Ferro Corporation 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-584
FERRO CORPORATION
(Exact name of registrant as
specified in its charter)
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Ohio
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34-0217820
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(State of Corporation)
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(IRS Employer Identification
No.)
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1000 Lakeside Avenue
Cleveland, OH
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44114
(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
216-641-8580
Securities Registered Pursuant to section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $1.00
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New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the
Act:
91/8% Senior
Notes due January 1, 2009
Series A ESOP Convertible Preferred Stock, without Par
Value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
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 o NO þ
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 þ NO o
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
registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer
o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). YES o NO þ
The aggregate market value of Ferro Corporation Common Stock,
par value $1.00, held by non-affiliates and based on the closing
sale price as of June 30, 2006, was approximately
$658,239,000.
On January 31, 2007, there were 43,141,565 shares of
Ferro Corporation Common Stock, par value $1.00 outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Ferro Corporations
2007 Annual Meeting of Shareholders are incorporated into
Part III of this Annual Report on
Form 10-K.
PART I
Item 1
Business
History,
Organization and Products
Ferro Corporation was incorporated in Ohio in 1919 as an
enameling company. When we use the terms Ferro,
we, us or the Company, we
are referring to Ferro Corporation and its consolidated
subsidiaries unless we indicate otherwise. Today, we are a
leading producer of specialty materials and chemicals that are
sold to a broad range of manufacturers who, in turn, make
products for many end-use markets. In approximately 50
manufacturing sites around the world, we produce the following
types of products:
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Inorganic specialty products High-quality glazes,
frits, enamels, pigments, dinnerware decorations and other
performance materials;
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Organic specialty products Polymer specialty
materials, engineered plastic compounds, electrolytes,
high-potency pharmaceutical active ingredients and specialty
solvents; and
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Electronic materials High-performance dielectrics,
conductive pastes, metal powders and polishing materials.
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We refer to our products as performance materials and chemicals
because we formulate them to perform specific functions in the
manufacturing processes and end products of our customers. The
products we develop often are delivered to our customers in
combination with customized technical service. The value of our
products stems from the value they create in actual use. We
develop and deliver innovative products to our customers through
our key strengths in:
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Particle Engineering Our ability to design and
produce very small particles made of a broad variety of
materials, with precisely controlled characteristics of shape,
size and distribution. We understand how to disperse these
particles within liquid, paste and gel formulations.
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Color and Glass Science Our understanding of
the chemistry required to develop and produce pigments that
provide color characteristics ideally suited to customers
applications. An ability to provide glass-based coatings with
properties that precisely meet customers needs in a broad
variety of applications.
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Surface Chemistry and Surface Application Technology
Our understanding of chemicals and materials used to develop
products and processes that involve the interface between layers
and the surface properties of materials.
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Technical Applications Support Our skill at working
in customers manufacturing operations to ensure successful
application of our products.
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We divide our operations into eight business units, which
comprise six reportable business segments. We have grouped these
segments by their product group below:
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Inorganic Specialties
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Organic Specialties
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Electronic Materials(3)
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Tile Coating
Systems(1)
Porcelain Enamel(1)
Color and Glass Performance Materials
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Polymer Additives
Specialty Plastics
Pharmaceuticals(2)
Fine Chemicals(2)
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(1) |
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Tile Coating Systems and Porcelain Enamel are combined into one
business segment, Performance Coatings, for financial reporting
purposes. |
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Pharmaceuticals and Fine Chemicals are combined into one
business segment, Other Businesses, for financial reporting
purposes. |
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Electronic Materials segment is its own distinct product group. |
3
Markets
and Customers
Ferros products are used in a variety of product
applications in markets including:
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Major appliances
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Transportation
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Building and renovation
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Electronics
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Household furnishings
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Industrial products
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Packaging
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Pharmaceuticals
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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 applied as films in products such
as solar cells and other electronic components. Still other
products are added to other ingredients during our
customers manufacturing processes to provide desirable
properties to the 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 leading customers include manufacturers of tile, major
appliances, construction materials, automobiles, glass,
multi-layer capacitors, solar cells, batteries, and
pharmaceuticals. Many of our customers, including makers of
major appliances and automobiles, 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 distributors, to deliver products to market. In 2006, 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 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 glaze coatings. There is strong
competition in our markets, ranging from large multinational
corporations to local producers. While many of our customers
purchase custom products and formulations from us, our customers
could generally buy from other sources, if necessary.
4
Raw
Materials and Supplier Relations
Raw materials widely used in our operations include:
Metal Oxides:(1)
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Zinc oxide
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Cobalt oxide
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Lead oxide
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Aluminum oxide
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Nickel oxide
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Polymers:(2)
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Polypropylene
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Unsaturated polyester
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Polystyrene
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Other Inorganic Materials:
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Zircon(1)
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Feldspar(1)
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Silica(1)
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Titanium dioxide(2)
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Fiberglass(2)
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Boron(3)
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Precious and Non-precious Metals:(3)
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Gold
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Platinum
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Palladium
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Silver
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Titanium
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Chromium
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Copper
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Bismuth
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Lithium
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Zinc
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Other Organic Materials:(4)
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Phthalic anhydride
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Toluene
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Butanol
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Tallow
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Soybean oil
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(1) |
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Primarily used by Color and Glass Performance Materials,
Tile Coating Systems and Porcelain Enamel. |
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(2) |
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Primarily used by Specialty Plastics. |
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Primarily used by Electronic Materials, Color and
Glass Performance Materials and Fine Chemicals. |
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Primarily used by Polymer Additives. |
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 may have a significant impact on the financial
performance of the related businesses. We attempt to pass
through to our customers raw material cost fluctuations,
including those related to precious metals.
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. In addition, the magnitude of our purchases provides
for leverage in negotiating favorable conditions for supplier
contracts. We did not encounter raw material shortages in 2006,
but we are aware of potential future shortages in the world
market for certain commodities. We expect to be affected by the
cost increases relating to the shortages, but do not expect any
interruptions in our production processes or deliveries to our
customers.
Environmental
Matters
As part of the production of some of our products, we handle,
process, use and store hazardous materials. As a result of this,
we operate manufacturing facilities that are subject to a broad
array of environmental laws and regulations in the countries in
which they operate, particularly for plant wastes and emissions.
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 compliance with the environmental
regulations to which our operations are subject and
5
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.
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. Capital
expenditures for environmental control were $6.2 million in
2006, $3.3 million in 2005, and $7.1 million in 2004.
These amounts pertain primarily to costs associated with
environmental protection equipment. Although we cannot precisely
predict future environmental capital spending, we do not expect
the costs 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, 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 becomes more certain, or as additional technical
or legal information becomes 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. We also conduct research and development
activities at our Posnick Center for Innovative Technology in
Independence, Ohio. These centers are augmented by local
laboratories, which provide technical service and support to
meet customer and market needs of particular geographic areas.
Expenditures for research and development activities for
continuing operations were approximately $42.6 million in
2006, $38.4 million in 2005, and $42.4 million in
2004. Expenditures for individual customer requests for research
and development were not material. During 2007, we expect to
spend approximately $45.9 million on research and
development.
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, 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 2025.
We also use a number of trademarks that are important to our
businesses as a whole or to a particular segment. We believe
that these trademarks are adequately protected.
Employees
At December 31, 2006, we employed 6,660 full-time
employees, including 4,367 employees in our foreign consolidated
subsidiaries and 2,293 in the U.S. Total employment
decreased from the prior year end due to our various
restructuring and cost reduction programs.
Collective bargaining agreements cover approximately 21.8% of
our U.S. workforce. Approximately 7.3% of the
U.S. employees are affected by labor agreements that expire
in 2007 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 works councils. Some of these laws
and regulations may affect the timing, amount and nature of
restructuring and cost reduction programs in that region.
6
Domestic
and Foreign Operations
Financial information about our domestic and foreign operations
by segment is included herein in Note 17 to the
consolidated financial statements under Item 8 of this
Form 10-K.
More than 50% of our net sales are outside of the U.S. Our
customers represent more than 30 industries and operate in
approximately 100 countries.
We began international operations in 1927. Our products are
produced and distributed through our subsidiaries in the
following countries:
Wholly-owned:
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Argentina
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Australia
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Belgium
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Brazil
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China
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France
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Germany
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Italy
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Japan
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Mexico
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Netherlands
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Portugal
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Spain
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Taiwan
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Thailand
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United Kingdom
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Majority-owned and Controlled:
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China
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Indonesia
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Italy
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Spain
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South Korea
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Thailand
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Venezuela
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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 Governance Principles, Legal and Ethical Policies,
Guidelines for Determining Director Independence, and charters
for our Audit Committee, Compensation Committee, Finance
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 1000 Lakeside Avenue, Cleveland, Ohio,
44114-1147.
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.
7
Item 1A
Risk Factors
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
depend on reliable sources of raw materials and other supplies
at a reasonable cost, but the availability of these materials
and supplies could be interrupted
and/or their
prices could escalate and adversely affect the Companys
sales and profitability.
We purchase many raw materials and supplies that 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 availability or cost. 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.
The
markets for our products are highly competitive and subject to
intense price competition, and that could adversely affect the
Companys 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.
We
strive to improve operating margins through sales growth, price
increases, productivity gains, improved purchasing techniques
and restructuring activities, 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, adopting
purchasing techniques that lower costs or provide increased cost
predictability, and restructuring businesses 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 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.
We
sell our products into industries where demand has been
unpredictable, cyclical or heavily influenced by consumer
spending.
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 and
transportation, are cyclical or closely tied to consumer demand,
which is difficult to predict. Incorrect forecasts of demand or
unforeseen reductions in demand can adversely affect costs and
profitability due to factors such as underused manufacturing
capacity, excess inventory, or working capital needs. These
factors can result in lower profitability.
The
global scope of our operations exposes us to risks related to
currency conversion rates and changing economic, social and
political conditions around the world.
In order to support global customers, access regional markets
and compete effectively, our operations are located around the
world. As a result, our operations have additional complexity
from changing economic, social and political conditions in
multiple locations. While we attempt to anticipate these changes
and manage our business appropriately, 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.
8
We
have a growing presence in the Asia/Pacific region where it can
be difficult for a
U.S.-based
company, such as Ferro, to compete lawfully with local
competitors.
Many of our most promising growth opportunities are in the
Asia/Pacific region, especially the Peoples Republic of
China. Although we have been able to compete successfully in
those markets to date, local laws and customs can make it
difficult for a
U.S.-based
company to compete on a level playing field with
local competitors without engaging in conduct that would be
illegal under U.S. law. Our strict policy of observing the
highest standards of legal and ethical conduct may cause us to
lose some otherwise attractive business opportunities to local
competition in the region.
Regulatory
authorities in the U.S., European Union and elsewhere are taking
a much more aggressive approach to regulating hazardous
materials, and those regulations could affect sales of our
products.
Hazardous material legislation and regulations 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 Proposition 65 or the European Unions
(EU) hazardous substances directive. The proposed EU
REACH registration system, for example, would
require us to perform toxicity studies of the components of some
of our products and to register the information in a central
database, increasing the cost of these products. As a result of
these hazardous material regulations, customers may avoid
purchasing some products in favor of perceived
greener, less hazardous or less costly alternatives.
This factor could adversely affect our sales and operating
profits.
Our
operations are subject to stringent environmental, health and
safety regulations, and compliance with those regulations could
require us to make significant investments.
We strive to 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 may require us to make significant capital
investments, incur training costs, make changes in manufacturing
processes or product formulations, or incur costs that could
adversely affect the Companys profitability. 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
depend on external financial resources, and any interruption in
access to capital markets or borrowings could adversely affect
our financial condition.
As of December 31, 2006, the Company had approximately
$592 million of short-term and long-term debt with varying
maturities. These borrowings have allowed us to make investments
in growth opportunities and fund working capital requirements.
Our continued access to capital markets is essential if we are
to meet our current obligations as well as fund our strategic
initiatives. An interruption in our access to external financing
could adversely affect our business prospects and financial
condition. See further information regarding the Companys
liquidity in Note 5 to the consolidated financial
statements included under Item 8 of this
Form 10-K.
Interest
rates on some of our borrowings are variable, and our borrowing
costs could be affected adversely by interest rate
increases.
Portions of our debt obligations have variable interest rates.
Generally, when interest rates rise, as they have over the last
year, the Companys cost of borrowings increases. We
estimate, based on the debt obligations outstanding at
December 31, 2006, that a one percent increase in interest
rates would cause interest expense to increase by approximately
$4.8 million annually. Continued interest rate increases
could raise the cost of borrowings and adversely affect our
financial performance. See further information regarding the
Companys liquidity in Note 5 to the consolidated
financial statements included under Item 8 of this
Form 10-K.
9
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.
Our debt obligations are secured by substantially all of the
Companys 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 5 to the consolidated financial statements
under Item 8 of this
Form 10-K.
We are
subject to a number of restrictive covenants under our credit
facilities, and those covenants could affect our flexibility to
fund strategic initiatives.
Our credit facilities contain a number of restrictive covenants
as described in more detail in Note 5 to the consolidated
financial statements under Item 8 of this
Form 10-K.
These covenants include customary operating restrictions that
limit our ability to engage in certain activities, including
additional loans and investments; prepayments, redemptions and
repurchases of debt; and mergers, acquisitions and asset sales.
We are also subject to customary financial covenants including a
leverage ratio and a fixed charge coverage ratio. These
covenants restrict the amount of our borrowings, reducing our
flexibility to fund strategic initiatives. Breaches of these
covenants could become defaults under our credit facilities and
cause the acceleration of debt payments beyond our ability
to pay.
We
have significant deferred tax assets, and our ability to utilize
these assets will depend on the Companys future
performance.
To fully realize the carrying value of our net deferred tax
assets, we will have to generate adequate taxable profits in
various tax jurisdictions. As of December 31, 2006, the
Company had $101.2 million of net deferred tax assets,
after a valuation allowance. If the Company does 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
allowance may need to be increased in our financial statements,
adversely affecting results of operations. Further information
on our deferred tax assets is presented in Note 7 to the
consolidated financial statements under Item 8 of this
Form 10-K.
We are
a defendant in several lawsuits that could have an adverse
effect on our financial condition
and/or
financial performance, unless they are successfully
resolved.
We are routinely involved in litigation brought by suppliers,
customers, employees, governmental agencies and others.
Litigation is an inherently unpredictable process and
unanticipated negative outcomes are possible. The most
significant pending litigation is described in
Item 3 Legal Proceedings of this
Form 10-K.
Our
businesses depend on a continuous stream of new products, and
failure to introduce new products could affect our sales and
profitability.
One way that we remain competitive in our markets 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 features and performance
required by customers could adversely affect our sales, or could
require us to compensate by lowering prices. The result could be
lower sales
and/or lower
profitability.
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.
10
We are
exposed to risks associated with acts of God, terrorists and
others, as well as fires, explosions, wars, riots, accidents,
embargos, natural disasters, strikes and other work stoppages,
quarantines and other governmental actions, and other events or
circumstances that are beyond our control.
The Company is exposed to risks from various events that are
beyond its control, which may have significant effects on its
results of operations. While we attempt to mitigate these risks
through appropriate 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 results of 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 the Company. 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
Our corporate headquarters offices are located at 1000 Lakeside
Avenue, Cleveland, Ohio. The Company also owns other corporate
facilities, including a centralized research and development
facility, which are located in Independence, Ohio. We own
principal manufacturing plants that range in size from
17,000 sq. ft. to over 500,000 sq. ft.
Plants with more than 250,000 sq. ft. are located in:
Germany; Spain; Niagara Falls, New York; Penn Yan, New York;
Fort Worth, Texas; and France. The locations of these
principal manufacturing plants by reportable business segment
are as follows:
Performance Coatings U.S.: Cleveland, Ohio. Outside
the U.S.: Argentina, Australia, China, France, Indonesia, Italy,
Mexico, the Netherlands, Spain, Thailand and Venezuela.
Electronic Materials U.S.: Penn Yan, New York; South
Plainfield, New Jersey; and Niagara Falls, New York. Outside the
U.S.: the Netherlands.
Color and Glass Performance Materials U.S.:
Toccoa, Georgia; Orrville, Ohio; and Washington, Pennsylvania.
Outside the U.S.: Australia, China, France, Germany, Italy,
Mexico, United Kingdom and Venezuela.
Polymer Additives U.S.: Bridgeport, New Jersey;
Cleveland, Ohio; Walton Hills, Ohio; and Fort Worth, Texas.
Specialty Plastics U.S.: Evansville, Indiana;
Plymouth, Indiana; Edison, New Jersey; and Stryker, Ohio.
Outside the U.S.: the Netherlands and Spain.
Other U.S.: Waukegan, Illinois; and Baton Rouge,
Louisiana. Outside the U.S.: China
In October 2005, the Dutch government placed a lien on one of
our facilities in the Netherlands as collateral for any future
payment relating to an unresolved environmental claim. In March
2006, as a result of a credit rating downgrade, lenders of the
Companys revolving credit facility, senior notes and
debentures became entitled to security interest in the
Companys and its domestic material subsidiaries real
estate. This security interest was substantially completed in
April 2006. Ferros current revolving credit and term loan
facility, which was established in June 2006, also shares in
this security interest.
In September 2006, we announced we had begun construction of a
new manufacturing plant at our existing location in Almazora,
Spain. The new plant will include approximately
125,000 sq. ft. of manufacturing space and will
produce colors for the European tile coatings market. The new
facility is expected to begin commercial production in the
fourth quarter of 2007. In November 2006, we announced that we
will cease production at our Niagara Falls, New York,
manufacturing facility by the end of 2007 and will transfer some
of its production to other Ferro production facilities.
11
In addition, we lease manufacturing facilities for the
Performance Coatings segment in Brazil and Italy; for the
Electronic Materials segment in Vista, California, Germany and
Japan; for the Color and Glass Performance Materials
segment in Japan and Portugal; for the Polymer Additives segment
in Belgium and the United Kingdom; and for the Specialty
Plastics segment in Carpentersville, Illinois. In some
instances, the manufacturing facilities are used for two or more
business segments. Leased facilities range in size from
23,000 sq. ft. to over 300,000 sq. ft. at a
plant located in Portugal.
Item 3
Legal Proceedings
In February 2003, we were requested to produce documents in
connection with an investigation by the United States Department
of Justice into possible antitrust violations in the heat
stabilizer industry. In April 2006, we were notified by the
Department of Justice that the Government had closed its
investigation and that the Company was relieved of any
obligation to retain documents that were responsive to the
Governments earlier document request. Before closing its
investigation, the Department of Justice took no action against
the Company or any of its current or former employees. The
Company was previously named as a defendant in several lawsuits
alleging civil damages and requesting injunctive relief relating
to the conduct the Government was investigating. We are
vigorously defending the Company in those actions and believe we
would have a claim for indemnification by the former owner of
our heat stabilizer business if the Company were found liable.
Because these actions are in their preliminary stages, we cannot
determine the outcomes of these lawsuits at this time.
In a July 2004 press release, we announced that our Polymer
Additives business performance in the second quarter of 2004
fell short of expectations and that our Audit Committee would
investigate possible inappropriate accounting entries in the
Polymer Additives business. We were later sued in a series of
putative securities class action lawsuits related to this July
2004 announcement. Those lawsuits were consolidated into a
single case, and the consolidated case is currently pending in
the United States District Court for the Northern District of
Ohio against the Company, our deceased former Chief Executive
Officer, our former Chief Financial Officer, and a former
operating Vice President of the Company. This claim is based on
alleged violations of Federal securities laws. We consider these
allegations to be unfounded and are defending this action
vigorously. We have notified Ferros directors and officers
liability insurer of the claim. Because this action is in its
preliminary stage, we cannot determine the outcome of this
litigation at this time.
Also following this July 2004 press release, four derivative
lawsuits were filed and subsequently consolidated in the United
States District Court for the Northern District of Ohio. These
lawsuits alleged breach of fiduciary duties and
mismanagement-related claims. In March 2006, the Court dismissed
the consolidated derivative action without prejudice. In April
2006, the plaintiffs filed a motion seeking relief from the
judgment that dismissed the derivative lawsuit and seeking to
amend their complaint further following discovery. The
plaintiffs motion was denied. Later in April 2006,
plaintiffs filed a Notice of Appeal to the Sixth Circuit Court
of Appeals. The Directors and named executives consider the
allegations contained in the derivative actions to be unfounded,
have vigorously defended this action and will defend against the
new filing. We have notified Ferros directors and officers
liability insurer of the claim. Because this appeal is in the
preliminary stage, we cannot determine the outcome of this
litigation at this time.
Finally, in June 2005, a putative class action lawsuit was filed
against the Company and certain former and current employees
alleging breach of fiduciary duty with respect to ERISA plans in
connection with the matters announced in the July 2004 press
release. In October 2006, the parties reached a settlement in
principle that would result in the dismissal of the lawsuit with
prejudice in exchange for a settlement amount of
$4.0 million, which would be paid by the Companys
liability insurer subject to our satisfaction of the remaining
retention amount under the insurance policy. The Company and the
individual defendants have expressly denied any and all
liability. The United States District Court granted preliminary
approval of the settlement in November 2006. Several conditions
must be met before the settlement becomes final. We do not
expect the ultimate outcome of the lawsuit to have a material
effect on the financial position, results of operations or cash
flows of the Company.
In October 2004, the Belgian Ministry of Economic Affairs
Commercial Policy Division (the Ministry) served on
our Belgian subsidiary a mandate requiring the production of
certain documents related to an alleged cartel among producers
of butyl benzyl phthalate (BBP) from 1983 to 2002.
Subsequently, German and
12
Hungarian authorities initiated their own national
investigations related to the same allegations. Our Belgian
subsidiary acquired its BBP business from Solutia Europe
S.A./N.V. (SOLBR) in August 2000. Ferro promptly
notified SOLBR of the Ministrys actions and requested
SOLBR to indemnify and defend Ferro and its Belgian subsidiary
with respect to these investigations. In response to our notice,
SOLBR exercised its right under the 2000 acquisition agreement
to take over the defense and settlement of these matters. In
December 2005, the Hungarian authorities imposed a
de minimus fine on our Belgian subsidiary, and we expect
the German and Belgian authorities also to assess fines for the
alleged conduct. We cannot predict the amount of fines that will
ultimately be assessed and cannot predict the degree to which
SOLBR will indemnify Ferros Belgian subsidiary for such
fines.
In October 2005, we disclosed to the New Jersey Department of
Environmental Protection (NJDEP) that we had
identified potential violations of the New Jersey Water
Pollution Control Act, and that we had started an investigation
of the possible violations. We also committed to report any
violations and to undertake any necessary remedial actions. In
September 2006, we entered into an agreement with the NJDEP
under which we paid the State of New Jersey a civil
administrative penalty of approximately $0.2 million in
full settlement of the violations. In December 2006, a former
employee pled guilty to a charge of negligently submitting false
information and was fined accordingly.
In late February 2007, we discovered that some of the values
shown on certificates of analysis provided to customers by its
Specialties Plastics business were inaccurate. While we are
uncertain as to when these inaccuracies began or their source,
we believe the material currently being shipped by our Specialty
Plastics business is consistent with the overall quality of past
shipments. We are in the process of compiling historical
physical properties data on products supplied to customers in
the past and will work with the customers to show how the
historical data can be utilized as the basis for establishing
shipping specifications consistent with what those customers
have been receiving. While it is possible some customers may not
accept products with the new shipping specifications or
otherwise may assert claims relating to this issue, we cannot
predict at this time the financial effects of any resulting lost
business or claims.
There are various other lawsuits and claims pending against the
Company and its consolidated subsidiaries. In our opinion, the
ultimate liabilities, if any, and expenses resulting from such
lawsuits and claims will not materially affect the consolidated
financial position, results of operations, or cash flows of the
Company.
Item 4
Submission of Matters to a Vote of Security
Holders
At Ferro Corporations 2006 Annual Meeting of Shareholders
held on November 3, 2006, there were a total of
40,171,441 shares represented either in person or by proxy.
The shareholders elected three Directors to the Ferro
Corporation Board of Directors, Jennie S. Hwang, Ph.D.,
James F. Kirsch, and William J. Sharp, to serve on the Board
until the meeting in the year 2009. The results of the voting
for Directors were as follows.
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For
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Withheld Authority
|
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Jennie S. Hwang, Ph.D.
|
|
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36,556,649
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|
|
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3,614,792
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James F. Kirsch
|
|
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37,850,506
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|
|
|
2,320,935
|
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William J. Sharp
|
|
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36,454,139
|
|
|
|
3,717,302
|
|
The terms of office for Michael H. Bulkin, Sandra Austin
Crayton, William B. Lawrence, Michael F. Mee, Dennis W.
Sullivan, and Alberto Weisser continued after the meeting.
Shareholders approved the 2006 Long-Term Incentive Plan. The
vote was 24,691,739 for; 11,927,139 against; and 843,804
abstaining.
Shareholders approved an amendment of Ferros Code of
Regulations to permit notice of shareholder meetings via
electronic communication. The vote was 39,653,898 for; 402,780
against; and 114,763 abstaining.
13
Executive
Officers of the Registrant
The executive officers of the Company as of February 28,
2007, are listed below, along with their ages and positions held
during the past five years. The year indicates when the
individual was named to the indicated position. No family
relationship exists between any of Ferros executive
officers.
