FOE 10-K Fiscal year ended Dec. 31, 2016



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________

Form 10-K

( Mark One)



For the fiscal year ended December 31, 2016

or

For the transition period from _________ to __________

Commission file number 1-584

FERRO CORPORATION

(Exact name of registrant as specified in its charter)



Registrant’s telephone number, including area code: 216-875-5600





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES ☐ NO ☒

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒ NO ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained here, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

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

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

The aggregate market value of Ferro Corporation Common Stock, par value $1.00, held by non-affiliates and based on the closin g sale price as of June 30, 2016 , was approximately $1,096,926 ,000 .

On January 31, 2017, there were 83,438,992 shares of Ferro Corporation Common Stock, par value $1.00 outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statem ent for Ferro Corporation’s 2017 Annual Meeting of Shareholders are incorporated into Part III of this Annual Report on Form 10-K.





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TABLE OF CONTENTS





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PART I

Item 1 — Business

History, Organization and Products

Ferro Corporation was incorporated in Ohio in 1919 as an enameling company and today is a leading producer of specialty materials that are sold to a broad range of manufacturers who, in turn, make products for many end-use markets.  When we use the terms “Ferro,” “we,” “us” or “the Company,” we are referring to Ferro Corporation and its subsidiaries unless indicated otherwise.

Ferro’s products fall into two general categories: functional coatings, which perform specific functions in the manufacturing processes and end products of our customers; and color solutions, which provide aesthetic and performance characteristics to our customers’ products. Our products are manufactured in approximately 41 facilities around the world.  They include:

 Frits, porcelain and other glass enamels, glazes, stains, decorating colors, pigments, inks, polishing materials, dielectrics, electronic glasses, and other specialty coatings.

Ferro develop s and deliver s innovative products to our customers based on our strengths in the following technologies :

We differentiate ourselves in our industry by the consistent high quality of our products, combined with delivery of localized technical service and customized application technology support.  Our value-added technology services assist customers in their material specification and evaluation, product design, and manufacturing process characterization in order to help them optimize the application of our products.

Ferro’s operations are divided into four business units, which comprise three reportable segments listed below:

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Financial information about our segments is included herein in Note 20 to the consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

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Markets and Customers

Ferro’s products are used in a variety of product applications in markets including:



Many of our products are used as coatings on our customers’ products, such as glazes and decorations on tile, glass and dinnerware. Other products are supplied to customers as powders that are used to manufacture electronic components and other products. Still other products are added during our customers’ manufacturing processes to provide desirable properties to their end product. Often, our products are a small portion of the total cost of our customers’ products, but they can be critical to the appearance or functionality of those products.

Our customers include manufacturers of ceramic tile, major appliances, construction materials, aut omobile parts, automobile, architectural and container glass, and electronic components and devices . Many of our customers, including makers of major appliances and automobile parts, purchase materials from more than one of our business units. Our customer base is well diversified both geographically and by end market.

We generally sell our products directly to our customers. However, a portion of our business uses indirect sales channels, such as agents and distributors, to del iver products to mar ket. In 2016 , no single customer or related group of customers represented more than 10% of net sales. In addition, none of our reportable segments is dependent on any single customer or related group of customers.

Backlog of Orders and Seasonality

Generally, there is no significant lead time between customer orders and delivery in any of our business segments. As a result, we do not consider that the dollar amount of backlogged orders believed to be firm is material information for an understanding of our business. We also do not regard any material part of our business to be seasonal. However, customer demand has historically been higher in the second quarter when building and renovation markets are particularly active, and this quarter is normally the strongest for sales and operating profit.

Competition

In most of our markets, we have a substantial number of competitors, none of which is dominant. Due to the diverse nature of our product lines, no single competitor directly matches all of our product offerings. Our competition varies by product and by region, and is based primarily on price, product quality and performance, customer service and technical support, and our ability to develop custom products to meet specific customer requirements.

We are a worldwide leader in the production of glass enamels, porcelain enamels, and ceramic tile coatings. There is strong competition in our markets, ranging from large multinational corporations to local producers. While many of our customers purchase customized products and formulations from us, our customers could generally buy from other sources, if necessary.

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Raw Materials and Supplier Relations

Raw materials widely used in our operations include:









These raw materials make up a large portion of our product costs in certain of our product lines, and fluctuations in the cost of raw materials can have a significant impact on the financial performance of the related businesses. We attempt to pass through to our customers raw material cost increases.

We have a broad supplier base and, in many instances, multiple sources of essential raw materials are available worldwide if problems arise with a particular supplier. We maintain many comprehensive supplier agreements for strategic and critical raw materials. We did not encounte r raw material shortages in 2016 that significantly affected our manufacturing operations, but we are subject to volatile raw material costs that can affect our results of operations.

Environmental Matters

As part of the production of some of our products, we handle, process, use and store hazardous materials. As a result, we operate manufacturing facilities that are subject to a broad array of environmental laws and regulations in the countries in which we operate, particularly for plant wastes and emissions. In addition, some of our products are subject to restrictions under laws or regulations such as California ’s Proposition 65 or the European Union’s (“EU”) chemical substances directive. The costs to comply with complex environmental laws and regulations are significant and will continue for the industry and us for the foreseeable future. These routine costs are expensed as they are incurred. While these costs may increase in the future, they are not expected to have a material impact on our financial position, liquidity or results of operations. We believe that we are in substantial compliance with the environmental regulations to which our operations are subject and that, to the extent we may not be in compliance with such regulations, non-compliance will not have a materially adverse effect on our financial position, liquidity or results of operations.

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Our policy is to operate our plants and facilities in a manner that protects the environment and the health and safety of our employees and the public. We intend to continue to make expenditures for environmental protection and improvements in a timely manner consistent with available technology. Although we cannot precisely predict future environmental spending, we do not expect the costs to have a material impact on our financial position, liquidity or results of operations. Capital expenditures for environmental protection were $ 1.4 million in 2016 , $5.5 million in 2015 , and $0.7 million in 2014 . We also accrue for environmental remediation costs when it is probable that a liability has been incurred and we can reasonably estimate the amount. We determine the timing and amount of any liability based upon assumptions regarding future events, and inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. We adjust these liabilities periodically as remediation efforts progress, the nature and extent of contamination become s more certain, or as additional technical or legal information become s available.

Research and Development

We are involved worldwide in research and development activities relating to new and existing products, services and technologies required by our customers’ continually changing markets. Our research and development resources are organized into centers of excellence that support our regional and worldwide major business units . These centers are augmented by local laboratories that provide technical service and support to meet customer and market needs in various geographic areas.

Total expenditures for product and application technology, including research and development, customer technical support and other related activities , were $27.3 million in 2016 , $25.6 million in 2015 , and $22.7 million in 2014 .

Patents, Trademarks and Licenses

We own a substantial number of patents and patent applications relating to our various products and their uses. While these patents are of importance to us and we exercise diligence to ensure that they are valid, we do not believe that the invalidity or expiration of any single patent or group of patents would have a material adverse effect on our businesses. Our patents will expire at various dates through the year 2034 . We also use a number of trademarks that are important to o ur businesses as a whole or to particular segment s of our business . We believe that these trademarks are adequately protected.

Employees

At December 31, 2016 , we employed 5,125 full -time employees, including 4,326 employees in our foreign c onsolidated subsidiaries and 799 in the Unit ed States (“U.S.”) . T otal employment increased by 218 in o ur foreign subsidiaries and by 6 1 in the U.S. from the prior year end due to the additions related to acquisitions and new b usiness opportunities net of cost r eduction initiatives .

Collectiv e bargaining agreements cover 12.5 % of our U.S. workforce. Approximately 8.1% of all U.S. employees are affected by labor agreements that expire in 2017, and we expect to complete renewals of these agreements with no significant disruption to the related businesses. We consider our relations with our employees, including those covered by collective bargaining agreements, to be good.

Our employees in Europe have protections afforded them by local laws and regulations through unions and works councils. Some of these laws and regulations may affect the timing, amount and nature of restructuring and cost reduction programs in that region.

Domestic and Foreign Operations

We began international operations in 1927. Our products are manufactured and/or distributed through our consolidated subsidiaries and unconsolidated affiliates in the following countries:



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Consolidated Subsidiaries:





Unconsolidated Affiliates:







Financial information for geograp hic areas is included in Note 20 to the consolidated financial statements under Item 8 of this Annual Report on Form 10-K . More than 70% of our net sales are outside of the U.S. Our customers represent more than 30 industries and operate in approximately 100 countries.

Our U.S. parent company receives technical service fees and/or royalties from many of its foreign subsidiaries. As a matter of corporate policy, the foreign subsidiaries have historically been expected to remit a portion of their annual earnings to the U.S. parent company as dividends. To the extent earnings of foreign subsidiaries are not remitted to the U.S. parent company, those earnings are indefinitely re-invested in those subsidiaries.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including any amendments, will be made available free of charge on our Web site, www.ferro.com, as soon as reasonably practical, following the filing of the reports with the U.S. Securities and Exchange Commission (“SEC”). Our Corporate G overnance Principles, legal and ethical p olicies, Guidelines for Determining Director Independence, and charters for our Audit Committee, Compensation Committee and Governance and Nomination Committee are available free of charge on our Web site or to any shareholder who requests them from the Ferro Corporation Investor Relations Department located at 6060 Parkland Blvd., Suite 250, Mayfield Heights, Ohio, 44124.

Forward-looking Statements

Certain statements contained here and in future filings with the SEC reflect our 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 our operations and the business environment, which are difficult to predict and are beyond our control.

Item 1A — Risk Fac tors

Many factors could cause our actual results to differ materially from those suggested by statements contained in this filing and could adversely affect our future financial performance. Such factors include the following:

We sell our products into industries where demand has been unpredictable, cyclical or heavily influenced by consumer spending, and such demand and our results of operations may be further impacted by macro-economic circumstances.

We sell our products to a wide variety of customers who supply many different market segments. Many of these market segments, such as building and renovation, major appliances, transportation, and electronics, are cyclical or closely tied to consumer demand. Consumer demand is difficult to accurately forecast and incorrect forecasts of demand or unforeseen reductions in demand can adversely

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affect costs and profitability due to factors such as underused manufacturing capacity, excess inventory, or working capital needs. Our forecasting systems and modeling tools may not accurately predict changes in demand for our products or other market conditions.

Our results of operations are materially affected by conditions in capital markets and economies in the U.S. and elsewhere around the world. Concerns over fluctuating prices, energy costs, geopolitical issues, government deficits and debt loads, and the availability and cost of credit have contributed to economic uncertainty around the world. Our customers may be impacted by these conditions and may modify, delay, or cancel plans to purchase our products. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. A reduction in demand or inability of customers to pay us for our products may adversely affect our earnings and cash flow.

We strive to improve operating margins through sales growth, price increases, productivity gains, and improved purchasing techniques, but we may not achieve the desired improvements.

