30

$

0.45

See accompanying notes to condensed consolidated financial statements.

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Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2020

2019

2020

2019

Net income

$

14,914

$

13,210

$

25,883

$

38,197

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

Foreign currency translation income (loss)

13,831

(10,966)

(678)

(3,585)

Cash flow hedging instruments, unrealized income (loss)

269

(1,644)

(10,331)

(13,307)

Other comprehensive income (loss), net of income tax

14,100

(12,610)

(11,009)

(16,892)

Total comprehensive income

29,014

600

14,874

21,305

Less: Comprehensive income attributable to noncontrolling interests

197

146

453

648

Comprehensive income attributable to Ferro Corporation

$

28,817

$

454

$

14,421

$

20,657

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

September 30,

December 31,

(Dollars in thousands)

2020

2019

ASSETS

Current assets

Cash and cash equivalents

$

64,495

$

96,202

Accounts receivable, net

148,050

139,333

Inventories

272,797

264,476

Other receivables

69,933

69,365

Other current assets

15,724

22,373

Current assets held-for-sale

285,229

291,420

Total current assets

856,228

883,169

Other assets

Property, plant and equipment, net

303,291

302,672

Goodwill

173,241

172,209

Intangible assets, net

120,658

127,815

Deferred income taxes

103,380

98,714

Operating leased assets

14,246

20,088

Other non-current assets

88,361

72,023

Non-current assets held-for-sale

163,103

157,931

Total assets

$

1,822,508

$

1,834,621

LIABILITIES AND EQUITY

Current liabilities

Loans payable and current portion of long-term debt

$

8,764

$

8,703

Accounts payable

92,702

138,799

Accrued payrolls

30,232

27,447

Accrued expenses and other current liabilities

103,344

73,016

Current liabilities held-for-sale

89,481

133,780

Total current liabilities

324,523

381,745

Other liabilities

Long-term debt, less current portion

798,775

798,862

Postretirement and pension liabilities

170,467

174,021

Operating leased non-current liabilities

9,000

14,474

Other non-current liabilities

59,300

56,976

Non-current liabilities held-for-sale

69,535

38,341

Total liabilities

1,431,600

1,464,419

Equity

Ferro Corporation shareholders’ equity:

Common stock, par value $1 per share; 300.0 million shares authorized; 93.4 million shares issued; 82.3 million and 82.0 million shares outstanding at September 30, 2020, and December 31, 2019, respectively

93,436

93,436

Paid-in capital

294,077

294,543

Retained earnings

287,073

262,016

Accumulated other comprehensive loss

(120,012)

(109,376)

Common shares in treasury, at cost

(173,945)

(180,243)

Total Ferro Corporation shareholders’ equity

380,629

360,376

Noncontrolling interests

10,279

9,826

Total equity

390,908

370,202

Total liabilities and equity

$

1,822,508

$

1,834,621

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Equity

Ferro Corporation Shareholders

Common Shares

Accumulated

in Treasury

Other

Non-

Common

Paid-in

Retained

Comprehensive

controlling

Total

(In thousands)

Shares

Amount

Stock

Capital

Earnings

Loss

Interests

Equity

Balances at December 31, 2019

11,431 

$

(180,243)

$

93,436 

$

294,543 

$

262,016 

$

(109,376)

$

9,826 

$

370,202 

Net income (loss)

16,123 

10 

16,133 

Other comprehensive income (loss)

(27,312)

(94)

(27,406)

Stock-based compensation transactions

(238)

5,332 

(2,723)

2,609 

Balances at March 31, 2020

11,193 

(174,911)

93,436 

291,820 

278,139 

(136,688)

9,742 

361,538 

Net income (loss)

(5,540)

376 

(5,164)

Other comprehensive income (loss)

2,333 

(36)

2,297 

Stock-based compensation transactions

(8)

159 

1,825 

1,984 

Balances at June 30, 2020

11,185 

(174,752)

93,436 

293,645 

272,599 

(134,355)

10,082 

360,655 

Net income (loss)

14,474 

440 

14,914 

Other comprehensive income (loss)

14,343 

(243)

14,100 

Stock-based compensation transactions

(40)

807 

432 

1,239 

Balances at September 30, 2020

11,145 

$

(173,945)

$

93,436 

$

294,077 

$

287,073 

$

(120,012)

$

10,279 

$

390,908 

Ferro Corporation Shareholders

Common Shares

Accumulated

in Treasury

Other

Non-

Common

Paid-in

Retained

Comprehensive

controlling

Total

(In thousands)

Shares

Amount

Stock

Capital

Earnings

Loss

Interests

Equity

Balances at December 31, 2018

10,433 

$

(165,545)

$

93,436 

$

298,123 

$

255,978 

$

(105,361)

$

9,218 

$

385,849 

Net income (loss)

13,604 

274 

13,878 

Other comprehensive income (loss)

(912)

106 

(806)

Purchase of treasury stock

1,441 

(25,000)

(25,000)

Stock-based compensation transactions

(370)

8,422 

(6,446)

1,976 

Balances at March 31, 2019

11,504 

(182,123)

93,436 

291,677 

269,582 

(106,273)

9,598 

375,897 

Net income (loss)

10,871 

238 

11,109 

Other comprehensive income (loss)

(3,360)

(116)

(3,476)

Stock-based compensation transactions

(1)

37 

2,181 

2,218 

Distributions to noncontrolling interests

(654)

(654)

Balances at June 30, 2019

11,503 

$

(182,086)

$

93,436 

$

293,858 

$

280,453 

$

(109,633)

$

9,066 

$

385,094 

Net income

12,820

390

13,210

Other comprehensive income (loss)

(12,366)

(244)

(12,610)

Stock-based compensation transactions

(36)

992

112

1,104

Balances at September 30, 2019

11,467

$

(181,094)

$

93,436

$

293,970

$

293,273

$

(121,999)

$

9,212

$

386,798

See accompanying notes to condensed consolidated financial statements.

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Ferro Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

Cash flows from operating activities

Net cash used in operating activities

$

(106,481)

$

(67,240)

Cash flows from investing activities

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

(21,681)

(40,820)

Collections of financing receivables

97,299

60,904

Business acquisitions, net of cash acquired

(251)

Other investing activities

803

1,930

Net cash provided by investing activities

76,421

21,763

Cash flows from financing activities

Net borrowings under loans payable

(683)

8,220

Principal payments on term loan facility - Amended Credit Facility

(6,150)

(6,150)

Proceeds from revolving credit facility - Amended Credit Facility

398,336

216,066

Principal payments on revolving credit facility - Amended Credit Facility

(392,596)

(193,595)

Acquisition-related contingent consideration payment

(5,200)

Purchase of treasury stock

(25,000)

Other financing activities

(728)

(757)

Net cash used in financing activities

(1,821)

(6,416)

Effect of exchange rate changes on cash and cash equivalents

174

(667)

Decrease in cash and cash equivalents

(31,707)

(52,560)

Cash and cash equivalents at beginning of period

104,402

104,301

Cash and cash equivalents at end of period

72,695

51,741

Less: Cash and cash equivalents of discontinued operations at end of period

8,200

8,200

Cash and cash equivalents of continuing operations at end of period

$

64,495

$

43,541

Cash paid during the period for:

Interest

$

20,176

$

25,475

Income taxes

$

13,005

$

12,845

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, 2019.

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

Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results expected in subsequent quarters or for the full year ending December 31, 2020.

During the fourth quarter of 2019, substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets. As further discussed in Note 4, we entered into a definitive agreement to sell our Tile Coatings business, which has historically been included in the Performance Coatings reportable segment. Therefore, the associated operating results, net of income tax, have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented. Throughout this Quarterly Report on Form 10-Q, with the exception of the statements of cash flows and unless otherwise indicated, amounts and activity are presented on a continuing operations basis.

Subsequent to the treatment of the Tile Coatings business as discontinued operations, the remaining businesses within Performance Coatings were included within the Performance Colors and Glass reportable segment, which as of January 1, 2020, was renamed Functional Coatings.

Certain reclassifications have been made to the prior year financial statements to conform to current year classifications. The reclassification relates to the balance sheet presentation of assets and liabilities as held for sale and statement of operations presentation of results classified as discontinued operations in relation to the Tile Coatings business transaction.

2.    Recent Accounting Pronouncements

Recently Adopted Accounting Standards

This section provides a description of new accounting pronouncements ("Accounting Standard Update" or "ASU") issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company.

New Accounting Standards Not Yet Adopted

We are currently evaluating the impact on our financial statements of the following ASUs:

Standard

Description

ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, issued March, 2020

Provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU are effective for all entities through December 31, 2022.

ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans, issued August, 2018

Modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for fiscal years beginning after December 15, 2020 and is to be applied using a retrospective approach for all periods presented. Early adoption is permitted.

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

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3. Revenue

Revenues disaggregated by geography and reportable segment for the three months ended September 30, 2020, follow:

(Dollars in thousands)

EMEA

United States

Asia Pacific

Latin America

Total

Functional Coatings

$

65,081

$

49,580

$

26,779

$

12,778

$

154,218

Color Solutions

30,472

36,705

10,766

9,716

87,659

Total net sales

$

95,553

$

86,285

$

37,545

$

22,494

$

241,877

Revenues disaggregated by geography and reportable segment for the three months ended September 30, 2019, follow:

(Dollars in thousands)

EMEA

United States

Asia Pacific

Latin America

Total

Functional Coatings

$

70,048

$

46,657

$

26,364

$

11,675

$

154,744

Color Solutions

33,349

38,758

10,412

8,076

90,595

Total net sales

$

103,397

$

85,415

$

36,776

$

19,751

$

245,339

Revenues disaggregated by geography and reportable segment for the nine months ended September 30, 2020, follow:

(Dollars in thousands)

EMEA

United States

Asia Pacific

Latin America

Total

Functional Coatings

$

192,009

$

148,468

$

70,268

$

30,580

$

441,325

Color Solutions

96,235

108,384

29,172

23,888

257,679

Total net sales

$

288,244

$

256,852

$

99,440

$

54,468

$

699,004

Revenues disaggregated by geography and reportable segment for the nine months ended September 30, 2019, follow:

(Dollars in thousands)

EMEA

United States

Asia Pacific

Latin America

Total

Functional Coatings

$

223,310

$

149,574

$

73,962

$

38,616

$

485,462

Color Solutions

105,960

125,499

28,248

24,510

284,217

Total net sales

$

329,270

$

275,073

$

102,210

$

63,126

$

769,679

4.    Discontinued Operations

During the fourth quarter of 2019, substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets. We entered into a definitive agreement to sell our Tile Coatings business, which has historically been a part of our Performance Coatings reportable segment. Therefore, the associated operating results, net of income tax, have been classified as discontinued operations in the accompanying consolidated statements of operations for all periods presented.

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Table of Contents

The table below summarizes results for the Tile Coatings business for the three and nine months ended September 30, 2020 and 2019, which are reflected in our consolidated statements of operations as discontinued operations. Interest expense has been allocated to the discontinued operations based on the ratio of net assets of the business to consolidated net assets excluding debt.