James F. Kirsch 49
Chairman, President and Chief Executive Officer, 2006
President and Chief Executive Officer, 2005
President and Chief Operating Officer, 2004
President, Premix Inc., and President, Quantum Composites Inc.,
manufacturers of thermoset molding compounds, parts and
sub-assemblies
for the automotive, aerospace, electrical and HVAC industries,
2002
Sallie B. Bailey 47
Vice President and Chief Financial Officer, 2007
Senior Vice President-Finance and Controller, The Timken
Company, an international manufacturer of highly engineered
bearings and alloy steels and provider of related products and
services, 2003
Corporate Controller, The Timken Company, 2001
James C. Bays 57
Vice President, General Counsel and Secretary, 2006
Vice President and General Counsel, 2001
Ann E. Killian 52
Vice President, Human Resources, 2005
Vice President, Human Resources, W. W. Holdings, LLC, a
manufacturer and distributor of doors, frames and hardware
products for the commercial construction industry, 2003
Vice President, Compensation & Benefits, TRW Inc., a
provider of advanced technology products and services for the
global automotive, aerospace and information systems markets,
1999
Celeste Beeks Mastin 38
Vice President, Growth and Development, 2006
Vice President, Color and Glass Performance Materials, 2004
World Wide Business Director, Performance Pigments and Colors,
2003
Vice President and General Manager, Bostik Findley, Inc.,
Nonwovens Division, a global producer of adhesives, 2001
Michael J. Murry 55
Vice President, Inorganic Specialties, 2006
Vice President, Performance Coatings, 2005
President, Chief Executive Officer, and Director, Catalytica
Energy Systems, Inc., a provider of products that reduce
nitrogen oxides (NOx) emissions for the transportation and power
generation industries, 2003
Vice President and General Manager, Ballard Power Systems Inc.,
a producer of hydrogen proton exchange membrane (PEM) fuel cells
and component systems, 2001
Barry D. Russell 42
Vice President, Electronic Material Systems, 2006
Group Vice President and General Manager, Electronic Materials,
Honeywell International, a provider of aerospace products and
services; control technologies for buildings, homes, and
industry; turbo chargers; automotive products; and specialty
materials, 2004
Business Director and General Manager, Specialty Additives,
Honeywell International, 2002
Peter T. Thomas 51
Vice President, Organic Specialties, 2006
Vice President, Pharmaceuticals and Fine Chemicals and Polymer
Additives, 2004
Vice President, Pharmaceuticals and Fine Chemicals, 2003
Worldwide Business Director, Pharmaceuticals and Fine Chemicals,
2002
14
PART II
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Item 5
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Market
for Registrants 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. At January 31, 2007, we had
1,644 shareholders of record for our common stock. The
closing price of the common stock on January 31, 2007, was
$21.31 per share.
The quarterly high and low
intra-day
sales prices and dividends declared per share for our common
stock during 2006 and 2005 were as follows:
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|
|
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2006
|
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2005
|
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High
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Low
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Dividends
|
|
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High
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|
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Low
|
|
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Dividends
|
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First Quarter
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$
|
20.80
|
|
|
$
|
18.60
|
|
|
$
|
0.145
|
|
|
$
|
23.55
|
|
|
$
|
18.36
|
|
|
$
|
0.145
|
|
Second Quarter
|
|
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20.78
|
|
|
|
15.05
|
|
|
|
0.145
|
|
|
|
21.22
|
|
|
|
16.77
|
|
|
|
0.145
|
|
Third Quarter
|
|
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18.66
|
|
|
|
13.82
|
|
|
|
0.145
|
|
|
|
23.22
|
|
|
|
16.91
|
|
|
|
0.145
|
|
Fourth Quarter
|
|
|
21.70
|
|
|
|
16.74
|
|
|
|
0.145
|
|
|
|
20.71
|
|
|
|
16.27
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|
|
|
0.145
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We intend to continue to declare quarterly dividends on our
common stock, however, we cannot make any assurances about the
amount of future dividends, since any future dividends depend on
our cash flow from operations, earnings, financial condition,
capital requirements, and other liquidity matters discussed in
Managements Discussion and Analysis of Financial Condition
and Results of Operations under Item 7 of this Annual
Report on
Form 10-K.
We did not repurchase any of our common stock during the fourth
quarter of 2006.
The chart below compares Ferros cumulative total
shareholder return for the five years ended December 31,
2006, to that of the Standard & Poors 500 Index
and the Standard & Poors 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, 2001.
COMPARISON
OF FIVE-YEAR
CUMULATIVE TOTAL RETURNS
15
Item 6
Selected Financial Data
The following table presents selected financial data for the
last five years ended December 31:
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|
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2006
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2005
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|
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2004
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|
|
2003
|
|
|
2002
|
|
|
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(Dollars in thousands, except per share data)
|
|
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Net sales
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
|
$
|
1,615,598
|
|
|
$
|
1,528,454
|
|
Income from continuing operations
|
|
|
20,562
|
|
|
|
17,144
|
|
|
|
27,840
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|
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9,638
|
|
|
|
33,191
|
|
Basic earnings per share from
continuing operations
|
|
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0.45
|
|
|
|
0.37
|
|
|
|
0.62
|
|
|
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0.18
|
|
|
|
0.80
|
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Diluted earnings per share from
continuing operations
|
|
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0.45
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|
|
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0.37
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|
|
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0.62
|
|
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0.18
|
|
|
|
0.80
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Cash dividends declared per common
share
|
|
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0.58
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|
|
|
0.58
|
|
|
|
0.58
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|
|
|
0.58
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|
|
|
0.58
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Total assets
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|
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1,732,937
|
|
|
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1,668,544
|
|
|
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1,733,437
|
|
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1,731,258
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|
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1,603,586
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Long-term debt, including current
portion
|
|
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584,978
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|
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547,857
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|
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498,829
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525,345
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444,434
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|
On September 30, 2002, we sold our Powder Coatings business
unit. On June 30, 2003, the Company sold its Petroleum
Additives business and its Specialty Ceramics business. For all
periods presented, we report those businesses as discontinued
operations. The divestiture of the Powder Coatings, Petroleum
Additives and Specialty Ceramics businesses are further
discussed in Note 15 to the consolidated financial
statements under Item 8 of this Annual Report on
Form 10-K.
Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview
Market conditions in 2006 were generally favorable and sales
increased in a number of product lines and regions. Sales
increased most significantly in our Electronic Materials,
Performance Coatings and Color and Glass Performance
Materials segments. Sales grew at a slower pace in our Polymer
Additives segment, and declined in Specialty Plastics. Both the
Polymer Additives and Specialty Plastics segments were affected
by weaker demand during the second half of the year from North
American customers serving residential construction and
automotive markets. For the year, sales increased by
approximately 3% in North America, 15% in Europe, 17% in Asia
and 17% in Latin America. Total company sales increased by 8.5%.
Beyond fundamental product demand, the factors that most
affected 2006 results included the following:
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Increased and volatile raw material costs, and our ability to
adjust selling prices to maintain our profitability,
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Increased borrowing levels and increased interest rates on our
debt,
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Cost control initiatives, including costs associated with
restructuring programs, and
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Costs incurred for the accounting investigation and restatement
process.
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Prices for a number of raw materials increased significantly
during the year. Natural gas prices were high in the beginning
of the year, but moderated somewhat as the year progressed. We
were able to adjust product prices higher, in aggregate, to
cover increases in raw material costs. We also reformulated
certain products to provide customers with alternatives that
used less costly raw materials. In some cases we also employed
hedging strategies to reduce the volatility of our raw material
costs and provide more time to change prices in anticipation of
future raw material cost increases.
During 2006, our debt levels increased, largely as a result of
increased deposit requirements for precious metal consignment
arrangements and for increased working capital to support higher
sales. In addition, we entered into new revolving credit and
term loan agreements during the year that included higher
interest rates than the
16
agreements they replaced. As a result, our interest expense
increased. Also during 2006, we initiated multiple restructuring
programs that are expected to reduce our operating costs in
future years. As part of these programs, we recorded asset
impairments, accelerated depreciation, severance and other costs
that reduced our overall profitability.
In 2006, we recorded costs associated with the accounting
investigation and restatements of our 2003 and first quarter
2004 consolidated financial statements. We completed the
restatements of those financial statements in 2006 and became
current in our financial filings with the SEC.
Total segment income increased in 2006 to $151.8 million
from $118.0 million in 2005. This improvement was driven by
increases in the Electronic Materials, Performance Coatings,
Color and Glass Performance Materials and Specialty
Plastics segments, primarily as the result of improved prices.
Segment income in Polymer Additives declined for the year,
primarily as a result of higher manufacturing costs throughout
the year and weaker sales volume in the fourth quarter.
Income from continuing operations for the year increased to
$20.6 million from $17.1 million in 2005. The primary
reasons for the increase were higher sales, improving gross
profit, lower selling, general and administrative expenses,
increased interest earned and lower taxes. These improvements
were partially offset by higher restructuring-related costs and
increased interest expense.
During 2006, working capital increased as a result of higher
receivables and inventory levels required to support increased
sales. As a result of the higher working capital requirements,
including cash deposit requirements for precious metal
consignments, total short-term and long-term debt increased by
$38.7 million. Also, at the end of 2006, our note
receivable from Ferro Finance Corporation (FFC), a
wholly-owned unconsolidated qualified special purpose entity,
was $16.1 million, down from $111.9 million at the end
of 2005. This change reflects proceeds from FFC in excess of
trade accounts receivable sold to FFC during 2006 in our primary
receivable sales program. An additional $25.0 million
investment by Ferro Corporation in FCC was the primary driver of
an increase in other non-current assets at the end of 2006,
compared with the end of 2005. Post retirement and pension
liabilities declined in 2006, primarily as the result of
$37.3 million in curtailments resulting from changes to our
U.S. pension and post retirement benefit programs, as
announced in February 2006, and settlements paid, primarily to
the beneficiaries of our deceased former Chief Executive
Officer, from a non-qualified defined benefit retirement plan.
Our financial condition and the refinancing of our former credit
facility significantly affected the nature of our 2006 cash
flows. This resulted in a decrease in net borrowing cash flows
for 2006 as compared with 2005 of $11.5 million and the
payment of debt issue costs in 2006 of $16.2 million. Also
as a result of our financial condition in 2006, we were required
to invest $25.0 million in Ferro Finance Corporation and to
place $51.1 million more on deposit for precious metals. In
2005, we were required to place $11.0 million more on
deposit for precious metals. Increased working capital
requirements for accounts receivable and inventories aggregating
$47.0 million negatively impacted operating cash flows for
2006. These were offset by increased net income of
$3.8 million, increased non-cash restructuring charges of
$19.5 million, increased depreciation expense of
$4.7 million due to accelerated depreciation, other changes
in working capital aggregating $6.9 million, and increased
proceeds from our asset securitization program of
$101.9 million, which positively impacted operating cash
flows for 2006.
Outlook
Economic conditions continue to be generally favorable, although
we expect differences between geographic regions. We expect to
continue overall sales growth, although weaker demand in the
United States, particularly from customers serving markets
related to residential construction and automotive production,
is expected to continue for several quarters. We expect to
continue to record charges associated with current and future
restructuring programs, particularly related to our
rationalization of the manufacturing assets in our European
operations. Interest expense is expected to decline somewhat
from the levels experienced during the final quarter of 2006 as
a result of lower deposit requirements on precious metals and
slightly lower interest rates realized by becoming current on
our financial reporting.
17
Results
of Operations
Comparison
of the years ended December 31, 2006 and 2005
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|
|
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2006
|
|
|
2005
|
|
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$ Change
|
|
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% Change
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Net sales
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
159,220
|
|
|
|
8.5
|
%
|
Cost of sales
|
|
|
1,626,733
|
|
|
|
1,498,504
|
|
|
|
128,229
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
414,792
|
|
|
|
383,801
|
|
|
|
30,991
|
|
|
|
8.1
|
%
|
Gross margin percentage
|
|
|
20.3
|
%
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
305,211
|
|
|
|
310,056
|
|
|
|
(4,845
|
)
|
|
|
(1.6
|
)%
|
Restructuring charges
|
|
|
23,146
|
|
|
|
3,677
|
|
|
|
19,469
|
|
|
|
529.5
|
%
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
64,427
|
|
|
|
46,919
|
|
|
|
17,508
|
|
|
|
37.3
|
%
|
Interest earned
|
|
|
(4,466
|
)
|
|
|
(538
|
)
|
|
|
(3,928
|
)
|
|
|
730.1
|
%
|
Foreign currency transactions, net
|
|
|
1,040
|
|
|
|
1,284
|
|
|
|
(244
|
)
|
|
|
(19.0
|
)%
|
Gain on sale of businesses
|
|
|
(67
|
)
|
|
|
(69
|
)
|
|
|
2
|
|
|
|
(2.9
|
)%
|
Miscellaneous income, net
|
|
|
(87
|
)
|
|
|
(1,600
|
)
|
|
|
1,513
|
|
|
|
(94.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
25,588
|
|
|
|
24,072
|
|
|
|
1,516
|
|
|
|
6.3
|
%
|
Income tax expense
|
|
|
5,026
|
|
|
|
6,928
|
|
|
|
(1,902
|
)
|
|
|
(27.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
20,562
|
|
|
|
17,144
|
|
|
|
3,418
|
|
|
|
19.9
|
%
|
Loss on disposal of discontinued
operations, net of tax
|
|
|
472
|
|
|
|
868
|
|
|
|
(396
|
)
|
|
|
(45.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,090
|
|
|
$
|
16,276
|
|
|
$
|
3,814
|
|
|
|
23.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share
|
|
$
|
0.44
|
|
|
$
|
0.35
|
|
|
$
|
0.09
|
|
|
|
25.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from continuing operations grew by 8.5% in 2006, driven
primarily by improved pricing and product mix throughout the
world. Improved volumes in Europe and Latin America were offset
by volume declines in North America and Asia. On a consolidated
basis, favorable changes in foreign exchange rates increased
sales by less than one percent.
Gross profit increased during 2006, compared with 2005. The
increase in gross profit was the result of higher sales, and
prices that increased more than the aggregate increase in raw
material costs. Gross margin percentage, defined as gross profit
as a percentage of sales, declined in 2006, compared with 2005,
as a result of accelerated depreciation costs and higher
precious metal prices. Gross profit was reduced by
$4.6 million in 2006 as a result of costs associated with
our manufacturing rationalization programs. Higher precious
metal costs also contributed to the decline in gross margin
percentage because changes in precious metal prices are
generally passed through to customers without gross margin
contribution.
Selling, general and administrative (SG&A) costs decreased
by $4.8 million during 2006, while SG&A expenses as a
percent of revenues declined from 16.5% to 15.0% during the
year. Charges of $8.2 million, primarily related to the
accounting investigation and restatement, were recorded as part
of SG&A expense during 2006. These charges were
$2.3 million less than the amount recorded in 2005. This
reduction in 2006 SG&A expense was partially offset by other
expense increases required to support the growth in sales,
particularly in our Electronic Materials business. During the
first quarter of 2006, we announced changes to some of our
postretirement benefit programs. Certain employees who had been
participating in our largest defined benefit program stopped
accruing benefit service after March 31, 2006. In addition,
we limited eligibility for retiree medical and life insurance
coverage to those employees who were 55 years of age or
older with 10 or more years of service as of December 31,
2006. Benefits under these programs will be available only to
those employees who retire by December 31, 2007, after
having advised us of their retirement plans by March 31,
2007. These changes resulted in a one-time benefit of
$5.0 million in the second quarter of 2006. Offsetting this
benefit was a $4.9 million settlement loss from a
18
nonqualified benefit retirement plan, related primarily to a
lump sum payment to the beneficiary of Ferros deceased
former Chief Executive Officer.
Restructuring charges of $23.1 million were recorded in
2006, primarily associated with the consolidation and closing of
some of our manufacturing assets in our Performance Coatings and
Color and Glass Performance Materials segments in Europe
and our Electronic Materials segment in the United States.
Interest expense was higher in 2006 as a result of increased
debt levels and higher interest rates. Our total borrowings were
increased, in part, as a result of higher cash deposit
requirements on precious metal consignment arrangements. These
deposits increased from $19.0 million at the end of 2005 to
$70.1 million at the end of 2006. We expect that these
deposit requirements will be less in 2007, as a result of our
regaining current status on financial reporting and our efforts
to negotiate more favorable terms from participants in our
consignment programs. Borrowings also increased as a result of
other increased working capital requirements used to support
higher sales levels. During 2006, inventories increased to
$254.5 million from $215.3 million in 2005. Net
receivables increased to $220.9 million from
$182.4 million in the prior year. Also included in the 2006
interest expense are charges of $2.5 million associated
with previously unamortized fees and discounts related to
certain of our debentures that were repaid in July and August
2006 and previously unamortized fees related to our former
revolving credit facility.
Interest earned during 2006 increased to $4.5 million from
$0.5 million in 2005 primarily as a result of interest
earned on cash deposits associated with our precious metal
consignments.
Net foreign currency losses were largely unchanged from 2005 to
2006. We use certain foreign currency financial instruments to
offset, or hedge, short-term transactions that are denominated
in non-dollar currencies. The carrying values of these contracts
are adjusted to market value and the resulting gains or losses
are charged to income or expense in the period.
In 2006, we recognized a $0.4 million gain on the sale of
our interest in Chilches Materials SA, an unconsolidated
affiliate, and a $0.3 million loss from the liquidation of
Ferro Toyo Company Limited, a consolidated subsidiary.
Net miscellaneous income from continuing operations was
$0.1 million in 2006, compared with income of
$1.6 million in 2005. Within net miscellaneous income
during 2006, we recorded a gain of $2.4 million for a legal
settlement in a class action lawsuit for price fixing in the
rubber chemicals industry. In addition, we recorded a loss of
$2.5 million associated with
mark-to-market
supply contracts, mainly for natural gas. During 2005, we
recorded a gain of $3.1 million associated with supply
contracts.
For the year, taxes on continuing income were $5.0 million,
or 19.6% of income, compared to $6.9 million or 28.8% of
income in 2005. The primary reason for the decrease in 2006 was
a net decrease in our valuation allowance due to our
determination that it is more likely than not certain deferred
assets would be realized, and a tax rate change in the
Netherlands affecting our deferred income taxes. The decrease
was partially offset by an allowance for unremitted earnings
from foreign subsidiaries no longer considered indefinitely
reinvested.
19
There were no new businesses included in discontinued operations
in 2006. We recorded a loss of $0.5 million, net of taxes,
in 2006 related to post-closing matters associated with
businesses we sold in previous years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Segment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
538,385
|
|
|
$
|
488,467
|
|
|
$
|
49,918
|
|
|
|
10.2
|
%
|
Electronic Materials
|
|
|
444,463
|
|
|
|
355,676
|
|
|
|
88,787
|
|
|
|
25.0
|
%
|
Color &
Glass Performance Materials
|
|
|
387,540
|
|
|
|
359,613
|
|
|
|
27,927
|
|
|
|
7.8
|
%
|
Polymer Additives
|
|
|
313,500
|
|
|
|
300,563
|
|
|
|
12,937
|
|
|
|
4.3
|
%
|
Specialty Plastics
|
|
|
271,307
|
|
|
|
279,119
|
|
|
|
(7,812
|
)
|
|
|
(2.8
|
)%
|
Other
|
|
|
86,330
|
|
|
|
98,867
|
|
|
|
(12,537
|
)
|
|
|
(12.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
159,220
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
42,094
|
|
|
$
|
31,600
|
|
|
$
|
10,494
|
|
|
|
33.2
|
%
|
Electronic Materials
|
|
|
35,129
|
|
|
|
13,463
|
|
|
|
21,666
|
|
|
|
160.9
|
%
|
Color &
Glass Performance Materials
|
|
|
43,345
|
|
|
|
38,879
|
|
|
|
4,466
|
|
|
|
11.5
|
%
|
Polymer Additives
|
|
|
10,986
|
|
|
|
18,533
|
|
|
|
(7,547
|
)
|
|
|
(40.7
|
)%
|
Specialty Plastics
|
|
|
14,535
|
|
|
|
13,387
|
|
|
|
1,148
|
|
|
|
8.6
|
%
|
Other
|
|
|
5,674
|
|
|
|
2,175
|
|
|
|
3,499
|
|
|
|
160.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
151,763
|
|
|
$
|
118,037
|
|
|
$
|
33,726
|
|
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. Sales
grew in Performance Coatings as a result of improved pricing
across the business and improved volumes in the tile coatings
portion of the business. Sales growth was strong in North
America, Europe and Latin America, while overall sales in Asia
declined modestly. Growth in Asia was negatively impacted by
natural gas supply issues in Indonesia, which affected both our
own and our customers manufacturing operations. Favorable
currency exchange rates also contributed to the sales increase
for the year. Operating income increased during 2006 primarily
because pricing was increased in excess of raw material cost
increases. In addition, the mix of products was more favorable,
particularly in our porcelain enamel business.
Electronic Materials Segment Results. Sales in
Electronic Materials were sharply higher for the year due to
strong customer demand for metal pastes for solar cells and
materials for multilayer capacitors, compared with 2005 when
customers demand was weak for capacitor materials in the
first half of the year. In addition, higher precious metals
prices, which are passed through to customers, contributed to
the sales increase. Sales increased in North America, Asia and
Europe. Operating income increased as a result of the
combination of improved volume, product mix, pricing and lower
manufacturing costs. These improvements more than offset
increases in raw material costs and increased product
development expense.
Color and Glass Performance Materials Segment
Results. Sales in Color and
Glass Performance Materials increased primarily as a result
of improved pricing. Sales growth was the strongest in Europe,
and sales also grew in Latin America and Asia. Sales were
relatively flat in North America. Operating income increased as
improved pricing more than offset increased raw material costs.
Polymer Additives Segment Results. Sales in
Polymer Additives increased for the year, although the growth
rate was negatively impacted by weak demand in North America
during the fourth quarter. This weakness was mainly due to
reduced customer demand for products used in residential
construction. For the year, improved pricing and product mix
more than offset declines in volume. Sales increases in Europe
were partially offset by declines in North America. Segment
income declined for the year. Although price increases exceeded
raw material cost increases for the year, these increases were
not enough to offset lower volumes and increased manufacturing
costs, resulting in a decline in segment income.
20
Specialty Plastics Segment Results. Sales
declined in Specialty Plastics primarily as a result of weakness
in the North American market during the second half of the year.
During that period, customer demand related to
U.S. residential construction and automotive production
declined, leading to lower sales volume. Although prices
increased, they did not increase enough to offset the lower
volume. Despite the lower volume, operating income increased due
to price increases, lower manufacturing costs and lower SG&A
expenses, which together more than offset raw material cost
increases.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Geographic Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
951,215
|
|
|
$
|
925,895
|
|
|
$
|
25,320
|
|
|
|
2.7
|
%
|
International
|
|
|
1,090,310
|
|
|
|
956,410
|
|
|
|
133,900
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
159,220
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales increased in the United States, driven by increases in
Electronic Materials and Performance Coatings. These increases
were partially offset by U.S. sales declines in Polymer
Additives and Specialty Plastics. International sales increases
occurred in Europe, Asia and Latin America and were primarily
within the Performance Coatings, Color and
Glass Performance Materials and Performance Coatings
segments.
Comparison
of the years ended December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Net sales
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
|
$
|
38,584
|
|
|
|
2.1
|
%
|
Cost of sales
|
|
|
1,498,504
|
|
|
|
1,458,899
|
|
|
|
39,605
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
383,801
|
|
|
|
384,822
|
|
|
|
(1,021
|
)
|
|
|
(0.3
|
)%
|
Gross margin percentage
|
|
|
20.4
|
%
|
|
|
20.9
|
%
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
310,056
|
|
|
|
309,967
|
|
|
|
89
|
|
|
|
0.0
|
%
|
Restructuring charges
|
|
|
3,677
|
|
|
|
6,006
|
|
|
|
(2,329
|
)
|
|
|
(38.8
|
)%
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
46,919
|
|
|
|
41,993
|
|
|
|
4,926
|
|
|
|
11.7
|
%
|
Interest earned
|
|
|
(538
|
)
|
|
|
(887
|
)
|
|
|
349
|
|
|
|
(39.3
|
)%
|
Foreign currency transactions, net
|
|
|
1,284
|
|
|
|
3,035
|
|
|
|
(1,751
|
)
|
|
|
(57.7
|
)%
|
Gain on sale of businesses
|
|
|
(69
|
)
|
|
|
(5,195
|
)
|
|
|
5,126
|
|
|
|
(98.7
|
)%
|
Miscellaneous income, net
|
|
|
(1,600
|
)
|
|
|
(1,289
|
)
|
|
|
(311
|
)
|
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
24,072
|
|
|
|
31,192
|
|
|
|
(7,120
|
)
|
|
|
(22.8
|
)%
|
Income tax expense
|
|
|
6,928
|
|
|
|
3,352
|
|
|
|
3,576
|
|
|
|
106.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
17,144
|
|
|
|
27,840
|
|
|
|
(10,696
|
)
|
|
|
(38.4
|
)%
|
Loss on disposal of discontinued
operations, net of tax
|
|
|
868
|
|
|
|
2,915
|
|
|
|
(2,047
|
)
|
|
|
(70.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,276
|
|
|
$
|
24,925
|
|
|
$
|
(8,649
|
)
|
|
|
(34.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per
share
|
|
$
|
0.35
|
|
|
$
|
0.55
|
|
|
$
|
(0.20
|
)
|
|
|
(36.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue gains in 2005 over 2004 were driven by improved pricing
and more favorable product mix in North America, Asia-Pacific
and Latin America. Weakness in the market for multilayer
capacitors depressed unit demand and revenues, particularly in
the first half of 2005. On a consolidated basis, the impact of
strengthening foreign currencies versus the U.S. dollar had
only a minimal positive impact on revenues.
The reduced gross margin percentage was mainly due to a
combination of higher raw materials costs and lower customer
unit demand, partially offset by a more favorable price and mix
of products sold.
21
As a percent of sales, selling, general and administrative
(SG&A) expenses were 16.5% in 2005, compared with 16.8% in
the prior-year period. The lower SG&A expense primarily was
driven by ongoing cost reduction measures which resulted in a
decline in spending for sales, technical service, research and
development, partially offset by an increase in fees related to
the accounting investigation and restatement. During 2005, we
recorded as part of SG&A expenses $10.5 million
relating to the accounting investigation and restatements of our
2003 and first quarter 2004 consolidated financial statements.
The increase in interest expense was due to the combined effect
of higher interest rates on our variable-rate borrowings and
increased borrowing levels. Long-term debt increased to
$547.9 million on December 31, 2005, compared with
$498.8 million on December 31, 2004. The increase was
partially due to increased deposit requirements on precious
metal consignment agreements in the fourth quarter of 2005. In
addition, increased borrowings were made to support higher
working capital requirements, primarily driven by a decline in
accounts payable.
We use certain foreign currency instruments to offset the effect
of changing exchange rates on foreign subsidiary earnings and
short-term transaction exposures. The carrying values of such
contracts are adjusted to market value and resulting gains or
losses are charged to income or expense in the period.