We work to improve operating profit margins through activities such as growing sales to achieve increased economies of scale, increasing prices, improving manufacturing processes, and adopting purchasing techniques that lower costs or provide increased cost predictability to realize cost savings. However, these activities depend on a combination of improved product design and engineering, effective manufacturing process control initiatives, cost-effective redistribution of production, and other efforts that may not be as successful as anticipated. The success of sales growth and price increases depends not only on our actions but also on the strength of customer demand and competitors' pricing responses, which are not fully predictable. Failure to successfully implement actions to improve operating margins could adversely affect our financial performance.

The global scope of our operations exposes us to risks related to currency conversion rates, new and different regulatory schemes and changing economic, regulatory, social and political conditions around the world.

More than 70% of our ne t sales during 2016 were outside of the U.S. In order to support our customers, access regional markets and compete effectively, our operations are located around the world. Our operations are subject to economic, regulatory, social and political conditions in multiple locations and we are subject to risks relating to currency conversion rates. We also may encounter difficulties expanding into additional growth markets around the world. Other risks inherent in international operations include the following:



We have subsidiaries in Turkey and in Egypt, countries with recent political strains that are located near politically volatile regions. Such conditions could potentially impact our ability to recover both the cost of our investments and earnings from those investments. While we attempt to anticipate these changes and manage our business appropriately in each location where we do business, these changes are often beyond our control and difficult to forecast.

The consequences of these risks may have significant adverse effects on our results of operations or financial position, and if we fail to comply with applicable laws and regulations, we could be exposed to civil and criminal penalties, reputational harm, and restrictions on our operations.

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We may not be able to complete or successfully integrate future acquisitions into our business, which could adversely affect our business or results of operations.

As part of our strategy, we have and intend to continue to pursue acquisitions. Our success in accomplishing growth through acquisitions may be limited by the availability and suitability of acquisition candidates and by our financial resources, including available cash and borrowing capacity. Acquisitions involve numerous risks, including difficulty determining appropriate valuation, integrating operations, technologies, services and products of the acquired product lines or businesses, personnel turnover, and the diversion of management's attention from other business matters. In addition, we may be unable to achieve anticipated benefits from these acquisitions in the time frame that we anticipate, or at all, which could adversely affect our business or results of operations.

We have a presence in regions of the world where it can be difficult for a multi-national company such as Ferro to compete lawfully with local competitors, which may cause us to lose business opportunities.

We pursue business opportunities around the world and many of our most promising growth opportunities are in developing markets and the Asia-Pacific region, including the People’s Republic of China, Latin America , and the Middle East . Although we have been able to compete successfully in those markets to date, local laws and customs can make it difficult for a multi-national company such as Ferro to compete on a “level playing field” with local competitors without engaging in conduct that would be illegal under U.S. or other countries ’ anti- bribery laws. Our strict policy of observing the highest standards of legal and ethical conduct may cause us to lose some otherwise attractive business opportunities to competitors in these regions.

We have undertaken and continue to undertake optimization and cost-savings initiatives, including restructuring programs, to improve our operating performance, but we may not be able to implement and/or administer these initiatives in the manner contemplated and these initiatives may not produce the desired results.

We have undertaken optimization and cost-savings initiatives, including restructuring programs, and may undertake additional optimization and cost-savings initiatives in the future. These initiatives involve, among other things, restructuring programs that involve plant closures and staff reductions. Although we expect these initiatives to help us achieve incremental cost savings and operational efficiencies, we may not be able to implement and/or administer these initiatives, including plant closures and staff reductions, in the manner contemplated, which could cause the initiatives to fail to achieve the desired results. Additionally, the implementation of these initiatives may result in impairment charges, some of which could be material. Even if we do implement and administer these initiatives in the manner contemplated, they may not produce the desired results. Accordingly, the initiatives that we have implemented and those that we may implement in the future may not improve our operating performance and may not help us achieve cost savings. Failure to successfully implement and/or administer these initiatives could have an adverse effect on our financial performance.

Our businesses depend on a continuous stream of new products, and failure to introduce new products could affect our sales, profitability and liquidity.

One way that we remain competitive is by developing and introducing new and improved products on an ongoing basis. Customers continually evaluate our products in comparison to those offered by our competitors. A failure to introduce new products at the right time that are price competitive and that provide the performance and other features required by customers could adversely affect our sales, or could require us to compensate by lowering prices. In addition, when we invest in new product development, we face risks related to production delays, cost over-runs and unanticipated technical difficulties, which could impact sales, profitability and/or liquidity.

Our strategy includes seeking opportunities in new growth markets, and failure to identify or successfully enter such markets could affect our ability to grow our revenues and earnings.

Certain of our products are sold into mature markets and part of our strategy is to identify and enter into markets growing more rapidly. These growth opportunities may involve new geographies, new product lines, new technologies, or new customers.  We may not successfully exploit such opportunities and our ability to increase our revenue and earnings could be impacted as a result .



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We rely on information systems to conduct our business and interruption, or damage to, or failure or compromise of, these systems may adversely affect our business and results of operations.

We rely on information systems to obtain, process, analyze and manage data to forecast and facilitate the purchase and distribution of our products; to receive, process, and ship orders on a ti mely basis; to account for our product and service transactions with customers; to manage the accurate billing and collections for thousands of customers; to process payments to suppliers; and to manage data and records relating to our employees, contractors, and other individuals. Our business and results of operations may be adversely affected if these systems are interrupted, damaged, or compromised or if they fail for any extended period of time, due to events including but not limited to programming errors, computer viruses and security breaches. Information privacy and security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks, and prevention of privacy or security breaches cannot be assured. In addition, the processing and storage of certain information is increasingly subject to privacy and data security regulations and such regulations are country-specific and subject to differing interpretations and may be inconsistent among jurisdictions. We may be required to expend additional resources to continue to enhance our information privacy and security measures, investigate and remediate any information security vulnerabilities and/or comply with regulatory requirements. In addition, third-party service providers are responsible for managing a significant portion of our information systems, and we are subject to risk as a result of possible information privacy and security breaches of those third parties. The consequences of these risks could adversely impact our results of operations, financial condition, and cash flows.

We are subject to a number of restrictive covenants under our revolving credit facility, which could affect our flexibility to fund ongoing operations and strategic initiatives, and, if we are unable to maintain compliance with such covenants, could lead to significant challenges in meeting our liquidity requirements.

Our New Credit Facility , entered into on February 14, 2017, contains a number of restrictive covenants, including those described in more detail in Note 8 to the consolidated financial statements under Item 8 of this Annual Report on Form 10 ‑K. These covenants include 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 New Credit Facility also contains standard provisions relating to conditions of borrowing and customary events of default, including the non-payment of obligations by the Company and the bankruptcy of the Company. Specific to the revolving credit facility, the Company is subject to a financial covenant regarding the Company’s max imum leverage ratio . If an event of default occurs, all amounts outstanding under the New Credit Facility may be accelerated and become immediately due and payable. The New Credit Facility is described in more detail in “Capital Resources and Liquidity” under Item 7 and in Note 8 to the consolidated financial statements under Item 8 of this Annual Report on Form 10-K.

We depend on external financial resources, and the economic environment and credit market uncertainty could interrupt our access to capital markets, borrowings, or financial transactions to hedge certain risks, which could adversely affect our financial condition.

At December 31, 2016 , we had approximately $574.5 million of short-term and long-term debt with varying maturities and approximately $35.1 million of off balance sheet arrangements, including consignment arrangements for precious metals, bank guarantees, and standby letters of credit. These arrangements have allowed us to make investments in growth opportunities and fund working capital requirements. In addition, we may enter into financial transactions to hedge certain risks, including foreign exchange, commodity pricing, and sourcing of certain raw materials. Our continued access to capital markets, the stability of our lenders, customers and financial partners and their willingness to support our needs are essential to our liquidity and our ability to meet our current obligations and to fund operations and our strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could adversely affect our business prospects and financial condition. See further information regarding our liquidity in “Capital Resources and Liquidity” under Item 7 and in Note 8 to the consolidated financial statements under Item 8 of this Annual Report on Form 10 ‑K.

We depend on reliable sources of energy and raw materials, minerals and other supplies, at a reasonable cost, but the availability of these materials and supplies could be interrupted and/or their prices could change and adversely affect our sales and profitability.

We purchase energy and many raw materials, which we use to manufacture our products. Changes in their availability or price could affect our ability to manufacture enough products to meet customers' demands or to manufacture products profitably. We try to maintain multiple sources of raw materials and supplies where practical, but this may not prevent unanticipated changes in their

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availability or cost and, for certain raw materials, there may not be alternative sources. We may not be able to pass cost increases through to our customers. Significant disruptions in availability or cost increases could adversely affect our manufacturing volume or costs, which could negatively affect product sales or profitability of our operations.

Sales of our products to certain customers or into certain industries may expose us to different and complex regulatory regimes.

We seek to expand our customer base and the industries into which we sell. Selling products to certain customers or into certain industries, such as governments or the defense industry, requires compliance with regulatory regimes that do not apply to sales involving other customers or industries and that can be complex and difficult to navigate. Our failure to comply with these regulations could result in liabilities or damage to our reputation, which could negatively impact our business, financial condition, or results of operations.

Regulatory authorities in the U.S., European Union and elsewhere are taking a much more aggressive approach to regulating hazardous materials and other substances, and those regulations could affect sales of our products.

Legislation and regulations concerning hazardous materials and other substances can restrict the sale of products and/or increase the cost of producing them. Some of our products are subject to restrictions under laws or regulations such as California’s Proposition 65 or the EU’s chemical substances directive. The EU “REACH” registration system requires us to perform studies of some of our products or components of our products and to register the information in a central database, increasing the cost of these products. As a result of such regulations, customers may avoid purchasing some products in favor of less hazardous or less costly alternatives. It may be impractical for us to continue manufacturing heavily regulated products, and we may incur costs to shut down or transition such operations to alternative products. These circumstances could adversely affect our business, including our sales and operating profits.

The markets for our products are highly competitive and subject to intense price competition, which could adversely affect our sales and earnings performance.

Our customers typically have multiple suppliers from which to choose. If we are unwilling or unable to provide products at competitive prices, and if other factors, such as product performance and value-added services do not provide an offsetting competitive advantage, customers may reduce, discontinue, or decide not to purchase our products. If we could not secure alternate customers for lost business, our sales and earnings performance could be adversely affected.

If we are unable to protect our intellectual property rights , including trade secrets, or to successfully resolve claims of infringement brought against us, our product sales and financial performance could be adversely affected.

Our performance may depend in part on our ability to establish, protect and enforce intellectual property rights with respect to our products, technologies and proprietary rights and to defend against any claims of infringement, which involves complex legal, scientific and factual questions and uncertainties. We may have to rely on litigation to enforce our intellectual property rights. The intellectual property laws of some countries may not protect our rights to the same extent as the laws of the U.S. In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. If litigation that we initiate is unsuccessful, we may not be able to protect the value of some of our intellectual property. In the event a claim of infringement against us is successful, we may be required to pay royalties or license fees to continue to use technology or other intellectual property rights that we have been using or we may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable time.