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2020

2019

2020

2019

Net sales

$

120,163

$

120,389

$

310,167

$

377,499

Cost of sales

89,120

96,160

235,095

300,145

Gross profit

31,043

24,229

75,072

77,354

Selling, general and administrative expenses

18,549

20,180

52,899

53,725

Restructuring and impairment charges

269

4,161

2,306

10,751

Interest expense

2,950

2,880

7,698

8,838

Interest earned

(21)

(24)

(174)

(91)

Foreign currency losses (gains), net

113

(158)

5,074

(2,047)

Miscellaneous expense, net

173

328

1,420

598

Income (loss) from discontinued operations before income taxes

9,010

(3,138)

5,849

5,580

Income tax expense

3,643

382

3,499

4,275

Income (loss) from discontinued operations, net of income taxes

5,367

(3,520)

2,350

1,305

Less: Net income (loss) attributable to noncontrolling interests

(11)

92

33

242

Net income (loss) attributable to Tile Coatings business

$

5,378

$

(3,612)

$

2,317

$

1,063

The following table summarizes the assets and liabilities which are classified as held-for-sale at September 30, 2020 and December 31, 2019:

September 30,

December 31,

(Dollars in thousands)

2020

2019

Cash and cash equivalents

$

8,200

$

8,200

Accounts receivable, net

186,457

156,645

Inventories

84,422

101,127

Other receivables

3,331

22,442

Other current assets

2,819

3,006

Current assets held-for-sale

285,229

291,420

Property, plant and equipment, net

100,944

96,762

Goodwill

3

3

Amortizable intangible assets, net

40,947

39,692

Deferred income taxes

14,695

14,425

Other non-current assets

6,514

7,049

Non-current assets held-for-sale

163,103

157,931

Total assets held-for-sale

$

448,332

$

449,351



Loans payable and current portion of long-term debt

$

3,759

$

3,678

Accounts payable

66,082

96,998

Accrued payrolls

7,597

4,838

Accrued expenses and other current liabilities

12,043

28,266

Current liabilities held-for-sale

89,481

133,780

Long-term debt, less current portion

54,755

25,805

Postretirement and pension liabilities

8,378

7,473

Other non-current liabilities

6,402

5,063

Non-current liabilities held-for-sale

69,535

38,341

Total liabilities held-for-sale

$

159,016

$

172,121

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The following table summarizes cash flow data relating to discontinued operations for the nine months ended September 30, 2020 and 2019:

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

Depreciation

$

$

8,702

Amortization of intangible assets

2,388

Capital expenditures

(3,048)

(9,114)

Non-cash operating activities - goodwill impairment

9,100

Non-cash operating activities - restructuring and impairment charges

1,091

127

Non-cash investing activities - capital expenditures, consisting of unpaid capital expenditure liabilities at period end

683

738

5.    Inventories

September 30,

December 31,

(Dollars in thousands)

2020

2019

Raw materials

$

84,417

$

80,176

Work in process

50,548

49,717

Finished goods

137,832

134,583

Total inventories

$

272,797

$

264,476

In the production of some of our products, we use precious metals, which we obtain from financial institutions under consignment agreements with terms of one year or less. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign. These fees were $0.6 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively and were $2.3 million and $2.2 million for the nine months ended September 30, 2020 and 2019. We had on-hand precious metals owned by participants in our precious metals consignment program of $87.5 million at September 30, 2020, and $66.2 million at December 31, 2019, measured at fair value based on market prices for identical assets.

6.    Property, Plant and Equipment

Property, plant and equipment is reported net of accumulated depreciation of $430.8 million at September 30, 2020 and $413.9 million at December 31, 2019. As discussed in Note 4, the assets of our Tile Coatings business were classified as held-for-sale under ASC Topic 360; Property, Plant, and Equipment. As such, additional accumulated depreciation of $141.4 million at September 30, 2020 and $136.7 million at December 31, 2019 were classified as Non-current assets held for sale.

Unpaid capital expenditure liabilities, which are non-cash investing activities, were $2.9 million at September 30, 2020 and $3.3 million at September 30, 2019.

7. Goodwill and Other Intangible Assets

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

Functional

Color

(Dollars in thousands)

Coatings

Solutions

Total

Goodwill, net at December 31, 2019

$

121,902

$

50,307

$

172,209

Foreign currency adjustments

335

697

1,032

Goodwill, net at September 30, 2020

$

122,237

$

51,004

$

173,241

September 30,

December 31,

(Dollars in thousands)

2020

2019

Goodwill, gross

$

231,708

$

230,676

Accumulated impairment

(58,467)

(58,467)

Goodwill, net

$

173,241

$

172,209

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Table of Contents

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, 2020, the Company is not aware of any events or circumstances that occurred which would require a goodwill impairment test.

Amortizable intangible assets consisted of the following:

September 30,

December 31,

(Dollars in thousands)

2020

2019

Gross amortizable intangible assets:

Patents

$

5,504

$

5,434

Land rights

3,053

2,900

Technology/know-how and other

115,270

112,940

Customer relationships

66,815

66,454

Total gross amortizable intangible assets

190,642

187,728

Accumulated amortization:

Patents

(5,482)

(5,413)

Land rights

(1,549)

(1,378)

Technology/know-how and other

(58,973)

(50,973)

Customer relationships

(16,923)

(14,831)

Total accumulated amortization

(82,927)

(72,595)

Amortizable intangible assets, net

$

107,715

$

115,133

Indefinite-lived intangible assets consisted of the following:

September 30,

December 31,

(Dollars in thousands)

2020

2019

Indefinite-lived intangibles assets:

Trade names and trademarks

$

12,943

$

12,682

8.    Debt

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

September 30,

December 31,

(Dollars in thousands)

2020

2019

Loans payable

$

$

Current portion of long-term debt

8,764

8,703

Current portion of long-term debt

$

8,764

$

8,703

Long-term debt consisted of the following:

September 30,

December 31,

(Dollars in thousands)

2020

2019

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

$

795,483

$

801,764

Revolving credit facility

5,740

Finance lease obligations

2,610

2,305

Other notes

3,706

3,496

Total long-term debt

807,539

807,565

Current portion of long-term debt

(8,764)

(8,703)

Long-term debt, less current portion

$

798,775

$

798,862

(1)The carrying value of the term loan facility, maturing 2024, is net of unamortized debt issuance costs of $4.0 million at September 30, 2020 and $3.9 million at December 31, 2019.

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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”), and (c) provided new tranches of term loans (“Tranche B-2 Loans” and “Tranche B-3 Loans”) denominated in U.S. dollars. On May 4, 2020, the Company entered into an amendment (Third Amendment to Credit Agreement) to the Amended Credit Facility, which added an approval to Section 7.2.8 Permitted Dispositions for the Tile Coatings Business Disposition. The Amended Credit Facility will be used for ongoing working capital requirements and general corporate purposes. The Tranche B-2 Loans are borrowed by the Company and the Tranche B-3 Loans are borrowed on a joint and several basis by Ferro GmbH and Ferro Europe Holdings LLC.

The Amended Credit Facility consists of a $500 million secured revolving line of credit with a maturity of February 14, 2023, a $355 million secured term loan facility with a maturity of February 14, 2024, a $235 million secured term loan facility with a maturity of February 14, 2024 and a $230 million secured term loan facility with a maturity of February 14, 2024. The term loans are payable in equal quarterly installments in an amount equal to 0.25% of the original principal amount of the term loans, with the remaining balance due on the maturity date thereof. In addition, the Company is required, on an annual basis, to make a prepayment in an amount equal to a portion of the Company’s excess cash flow, as calculated pursuant to the Amended Credit Facility, which prepayment will be applied first to the term loans until they are paid in full, and then to the revolving loans.

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

Certain of the Company’s U.S. subsidiaries have guaranteed the Company’s obligations under the Amended Credit Facility and such obligations are secured by (a) substantially all of the personal property of the Company and the U.S. subsidiary guarantors and (b) a pledge of 100% of the stock of certain of the Company’s U.S. subsidiaries and 65% of the stock of certain of the Company’s direct foreign subsidiaries. The Tranche B-3 Loans are guaranteed by the Company, the U.S. subsidiary guarantors and a cross-guaranty by the borrowers of the Tranche B-3 Loans and are secured by the collateral securing the revolving loans and the other term loans, in addition to a pledge of the equity interests of Ferro GmbH.

Interest Rate – Term Loans: The interest rates applicable to the term loans will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable margin.

The base rate for term loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans is 1.25%.

The LIBOR rate for term loans shall not be less than 0.0% and the applicable margin for LIBOR rate term loans is 2.25%.

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

At September 30, 2020, the Company had borrowed $346.1 million under the Tranche B-1 Loans at an interest rate of 2.47%, $229.1 million under the Tranche B-2 Loans at an interest rate of 2.47%, and $224.3 million under the Tranche B-3 Loans at an interest rate of 2.47%. At September 30, 2020, there were no additional borrowings available under the Tranche B-1 Loans, Tranche B-2 Loans, or Tranche B-3 Loans. In connection with these borrowings, we entered into swap agreements in the second quarter of 2018. At September 30, 2020, the effective interest rate for the Tranche B-1 Loans, Tranche B-2 Loans, and Tranche B-3 Loans, after adjusting for the interest rate swap, was 4.93%, 2.05%, and 2.48%, respectively.

Interest Rate – Revolving Credit Line: The interest rates applicable to loans under the 2018 Revolving Credit Facility will be, at the Company’s option, equal to either a base rate or a LIBOR rate plus, in both cases, an applicable variable margin. The variable margin will be based on the ratio of (a) the Company’s total consolidated net debt outstanding (as defined in the Amended Credit Agreement) at such time to (b) the Company’s consolidated EBITDA (as defined in the Amended Credit Agreement) computed for the period of four consecutive fiscal quarters most recently ended.

The base rate for revolving loans will be the highest of (i) the federal funds rate plus 0.50%, (ii) the syndication agent’s prime rate, (iii) the daily LIBOR rate plus 1.00% or (iv) 0.00%. The applicable margin for base rate loans will vary between 0.50% to 1.50%.

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The LIBOR rate for revolving loans shall not be less than 0% and the applicable margin for LIBOR rate revolving loans will vary between 1.50% and 2.50%.

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

At September 30, 2020, there were $5.7 million of borrowings under the 2018 Revolving Credit Facility. After reductions for outstanding letters of credit secured by these facilities, we had $490.0 million of additional borrowings available under the revolving credit facilities at September 30, 2020.

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

Specific to the 2018 Revolving Facility, the Company is subject to a financial covenant regarding the Company’s maximum leverage ratio. If an event of default occurs, all amounts outstanding under the Amended Credit Facility agreement may be accelerated and become immediately due and payable. At September 30, 2020, we were in compliance with the covenants of the Amended Credit Facility.

Credit Facility

On February 14, 2017, the Company entered into the Credit Facility with a group of lenders to refinance its then outstanding credit facility debt and to provide liquidity for ongoing working capital requirements and general corporate purposes. The Credit Facility consisted of a $400 million secured revolving line of credit with a term of five years, a $357.5 million secured term loan facility with a term of seven years and a €250 million secured Euro term loan facility with a term of seven years. For further discussion of the Company’s Credit Facility, refer to Note 9 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Receivable Sales Programs

We have several international programs to sell without recourse trade accounts receivable to financial institutions. During the third quarter of 2020, these programs were amended to include a domestic program. These transactions are treated as a sale and are accounted for as a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. The Company continues to service the receivables sold in exchange for a fee. The servicing fee for the three and nine months ended September 30, 2020, was immaterial. The program, whose maximum capacity is 85 million, is scheduled to expire on December 31, 2023. Generally, at the transfer date, the Company receives cash equal to approximately 85% of the value of the sold receivable. Cash proceeds at the transfer date from these arrangements are reflected in operating activities in our consolidated statement of cash flows. The proceeds from the deferred purchase price are reflected in investing activities.