In 2004, we recognized $5.2 million as gain on sale of
business and related to the sale of our interest in Tokan
Material Technology Co. Limited, which was an unconsolidated
affiliate. There were no divestitures made in 2005.
During 2005, we recorded gains of $3.1 million associated
with
marked-to-market
forward supply contracts, primarily for natural gas. During
2004, we recorded a loss of $1.7 million from
marked-to-market
supply contracts. Partially offsetting this 2005 increase were
higher minority interest expenses, lower realized gains on
investments designated to fund payments for a nonqualified
benefit plan, and lower gains on sales of fixed assets in 2005.
Income tax as a percentage of pre-tax income from continuing
operations for the year ended December 31, 2005, was 28.8%
compared with 10.7% for the year ended December 31, 2004.
The primary reason for the increase in 2005 was our 2004
reversal of valuation allowances due to utilization of net
operating losses and our determination that, more likely than
not, certain deferred tax assets would be realized. Also
contributing to the higher effective tax rate in 2005 was a
higher proportion of earnings in jurisdictions having higher
effective tax rates.
22
Discontinued operations relate to the Powder Coatings, Petroleum
Additives and Specialty Ceramics business that were sold in 2002
and 2003. However, we recorded costs in both 2005 and 2004
related to certain post-closing matters associated with these
businesses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Segment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
488,467
|
|
|
$
|
466,461
|
|
|
$
|
22,006
|
|
|
|
4.7
|
%
|
Electronic Materials
|
|
|
355,676
|
|
|
|
388,264
|
|
|
|
(32,588
|
)
|
|
|
(8.4
|
)%
|
Color &
Glass Performance Materials
|
|
|
359,613
|
|
|
|
355,894
|
|
|
|
3,719
|
|
|
|
1.0
|
%
|
Polymer Additives
|
|
|
300,563
|
|
|
|
280,199
|
|
|
|
20,364
|
|
|
|
7.3
|
%
|
Specialty Plastics
|
|
|
279,119
|
|
|
|
265,000
|
|
|
|
14,119
|
|
|
|
5.3
|
%
|
Other
|
|
|
98,867
|
|
|
|
87,903
|
|
|
|
10,964
|
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
|
$
|
38,584
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
31,600
|
|
|
$
|
23,880
|
|
|
$
|
7,720
|
|
|
|
32.3
|
%
|
Electronic Materials
|
|
|
13,463
|
|
|
|
33,220
|
|
|
|
(19,757
|
)
|
|
|
(59.5
|
)%
|
Color &
Glass Performance Materials
|
|
|
38,879
|
|
|
|
37,128
|
|
|
|
1,751
|
|
|
|
4.7
|
%
|
Polymer Additives
|
|
|
18,533
|
|
|
|
(911
|
)
|
|
|
19,444
|
|
|
|
(2,134.4
|
)%
|
Specialty Plastics
|
|
|
13,387
|
|
|
|
9,621
|
|
|
|
3,766
|
|
|
|
39.1
|
%
|
Other
|
|
|
2,175
|
|
|
|
3,517
|
|
|
|
(1,342
|
)
|
|
|
(38.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118,037
|
|
|
$
|
106,455
|
|
|
$
|
11,582
|
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. The
higher revenue in the Performance Coatings segment was due to
price increases and a favorable mix of products, as well as
improved volumes. Growth was mainly within our tile coatings
business, and was distributed across the Asia-Pacific, European
and North American markets. The increase in segment gross profit
was driven primarily by increased volume and higher average
selling prices, which more than offset higher raw materials
costs.
Electronic Materials Segment Results. The
decline in revenue for our Electronic Materials segment was
largely due to weakness in the demand for multilayer capacitors
due to inventory corrections by our customers. These inventory
corrections resulted in sharply lower volumes. Sales increased
in Asia-Pacific, but not enough to offset declines in North
America and Europe. The decline in segment gross profit
reflected the lower volume of products sold, and the resulting
negative impact of fixed manufacturing costs coupled with lower
prices for the Companys products.
Color and Glass Performance Materials Segment
Results. The volume increase for the year in our
Color and Glass Performance Materials segment was slightly
larger than the decline due to the combination of price and a
less favorable product mix. The higher segment gross profit was
due primarily to improvements in the average selling price of
products sold. This improvement was partially offset by higher
raw materials costs.
Polymer Additives Segment Results. The
year-over-year
increase in sales for our Polymer Additives segment was
primarily due to improved performance in North American end
markets, including vinyl processing and construction. Increased
pricing, particularly in the markets for polymer modifiers, more
than offset a reduction in volumes across the Polymer Additives
product lines. The increased segment gross profit was due to
these pricing increases and to lower SG&A expenses result
from previous cost cutting programs.
23
Specialty Plastics Segment Results. The
year-over-year
increase in sales for our Specialty Plastics segment was
primarily due to improved demand for North American durable
goods, including automobiles and appliances. These sales gains
were partially offset by weakness in Europe, where sales
declined by approximately 8%. Segment operating income increased
to $13.4 million from $9.6 million in 2004. The higher
segment gross profit was due primarily to improved average
selling prices, partially offset by higher raw material costs
and lower volumes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Geographic Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
925,895
|
|
|
$
|
899,973
|
|
|
$
|
25,922
|
|
|
|
2.9
|
%
|
International
|
|
|
956,410
|
|
|
|
943,748
|
|
|
|
12,662
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
|
$
|
38,584
|
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increased sales in the United States were primarily due to sales
growth in our Polymer Additives, Performance Coatings and
Specialty Plastics businesses, partially offset by lower sales
in Electronic Materials. The increase in international sales was
driven by sales growth in Asia, largely within the Color and
Glass Performance Materials and Electronic Materials
segments. This growth was partially offset by a volume decline
in Europe that was not fully offset by pricing and product mix
improvements.
Summary
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net cash provided by operating
activities
|
|
$
|
70,944
|
|
|
$
|
21,381
|
|
|
$
|
61,904
|
|
Net cash used for investing
activities
|
|
|
(68,718
|
)
|
|
|
(35,814
|
)
|
|
|
(19,384
|
)
|
Net cash (used for) provided by
financing activities
|
|
|
(3,035
|
)
|
|
|
18,137
|
|
|
|
(51,802
|
)
|
Effect of exchange rate changes on
cash
|
|
|
381
|
|
|
|
(230
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
$
|
(428
|
)
|
|
$
|
3,474
|
|
|
$
|
(9,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities. The increase in net cash
provided by operating activities of continuing operations was
driven by the increase in net income of $3.8 million in
2006, supplemented by increased proceeds from the asset
securitization program of $101.9 million, an increase in
non-cash restructuring charges of $19.5 million and changes
in other working capital items of $6.9 million. The other
reconciling items primarily had positive impacts to operating
cash flows and related to deferred income taxes, retirement
benefits and increased depreciation expense of $4.7 million
primarily due to accelerated depreciation. Offsetting these
positive cash flow items were increased changes in deposit
requirements under the Companys precious metals
consignment program of $40.0 million, increased changes in
inventories of $28.4 million, and increased changes in
accounts receivable of $18.6 million. The increase in
inventory levels was primarily due to a discrete build in
inventory levels and increases to raw material prices from
suppliers. Accounts receivable increased due to higher net sales.
In 2005, cash flows from operating activities of continuing
operations decreased $40.3 million as compared to 2004. We
increased our use of cash for retirement benefits by
$36.5 million during the year. We also increased payments
of accounts payable by $38.1 million in order to manage
vendor relationships. We used operating cash through lower net
income of $8.6 million, increased accounts receivable
balance of $12.7 million due to increased sales, and other
operating cash outflows of $14.0 million. Partially
offsetting these decreases in operating cash flows were slower
growth in inventories of $36.9 million and a reduction in
the balance of the note receivable from Ferro Finance
Corporation and the asset securitization program of
$8.4 million. Additionally, the cash flow impact from
accrued expenses and other current liabilities of
$25.4 million favorably impacted operating cash flows,
primarily due to the payment of such liabilities in 2004 without
comparable payment levels in 2005.
Investing activities. In June 2006, the
Company invested an additional $25.0 million in Ferro
Finance Corporation, a wholly-owned unconsolidated subsidiary,
in connection with the June 2006 amendment of the asset
24
securitization agreement. Capital expenditures during 2006
increased $7.8 million as compared with 2005. The primary
reasons for the increased capital spending included the start of
construction of a freestanding,
state-of-the-art
plant in Spain that will produce colors for the European tile
market and increased investment in the Companys
manufacturing facilities in the Asia Pacific region.
In 2005, cash flows from investing activities decreased
$16.4 million as compared to 2004. The decreased in cash
flows from investing activities reflected the absence of a
discrete adjustment to the purchase price of a prior acquisition
of $8.5 million, decreased proceeds from the sales of
assets and businesses of $2.6 and increased capital expenditures
for property, plant and equipment of $3.8 million.
Expenditures for property, plant and equipment increased due in
our investments in production equipment in the Asia Pacific
region.
Financing activities. In March 2006, we
accepted a commitment from a group of lenders for a
$700 million credit facility (the New Credit
Facility) and, in June 2006, finalized the agreement. The
New Credit Facility consists of a five-year, $250 million
multi-currency senior revolving credit facility and a six-year,
$450 million senior term loan facility. The New Credit
Facility replaced the former revolving credit facility that
would have expired in September 2006. In June 2006, Ferro
borrowed $95 million of the term loan facility to partially
repay the former revolving credit facility. In addition, in July
and August of 2006, we borrowed another $155 million of the
term loan facility to repay $155 million of outstanding
debentures, as bondholders accelerated payment of these
obligations due to defaults caused by our delayed financial
filings with the SEC for 2005. In 2006, our net borrowings on
long-term debt decreased to $36.9 million as compared with
2005 borrowings of $48.4 million, for a net decrease in our
rate of borrowing of $11.5 million. We paid
$16.2 million in debt issue costs to establish and use the
New Credit Facility in 2006, whereas in 2005 we did not pay any
debt issue costs. Increased 2006 short-term borrowings of
$3.5 million and other financing activities of
$3.1 million as compared to 2005 offset the negative
financing cash flows described above. We also continued to pay
dividends on our common stock at our historical quarterly rate
of $0.145 per share, totaling $25.9 million in 2006.
In 2005, cash flows from financing activities increased
$70.0 million as compared to 2004. This increase reflected
our borrowing on the former revolving credit facility of
$75.4 million in order to finance operations, offset by
other changes in financing cash flows and short-term borrowings
of $5.6 million.
Capital
Resources and Liquidity
New
Credit Facility
At December 31, 2006, we had borrowed $128.0 million
of the revolving credit facility and had $109.3 million
available, after reductions for standby letters of credit
secured by this facility. In addition, we can request an
increase of $50 million in the revolving credit facility.
At the same time, we had borrowed $250.0 million of the
term loan facility and had $55 million available, which we
drew down in January 2007 and used to partially repay the
revolving credit facility. At December 31, 2006, we were in
compliance with the covenants of the New Credit Facility.
Senior
Notes
At December 31, 2006, we had $200.0 million principal
amount outstanding under senior notes. In March 2006,
Standard & Poors Rating Group
(S&P) downgraded the Companys senior
credit rating from BB to B+, and Moodys Investor Service,
Inc. (Moodys) downgraded its rating from Ba1
to B1 and then withdrew its rating. Moodys cited the
absence of audited financial statements for a sustained period
of time and the concern that there may be additional delays in
receiving audited financials for 2005. Moodys also noted
that the Companys business profile is consistent with a
rating in the Ba category, according to Moodys rating
methodology for the chemical industry. Moodys indicated it
could reassign ratings to the Company after we filed audited
financial statements for 2004 and 2005 with the SEC. We have
filed these statements with the SEC and have had initial
discussions with Moodys about reinstatement of its ratings.
In April 2006, we received from the Trustee of the senior notes
a notice of default caused by our delayed financial filings with
the SEC for 2005. In December 2006, we became current with all
of our financial reporting
25
requirements under the senior notes, and the related default was
no longer continuing. At December 31, 2006, we were in
compliance with the covenants under the indentures for the
senior notes.
Off
Balance Sheet Arrangements
Receivable Sales Programs. We sell, on an
ongoing basis, substantially all of Ferros U.S. trade
accounts receivable under an asset securitization program. This
program accelerates cash collections at favorable financing
costs and helps us manage the Companys liquidity
requirements. We sell these trade accounts receivable to Ferro
Finance Corporation (FFC), a wholly-owned
unconsolidated qualified special purpose entity
(QSPE). FFC finances its acquisition of trade
receivable assets by issuing beneficial interests in
(securitizing) the receivables to multi-seller receivables
securitization companies (conduits) for proceeds of
up to $100.0 million. FFC and the conduits have no recourse
to Ferros other assets for failure of debtors to pay when
due as the assets transferred are legally isolated in accordance
with the U.S. bankruptcy laws. Ferros consolidated
balance sheet does not include the trade receivables sold, but
does include a note receivable from FFC to the extent that cash
proceeds from the sales of accounts receivable to FFC have not
yet been received by Ferro. In June 2006, we amended the program
to cure a default that resulted from a credit rating downgrade,
to modify the reporting requirements to more closely match those
in the New Credit Facility, and to extend the program to June
2009. The program requires FFC to maintain a minimum tangible
net worth. To meet this requirement, we invested an additional
$25 million in FFC in June 2006. At December 31, 2006,
FFC had received net proceeds of $60.6 million for
outstanding receivables, and the balance of Ferros note
receivable from FFC was $16.1 million.
In addition, we maintain several international programs to sell
trade accounts receivable, primarily without recourse. The
commitments supporting this program can be withdrawn at any time
and totaled $49.2 million at December 31, 2006. The
amount of outstanding receivables sold under the international
programs was $33.7 million at December 31, 2006.
Consignment and Customer Arrangements for Precious
Metals. In the production of some of our
products, we use precious metals, primarily silver for
Electronic Materials products and gold for Color and
Glass Performance Materials products. We obtain most
precious metals from financial institutions under consignment
agreements with terms of one year or less. The financial
institutions retain ownership of the precious metals and charge
us fees based on the amounts we consign. These fees were
$3.1 million for 2006. In November 2005, the financial
institutions renewed their requirement for cash deposits from us
to provide additional collateral beyond the value of the
underlying precious metals. Outstanding collateral deposits grew
from $19.0 million at December 31, 2005, to
$109.4 million during 2006, but declined to
$70.1 million by December 31, 2006. We also process
precious metals owned by our customers. At December 31,
2006, we had on hand $120.9 million of precious metals
owned by financial institutions, measured at fair value.
Bank Guarantees and Standby Letters of
Credit. At December 31, 2006, the Company
had bank guarantees and standby letters of credit issued by
financial institutions, which totaled $21.0 million. These
agreements primarily relate to Ferros insurance programs,
natural gas contracts, potential environmental remediation
liabilities, and foreign tax payments.
Other
Financing Arrangement
We maintain other lines of credit to provide global flexibility
for Ferros short-term liquidity requirements. These
facilities are uncommitted lines for our international
operations and totaled $21.0 million at December 31,
2006. The unused portions of these lines provided
$18.7 million of additional liquidity at December 31,
2006.
Liquidity
Requirement
Our liquidity requirements primarily include debt service,
purchase commitments, working capital requirements, capital
investments, postretirement obligations and dividend payments.
Ferros level of debt and debt service requirements could
have important consequences to its business operations and uses
of cash flows.
26
The Companys aggregate amount of obligations for the next
five years and thereafter is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Totals
|
|
|
|
(Dollars in thousands)
|
|
|
Loans payable to banks
|
|
$
|
7,440
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,440
|
|
Senior notes
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,953
|
|
|
|
|
|
|
|
127,953
|
|
Term loan facility
|
|
|
1,875
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
61,563
|
|
|
|
179,062
|
|
|
|
250,000
|
|
Other long-term notes
|
|
|
372
|
|
|
|
179
|
|
|
|
149
|
|
|
|
131
|
|
|
|
99
|
|
|
|
78
|
|
|
|
1,008
|
|
Obligations under capital leases
|
|
|
1,634
|
|
|
|
1,381
|
|
|
|
1,182
|
|
|
|
1,151
|
|
|
|
749
|
|
|
|
4,713
|
|
|
|
10,810
|
|
Obligations under operating leases
|
|
|
12,464
|
|
|
|
8,672
|
|
|
|
4,829
|
|
|
|
2,893
|
|
|
|
2,393
|
|
|
|
12,514
|
|
|
|
43,765
|
|
Purchase commitments
|
|
|
11,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
35,413
|
|
|
$
|
12,732
|
|
|
$
|
208,660
|
|
|
$
|
6,675
|
|
|
$
|
192,757
|
|
|
$
|
196,367
|
|
|
$
|
652,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash required for interest costs in 2006 was $63.0 million.
We expect that the amount for 2007 will not be substantially
different, but the actual amount depends on interest rates on
our variable-rate debt and our overall debt levels.
We pay taxes as part of our normal operations as a profitable
company. The amount of taxes we pay depends on a variety of
factors described in more detail in Critical Accounting Policies
below. However, the principal factors are the level of our
profitability and the countries in which we earn our taxable
income. We have paid and expect to continue to pay taxes for the
foreseeable future. Based on the historical relationship between
pretax income and the amount of income taxes we have paid, we
expect to pay a substantially higher amount of taxes in 2007.
We expect to contribute approximately $41.3 million to our
post employment benefit plans in 2007. Over the four-year period
from 2008 through 2011, we may be required to contribute an
additional $107.7 million to these plans. We determined
these funding amounts based on the minimum contributions
required under various applicable regulations in each respective
country. Actual contributions also depend on the future funded
status of the plans and on the amount of employee contributions.
Critical
Accounting Policies and Their Application
When we prepare our financial statements we are required to make
estimates and assumptions that affect the amounts we report in
the 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.
Inventories
We value inventory at the lower of cost or market, with cost
determined utilizing the
first-in,
first-out (FIFO) method, except for selected inventories where
the last-in,
first-out (LIFO) method is used. As of December 31, 2006,
we are considering changing our accounting method for those
inventories valued on the LIFO method to the FIFO method. This
potential change in accounting method could result in an
increase in inventory values of $15.5 million upon the date
of adoption. If we make such a change, our financial statements
would be retroactively adjusted to reflect the new method in
each period presented.
We periodically evaluate the net realizable value of inventories
based primarily upon their age, but also upon assumptions of
future demand and market conditions. As a result of the
evaluation, the inventory may be written down to the lower of
cost or realizable value. Historically, write-downs for the net
realizable value of inventories have not been significant, and
we do not expect them to have a material impact on our financial
position, liquidity or results of operations in the future.
However, if actual demand and market conditions turn out to be
less favorable
27
than those we projected in our evaluations of the net realizable
value of inventories, additional write-downs may be required.
Environmental
Liabilities
Our manufacturing facilities are subject to a broad array of
environmental laws and regulations in the countries in which
they operate. 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. Because of these inherent
uncertainties with respect to environmental remediation costs,
potential liabilities could increase significantly from the
$5.1 million recorded as of December 31, 2006, due to
adverse changes in circumstances.
At December 31, 2006, our consolidated balance sheet
included an accrued liability for environmental remediation
costs of $5.5 million compared with $6.6 million at
December 31, 2005. Of the $5.5 million accrued
liability at December 31, 2006, approximately 24.0% was
reserved for facilities outside of the U.S. Of the amounts
accrued, $1.1 million at December 31, 2006, and
$1.2 million at December 31, 2005, related to 6
Superfund sites.
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. 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 and 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 taxable income in a prior
year, as well as successful implementation of various tax
strategies to generate taxable income where net operating losses
or credit carryforwards exist. In evaluating our ability to
realize the deferred income tax assets, we rely principally on
forecasted taxable income using historical and projected future
operating results, the reversal of existing temporary
differences and the availability of tax planning strategies.
We earn a significant portion of our pre-tax income outside the
U.S. Many of these
non-U.S. tax
jurisdictions have statutory income tax rates that are lower
than that in the U.S. Because we carry a majority of our
debt in the U.S., we also have significant cash needs in the
U.S. to service this debt. As a result, it is necessary for
us to perform significant tax and treasury planning and analysis
to determine the best actions to achieve the goals of meeting
our U.S. cash needs, while also reducing our worldwide
taxable income. In this tax and treasury planning, we consider
future taxable income in the U.S. and
non-U.S. jurisdictions,
future cash needs in the U.S., and the timing and amount of
dividend repatriations. Our ability to balance future taxable
income and cash flows between the U.S. and foreign locations
depends on various strategies, such as the charging of
management fees for intercompany services, transfer pricing,
intercompany royalties, intercompany sales of technologies and
intellectual property, and choosing between allowable tax
methods.
28
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 represent approximately
64% of pension plan assets, 63% of benefit obligations and 53%
of net periodic pension cost. The measurement dates used to
determine pension and other postretirement benefit measurements
are September 30th for the U.S. plans and
December 31st for the plans outside the U.S.
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. In accordance with
U.S. GAAP, actual results that differ from the assumptions
are accumulated and amortized over future periods and,
therefore, affect expense recognized and obligations recorded in
future periods.
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 Moodys or S&P. The discount rates
for the
non-U.S. plans
are based on a yield curve method, using AA-rated bonds
applicable in respective capital markets. The duration of each
plans liabilities is used to select the rate from the
yield curve corresponding to the same duration. We then round
the resulting yields to the nearest 25 basis points.
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. Our target asset
allocation percentages are 31% bonds and 69% equity securities
for U.S. plans and 60% bonds, 35% equity securities, and 5%
other investments for
non-U.S. plans.
In determining the expected returns, we consider both historical
performance and an estimate of future long-term rates of return.
The resulting expected returns are then rounded to the nearest
25 basis points. The actual rate of return in 2006 was 8.4% for
U.S. plans and 5.0% for
non-U.S. plans.
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 Companys 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25-Basis-Point Decrease
|
|
|
|
25-Basis-Point Decrease
|
|
|
in Asset Return
|
|
|
|
in Discount Rate
|
|
|
Assumption
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Pension Plans
|
|
$
|
1,062
|
|
|
$
|
647
|
|
U.S. Retiree Medical Plan
|
|
|
(39
|
)
|
|
|
|
|
Non-U.S. Pension
Plans
|
|
|
458
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,481
|
|
|
$
|
1,006
|
|
|
|
|
|
|
|
|
|
|
29
The following table provides the rates used in the assumptions
and the changes between 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
Discount rate used to measure
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension and retiree
medical plans
|
|
|
5.90
|
%
|
|
|
6.10
|
%
|
|
|
(0.20
|
)%
|
Non-U.S. pension
plans
|
|
|
4.34
|
%
|
|
|
4.77
|
%
|
|
|
(0.43
|
)%
|
Discount rate used to measure
benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
|
|
|
6.05
|
%
|
|
|
5.90
|
%
|
|
|
0.15
|
%
|
U.S. retiree medical plan
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
|
|
|
%
|
Non-U.S. pension
plans
|
|
|
4.69
|
%
|
|
|
4.30
|
%
|
|
|
0.39
|
%
|
Expected return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
%
|
Non-U.S. pension
plans
|
|
|
4.63
|
%
|
|
|
5.26
|
%
|
|
|
(0.63
|
)%
|
Changes in the rates used in these assumptions reflect changes
in the underlying bond and equity yields.
The amortization of net actuarial unrecognized gains or losses
is a component of net periodic cost. These gains or losses
result from the difference between actual and assumed results
and from changes in actuarial assumptions. At December 31,
2006, our U.S. and
non-U.S. pension
plans, including the nonqualified retirement plan, and our
U.S. retiree medical plan had unrecognized net losses of
$104.3 million. We will recognize these unrecognized net
losses in net periodic cost in future years, with an estimated
$6.5 million being recognized in 2007.
As of December 31, 2006 we adopted the recognition and
disclosure provisions of FASB Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans,
(FAS No. 158). As a result of our
adoption of FAS No. 158, we recorded a decrease in
other non-current assets of $1.2 million, an increase in
accrued expenses and other current liabilities of
$6.5 million, a decrease in postretirement and pension
liabilities of $5.2 million, an increase in non-current
deferred tax assets of $3.5 million, and a decrease in
accumulated other comprehensive loss of $1.0 million.
During 2006, we entered into an agreement to contingently make
an additional contribution above the requirements of local
statutory law to one international defined benefit plan if we
terminate the participants in the plan prior to
December 31, 2012. We may avoid the additional contribution
if we transfer the participants and their accrued benefits to a
third party. We would be required to make an additional
contribution of $4.7 million should we terminate these
participants in 2007, declining to $1.1 million should we
terminate them in 2012.
Our overall net periodic benefit cost for all defined benefit
plans decreased approximately $3.3 million from 2005 to
2006, primarily due to $11.4 million in expense reductions
relating to the changes in our defined benefit pension and
retiree medical plans as described below. This reduction in
expense for 2006 was offset by a $4.9 million charge
related primarily to a lump sum settlement payment to the
beneficiary of our deceased former Chief Executive Officer from
our nonqualified defined benefit retirement plan. Also as a
result of these actions we reduced our additional minimum
pension liability by $7.7 million, net of tax, as a credit
to Other Comprehensive Income in shareholders equity.
In April 2006, we froze the retirement benefits for our largest
U.S. defined benefit pension plan that covers certain
salaried and hourly employees. This change in benefits does not
affect current retirees or former employees. We now provide the
affected employees with retirement benefits through our defined
contribution plan that provides us with more predictable benefit
costs. This change should reduce annual pension costs by
$5.7 million for the next several years.
Additionally, we limited eligibility for the retiree medical and
life insurance coverage for all nonunion employees. Only
employees age 55 or older with 10 or more years of service
as of December 31, 2006, are now eligible for
post-retirement medical and life insurance benefits. Moreover,
these benefits will be available only to those employees who
retire by December 31, 2007, after having advised the
Company of their retirement plans by March 31, 2007. This
change does not affect current retirees benefits. This
change should reduce annual costs by $0.7 million for the
next several years.
30
In November 2006, we announced that we will be closing our
manufacturing facility in Niagara Falls, New York by the end of
2007. In the first quarter of 2007, we will record a net
curtailment loss of $0.3 million for pension benefits
related to this closing. We will also record a net curtailment
gain of approximately $1.9 million for other benefits for
the closing, but the timing and eventual amount depend on when
employees are terminated. As a result of this action, our annual
net periodic benefit cost will be reduced by approximately
$0.4 million.