Our operations are subject to operating hazards and, as a result, to stringent environmental, health and safety regulations, and compliance with those regulations could require us to make significant investments.

Our production facilities are subject to hazards associated with the manufacture, handling, storage, and transportation of chemical materials and products. These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination and other environmental damage and could have an adverse effect on our business, financial condition or results of operations.

We strive to maintain our production facilities and conduct our manufacturing operations in a manner that is safe and in compliance with all applicable environmental, health and safety regulations. Compliance with changing regulations, or other circumstances, may require us to make significant capital investments, incur training costs, make changes in manufacturing processes or product

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formulations, or incur costs that could adversely affect our profitability, and violations of these laws could lead to substantial fines and penalties. These costs may not affect competitors in the same way due to differences in product formulations, manufacturing locations or other factors, and we could be at a competitive disadvantage, which might adversely affect financial performance.

We have limited or no redundancy for certain of our manufacturing facilities, and damage to or interference with those facilities could interrupt our operations, increase our costs of doing business and impair our ability to deliver our products on a timely basis.

If certain of our existing production facilities become incapable of manufacturing products for any reason, we may be unable to meet production requirements, we may lose revenue and we may not be able to maintain our relationships with our customers. Without operation of certain existing production facilities, we may be limited in our ability to deliver products until we restore the manufacturing capability at the particular facility, find an alternative manufacturing facility or arrange an alternative source of supply. Although we carry business interruption insurance to cover lost revenue and profits in an amount we consider adequate, this insurance does not cover all possible situations. In addition, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing customers resulting from our inability to produce products for them.

If we are unable to manage our general and administrative expenses, our business, financial condition or results of operations could be negatively impacted.

We may not be able to manage our administrative expense in all circumstances. While we attempt to effectively manage such expenses, including through projects designed to create administrative efficiencies, increases in staff-related and other administrative expenses may occur from time to time. Recently, we have made significant efforts to achieve general and administrative cost savings and improve our operational performance. As a part of these initiatives, we have and will continue to consolidate business and management operations and enter into arrangements with third parties offering additional cost savings. It cannot be assured that our strategies to reduce our general and administrative costs and improve our operating performance will be successful or achieve the anticipated savings.

Our multi-jurisdictional tax structure may not provide favorable tax efficiencies.

We conduct our business operations in a number of countries and are subject to taxation in those jurisdictions. While we seek to minimize our worldwide effective tax rate, our corporate structure may not optimize tax efficiency opportunities. We develop our tax position based upon the anticipated nature and structure of our business and the tax laws, administrative practices and judicial decisions now in effect in the countries in which we have assets or conduct business, which are subject to change or differing interpretations. In addition, our effective tax rate could be adversely affected by several other factors, including: increases in expenses that are not deductible for tax purposes, the tax effects of restructuring charges or purchase accounting for acquisitions, changes related to our ability to ultimately realize future benefits attributed to our deferred tax assets, including those related to other-than-temporary impairment, and a change in our decision to indefinitely reinvest foreign earnings. Further, we are subject to review and audit by both domestic and foreign tax authorities, which may result in adverse decisions. Increased tax expense could have a negative effect on our operating results and financial condition.

We have significant deferred tax assets, and if we are unable to utilize these assets, our results of operations may be adversely affected.

To fully realize the carrying value of our net deferred tax assets, we will have to generate adequate taxable profits in various tax jurisdictions. At December 31, 2016 , we had $80.3 million of net deferred tax assets, after valuation allowances. If we do not generate adequate profits within the time periods required by applicable tax statutes, the carrying value of the tax assets will not be realized. If it becomes unlikely that the carrying value of our net deferred tax assets will be realized, the valuation allowances may need to be increased in our consolidated financial statements, adversely affecting results of operations. Further information on our deferred tax assets is presented in Note 10 to the consolidated financial statements under Item 8 of this Annual Report on Form 10 ‑K.

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We may not be successful in implementing our strategies to increase our return on invested capital.

We are taking steps to generate a higher return on invested capital. There are risks associated with the implementation of these steps, which may be complicated and may involve substantial capital investment. To the extent we fail to achieve these strategies, our results of operations may be adversely affected.

We are subject to stringent labor and employment laws in certain jurisdictions in which we operate, we are party to various collective bargaining arrangements, and our relationship with our employees could deteriorate, which could adversely impact our operations.

A majority of our full-time employees are employed outside the U.S. In certain jurisdictions where we operate, labor and employment laws are relatively stringent and, in many cases, grant significant job protection to certain employees, including rights on termination of employment. In addition, in certain countries where we operate, our employees are members of unions or are represented by works councils. We are often required to consult and seek the consent or advice of these unions and/or works councils. These regulations and laws, coupled with the requirement to consult with the relevant unions or works councils, could have a significant impact on our flexibility in managing costs and responding to market changes.

Furthermore, approximately 12.5 % of our U.S. employees as of December 31, 2016 , are subject to collective bargaining arrangements or similar arrangements. Approximately 8.1% of all U.S. employees are affected by labor agreements that expire in 2017, and we expect to complete renewals of these agreements with no significant disruption to the related businesses. W hile we expect to be able to renew these  agreements without significant disruption to our business when they are scheduled to expire, there can be no assurance that we will be able to negotiate labor agreements on satisfactory terms or that actions by our employees will not be disruptive to our business. If these workers were to engage in a strike, work stoppage or other slowdown or if other employees were to become unionized, we could experience a significant disruption of our operations and/or higher ongoing labor costs, which could adversely affect our business, financial condition and results of operations.

Employee benefit costs, especially postretirement costs, constitute a significant element of our annual expenses, and funding these costs could adversely affect our financial condition.

Employee benefit costs are a significant element of our cost structure. Certain expenses, particularly postretirement costs under defined benefit pension plans and healthcare costs for employees and retirees, may increase significantly at a rate that is difficult to forecast and may adversely affect our financial results, financial condition or cash flows. Changes in the applicable discount rate can affect our postretirement obligation. Declines in global capital markets may cause reductions in the value of our pension plan assets. Such circumstances could have an adverse effect on future pension expense and funding requirements. Further information regarding our retirement benefits is presented in Note 12 to the consolidated financial statements under Item 8 of this Annual Report on Form 10 ‑K.

Our implementation and operation of business information systems and processes could adversely affect our results of operations and cash flow.

We have been implementing and operating information systems and related business processes for our business operations. Implementation and operation of information systems and related processes involves risk, including risks related to programming and data transfer. Costs of implementation also could be greater than anticipated. In addition, we may be unable or decide not to implement such systems and processes in certain locations. Inherent risks, decisions and constraints related to implementation and operation of information systems could result in operating inefficiencies and could impact our ability to perform business transactions. These risks could adversely impact our results of operations, financial condition, and cash flows.

We are subject to risks associated with outsourcing functions to third parties.

We have entered into outsourcing agreements with third parties, and rely on such parties, to provide certain services in support of our business. One such vendor provides a number of business services related to our information systems and finance and accounting activity. Arrangements with third party service providers may make our operations vulnerable if vendors fail to provide the expected service or there are changes in their own operations, financial condition, or other matters outside of our control. If these service providers are unable to perform to our requirements or to provide the level of service expected, our operating results and financial condition may

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suffer and we may be forced to pursue alternatives to provide these services, which could result in delays, business disruptions and additional expenses.

There are risks associated with the manufacture and sale of our materials into industries making products for sensitive applications.

We manufacture and sell materials to parties that make products for sensitive applications, such as medical devices. The supply of materials that enter the human body involves the risk of injury to consumers, as well as commercial risks. Injury to consumers could result from, among other things, tampering by unauthorized third parties or the introduction into the material of foreign objects, substances, chemicals and other agents during the manufacturing, packaging, storage, handling or transportation phases. Shipment of adulterated materials may be a violation of law and may lead to an increased risk of exposure to product liability or other claims, product recalls and increased scrutiny by federal and state regulatory agencies. Such claims or liabilities may not be covered by our insurance or by any rights of indemnity or contribution that we may have against third parties. In addition, the negative publicity surrounding any assertion that our materials caused illness or injury could have a material adverse effect on our reputation with existing and potential customers, which could negatively impact our business, operating results or financial condition.

We are exposed to lawsuits in the normal course of business, which could harm our business.

We are from time to time exposed to certain legal proceedings, which may include claims involving product liability, infringement of intellectual property rights of third parties and other claims. Due to the uncertainties of litigation, we can give no assurance that we will prevail on claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. We do not believe that lawsuits we currently face are likely to have a material adverse effect on our business, operating results or financial condition. Future claims or lawsuits, if they were to result in a ruling adverse to us, could give rise to substantial liability, which could have a material adverse effect on our business, operating results or financial condition.

We are exposed to intangible asset risk, and a write down of our intangible assets could have an adverse impact to our operating results and financial position.

We have recorded intangible assets, including goodwill, in connection with business acquisitions. We are required to perform goodwill impairment tests on at least an annual basis and whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our annual and other periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position. See further information regarding our goodwill and other intangible assets in “Critical Accounting Policies” under Item 7 and in Note 7 to the consolidated financial statements under Item 8 of this Form 10-K.

Interest rates on some of our borrowings are variable, and our borrowing costs could be adversely affected by interest rate increases.

Portions of our debt obligations have variable interest rates. Generally, when interest rates rise, our cost of borrowings increases. We estimate, based on the debt obligations outstanding at December 31, 2016 , that a one percent increase in interest rates would cause interest expense to increase by $5.6 million annually . Although interest rates have remained relatively stable over the past few years, future increases could raise our cost of borrowings and adversely affect our financial performance. See further information regarding our interest rates on our debt obligations in “Quantitative and Qualitative Disclosures about Market Risk” under Item 7A and in Note 8 to the consolidated financial statements under Item 8 of this Form 10-K.

Many of our assets are encumbered by liens that have been granted to lenders, and those liens affect our flexibility to dispose of property and businesses.

Certain of our debt obligations are secured by substantially all of our assets. These liens could reduce our ability and/or extend the time to dispose of property and businesses, as these liens must be cleared or waived by the lenders prior to any disposition. These security interests are described in more detail in Note 8 to the consolidated financial statements under Item 8 of this Annual Report on Form 10 ‑K.

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We may not pay dividends on our common stock at any time in the foreseeable future.

Holders of our common stock are entitled to receive such dividends as our Board of Directors from time to time may declare out of funds legally available for such purposes. Our Board of Directors has no obligation to declare dividends under Ohio law or our amended Articles of Incorporation. We may not pay dividends on our common stock at any time in the foreseeable future. Any determination by our Board of Directors to pay dividends in the future will be based on various factors, including our financial condition, results of operations and current anticipated cash needs and any limits our then-existing credit facility and other debt instruments place on our ability to pay dividends.

We are exposed to risks associated with acts of God, terrorists and others, as well as fires, explosions, wars, riots, accidents, embargoes, natural disasters, strikes and other work stoppages, quarantines and other governmental actions, and other events or circumstances that are beyond our control.