The outstanding principal amount of receivables sold under this program, which has not yet been collected from the customer, was $20.3 million at September 30, 2020 and $19.3 million at December 31, 2019. The carrying amount of deferred purchase price was $11.6 million at September 30, 2020 and $6.6 million at December 31, 2019 and is recorded in Other receivables. Trade accounts receivable collected from customers to be remitted to financial institutions were $33.1 million at September 30, 2020 and $12.8 million at December 31, 2019 and is recorded in Accrued expenses and other current liabilities. As discussed in Note 4, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business. As such, our Tile Coatings business was classified as held-for-sale. At December 31, 2019, $52.6 million of the outstanding gross principal amount of receivables sold under this program, pertained to the Tile Coatings business, and, at September 30, 2020, no amount remained. The carrying amount of the deferred purchase price at December 31, 2019 was $20.5 million, and, at September 30, 2020, no amount remained. Both are recorded in Current assets held-for-sale in our consolidated balance sheets.

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Activity from these programs for the nine months ended September 30, 2020 and 2019 is detailed below:

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

Trade accounts receivable sold to financial institutions

$

206,104

$

29,432

Cash proceeds from financial institutions (1)

139,549

18,293

(1)Excluded from the table above, in the nine months ended September 30, 2020 and 2019, our Tile Coatings business received cash proceeds from financial institutions of $47.3 million and $100.4 million, respectively. Refer to Note 4 for additional discussion of the Tile Coatings business and its classification as discontinued operations.

Other Financing Arrangements

We maintain other lines of credit to provide global flexibility for our short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $28.1 million at September 30, 2020 and December 31, 2019. The unused portions of these lines provided additional liquidity of $25.0 million at September 30, 2020 and December 31, 2019.

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:

September 30, 2020

Carrying

Fair Value

(Dollars in thousands)

Amount

Total

Level 1

Level 2

Level 3

Cash and cash equivalents

$

64,495

$

64,495

$

64,495

$

$

Term loan facility - Amended Credit Facility (1)

(795,483)

(781,721)

(781,721)

Revolving credit facility

(5,740)

(6,046)

(6,046)

Other long-term notes payable

(3,706)

(3,186)

(3,186)

Cross currency swaps

6,962

6,962

6,962

Interest rate swaps

(26,380)

(26,380)

(26,380)

Foreign currency forward contracts, net

128

128

128

December 31, 2019

Carrying

Fair Value

(Dollars in thousands)

Amount

Total

Level 1

Level 2

Level 3

Cash and cash equivalents

$

96,202

$

96,202

$

96,202

$

$

Term loan facility - Amended Credit Facility (1)

(801,764)

(799,750)

(799,750)

Other long-term notes payable

(3,496)

(1,557)

(1,557)

Cross currency swaps

22,111

22,111

22,111

Interest rate swaps

(14,698)

(14,698)

(14,698)

Foreign currency forward contracts, net

601

601

601

(1)The carrying value of the term loan facility is net of unamortized debt issuance costs of $4.0 million and $3.9 million for the period ended September 30, 2020, and December 31, 2019, respectively.

The fair value of cash and cash equivalents are based on the fair values of identical assets. The fair value of loans payable is based on the present value of expected future cash flows and approximate their carrying amounts due to the short periods to maturity. The fair value of the term loan facility is based on market price information and is measured using the last available bid price of the instrument on a secondary market. The fair value of 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 value of the foreign currency forward contracts are based on market prices for comparable contracts.

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Derivative Instruments

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

Derivatives Designated as Hedging Instruments

Cash Flow Hedges. For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is recorded as a component of Accumulated other comprehensive loss (“AOCL”) and reclassified into earnings in the same period during which the hedged transaction affects earnings.

The Company utilizes interest rate swaps to limit exposure to market fluctuations on floating-rate debt.

During the second quarter of 2018, the Company entered into variable to fixed interest rate swaps with a maturity date of February 14, 2024. The notional amount is $312.0 million at September 30, 2020. These swaps are hedging risk associated with the Tranche B-1 Loans. These interest rate swaps are designated as cash flow hedges. As of September 30, 2020, the Company expects it will reclassify net losses of approximately $8.4 million, currently recorded in AOCL, into interest expense in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.

The Company has converted a U.S. dollar denominated, variable rate debt obligation into a Euro fixed rate obligation using receive-float, pay-fixed cross currency swaps in the second quarter of 2018. These swaps are hedging currency and interest rate risk associated with the Tranche B-3 Loans. These cross-currency swaps are designated as cash flow hedges. The notional amount is $224.3 million at September 30, 2020, with a maturity date of February 14, 2024. As of September 30, 2020, the Company expects it will reclassify net gains of approximately $0.3 million, currently recorded in AOCL, into interest expense in earnings within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.

The amount of loss recognized in AOCL and the amount of loss (gain) reclassified into earnings for the three months ended September 30, 2020 and 2019, follow:

Amount of Loss (Gain)

Amount of Gain (Loss)

Reclassified from

Location of Gain (Loss)

Recognized in AOCL

AOCL into Income

Reclassified from

(Dollars in thousands)

2020

2019

2020

2019

AOCL into Income

Interest rate swaps

$

(975)

$

(2,328)

$

(1,648)

$

(363)

Interest expense

Cross currency swaps

(10,286)

10,750

116

1,419

Interest expense

$

(1,532)

$

1,056

Total Interest expense

Cross currency swaps

(9,825)

9,497

Foreign currency losses, net

$

(9,825)

$

9,497

Total Foreign currency losses, net

The amount of gain (loss) recognized in AOCL and the amount of loss (gain) reclassified into earnings for the nine months ended September 30, 2020 and 2019, follow:

Amount of Loss (Gain)

Amount of Gain (Loss)

Reclassified from

Location of Gain (Loss)

Recognized in AOCL

AOCL into Income

Reclassified from

(Dollars in thousands)

2020

2019

2020

2019

AOCL into Income

Interest rate swaps

$

(15,783)

$

(13,248)

$

(2,970)

$

(149)

Interest expense

Cross currency swaps

(8,930)

11,122

2,135

4,579

Interest expense

$

(835)

$

4,430

Total Interest expense

Cross currency swap

(10,407)

11,275

Foreign currency losses, net

$

(10,407)

$

11,275

Total Foreign currency losses, net

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The total amounts of expense and the respective line items in which the effect of cash flow hedges is presented in the condensed consolidated statement of operations for the three and nine months ended September 30, 2020 and 2019, are as follows:

Three months ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2020

2019

2020

2019

Interest expense

$

4,767

$

6,002

$

16,474

$

18,578

Foreign currency losses, net

1,450

3,655

1,278

7,662

Net Investment Hedges. For derivatives that are designated and qualify as net investment hedges, the gain or loss on the derivative is reported as a component of the currency translation adjustment in AOCL. These cross-currency swaps are designated as hedges of our net investment in European operations. Time value is excluded from the assessment of effectiveness and the amount of interest paid or received on the swaps will be recognized as an adjustment to interest expense in earnings over the life of the swaps.

In the second quarter of 2018, the Company entered into cross currency swap agreements under which we pay variable rate interest in Euros and receive variable rate interest in U.S. dollars. The notional amount is 95.5 million at September 30, 2020, with a maturity date of February 14, 2024. These swaps are hedging risk associated with the net investment in Euro denominated operations due to fluctuating exchange rates and are designated as net investment hedges. The changes in the fair value of these designated cross-currency swaps will be recognized in AOCL.

The amount of loss on net investment hedges recognized in AOCL, the amount reclassified into earnings and the amount of gain recognized in income on derivative (amount excluded from effectiveness testing) for the three months ended September 30, 2020 and 2019, follow:

Amount of Gain

Amount of Gain

Recognized in Income on

Amount of Gain (Loss)

Reclassified from

Derivative (Amount Excluded

Location of Gain

Recognized in AOCL

AOCL into Income

from Effectiveness Testing)

in Earnings

(Dollars in thousands)

2020

2019

2020

2019

2020

2019

Cross currency swaps

$

(4,285)

$

5,977

$

$

$

259

$

897

Interest expense

The amount of loss on net investment hedges recognized in AOCL, the amount reclassified into earnings and the amount of gain recognized in income on derivative (amount excluded from effectiveness testing) for the nine months ended September 30, 2020 and 2019, follow:

Amount of Gain

Amount of Gain

Recognized in Income on

Amount of Gain (Loss)

Reclassified from

Derivative (Amount Excluded

Location of Gain

Recognized in AOCL

AOCL into Income

from Effectiveness Testing)

in Earnings

(Dollars in thousands)

2020

2019

2020

2019

2020

2019

Cross currency swaps

$

(3,195)

$

8,454

$

$

$

1,651

$

2,847

Interest expense

Derivatives Not Designated as Hedging Instruments

Foreign Currency Forward Contracts. We manage foreign currency risks principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions. These forward contracts are not formally designated as hedges. Gains and losses on these foreign currency forward contracts are netted with gains and losses from currency fluctuations on transactions arising from international trade and reported as Foreign currency losses, net in the condensed consolidated statements of operations. We recognized net gains of $3.6 million and $4.0 million in the three and nine months ended September 30, 2020, respectively, and net losses of $1.6 million in the three and nine months ended September 30, 2019, respectively, arising from the change in fair value of our financial instruments, which partially offset the related net gains and losses on international trade transactions. The notional amount of foreign currency forward contracts was $554.6 million at September 30, 2020 and $625.9 million at December 31, 2019.

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The following table presents the effect on our condensed consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019, respectively, of our foreign currency forward contracts:

Amount of Gain (Loss)

Amount of Gain

Recognized in Earnings

Recognized in Earnings

Three Months Ended

Nine Months Ended

September 30,

September 30,

Location of Gain (Loss) in Earnings

(Dollars in thousands)

2020

2019

2020

2019

Foreign currency forward contracts

$

3,586

$

(1,642)

$

3,996

$

(1,615)

Foreign currency losses, net

Location and Fair Value Amount of Derivative Instruments

The following table presents the fair values of our derivative instruments on our condensed consolidated balance sheets. All derivatives are reported on a gross basis.

September 30,

December 31,

(Dollars in thousands)

2020

2019

Balance Sheet Location

Asset derivatives:

Cross currency swaps

$

1,331

$

6,711

Other current assets

Cross currency swaps

5,631

15,400

Other non-current assets

Foreign currency forward contracts

2,107

1,474

Other current assets

Liability derivatives:

Interest rate swaps

$

(8,369)

$

(3,723)

Accrued expenses and other current liabilities

Interest rate swaps

(18,011)

(10,975)

Other non-current liabilities

Foreign currency forward contracts

(1,979)

(873)

Accrued expenses and other current liabilities

10.    Income Taxes

Income tax expense for the nine months ended September 30, 2020 was $10.4 million, or 30.6% of pre-tax income. Income tax expense for the nine months ended September 30, 2019 was $8.9 million, or 19.4% of pre-tax income. The tax expense during the nine months ended September 30, 2020, 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 U.S. taxation of foreign earnings. The tax expense during the nine months ended September 30, 2019, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 21% primarily as a result of tax credits.

11.    Contingent Liabilities

We have recorded environmental liabilities of $5.8 million at September 30, 2020 and $7.2 million at December 31, 2019, for costs associated with the remediation of certain of our current or former properties that have been contaminated. The balance at September 30, 2020 and December 31, 2019, were primarily comprised of liabilities related to a non-operating facility in Brazil, and for retained environmental obligations related to a site in the United States that was part of the sale of our North American and Asian metal powders product line in 2013. These costs include, but are not limited to, legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring, and related activities. The ultimate liability could be affected by numerous uncertainties, including the extent of contamination found, the required period of monitoring, the ultimate cost of required remediation, and other circumstances.

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In November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane. The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages. The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to liability for the plaintiff’s claims, and is vigorously defending this proceeding. Since December 2018, additional complaints were filed in the same court by 25 other New York municipal water suppliers and in New York State Supreme Court by one water supplier against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.