Restructuring
and Cost Reduction Programs
During 2006, we developed and initiated several restructuring
programs across a number of our business segments with the
objectives of leveraging our global scale, realigning and
lowering our cost structure and optimizing capacity utilization.
The programs are primarily associated with North America and
Europe. Management continues to evaluate our business, and
therefore, there may be supplemental provisions for new plan
initiatives as well as changes in estimates to amounts
previously recorded, as payments are made or actions are
completed. Significant restructuring programs are described
below. The majority of initiatives begun in 2005 and prior are
substantially completed.
In total, we recorded $23.1 million of pre-tax
restructuring charges in 2006 as compared with $3.7 million
of pre-tax charges during 2005. All of the 2005 charges related
to severance benefits for employees affected by plant closings
or capacity reduction, as well as various personnel in
administrative or shared service functions. The 2006 charges
included both termination benefits and asset writedowns. We
estimated 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 analyzed the carrying value of long-lived assets
and recorded estimated accelerated depreciation through for the
assets affected by the restructuring. 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. Delays in moving continuing operations to
other facilities or increased cash outlays will increase our
restructuring costs to such an extent that it could have a
material impact on the Companys results of operations,
financial position, or cash flows. Other events, for example, a
delay in completion of construction of new facilities, may also
delay the resulting cost savings.
For the European restructurings initiated in 2006, we
established a goal of $40.0 million to $50.0 million
in annual cost savings by the end of 2009, with the full
benefits realized in 2010. The initial phase of restructuring
efforts began in July 2006 and targeted our Performance Coatings
and Color and Glass Performance Materials segments in our
European operations with an annual cost savings goal of
$10.0 million. This restructuring should result in
significant manufacturing efficiencies and will contribute to
increased production capacity to support our revenue growth. The
current actions taking place are a consolidation of our
Cassiglie, Italy, manufacturing operations and administrative
functions, as well as the consolidation of decoration and
certain color manufacturing operations from Frankfurt, Germany,
into a European center of excellence in Colditz, Germany. We are
in consultation with various works councils regarding the
effects of these restructuring programs. We estimate the total
termination benefits for the 150 employees affected by the
European restructuring to be approximately $4.7 million to
$4.9 million. We recorded $3.9 million of termination
benefits related to this action during 2006, and we expect to
record an additional $0.8 million to $1.0 million in
2007. We also recorded $1.0 million of impairment charges
for equipment made obsolete due to this plan.
A second restructuring program involves our Electronic Materials
segment and will result in the closing of our manufacturing
facilities in Niagara Falls, New York by the end of 2007. This
action is expected to result in annual cost reduction of
approximately $7.5 million. As part of the restructuring
activities, we will redistribute the production at that facility
to other existing Electronic Materials manufacturing facilities
and we anticipate that we will reduce our workforce by 110
employees, net of an estimated addition of 43 employees at
locations to which production will be transferred. Of the
employees who will be terminated, 115 are represented by a
union. We believe
31
that the total estimated restructuring costs will be
approximately $20.0 million. In the table below, we have
summarized the charges recorded during 2006 and the estimated
future charges to be incurred related to this action:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Charges
|
|
|
|
Charges Incurred
|
|
|
to be Incurred in
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Asset impairments:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
11,021
|
|
|
$
|
|
|
Intellectual property
|
|
|
3,503
|
|
|
|
|
|
Termination benefits
|
|
|
1,531
|
|
|
|
1,072
|
|
Other
|
|
|
|
|
|
|
2,832
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,055
|
|
|
$
|
3,904
|
|
|
|
|
|
|
|
|
|
|
We are currently in negotiation with the union that represents
the hourly workers in our Niagara Falls, New York manufacturing
plant to determine termination benefits as the result of the
closing. We accrued the estimated termination costs based upon
our current contract with the union.
Revenue
Recognition
We recognize sales typically when we ship goods to our customers
and when all of the following criteria are met:
|
|
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
The selling price is fixed and determinable;
|
|
|
|
Collection is reasonably assured; and
|
|
|
|
Title and risk of loss has passed to our customers.
|
Because we sell our many products throughout the world, we use
varying sales and payments terms as agreed to with our
customers. In the U.S., our standard payment terms vary by
industry and business unit, but are generally 30 to
60 days. Substantial amounts of our consolidated revenues
are derived from foreign countries and in many of those
countries the standard payment terms are longer than those
prevalent in the U.S. 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 with a
separate display of cost of sales to arrive at gross profit. We
record revenues this way because we act as the principal in the
transactions we enter into and take title and the risks and
rewards of ownership of the inventory we process, although the
timing of when we take title to the inventory during the
production process may vary.
The amount of shipping and handling fees invoiced to our
customers at the time our product is shipped is included in net
sales. Shipping and handling fees included in net sales were
$38.4 million in 2006 and $37.9 million in 2005.
Credit memos issued to customers for sales returns, discounts
allowed and sales adjustments are recorded when they are
incurred as a reduction of sales. We use estimated allowances to
provide for future sales returns and adjustments in order to
record revenues in the proper accounting period and to state the
related accounts receivable at their net realizable value. We
estimate these allowances based upon historical sales return and
adjustment rates. Actual allowances may be more or less than the
amount we estimate. In the past these differences have not been
material and we do not expect any material differences in the
future.
Additionally, we provide certain of our customer with incentive
rebate programs to promote customer loyalty and encourage
greater product sales. We accrue customer rebates over the
rebate periods based upon estimated attainments of the
provisions in the rebate agreements using available information
and record these rebate accruals as reductions of sales. We
incurred $12.5 million of customer rebates in 2006 and
$12.4 million in 2005. We do not expect customer rebates to
increase significantly in future periods.
32
Valuation
of Goodwill and Other Intangibles
While goodwill and intangible assets with indefinite useful
lives recorded on our balance sheet are no longer amortized, we
review these assets for impairment each year on a measurement
date of October 31st. We estimate the fair value of each
business unit using a discounted cash flow method based on
historical results and trends and our projections of market
growth, internal sales efforts, input cost movements, and cost
reduction opportunities. We then allocate certain corporate
expenses, assets and liabilities to the business units in this
process. Using a risk adjusted, weighted average
cost-of-capital,
we discount the cash flow projections to measurement date. If
the fair value of any of the units were 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 to determine the amount of any impairment.
Our estimates of fair value can be affected by a variety of
factors. Reductions in actual or projected growth or
profitability due to unfavorable market conditions in our
business units, or significant increases in previous levels of
capital spending, could lead to the impairment of any 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 value of one or more of our business
units and therefore lead to the impairment of goodwill.
Assessment
of Long-Lived Assets
Our long-lived assets include property, plant, equipment,
goodwill and other intangible assets. We depreciate property,
plant and equipment on a straight-line basis over the estimated
useful lives of the assets. We continually assess long-lived
assets for the appropriateness of their estimated useful lives.
When circumstances indicate that there has been a reduction in
the economic useful life of an asset or an asset group, we
revise our estimates. As discussed above, in 2006 we shortened
our estimates of the useful lives for several asset groups due
to our restructuring activities.
We also review property, plant and equipment and intangibles for
impairment whenever events or circumstances indicate that the
undiscounted net cash flows to be generated by their use and
eventual disposition are less than the assets recorded
value. In the event of impairment, we recognize a loss for the
excess of the recorded value of the asset over its fair value.
The long-term nature of these assets requires that we estimate
cash inflows and outflows for several years into the future and
only take into consideration technological advances known at the
time of impairment.
Due to depressed conditions in the electronics industry in late
2004 and in 2005, we specifically evaluated our electronics
assets in Holland. Also in 2005, we evaluated our Italian tile
and Belgian polymer additives manufacturing assets because of
sluggish market conditions in these regions. In each situation,
we concluded that the assets were not impaired. In 2006, we
recorded impairment charges for both property, plant and
equipment and intangibles due to the restructuring activities
discussed above.
Derivative
Financial Instruments
We use derivative financial instruments in the normal course of
business to manage our exposure to fluctuations in commodity
prices and foreign currency exchange rates. The accounting for
derivative financial instruments can be complex and require
significant judgments. Generally, the derivative financial
instruments that we use are not complex and quoted market prices
are available through financial institutions. We do not engage
in speculative transactions for trading purposes. Financial
instruments, including derivative financial instruments, expose
us to counterparty credit risk for non-performance. 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.
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
non-functional currency cash
33
flows. Our principal foreign currency exposures relate to the
Euro, the British Pound Sterling, the Japanese Yen, and the
Chinese Yuan. We mark these forward contracts to fair value at
the end of each reporting period and recognize the resulting
gains or losses as other income or expense from foreign currency
transactions. We recorded
mark-to-market
losses from forward currency contracts of $0.8 million in
2006 and
mark-to-market
gains of $0.8 million in 2005. The amounts of gains or
losses we record depend on a variety of factors including the
notional amount of the forward contracts entered into and the
fluctuation of the underlying currency exchange rates. We do not
expect any change in our foreign currency risk policies or in
the nature of the transactions were enter into to mitigate
foreign currency risk.
Our exposure to market risk from commodity prices relate
primarily to commodity raw materials and energy used in the
production of a portion of our products. We purchase portions of
our natural gas requirements under fixed price contracts to
reduce the volatility of cost changes. For contracts entered
into prior to April 2006, we marked these contracts to fair
value and recognized the resulting gains or losses as
miscellaneous income or expense, respectively. Beginning April
2006, we designated new natural gas contracts as normal purchase
contracts, which are not
marked-to-market.
During 2006, we recognized $2.6 million in
mark-to-market
losses and in 2005 we recognized $3.0 million in
mark-to-market
gains. Due to the designation of these contracts as normal
purchase contracts, we do not expect to recognize
mark-to-market
gains or losses in future periods. Our purchase commitments for
natural gas under normal purchase contracts was
$6.3 million at December 31, 2006, for
0.7 million MBTUs.
We also manage a portion of our exposure to market risk for
changes in the pricing of certain raw material commodities using
derivative instruments. We hedge our exposure principally
through swap arrangements that allow us to fix the price of the
commodities for future purchases. These swap arrangements are
settled in cash at their maturities. We mark these contracts to
fair value and recognize the resulting gains or losses as other
comprehensive income. After the contracts mature and the
materials are sold, the gains and losses are recognized as a
part of cost of sales. During 2006, we recognized
$5.3 million of net gains in cost of sales related to the
settlement of these swaps. For 2005, the amount was not
material. At December 31, 2006, $3.1 million of gains
remained in other comprehensive income and inventories. We do
not expect any change in our commodity risk policies or in the
nature of the transactions we enter into to mitigate commodity
market risk.
Impact
of Newly Issued Accounting Pronouncements
In March 2006, the FASB issued Statement No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140,
(FAS No. 156). This statement requires an
entity to recognize at fair value, if practicable, a servicing
asset or liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract
in certain situations primarily relating to off-balance sheet
arrangements. Entities may choose between two subsequent
measurement methods for each class of separately recognized
servicing assets and servicing liabilities.
FAS No. 156 is effective for fiscal years beginning
after September 15, 2006. The provisions of
FAS No. 156 are to be applied prospectively to
transactions entered into after its adoption. We will adopt
FAS No. 156 as of January 1, 2007, as permitted,
and are currently evaluating the implementation options; at this
time, we are uncertain as to the impact on our results of
operations and financial position.
In June 2006, the FASB published Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
(Interpretation No. 48). This interpretation
requires an entity to recognize the benefit of a tax position
only when it is more likely than not, based on the
positions technical merits, that the position would be
sustained upon examination by the respective taxing authority.
We will adopt Interpretation No. 48 as of January 1,
2007. The cumulative effect of adopting Interpretation
No. 48, if material, is required to be reported separately
as an adjustment to retained earnings as of the beginning of
2007. We are currently evaluating the impact of Interpretation
No. 48 and, at this time, are unable to determine whether
the cumulative adjustment is material.
In September 2006, the FASB published Staff Position
No. AUG AIR-1, Accounting for Planned Maintenance
Activities. This staff position prohibits the use of the
accrue-in-advance
method of accounting for planned major maintenance activities.
It is effective for fiscal years beginning after
December 15, 2006, and is to be applied retrospectively.
When adopted in fiscal 2007, the staff position will increase
our retained earnings as of the
34
beginning of 2005 by $1.6 million, increase 2005 income
from continuing operations by $0.4 million
($0.3 million net of tax), and decrease 2006 income from
continuing operations by $0.4 million ($0.3 million
net of tax).
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements,
(FAS No. 157). FAS No. 157
defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements. Accordingly,
FAS No. 157 does not require any new fair value
measurements, but will change current practice for some
entities. FAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We will apply this standard prospectively, as permitted.
In September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R),
(FAS No. 158). We are required to adopt
the measurement provisions of FAS No. 158 as of
December 31, 2008. The measurement provisions require
companies to measure defined benefit plan assets and obligations
as of the balance sheet date. Currently, we use
September 30 as the measurement date for U.S. pension
and other postretirement benefits. We are evaluating these
requirements and have not yet determined the impact this may
have on our consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, (FAS No. 159). This
statement permits all entities to choose, at specified election
dates, to measure eligible items at fair value (the fair
value option). A business entity should report unrealized
gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date.
Upfront costs and fees related to items for which the fair value
option is elected shall be recognized in earnings as incurred
and not deferred. FAS No. 159 is effective as of the
beginning of the first fiscal year that begins after
November 15, 2007. We are currently evaluating the impact
of the adoption of this statement; at this time, we are
uncertain as to the impact on our results of operations and
financial position.
Item 7A
Quantitative and Qualitative Disclosures about Market
Risk
Our exposure to market risks is generally limited to
fluctuations in interest rates, foreign currency exchange rates,
and costs of raw materials and natural gas.
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 the negative effect of rising interest rates on earnings,
cash flows and overall borrowing costs, while preserving
flexibility and allowing us to benefit during periods of falling
rates. In 2006, our level of fixed-rate debt decreased and
variable-rate debt increased. As we anticipated and planned for,
during July and August 2006, bondholders accelerated the payment
of the principal amount of the Companys fixed-rate
debentures, of which $155 million was outstanding. The
debentures were repaid through use of the variable-rate term
loan facility.
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 offset these gains and losses.
We are also subject to cost changes with respect to our raw
materials and natural gas purchases. We attempt to mitigate raw
materials cost increases with price increases to our customers.
We also hedge a portion of our exposure to changes in the
pricing of certain raw material commodities using derivative
financial instruments. We hedge our exposure principally through
swap arrangements that allow us to fix the pricing of the
commodities for future purchases. In addition, we purchase
portions of our natural gas requirements under fixed price
contracts to reduce the volatility of this cost. For contracts
entered into prior to April 2006, we mark these contracts to
fair value and recognize the resulting gains or losses as
miscellaneous income or expense, respectively. Beginning April
2006, we designated new natural gas contracts as normal purchase
contracts, which are not
marked-to-market.
Our purchase commitment for natural gas under normal purchase
contracts was $6.3 million at December 31, 2006.
35
Information about our exposure to these market risks and
sensitivity analyses about potential losses resulting from
hypothetical changes in market rates is presented below:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands,
|
|
|
|
except as noted)
|
|
|
Variable-rate debt and utilization
of asset securitization program:
|
|
|
|
|
|
|
|
|
Change in annual interest expense
from 1% change in interest rates
|
|
$
|
4,797
|
|
|
$
|
1,928
|
|
Fixed-rate debt:
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
$
|
200,281
|
|
|
$
|
354,393
|
|
Fair value
|
|
$
|
206,399
|
|
|
$
|
354,625
|
|
Change in fair value from 1%
increase in interest rate
|
|
$
|
(5,240
|
)
|
|
$
|
(17,030
|
)
|
Change in fair value from 1%
decrease in interest rate
|
|
$
|
5,413
|
|
|
$
|
18,898
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
121,430
|
|
|
$
|
119,348
|
|
Carrying amount and fair value
|
|
$
|
(640
|
)
|
|
$
|
121
|
|
Change in fair value from 10%
appreciation of U.S. dollar
|
|
$
|
(1,142
|
)
|
|
$
|
(410
|
)
|
Change in fair value from 10%
depreciation of U.S. dollar
|
|
$
|
1,396
|
|
|
$
|
501
|
|
Raw material commodity swaps:
|
|
|
|
|
|
|
|
|
Notional amount (in metric tons of
base metals)
|
|
|
2,004
|
|
|
|
3,092
|
|
Carrying amount and fair value
|
|
$
|
1,939
|
|
|
$
|
111
|
|
Change in fair value from 10%
change in forward prices
|
|
$
|
1,003
|
|
|
$
|
662
|
|
Precious metals forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount (in troy ounces)
|
|
|
183,264
|
|
|
|
61,050
|
|
Carrying amount and fair value
|
|
$
|
192
|
|
|
$
|
302
|
|
Change in fair value from 10%
change in forward prices
|
|
$
|
465
|
|
|
$
|
269
|
|
Marked-to-market
natural gas forward purchase contracts:
|
|
|
|
|
|
|
|
|
Notional amount (in MBTUs)
|
|
|
120,000
|
|
|
|
1,190,000
|
|
Carrying amount and fair value
|
|
$
|
(442
|
)
|
|
$
|
2,127
|
|
Change in fair value from 10%
change in forward prices
|
|
$
|
78
|
|
|
$
|
1,290
|
|
36
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, 2006 and 2005, and the related consolidated
statements of income, shareholders equity and
comprehensive income, and cash flows for the years then ended.
Our audits also included the financial statement schedule listed
in the index at Item 15(b) for the years ended
December 31, 2006 and 2005. These consolidated financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on
our audits. The consolidated financial statements of the Company
for the year ended December 31, 2004, were audited by other
auditors whose report, dated March 31, 2006, except as to
note 19, which is as of September 28, 2006, on those
statements included an explanatory paragraph concerning the
Companys ability to continue as a going concern.
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 2006 and 2005 consolidated financial
statements present fairly, in all material respects, the
financial position of Ferro Corporation and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United Sates of America. Also, in our opinion, such financial
statement schedule for the years ended December 31, 2006
and 2005, when considered in relation to the basic 2006 and 2005
consolidated statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Notes 1, 9, and 12 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R),
Share-Based Payment, and the recognition and disclosure
provisions of SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, in 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, and our report dated
March 1, 2007, expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
adverse opinion on the effectiveness of the Companys
internal control over financial reporting because of material
weaknesses.
/s/ Deloitte &
Touche LLP
Cleveland, Ohio
March 1, 2007
37
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Ferro Corporation:
We have audited the accompanying consolidated statements of
income, shareholders equity and comprehensive income, and
cash flows of Ferro Corporation and subsidiaries for the year
ended December 31, 2004. In connection with our audit of
these consolidated financial statements, we have also audited
the financial statement schedule listed in the index at
Item 15(b) for the year ended December 31, 2004. These
consolidated financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the results
of operations and the cash flows of Ferro Corporation and
subsidiaries for the year ended December 31, 2004, in
conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. As
discussed in note 5 to the financial statements, the
Company faces certain liquidity uncertainties that raise
substantial doubt about its ability to continue as a going
concern. Managements plans in regard to these matters are
also described in note 5. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
Cleveland, Ohio
March 31, 2006, except as to note 19,
which is as of September 28, 2006
38
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
Cost of sales
|
|
|
1,626,733
|
|
|
|
1,498,504
|
|
|
|
1,458,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
414,792
|
|
|
|
383,801
|
|
|
|
384,822
|
|
Selling, general and
administrative expenses
|
|
|
305,211
|
|
|
|
310,056
|
|
|
|
309,967
|
|
Restructuring charges
|
|
|
23,146
|
|
|
|
3,677
|
|
|
|
6,006
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
64,427
|
|
|
|
46,919
|
|
|
|
41,993
|
|
Interest earned
|
|
|
(4,466
|
)
|
|
|
(538
|
)
|
|
|
(887
|
)
|
Foreign currency transactions, net
|
|
|
1,040
|
|
|
|
1,284
|
|
|
|
3,035
|
|
Gain on sale of businesses
|
|
|
(67
|
)
|
|
|
(69
|
)
|
|
|
(5,195
|
)
|
Miscellaneous income, net
|
|
|
(87
|
)
|
|
|
(1,600
|
)
|
|
|
(1,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
25,588
|
|
|
|
24,072
|
|
|
|
31,192
|
|
Income tax expense
|
|
|
5,026
|
|
|
|
6,928
|
|
|
|
3,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
20,562
|
|
|
|
17,144
|
|
|
|
27,840
|
|
Loss on disposal of discontinued
operations, net of tax
|
|
|
472
|
|
|
|
868
|
|
|
|
2,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
20,090
|
|
|
|
16,276
|
|
|
|
24,925
|
|
Dividends on preferred stock
|
|
|
(1,252
|
)
|
|
|
(1,490
|
)
|
|
|
(1,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
18,838
|
|
|
$
|
14,786
|
|
|
$
|
23,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
42,394
|
|
|
|
42,309
|
|
|
|
41,981
|
|
Incremental common shares
attributable to convertible preferred stock, performance shares
and stock options
|
|
|
28
|
|
|
|
36
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares
outstanding
|
|
|
42,422
|
|
|
|
42,345
|
|
|
|
42,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.45
|
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.44
|
|
|
$
|
0.35
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.45
|
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.44
|
|
|
$
|
0.35
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
39
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,985
|
|
|
$
|
17,413
|
|
Accounts and trade notes
receivable, net
|
|
|
220,899
|
|
|
|
182,390
|
|
Note receivable from Ferro Finance
Corporation
|
|
|
16,083
|
|
|
|
111,925
|
|
Inventories
|
|
|
254,513
|
|
|
|
215,257
|
|
Deposits for precious metals
|
|
|
70,073
|
|
|
|
19,000
|
|
Deferred income taxes
|
|
|
18,175
|
|
|
|
40,732
|
|
Other current assets
|
|
|
25,877
|
|
|
|
24,002
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
622,605
|
|
|
|
610,719
|
|
Other assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
526,802
|
|
|
|
531,139
|
|
Goodwill and other intangible
assets, net
|
|
|
406,340
|
|
|
|
410,666
|
|
Deferred income taxes
|
|
|
94,662
|
|
|
|
61,130
|
|
Other non-current assets
|
|
|
82,528
|
|
|
|
54,890
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,732,937
|
|
|
$
|
1,668,544
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Loans payable and current portion
of long-term debt
|
|
$
|
10,764
|
|
|
$
|
7,555
|
|
Accounts payable
|
|
|
237,018
|
|
|
|
236,282
|
|
Income taxes
|
|
|
8,732
|
|
|
|
5,474
|
|
Accrued payrolls
|
|
|
33,164
|
|
|
|
25,112
|
|
Accrued expenses and other current
liabilities
|
|
|
93,206
|
|
|
|
92,461
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
382,884
|
|
|
|
366,884
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current
portion
|
|
|
581,654
|
|
|
|
546,168
|
|
Postretirement and pension
liabilities
|
|
|
194,427
|
|
|
|
230,320
|
|
Deferred income taxes
|
|
|
11,037
|
|
|
|
14,002
|
|
Other non-current liabilities
|
|
|
21,599
|
|
|
|
22,611
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,191,601
|
|
|
|
1,179,985
|
|
Series A convertible
preferred stock
|
|
|
16,787
|
|
|
|
20,468
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Common stock, par value
$1 per share; 300,000,000 shares authorized;
52,323,053 shares issued
|
|
|
52,323
|
|
|
|
52,323
|
|
Paid-in capital
|
|
|
158,504
|
|
|
|
163,074
|
|
Retained earnings
|
|
|
590,136
|
|
|
|
595,902
|
|
Accumulated other comprehensive
loss
|
|
|
(65,138
|
)
|
|
|
(115,990
|
)
|
Unearned compensation
|
|
|
|
|
|
|
(6,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
735,825
|
|
|
|
689,186
|
|
Common shares in treasury, at cost
|
|
|
(211,276
|
)
|
|
|
(221,095
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
524,549
|
|
|
|
468,091
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
1,732,937
|
|
|
$
|
1,668,544
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
40
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Share-
|
|
|
|
In Treasury
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Unearned
|
|
|
holders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)(a)
|
|
|
Compensation
|
|
|
Equity(b)
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
Balances at December 31,
2003
|
|
|
10,866
|
|
|
$
|
(233,651
|
)
|
|
|
52,323
|
|
|
|
159,162
|
|
|
|
606,588
|
|
|
|
(83,296
|
)
|
|
|
(6,915
|
)
|
|
$
|
494,211
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,925
|
|
|
|
|
|
|
|
|
|
|
|
24,925
|
|
Other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,166
|
|
|
|
|
|
|
|
25,166
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,778
|
)
|
|
|
|
|
|
|
(9,778
|
)
|
Other adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,538
|
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,344
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,344
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,705
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,705
|
)
|
Federal tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Transactions involving benefit plans
|
|
|
(681
|
)
|
|
|
10,135
|
|
|
|
|
|
|
|
3,750
|
|
|
|
|
|
|
|
|
|
|
|
(377
|
)
|
|
|
13,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2004
|
|
|
10,185
|
|
|
$
|
(223,516
|
)
|
|
|
52,323
|
|
|
|
162,912
|
|
|
|
605,521
|
|
|
|
(67,683
|
)
|
|
|
(7,292
|
)
|
|
$
|
522,265
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,276
|
|
|
|
|
|
|
|
|
|
|
|
16,276
|
|
Other comprehensive loss, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,769
|
)
|
|
|
|
|
|
|
(38,769
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,518
|
)
|
|
|
|
|
|
|
(9,518
|
)
|
Other adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,031
|
)
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,447
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,447
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,490
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,490
|
)
|
Federal tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Transactions involving benefit plans
|
|
|
(215
|
)
|
|
|
2,421
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
1,169
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2005
|
|
|
9,970
|
|
|
$
|
(221,095
|
)
|
|
|
52,323
|
|
|
|
163,074
|
|
|
|
595,902
|
|
|
|
(115,990
|
)
|
|
|
(6,123
|
)
|
|
$
|
468,091
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,090
|
|
|
|
|
|
|
|
|
|
|
|
20,090
|
|
Other comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,468
|
|
|
|
|
|
|
|
33,468
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,858
|
|
|
|
|
|
|
|
15,858
|
|
Other adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,918
|
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,649
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,649
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,252
|
)
|
Federal tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Transactions involving benefit plans
|
|
|
(512
|
)
|
|
|
9,819
|
|
|
|
|
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,372
|
|
Reclassification to initially apply
FAS No. 123R as of January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,123
|
)
|
|
|
|
|
|
|
|
|
|
|
6,123
|
|
|
|
|
|
Adjustment to initially apply
FAS No. 158, net of tax, as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31,
2006
|
|
|
9,458
|
|
|
$
|
(211,276
|
)
|
|
|
52,323
|
|
|
|
158,504
|
|
|
|
590,136
|
|
|
|
(65,138
|
)
|
|
|
|
|
|
$
|
524,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
|
|
|
(a)
|
|
Accumulated translation adjustments
were $(3,657), $(37,125) and $1,644, and accumulated
postemployment benefit liability adjustments were $(62,458),
$(79,340) and $(69,822) at December 31, 2006, 2005 and
2004, respectively.