Ferro is exposed to risks from various events that are beyond our control, which may have significant effects on our results of operations. While we attempt to mitigate these risks through appropriate loss prevention measures, insurance, contingency planning and other means, we may not be able to anticipate all risks or to reasonably or cost-effectively manage those risks that we do anticipate. As a result, our operations could be adversely affected by circumstances or events in ways that are significant and/or long lasting.

The risks and uncertainties identified above are not the only risks that we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely affect us. If any known or unknown risks and uncertainties develop into actual events, these developments could have material adverse effects on our financial position, results of operations, and cash flows.



Item 1B — Unresolved Staff Comments

None .

Item 2 — Properties

We lease our corporate headquarters offices, which are located at 6060 Parkland Blvd. , Mayfield Heights, Ohio.  The C ompany owns other corporate facilities worldwide.  We own principal manufacturing plants that range in size from 18,000 sq. ft. to over 700,000 sq. ft.  Plants we own with more than 250,000 sq. ft. are located in Spain; Germany; Belgium; Colombia; Mexico; Cleveland, Ohio; and Penn Yan, New York .  The locations of these principal manufacturing plants by reportable segment are as follows:

Pigments, Powders and Oxides-U.S.: Penn Yan, New York and Norcross, Georgia.  Outside the U.S.: Colombia, China, India, Belgium, France, Romania, Spain and Brazil.



Performance Colors and Glass-U.S.: Washington, Pennsylvania, and Orrville, Ohio.  Outside the U.S.:  Brazil, China, France, Germany, Mexico, Spain, and the United Kingdom.



Performance Coatings-U.S.: Cleveland, Ohio.  Outside the U.S.: Argentina, Brazil, China, Egypt, France, Indonesia, Italy, Mexico, Spain, Poland, Portugal, and Thailand.

In addition, we lease manufacturing facilities for the Performance Colors and Glass segment in the United Kingdom; Germany; Japan; Italy; King of Prussia, Pennsylvania; and Vista, California.  We also lease manufacturing facilities for the Performance Coatings segment in Italy and Poland.  In some instances, the manufacturing facilities are used for two or more segments.  Leased facilities range in size from 15 ,000 sq. ft. to over 100,000 sq. ft.



Item 3 — Legal Proceedings

There are various lawsuits and claims pending against the Company and its consolidated subsidiaries. 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.



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Item 4 — Mine Safety Disclosures

Not applicable.

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Executive Officers of the Registrant

The executive officers of the Company as of March 1 , 2017 , are listed below, along wi th their ages and business experience during the past five years. The year indicates when the individual was named to the indicated position with Ferro, unless otherwise indicated .

Peter T. Thomas — 6 1

Chairman of the Board of Directors, 2014

President and Chief Executive Officer, 2013

Interim President and Chief Executive Officer, 2012

Mark H. Duesenberg — 55

Vice President, General Counsel and Secretary, 2008

Benjamin J. Schlater — 41

Vice President and Chief Financial Officer, 2016

Vice President, Corporate Development and Strategy, 2015

Treasurer and head of corporate development, strategic and financial planning and risk management, Veyance Technologies, a global manufacturing company, 2007

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PART II

Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange under the ticker symbol FOE. On January 31, 2017 , we had 901 shareholders of record for our common stock, and the closing price of the common stock was $ 14.14 per share.

The chart below compares Ferro’s cumulative total shareholder return for the fi ve years ended December 31, 2016 , to that of the Standard & Poor’s 500 Index and the Standard & Poor’s MidCap Specialty Chemicals Index. In all cases, the information is presented on a dividend-reinvested basis and assumes investment of $100.00 on December 31, 2011 . At December 31, 2016 , the closing price of our common stock was $14.33 per share.

COMPARISON OF FIVE-YEAR

CUMULATIVE TOTAL RETURNS

The quarterly high and low intra-day sales prices and dividends declared per share for our common stock during 2016 and 2015 were as follows:



The restrict ive covenants contained in our C redit F acility limit the amount of dividends we can pay on our common stock. For further discussion, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Annual Report on Form 10-K.

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The Company’s Board of Directors approved share repurchase programs, under which the Company is authorized to repurchase up to $100 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 Company repurchased 1,175, 437 shares of common stock at an average price of $9. 72 per share for a total cost of $11.4 million during 2016.  Under the share repurchase programs, the Company has repurchased an aggregate of 4,458,345 shares of common stock, at an average price of $11. 21 per share, for a total cost of $50.0 million.  As of December 31, 2016 , $50.0 million may still be purchased under the programs.

The following table summarizes purchases of our common stock by the Company and affiliated purchasers during the three months ended December 31, 2016 :









Item 6 — Selected Financial Data

The following table presents selected financial data for the last five years ended December 31st:





In 2015, we adopted the provisions of ASU 2015-03.  The ASU requires debt issuance costs for term loans to be presented in the balance sheet as a reduction of the related debt liability rather than an asset. The adoption resulted in the reclassificatio n of $5.3 million, $3.4 million and $4.3 million of unamortized debt issuance costs related to the term loan from Total assets to a reduction in Long-term debt, including current portion within the financial data abov e as of December 31, 2014, 2013 and 2012 , respectively.

In 2014, we commenced a process to market for sale all of the assets in our Polymer Additives reportable segment.  During 2014, we sold substantially all of the assets related to our North America-based Polymer Additives business, which is presented as discontinued operations in 2012 through 2014. In 2016, we completed the disposition of the Europe-based Polymer Additives business, which is presented as discontinued operations in 2012 through 2016 .

In 2014, we sold substantially all of the assets in our Specialty Plastics business, which is presented as discontinued operations in 2012 through 2014.

In 2013, we sold our Pharmaceuticals business, which is presented as discontinued o perations in 2012 through 2013.

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Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

During the year ended December 31, 2016 , net sales increased $70.0 million, or 6.5% , compared with 2015 . The increase was driven by an increase in sales in Pigme nts, Powders and Oxides of $81.6 mi llion, partially offset by a decrease in sales in Performance Coatings of $6.4 million and Performance Colo rs and Glass of $5.3 million. G ross profit increased $49.5 million compared with 2015 .  As a percentage of net sales , gross profit rate increased approximately 260 basis points to 30.7% , from 28.1% in the prior year.

For the year ended December 31, 2016 , selling, general and administrative (“SG&A” ) expenses increased $24.8 million, or 11.4% , compared with 2015 , primarily driven by the increase in expense in pension and other postretirement benefits of $ 14.9 million .

For the year ended December 31, 2016 , net loss was $19.9 million, compared with net income of $63.1 million in 2015 , and net loss attributable to common shareholders was $20.8 million, compared with net income attributable to common shareholders of $64.1 million in 2015 . Income from continuing operations was $44.6 million for the year ended December 31, 2016 , compared with income from continuing operations of $99.9 million in 2015 .



2016 Transactional Activity

Business Acquisitions

Acquisition of Cappelle: As discussed in Note 4, in the fourth quarter of 2016 , the Company acquired 100% of the share capital of Belgium-based Cappelle Pigments NV (“Cappelle”), a leader in specialty, high-performance inorganic and organic pigments used in coating s , inks and plastics, for €40 . 0 million (approximately $42.4 million).

Acquisition of ESL: As discussed in Note 4, in the fourth quarter of 2016 , the Company acquired 100% of the membership interest of Electro-Science Laboratories , Inc. (“ESL”), a leader in electronic packaging materials for $78.0 million.

Acquisition of Delta Performance Products: As discussed in Note 4, in the third quarter of 2016, the Company acquired certain assets of Delta Performance Products, LLC, for a cash purchase price of $4.4 million.

Acquisition of Pinturas: As discussed in Note 4, in the second quarter of 2016, the Company acquired 100% of the equity of privately held Pinturas Benicarló, S.L. (“Pinturas”) for €16.5 million in cash (approximately $18.4 million).

Acquisition of Ferer: As discussed in Note 4, in the first quarter of 2016, the Company completed the purchase of 100% of the equity of privately held Istanbul-based Ferer Dis Ticaret Ve Kimyasallar Anonim Sirketi A.S. (“Ferer”) for approximately $9.4 million in cash.

Disposition of the Europe-based Polymer Additives business

As discussed in Note 3, in the third quarter of 2016, the Company completed the disposition of the Europe-based Polymer Additives business to Plahoma Two AG, an affiliate of the LIVIA Group.

Outlook

The Company delivered strong performance throughout 2016.  Sales increased 6.5% primarily due to acquisitions acquired within the last year.  In addition, gross profit, as a percentage of net sales, increased to 30.7% from 28.1%.  Partially offsetting the higher gross profit were increased SG&A costs, primarily driven by an increase in pension and postretirement benefits expense and incentive compensation expense. Our effective tax ra te for 2016 was 28.6 %.

For 2017 , we expec t gro ss margin will continue to improve .  W e anticipate benefitting from strategic actions taken to improve growth in our core businesses and will continue to benefit from recent acquisitions. Raw material costs are expected to increase in 2017 , however ou r expectation is to offset these cost increases through pricing actions, product reformulations and optimization actions . In addition, foreign currency exchange rates continue to be volatile, and we anticipate changes in rates will adversely impact reported results.

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We remain focused on the integration of our recent acquisitions and continue to work toward achieving the identified synergies.  We will continue to focus on opportunities to optimize our cost structure and make our business processes and systems more efficient, and to leverage tax planning opportunities.  We continue to expect cash flow from operating activities to be positive for 2017 , providing additional liquidity.



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Results of Operations - Consolidated

Comparison of the years ended December 31, 2016 and 2015

For the year ended December 31, 2016 , income from continuing operations was $44.6 million, compared with income from continuing operations of $99.9 million in 2015 . For the year ended December 31, 2016 , net loss was $19.9 million, compared with net income of $63.1 million in 2015 . For the year ended December 31, 2016 , net loss attributable to common shareholders was $20.8 million, or $0.25 loss per share, compared with net income attributable to common shareholders of $64.1 million, or $0.74 earnings per share in 2015 .

Net Sales







Net sales increased by $70.0 million, or 6.5% , in the year ended December 31, 2016 , compared with the prior year. The n et sales increas e was driven by higher sal es in Pig me nts, Powders and Oxides of $81.6 mi llion, partially offset by a decrease in sales in Performance Colors and Glass of $5.3 million and Performance Coatings of $6.4 million .  The increase in net sales was primarily driven by the sales from Nubiola of $66.3 million and sales from Al Salomi of $22.1 million , partially offset by a decrease in sales of frits an d glazes from Latin America of $23.9 million.

Gross Profit

Gross profit increased $49.5 million, or 16.4% , in 2016 to $351.2 million, compared with $301.7 million in 2015 and , as a percentage of net sales , it increased 260 basis points to 30.7% . The significant driver of the increased gross profit was strong performance in our Pigments, Powders and Oxides segment which exceede d prior- year gross profit by $38.6 milli on, primarily driven by sales from Nubiola. The i ncrease in gross profit was primarily due to an increase in sales vol umes and mix of $48.6 million, decreases in raw material costs of $21.0 million and decreases in m anufacturing costs of $11.1 million, partially offset by unfa vorable product pricing of $15.0 million and unfavorabl e foreign currency impacts of $9.1 million.