In addition to the proceedings described above, the Company and its consolidated subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses. The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.

12.    Retirement Benefits

Net periodic benefit cost (credit) of our U.S. pension plans (including our unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life insurance benefit plans for the three months ended September 30, 2020 and 2019, respectively, follow:

U.S. Pension Plans

Non-U.S. Pension Plans

Other Benefit Plans

Three Months Ended September 30,

(Dollars in thousands)

2020

2019

2020

2019

2020

2019

Service cost

$

3

$

3

$

325

$

266

$

1

$

1

Interest cost

2,387

2,963

379

405

132

175

Expected return on plan assets

(3,708)

(3,153)

(128)

(144)

Amortization of prior service cost

(5)

(6)

Net periodic benefit (credit) cost

$

(1,318)

$

(187)

$

571

$

521

$

133

$

176

Net periodic benefit (credit) cost for the nine months ended September 30, 2020 and 2019, respectively, follow:

U.S. Pension Plans

Non-U.S. Pension Plans

Other Benefit Plans

Nine Months Ended September 30,

(Dollars in thousands)

2020

2019

2020

2019

2020

2019

Service cost

$

9

$

8

$

904

$

877

$

2

$

2

Interest cost

7,162

8,889

1,052

1,353

397

526

Expected return on plan assets

(11,124)

(9,458)

(356)

(480)

Amortization of prior service cost

(14)

(15)

Net periodic benefit (credit) cost

$

(3,953)

$

(561)

$

1,586

$

1,735

$

399

$

528

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.

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13.    Stock-Based Compensation

On May 3, 2018, our shareholders approved the 2018 Omnibus Incentive Plan (the “Plan”), which was adopted by the Board of Directors on February 22, 2018. The Plan’s purpose is to promote the Company’s long-term financial interests and growth by attracting, retaining and motivating high-quality key employees and directors, motivating such employees and directors to achieve the Company’s short- and long-range performance goals and objectives, and thereby align their interests with those of the Company’s shareholders. The Plan reserves 4,500,000 shares of common stock to be issued for grants of several different types of long-term incentives including stock options, stock appreciation rights, restricted awards, performance awards, other common stock-based awards, and dividend equivalent rights.

The Plan replaced the 2013 Omnibus Incentive Plan (the “Previous Plan”), and no future grants may be made under the Previous Plan. However, any outstanding awards or grants made under the Previous Plan will continue until the end of their specified terms.

In the first nine months of 2020, our Board of Directors granted 0.3 million stock options, 0.2 million performance share units, and 0.2 million restricted stock units under the Plan.

We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. The following table details the weighted-average grant-date fair values and the assumptions used for estimating the fair values of stock option grants made during the nine months ended September 30, 2020:

Stock Options

Weighted-average grant-date fair value

$

5.28

Expected life, in years

5.2

Risk-free interest rate

1.4

%

Expected volatility

35.1

%

The weighted average grant date fair value of our performance share units granted in the nine months ended September 30, 2020, was $14.64. We measure the fair value of performance share units based on the closing market price of our common stock on the date of the grant. These shares are evaluated each reporting period for respective attainment rates against the performance criteria.

The weighted-average grant date fair value of our restricted share units granted in the nine months ended September 30, 2020, was $14.64. We measure the fair value of restricted share units based on the closing market price of our common stock on the date of the grant. The restricted share units vest over three years.

We recognized stock-based compensation expense of $1.6 million and $7.1 million for the three and nine months ended September 30, 2020, respectively, and $0.3 million and $5.9 million and for the three and nine months ended September 30, 2019, respectively. At September 30, 2020, unearned compensation cost related to the unvested portion of all stock-based compensation awards was approximately $9.9 million and is expected to be recognized over the remaining vesting period of the respective grants, through the second quarter of 2023.

14.    Restructuring and Optimization Programs

Total restructuring charges were $2.4 million and $12.2 million for the three and nine months ended September 30, 2020, respectively, and $2.1 million and $7.9 million for the three and nine months ended September 30, 2019, respectively. As discussed in Note 4, our Tile Coatings business was classified as held-for-sale during the fourth quarter of 2019. As such, there were additional restructuring charges of $0.3 million and $2.3 million for the three and nine months ended September 30, 2020, respectively, and $4.2 million and $10.8 million for the three and nine months ended September 30, 2019, respectively classified as Net income from discontinued operations, net of income taxes.

Organizational Optimization Plan

In conjunction with the pending sale of the Tile Coatings business, discussed in Note 4, we developed our Organizational Optimization Plan and initiated a program across the organization with the objective of realigning the business and lowering our cost structure in anticipation of the pending sale. As a result of these actions, the Company expects to incur total charges of approximately $1.5 million, substantially all of which will be for anticipated severance costs. The remaining activities of the program are expected to be recognized throughout the remainder of 2020 and 2021. Charges associated with the program were $1.2 million for the three and nine months ended September 30, 2020.

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Americas Manufacturing Optimization Plan

In the second quarter of 2019, we developed our Americas Manufacturing Optimization Plan and initiated a program across the organization with the objective of realigning the business and lowering our cost structure. The Americas Manufacturing Optimization Plan is focused on the construction of a new manufacturing center of excellence located in Villagran, Mexico. We are in the process of consolidating two plants located in the United States and two sites in Latin America into the expanded Villagran location. As a result of these actions, the Company expects to incur total charges of approximately $8.7 million, substantially all of which will be for anticipated severance costs. The remaining activities of the program are expected to be recognized within the next 12 months. Charges associated with the program were $1.1 million for the nine months ended September 30, 2020, and $1.9 million and $5.8 million for the three and nine months ended September 30, 2019, respectively.

Global Optimization Plan

The program involves our global operations and certain functions and initiatives to increase operational efficiencies, some of which is associated with integration of our recent acquisitions. Actions associated with the Global Optimization Plan were substantially completed during 2020, and as such, we do not anticipate material charges related to this plan for the remainder of 2020. Charges associated with the program were $1.2 million and $9.9 million for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $2.1 million for the three and nine months ended September 30, 2019, respectively.

The charges associated with these programs are further summarized below.

Employee

Other

(Dollars in thousands)

Severance

Costs

Total

Balances at December 31, 2019

$

747

$

1,492

$

2,239

Restructuring charges

9,792

2,439

12,231

Cash payments

(4,236)

(736)

(4,972)

Non-cash items

280

98

378

Balances at September 30, 2020

$

6,583

$

3,293

$

9,876

We expect to make cash payments to settle the remaining liability for employee severance benefits and other costs over the next twelve months, except where legal or contractual obligations would require it to extend beyond that period.

15.    Leases

The Company has leases for equipment, office space, plant sites and distribution centers. Certain of these leases include options to extend the lease and some include options to terminate the lease early. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

There are no leases that have not yet commenced that create significant rights and obligations for the Company.

The components of lease cost are shown below:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2020

2019

2020

2019

Income Statement Location

Operating lease cost(1)

$

1,143

$

1,239

$

3,606

$

3,885

Selling, general and administrative expenses

Operating lease cost(2)

1,871

2,161

5,608

6,687

Cost of sales

Finance lease cost

Amortization of right-of-use assets

81

45

217

158

Cost of sales

Interest of lease liabilities

10

4

24

10

Interest expense

Net lease cost

$

3,105

$

3,449

$

9,455

$

10,740

(1)Included in operating lease cost is $0.3 million and $0.7 million of short-term lease costs for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2019 and $0.1 million and $0.3 million of variable lease costs for the three and nine months ended September 30, 2020, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively.

(2)Included in operating lease cost is $0.7 million and $2.0 million of short-term lease costs for the three and nine months ended September 30, 2020, respectively, and $0.5 and $1.8 million of short-term lease costs for the three and nine months ended September 30, 2019 and $0.1 million and $0.5 million of variable lease costs for the three and nine months ended September 30, 2020, respectively, and $0.2 million and $0.7 million of variable lease costs for the three and nine months ended September 30, 2019, respectively.

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Supplemental balance sheet information related to leases is shown below:

September 30,

December 31,

(Dollars in thousands)

2020

2019

Balance Sheet Location

Assets

Operating leased assets

$

14,246

$

20,088

Operating leased assets

Finance leased assets (1)

1,189

859

Property, plant and equipment, net

Total leased assets

$

15,435

$

20,947

Liabilities

Current

Operating

$

5,262

$

6,515

Accrued expenses and other current liabilities

Finance

564

438

Loans payable and current portion of long-term debt

Noncurrent

Operating

9,000

14,474

Operating lease non-current liabilities

Finance

2,046

1,867

Long-term debt, less current portion

Total lease liabilities

$

16,872

$

23,294

(1)Finance leases are net of accumulated depreciation of $3.4 million and $3.4 million for September 30, 2020 and December 31, 2019, respectively.

Supplemental cash flow information related to leases are shown below:

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2020

2019

2020

2019

Cash paid for amounts included in the measurement of lease liabilities

Operating cash flows from finance leases

$

10

$

4

$

24

$

10

Operating cash flows from operating leases

1,922

1,941

5,749

6,610

Financing cash flows from finance leases

97

49

239

151

Leased assets obtained in exchange for new finance lease liabilities

379

419

534

637

Leased assets obtained in exchange for new operating lease liabilities

1,580

1,107

4,142

25,326

September 30,

2020

Weighted-average remaining lease term (years)

Operating leases

3.8

Finance leases

5.4

Weighted-average discount rate

Operating leases

4.2%

Finance leases

4.9%

Maturities of lease liabilities are shown below as of September 30, 2020:

Finance

Operating

(Dollars in thousands)

Leases

Leases

Remaining in 2020

$

201

$

1,788

2021

748

5,834

2022

728

3,607

2023

658

1,842

2024

549

872

2025

443

697

Thereafter

455

1,689

Net minimum lease payments

$

3,782

$

16,329

Less: interest

1,172

2,068

Present value of lease liabilities

$

2,610

$

14,261

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16.    Earnings Per Share

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands, except per share amounts)

2020

2019

2020

2019

Basic earnings per share computation:

Income from continuing operations

$

9,547

$

16,730

$

23,533

$

36,892

Less: Net income attributable to noncontrolling interests from continuing operations

451

298

793

660

Net income attributable to Ferro Corporation from continuing operations

9,096

16,432

22,740

36,232

Income (loss) from discontinued operations, net of income taxes

5,367

(3,520)

2,350

1,305

Less: Net income attributable to noncontrolling interests from discontinued operations

(11)

92

33

242

Net income (loss) attributable to Ferro Corporation from discontinued operations

5,378

(3,612)

2,317

1,063

Total

$

14,474

$

12,820

$

25,057

$

37,295

Weighted-average common shares outstanding

82,261

81,942

82,201

82,118

Basic earnings per share from continuing operations attributable to Ferro Corporation common shareholders

$

0.11

$

0.20

$

0.28

$

0.44

Diluted earnings per share computation:

Net income attributable to Ferro Corporation from continuing operations

$

9,096

$

16,432

$

22,740

$

36,232

Net income (loss) attributable to Ferro Corporation from discontinued operations

5,378

(3,612)

2,317

1,063

Total

$

14,474

$

12,820

$

25,057

$

37,295

Weighted-average common shares outstanding

82,261

81,942

82,201

82,118

Assumed exercise of stock options

272

319

260

470

Assumed satisfaction of restricted stock unit conditions

157

143

300

232

Assumed satisfaction of performance share unit conditions

81

91

130

136

Weighted-average diluted shares outstanding

82,771

82,495

82,891

82,956

Diluted earnings per share from continuing operations attributable to Ferro Corporation common shareholders

$

0.11

$

0.20

$

0.27

$

0.44

The number of anti-dilutive shares were 2.8 million and 2.7 million for the three and nine months ended September 30, 2020, respectively, and 2.5 million and 2.2 million for the three and nine months ended September 30, 2019, respectively. These shares are excluded from the calculation of diluted earnings per share due to their anti-dilutive impact.