|
|
(b)
|
|
Dividends per share of common stock
were $0.58 for 2006, 2005 and 2004. Dividends per share of
convertible preferred stock were $3.25 for 2006, 2005 and 2004.
|
41
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,090
|
|
|
$
|
16,276
|
|
|
$
|
24,925
|
|
Adjustments to reconcile net income
to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued
operations, net of tax
|
|
|
472
|
|
|
|
868
|
|
|
|
2,915
|
|
Loss (gain) on sale of business,
net of tax
|
|
|
67
|
|
|
|
|
|
|
|
(3,376
|
)
|
(Gain) loss on sale of fixed assets
|
|
|
(1,693
|
)
|
|
|
948
|
|
|
|
(1,419
|
)
|
Depreciation and amortization
|
|
|
79,501
|
|
|
|
74,823
|
|
|
|
75,020
|
|
Restructuring charges
|
|
|
23,146
|
|
|
|
3,677
|
|
|
|
6,006
|
|
Provision for allowance for
doubtful accounts
|
|
|
1,452
|
|
|
|
1,799
|
|
|
|
3,650
|
|
Retirement benefits
|
|
|
(13,826
|
)
|
|
|
(20,345
|
)
|
|
|
16,186
|
|
Deferred income taxes
|
|
|
(13,714
|
)
|
|
|
(9,125
|
)
|
|
|
(10,477
|
)
|
Changes in current assets and
liabilities, net of effects of acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and trade notes receivable
|
|
|
(25,921
|
)
|
|
|
(7,357
|
)
|
|
|
5,354
|
|
Note receivable from Ferro Finance
Corporation and asset securitization
|
|
|
95,842
|
|
|
|
(6,071
|
)
|
|
|
(14,510
|
)
|
Inventories
|
|
|
(28,717
|
)
|
|
|
(343
|
)
|
|
|
(37,210
|
)
|
Deposits for precious metals
|
|
|
(51,073
|
)
|
|
|
(11,100
|
)
|
|
|
(7,900
|
)
|
Other current assets
|
|
|
(197
|
)
|
|
|
9,129
|
|
|
|
7,623
|
|
Accounts payable
|
|
|
(14,826
|
)
|
|
|
(17,595
|
)
|
|
|
20,494
|
|
Accrued expenses and other current
liabilities
|
|
|
1,508
|
|
|
|
(6,989
|
)
|
|
|
(32,390
|
)
|
Other operating activities
|
|
|
(481
|
)
|
|
|
(5,428
|
)
|
|
|
8,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operations
|
|
|
71,630
|
|
|
|
23,167
|
|
|
|
63,486
|
|
Net cash used for discontinued
operations
|
|
|
(686
|
)
|
|
|
(1,786
|
)
|
|
|
(1,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
70,944
|
|
|
|
21,381
|
|
|
|
61,904
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for plant and
equipment of continuing operations
|
|
|
(50,615
|
)
|
|
|
(42,825
|
)
|
|
|
(39,054
|
)
|
Acquisitions, net of cash acquired
|
|
|
|
|
|
|
(1,908
|
)
|
|
|
(2,533
|
)
|
Cash adjustments to purchase price
of prior acquisition
|
|
|
1,790
|
|
|
|
|
|
|
|
8,505
|
|
Proceeds from the sale of assets
and businesses
|
|
|
5,130
|
|
|
|
9,287
|
|
|
|
11,872
|
|
Cash investment in Ferro Finance
Corporation
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
Other investing activities
|
|
|
(23
|
)
|
|
|
(368
|
)
|
|
|
1,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(68,718
|
)
|
|
|
(35,814
|
)
|
|
|
(19,384
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) under
short-term facilities
|
|
|
1,334
|
|
|
|
(2,119
|
)
|
|
|
(3,533
|
)
|
Proceeds from former revolving
credit facility
|
|
|
461,900
|
|
|
|
949,867
|
|
|
|
661,162
|
|
Proceeds from revolving credit
facility
|
|
|
697,929
|
|
|
|
|
|
|
|
|
|
Proceeds from term loan facility
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
Principal payments on former
revolving credit facility
|
|
|
(648,000
|
)
|
|
|
(901,482
|
)
|
|
|
(688,159
|
)
|
Principal payments on revolving
credit facility
|
|
|
(569,976
|
)
|
|
|
|
|
|
|
|
|
Extinguishment of debentures
|
|
|
(155,000
|
)
|
|
|
|
|
|
|
|
|
Debt issue costs
|
|
|
(16,234
|
)
|
|
|
|
|
|
|
|
|
Cash dividends
|
|
|
(25,901
|
)
|
|
|
(25,937
|
)
|
|
|
(26,049
|
)
|
Other financing activities
|
|
|
913
|
|
|
|
(2,192
|
)
|
|
|
4,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by
financing activities
|
|
|
(3,035
|
)
|
|
|
18,137
|
|
|
|
(51,802
|
)
|
Effect of exchange rate changes on
cash
|
|
|
381
|
|
|
|
(230
|
)
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(428
|
)
|
|
|
3,474
|
|
|
|
(9,442
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
17,413
|
|
|
|
13,939
|
|
|
|
23,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
16,985
|
|
|
$
|
17,413
|
|
|
$
|
13,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
62,980
|
|
|
$
|
44,092
|
|
|
$
|
39,900
|
|
Income taxes
|
|
$
|
10,687
|
|
|
$
|
9,487
|
|
|
$
|
22,199
|
|
See accompanying notes to consolidated financial statements.
42
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and 2004
|
|
1.
|
Summary
of Significant Accounting Policies
|
Our
Business
Ferro Corporation (Ferro, we,
us or the Company) produces performance
materials for a broad range of manufacturers in diversified
industries throughout the world. Our products are classified as
performance materials, rather than commodities, because they are
formulated to perform specific and important functions both in
the manufacturing processes and in the finished products of our
customers. We use inorganic chemical processes, polymer science
and materials science to develop and produce these performance
materials. Performance materials require a high degree of
technical service on an individual customer basis. The value of
our products stems from the results and performance they achieve
in actual use. We manage our diverse businesses through eight
business units that are differentiated from one another by
product type. These business units are:
|
|
|
|
|
Tile Coating Systems;
|
|
|
|
Porcelain Enamel;
|
|
|
|
Electronic Materials;
|
|
|
|
Color and Glass Performance Materials;
|
|
|
|
Polymer Additives;
|
|
|
|
Specialty Plastics;
|
|
|
|
Pharmaceuticals; and
|
|
|
|
Fine Chemicals.
|
We produce our products principally in the United States
(U.S.) and Europe, but we also operate manufacturing
plants in Latin America and the Asia Pacific region.
Ferro sells its products directly to customers or through the
use of agents or distributors throughout the world. A large
portion of our products are sold in the U.S. and Europe,
however, we also sell to customers in strategically important
Latin America and Asia Pacific regions. Our customers use our
products to manufacture building and renovation, automotive,
household appliance and furnishing, transportation, electronic,
and industrial products.
Principles
of Consolidation
Our consolidated financial statements include the accounts of
the parent company and the accounts of subsidiary businesses in
which we own majority and controlling interests. When we
consolidate our financial statements we eliminate investments,
common stock and paid-in capital accounts, and intercompany
transactions, accounts and profits. We classify the minority
interests of others in our consolidated subsidiaries in the
other non-current liabilities section of our balance sheet. When
we exert significant influence over an investee but do not
control it, we account for the investment and the investment
income using the equity method. These investments are reported
in the other non-current assets section of our balance sheet.
When we acquire a subsidiary that is consolidated, its financial
results are included in our consolidated financial statements
from the date of the acquisition.
We sell substantially all of our domestic trade accounts
receivable to Ferro Finance Corporation (FFC). FFC
is a wholly-owned unconsolidated qualified special purpose
entity (QSPE). We do not consolidate FFC
because FFC:
|
|
|
|
|
Is demonstrably distinct from us;
|
|
|
|
Is permitted only significantly limited activities that we
cannot change;
|
43
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
|
|
|
|
|
Holds only passive assets that are sold to outside
parties; and
|
|
|
|
May only sell financial assets automatically under specified
conditions that are outside of our control.
|
In addition, we cannot unilaterally cause FFC to liquidate or to
change FFC so the conditions listed above are no longer met.
Use of
Estimates and Assumptions in the Preparation of Financial
Statements
We prepare our consolidated financial statements in conformity
with United States (U.S.) Generally Accepted
Accounting Principles, which requires us to make estimates and
to use judgments and assumptions that affect the timing and
amount of assets, liabilities, equity, revenues and expenses
recorded and disclosed. The more significant estimates and
judgments relate to accounts receivable and inventory
allowances, environmental and other contingent liabilities,
income taxes, pension and other postretirement benefits,
inventories, restructuring and cost reduction programs, revenue
recognition, valuation of goodwill and other intangibles,
assessment of long-lived assets, asset retirement obligations,
and derivative financial instruments. Actual outcomes could
differ from our estimates, resulting in changes in revenues or
costs that could have a material impact on the Companys
results of operations, financial position, or cash flows.
Foreign
Currency Translation
The financial results of our operations outside of the
U.S. are recorded in local currencies, which generally are
also the functional currencies for financial reporting purposes.
The results of operations outside of the United States are
translated from these local currencies into U.S. dollars
using the average monthly currency exchange rates. We use the
average currency exchange rate for these results of operations
as a reasonable approximation of the results had specific
currency exchange rates been used for each individual
transaction. Assets and liabilities are translated into
U.S. dollars using exchange rates at the balance sheet
dates, and we record the resulting foreign currency translation
adjustment as a separate component of accumulated other
comprehensive loss in shareholders equity.
Foreign currency transaction gains and losses are recorded as
incurred as other expense (income) in the consolidated
statements of income.
Cash
Equivalents
We consider all highly liquid instruments with original
maturities of three months or less when purchased to be cash
equivalents. These instruments are carried at cost.
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
generally do not require collateral. We provide for
uncollectible accounts based on historical experience and
specific circumstances, as appropriate. Customer accounts we
deem 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. Detailed information about
the allowance for doubtful accounts is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for doubtful accounts
|
|
$
|
7,544
|
|
|
$
|
7,519
|
|
|
$
|
9,244
|
|
Bad debt expense
|
|
|
1,452
|
|
|
|
1,799
|
|
|
|
3,650
|
|
44
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Note Receivable
from Ferro Finance Corporation
Ferro holds a note receivable from an unconsolidated subsidiary,
FFC, to the extent that expected cash proceeds from the sales of
accounts receivable to FFC have not yet been received.
Inventories
We value inventories at the lower of cost or market and
determine inventory costs using the
first-in,
first-out (FIFO) method, except for selected
inventories where the
last-in,
first-out (LIFO) method is used. Inventories include
material, labor and production overhead costs.
The following table details the percentage of inventories
accounted for under the LIFO method:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
|
13.8
|
%
|
|
|
14.9
|
%
|
Consolidated
|
|
|
6.2
|
%
|
|
|
7.0
|
%
|
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 dispose of these materials as time and manpower permit.
We maintain raw material on our premises that we do not own,
including precious metals consigned from financial institutions
and customers, and raw materials consigned from vendors.
Although we have physical possession of the goods, their value
is not reflected on our balance sheet because we do not have
title.
Property,
Plant and Equipment
We record property, plant and equipment at historical cost. In
addition to the original purchased cost, including
transportation, installation and taxes, we capitalize
expenditures that increase the utility or useful life of
existing assets. For self-constructed assets, we capitalize
interest costs incurred during the period of construction. We
depreciate property, plant and equipment using the straight-line
basis for financial reporting purposes, generally over the
following estimated useful lives of the assets:
|
|
|
|
|
Buildings
|
|
|
20 to 40 years
|
|
Machinery and equipment
|
|
|
5 to 15 years
|
|
Generally, we expense repair and maintenance costs as incurred.
However, major planned overhauls of equipment are accrued in
advance of the cash expenditures. We had accrued major planned
overhauls totaling $2.5 million at December 31, 2006
and $2.9 million at December 31, 2005.
We record asset retirement obligations (AROs) as
they are incurred. We record an asset and a liability equal to
the present value of the estimated costs associated with the
retirement of long-lived assets where a legal or contractual
obligation exists and the future costs can be reasonably
estimated. We depreciate the asset over its remaining estimated
useful life and the liability is accreted over time as an
operating expense. We estimate the AROs based on judgment,
taking into consideration the Companys historical
practices, current business intentions, and other relevant
information. In determining the amount of the estimated AROs, we
use an expected value technique based upon potential settlement
dates and related probabilities of settlement.
If we were to abandon or close certain of our facilities,
existing legal obligations would be triggered. Although we have
no current plans to do so, if we close certain operating
facilities, changes to or settlements of the related conditional
AROs could negatively affect the Companys results of
operations and cash flows. At December 31,
45
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
2006 and 2005, estimated liabilities for asset retirement
obligations were $2.0 million and $1.0 million,
respectively.
Asset
Impairment
The Companys long-lived assets include property, plant,
equipment, goodwill and other intangible assets. We review
property, plant and equipment for impairment whenever events or
circumstances indicate that its carrying value may not be
recoverable. The following are examples of such events or
changes in circumstances:
|
|
|
|
|
An adverse change in the business climate or market price of a
long-lived asset or asset group;
|
|
|
|
An adverse change in the extent or manner in which a long-lived
asset or asset group is used or in its physical
condition; or
|
|
|
|
Current operating losses for a long-lived asset or asset group
combined with a history or such losses or projected or
forecasted losses that demonstrate that the losses will be
continuing.
|
The carrying amount of long-lived assets is not recoverable if
it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. 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.
We review goodwill and other intangible assets for impairment
annually using a measurement date of October 31st or more
frequently in the event of an impairment indicator. The fair
value of goodwill and other intangible assets is estimated using
the discounted cash flow method. We use projections of market
growth, internal sales efforts, input cost movements, and cost
reduction opportunities to estimate future cash flows. The
majority of corporate expenses and assets and liabilities are
allocated to the reporting units in this process. Using a risk
adjusted, weighted average
cost-of-capital,
we discount the cash flow projections to the annual measurement
date. If the fair value of any of the reporting units were
determined to be less than its carrying value, we would obtain
comparable market values or independent appraisals of its
assets. In 2006 and 2005, the fair value exceeded the carrying
value, and therefore, it was not necessary to obtain independent
appraisals.
Income
Taxes
We determine income taxes using the liability method of
accounting. Income tax expense includes U.S. and international
income taxes plus the provision for U.S. taxes on
undistributed earnings of international subsidiaries we have not
deemed to be indefinitely invested. Tax credits and other
incentives reduce tax expense in the year the credits are
claimed. We recognize deferred tax assets if we believe it is
more likely than not that the assets will be realized in future
years. We record valuation allowances against net deferred tax
assets which we believe do not meet the criteria for realization
of more likely than not.
Environmental
Liabilities
As part of the production of some of our products, we handle,
process, use and store hazardous materials. As part of these
routine processes, we expense recurring costs associated with
control and disposal of hazardous materials as they are
incurred. Occasionally we are subject to ongoing, pending or
threatened litigation related to the handling of these materials
or other matters. If, based on available information, we believe
that we have incurred a liability and we can reasonably estimate
the amount, we accrue for environmental remediation and other
contingent liabilities. We disclose material contingencies if
the likelihood of the potential loss is reasonably possible but
the amount is not reasonably estimable.
46
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
In estimating the amount to be accrued for environmental
remediation, we use assumptions about:
|
|
|
|
|
Remediation requirements at the contaminated site;
|
|
|
|
The nature of the remedy;
|
|
|
|
Existing technology;
|
|
|
|
The outcome of discussions with regulatory agencies;
|
|
|
|
Other potentially responsible parties at multi-party sites; and
|
|
|
|
The number and financial viability of other potentially
responsible parties.
|
We actively monitor the status of sites, and, as assessments and
cleanups proceed, we update our assumptions and adjust our
estimates as necessary. Because we are uncertain about the
timing of related payments, we do not discount the estimated
remediation costs.
Unanticipated government enforcement actions, differences in
actual results as compared to expected remediation outcomes,
changes in health, safety or environmental regulations, or
testing requirements could result in higher or lower costs and
changes to our estimates.
Contingencies
We expense contingent items as they are incurred when events
giving rise to the items are probable and the amounts are
reasonably estimable. If a loss contingency is reasonably
possible and the amount of the loss is material, we disclose the
item. If only a range of possible losses can be estimated, we
record the low end of the range and disclose the possible range
of outcomes. However, if there is a best estimate of the amount
of the loss within the range, we will record that amount.
Gain contingencies are only recognized when their realization is
assured beyond a reasonable doubt. In December 2006, we received
a $2.4 million settlement in a class action lawsuit for
price-fixing in the rubber chemicals industry. The period
covered under the settlement began in 1995 and ended in 2001. We
recorded this gain as miscellaneous income, net in the
consolidated statement of income.
Restructuring
and Cost Reduction Programs
We expense costs associated with exit and disposal activities
designed to restructure operations and reduce ongoing costs of
operations when we incur the related liabilities. After the
appropriate level of management having the authority approves
the detailed restructuring plan or when other triggering events
occur, we establish accruals for underlying activities by
estimating employee termination costs. Our estimates are based
upon factors including statutory and union requirements,
affected employees lengths of service, contract
provisions, salary level and health care benefit choices. As
part of our assessment of exit and disposal activities, we also
analyze the carrying value of the affected long-lived assets for
impairment and reductions in the remaining estimated useful
lives.
We believe our estimates and assumptions used to calculate these
restructuring provisions are appropriate, and although we do not
anticipate significant changes, actual costs could differ from
the estimates should we make changes in the nature or timing of
the restructuring plans. The resulting changes in costs could
have a material impact on the Companys results of
operations, financial position, or cash flows.
Postretirement
and Other Employee Benefits
We recognize postretirement and other employee benefits as
employees render the services necessary to earn those benefits.
We determine defined benefit pension and other postretirement
benefit costs and obligations using actuarial calculations
performed by experts. The calculations and the resulting amounts
recorded in our financial
47
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
statements are affected by assumptions including the discount
rate, expected long-term rate of return on plan assets, the
annual rate of change in compensation for plan-eligible
employees, estimated changes in costs of healthcare benefits,
and other factors. We evaluate the assumptions used on an annual
basis. Postretirement obligations for U.S. employees are
measured each September 30th while these obligations for
foreign employees are measured each December 31st.
Derivative
Financial Instruments and Precious Metals Deposits
As part of our risk management activities, we employ derivative
financial instruments, primarily foreign currency forward
exchange contracts, to hedge certain anticipated transactions,
firm commitments, or assets and liabilities denominated in
foreign currencies. We also purchase portions of our natural gas
requirements under fixed price forward purchase contracts. Under
certain circumstances, these contracts require us to settle the
obligations in cash at prevailing market prices.
We record derivatives on our balance sheet as either assets or
liabilities that are measured at fair value. We adjust the fair
value of derivatives that are not hedges through income.
Depending on the nature of the hedge, changes in fair value of
the derivatives are either offset against the changes in the
fair value of assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion
of a derivatives change in value, if any, is immediately
recognized in earnings. We use derivatives only to manage
well-defined foreign currency and commodity price risks and do
not use derivatives for speculative purposes.
We obtain precious metals under consignment agreements with
financial institutions for periods of one year or less. These
precious metals are primarily silver, gold, platinum and
palladium and are used in the production of certain products for
our customers. Under these arrangements, the financial
institutions own the precious metals, and accordingly, we do not
report these precious metals as inventory on our consolidated
balance sheet although they physically are in our possession.
These agreements are cancelable by either party at the end of
each consignment period, however, because we have access to a
number of consignment arrangements with available capacity, our
consignment needs can be shifted among the other participating
institutions in order to ensure our supply. In certain cases,
these financial institutions have required cash deposits to
provide additional collateral beyond the value of the underlying
precious metals. The financial institutions charge us fees for
these consignment arrangements, and these fees are recorded as
cost of sales.
Revenue
Recognition
We recognize sales typically when we ship goods to our customers
and when all of the following criteria are met:
|
|
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
The selling price is fixed and determinable;
|
|
|
|
Collection is reasonably assured; and
|
|
|
|
Title and risk of loss has passed to our customers.
|
Because we sell our products throughout the world, we use
varying sales and payments terms as agreed to with our customers
and we do not generally require collateral on accounts
receivable. Substantial amounts of our consolidated revenues are
derived from foreign countries and in many of those countries
the standard payment terms are longer than those prevalent in
the U.S. 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 with a separate display of cost
of sales to arrive at gross profit. We record revenues this way
because we act as the principal in the
48
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
transactions we enter into and take title and the risks and
rewards of ownership of the inventory we process, although the
timing of when we take title to inventory during the production
process may vary.
The amount of shipping and handling fees invoiced to our
customers at the time our product is shipped is included in net
sales. Credit memos issued to customers for sales returns,
discounts allowed and sales adjustments are recorded when they
are incurred as a reduction of sales. We use estimated
allowances to provide for future sales returns and adjustments
in order to record revenues in the proper accounting period and
to state the related accounts receivable at their net realizable
value. We estimate these allowances based upon historical sales
return and adjustment rates.
Additionally, we provide certain of our customers with incentive
rebate programs to promote customer loyalty and encourage
greater product sales. We accrue customer rebates over the
rebate periods based upon estimated attainments of the
provisions in the rebate agreements using available information
and record these rebate accruals as reductions of sales.
Cost
of Sales
We include in cost of sales the purchased cost of raw materials,
and labor and overhead directly associated with the production
process. Cost of sales also includes shipping and handling
costs, purchasing and receiving costs, depreciation and leasing
costs of buildings and equipment used in production, utilities,
operating parts and supplies, warehousing costs, internal
transfer costs, other costs of distribution, costs of hazardous
materials control and disposal, physical inventory adjustments,
and obsolescence and rework costs.
Cost of sales is initially recorded using standard costs, which
are generally established at least annually to fully absorb
qualifying production costs into inventory based on normal
production capacity. Production variances related to volume,
rework, and other production inefficiencies are expensed as
incurred. We review manufacturing costs periodically to ensure
that only those costs that clearly relate to production and that
increase the economic utility of the related inventories are
capitalized into inventory. We adjust the standard cost of
inventory at the balance sheet date to actual by applying
material purchase price and the appropriate production variances
most recently incurred. For a portion of our inventories, these
recent actual costs are reduced to their LIFO value through the
calculation and recording of a LIFO adjustment in cost of sales.
Selling,
General and Administrative Expenses
We include in selling, general and administrative expense those
salaries and wages, benefits, stock-based compensation, sales
commissions, bad debt expense, lease costs and depreciation
related to buildings and equipment, and outside services such as
legal, audit and consulting fees that are used in sales and
administrative functions. Included in selling, general and
administrative expenses are certain warehousing costs of
$4.0 million in 2006 and $4.1 million in 2005.
Research and development expenses are expensed as incurred and
are also included in selling, general and administrative
expenses. Amounts expended for development or significant
improvement of new or existing products, services and techniques
were $42.6 million for 2006, $38.4 million for 2005,
and $42.4 million for 2004.
Reclassifications
We made reclassifications in the prior year financials
statements to conform the presentation to the current year.
Restructuring charges totaling $3.7 million in 2005 and
$6.0 million in 2004 were reclassified from cost of sales,
and selling, general and administrative expenses, and
miscellaneous income in the consolidated statements of
49
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
income and from the net change in accrued expenses and other
current liabilities in the consolidated statements of cash flows.
In the consolidated balance sheet for December 31, 2005, we
combined miscellaneous notes receivable with other current
assets and then separately reported the note receivable from
Ferro Finance Corporation of $111.9 million and deposits
for precious metals of $19.0 million. In the consolidated
statements of cash flows, we reclassified the increases in the
note receivable from Ferro Finance Corporation of
$3.5 million in 2005 and $16.7 million in 2004 and the
increases in precious metal deposits of $11.1 million in
2005 and $7.9 million in 2004 from changes in other current
assets.
Recently
Adopted Accounting Pronouncements
Prior to January 1, 2006, we accounted for stock-based
compensation under the intrinsic value method. Accordingly, we
did not recognize compensation expense for stock options,
because under the award plans the stock option exercise price
may not be less than the per share fair market value of the
Companys stock on the date of grant. Effective
January 1, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based
Payment, (FAS No. 123R). We now
recognize compensation expense for stock options over the
required employee service periods. We base stock-based
compensation costs on the estimated grant-date fair value of
stock-based awards that are expected to ultimately vest and
adjust expected vesting rates to actual results as these become
known.
Ferros consolidated financial statements for 2006 reflect
the impact of FAS No. 123R. Because we adopted
FAS No. 123R using the modified prospective transition
method, the consolidated financial statements for the prior
periods do not include the impact of FAS No. 123R.
Under the modified prospective transition method, we recognize
compensation expense that includes compensation cost for all
stock-based compensation granted, but not yet vested, as of the
date of adoption, and compensation cost for all stock-based
compensation granted on or subsequent to adoption.
The adoption of FAS No. 123R reduced the
Companys 2006 reported pre-tax income from continuing
operations by $3.0 million and net income by
$2.0 million. The adoption of FAS No. 123R also
reduced basic earnings per share by $0.05 and diluted earnings
per share by $0.05 and required the classification of realized
tax benefits, related to the excess of the deductible
compensation cost over the amount recognized, as a financing
activity rather than as an operating activity in the
consolidated statement of cash flows. Upon the initial adoption
of FAS No. 123R, we reclassified $6.1 million of
unearned stock-based compensation to additional paid-in capital
in the consolidated balance sheet. As required by
FAS No. 123R, we recorded all subsequent stock-based
compensation expense for equity awards to additional paid-in
capital.