G eographic Revenues

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





The increase in net sales of $70.0 million, compared with 2015 , was driven by increased sales from Europe, Asia Pacific and the United States , pa rtially mitigat ed by a decrease in sales from Latin America . The increase from Europe was primarily attrib utable to Nubiola sales of $24.6 million and an increase in P erformance Coatings sales of $11.2 million a nd the increase from Asia Pacific was attributable to an increase in sales in all segments. The increase from the United S tates was attributable to an increase in sales in Pigments, Powders and Oxides of $29.4 million, pa rt ially offset by lower sales in Per formance Colors and Glass of $11.5 m illion. The decrease in sales from Lat in America was attributable to the sale of our interest in an operating affiliate in Venezuela in 2015 which contributed $8.4 million in net sales .

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







Selling, General and Administrative Expense

The following table includes SG&A components with significant changes between 2016 and 2015 .



SG&A expenses were $24.8 million higher in 2016 compared with the prior year . As a percentage of net sales , SG&A expenses increased 90 basis points from 20.2 % in 2015 to 21.1 % in 201 6 . The most si gnificant driver of the increase in SG&A expenses in 2016 was the change in the mark-to-market loss and curtailment and settlement effects on our defined benefit pension plans and postretirement health care and lif e insurance be nefit plans of $8.1 million, and is included within the pension and other postretirement benefits line above. The expense in 2016 was higher than the prior year due to the loss from expected returns on plan assets exceeding actual returns and a decrease in the discount rate compared with the prior ye ar . Excluding the impacts of the pension and other postretirement benefits expense, SG&A expenses decreased 30 basis points from 20.0% in 2015 to 19.7% in 2016 . The increase in personnel expenses was attributable to the acquisitions acquired which contributed $5.5 million and the in crease in incentive compensation was a result of the Company’s performance relative to targets for certain awards compared with the prior year .

The following table presents SG&A expenses attributable to sales, research and development , and operations costs as strategic services and presents other SG&A costs as functional services .







SG&A e xpenses were $24.8 million higher in 2016, compared with 2015.  The increase in SG&A expenses was driven by higher expenses in functional services due to the increase in pension and other postretirement benefit expense. The increase in strategic expenses was due to the increased expenses of $8.7 million associated with the acquisitions acq uired within the last year and an in crease in bad debt expense of $0.7 million in 2016, compared with 2015.

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Restructuring and Impairment Charges





Restructuring and impairment charges increased by $6.3 million in 2016 , compared with 2015 . The increase was driven by an impairment charge within our Tile Coating Systems reporting unit, a component of our Performance Coatings operating segment in 2016 of $13.2 million. This increase was partially mitigated by a decrease in employee severance cost of $2.7 million in 2016 , compa red with 2015 and the early termination cost of a contract associated with restructuring a corporate function of $2.8 million in 2015 .

Interest Expense



Interest expense in 2016 in creased $6.4 million compared with 2015 , primarily due to an increase in the average long-term d ebt balance for the 2016 period compared with 2015 , as well as less interest capitalization associated with long-term capital projects , which was driven by the substantial completion of the Antwerp, Belgium facility in the fourth quarter of 2015.

Income Tax Expense

In 2016 , we recorded an income tax expense of $17.9 million, or 28.6 % of income before income taxes, compared to an income tax benefit of $45.1 million, or (82.3%) of income before income taxes in 2015 .  The 2016 effective tax rate is less than the statutory income tax rate of 35% , primarily as a result of a $5.5 million benefit related to greater levels of income earned in lower tax jurisdictions, $4.8 million net benefit for the release of valuation allowances related to deferred tax assets that were utilized in the current year, $2.0 million in net benefit for the release of valuation allowances, which are deemed no longer necessary based upon changes in the current and expected future years operating profits , $1.8 million benefit related to notional interest deductions, $2.8 million benefit for the generation of tax credits offset by a $4.1 million expense related to the impairment of book basis goodwill and a $2.1 million expense related to non-deductible expenses . The 2015 effective tax rate was less than the statutory income tax rate of 35% primarily as a result of a $3.8 million benefit related to greater levels of income earned in lower tax jurisdictions, $3.1 million benefit for the release of the valuation allowances related to deferred tax assets that wer e utilized in the current year and $63.3 million benefit for the release of valuation allowances in certain jurisdictions, which are deemed no longer necessary based upon a change from a cumulative three-year loss to income and our expectation of sufficient future taxable income to be able to realize the respective benefits , offset by $2.4 million expense related to ne w uncertain tax positions and $1.7 million expense related to non-deductible expenses .

Comparison of the years ended December 31, 2015 and 2014

For the year ended December 31, 2015 , income from continuing operations was $ 99.9 million, compared with a loss from continuing operations of $ 8.6 million in 2014 . For the year ended December 31, 2015 , net income was $63.1 million, compared with net income of $86.2 million in 2014 . For the year ended December 31, 2015 , net income attributable to common shareholders was $64.1 million, or $0.74 earnings per share, compared with net income attributable to common shareholders of $86.1 million, or $0.99 earnings per share in 2014 .

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Net Sales



Net sales decreased by $ 36.3 million, or 3.3 % in the year ended December 31, 2015 , compared with the prior year. Net sales decreased $36.3 million, primarily driven by a decrease in sales in Performance Coatings and Performance Colors an d Glass of $55.2 million and $30.9 million, respectively, partially mitigated by an increase in net sales in Pigments, Powders and Oxides of $ 49.8 million. The main driver of the decrease in net sales was unfavorable foreign currency impacts, which totaled approximately $132.4 million, and unfavorable pricing impacts of $16.6 million, partially mitigated by $56.9 million of sales from Nubiola, which was acquired in the third quarter of 2015, and $56.0 million of sales from Vetriceramici, which was acquired in the fourth quarter of 2014 .

Gross Profit

Gross profit increased $16.6 million, or 5.8 % in 2015 to $301.7 million , compared with $285.1 million in 2014 and as a percentage of net sales , it increased 250 basis points to 28 .1%. The significant driver of the increased gross profit was strong performance in our Pigments, Powders and Oxides segment which exceeded prior-year gross profit by $17.2 million, primarily driven by Nubiola, which was acquired in the third quarter of 2015.  Gross profit was negatively impacted by a charge of $5.8 million related to a purchase price adjustment f rom the acquisition of Nubiola , for step up of inventory acquired and subsequently sold in the third quarter that will not recur.

G eographic Revenues

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



The decline in net sales of $36.3 million, compared with 2014 , was driven by decreased sales from Europe, Asia Pacific and Latin America, partially mitigated by an increas e in sales from the United States. The decline in sales from Eu rope was due to lower sales in Performance Colors and Glass an d Performance Coatings of $23.0 million and $18.7 million, respectively, and was largely due to unfavorable foreign currency impacts. T he decrease from Europe was partially m itigated by increased sales in Pig ments, Powders and Oxides of $17.1 million, driven by sales from Nubiola, which was acquired in the third quarter of 2015. The decline from Asia Pacific was driven by lower sales of $22.6 million in Performance Coatings , lower sales of $4.5 million in Performance Colors and Glass and the result of the sale of our North American and Asian metal powders business, which comprised $7.5 million of t he decrease.  The lower sales from Latin America was due to lower sales in Performance Coatings and Performance Colors and Glass of $8.9 million and $7.4 million, respectively, partia ll y mitigated by higher sales in Pigments, Powders and Oxides of $13.2 million. The decline in sales from Latin America in Performance Coatings was primarily due to the unfavorable foreign currency impacts related to the change in currency exchange mechanisms in Venezuela during the first quarter of 2015 and the sale of our operating affiliate in Venezuela in the fourth quarte r of 2015. The higher sales from the United States in 2015 compared to 2014, was driven by higher sales volumes within Pigments, Powders and Oxides and Performance Colors and Glass, pa rt ially offset by lower sales in Performance Coatings.

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













Selli ng, General and Administrative Expense

The following table includes SG&A components with significant changes between 2015 and 2014.







SG&A expenses were $69.9 million lower in 2015 compared with the prior year. As a percentage of net sales, SG&A expenses decreased 560 basis points from 25.8% in the prior year to 20.2% in 2015 . The most significant driver of the decrease in SG&A expenses in 2015 was the change in the mark-to-market loss and curtailment and settlement effects on our defined benefit pension plans and postretirement health care and life insurance benefit plans of $80.3 million, and is included within the pension and other postretirement benefits line above. The expense in 2014 was primarily related to changes in actuarial assumptions used in calculating the value of the U.S. pension liability. In addition, during 2014, the Company adopted the use of new mortality tables within its calculation assumptions, which had a one-time impact of increasing the liability.  The new mortality tables reflect underlying increases in life expectancy of participants, thus driving longer benefit payment periods. The impact of the change in mortality assumption on the U.S. pension liability was an increase of the liability of approximately $18 million. Excluding the impacts of the pension and other postretirement benefits expense , SG&A expenses increased 190 basis points from 18.1% in 2014 to 20.0% in 2015. Included in SG&A expenses were $8.1 million and $12.5 million of expenses attributable to Nubiola and Vetriceramici, which were acquired in the third quarter of 2015 and the fourth quarter of 2014, respectively. The increase in business development costs of $10.1 million was a result of higher costs associated with professional fees that were related to business development activities. These increases were offset by lower incentive compensation expense of $6.6 million, which is based on certain performance metrics, and lower bad debt expenses of $2.0 million.  The decrease in SG&A is also a result of foreign currency impacts.



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The following table presents SG&A expenses attributable to sales, research and development and operations costs as strategic services and other SG&A expenses as functional services.





SG&A expenses were $69.1 million lower in 2015, compared with 2014.  The decrease in SG &A expenses was driven by lower expenses in functional services from the change in the mark-to-market loss and curtailment and settlement effects on our defined benefit pension plans and postretirement health care and life insurance benefit plans of $80.3 million, partially offset by an increase in business development expenses of $10.1 million. Lower SG&A expenses were also driven by lower incentive and stock-based compensation expense, partially offset by higher expenses in strategic services driven by the Vetriceramici and Nubiola acquisitions.

Restructuring and Impairment Charges







Restructuring and impairment charges increased in 2015 compared with 2014. The primary drivers were the increase in employee severance cost of $1.3 million in 2015 compared with 2014 and the early termination cost of a contract associated with restructuring a corporate function of $2.8 million during in 2015. The increase in restructuring and impairment charges was partially mitigated by a decrease of $2.5 million due to a lease termination charge that occurred in 2014.

Interest Expense





Interest expen se in 2015 decreased $1.1 million compared with 2014, primarily due to the redemption of the 7.875% Senior Notes and refinancing of the 2013 Revolving Credit Facility during the third quarter of 2014.  The decrease was partially offset by less interest capitalization associated with long-term capital projects , which was driven by the substantial completion of the Antwerp, Belgium facility in the fourth quarter of 2015.