17.    Share Repurchase Program

The Company’s Board of Directors has approved a share repurchase program under which the Company is authorized to repurchase up to $150 million of the Company’s outstanding shares of common stock on the open market, including through a Rule 10b5-1 plan, or in privately negotiated transactions.

The timing and amount of shares to be repurchased will be determined by the Company, based on evaluation of market and business conditions, share price, and other factors. The share repurchase programs do not obligate the Company to repurchase any dollar amount or number of common shares, and may be suspended or discontinued at any time.

As of September 30, 2020, $46.2 million remains authorized under the program for the repurchase of common stock.

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18.    Accumulated Other Comprehensive Loss

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

Three Months Ended September 30,

Postretirement

Foreign

Net Gain (Loss)

Benefit Liability

Currency

on Cash Flow

(Dollars in thousands)

Adjustments

Items

Hedges

Total

Balances at June 30, 2019

$

1,126

$

(95,799)

$

(14,960)

$

(109,633)

Other comprehensive income (loss) before reclassifications, before tax

(9,547)

8,422

(1,125)

Reclassification to earnings:

Cash flow hedge income (loss), before tax

(10,553)

(10,553)

Current period other comprehensive income (loss), before tax

(9,547)

(2,131)

(11,678)

Tax effect

1,175

(487)

688

Current period other comprehensive income (loss), net of tax

(10,722)

(1,644)

(12,366)

Balances at September 30, 2019

$

1,126

$

(106,521)

$

(16,604)

$

(121,999)

Balances at June 30, 2020

$

1,206

$

(111,954)

$

(23,607)

$

(134,355)

Other comprehensive income (loss) before reclassifications, before tax

13,022

(11,261)

1,761

Reclassification to earnings:

Cash flow hedge income (loss), before tax

11,357

11,357

Current period other comprehensive income (loss), before tax

13,022

96

13,118

Tax effect

(1,052)

(173)

(1,225)

Current period other comprehensive income (loss), net of tax

14,074

269

14,343

Balances at September 30, 2020

$

1,206

$

(97,880)

$

(23,338)

$

(120,012)

Nine Months Ended September 30,

Postretirement

Foreign

Net Loss

Benefit Liability

Currency

on Cash

(Dollars in thousands)

Adjustments

Items

Flow Hedges

Total

Balances at December 31, 2018

$

1,126

$

(103,190)

$

(3,297)

$

(105,361)

Other comprehensive income (loss) before reclassifications, before tax

(2,033)

(2,126)

(4,159)

Reclassification to earnings:

Cash flow hedge income (loss), before tax

(15,705)

(15,705)

Current period other comprehensive income (loss), before tax

(2,033)

(17,831)

(19,864)

Tax effect

1,298

(4,524)

(3,226)

Current period other comprehensive income (loss), net of tax

(3,331)

(13,307)

(16,638)

Balances at September 30, 2019

$

1,126

$

(106,521)

$

(16,604)

$

(121,999)

Balances at December 31, 2019

$

1,206

$

(97,575)

$

(13,007)

$

(109,376)

Other comprehensive income (loss) before reclassifications, before tax

(1,427)

(24,713)

(26,140)

Reclassification to earnings:

Cash flow hedge income (loss), before tax

11,242

11,242

Current period other comprehensive income (loss), before tax

(1,427)

(13,471)

(14,898)

Tax effect

(1,122)

(3,140)

(4,262)

Current period other comprehensive income (loss), net of tax

(305)

(10,331)

(10,636)

Balances at September 30, 2020

$

1,206

$

(97,880)

$

(23,338)

$

(120,012)

19.    Reporting for Segments

As discussed in Note 4, during the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business which has historically been the majority of our Performance Coatings reportable segment. Substantially all of the assets and liabilities of our Tile Coatings business were classified as held-for-sale in the accompanying consolidated balance sheets and results are included within discontinued operations in the consolidated statement of operations for all periods presented. The retained assets, liabilities and operations of the Performance Coatings reportable segment are reflected within our Functional Coatings reportable segment.

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2020

2019

2020

2019

Functional Coatings

$

154,218

$

154,744

$

441,325

$

485,462

Color Solutions

87,659

90,595

257,679

284,217

Total net sales

$

241,877

$

245,339

$

699,004

$

769,679

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in thousands)

2020

2019

2020

2019

Functional Coatings

$

41,906

$

47,275

$

125,842

$

144,812

Color Solutions

28,450

29,122

89,222

87,220

Other cost of sales

(190)

(335)

(416)

1,019

Total gross profit

70,166

76,062

214,648

233,051

Selling, general and administrative expenses

47,820

47,543

154,407

157,723

Restructuring and impairment charges

2,447

2,065

12,231

7,862

Other expense, net

5,305

6,377

14,113

21,681

Income before income taxes

$

14,594

$

20,077

$

33,897

$

45,785

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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, 2020, decreased by $3.4 million, or 1.4%, compared with the prior-year same period. Net sales decreased by $2.9 million in Color Solutions and $0.5 million in Functional Coatings. During the three months ended September 30, 2020, gross profit decreased $5.9 million, or 7.8%, compared with the prior-year same period; as a percentage of net sales, it decreased approximately 200 basis points to 29.0%. Our total gross profit for the third quarter of 2020 was $70.2 million, compared with $76.1 million for the three months ended September 30, 2019. The decrease in gross profit was attributable to lower gross profit in Functional Coatings of $5.4 million and Color Solutions of $0.7 million.

For the three months ended September 30, 2020, selling, general and administrative (“SG&A”) expenses increased $0.3 million, or 0.6%, compared with the prior-year same period. As a percentage of net sales, it increased approximately 40 basis points to 19.8%.

For the three months ended September 30, 2020, net income was $14.9 million, compared with $13.2 million for the prior-year same period, and net income attributable to common shareholders was $14.5 million, compared with $12.8 million for the prior-year same period. Income from continuing operations was $9.5 million for the three months ended September 30, 2020, compared with $16.7 million in 2019.

Outlook

The improving demand for Ferro’s products that began in the latter part of the second quarter continued in the third quarter, despite the continued impact of the novel coronavirus (“COVID-19”) pandemic on macroeconomic conditions around the globe.

Ferro has market leadership positions in a diverse portfolio of products, and many of our products and services support niche markets in “critical” or “essential” industries such as healthcare, food and beverage, energy, information technology and defense, which generally have continued to operate during the pandemic. We believe these characteristics, together with improved economic activity more broadly in the markets we serve, should continue to provide certain end market demand and margin tailwinds for the balance of the year.

Along with managing through the COVID-19 pandemic, Ferro continues to execute its strategic priorities, which include advancing our optimization initiatives, preparing for and completing the sale of the Tile Coatings business and continuing to develop innovative products for our customers.

We recognize the potential continued uncertainty in macroeconomic conditions going forward. This uncertainty may result in volatility in demand in our end markets, foreign exchange rates and in interest rates, which could impact our reported results through the remainder of 2020 and into 2021.

COVID-19

In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a global pandemic and recommended containment and mitigation measures worldwide. COVID-19 has spread through Asia, Europe, the Middle East and North and South America, all regions in which we have operations. In response, government authorities have issued an evolving set of mandates, including requirements to shelter-in-place, curtail business operations, restrict travel, and avoid physical interaction. These mandates and the continued spread of COVID-19 have disrupted normal business activities in many segments of the global economy, resulting in weakened economic conditions. In some areas around the world, government mandates have been lifted by certain public authorities and economic conditions have improved in certain sectors of the economy relative to early in the second quarter. Meanwhile, some regions have experienced increasing numbers of COVID-19 cases, and if this continues and if public authorities intensify efforts to contain the spread of COVID-19, normal business activity may be further disrupted and economic conditions could weaken.

We continue to monitor the impact of the outbreak of COVID-19 on our business, including how it may impact our customers, employees, supply chain and distribution network and to take action, as appropriate, to address these circumstances.

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Our manufacturing facilities generally have continued to operate since the pandemic was declared in early March 2020, with most sites experiencing only relatively brief or no suspensions of activity. While COVID-19 did not have a significant effect on our reported results for the first quarter of 2020, it had a more pronounced effect on our business during the second quarter, primarily as a result of reduced demand in certain of our end markets, such as the automotive sector. During the third quarter, the favorable momentum in our business that we experienced in the latter part of the second quarter continued, with improving demand from many of our customers across multiple product lines. Nevertheless, if certain regions of the world experience increasing numbers of COVID-19 cases, we may be required to take further actions to comply with mandates of national, state or local authorities, and we may take additional actions that we determine to be in the best interests of our employees, customers, suppliers and other stakeholders, which could disrupt or restrict our ability to operate our facilities and travel to our domestic and international sites. The extent to which our operations may be impacted by COVID-19 in the remainder of 2020 depends on a variety of factors, including the duration, severity, and scope of the pandemic, which remain uncertain.

We believe we are well positioned from a liquidity perspective to manage through the effects of the COVID-19 pandemic. As of September 30, 2020, we had liquidity of approximately $562.7 million, consisting of cash and availability under our various credit facilities, primarily our revolving credit facility. We are in compliance with the covenants under our various credit facilities and expect to remain in compliance. We will continue to evaluate and take action to preserve liquidity and generate cash flow during the crisis, including by limiting capital expenditures and discretionary spending, as appropriate and where possible.

Factors that could adversely affect our future performance include those described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of the Annual Report on Form 10-K for the year ended December 31, 2019.


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Results of Operations - Consolidated

Comparison of the three months ended September 30, 2020 and 2019

For the three months ended September 30, 2020, net income from continuing operations was $9.5 million, compared with $16.7 million for the three months ended September 30, 2019. For the three months ended September 30, 2020, net income attributable to common shareholders was $14.5 million, or earnings per share of $0.18, compared with net income attributable to common shareholders of $12.8 million, or earnings per share of $0.16, for the three months ended September 30, 2019.

Net Sales

Three Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Net sales

$

241,877

$

245,339

$

(3,462)

(1.4)

%

Cost of sales

171,711

169,277

2,434

1.4

%

Gross profit

$

70,166

$

76,062

$

(5,896)

(7.8)

%

Gross profit as a % of net sales

29.0

%

31.0

%

Net sales decreased by $3.4 million, or 1.4%, for the three months ended September 30, 2020, compared with the prior-year same period, driven by lower sales in Color Solutions and Functional Coatings of $2.9 million and $0.5 million, respectively. The decrease in net sales was driven by lower volume and mix of $6.6 million, partially mitigated by favorable foreign currency impacts of $1.7 million and higher product pricing of $1.5 million.

Gross Profit

Gross profit decreased $5.9 million, or 7.8%, for the three months ended September 30, 2020, compared with the prior-year same period. As a percentage of net sales, gross profit decreased 200 basis points to 29.0%. The decrease in gross profit was attributable to lower gross profit in Functional Coatings and Color Solutions of $5.4 million and $0.7 million, respectively. The decrease in gross profit was driven by lower sales volumes and mix of $6.7 million and higher manufacturing costs of $4.4 million, partially mitigated by lower raw material costs of $3.4 million, favorable product pricing of $1.5 million and favorable foreign currency impacts of $0.3 million.