50
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
The following table contains pro forma disclosures regarding the
effect on Ferros net income and basic and diluted earnings
per share for 2005 and 2004, had the Company applied a fair
value method of accounting for stock-based compensation in
accordance with FAS No. 123R.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Income from continuing operations
available to common shareholders as reported
|
|
$
|
15,654
|
|
|
$
|
26,135
|
|
Add: Stock-based employee
compensation expense included in reported income, net of tax
|
|
|
175
|
|
|
|
143
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value methods for all
awards, net of tax
|
|
|
(3,353
|
)
|
|
|
(3,490
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
available to common shareholders pro forma
|
|
$
|
12,476
|
|
|
$
|
22,788
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from
continuing operations as reported
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
Basic earnings per share from
continuing operations pro forma
|
|
$
|
0.29
|
|
|
$
|
0.54
|
|
Diluted earnings per share from
continuing operations as reported
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
Diluted earnings per share from
continuing operations pro forma
|
|
$
|
0.29
|
|
|
$
|
0.54
|
|
There was no impact on pro forma expense from discontinued
operations for the periods presented.
For the purpose of computing pro forma net income, we estimated
the fair value of stock options at their grant date using the
Black-Scholes option pricing model. This model was developed for
use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable, characteristics
that are not present in the Companys option grants. If the
model permitted consideration of the unique characteristics of
employee stock options, the resulting estimate of the fair value
of the stock options could be different and would likely be
lower.
FASB Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations,
(FIN No. 47) was issued in March 2005 and
is effective for fiscal years ending after December 15,
2005. FIN No. 47 clarifies that the term
conditional asset retirement obligation as used in
FASB Statement No. 143, Accounting for Asset Retirement
Obligations, refers to an unconditional legal obligation to
perform an asset retirement activity in which the timing or
method of settlement are conditional on a future event. This
obligation should be recognized at its fair value, if that value
can be reasonably estimated. We adopted FIN No. 47 as
of January 1, 2005, and recorded additional conditional
asset retirement obligations of $0.9 million; the pro forma
effect of FIN No. 47 on the Companys net income
and earnings per share for the year ended December 31,
2004, was not material.
The FASB issued Statement No. 151, Inventory Costs,
(FAS No. 151) in November 2004.
FAS No. 151 is effective for fiscal years beginning
after June 15, 2005, and clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). FAS No. 151
requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of
so abnormal. We adopted FAS No. 151 as of
January 1, 2006, and it did not have a material impact on
the results of operations or financial position of the Company.
In 2006, we adopted the recognition and disclosure provisions of
FASB Statement No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans,
(FAS No. 158). As a result of our
adoption of FAS No. 158, we recorded a decrease in
other non-current assets of $1.2 million, an increase in
accrued expenses and other current liabilities of
$6.5 million, a decrease in postretirement and pension
liabilities of $5.2 million, an increase in non-current
deferred tax assets of $3.5 million, and a decrease in
accumulated other comprehensive loss of $1.0 million.
51
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Newly
Issued Accounting Pronouncements
In March 2006, the FASB issued Statement No. 156,
Accounting for Servicing of Financial Assets an
amendment of FASB Statement No. 140,
(FAS No. 156). This statement requires an
entity to recognize at fair value, if practicable, a servicing
asset or liability each time it undertakes an obligation to
service a financial asset by entering into a servicing contract
in certain situations primarily relating to off-balance sheet
arrangements. Entities may choose between two subsequent
measurement methods for each class of separately recognized
servicing assets and servicing liabilities.
FAS No. 156 is effective for fiscal years beginning
after September 15, 2006. The provisions of
FAS No. 156 are to be applied prospectively to
transactions entered into after its adoption. We will adopt
FAS No. 156 as of January 1, 2007, as permitted,
and are currently evaluating the implementation options; at this
time, we are uncertain as to the impact on our results of
operations and financial position.
In June 2006, the FASB published Interpretation No. 48,
Accounting for Uncertainty in Income Taxes,
(Interpretation No. 48). This interpretation
requires an entity to recognize the benefit of a tax position
only when it is more likely than not, based on the
positions technical merits, that the position would be
sustained upon examination by the respective taxing authority.
We will adopt Interpretation No. 48 as of January 1,
2007. The cumulative effect of adopting Interpretation
No. 48, if material, is required to be reported separately
as an adjustment to retained earnings as of the beginning of
2007. We are currently evaluating the impact of Interpretation
No. 48 and, at this time, are unable to determine whether
the cumulative adjustment is material.
In September 2006, the FASB published Staff Position
No. AUG AIR-1, Accounting for Planned Maintenance
Activities. This staff position prohibits the use of the
accrue-in-advance
method of accounting for planned major maintenance activities.
It is effective for fiscal years beginning after
December 15, 2006, and is to be applied retrospectively.
When adopted in fiscal 2007, the staff position will increase
our retained earnings as of the beginning of 2005 by
$1.6 million, increase 2005 income from continuing
operations by $0.4 million ($0.3 million net of tax)
and decrease 2006 income from continuing operations by
$0.4 million ($0.3 million net of tax).
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements,
(FAS No. 157). FAS No. 157
defines fair value, establishes a framework and gives guidance
regarding the methods used for measuring fair value, and expands
disclosures about fair value measurements. Accordingly,
FAS No. 157 does not require any new fair value
measurements, but will change current practice for some
entities. FAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We will apply this standard prospectively, as permitted.
In September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R),
(FAS No. 158). We are required to adopt
the measurement provisions of FAS No. 158 as of
December 31, 2008. The measurement provisions require
companies to measure defined benefit plan assets and obligations
as of the balance sheet date. Currently, we use
September 30 as the measurement date for U.S. pension
and other postretirement benefits. We are evaluating these
requirements and have not yet determined the impact this may
have on our consolidated financial statements.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, (FAS No. 159). This
statement permits all entities to choose, at specified election
dates, to measure eligible items at fair value (the fair
value option). A business entity should report unrealized
gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date.
Upfront costs and fees related to items for which the fair value
option is elected shall be recognized in earnings as incurred
and not deferred. FAS No. 159 is effective as of the
beginning of the first fiscal year that begins after
November 15, 2007. We are currently evaluating the impact
of the adoption of this statement; at this time, we are
uncertain as to the impact on our results of operations and
financial position.
52
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Inventories at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Raw materials
|
|
$
|
74,240
|
|
|
$
|
62,488
|
|
Work in process
|
|
|
44,658
|
|
|
|
34,122
|
|
Finished goods
|
|
|
151,140
|
|
|
|
133,060
|
|
|
|
|
|
|
|
|
|
|
FIFO cost (approximates
replacement cost)
|
|
|
270,038
|
|
|
|
229,670
|
|
LIFO reserve
|
|
|
(15,525
|
)
|
|
|
(14,413
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254,513
|
|
|
$
|
215,257
|
|
|
|
|
|
|
|
|
|
|
In the production of some of our products, we use precious
metals, primarily silver for Electronic Materials products and
gold for Color and Glass Performance Materials products. We
obtain some precious metals from financial institutions under
consignment agreements with terms of one year or less. The
financial institutions retain ownership of the precious metals
and charge us fees based on the amounts we consign. These fees
were $3.1 million for 2006, $1.6 million for 2005 and
$2.4 million for 2004, and were charged to cost of sales.
In November 2005, the financial institutions renewed their
requirement for cash deposits from us to provide additional
collateral beyond the value of the underlying precious metals.
Outstanding collateral deposits were $70.1 million at
December 31, 2006 and $19.0 million at
December 31, 2005. We also process precious metals owned by
our customers. We had on hand at December 31, 2006,
$120.9 million and at December 31, 2005,
$99.3 million of precious metals owned by financial
institutions, measured at fair value.
|
|
3.
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Land
|
|
$
|
43,801
|
|
|
$
|
38,909
|
|
Buildings
|
|
|
257,145
|
|
|
|
251,675
|
|
Machinery and equipment
|
|
|
903,913
|
|
|
|
822,837
|
|
Leased property, plant and
equipment under capital leases
|
|
|
13,380
|
|
|
|
12,683
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
1,218,239
|
|
|
|
1,126,104
|
|
Total accumulated depreciation
|
|
|
(691,437
|
)
|
|
|
(594,965
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
526,802
|
|
|
$
|
531,139
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense from continuing operations was
$69.5 million, $68.4 million, and $67.8 million
for the years ended December 31, 2006, 2005, and 2004,
respectively.
During 2006, we capitalized $1.1 million of interest costs
related to property, plant and equipment under construction. The
amounts of interest we capitalized in 2005 and 2004 were not
material. At December 31, 2006, we had $36.9 million
of property, plant and equipment under construction, as compared
with $25.0 million under construction at December 31,
2005.
In October 2005, the Dutch government placed a lien on one of
the Companys facilities in the Netherlands as collateral
for any future payment relating to an unresolved environmental
claim. Negotiations are ongoing relating to the environmental
issue. We do not believe the ultimate resolution of this matter
will have a material effect on Ferros financial position
or results of operations.
53
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
|
|
4.
|
Goodwill
and Other Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
December 31,
|
|
|
|
Economic Life
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Goodwill
|
|
Indefinite
|
|
$
|
421,455
|
|
|
$
|
423,585
|
|
Patents
|
|
9-15 years
|
|
|
6,516
|
|
|
|
6,655
|
|
Non-compete
|
|
3-10 years
|
|
|
|
|
|
|
3,287
|
|
Other
|
|
1 year - indefinite
|
|
|
13,807
|
|
|
|
11,125
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross intangible assets
|
|
|
|
|
441,778
|
|
|
|
444,652
|
|
Accumulated amortization
|
|
|
|
|
(35,438
|
)
|
|
|
(33,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
|
$
|
406,340
|
|
|
$
|
410,666
|
|
|
|
|
|
|
|
|
|
|
|
|
As part of our restructuring activities in 2006, we recorded an
impairment charge of $3.5 million relating to intellectual
property at our Niagara Falls, New York, facility.
We recorded amortization expense from continuing operations
related to intangible assets and other non-current assets, as
detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Intangibles
|
|
$
|
965
|
|
|
$
|
809
|
|
|
$
|
1,092
|
|
Other non-current assets
|
|
|
9,054
|
|
|
|
5,650
|
|
|
|
6,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,019
|
|
|
$
|
6,459
|
|
|
$
|
7,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Financing
and Short-term and Long-term Debt
|
Loans payable and current portion of long-term debt at
December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Loans payable to banks
|
|
$
|
7,440
|
|
|
$
|
5,866
|
|
Current portion of long-term debt
|
|
|
3,324
|
|
|
|
1,689
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,764
|
|
|
$
|
7,555
|
|
|
|
|
|
|
|
|
|
|
54
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Long-term debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
$200,000 Senior notes, 9.125%, due
2009*
|
|
$
|
199,273
|
|
|
$
|
198,909
|
|
$25,000 Debentures, 7.625%, due
2013*
|
|
|
|
|
|
|
24,877
|
|
$25,000 Debentures, 7.375%, due
2015*
|
|
|
|
|
|
|
24,965
|
|
$50,000 Debentures, 8.0%, due 2025*
|
|
|
|
|
|
|
49,550
|
|
$55,000 Debentures, 7.125%, due
2028*
|
|
|
|
|
|
|
54,532
|
|
Revolving credit facility
|
|
|
127,953
|
|
|
|
|
|
Term loan facility
|
|
|
250,000
|
|
|
|
|
|
Former revolving credit facility
|
|
|
|
|
|
|
186,100
|
|
Capital lease obligations (see
Note 14)
|
|
|
6,744
|
|
|
|
7,364
|
|
Other notes
|
|
|
1,008
|
|
|
|
1,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
584,978
|
|
|
|
547,857
|
|
Current portion
|
|
|
(3,324
|
)
|
|
|
(1,689
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
581,654
|
|
|
$
|
546,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Net of unamortized discounts |
The annual maturities of long-term debt for each of the five
years after December 31, 2006 were as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
2007
|
|
$
|
3,324
|
|
2008
|
|
|
3,560
|
|
2009
|
|
|
202,682
|
|
2010
|
|
|
3,452
|
|
2011
|
|
|
190,094
|
|
Thereafter
|
|
|
181,866
|
|
|
|
|
|
|
Total
|
|
$
|
584,978
|
|
|
|
|
|
|
Revolving
Credit and Term Loan Facilities
In March 2006, we accepted a commitment from a group of lenders
for a $700 million credit facility (the New Credit
Facility) and, in June 2006, finalized the agreement. The
New Credit Facility consists of a five-year, $250 million
multi-currency senior revolving credit facility and a six-year,
$450 million senior term loan facility. At
December 31, 2006, we had $109.3 million available
under the revolving credit facility, after reductions for
standby letters of credit secured by this facility, and
$55.0 million available under the term loan facility. In
addition, we can request an increase of $50 million in the
revolving credit facility. To establish and use the New Credit
Facility, we paid fees of $6.4 million for the revolving
credit facility and $9.6 million for the term loan
facility, which will be amortized over the lives of the
facilities.
The New Credit Facility replaced the former revolving credit
facility that would have expired in September 2006. At
December 31, 2005, we had $113.9 million available
under that facility. In June 2006, when we terminated the former
revolving credit facility, we expensed the remaining deferred
fees from that facility of $0.6 million.
55
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
In June 2006, Ferro borrowed $95 million of the term loan
facility to partially repay the former revolving credit
facility. In July and August of 2006, we borrowed another
$155 million of the term loan facility to repay
$155 million of outstanding debentures, as bondholders
accelerated payment of these obligations due to defaults caused
by our delayed financial filings with the U.S. Securities
and Exchange Commission (SEC) for 2005. In addition,
in January 2007, we borrowed $55 million of the term loan
facility and used the proceeds to reduce borrowings under the
revolving credit facility. At that time, we also cancelled the
remaining unused term loan commitment of $145 million,
which was reserved to finance the potential accelerated payment
of the senior notes, since the default under the senior notes
was no longer continuing. See further discussion under
Senior Notes and Debentures below. Ferro is required
to make quarterly principal payments equal to 0.25% of the
amount borrowed under the term loan facility beginning in April
2007.
Interest rates for borrowings under the New Credit Facility are
equal to the sum of (A) at our option, either
(1) LIBOR or (2) the higher of the Federal Funds Rate
plus 0.5% or the Prime Rate and (B) for the revolving
credit facility, a variable margin based on Ferros debt
rating, or for the term loan facility, a fixed margin. At
December 31, 2006, the average interest rate was 8.1% for
revolving credit borrowings and 8.1% for term loan borrowings.
At December 31, 2005 the average interest rate for
borrowings against the former revolving credit facility was 6.4%.
The New Credit Facility is secured by substantially all of
Ferros assets, generally including 100% of the shares of
the Companys domestic subsidiaries and 65% of the shares
of the foreign subsidiaries directly owned by the domestic
parent company, but excluding trade receivables sold pursuant to
our accounts receivable sales programs. This security interest
is shared with the holders of the Companys senior notes,
as required under their indenture.
The New Credit Facility contains customary operating covenants
that limit our ability to engage in certain activities,
including additional loans and investments; creation of liens;
prepayments, redemptions and repurchases of debt; and mergers,
acquisitions and asset sales. We are also subject to customary
financial covenants including a leverage ratio and a fixed
charge coverage ratio. Failure to satisfy certain of these
covenants, either immediately or within a brief period, would
result in a default. If a default should occur and be continuing
and we have not obtained a waiver, the obligations under the New
Credit Facility may become immediately due and payable at the
option of providers of more than 50% of the credit facility
commitment. At December 31, 2006, we were in compliance
with the covenants of the New Credit Facility.
Senior
Notes and Debentures
The Companys senior credit rating was B+ by
Standard & Poors Rating Group
(S&P) at December 31, 2006. The Company is
not currently rated by any other debt-rating agency.
The indentures for the senior notes and the debentures contain
operating covenants that limit our ability to engage in certain
activities, including corporate consolidations, mergers,
transfers of assets, and sale and leaseback transactions. The
indentures contain cross-default provisions with other debt
obligations that exceed $10 million of principal
outstanding. In addition, the terms of the indentures require us
to file with the Trustee copies of Ferros annual reports
on
Form 10-K,
quarterly reports on
Form 10-Q
and an Officers Certificate relating to our compliance
with the terms of the indentures within 120 days after the
end of our fiscal year. We stopped satisfying these reporting
requirements when we delayed filing Ferros
Form 10-Q
for the second quarter of 2004 due to the restatements of the
Companys 2003 and first quarter 2004 results. As we
anticipated and planned for, in March and April 2006, we
received notices of default from a holder and the Trustee of the
senior notes and debentures of which $355 million was
outstanding. The notices of default related only to financial
reports and the related Officers Certificate. Under the
terms of the indentures, we had 90 days from the notices of
default in which to cure the deficiencies identified in the
notices or obtain waivers, or defaults would have occurred and
the holders of the senior notes or debentures or the Trustee
could declare the principal immediately due and payable. At the
end of these periods, the deficiencies had not been cured and
waivers had not been obtained. During July and August 2006, the
bondholders accelerated the payment of the principal amount of
the debentures, of which $155 million was
56
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
outstanding, and the Company funded the accelerated payments by
borrowing against the term loan facility discussed above. As a
result, we expensed the remaining unamortized discounts and
deferred fees of $1.9 million associated with these
debentures. In December 2006, we became current with all of our
financial reporting requirements under the indenture for the
senior notes, and the related default was no longer continuing.
The senior notes are redeemable at our option at any time for
the principal amount then outstanding plus the present value of
unpaid interest through maturity. The senior notes are
redeemable at the option of the holders only upon a change in
control of the Company combined with a rating by either
Moodys or S&P below investment grade as defined in the
indenture. Currently, the rating by S&P of the senior notes
is below investment grade.
Receivable
Sales Programs
We have several programs to sell, on an ongoing basis, pools of
our trade accounts receivable. These programs accelerate cash
collections at favorable financing costs and help us manage the
Companys liquidity requirements. In our largest program,
we sell substantially all of Ferros U.S. trade
accounts receivable to FFC, a wholly-owned unconsolidated QSPE.
FFC finances its acquisition of trade receivable assets by
issuing beneficial interests in (securitizing) the receivables
to multi-seller receivables securitization companies
(conduits) for proceeds of up to
$100.0 million. FFC had received net proceeds of
$60.6 million and $1.0 million for outstanding
receivables at December 31, 2006 and 2005, respectively.
FFC and the conduits have no recourse to Ferros other
assets for failure of debtors to pay when due as the assets
transferred are legally isolated in accordance with the
U.S. bankruptcy laws. Ferro, on behalf of FFC and the
conduits, provides normal collection and administration services
with respect to the trade accounts receivable sold.
Activity from this program is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Trade accounts receivable sold to
FFC
|
|
$
|
994,436
|
|
|
$
|
946,187
|
|
|
$
|
923,656
|
|
Cash proceeds from FFC
|
|
|
1,090,485
|
|
|
|
941,988
|
|
|
|
906,696
|
|
Trade accounts receivable
collected and remitted to FFC and the conduits
|
|
|
1,005,885
|
|
|
|
944,630
|
|
|
|
904,514
|
|
Ferros consolidated balance sheet does not include the
trade receivables sold, but does include a note receivable from
FFC to the extent that cash proceeds from the sales of accounts
receivable to FFC have not yet been received by Ferro. We
measure the fair value of the note receivable on a monthly basis
using our best estimate of FFCs ability to pay based on
the undiscounted expected future cash collections on the
outstanding accounts receivable sold. Actual cash collections
may differ from these estimates and would directly affect the
fair value of the note receivable.
In June 2006, we amended the program to cure a default that
resulted from a credit rating downgrade, to modify the reporting
requirements to more closely match those in the New Credit
Facility, and to extend the program to June 2009. The program
contains operating covenants that limit FFCs ability to
engage in certain activities, including borrowings, creation of
liens, mergers, and investing in other companies. The program
also requires FFC and Ferro to provide periodic financial
statements and reports on the accounts receivable and limits our
ability to make significant changes in receivable collection
practices. In addition, FFC is required to maintain a minimum
tangible net worth. To meet this requirement, we invested an
additional $25 million in FFC in June 2006. The program is
subject to customary termination events, including
non-performance, deterioration in the quality of the accounts
receivable pool, and cross-default provisions with Ferros
New Credit Facility and other debt obligations with principal
outstanding of at least $5 million. If a termination event
occurs and is not cured, the program may be terminated or a
third party may be selected to act as administrator in
collecting FFCs accounts receivable.
57
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
In addition, we maintain several international programs to sell
trade accounts receivable, primarily without recourse. The
commitments supporting these programs can be withdrawn at any
time and totaled $49.2 million and $29.1 million at
December 31, 2006 and 2005, respectively. The amount of
outstanding receivables sold under the international programs
was $33.7 million and $19.3 million at
December 31, 2006 and 2005, respectively.
Other
Financing Arrangements
We maintain other lines of credit to provide global flexibility
for Ferros short-term liquidity requirements. These
facilities are uncommitted lines for our international
operations and totaled $21.0 million and $18.7 million
at December 31, 2006 and 2005, respectively. The unused
portions of these lines provided $18.7 million and
$14.1 million of additional liquidity at December 31,
2006 and 2005, respectively.
The carrying amounts of the following assets and liabilities
meeting the definition of a financial instrument approximate
their fair values due to the short period to maturity of the
instruments:
|
|
|
|
|
Cash and cash equivalents;
|
|
|
|
Accounts and trade notes receivable;
|
|
|
|
Notes receivable;
|
|
|
|
Deposits;
|
|
|
|
Miscellaneous receivables;
|
|
|
|
Short-term loans payable to banks; and
|
|
|
|
Accounts payable and accrued liabilities.
|
Long-term
Debt
The carrying values of borrowings under the New Credit Facility
and the former revolving credit facility approximate their fair
values, due to their variable market interest rates. The fair
values of Ferros senior notes and debentures are based on
a third partys estimated bid price. The fair values of
other long-term notes are estimated using present value
techniques.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Senior notes
|
|
$
|
199,273
|
|
|
$
|
205,500
|
|
|
$
|
198,909
|
|
|
$
|
209,500
|
|
Debentures
|
|
|
|
|
|
|
|
|
|
|
153,924
|
|
|
|
143,700
|
|
Other long-term notes
|
|
|
1,008
|
|
|
|
899
|
|
|
|
1,560
|
|
|
|
1,425
|
|
Derivative
Instruments
We manage foreign currency risks principally by entering into
forward contracts to mitigate the impact of currency
fluctuations on transactions. Our principal foreign currency
exposures relate to the Euro, the British Pound Sterling, the
Japanese Yen, and the Chinese Yuan. The maturities of these
foreign currency forward contracts are consistent with the terms
of the underlying exposures that are generally less than one
year. We do not engage in speculative transactions for trading
purposes. We enter into these forward contracts with major
reputable multinational financial institutions. Accordingly, we
do not anticipate counter-party default. We mark these contracts
to
58
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
fair value at the end of each reporting period and recognize the
resulting gains or losses as other income or expense from
foreign currency transactions.
We hedge a portion of our exposure to changes in the pricing of
certain raw material commodities using derivative instruments.
We hedge our exposure principally through swap arrangements that
allow us to fix the price of the commodities for future
purchases. These swap arrangements are settled in cash at their
maturities. We mark these contracts to fair value and recognize
the resulting gains or losses as other comprehensive income.
After the contracts mature and the materials are sold, the gains
and losses are recognized as a part of cost of sales. The amount
at December 31, 2006, that was expected to be reclassified
into earnings within the next 12 months was
$2.4 million of income.
Precious metals (primarily silver, platinum and palladium)
represent a significant portion of raw material costs in our
Electronic Materials products. Sometimes when an order for these
products is placed, the customer requests a fixed price for the
precious metals content. In these instances, we enter into a
fixed price sales contract to establish the cost for the
customer at the estimated future delivery date. At the same
time, we enter into a forward purchase arrangement with a
precious metals supplier to completely cover the value of the
fixed price sales contract. We mark these contracts to fair
value at the end of each reporting period and recognize the
resulting gains or losses as miscellaneous income or expense,
respectively.
Ferro purchases portions of its natural gas requirements under
fixed price contracts to reduce the volatility of cost changes.
For contracts entered into prior to April 2006, we marked these
contracts to fair value and recognized the resulting gains or
losses as miscellaneous income or expense, respectively.
Beginning April 2006, we designated new natural gas contracts as
normal purchase contracts, which are not
marked-to-market.
Our purchase commitment for natural gas under normal purchase
contracts was $6.3 million at December 31, 2006.
The notional amount, carrying amount and fair value of these
derivative instruments at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
121,430
|
|
|
$
|
119,348
|
|
Carrying amount and fair value
|
|
$
|
(640
|
)
|
|
$
|
121
|
|
Raw material commodity swaps:
|
|
|
|
|
|
|
|
|
Notional amount (in metric tons of
base metals)
|
|
|
2,004
|
|
|
|
3,092
|
|
Carrying amount and fair value
|
|
$
|
1,939
|
|
|
$
|
111
|
|
Precious metals forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount (in troy ounces)
|
|
|
183,264
|
|
|
|
61,050
|
|
Carrying amount and fair value
|
|
$
|
192
|
|
|
$
|
302
|
|
Marked-to-market
natural gas forward purchase contracts:
|
|
|
|
|
|
|
|
|
Notional amount (in MBTUs)
|
|
|
120,000
|
|
|
|
1,190,000
|
|
Carrying amount and fair value
|
|
$
|
(442
|
)
|
|
$
|
2,127
|
|
59
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Income taxes are based on our earnings (losses) from continuing
operations before income taxes as presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
U.S.
|
|
$
|
(26,279
|
)
|
|
$
|
(13,478
|
)
|
|
$
|
(80
|
)
|
Foreign
|
|
|
51,867
|
|
|
|
37,550
|
|
|
|
31,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,588
|
|
|
$
|
24,072
|
|
|
$
|
31,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the liability method of accounting for income taxes, we
determine deferred income tax assets and liabilities based on
the temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts
used for tax purposes. We measure these differences using the
income tax rates and laws that are currently in effect.