Income Tax Expense

In 2015, we recorded an income tax benefit of $45.1 million, or (82.3%) of income before income taxes, compared to an income tax benefit of $34.2 million, or 79.9% of loss before taxes in 2014. The 2015 effective tax rate was less than the statutory income tax rate of 35% primarily as a result of $3.8 million benefit related to greater levels of income earned in lower tax jurisdictions, a $3.1 million benefit for the release of the valuation allowances related to deferred tax assets that we re utilized in the current year and $63.3 million benefit for the release of valuation allowances in certain jurisdictions, which are deemed no longer necessary based upon a

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change from a cumulative three-year loss to income and our expectation of sufficient future taxable income to be able to realize the respective benefits , offset by $2.4 million expense related to ne w uncertain tax positions and $1.7 million expense related to non-deductible expenses .  The 2014 effective tax rate was greater than the statutory income tax rate of 35% primarily as a result of a $17.4 million benefit related to the release of valuation allowances for deferred tax assets that were utilized in the 2014, the release of valuation allowances deemed no longer necessary and the expiration of fully valued tax attributes, $15.2 million of benefit related to 2014 domestic foreign tax credit generated and utilized, and foreign tax rate differences from the statutory income tax rate of 35%.

Results of Operations - Segment Information

Comparison of the years ended December 31, 2016 and 2015

Performance Coatings











Net sales declined in Performance Coatings compared with 2015 , primarily driven by a decreas e in sales of $20.9 million in frits and glazes, and $8.4 millio n due to the sale of our Venez uela business , partially mitigated by $22.1 million in sales from Al Salomi.  The decrease in net sales was impacted by unfavorable foreign currency impacts of $3 4.4 million and lower product pricing of $15.9 million, partially offset by increased sales volume and mix of $44 .0 million . Gross profit increased $12 .5 million from 2015 , primarily driven by lower manufacturing costs of $4 .6 million, hig he r sales volumes and mix of $23.2 million, and lower raw material costs of $7.9 million, partially offset by unfavorable product pricing impacts of $15.9 million and unfavorable foreign currency impacts of $7.3 million.







The net sales decrease of $6.4 m illion was driven by declines in sales from Latin America, partially mitiga ted by an increase in sales from Europe, Asia Pacific and the United States .  The sales decline from Latin America included a decrease in sales in frits and glazes of $23.9 million and a decrease in sales from Venezuela of $8.4 million , partially mitigated by increased sales in digital inks and opacifiers of $5.7 million and $5.3 million, respect ively.  The increase in sales from Europe was primary attributable to $22.1 million in sales from Al Salomi, partially offset by decreased sales in digital inks and Vetriceramic i products of $5.7 million and $4.6 million , respectively.  The increase from Asia Pacific was primarily due to increased sales in digital i nks and frits and glazes of $2.7 million and $2.5 million, partially offset by decreased sales in porcelain enamel of $1.3 million. The increase from the United States was fully attributable to increased sales in porcelain enamel of $0.3 million.



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Performance Colors and Glass







Net sales decreased compared with 2015 , primarily driven by lower sales of our electronics products and industrial products of $3.1 million and $2.8 million, respectively. Net sales were impacted by unfavorable foreign currency impacts of $4.9 million and u nfavorable volume and mix of $1.0 million , partially mitigated by high er product pricing of $0.6 million. Gross profit increased from 2015 , primarily due t o lower raw material costs of $7.9 million, l ower manufacturing costs of $1.9 million an d higher product pricing of $0.6 million, partially offset by l ower sales volumes and mix of $3.2 million and unfavorable foreign currency impacts of $1.6 million.







The net sales decline of $5.3 million was driven by lower sal es from the United States and Latin America, partially mitigated by increased sales from Europe and Asia P acific. The decrease in sales from the United States was attributable to lower sales across all product lines, and the decline in sales from Latin America was primarily due to low er sales of decoration products of $0 .2 millio n.  The increase in sales from Europe was partially attributable to increased s ales of electronics and automobile products of $2.3 million and $1.4 million, respectively, partially offset by a decrease in sales in industrial products of $0.9 million .  The increase in sales from Asia Pacific was primarily due to higher sale s of automotive products of $3.4 million, partially offset by lower sale s in decoration products of $0.3 million.

Pigments, Powders and Oxides







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Net sales increased compared with 2 015 , primarily due to higher sale s from Nubiola products of $66.3 million , an increase in sales of surface technology products and of pigments of $6.1 million and $5.7 million, respectively , and an increase in sales from Cappelle of $2.2 million .  Net sales were positively impacted by higher volumes and mix of $82.1 million and f avorable product pricing of $0.4 million, partially offset by unfavorable foreign currency impacts of $0.8 million.  Gross profit increased from 2015 , primarily due to hig her sales volumes and mix of $ 28.6 million, fa vorable raw material costs of $5.2 million, lower manufacturing costs of $4 .6 million and f avorable product pricing of $0.4 million, partially offset by unfavorable foreign currency impacts of $0.2 million. Gross profit was negatively impacted by a charge of $5.8 million in 2015, related to a purchase price adjustment from the acquisition of Nubiola for step up of inventory acquired an d subsequently sold that will not recur.





The increase in net sales of $81.6 million compared with 2015 was due to higher sales across all re gions.  The increase in sales from the Unite d States was driven by increased sales from Nuiobla of $17.7 million and in creased sales in surface technology and pigments of $6.1 million and $3.6 million , respectively . The increase in sales from Europe and Latin America was dri ven by sales from Nubiola of $24.6 million and $14.6 million, respect ively.  The increase in sales from Asia Pacific was primarily driv en by sales from Nubiola of $9.3 million and pigments of $2.5 million .

Comparison of the years ended December 31, 2015 and 2014

Performance Coatings







Net sales decreased in Performance Coatings compared with 2014 due to lower sales of frits and glazes, colors, porcelain enamels, digital inks and other tile product lines of $54.3 million, $17.9 million, $17.8 million, $12.8 million and $6.9 million, respectively. The sales decline was partially mitigated by an increase of $54.5 million in sales from Vetriceramici, which was acquired in the fourth quarter of 2014.  A substantial portion of the decline in sales was attributed to unfavorable foreign currency impacts of $90.8 million and lower product pricing of $19.4 million, partially mitigated by favorable mix and higher sales volumes of $22.7 million and $32.3 million, respectively. Gross profit decreased from 2014, and was driven by lower product pricing impacts of $19.4 million and unfavorable foreign currency impacts of $18.7 million, partially mitigated by favorable volume and mix of $ 15.1 million, lower manufacturing costs of $11.1 million and favorable raw material impacts of $7.8 million.

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The net sales decrease of $55.2 million compared with 2014 reflected lower sales in all regions.  The decline from Asia Pacific was driven by lower sales of frits and glaze products, digital inks, porcelain enamels, and colors of $12.4 million, $4.0 million, $3.3 million, and $2.9 million respe ctively. The decline in sales from Europe was attributable to lower sales of our porcelain enamel products, partially mitigated by higher sales of tile products, including Vetriceramici sales. The de cline in sale s from Latin America compared to 2014 was due to lower sales in colors and porcelain enamel products, partially mitigated by higher sales of digit al inks products. The decline from the United States was attributable to porcelain enamel products .

Performance Colors and Glass







Net sales decreased $30.9 million in 2015 compared with 2014, with d ecreases of $18.0 million in decoration, $6.4 million in industrial products, $7.1 million in automotive, and $0.9 million in electronics, partially mitigated by an increase in sales of $1.5 million from Vetriceramici, which was acquired in the fourth quarter of 2014. Net sales reflected unfavorable foreign currency impacts of $36.1 million and lower sales volume of $5.3 million, partially mitigated by favorable mix of $8.0 million and higher product pricing of $2.5 million. Gross profit decreased from 2014, due to unfavorable foreign currency impacts of $12.3 million, unfavorable sales volumes and mix of $6.8 million, and higher manufacturing costs of $1.0 million, partially mitigated by favorable raw material impacts of $10.9 million and higher product pricing impacts of $2.5 million.





The decrease in net sales of $30.9 million compared with 2014, was primarily driven by lower sales in decoration pro ducts and industrial products from Europe of $8.0 million and $7.5 million, respectively, and lower sales of decoration products from Latin America and Asia Pacific of $8.3 million and $3.0 million.  The decrease was partially mitigated by higher sales in electronic s products from the Uni ted States of $4.0 million .

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Pigments, Powders and Oxides







Net sales increased compared with 2014, primarily due to higher volume and mix of $54.9 million, of which $56.9 million is related to sales from the Nubiola acquisition in the third quarter of 2015. The increase in sales is also due to favorable product pricing impacts of $0.4 million, partially mitigated by unfavorable foreign currency impacts of $5.5 million. Gross profit increased from 2014 and was a result of favorable volume and mix of $13.1 million, lower manufacturing costs of $3.6 million, favorable raw material impacts of $1.3 million, and higher product pricing of $0.4 million, partially offset by unfavorable foreign currency impacts of $1.2 million.  Gross profit was negatively impacted by a charge of $5.8 million related to a purchase price adjustment from the acquisition of Nubiola, which was acquired in the third quarter of 2015, for step up of inventory acquired and subsequently sold in the third quarter that will not recur.





The increase in net sales of $49.8 million in 2015 compared with 2014 , was due to higher sales from the United States, Europe and Latin America . The increase in sales from the United States was driven by increases of $4.8 million in surface finishing products, $0.6 million in pigments, and $15.2 million by sales from Nubiola, which was acquired in the third quar ter of 2015, partially offset by a decrease in sales of $0.5 million in liquid coatings. The increase in sales from Europe and Latin America was driven by sales from Nubiola of $21.2 million and $13.7 million, r espectively, partially offset by a decrease in sales of $4.1 million and $0.5 million in pigments, respectively.

Summary of Cash Flows for the years ended December 31, 2016 , 2015 , and 2014





Operating activities. Cash flows from operating activities increased $11.4 million in 2016 compared to 2015 . The increase was due to lower cash outflows for other assets and liabilities of $28.0 million and higher earnings after consideration of non-cash items of $30.4 million , partially offset by higher cash out flows for wor king capital of $43.2 million .

Cash fl ows from operating activities decreased $9.3 million in 2015 compared to 2014 . The change was driven by lower net income of $23.1 million. The decrease was partially mitigated by reduced payments associated with restructuring activities of $9.8 million and by a cash inflows of $12.2 million in 2015 related to working capital, compared to cash outflows of $12.3 million in 2014 .

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Investing activities. Cash flows from investing activities increased approximately $93.8 million in 2016 . The increase was primarily due to lower cash outflows for business combinations of $ 72 .6 million and low er capital expenditures of $18.1 million which was driven by lower spend fo r the Antwerp, Belgium facility.  This facility was substantially completed in the fourth quarter of 2015 .