Geographic Revenues

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

Three Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Geographic Revenues on a sales origination basis

EMEA

$

95,553

$

103,397

$

(7,844)

(7.6)

%

United States

86,285

85,415

870

1.0

%

Asia Pacific

37,545

36,776

769

2.1

%

Latin America

22,494

19,751

2,743

13.9

%

Net sales

$

241,877

$

245,339

$

(3,462)

(1.4)

%

The decline in net sales of $3.4 million, compared with the prior-year same period, was driven by a decrease in sales from EMEA, partially mitigated by higher sales in Latin America, United States and Asia Pacific regions. The decrease in sales from EMEA was attributable to lower sales in Functional Coatings and Color Solutions of $5.0 million and $2.8 million, respectively. The increase in sales from Latin America was attributable to higher sales in Color Solutions and Functional Coatings of $1.6 million and $1.1 million, respectively. The increase in sales from the United States was attributable to higher sales in Functional Coatings of $2.9 million, partially offset by a decrease in Color Solutions of $2.0 million. The increase in sales from Asia Pacific was attributable to higher sales in Functional Coatings and Color Solutions of $0.4 million and $0.4 million, respectively.

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Selling, General and Administrative Expenses

The following table includes SG&A components with significant changes between 2020 and 2019.

Three Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Personnel expenses (excluding R&D personnel expenses)

$

19,827

$

21,867

(2,040)

(9.3)

%

Research and development expenses

8,488

9,903

(1,415)

(14.3)

%

Business development

3,113

666

2,447

367.4

%

Incentive compensation

2,018

356

1,662

466.9

%

Stock-based compensation

1,608

300

1,308

436.0

%

Intangible asset amortization

1,504

2,053

(549)

(26.7)

%

Pension and other postretirement benefits

213

256

(43)

(16.8)

%

Bad debt

62

5

57

NM

%

All other expenses

10,987

12,137

(1,150)

(9.5)

%

Selling, general and administrative expenses

$

47,820

$

47,543

$

277

0.6

%

SG&A expenses were $0.3 million higher in the three months ended September 30, 2020, compared with the prior-year same period. The higher SG&A expenses compared to the prior-year same period are primarily driven by higher business development costs, incentive and stock-based compensation expense, partially offset by lower personnel costs 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.

Three Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Strategic services

$

22,363

$

25,254

$

(2,891)

(11.4)

%

Functional services

21,831

21,633

198

0.9

%

Incentive compensation

2,018

356

1,662

NM

%

Stock-based compensation

1,608

300

1,308

436.0

%

Selling, general and administrative expenses

$

47,820

$

47,543

$

277

0.6

%

Restructuring and Impairment Charges

Three Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Employee severance

$

1,960

$

1,906

$

54

2.8

%

Other restructuring costs

487

159

328

206.3

%

Restructuring and impairment charges

$

2,447

$

2,065

$

382

18.5

%

Restructuring and impairment charges increased in the third quarter of 2020 compared with the prior-year same period. The increase primarily relates to costs associated with our Global Optimization and Organizational Optimization Plans, compared with the prior-year same period. Refer to Note 14 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of our optimization plans and related costs.

Interest Expense

Three Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Interest expense

$

4,810

$

6,260

$

(1,450)

(23.2)

%

Amortization of bank fees

1,071

968

103

10.6

%

Interest swap amortization

(315)

(315)

%

Interest capitalization

(799)

(911)

112

(12.3)

%

Interest expense

$

4,767

$

6,002

$

(1,235)

(20.6)

%

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Interest expense decreased in the third quarter of 2020 compared with the prior-year same period. The decrease in interest expense was due to a decrease in the average interest rate and the average long-term debt balance during the third quarter of 2020 compared with the prior-year same period.

Income Tax Expense

Income tax expense for the three months ended September 30, 2020 was $5.0 million, or 34.6% of pre-tax inome. Income tax expense for the three months ended September 30, 2019 was $3.3 million, or 16.7% of pre-tax income. The tax expense during the three months ended September 30, 2020, 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 U.S. taxation of foreign earnings. The tax expense during the three months ended September 30, 2019, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 21% primarily as a result of tax credits.

Results of Operations - Segment Information

Comparison of the three months ended September 30, 2020 and 2019

Functional Coatings

Three Months Ended

Change due to

September 30,

Volume /

(Dollars in thousands)

2020

2019

$ Change

% Change

Price

Mix

Currency

Other

Segment net sales

$

154,218

$

154,744

$

(526)

(0.3)

%

$

1,804

$

(3,026)

$

696

$

Segment gross profit

41,906

47,275

(5,369)

(11.4)

%

1,804

(4,897)

146

(2,422)

Gross profit as a % of segment net sales

27.2

%

30.6

%

Net sales decreased compared with the prior-year same period, primarily driven by lower sales in decoration, automotive and industrial products of $3.1 million, $2.0 million and $1.2 million, respectively, partially mitigated by increased sales in electronic products. The decrease in net sales was driven by unfavorable volume and mix of $3.0 million, partially mitigated by higher product pricing of $1.8 million and favorable foreign currency impacts of $0.7 million. Gross profit decreased from the prior-year same period primarily due to unfavorable manufacturing costs of $4.5 million and unfavorable volume and mix of $4.9 million, partially mitigated by favorable raw material costs of $2.1 million, higher product pricing of $1.8 million and favorable foreign currency impacts of $0.1 million.

Three Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Segment net sales by Region

EMEA

$

65,081

$

70,048

$

(4,967)

(7.1)

%

United States

49,580

46,657

2,923

6.3

%

Asia Pacific

26,779

26,364

415

1.6

%

Latin America

12,778

11,675

1,103

9.4

%

Total

$

154,218

$

154,744

$

(526)

(0.3)

%

The net sales decrease of $0.5 million was driven by lower sales from EMEA, partially mitigated by higher sales from the United States, Latin America and Asia Pacific. The decrease in sales from EMEA was primarily attributable to lower sales of industrial and decoration products of $2.7 million and $2.0 million, respectively. The increase in sales from the United States was primarily attributable to an increase in sales of electronic products of $4.7 million, partially offset by lower sales of porcelain enamel and automotive products of $1.3 million and $0.6 million, respectively. The increase in sales from Latin America was primarily attributable to higher sales of porcelain enamel and decoration products of $0.8 million and $0.4 million, respectively. The increase in sales from Asia Pacific was primarily attributable to increased sales of industrial and porcelain enamel products of $1.6 million and $1.1 million respectively, partially offset by lower sales in decoration and automotive products of $1.9 million and $0.4 million, respectively.

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Table of Contents

Color Solutions

Three Months Ended

Change due to

September 30,

Volume /

(Dollars in thousands)

2020

2019

$ Change

% Change

Price

Mix

Currency

Other

Segment net sales

$

87,659

$

90,595

$

(2,936)

(3.2)

%

$

(313)

$

(3,576)

$

953

$

Segment gross profit

28,450

29,122

(672)

(2.3)

%

(313)

(1,964)

150

1,455

Gross profit as a % of segment net sales

32.5

%

32.1

%

Net sales decreased compared with the prior-year same period, primarily due to lower sales of pigment products of $3.5 million, partially mitigated by higher sales of surface technology and dispersions and colorants products of $0.4 million and $0.2 million, respectively. The decrease in net sales was driven by unfavorable sales volume and mix of $3.6 million and lower product pricing of $0.3 million, partially mitigated by favorable foreign currency impacts of $1.0 million. Gross profit decreased from the prior-year same period, primarily due to unfavorable sales volume and mix of $2.0 million, partially mitigated by lower raw material costs of $1.3 million.

Three Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Segment net sales by Region

United States

$

36,705

$

38,758

$

(2,053)

(5.3)

%

EMEA

30,472

33,349

(2,877)

(8.6)

%

Asia Pacific

10,766

10,412

354

3.4

%

Latin America

9,716

8,076

1,640

20.3

%

Total

$

87,659

$

90,595

$

(2,936)

(3.2)

%

The net sales decrease of $2.9 million was driven by lower sales from EMEA and the United States, partially mitigated by higher sales from Latin America. The decrease in sales from EMEA was primarily attributable to lower sales of pigment and dispersions and colorants products of $2.5 million and $0.3 million, respectively. The decrease in sales from the United States was primarily driven by lower sales of pigment products of $2.8 million. The increase in sales from Latin America was primarily attributable to higher sales of pigment products of $1.5 million.

Comparison of the nine months ended September 30, 2020 and 2019

For the nine months ended September 30, 2020, net income from continuing operations was $23.5 million, compared with $36.9 million for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, net income attributable to common shareholders was $25.1 million, or earnings per share of $0.31, compared with net income attributable to common shareholders of $37.3 million, or earnings per share of $0.45, for the nine months ended September 30, 2019.

Net Sales

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Net sales

$

699,004

$

769,679

$

(70,675)

(9.2)

%

Cost of sales

484,356

536,628

(52,272)

(9.7)

%

Gross profit

$

214,648

$

233,051

$

(18,403)

(7.9)

%

Gross profit as a % of net sales

30.7

%

30.3

%

Net sales decreased by $70.7 million, or 9.2%, for the nine months ended September 30, 2020, compared with the prior-year same period, driven by lower sales in Functional Coatings and Color Solutions of $44.1 million and $26.5 million, respectively. The decrease in net sales was driven by unfavorable volume and mix of $63.2 million and unfavorable foreign currency impacts of $9.8 million, partially mitigated by higher product pricing of $2.3 million.

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Table of Contents

Gross Profit

Gross profit decreased $18.4 million, or 7.9%, for the nine months ended September 30, 2020, compared with the prior-year same period. As a percentage of net sales, gross profit increased approximately 40 basis points to 30.7%. The decrease in gross profit was primarily attributable to a decrease in Functional Coatings of $19.0 million, partially offset by an increase in Color Solutions of $2.0 million. The decrease in gross profit was primarily driven by unfavorable sales volume and mix of $32.7 million and unfavorable foreign currency impacts of $2.7 million, partially mitigated by lower raw material costs of $13.2 million, higher product pricing of $2.3 million and lower manufacturing costs of $1.5 million.

Geographic Revenues

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

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Geographic Revenues on a sales origination basis

EMEA

$

288,244

$

329,270

$

(41,026)

(12.5)

%

United States

256,852

275,073

(18,221)

(6.6)

%

Asia Pacific

99,440

102,210

(2,770)

(2.7)

%

Latin America

54,468

63,126

(8,658)

(13.7)

%

Net sales

$

699,004

$

769,679

$

(70,675)

(9.2)

%

The decline in net sales of $70.7 million, compared with the prior-year same period, was driven by a decrease in sales from all regions. The decrease in sales from EMEA was attributable to lower sales in Functional Coatings and Color Solutions of $31.3 million and $9.7 million, respectively. The decrease in sales from the United States was attributable to lower sales in Color Solutions and Functional Coatings of $17.1 million and $1.1 million, respectively. The decrease in sales from Latin America was attributable to lower sales in Functional Coatings and Color Solutions of $8.0 million and $0.6 million, respectively. The decrease in sales from Asia Pacific was attributable to lower sales in Functional Coatings of $3.7 million, partially offset by higher sales in Color Solutions of $0.9 million.

Selling, General and Administrative Expenses

The following table includes SG&A components with significant changes between 2020 and 2019.