Our income tax expense (benefit) from continuing operations
consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
|
|
|
$
|
(240
|
)
|
|
$
|
2,151
|
|
Foreign
|
|
|
18,929
|
|
|
|
16,022
|
|
|
|
11,484
|
|
State and local
|
|
|
(189
|
)
|
|
|
271
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,740
|
|
|
|
16,053
|
|
|
|
13,829
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(2,065
|
)
|
|
|
(5,258
|
)
|
|
|
(3,650
|
)
|
Foreign
|
|
|
(11,993
|
)
|
|
|
(2,948
|
)
|
|
|
(6,780
|
)
|
State and local
|
|
|
344
|
|
|
|
(919
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,714
|
)
|
|
|
(9,125
|
)
|
|
|
(10,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax
|
|
$
|
5,026
|
|
|
$
|
6,928
|
|
|
$
|
3,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to total income tax expense above, tax expense
(benefit) we allocated directly to shareholders equity is
detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Pension benefit liability
adjustments
|
|
$
|
1,085
|
|
|
$
|
(5,125
|
)
|
|
$
|
(6,371
|
)
|
Other adjustments to other
comprehensive income
|
|
|
372
|
|
|
|
(11
|
)
|
|
|
121
|
|
Dividends on performance shares
|
|
|
(45
|
)
|
|
|
(42
|
)
|
|
|
(57
|
)
|
Stock options exercised
|
|
|
(208
|
)
|
|
|
(181
|
)
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
allocated to shareholders equity
|
|
$
|
1,204
|
|
|
$
|
(5,359
|
)
|
|
$
|
(7,092
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
A reconciliation of the U.S. federal statutory income tax
rate and our effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
U.S. federal statutory income
tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Adjustment of valuation allowances
|
|
|
(29.2
|
)
|
|
|
1.0
|
|
|
|
(9.9
|
)
|
U.S. tax cost of foreign
dividends
|
|
|
29.0
|
|
|
|
6.3
|
|
|
|
4.2
|
|
Foreign tax rate difference
|
|
|
(12.2
|
)
|
|
|
0.9
|
|
|
|
(9.1
|
)
|
Net adjustment of prior year
accrual
|
|
|
6.9
|
|
|
|
(3.1
|
)
|
|
|
(6.6
|
)
|
Extraterritorial income exclusion
|
|
|
(4.1
|
)
|
|
|
(6.2
|
)
|
|
|
(4.4
|
)
|
Effect of equity earnings
|
|
|
(3.3
|
)
|
|
|
(3.6
|
)
|
|
|
(1.9
|
)
|
ESOP dividend tax benefit
|
|
|
(2.3
|
)
|
|
|
(3.0
|
)
|
|
|
(2.5
|
)
|
Miscellaneous
|
|
|
(.2
|
)
|
|
|
1.5
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
19.6
|
%
|
|
|
28.8
|
%
|
|
|
10.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred tax assets and liabilities at
December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pension and other benefit programs
|
|
$
|
72,920
|
|
|
$
|
79,712
|
|
Foreign tax credit carryforwards
|
|
|
38,040
|
|
|
|
32,587
|
|
Foreign net operating loss
carryforwards
|
|
|
23,480
|
|
|
|
24,206
|
|
Other credit carryforwards
|
|
|
8,441
|
|
|
|
7,976
|
|
Accrued liabilities
|
|
|
8,372
|
|
|
|
7,699
|
|
Inventories
|
|
|
8,284
|
|
|
|
2,907
|
|
U.S. federal and state net
operating loss carryforwards
|
|
|
5,211
|
|
|
|
8,051
|
|
Allowance for doubtful accounts
|
|
|
2,786
|
|
|
|
3,132
|
|
Other
|
|
|
4,101
|
|
|
|
2,109
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
171,635
|
|
|
|
168,379
|
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Property, equipment and
intangibles depreciation and amortization
|
|
|
60,334
|
|
|
|
70,949
|
|
Unremitted earnings of foreign
subsidiaries
|
|
|
6,072
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
66,406
|
|
|
|
71,465
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before
valuation allowance
|
|
|
105,229
|
|
|
|
96,914
|
|
Valuation allowance
|
|
|
(4,023
|
)
|
|
|
(9,651
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
101,206
|
|
|
$
|
87,263
|
|
|
|
|
|
|
|
|
|
|
In 2006, we capitalized research and development expenses for
tax purposes only and created a deferred tax asset of
$7.9 million. In the table above, we netted this deferred
tax asset against deferred tax liabilities under the caption of
property, equipment and intangibles depreciation and
amortization. We will amortize this deferred tax asset over a
useful life of 10 years.
61
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
We had benefits from domestic federal and state operating loss
carryforwards and foreign operating loss carryforwards for tax
purposes, some of which can be carried forward indefinitely and
others expire in one to twenty years.
We established a valuation allowance due to the uncertainty of
realizing certain state and foreign net operating loss
carryforwards. The overall decrease in the valuation allowance
in 2006 was the result of a net $6.8 million decrease in
the valuation reserve for certain foreign net operating losses,
partially offset by an increase of $1.1 million related to
state net operating losses and tax credits. At December 31,
2006, $1.7 million of the valuation allowance related to
losses incurred by acquired companies prior to our purchase, and
any future reduction of this portion of the valuation allowance
will be recognized as a reduction of goodwill and other
intangibles, rather than as tax benefits in the statement of
income.
At December 31, 2006, we had tax benefits from foreign tax
credit carryforwards for tax purposes that can be carried
forward for ten years. In our opinion, it is more likely than
not that the credits will be utilized before expiration. These
carryforwards expire in the following years:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
2011
|
|
$
|
3,178
|
|
2012
|
|
|
7,370
|
|
2013
|
|
|
6,841
|
|
2014
|
|
|
4,633
|
|
2015
|
|
|
11,433
|
|
2016
|
|
|
4,585
|
|
|
|
|
|
|
Total
|
|
$
|
38,040
|
|
|
|
|
|
|
We classified net deferred income tax assets as of
December 31, as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
18,175
|
|
|
$
|
40,732
|
|
Non-current assets
|
|
|
94,662
|
|
|
|
61,130
|
|
Current liabilities
|
|
|
(594
|
)
|
|
|
(597
|
)
|
Non-current liabilities
|
|
|
(11,037
|
)
|
|
|
(14,002
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
101,206
|
|
|
$
|
87,263
|
|
|
|
|
|
|
|
|
|
|
We have provided $6.1 million for deferred income taxes on
approximately $76.0 million of undistributed earnings of
certain foreign subsidiaries. We have not provided deferred
income taxes on undistributed earnings of approximately
$63.7 million, since we intend to indefinitely reinvest the
earnings.
|
|
8.
|
Contingent
Liabilities
|
In February 2003, we were requested to produce documents in
connection with an investigation by the United States Department
of Justice into possible antitrust violations in the heat
stabilizer industry. In April 2006, we were notified by the
Department of Justice that the Government had closed its
investigation and that the Company was relieved of any
obligation to retain documents that were responsive to the
Governments earlier document request. Before closing its
investigation, the Department of Justice took no action against
the Company or any of its current or former employees. The
Company was previously named as a defendant in several lawsuits
alleging civil damages and requesting injunctive relief relating
to the conduct the Government was investigating. We are
vigorously defending the Company in those actions and believe we
would have a claim for indemnification by the former owner
62
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
of our heat stabilizer business if the Company were found
liable. Because these actions are in their preliminary stages,
we cannot determine the outcomes of these lawsuits at this time.
In a July 2004 press release, we announced that our Polymer
Additives business performance in the second quarter of 2004
fell short of expectations and that our Audit Committee would
investigate possible inappropriate accounting entries in the
Polymer Additives business. We were later sued in a series of
putative securities class action lawsuits related to this July
2004 announcement. Those lawsuits were consolidated into a
single case, and the consolidated case is currently pending in
the United States District Court for the Northern District of
Ohio against the Company, our deceased former Chief Executive
Officer, our former Chief Financial Officer, and a former
operating Vice President of the Company. This claim is based on
alleged violations of Federal securities laws. We consider these
allegations to be unfounded and are defending this action
vigorously. We have notified Ferros directors and officers
liability insurer of the claim. Because this action is in its
preliminary stage, we cannot determine the outcome of this
litigation at this time.
Also following this July 2004 press release, four derivative
lawsuits were filed and subsequently consolidated in the United
States District Court for the Northern District of Ohio. These
lawsuits alleged breach of fiduciary duties and
mismanagement-related claims. In March 2006, the Court dismissed
the consolidated derivative action without prejudice. In April
2006, the plaintiffs filed a motion seeking relief from the
judgment that dismissed the derivative lawsuit and seeking to
amend their complaint further following discovery. The
plaintiffs motion was denied. Later in April 2006,
plaintiffs filed a Notice of Appeal to the Sixth Circuit Court
of Appeals. The Directors and named executives consider the
allegations contained in the derivative actions to be unfounded,
have vigorously defended this action and will defend against the
new filing. We have notified Ferros directors and officers
liability insurer of the claim. Because this appeal is in the
preliminary stage, we cannot determine the outcome of this
litigation at this time.
Finally, in June 2005, a putative class action lawsuit was filed
against the Company and certain former and current employees
alleging breach of fiduciary duty with respect to ERISA plans in
connection with the matters announced in the July 2004 press
release. In October 2006, the parties reached a settlement in
principle that would result in the dismissal of the lawsuit with
prejudice in exchange for a settlement amount of
$4.0 million, which would be paid by the Companys
liability insurer subject to our satisfaction of the remaining
retention amount under the insurance policy. The Company and the
individual defendants have expressly denied any and all
liability. The United States District Court granted preliminary
approval of the settlement in November 2006. Several conditions
must be met before the settlement becomes final. We do not
expect the ultimate outcome of the lawsuit to have a material
effect on the financial position, results of operations or cash
flows of the Company.
In October 2004, the Belgian Ministry of Economic Affairs
Commercial Policy Division (the Ministry) served on
our Belgian subsidiary a mandate requiring the production of
certain documents related to an alleged cartel among producers
of butyl benzyl phthalate (BBP) from 1983 to 2002.
Subsequently, German and Hungarian authorities initiated their
own national investigations related to the same allegations. Our
Belgian subsidiary acquired its BBP business from Solutia Europe
S.A./N.V. (SOLBR) in August 2000. Ferro promptly
notified SOLBR of the Ministrys actions and requested
SOLBR to indemnify and defend Ferro and its Belgian subsidiary
with respect to these investigations. In response to our notice,
SOLBR exercised its right under the 2000 acquisition agreement
to take over the defense and settlement of these matters. In
December 2005, the Hungarian authorities imposed a
de minimus fine on our Belgian subsidiary, and we expect
the German and Belgian authorities also to assess fines for the
alleged conduct. We cannot predict the amount of fines that will
ultimately be assessed and cannot predict the degree to which
SOLBR will indemnify Ferros Belgian subsidiary for such
fines.
In October 2005, we disclosed to the New Jersey Department of
Environmental Protection (NJDEP) that we had
identified potential violations of the New Jersey Water
Pollution Control Act, and that we had started an investigation
of the possible violations. We also committed to report any
violations and to undertake any necessary remedial actions. In
September 2006, we entered into an agreement with the NJDEP
under which we paid the State
63
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
of New Jersey a civil administrative penalty of approximately
$0.2 million in full settlement of the violations. In
December 2006, a former employee pled guilty to a charge of
negligently submitting false information and was fined
accordingly.
In late February 2007, we discovered that some of the values
shown on certificates of analysis provided to customers by its
Specialties Plastics business were inaccurate. While we are
uncertain as to when these inaccuracies began or their source,
we believe the material currently being shipped by our Specialty
Plastics business is consistent with the overall quality of past
shipments. We are in the process of compiling historical
physical properties data on products supplied to customers in
the past and will work with the customers to show how the
historical data can be utilized as the basis for establishing
shipping specifications consistent with what those customers
have been receiving. While it is possible some customers may not
accept products with the new shipping specifications or
otherwise may assert claims relating to this issue, we cannot
predict at this time the financial effects of any resulting lost
business or claims.
There are various other lawsuits and claims pending against the
Company and its consolidated subsidiaries. In our opinion, the
ultimate liabilities, if any, and expenses resulting from such
lawsuits and claims will not materially affect the consolidated
financial position, results of operations, or cash flows of the
Company.
At December 31, 2006 and 2005, the Company had bank
guarantees and standby letters of credit issued by financial
institutions, which totaled $20.8 million and
$21.8 million, respectively. These agreements primarily
relate to the Ferros insurance programs, natural gas
contracts, potential environmental remediation liabilities, and
foreign tax payments. If the Company fails to perform its
obligations, the guarantees and letters of credit may be drawn
down by their holders, and we would be liable to the financial
institutions for the amounts drawn.
During 2006, we entered into an agreement to contingently make
an additional contribution above the requirements of local
statutory law to one international defined benefit plan if we
terminate the participants in the plan prior to
December 31, 2012. We may avoid the additional contribution
if we transfer the participants and their accrued benefits to a
third party. We would be required to make an additional
contribution of $4.7 million should we terminate these
participants in 2007, declining to $1.1 million should we
terminate them in 2012.
64
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Defined
Benefit Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit
obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
351,896
|
|
|
$
|
315,162
|
|
|
$
|
175,803
|
|
|
$
|
173,586
|
|
Service cost
|
|
|
6,489
|
|
|
|
9,835
|
|
|
|
6,131
|
|
|
|
6,540
|
|
Interest cost
|
|
|
19,897
|
|
|
|
18,793
|
|
|
|
7,949
|
|
|
|
7,420
|
|
Amendments
|
|
|
|
|
|
|
|
|
|
|
(295
|
)
|
|
|
|
|
Curtailments
|
|
|
(16,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
(914
|
)
|
|
|
(1,125
|
)
|
Plan participants
contributions
|
|
|
13
|
|
|
|
17
|
|
|
|
659
|
|
|
|
655
|
|
Benefits paid
|
|
|
(17,522
|
)
|
|
|
(16,084
|
)
|
|
|
(7,844
|
)
|
|
|
(6,728
|
)
|
Actuarial (gain) loss
|
|
|
(7,890
|
)
|
|
|
24,173
|
|
|
|
(2,962
|
)
|
|
|
17,295
|
|
Exchange rate effect
|
|
|
|
|
|
|
|
|
|
|
19,055
|
|
|
|
(21,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
335,918
|
|
|
$
|
351,896
|
|
|
$
|
197,582
|
|
|
$
|
175,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at
end of year
|
|
$
|
334,319
|
|
|
$
|
332,835
|
|
|
$
|
185,066
|
|
|
$
|
165,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
226,480
|
|
|
$
|
192,030
|
|
|
$
|
119,355
|
|
|
$
|
120,077
|
|
Actual return on plan assets
|
|
|
20,264
|
|
|
|
18,654
|
|
|
|
6,510
|
|
|
|
12,707
|
|
Employer contributions
|
|
|
29,502
|
|
|
|
31,863
|
|
|
|
11,962
|
|
|
|
8,993
|
|
Plan participants
contributions
|
|
|
13
|
|
|
|
17
|
|
|
|
659
|
|
|
|
655
|
|
Benefits paid
|
|
|
(17,522
|
)
|
|
|
(16,084
|
)
|
|
|
(7,844
|
)
|
|
|
(6,728
|
)
|
Effect of settlements
|
|
|
|
|
|
|
|
|
|
|
(914
|
)
|
|
|
(1,125
|
)
|
Exchange rate effect
|
|
|
|
|
|
|
|
|
|
|
13,710
|
|
|
|
(15,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
258,737
|
|
|
$
|
226,480
|
|
|
$
|
143,438
|
|
|
$
|
119,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(77,181
|
)
|
|
$
|
(125,416
|
)
|
|
$
|
(54,144
|
)
|
|
$
|
(56,448
|
)
|
Contributions between measurement
date and end of year
|
|
|
973
|
|
|
|
6,090
|
|
|
|
|
|
|
|
|
|
Unrecognized net loss
|
|
|
NA
|
*
|
|
|
108,032
|
|
|
|
NA
|
*
|
|
|
26,361
|
|
Unrecognized prior service cost
|
|
|
NA
|
*
|
|
|
4,831
|
|
|
|
NA
|
*
|
|
|
2,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(76,208
|
)
|
|
$
|
(6,463
|
)
|
|
$
|
(54,144
|
)
|
|
$
|
(27,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Amounts recognized in the
balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
97
|
|
Other non-current assets
|
|
|
|
|
|
|
1,367
|
|
|
|
575
|
|
|
|
38
|
|
Accrued expenses and other current
liabilities
|
|
|
(33
|
)
|
|
|
|
|
|
|
(1,523
|
)
|
|
|
|
|
Postretirement and pension
liabilities
|
|
|
(76,175
|
)
|
|
|
(100,265
|
)
|
|
|
(53,196
|
)
|
|
|
(49,883
|
)
|
Accumulated other comprehensive
loss (pre-tax)
|
|
|
NA
|
*
|
|
|
92,435
|
|
|
|
NA
|
*
|
|
|
22,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(76,208
|
)
|
|
$
|
(6,463
|
)
|
|
$
|
(54,144
|
)
|
|
$
|
(27,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as
of the measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.05
|
%
|
|
|
5.90
|
%
|
|
|
4.69
|
%
|
|
|
4.30
|
%
|
Rate of compensation increase
|
|
|
3.25
|
%
|
|
|
3.38
|
%
|
|
|
3.05
|
%
|
|
|
3.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plans with benefit
obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations
|
|
$
|
335,918
|
|
|
$
|
351,896
|
|
|
$
|
180,631
|
|
|
$
|
173,292
|
|
Plan assets
|
|
|
258,737
|
|
|
|
226,480
|
|
|
|
125,912
|
|
|
|
116,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension plans with accumulated
benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations
|
|
$
|
335,918
|
|
|
$
|
351,896
|
|
|
$
|
170,727
|
|
|
$
|
159,412
|
|
Accumulated benefit obligations
|
|
|
334,319
|
|
|
|
332,835
|
|
|
|
162,092
|
|
|
|
150,469
|
|
Plan assets
|
|
|
258,737
|
|
|
|
226,480
|
|
|
|
117,790
|
|
|
|
103,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amounts That
|
|
|
|
Amounts Recognized in
|
|
|
Will Be Amortized
|
|
|
|
Accumulated Other Comprehensive Income at
|
|
|
from Accumulated Other Comprehensive Income
|
|
|
|
December 31, 2006
|
|
|
in 2007
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss
|
|
$
|
(82,454
|
)
|
|
$
|
(19,974
|
)
|
|
$
|
(5,833
|
)
|
|
$
|
(557
|
)
|
Prior service cost
|
|
|
(1,183
|
)
|
|
|
(2,357
|
)
|
|
|
(173
|
)
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
loss
|
|
$
|
(83,637
|
)
|
|
$
|
(22,331
|
)
|
|
$
|
(6,006
|
)
|
|
$
|
(683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net periodic benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
6,489
|
|
|
$
|
9,835
|
|
|
$
|
8,496
|
|
|
$
|
6,131
|
|
|
$
|
6,540
|
|
|
$
|
6,114
|
|
Interest cost
|
|
|
19,896
|
|
|
|
18,793
|
|
|
|
17,915
|
|
|
|
7,949
|
|
|
|
7,420
|
|
|
|
7,460
|
|
Expected return on plan assets
|
|
|
(19,232
|
)
|
|
|
(16,185
|
)
|
|
|
(15,837
|
)
|
|
|
(5,899
|
)
|
|
|
(5,910
|
)
|
|
|
(5,973
|
)
|
Amortization of prior service cost
|
|
|
81
|
|
|
|
(56
|
)
|
|
|
(32
|
)
|
|
|
121
|
|
|
|
(30
|
)
|
|
|
112
|
|
Net amortization and deferral
|
|
|
5,783
|
|
|
|
5,948
|
|
|
|
5,606
|
|
|
|
1,058
|
|
|
|
877
|
|
|
|
524
|
|
Curtailment and settlement effects
|
|
|
(2,524
|
)
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
(353
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,493
|
|
|
$
|
18,335
|
|
|
$
|
16,148
|
|
|
$
|
9,336
|
|
|
$
|
8,544
|
|
|
$
|
8,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
6.10
|
%
|
|
|
6.25
|
%
|
|
|
4.34
|
%
|
|
|
4.77
|
%
|
|
|
5.41
|
%
|
Rate of compensation increase
|
|
|
3.38
|
%
|
|
|
3.36
|
%
|
|
|
2.64
|
%
|
|
|
3.09
|
%
|
|
|
3.19
|
%
|
|
|
3.28
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.75
|
%
|
|
|
4.63
|
%
|
|
|
5.26
|
%
|
|
|
5.54
|
%
|
In 2006, we announced changes to certain of our defined benefit
pension plans. Employees who had been participating in our
largest U.S. pension plan stopped accruing benefit service
after March 31, 2006. As a result, we recorded a
curtailment gain of $2.5 million and reduced our additional
minimum pension liability by $4.3 million, net of tax, as a
credit to Other Comprehensive Income in shareholders
equity. The effected employees now receive benefits in the
Companys defined contribution plan that previously covered
only U.S. salaried employees hired after 2003. These
changes do not affect current retirees or former employees.
We base the expected return on plan assets at the beginning of
the year on the weighted-average expected return for the target
asset allocations of the principal asset categories held by each
plan. In determining the expected return, the Company considers
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.
The Company establishes asset allocation ranges for each major
category of plan assets. The risks inherent in the various asset
categories are considered along with the benefit obligations,
financial status and short-term liquidity needs of the fund. The
target allocation for each major asset category and the actual
weighted average asset allocations at the pension plan
measurement dates were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
Target
|
|
|
|
|
|
|
|
|
Target
|
|
|
|
|
|
|
|
|
|
Allocation
|
|
|
2006
|
|
|
2005
|
|
|
Allocation
|
|
|
2006
|
|
|
2005
|
|
|
Debt Securities
|
|
|
31
|
%
|
|
|
32
|
%
|
|
|
39
|
%
|
|
|
60
|
%
|
|
|
62
|
%
|
|
|
63
|
%
|
Equity Securities
|
|
|
69
|
|
|
|
68
|
|
|
|
61
|
|
|
|
35
|
|
|
|
29
|
|
|
|
31
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
9
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys U.S. pension plans held 424,651 and
424,651 shares of the Companys common stock with a
market value of $8.8 million and $8.0 million at
December 31, 2006 and 2005, respectively, and received
$0.2 million of dividends from the Companys common
stock in 2006, 2005 and 2004.
We expect to contribute approximately $23.6 million to our
U.S. pension plans and $8.5 million to our
non-U.S. pension
plans in 2007.
67
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
We estimate that future pension payments, which reflect expected
future service, will be as follows:
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
$
|
17,253
|
|
|
$
|
7,537
|
|
2008
|
|
|
18,114
|
|
|
|
7,717
|
|
2009
|
|
|
18,536
|
|
|
|
9,763
|
|
2010
|
|
|
18,928
|
|
|
|
8,711
|
|
2011
|
|
|
19,487
|
|
|
|
9,517
|
|
2012-2016
|
|
|
105,871
|
|
|
|
53,009
|
|
Postretirement
Health Care and Life Insurance Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit
obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
59,406
|
|
|
$
|
54,005
|
|
Service cost
|
|
|
690
|
|
|
|
799
|
|
Interest cost
|
|
|
3,287
|
|
|
|
3,160
|
|
Effect of curtailment
|
|
|
(5,457
|
)
|
|
|
|
|
Benefits paid
|
|
|
(3,541
|
)
|
|
|
(3,757
|
)
|
Actuarial loss (gain)
|
|
|
6,090
|
|
|
|
5,199
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
60,475
|
|
|
$
|
59,406
|
|
|
|
|
|
|
|
|
|
|
Change in plan
assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
$
|
|
|
|
$
|
|
|
Employer contributions
|
|
|
3,541
|
|
|
|
3,757
|
|
Benefits paid
|
|
|
(3,541
|
)
|
|
|
(3,757
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
68
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Reconciliation of accrued
costs:
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(60,475
|
)
|
|
$
|
(59,406
|
)
|
Contributions between measurement
date and end of year
|
|
|
788
|
|
|
|
909
|
|
Unrecognized net actuarial loss
(gain)
|
|
|
NA
|
*
|
|
|
(4,926
|
)
|
Unrecognized prior service cost
(benefit)
|
|
|
NA
|
*
|
|
|
(2,718
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(59,687
|
)
|
|
$
|
(66,141
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
balance sheet:
|
|
|
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
$
|
(4,479
|
)
|
|
$
|
|
|
Postretirement and pension
liabilities
|
|
|
(55,208
|
)
|
|
|
(66,141
|
)
|
Accumulated other comprehensive
income
|
|
|
NA
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(59,687
|
)
|
|
$
|
(66,141
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as
of December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
Current trend rate for health care
costs
|
|
|
10.10
|
%
|
|
|
9.30
|
%
|
Ultimate trend rate for health
care costs
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
Year that ultimate trend rate is
reached
|
|
|
2017
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amounts That
|
|
|
|
Amounts Recognized in
|
|
|
Will Be Amortized
|
|
|
|
Accumulated Other
|
|
|
from Accumulated Other
|
|
|
|
Comprehensive Income at
|
|
|
Comprehensive Income
|
|
|
|
December 31, 2006
|
|
|
in 2007
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss
|
|
$
|
(1,164
|
)
|
|
$
|
|
|
Prior service credit (cost)
|
|
|
4,887
|
|
|
|
(1,172
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
$
|
3,723
|
|
|
$
|
(1,172
|
)
|
|
|
|
|
|
|
|
|
|
In December 2003, the Medicare Prescription Drug, Improvement
and Modernization Act of 2003 became law in the United States.
This Act provides subsidies for certain drug costs to companies
that provide coverage that is actuarially equivalent to the drug
coverage under Medicare D. In 2006, this subsidy contributed to
the accumulated other comprehensive income of $3.7 million.
Without the effect of this subsidy, the result would have been
an accumulated other comprehensive loss of $3.1 million.