Cash flows from investing activities decreased appro ximately $319.8 million in 2015 compared with 2014 . The decrease was driven primarily by business acquisitio ns, net of cash acquired, of $202.2 million in 2015, compared to cash used for busin ess acquisitions in 2014 of $115.6 million, partially offset by net proceeds from the sales of our North America-based Polymer Additives assets and Specialty Plastics business in 2014 of $149.5 million and $88.3 million, respectively. Capital expenditures decreased $10.7 million in 2015 compared with 2014.

Financing activities. Cash flows from financing activities decreased $37.7 million in 2016 compared with 2015 , driven by the $50.0 million prepayment on the term loan facilit y that was made in January 2016 and a net borrowing decrease on the revolving credit facility of $28.4 million, partially mitigated by decreased purchase of treasury stock of $27.1 million and an increase in net bo rrowings on loans payable of $11.9 million .

Cash flows from fi nancing activities i ncreased $137.9 million in 2015 compared with 2014 . The increase was primarily the result of net borrowings on the revolving credit facility of $170.0 million in 2015 compared to a repayment of $9.2 million in 2014. Net borrowings in 2015 were primarily used to fund acquisitions , the Company’s share repurchase program, and for other general business use. Further, we had a cash outflow of $41.0 million in 2014, related to repayment of debt outstanding under our accounts receivable securitization program , which expired during the year.

We have paid no dividends on our common stock since 2009.

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Capital Resources and Liquidity

Major debt instruments that were outstanding during 2016 are described below.

Credit Facility

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

Principal payments on the term loan facility of $0.75 million quarterly, are payable commencing December 31, 2014, with the remaining balance due on th e maturity date. At December 31 , 201 6, the Company had borrowed $243.3 million under the term loan facility, taking into account all prior quarterly payments and the $50 million prepayment that was made in January 2016, at an annual rate of 4.0%.  There are no additional borrowings available under the term loan facility.

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

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

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



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At December 31, 2016 , the Company had borrowed $311.6 millio n under the revolving credit facilities at a weighted average interest rate of 3.5 %.  The borrowing on the revolving credit line was used to fund the acquisitions, the share repurchase program s , and for other general business purposes . After reductions for outstanding letters of credit secured by these facilities, we had $ 84.1 million of additional borrowing s available under the revolving credit facilities at December 31, 2016 .

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

Specific to the revolving credit facility, the Company is subject to financial covenants regarding the Company’s outstanding net indebtedness and interest coverage ratios.

If an event of default occurs, all am ounts outstanding under the Credit Facility may be accelerated and become immediately due and p ayable. The Company was in compliance with our maximum leverage ratio covenant , as defined within our Credit Facility , as of September 30, 2016 . The financial covenants are not applicable as of December 31, 2016, due to the refinancing of the Credit Facility , which is described below .

On February 14, 2017, the Company entered into a new credit facility (the “ New Credit Facility”) with a group of lenders to refinanc e its outstanding Credit Facility and to provide liquidity for ongoing working capital requirements and general corporate purposes. The New Cred it Facility consists of a $400 million secured revolving line of credit with a term of five years, a $357.5 million secured term loan facility with a term of seven years and a €250 million secured euro term loan faci lity with a term of seven years.  Refer to Note 8 for further details on the New Credit Facility.

Off Balance Sheet Arrangements

Consignment and Customer Arrangements for Precious Metals. We use precious metals, primarily silver, in the production of some of our products. We obtain most precious metals from financial institutions under consignment agreements (generally referred to as our precious metals consignment program). 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 $ 0.8 million, $0.8 million and $0.8 million for 2016 , 2015 , and 2014 respectively.  We had on hand precious metals owned by participants in our precious metals consignment program of $28.7 mill ion at December 31, 2016 and $20.5 million at December 31, 2015 , measured at fair value based on market prices for identical assets and net of credits.

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 December 31, 2016 , or December 31, 2015 , 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 December 31, 2016 , the Company and its subsidiaries had bank guarantees and standby letters of credit issued by financial institutions that totaled $ 6 .4 million. These agreements primarily relate to Ferro’s insurance programs, foreign energy purchase contracts and foreign tax payments.

Other Financing Arrangements

We maintain other lines of credit to provide global flexibility for Ferro’s short-term liquidity requirements. These facilities are uncommitted lines for our international operations and totaled $7.3 million at December 31, 2016 . We had $6.7 million of additional borrowings available under these lines at December 31, 2016 .

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Liquidity Requirements

Our primary sources of liquidity are available cash and cash equivalents, availabl e lines of credit under the Credit Facility, and cash flows from operating activities. As of December 31, 2016 , we had $45.6 million of cash and cash equivalents. Substantially all 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.

Our liquidity requirements primarily include debt service, purchase commitments, labor costs, working capital requirements, restructuring expenditures, capital investments, precious metals cash collateral requirements, and postretirement obligations. We expect to meet these requirements in the long term through cash provided by operating activities and availability under existing credit facilities or other financing arrangements. Cash flows from operating activities are primarily driven by earnings before noncash charges and changes in working capital needs . In 2016 , cash flows from financing and operating activities were used to fund our investing activities. Additionally, we used the borrowing s available under the Credit Facility to fund the acquisitions , the share repurchase program s , an d for other general business purposes . We had a dditional borrowing capacity $112.0 million at December 31, 2016 , available under various credit facilities, primarily our revolving credit facility.

Our credit facilities contain a number of restrictive covenants, including those described in more detail in Note 8 to the consolidated financial statements under Item 8 of this Annual Report on Form 10-K. These covenants include customary operating restrictions, 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. We are also subject to customary financial covenants under our credit facilities, including a leverage ratio and an interest coverage ratio. These covenants under our credit facilities restrict the amount of our borrowings, reducing our flexibility to fund ongoing operations and strategic initiatives. These facilities are described in more detail in “Capital Resources and Liquidity” under Item 7 and in Note 8 to the consolidated financial statements under Item 8 of this Annual Report on Form 10-K. The most critical of these ratios is the leverage ratio for the revolving credit facility. The Company was in compliance with the covenant s , as defined within our Credit Facility , as of September 30, 2016 . The financial covenants are not applicable as of December 31, 2016 , due to the refinancing of the Credit Facility . Refer to Note 8 for further details on the New Credit Facility.

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 inv estment-grade credit ratings, except for one, which is not rated . 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 such a s sales we completed in 2014 and 2016 . We also evaluate and pursue acquisition opportunities that we believe will enhance our strategic position such as the acquisitions we completed in 2016, 2015 and 2014 . Generally, we publicly announce material divestiture and acquisition transactions only when we have entered into definitive agreements relating to those transaction s.

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Th e Company’s aggregate amount of contractual obligations for the next five years and thereafter is set forth below:





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Critical Accounting Policies

When we prepare our consolidated financial statements we are required to make estimates and assumptions that affect the amounts we report in the consolidated financial statements and footnotes. We consider the policies discussed below to be more critical than other policies because their application requires our most subjective or complex judgments. These estimates and judgments arise because of the inherent uncertainty in predicting future events. Management has discussed the development, selection and disclosure of these policies with the Audit Committee of the Board of Directors.

Revenue Recognition

We recognize sales typically when we ship goods to our customers and when all of the following criteria are met:

In order to ensure the revenue recognition in the proper period, we review material sales contracts for proper cut-off based upon the business practices and legal requirements of each country. For sales of products containing precious metals, we report revenues gross along with their corresponding cost of sales to arrive at gross profit. We record revenues this way because we act as the principal in the transactions into which we enter.

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Restructuring and Cost Reduction Programs

In recent years, we have developed and initiated a global cost reduction program with the objectives of leveraging our global scale, realigning and lowering our cost structure, and optimizing capacity utilization. Management continues to evaluate our businesses, and therefore, there may be additional provisions for new optimization and cost-savings initiatives, as well as changes in estimates to amounts previously recorded, as payments are made or actions are completed.

Restructuring charges include both termination benefits and asset writedowns. We estimate accruals for termination benefits based on various factors including length of service, contract provisions, local legal requirements, projected final service dates, and salary levels. We also analyze the carrying value of long-lived assets and record estimated accelerated depreciation through the anticipated end of the useful life of the assets affected by the restructuring or record an asset impairment. In all likelihood, this accelerated depreciation will result in reducing the net book value of those assets to zero at the date operations cease. While we believe that changes to our estimates are unlikely, the accuracy of our estimates depends on the successful completion of numerous actions. Changes in our estimates could increase our restructuring costs to such an extent that it could have a material impact on the Company’s results of operations, financial position, or cash flows. Other events, such as negotiations with unions and works councils, may also delay the resulting cost savings.

Accounts Receivable and the Allowance for Doubtful Accounts

Ferro sells its products to customers in diversified industries throughout the world. No customer or related group of customers represents greater than 10% of net sales or accounts receivable. We perform ongoing credit evaluations of our customers and require collateral principally for export sales, when industry practices allow and as market conditions dictate, subject to our ability to negotiate secured terms relative to competitive offers. We regularly analyze significant customer accounts and provide for uncollectible accounts based on historical experience, customer payment history, the length of time the receivables are past due, the financial health of the customer, economic conditions, and specific circumstances, as appropriate. Changes in these factors could result in additional allowances. Customer accounts we conclude to be uncollectible or to require excessive collection costs are written off against the allowance for doubtful accounts. Historically, write-offs of uncollectible accounts have been within our expectations.

Goodwill

We review goodwill for impairment each year using a measurement date of October 31st or more frequently in the event of an impairment indicator. We annually, or more frequently as warranted, evaluate the appropriateness of our reporting units utilizing operating segments as the starting point of our analysis.  In the event of a change in our reporting units, we would allocate goodwill based on the relative fair value. We estimate the fair values of the reporting units associated with these assets using the average of both the income approach and the market approach, which we believe provides a reasonable estimate of the reporting units’ fair values, unless facts and circumstances exist that indicate more representative fair values. The income approach uses projected cash flows attributable to the reporting units over their useful lives and allocates certain corporate expenses to the reporting units. We use historical results, trends and our projections of market growth, internal sales efforts and anticipated cost structure assumptions to estimate future cash flows. Using a risk-adjusted, weighted-average cost of capital, we discount the cash flow projections to the measurement date. The market approach estimates a price reasonably expected to be paid by a market participant in the purchase of similar businesses. If the fair value of any reporting unit was determined to be less than its carrying value, we would proceed to the second step and obtain comparable market values or independent appraisals of its assets and liabilities to determine the amount of any impairment.

The significant assumptions and ranges of assumptions we used in our impairment analyses of goodwill at October 31, 2016 and 2015 , were as follows:









Our estimates of fair value can be adversely affected by a variety of factors. Reductions in actual or projected growth or profitability at our reporting units due to unfavorable market conditions or significant increases in cost structure could lead to the impairment of any

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related goodwill. Additionally, an increase in inflation, interest rates or the risk-adjusted, weighted-average cost of capital could also lead to a reduction in the fair value of one or more of our reporting units and therefore lead to the impairment of goodwill.