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Personnel expenses (excluding R&D personnel expenses)

$

62,355

$

70,878

$

(8,523)

(12.0)

%

Research and development expenses

26,906

31,079

(4,173)

(13.4)

%

Business development

8,951

6,520

2,431

37.3

%

Incentive compensation

6,109

1,559

4,550

291.9

%

Stock-based compensation

6,550

5,945

605

10.2

%

Intangible asset amortization

4,593

6,607

(2,014)

(30.5)

%

Pension and other postretirement benefits

554

772

(218)

(28.2)

%

Bad debt

158

259

(101)

(39.0)

%

All other expenses

38,231

34,104

4,127

12.1

%

Selling, general and administrative expenses

$

154,407

$

157,723

$

(3,316)

(2.1)

%

SG&A expenses were $3.3 million lower in the nine months ended September 30, 2020, compared with the prior-year same period. The lower SG&A expenses compared to the prior-year same period are primarily driven by lower personnel expenses and research and development expenses, partially offset by higher incentive compensation and business development costs.

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Table of Contents

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.

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Strategic services

$

69,474

$

80,101

$

(10,627)

(13.3)

%

Functional services

72,274

70,118

2,156

3.1

%

Incentive compensation

6,109

1,559

4,550

291.9

%

Stock-based compensation

6,550

5,945

605

10.2

%

Selling, general and administrative expenses

$

154,407

$

157,723

$

(3,316)

(2.1)

%

Restructuring and Impairment Charges

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Employee severance

$

9,792

$

5,748

$

4,044

70.4

%

Other restructuring costs

2,439

2,114

325

15.4

%

Restructuring and impairment charges

$

12,231

$

7,862

$

4,369

55.6

%

Restructuring and impairment charges increased in the nine months ended September 30, 2020, compared with the prior-year same period. The increase primarily relates to costs associated with our Global Optimization Plan, compared with the prior-year same period. Refer to Note 14 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of our optimization plans and related costs.

Interest Expense

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Interest expense

$

17,039

$

19,004

$

(1,965)

(10.3)

%

Amortization of bank fees

2,866

2,780

86

3.1

%

Interest swap amortization

(947)

(947)

%

Interest capitalization

(2,484)

(2,259)

(225)

10.0

%

Interest expense

$

16,474

$

18,578

$

(2,104)

(11.3)

%

Interest expense decreased in the nine months ended September 30, 2020, compared with the prior-year same period. The decrease in interest expense was due to a decrease in the average interest rate, partially offset by an increase in the average long-term debt balance during the nine months ended September 30, 2020, compared with the prior-year same period.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2020 was $10.4 million, or 30.6% of pre-tax income. Income tax expense for the nine months ended September 30, 2019 was $8.9 million, or 19.4% of pre-tax income. The tax expense for the nine months ended September 30, 2020, 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 U.S. taxation of foreign earnings. The tax expense during the nine months ended September 30, 2019, as a percentage of pre-tax income, is lower than the U.S. federal statutory income tax rate of 21% primarily as a result of tax credits.

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Table of Contents

Results of Operations - Segment Information

Comparison of the nine months ended September 30, 2020 and 2019

Functional Coatings

Nine Months Ended

Change due to

September 30,

Volume /

(Dollars in thousands)

2020

2019

$ Change

% Change

Price

Mix

Currency

Other

Segment net sales

$

441,325

$

485,462

$

(44,137)

(9.1)

%

$

2,371

$

(39,012)

$

(7,496)

$

Segment gross profit

125,842

144,812

(18,970)

(13.1)

%

2,371

(17,331)

(2,277)

(1,733)

Gross profit as a % of segment net sales

28.5

%

29.8

%

Net sales decreased compared with the prior-year same period, primarily driven by lower sales in automotive, porcelain enamel, decoration and industrial products of $17.1 million, $15.8 million, $15.2 million and $13.2 million, respectively, partially mitigated by higher sales in electronic products of $16.0 million. The decrease in net sales was driven by unfavorable volume and mix of $39.0 million and foreign currency impacts of $7.5 million, partially mitigated by increased product pricing of $2.4 million. Gross profit decreased from the prior-year same period primarily due to unfavorable volume and mix of $17.3 million, unfavorable manufacturing costs of $9.1 million and unfavorable foreign currency impacts of $2.3 million, partially offset by favorable raw material costs of $7.3 million and increased product pricing of $2.4 million.

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Segment net sales by Region

EMEA

$

192,009

$

223,310

$

(31,301)

(14.0)

%

United States

148,468

149,574

(1,106)

(0.7)

%

Asia Pacific

70,268

73,962

(3,694)

(5.0)

%

Latin America

30,580

38,616

(8,036)

(20.8)

%

Total

$

441,325

$

485,462

$

(44,137)

(9.1)

%

The net sales decrease of $44.1 million was primarily driven by lower sales from all regions. The decrease in sales from EMEA was primarily attributable to lower sales of industrial, decoration and automotive products of $13.1 million, $9.6 million and $6.9 million. The decrease in sales from Latin America was primarily attributable to lower sales of porcelain enamel, automotive and industrial products of $5.7 million, $1.6 million and $0.6 million, respectively. The decrease in sales from Asia Pacific was primarily attributable to decreased sales of decoration and automotive products of $3.8 million and $2.9 million, respectively, partially mitigated by higher sales of industrial products of $3.2 million. The decrease in sales from the United States was primarily attributable to lower sales of automotive, porcelain enamel, industrial and decoration products of $5.7 million, $4.5 million, $2.7 million and $1.8 million, respectively, partially mitigated by higher sales of electronic products of $13.6 million.

Color Solutions

Nine Months Ended

Change due to

September 30,

Volume /

(Dollars in thousands)

2020

2019

$ Change

% Change

Price

Mix

Currency

Other

Segment net sales

$

257,679

$

284,217

$

(26,538)

(9.3)

%

$

(53)

$

(24,181)

$

(2,304)

$

Segment gross profit

89,222

87,220

2,002

2.3

%

(53)

(13,973)

(400)

16,428

Gross profit as a % of segment net sales

34.6

%

30.7

%

Net sales decreased compared with the prior-year same period, primarily driven by lower sales of surface technology, pigment and dispersions and colorants products of $13.7 million, $11.1 million and of $1.5 million, respectively. The decrease in net sales was driven by unfavorable volume and mix of $24.2 million and unfavorable foreign currency impacts of $2.3 million. Gross profit increased from the prior-year same period, primarily due to favorable manufacturing costs of $10.5 million and favorable raw material costs of $5.9 million, partially offset by unfavorable sales volume and mix of $14.0 million and unfavorable foreign currency impacts of $0.4 million.

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Table of Contents

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

% Change

Segment net sales by Region

United States

$

108,384

$

125,499

$

(17,115)

(13.6)

%

EMEA

96,235

105,960

(9,725)

(9.2)

%

Asia Pacific

29,172

28,248

924

3.3

%

Latin America

23,888

24,510

(622)

(2.5)

%

Total

$

257,679

$

284,217

$

(26,538)

(9.3)

%

The net sales decrease of $26.5 million was driven by lower sales from the United States, EMEA and Latin America, partially offset by higher sales from Asia Pacific. The decrease in sales from the United States was primarily driven by lower sales of surface technology, and pigment of $14.2 million and $3.1 million, respectively, partially mitigated by increased sales of dispersions and colorants products of $0.2 million. The decrease in sales from EMEA was primarily attributable to lower sales of pigment and dispersions and colorants products of $7.9 million and $1.6 million, respectively. The decrease in sales from Latin America was attributable to lower sales of pigment products. The increase in sales from Asia Pacific was attributable to increased sales of pigment and surface technology products of $0.5 million and $0.4 million, respectively.

Summary of Cash Flows for the nine months ended September 30, 2020 and 2019

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

Net cash used in operating activities

$

(106,481)

$

(67,240)

$

(39,241)

Net cash provided by investing activities

76,421

21,763

54,658

Net cash used in financing activities

(1,821)

(6,416)

4,595

Effect of exchange rate changes on cash and cash equivalents

174

(667)

841

Decrease in cash and cash equivalents

$

(31,707)

$

(52,560)

$

20,853

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

Nine Months Ended

September 30,

(Dollars in thousands)

2020

2019

$ Change

Cash flows from operating activities:

Net income

$

25,883

$

38,197

$

(12,314)

Loss (gain) on sale of assets

78

(947)

1,025

Depreciation and amortization

30,653

42,041

(11,388)

Interest amortization

2,866

2,780

86

Restructuring and impairment

6,944

9,837

(2,893)

Accounts receivable

(107,551)

(78,082)

(29,469)

Inventories

10,022

(9,182)

19,204

Accounts payable

(78,576)

(63,452)

(15,124)

Other current asset, liabilities and adjustments, net

3,200

(8,432)

11,632

Net cash used in operating activities

$

(106,481)

$

(67,240)

$

(39,241)

Cash flows from operating activities. Cash flows from operating activities decreased $39.2 million during the nine months ended September 30, 2020 compared with the prior-year same period. The decrease in cash from operating activities was primarily due to higher cash outflows for net working capital of $25.4 million and a decrease in net income of $12.3 million.

Cash flows used in investing activities. Cash flows from investing activities increased $54.7 million during the nine months ended September 30, 2020 compared with the prior-year same period. The increase in cash from investing activities was primarily due to higher collections of financing receivables from the receivable sales program (Note 8) of $36.4 million and lower cash outflows for capital expenditures of $19.1 million in the nine months ended September 30, 2020, compared to the prior-year same period.

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Table of Contents

Cash flows from financing activities. Cash flows from financing activities increased $4.6 million during the nine months ended September 30, 2020 compared with the prior-year same period. Compared to the prior-year same period, cash outflows for the purchase of treasury stock were lower by $25.0 million and cash outflows for acquisition-related contingency payments were lower by $5.2 million, partially offset by lower net proceeds from the revolving credit facility of $16.7 million and net borrowings from loans payable increased by $8.9 million.

Capital Resources and Liquidity

Refer to Note 8 to the consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of major debt instruments that were outstanding during 2020.

Off Balance Sheet Arrangements

Consignment and Customer Arrangements for Precious Metals.  We use precious metals, primarily silver, in the production of some of our products. We obtain precious metals from financial institutions under consignment agreements. The financial institutions retain ownership of the precious metals and charge us fees based on the amounts we consign and the period of consignment. These fees were $0.6 million and $0.5 million for the three months ended September 30, 2020 and 2019, respectively and were $2.3 million and $2.2 million for the nine months ended September 30, 2020 and 2019, respectively. We had on hand precious metals owned by participants in our precious metals program of $87.5 million at September 30, 2020, and $66.2 million at December 31, 2019, measured at fair value based on market prices for identical assets.

The consignment agreements under our precious metals program involve short-term commitments that typically mature within 30 to 90 days of each transaction and are typically renewed on an ongoing basis. As a result, the Company relies on the continued willingness of financial institutions to participate in these arrangements to maintain this source of liquidity. On occasion, we have been required to deliver cash collateral. While no deposits were outstanding at September 30, 2020, or December 31, 2019, we may be required to furnish cash collateral in the future based on the quantity and market value of the precious metals under consignment and the amount of collateral-free lines provided by the financial institutions. The amount of cash collateral required is subject to review by the financial institutions and can be changed at any time at their discretion, based in part on their assessment of our creditworthiness.

Bank Guarantees and Standby Letters of Credit. 

At September 30, 2020, the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $5.0 million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.

Liquidity Requirements

Our primary sources of liquidity are available cash and cash equivalents, available lines of credit under the revolving credit facility, and cash flows from operating activities. As of September 30, 2020, we had $72.7 million of cash and cash equivalents. The majority of our cash and cash equivalents were held by foreign subsidiaries. Cash generated in the U.S. is generally used to pay down amounts outstanding under our revolving credit facility and for general corporate purposes, including acquisitions. If needed, we could repatriate the majority of cash held by foreign subsidiaries without the need to accrue and pay U.S. income taxes. We do not anticipate a liquidity need requiring such repatriation of these funds to the U.S.