Based on our 2016 annual impairment test performed as of October 31, 2016 , we recognized an im pairment loss of $13.2 million in our Tile Coating Systems reporting unit, a component of our Performance Coatings segment. For the remaining reporting units tested for impairment, the fair values exceeded the carrying values of the respective reporting units by amounts ranging from 27.2% to 303.7 % at the 2016 measurement date. The lowest cushion relates to goodwill associated with th e Performance Coatings reportable segment, which had a goodwill balance of $28.1 million at December 31, 2016 .   A future potential impairment is possible for any of these reporting units if actual results are materially less than forecasted results. Some of the factors that could negatively affect our cash flows and, as a result, not support the carrying values of our reporting units are: new environmental regulations or legal restrictions on the use of our products that would either reduce our product revenues or add substantial costs to the manufacturing process, thereby reducing operating margins; new technologies that could make our products less competitive or require substantial capital investment in new equipment or manufacturing processes; and substantial downturns in economic conditions.

Long-Lived Asset Impairment

The Company’s long-lived assets include property, plant and equipment, and intangible assets. We review property, plant and equipment and intangible assets for impairment whenever events or circumstances indicate that their carrying values may not be recoverable. The following are examples of such events or changes in circumstances:

The carrying amount of property, plant and equipment and intangible assets is not recoverable if the carrying value of the asset group exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset group. In the event of impairment, we recognize a loss for the excess of the recorded value over fair value. The long-term nature of these assets requires the estimation of cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of review.

Income Taxes

The breadth of our operations and complexity of income tax regulations require us to assess uncertainties and make judgments in estimating the ultimate amount of income taxes we will pay. Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. The final income taxes we pay are based upon many factors, including existing income tax laws and regulations, negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation, and resolution of disputes arising from federal, state and international income tax audits. The resolution of these uncertainties may result in adjustments to our income tax assets and liabilities in the future.

Deferred income taxes result from differences between the financial and tax basis of our assets and liabilities. We adjust our deferred income tax assets and liabilities for changes in income tax rates and income tax laws when changes are enacted. We record valuation allowances to reduce deferred income tax assets when it is more likely than not that a tax benefit will not be realized. Significant judgment is required in evaluating the need for and the magnitude of appropriate valuation allowances against deferred income tax assets. The realization of these assets is dependent on generating future taxable income, our ability to carry back or carry forward net operating losses and credits to offset tax liabilities, as well as successful implementation of various tax strategies to generate tax where net operating losses or credit carryforwards exist. In evaluating our ability to realize the deferred income tax assets, we rely principally on the reversal of existing temporary differences, the availability of tax planning strategies, and forecasted income.

We recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Our estimate of the

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potential outcome of any uncertain tax positions is subject to management’s assessment of relevant risks, facts, and circumstances existing at that time. We record a liability for the difference between the benefit recognized and measured based on a more-likely-than-not threshold and the tax position taken or expected to be taken on the tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made. We report tax-related interest and penalties as a component of income tax expense.

Derivative Financial Instruments

We use derivative financial instruments in the normal course of business to manage our exposure to fluctuations in interest rates, foreign currency exchange rates , and precious metal prices. The accounting for derivative financial instruments can be complex and can require significant judgment. Generally, the derivative financial instruments that we use are not complex, and observable market-based inputs are available to measure their fair value. We do not engage in speculative transactions for trading purposes. Financial instruments, including derivative financial instruments, expose us to counterparty credit risk for nonperformance. We manage our exposure to counterparty credit risk through minimum credit standards and procedures to monitor concentrations of credit risk. We enter into these derivative financial instruments with major, reputable, multinational financial institutions. Accordingly, we do not anticipate counter-party default. We continuously evaluate the effectiveness of derivative financial instruments designated as hedges to ensure that they are highly effective. In the event the hedge becomes ineffective, we discontinue hedge treatment. Except as noted below, we do not expect any changes in our risk policies or in the nature of the transactions we enter into to mitigate those risks.

We manage foreign currency risks in a wide variety of foreign currencies principally by entering into forward contracts to mitigate the impact of currency fluctuations on transactions arising from international trade. Our objective in entering into these forward contracts is to preserve the economic value of nonfunctional currency cash flows. Our principal foreign currency exposures relate to the Euro, the Thailand Baht , the Indonesian Rupiah, the Japanese Yen, a nd the Romanian Leu . We mark these forward contracts to fair value based on market prices for comparable contracts and recognize the resulting gains or losses as other income or expense from foreign currency transactions.

Precious metals (primarily silver, gold, platinum and palladium) represent a significant portion of raw material costs in our electronic s products. When we enter into a fixed price sales contract at the customer’s request to establish the price for the precious metals content of the order, we also enter into a forward purchase arrangement with a precious metals supplier to completely cover the value of the precious metals content. Our current precious metal contracts are designated as normal purchase contracts, which are not marked to market.

We also purchase portions of our energy requirements, including natural gas and electricity, under fixed price contracts to reduce the volatility of cost changes. Our current energy contracts are designated as normal purchase contracts, which are not marked to market.

Pension and Other Postretirement Benefits

We sponsor defined benefit plans in the U.S. and many countries outside the U.S., and we also sponsor retiree medical benefits for a segment of our salaried and hourly work force within the U. S. The U.S. pension plans and retiree medical plans represent approximately 89% of pension plan assets, 73% of benefit obligations and 24 % of net periodic pension expense as of December 31, 2016 .

The assumptions we use in actuarial calculations for these plans have a significant impact on benefit obligations and annual net periodic benefit costs. We meet with our actuaries annually to discuss key economic assumptions used to develop these benefit obligations and net periodic costs.

We determine the discount rate for the U.S. pension and retiree medical plans based on a bond model. Using the pension plans’ projected cash flows, the bond model considers all possible bond portfolios that produce matching cash flows and selects the portfolio with the highest possible yield. These portfolios are based on bonds with a quality rating of AA or better under either Moody’s Investor Services, Inc. or Standard & Poor’s Rating Group, but exclude certain bonds, such as callable bonds, bonds with small amounts outstanding, and bonds with unusually high or low yields. The discount rates for the non-U.S. plans are based on a yield curve method, using AA-rated bonds applicable in their respective capital markets. The duration of each plan’s liabilities is used to select the rate from the yield curve corresponding to the same duration.

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For the market-related value of plan assets, we use fair value, rather than a calculated value. The market-related value recognizes changes in fair value in a systematic and rational manner over several years. We calculate the expected return on assets at the beginning of the year for defined benefit plans as the weighted-average of the expected return for the target allocation of the principal asset classes held by each of the plans. In determining the expected returns, we consider both historical performance and an estimate of future long-term rates of return. The Company consults with and considers the opinion of its actuaries in developing appropriate return assumptions. Our target asset allocation percentages are 35% fixed income, 60% equity, and 5% other investments for U.S. plans and 75% fixed income, 24% equity, and 1% other investments for non-U.S. plans. In 2016, investment returns on average plan assets were approximately 7 % within the U.S. p l ans and 23% within non-U.S. plans . In 2015, actual return on plan assets, were lower than the expected return. Future actual pension expense will depend on future investment allocation and performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.

All other assumptions are reviewed periodically by our actuaries and us and may be adjusted based on current trends and expectations as well as past experience in the plans. During the fourth quarter of 2014, the Company adopted the use of new mortality tables within its calculation assumptions, which had a one-time impact of increasing the liability. The new mortality tables reflect underlying increases in life expectancy of participants, thus driving longer benefit payment periods. The impact of the change in mortality assumption on the U.S. pension liability was an increase of the liability of approximately $18 million.

The following table provides the sensitivity of net annual periodic benefit costs for our pension plans, including a U.S. nonqualified retirement plan, and the retiree medical plan to a 25-basis-point decrease in both the discount rate and asset return assumption:







The following table provides the rates used in the assumptions and the changes between 2016 and 2015 :





Our overall net periodic benefit cost for all defined benefit plans was $ 20.2 million in 2016 and $1.5 million in 2015 . The change is mainly the result of increased mark to market actuarial net losses in 2016 .

For 2017 , assuming expected returns on plan assets and no actuarial gains or losses, we expect our o verall net periodic benefit income to be approximately $1.2 million, compared with income of ap proximately $0.1 million in 2016 on a comparable basis.

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Inventories

We value inventory at the lower of cost or market, with cost determined utilizing the first-in, first-out (FIFO) method. We periodically evaluate the net realizable value of inventories based primarily upon their age, but also upon assumptions of future usage in production, customer demand and market conditions. Inventories have been reduced to the lower of cost or realizable value by allowances for slow moving or obsolete goods. If actual circumstances are less favorable than those projected by management in its evaluation of the net realizable value of inventories, additional write-downs may be required. Slow moving, excess or obsolete materials are specifically identified and may be physically separated from other materials, and we rework or dispose of these materials as time and manpower permit.

Environmental Liabilities

Our manufacturing facilities are subject to a broad array of environmental laws and regulations in the countries in which they are located. The costs to comply with complex environmental laws and regulations are significant and will continue for the foreseeable future. We expense these recurring costs as they are incurred. While these costs may increase in the future, they are not expected to have a material impact on our financial position, liquidity or results of operations.

We also accrue for environmental remediation costs when it is probable that a liability has been incurred and we can reasonably estimate the amount. We determine the timing and amount of any liability based upon assumptions regarding future events. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. We adjust these liabilities periodically as remediation efforts progress or as additional technical or legal information becomes available.

Impact of Newly Issued Accounting Pronouncements

Refer to Note 2 to the consolidated financial statements under Item 8 of this Annual Report on Form 10-K for a discussion of accounting standards we recently adopted or will be required to adopt.

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Item 7A — 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, foreign currency exchange rates, and costs of raw materials and energy.

Our exposure to interest rate risk arises from our debt portfolio. We manage this risk by controlling the mix of fixed versus variable-rate debt after considering the interest rate environment and expected future cash flows. 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 that substantially offset these gains and losses.

We are subject to cost changes with respect to our raw materials and energy purchases. We attempt to mitigate raw materials cost increases through product reformulat ions, price increases and productivity improvements. We enter into forward purchase arrangements with preci ous metals suppliers to completely cover the value of the precious metals content of fixed price sales contracts. These agreements are designated as normal purchase contracts, which are not marked to market, and had purchase commitments totaling $ 1.8 million at December 31, 2016 . In addition, we purchase portions of our natural gas, electricity and oxygen requirements under fixed price contracts to reduce the volatility of these costs. These energy contracts are designated as normal purchase contracts, which are not marked to market, and had purchase commitments totaling $ 99.1 million at December 31, 2016 .

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 below:





NM -- Not meaningful



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Item 8 — Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Ferro Corporation

Cleveland, Ohio

We have audited the accompanying consolidated balance sheets of Ferro Corporation and subsidiaries (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included t he financial statement schedule listed in the Index at Item 15. These financial statements and financial st atement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements a nd financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ferro Corporation and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2017, expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Cleveland, Ohio

March 1, 2017