During the fourth quarter of 2019, we entered into a definitive agreement to sell our Tile Coatings business, which has historically been a part of our Performance Coatings reportable segment. We expect to use the proceeds of the sale to settle long-term obligations.

Our liquidity requirements and uses primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures, acquisition costs, capital investments, strategic optimization plans, precious metals cash collateral requirements, and postretirement obligations. We expect to meet these requirements in the long term through cash provided by operating activities and availability under existing credit facilities or other financing arrangements. Cash flows provided by operating activities are primarily driven by earnings before non-cash charges and changes in working capital needs. As of September 30, 2020, we had liquidity of approximately $562.7 million, consisting of cash and availability under our various credit facilities, primarily our revolving credit facility.

The 2018 Revolving Facility subjects us to a customary financial covenant regarding the Company’s maximum leverage ratio. This covenant under our Amended Credit Facility restricts the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives.

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Table of Contents

As of September 30, 2020, we were in compliance with our maximum leverage ratio covenant of 4.00x as our actual ratio was 3.08, providing $57.7 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, as defined within the Amended Credit Facility, falls below approximately $192 million for the most recently ended trailing four quarters, based on reasonably consistent net debt levels with those as of September 30, 2020, we could become unable to maintain compliance with our leverage ratio covenant. In such case, our lenders could demand immediate payment of outstanding amounts and we would need to seek alternate financing sources to pay off such debts and to fund our ongoing operations. Such financing may not be available on favorable terms, if at all.

Difficulties experienced in global capital markets could affect the ability or willingness of counterparties to perform under our various lines of credit, forward contracts, and precious metals program. These counterparties are major, reputable, multinational institutions, all having investment-grade credit ratings. Accordingly, we do not anticipate counterparty default. However, an interruption in access to external financing could adversely affect our business prospects and financial condition.

We assess on an ongoing basis our portfolio of businesses, as well as our financial and capital structure, to ensure that we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate the possible divestiture of businesses that are not critical to our core strategic objectives and, where appropriate, pursue the sale of such businesses and assets. We also evaluate and pursue acquisition opportunities that we believe will enhance our strategic position. Generally, we publicly announce divestiture and acquisition transactions only when we have entered into a material definitive agreement or closed on those transactions.

Critical Accounting Policies and Their Application

There were no material changes to our critical accounting policies described in “Critical Accounting Policies” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.

Impact of Newly Issued Accounting Pronouncements

Refer to Note 2 to the condensed consolidated financial statements under Item 1 of this Quarterly Report on Form 10-Q for a discussion of accounting standards we recently adopted or will be required to adopt.

Risk Factors

Certain statements contained here and in future filings with the SEC reflect the Company’s expectations with respect to future performance and constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are subject to a variety of uncertainties, unknown risks and other factors concerning the Company’s operations and business environment, which are difficult to predict and are beyond the control of the Company. Factors that could adversely affect our future financial performance include those described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to instruments that are sensitive to fluctuations in interest rates and foreign currency exchange rates.

Our exposure to interest rate risk arises from our debt portfolio. We manage this risk by controlling the mix of fixed-rate versus variable-rate debt after considering the interest rate environment and expected future cash flows. To reduce our exposure to interest rate changes on variable-rate debt, we have entered into interest rate swap agreements. These swaps effectively convert a portion of our variable-rate debt to a fixed rate. Our objective is to limit variability in earnings, cash flows and overall borrowing costs caused by changes in interest rates, while preserving operating flexibility.

We operate internationally and enter into transactions denominated in foreign currencies. These transactions expose us to gains and losses arising from exchange rate movements between the dates foreign currencies are recorded and the dates they are settled. We manage this risk by entering into forward currency contracts in an effort to substantially offset these gains and losses.

The notional amounts, carrying amounts of assets (liabilities), and fair values associated with our exposure to these market risks and sensitivity analysis about potential gains (losses) resulting from hypothetical changes in market rates are presented in the table below.

September 30,

December 31,

(Dollars in thousands)

2020

2019

Variable-rate debt:

Carrying amount(1)

$

801,223

$

801,764

Fair value

787,767

799,750

Increase in annual interest expense from 1% increase in interest rates

2,690

2,656

Decrease in annual interest expense from 1% decrease in interest rates

(2,690)

(2,656)

Fixed-rate debt:

Carrying amount

3,706

3,496

Fair value

3,186

1,557

Change in fair value from 1% increase in interest rates

NM

NM

Change in fair value from 1% decrease in interest rates

NM

NM

Interest rate swaps:

Notional amount

312,018

314,412

Carrying amount and fair value

(26,380)

(14,698)

Change in fair value from 1% increase in interest rates

8,947

11,399

Change in fair value from 1% decrease in interest rates

(3,723)

(10,676)

Cross currency swaps:

Notional amount

338,813

341,419

Carrying amount and fair value

6,962

22,111

Change in fair value from 10% appreciation of U.S. dollar

(35,730)

(34,795)

Change in fair value from 10% depreciation of U.S. dollar

35,730

34,795

Foreign currency forward contracts:

Notional amount

554,586

625,908

Carrying amount and fair value

128

601

Change in fair value from 10% appreciation of U.S. dollar

(4,875)

3,540

Change in fair value from 10% depreciation of U.S. dollar

5,959

(4,144)

(1)The carrying value of the term loan facility is net of unamortized debt issuance costs of $4.0 million and $3.9 million for the period ended September 30, 2020 and December 31, 2019, respectively.

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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Ferro is committed to maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) of the Exchange Act, Ferro has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined those disclosure controls and procedures as of September 30, 2020, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2020.

Changes in Internal Control over Financial Reporting

During the third quarter of 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not observed any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

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PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

In November 2017, Suffolk County Water Authority filed a complaint, Suffolk County Water Authority v. The Dow Chemical Company et al., against the Company and a number of other companies in the U.S. Federal Court for the Eastern District of New York with regard to the product 1,4 dioxane. The plaintiff alleges, among other things, that the Suffolk County water supply is contaminated with 1,4 dioxane and that the defendants are liable for unspecified costs of cleanup and remediation of the water supply, among other damages. The Company has not manufactured 1,4 dioxane since 2008, denies the allegations related to liability for the plaintiff’s claims, and is vigorously defending this proceeding. Since December 2018, additional complaints were filed in the same court by 25 other New York water suppliers against the Company and others making substantially similar allegations regarding the contamination of their respective water supplies with 1,4 dioxane. An additional complaint also was filed by the Hicksville Water District against the Company and others in New York State Supreme Court making substantially similar allegations and seeking damages of $900 million. The Company is likewise vigorously defending these additional actions. The Company currently does not expect the outcome of these proceedings to have a material adverse impact on its consolidated financial condition, results of operations, or cash flows, net of any insurance coverage. However, it is not possible to predict the ultimate outcome of these proceedings due to the unpredictable nature of litigation.

In addition to the proceedings described above, the Company and its consolidated subsidiaries are subject from time to time to various claims, lawsuits, investigations, and proceedings related to products, services, contracts, environmental, health and safety, employment, intellectual property, and other matters, including with respect to divested businesses. The outcome of such matters is unpredictable, our assessment of them may change, and resolution of them could have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. We do not currently expect the resolution of such matters to materially affect the consolidated financial position, results of operations, or cash flows of the Company.

Item 1A.  Risk Factors

Reference is made to Part 1, Item 1A. “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The risk factor set forth below updates, and should be read together with, such risk factors. Furthermore, the impact of the novel coronavirus (“COVID-19”) may exacerbate the risks discussed therein, any of which could have a material effect on the Company.

COVID-19 has spread around the world, including in Asia, Europe, the Middle East, and North and South America, all of which are regions in which Ferro has operations. The spread of COVID-19 has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. The measures taken by the authorities have impacted and may further impact certain of our workforce and operations, the operations of our customers, and those of our vendors and suppliers. Although certain jurisdictions have begun to ease restrictions, there still is considerable uncertainty regarding measures that authorities may implement in the future, which may restrict our operations and those of our suppliers and customers and disrupt logistics and other supply and distribution service providers. The spread of COVID-19 has caused us to modify certain of our business practices with respect to certain products (including site operations, employee workplace practices, travel, and participation in meetings, events, and conferences), and we may take further actions as required or recommended by authorities or deemed to be in the best interests of our employees and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be adversely affected. These circumstances could negatively impact our business, results of operations, financial condition and cash flows.

The degree to which COVID-19 will impact our results depends on many factors, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, actions to contain the virus or limit its impact, and the speed and extent to which normal economic and operating conditions resume. Even after the COVID-19 outbreak has subsided, we may experience material adverse impacts to our business as a result of the economic impact and any recession or other macroeconomic weakness that may occur.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Our Board of Directors has not declared any dividends on common stock during 2020 or 2019. The Company’s Amended Credit Facility restricts the amount of dividends we can pay on our common stock. Any future dividends declared would be at the discretion of our Board of Directors and would depend on our financial condition, results of operations, cash flows, contractual obligations, the terms our financing agreements at the time a dividend is considered, and other relevant factors.

The following table summarizes purchases of our common stock by the Company and affiliated purchasers during the three months ended September 30, 2020:

Total Amount of

Maximum Dollar

Shares Purchased

Amount that May

Total Number

as Part of Publicly

Yet Be Purchased

of Shares

Average Price

Announced Plans

Under the Plans

(Dollars in thousands, except for per share amounts)

Purchased

Paid per Share

or Programs

or Programs

July 1, 2020 to July 31, 2020

$

$

$

46,192,535

August 1, 2020 to August 31, 2020

$

$

$

46,192,535

September 1, 2020 to September 30, 2020

$

$

$

46,192,535

Total

$

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

The exhibits listed in the attached Exhibit Index are the exhibits required by Item 601 of Regulation S-K.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FERRO CORPORATION

(Registrant)

Date:

November 4, 2020

/s/ Peter T. Thomas

Peter T. Thomas

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

Date:

November 4, 2020

/s/ Benjamin J. Schlater

Benjamin J. Schlater

Group Vice President and Chief Financial Officer

(Principal Financial Officer)

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EXHIBIT INDEX

The following exhibits are filed with this report or are incorporated here by reference to a prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934.

Exhibit:

3

Articles of incorporation and by-laws:

3.1

Eleventh Amended Articles of Incorporation of Ferro Corporation (incorporated by reference to Exhibit 4.1 to Ferro Corporation’s Registration Statement on Form S3, filed March 5, 2008).

3.2

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed December 29, 1994 (incorporated by reference to Exhibit 4.2 to Ferro Corporation’s Registration Statement on Form S3, filed March 5, 2008).

3.3

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed on June 23, 1998 (incorporated by reference to Exhibit 4.3 to Ferro Corporation’s Registration Statement on Form S3, filed March 5, 2008).

3.4

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed on October 17, 2011 (incorporated by reference to Exhibit 3.1 to Ferro Corporation’s Current Report on Form 8-K, filed October 17, 2011).

3.5

Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro Corporation filed on April 25, 2014 (incorporated by reference to Exhibit 3.5 to Ferro’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2014).

3.6

Ferro Corporation Amended and Restated Code of Regulations (incorporated by reference to Exhibit 3.1 to Ferro Corporation's current Report on Form 8-K filed December 12, 2016).

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Certifications:

31.1

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).

31.2

Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).

32.1

Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350.

32.2

Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350.

101

Inline XBRL Documents:

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Schema Document

101.CAL

Inline XBRL Calculation Linkbase Document

101.LAB

Inline XBRL Labels Linkbase Document

101.PRE

Inline XBRL Presentation Linkbase Document

101.DEF

Inline XBRL Definition Linkbase Document

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL and contained in Exhibit 101.

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