69
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Components of cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
690
|
|
|
$
|
799
|
|
|
$
|
902
|
|
Interest cost
|
|
|
3,287
|
|
|
|
3,160
|
|
|
|
3,361
|
|
Amortization of prior service cost
|
|
|
(835
|
)
|
|
|
(558
|
)
|
|
|
(558
|
)
|
Net amortization and deferral
|
|
|
|
|
|
|
(232
|
)
|
|
|
(97
|
)
|
Curtailment and settlement effects
|
|
|
(2,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
689
|
|
|
$
|
3,169
|
|
|
$
|
3,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
6.10
|
%
|
|
|
6.25
|
%
|
Current trend rate for health care
costs
|
|
|
9.30
|
%
|
|
|
10.30
|
%
|
|
|
11.20
|
%
|
Ultimate trend rate for health
care costs
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
Year that ultimate trend rate is
reached
|
|
|
2013
|
|
|
|
2013
|
|
|
|
2013
|
|
In 2006, we limited eligibility for retiree medical and life
insurance coverage for nonunion employees. Only employees
age 55 or older with 10 or more years of service as of
December 31, 2006, will be eligible for postretirement
medical and life insurance benefits. Moreover, these benefits
will be available only to those employees who retire by
December 31, 2007, after having advised the Company of
their retirement plans by March 31, 2007. As a result, we
recorded a curtailment gain of $2.5 million in 2006.
A one-percentage point change in the assumed health care cost
trend rates would have the following effect:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage
|
|
|
1-Percentage
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
|
(Dollars in thousands)
|
|
|
Effect on total of service and
interest cost component
|
|
$
|
360
|
|
|
$
|
(300
|
)
|
Effect on postretirement benefit
obligation
|
|
$
|
5,111
|
|
|
$
|
(4,320
|
)
|
We estimate that future postretirement health care and life
insurance benefit payments will be as follows:
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
After
|
|
|
|
Medicare Subsidy
|
|
|
Medicare Subsidy
|
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
$
|
4,923
|
|
|
$
|
4,479
|
|
2008
|
|
|
5,408
|
|
|
|
4,879
|
|
2009
|
|
|
5,325
|
|
|
|
4,765
|
|
2010
|
|
|
5,275
|
|
|
|
4,696
|
|
2011
|
|
|
5,259
|
|
|
|
4,674
|
|
2012-2016
|
|
|
24,518
|
|
|
|
21,671
|
|
Other
Retirement Plans
We also sponsor unfunded nonqualified defined benefit retirement
plans for certain employees, and for these plans we expensed
$6.1 million, $2.3 million and $2.1 million in
2006, 2005 and 2004, respectively. For 2006, components of the
expense were service cost of $0.1 million, interest cost of
$0.5 million, amortization of prior service cost of
$0.1 million, amortization of net loss of
$0.3 million, curtailment loss of $0.2 million, and
settlement losses of $4.9 million. The settlement losses
related primarily to a lump sum payment to the beneficiary of
our deceased former Chief Executive Officer. These lump sum
payments and other distributions from the nonqualified
70
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
defined benefit retirement plans totaling $11.7 million
have been reflected in the 2006 consolidated statement of cash
flows as adjustments to reconcile net income to net cash
provided by operating activities under the caption of
retirement benefits. For 2005, components of the
expense were service cost of $0.2 million, interest cost of
$1.0 million, amortization of prior service cost of
$0.2 million, and amortization of net loss of
$0.9 million.
At December 31, 2006, the benefit obligation was
$4.8 million, the current liability was $0.5 million,
and the non-current liability was $4.2 million. As a result
of the 2006 settlements, we reduced our additional minimum
pension liability by $3.3 million, net of tax, as a credit
to Other Comprehensive Income in shareholders equity. At
December 31, 2005, the benefit obligation was
$16.1 million, the unrecognized actuarial loss was
$7.6 million, the accrued benefit liability was
$15.6 million, and the accumulated other comprehensive loss
was $7.2 million. We estimate that future benefit payments
will be as follows: $0.5 million in each of 2007 through
2011, and $2.3 million for the five-year period of
2012-2016.
We also have defined contribution retirement plans covering
certain employees. Our contributions are determined by the terms
of the plans and are limited to amounts that are deductible for
income taxes. Generally, benefits under these plans vest
gradually over a period of five years from date of employment
and are based on the employees contributions. The expense
applicable to these plans was $7.8 million,
$5.6 million and $5.2 million in 2006, 2005 and 2004,
respectively.
Effects
of Restructuring Activities on Retirement Benefits
In November 2006, the Company announced restructuring activities
that will result in closing the Companys Niagara Falls,
New York, manufacturing facility by the end of 2007. In the
first quarter of 2007, the Company will record a net curtailment
loss of $0.3 million for pension benefits related to this
closing. We will also record a net curtailment gain of
approximately $1.9 million for other benefits for the
closing, but the timing and eventual amount depend on when
employees are terminated.
|
|
10.
|
Serial
Convertible Preferred Stock
|
We are authorized to issue up to 2,000,000 shares of serial
convertible preferred stock without par value. In 1989, Ferro
issued 1,520,215 shares of 7% Series A ESOP
Convertible Preferred Stock (Series A Preferred
Stock) to the Trustee of the Ferro Employee Stock
Ownership Plan (ESOP) at a price of $46.375 per
share for a total consideration of $70.5 million. All
shares of the Series A Preferred Stock have been allocated
to participating individual employee accounts. The Trustee may
redeem the Series A Preferred Stock to provide for
distributions to, loans to, or withdrawals by participants or to
satisfy an investment election provided to participants. The
Company can redeem any or all of the Series A Preferred
Stock at any time. The redemption price is $46.375 per
preferred share plus earned but unpaid dividends as of the date
of redemption. In addition, the Trustee can convert any or all
of the Series A Preferred Stock at any time into Ferro
common stock at a conversion rate of 2.5988 shares of
common stock (adjusted for stock splits) per preferred share.
Each share of Series A Preferred Stock carries one vote,
voting together with the common stock on most matters. The
Series A Preferred Stock accrues dividends at an annual
rate of 7% on shares outstanding. The dividends are cumulative
from the date of issuance. To the extent the Company is legally
permitted to pay dividends and the Board of Directors declares a
dividend payable, Ferro pays dividends on a quarterly basis. In
the case of liquidation or dissolution of the Company, the
holders of the Series A Preferred Stock are entitled to
receive $46.375 per preferred share, or $25.00 per
preferred share in the event of involuntary liquidation, plus
earned but unpaid dividends, before any amount is paid to
holders of the Companys common stock.
There were 366,415 shares of Series A Preferred Stock
outstanding at December 31, 2006, and 442,271 shares
outstanding at December 31, 2005. The number of shares
redeemed was 75,856 in 2006 (47,378 in 2005 and 113,793 in 2004).
71
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
We did not purchase common stock on the open market in 2006,
2005 or 2004. Under our current treasury stock purchase program,
we had remaining authorization to acquire 4,201,216 shares
at December 31, 2006. The New Credit Facility limits our
ability to purchase shares.
Previously, the Company maintained a Shareholder Rights Plan,
but the rights under this plan expired in April 2006.
|
|
12.
|
Stock-based
Compensation
|
In November 2006, our shareholders approved the 2006 Long-Term
Incentive Plan (the Plan), which replaced the
earlier 2003 Long-Term Incentive Compensation Plan that had been
approved by our shareholders in April 2003. The Plans
purpose is to promote the Companys and the
shareholders long-term financial interests and growth by
attracting, retaining and motivating high-quality executives and
directors and aligning their interests with those of our
shareholders. The Plan authorizes us to grant several different
types of long-term incentives including stock options, stock
appreciation rights, restricted shares, performance shares,
other common stock-based awards, and dividend equivalent rights.
Unissued authorized shares or treasury stock may be issued under
the Plan. Generally, Ferro has issued treasury stock to satisfy
the common stock requirements of its long-term incentive plans.
The Plan has an effective date of September 28, 2006, and
reserves 3,000,000 common shares for future issuance.
Previous employee stock option plans and the 1997 Performance
Share Plan authorized different types of long-term incentives,
including stock options, stock appreciation rights, performance
shares and common stock awards. No further grants may be made
under Ferros previous employee stock option plans or under
Ferros 1997 Performance Share Plan. However, any
outstanding awards or grants made under these plans will
continue until the end of their specified terms. Stock options
granted under the previous plans have terms of 10 years and
performance share awards granted under those plans have terms of
three years.
Stock options and performance shares are the only grant types
currently outstanding. These are discussed separately below
because of the significant differences between the two grant
types.
Stock
Options
General
Information
The Compensation Committee of the Board of Directors (the
Committee) awards stock options under the Plan and
generally grants stock options during regularly scheduled
meetings. The exercise price of stock options granted may not be
less than the per share fair market value of the Companys
common stock on the date of the grant. Stock options have a term
of 10 years and vest evenly over four years on the
anniversary of the grant date. In the case of death, retirement,
disability or change in control, the stock options become 100%
vested and exercisable.
Stock
Option Valuation Model and Method Information
We estimate the fair value of each stock option on the date of
grant using the Black-Scholes option pricing model that uses the
assumptions noted in the following table. We use judgment in
selecting these assumptions because they may significantly
impact the timing and amount of compensation expense and we base
our judgments
72
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
primarily on historical data. When appropriate, we adjust the
historical data for circumstances that are not likely to occur
in the future. We adjust the assumptions each year based upon
new information.
We estimate stock option forfeitures based upon historical
employee termination rates. The following table details the
estimation method and the ranges of assumptions used for
differing grants of stock options:
|
|
|
|
|
Assumption
|
|
Estimation Method
|
|
Range
|
|
Expected life, in years
|
|
Historical stock option exercise
experience
|
|
6.80 to 8.20
|
Risk-free interest rate
|
|
Yield of U.S. Treasury Bonds
with remaining life equal to expected life of the stock option
|
|
3.50% to 5.94%
|
Expected volatility
|
|
Historical daily price
observations of the Companys common stock over a period
equal to the expected life of the stock option
|
|
28.07% to 37.30%
|
Expected dividend yield
|
|
Historical dividend rate at the
date of grant
|
|
2.18% to 3.00%
|
Stock
Option Activity Information
A summary of the stock option activity for 2006, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
(Dollars in
|
|
|
|
|
|
|
|
|
|
|
|
|
thousands)
|
|
|
Outstanding at January 1, 2006
|
|
|
4,829,900
|
|
|
$
|
22.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
608,250
|
|
|
|
20.52
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(237,610
|
)
|
|
|
17.54
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(342,865
|
)
|
|
|
22.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
4,857,675
|
|
|
|
22.20
|
|
|
|
5.3
|
|
|
$
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
3,643,321
|
|
|
|
22.54
|
|
|
|
4.2
|
|
|
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
December 31, 2006
|
|
|
4,757,337
|
|
|
|
22.24
|
|
|
|
5.2
|
|
|
|
1,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of stock options
granted during 2006 was $5.93, during 2005 it was $5.17, and
during 2004 it was $6.65.
We calculated the aggregate intrinsic value in the table above
by subtracting the total pretax difference between our common
stocks closing fair market value per share on the last
trading day of the year and the stock option exercise price for
each grant and that result by the number of shares that would
have been received by the option holders had they exercised all
their
in-the-money
stock options. At December 31, 2006, there were
1.2 million
in-the-money
stock options. We do not record the aggregate intrinsic value
for financial accounting purposes and the value changes daily
based on the changes in the fair market value of our common
stock.
73
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Information related to the stock options exercised follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Proceeds from the exercise of
stock options
|
|
$
|
4,169
|
|
|
$
|
1,849
|
|
|
$
|
6,606
|
|
Intrinsic value of stock options
exercised
|
|
|
577
|
|
|
|
533
|
|
|
|
2,414
|
|
Income tax benefit related to
stock options exercised
|
|
|
202
|
|
|
|
181
|
|
|
|
785
|
|
A summary of the status of the Companys nonvested stock
options as of December 31, 2006, and changes during 2006,
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2006
|
|
|
1,209,182
|
|
|
$
|
6.18
|
|
Granted
|
|
|
608,250
|
|
|
|
5.93
|
|
Vested
|
|
|
(416,077
|
)
|
|
|
6.74
|
|
Forfeited
|
|
|
(187,001
|
)
|
|
|
5.74
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
1,214,354
|
|
|
|
5.93
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Expense Information
A summary of the amounts recorded and to be recorded related to
stock-based compensation related to stock options for 2006
follows:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
Compensation expense recorded in
selling, general and administrative expenses
|
|
$
|
3,035
|
|
Total fair value of stock options
vested
|
|
|
3,230
|
|
Unrecognized compensation cost
related to stock options
|
|
|
5,035
|
|
Expected weighted-average
recognition period for unrecognized compensation, in years
|
|
|
2.4
|
|
During 2006, we recorded deferred income tax benefits related to
compensation expense for stock options of $1.1 million. We
elected the simplified transition method for accounting for the
income tax effects of share-based payment awards.
Performance
Shares
General
Information
We maintain multiple performance share awards whereby these
awards, expressed as shares of the Companys common stock,
are earned only if the Company meets specific performance
targets over a three-year period. The plans have a term of three
years and we establish a new plan each year. Therefore, there
are three plans outstanding at a given point in time. On the
grant date, we issue restricted common stock to the participants
and a trustee holds the shares for the benefit of the
participants until the end of the performance period. During the
performance period, participants have voting rights and receive
dividends on the restricted common shares.
We pay half of the value of any earned performance shares in
cash and half in unrestricted common shares. The portions of the
awards that will be paid in cash are treated as liabilities, and
therefore, we remeasure our liability, and the related
compensation expense, at the balance sheet date based upon the
fair value of the Companys common stock. We treat the
awards that are settled with common stock as equity awards, and
therefore, the amount
74
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
of stock-based compensation we record over the performance
period is equal to the fair value on the grant date. The
compensation expense for all performance share awards is
adjusted for the achievement of the performance share
awards performance conditions based upon our best estimate
using available facts and circumstances.
Performance
Share Award Information
In the following table, we have identified the potential number
of common shares that may be issued and the common stock price
on the date of grant for each plan. For the portion of the
awards that are treated as liabilities, the awards were
remeasured using the common stock closing market price of $20.69
at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential Number
|
|
|
Weighted-Average
|
|
|
Potential Future
|
|
|
|
Potential Number
|
|
|
of Shares at
|
|
|
Common
|
|
|
Stock-Based
|
|
|
|
of Shares at
|
|
|
December 31,
|
|
|
Stock Price at
|
|
|
Compensation
|
|
Plan
|
|
Grant Date
|
|
|
2006
|
|
|
Grant Date
|
|
|
Expense
|
|
|
|
(In thousands, except per share amounts)
|
|
|
2004 2006
|
|
|
118,100
|
|
|
|
86,900
|
|
|
$
|
26.50
|
|
|
$
|
|
|
2005 2007
|
|
|
127,900
|
|
|
|
92,600
|
|
|
|
19.39
|
|
|
|
120
|
|
2006 2008
|
|
|
251,200
|
|
|
|
235,300
|
|
|
|
17.79
|
|
|
|
2,484
|
|
The potential compensation expense is reduced during the
performance period by forfeitures and non-attainment of
performance conditions. However, actual compensation expense
related to the 2006 2008 Plan may be greater than
the amount in the table above because the plan allows for us to
pay up to 200% of the grant date value if the Companys
performance goals are exceeded. Conversely, the actual
compensation expense related to the 2006 2008 Plan
may be lower than the amount in the table if the Companys
performance goals are not met.
At December 31, 2006 we estimated each plans average
achievement percentage as follows:
|
|
|
|
|
|
|
Achievement
|
|
Plan
|
|
Percentage
|
|
|
2004 2006
|
|
|
37.5
|
%
|
2005 2007
|
|
|
19.5
|
%
|
2006 2008
|
|
|
80.0
|
%
|
Performance
Share Award Payout Information
In August 2006 we settled the awards for the 2003
2005 Plan based upon the common stock price of $19.56 per
share, which by the terms of the performance share awards,
represents the average closing price of a share of common for
the first ten days of the last month of the performance period.
We issued 13,728 non-restricted common shares and paid
participants a total of $0.3 million. The average
attainment percentage for this plan was 23.3%.
Stock-Based
Compensation Expense Information
A summary of the amounts recorded and to be recorded related to
stock-based compensation related to the performance share awards
follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Compensation expense recorded in
selling, general and administrative expenses
|
|
$
|
1,224
|
|
|
$
|
(511
|
)
|
Estimated future compensation cost
|
|
|
2,603
|
|
|
|
321
|
|
The expected recognition period for the estimated future
compensation cost was 2.0 years for 2006 and 2005. As of
December 31, 2006, the Company had accrued
$1.7 million of compensation related to the performance
75
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
share awards. During 2006, we recorded deferred income tax
benefits related to compensation expense for performance share
awards of $0.4 million.
|
|
13.
|
Restructuring
and Cost Reduction Programs
|
During 2006, we developed and initiated several restructuring
programs across a number of our business segments with the
objectives of leveraging our global scale, realigning and
lowering our cost structure and optimizing capacity utilization.
The programs are primarily associated with North America and
Europe. Management continues to evaluate our business, and
therefore, there may be supplemental provisions for new plan
initiatives as well as changes in estimates to amounts
previously recorded, as payments are made or actions are
completed.
In July 2006, we announced that we were restructuring our
European operations, including a portion of our Performance
Coatings and Color and Glass Performance Materials segments. Our
Italian manufacturing operations and administrative functions
will be largely consolidated with Spain, where additional
production capacity is being constructed. Additionally, we are
consolidating our decorative colors production, primarily from
Frankfurt, Germany, to Colditz, Germany. As a result of these
activities, we plan to reduce our workforce by approximately 150
employees. We expect these actions to significantly reduce the
cost structure of our manufacturing operations. During 2006, we
recorded $4.9 million of charges for these restructuring
activities, of which $0.8 million related to our
Performance Coatings segment and $4.1 million related to
our Color and Glass Performance Materials segment. Included
in the Performance Coatings charges was $0.8 million for
severance benefits. The Color and Glass Performance
Materials restructuring expenses include $1.0 million to
reflect the impairment of equipment made obsolete due to this
plan, as well as $3.1 million for one-time termination
benefits for affected employees.
In November 2006, we announced that we were restructuring the
Electronic Materials segment due to excess capacity we had for
the production of dielectric and industrial ceramic products. We
will cease production at our Niagara Falls, New York,
manufacturing facility by the end of 2007 and transfer some of
its production to facilities in Penn Yan, New York, and Uden,
Netherlands. The closure will impact approximately 153
employees. During 2006, we recorded $16.1 million of
restructuring charges as a result of these actions, of which
$14.5 million related to impairments of fixed assets and
identifiable intangible assets. Additionally, we identified and
eliminated another ten positions in a European plant during
December 2006. We incurred costs of $0.4 million for the
related termination benefits.
As part of continuing cost improvement efforts, we also
announced and completed workforce reductions in our Specialty
Plastics and Polymer Additives segments, which affected 37
employees. During 2006, we recorded restructuring costs of
$1.4 million associated with termination benefits.
Additionally, we closed plastics manufacturing operations at one
small international facility and recorded asset impairment costs
of $0.2 million for equipment made obsolete because of this
program. During 2007, we expect to incur additional charges of
$0.7 million for the completion of these efforts.
The charges that we incurred in 2005 and 2004 related to earlier
cost reduction and restructuring programs. These programs
included employment cost reductions in response to a slowdown in
general economic conditions. Restructuring charges for 2006
include $0.2 million in accrual adjustments for these
earlier programs.
76
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
We have summarized the activities and balances related to our
restructuring and cost reduction programs below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Other
|
|
|
Asset
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Writedowns
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2003
|
|
$
|
13,797
|
|
|
$
|
181
|
|
|
$
|
|
|
|
$
|
13,978
|
|
Gross charges
|
|
|
3,497
|
|
|
|
2,509
|
|
|
|
|
|
|
|
6,006
|
|
Cash payments
|
|
|
(12,397
|
)
|
|
|
(458
|
)
|
|
|
|
|
|
|
(12,855
|
)
|
Non-cash write-offs
|
|
|
|
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
4,897
|
|
|
|
976
|
|
|
|
|
|
|
|
5,873
|
|
Gross charges
|
|
|
5,201
|
|
|
|
|
|
|
|
|
|
|
|
5,201
|
|
Non-cash items
|
|
|
(1,524
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,524
|
)
|
Cash payments
|
|
|
(6,342
|
)
|
|
|
(910
|
)
|
|
|
|
|
|
|
(7,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
2,232
|
|
|
|
66
|
|
|
|
|
|
|
|
2,298
|
|
Gross charges
|
|
|
7,441
|
|
|
|
|
|
|
|
15,795
|
|
|
|
23,236
|
|
Non-cash items
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
Cash payments
|
|
|
(2,853
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
(2,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
6,730
|
|
|
$
|
39
|
|
|
$
|
15,795
|
|
|
$
|
22,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to make cash payments to settle the remaining
liability for employee termination benefits and other costs
primarily over the next twelve months except where legal or
contractual restrictions prevent us from doing so.
We did not incur any restructuring charges for discontinued
operations in 2006, 2005 or 2004.
Rent expense for all operating leases was $14.9 million in
2006, $14.5 million in 2005, and $13.9 million in
2004. Amortization of assets recorded under capital leases is
recorded as depreciation expense.
The Company has a number of capital lease arrangements relating
primarily to buildings and production equipment. Assets held
under capitalized leases and included in property, plant and
equipment at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Gross amounts capitalized
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
3,100
|
|
|
$
|
3,100
|
|
Equipment
|
|
|
10,280
|
|
|
|
9,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,380
|
|
|
|
12,683
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
(1,511
|
)
|
|
|
(1,434
|
)
|
Equipment
|
|
|
(7,117
|
)
|
|
|
(5,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,628
|
)
|
|
|
(7,282
|
)
|
|
|
|
|
|
|
|
|
|
Net capital lease assets
|
|
$
|
4,752
|
|
|
$
|
5,401
|
|
|
|
|
|
|
|
|
|
|
77
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
At December 31, 2006, future minimum lease payments under
all non-cancelable leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
$
|
1,634
|
|
|
$
|
12,464
|
|
2008
|
|
|
1,381
|
|
|
|
8,672
|
|
2009
|
|
|
1,182
|
|
|
|
4,829
|
|
2010
|
|
|
1,151
|
|
|
|
2,893
|
|
2011
|
|
|
749
|
|
|
|
2,393
|
|
Thereafter
|
|
|
4,713
|
|
|
|
12,514
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
10,810
|
|
|
$
|
43,765
|
|
|
|
|
|
|
|
|
|
|
Less amount representing executory
costs
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
|
10,737
|
|
|
|
|
|
Less amount representing imputed
interest
|
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease
payments
|
|
|
6,744
|
|
|
|
|
|
Less current portion
|
|
|
1,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations at
December 31, 2006
|
|
$
|
5,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Discontinued
Operations
|
In September 2002, we sold our Powder Coatings business unit in
separate transactions with Rohm and Haas Company and Akzo Nobel
NV. In June 2003, we sold our Petroleum Additives business to
Dover Chemicals and our Specialty Ceramics business to CerCo
LLC. We have reported the Powder Coatings, Petroleum Additives
and Specialty Ceramics businesses as discontinued operations for
all periods. The sales prices of these business units are
subject to post-closing adjustments with respect to assets sold
to and liabilities assumed by the buyers. The loss on disposal
of discontinued operations includes post-closing adjustments to
the sales prices, ongoing legal costs and allowance adjustments
directly related to the discontinued operations.
There were no sales, income before taxes, related tax expense,
or cash flows from investing or financing activities from
discontinued operations in any of the years presented. The
disposal of discontinued operations resulted in pre-tax losses
and related income tax expenses benefits of for each of the
following years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Pre-tax losses
|
|
$
|
738
|
|
|
$
|
1,423
|
|
|
$
|
3,849
|
|
Tax benefits
|
|
|
266
|
|
|
|
555
|
|
|
|
934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax losses
|
|
$
|
472
|
|
|
$
|
868
|
|
|
$
|
2,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have continuing environmental remediation obligations that
are related to these divestitures, and we have accrued
$3.1 million as of December 31, 2006 and 2005 for
these matters. The estimated amounts we have accrued are based
on our assessment of the nature and extent of the soil
and/or
groundwater contamination and the remedial actions we expect to
perform. In some cases, we have agreed to the required remedial
actions with the relevant governmental authorities and we have
based our estimates of the costs to remediate upon those
actions. Where alternative technologies exist to remediate a
contaminated site, we have determined our estimates of the costs
to remediate based on the technologies that we are most likely
to use.
78
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Details of the calculations of basic and diluted earnings per
share follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands,
|
|
|
|
except per share amounts)
|
|
|
Basic earnings per share
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
18,838
|
|
|
$
|
14,786
|
|
|
$
|
23,220
|
|
Add back: Loss from discontinued
operations
|
|
|
472
|
|
|
|
868
|
|
|
|
2,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,310
|
|
|
$
|
15,654
|
|
|
$
|
26,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
42,394
|
|
|
|
42,309
|
|
|
|
41,981
|
|
Basic earnings per share from
continuing operations
|
|
$
|
0.45
|
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common
shareholders
|
|
$
|
18,838
|
|
|
$
|
14,786
|
|
|
$
|
23,220
|
|
Add back: Loss from discontinued
operations
|
|
|
472
|
|
|
|
868
|
|
|
|
2,915
|
|
Plus: Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,310
|
|
|
$
|
15,654
|
|
|
$
|
26,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares
outstanding
|
|
|
42,394
|
|
|
|
42,309
|
|
|
|
41,981
|
|
Assumed conversion of convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed satisfaction of
performance share conditions
|
|
|
28
|
|
|
|
|
|
|
|
|
|
Assumed exercise of stock options
|
|
|
|
|
|
|
36
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares
outstanding
|
|
|
42,422
|
|
|
|
42,345
|
|
|
|
42,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from
continuing operations
|
|
$
|
0.45
|
|
|
$
|
0.37
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The convertible preferred shares were anti-dilutive for the
years ended December 31, 2006, 2005 and 2004, and thus not
included in the diluted shares outstanding. The stock options
were anti-dilutive for the year ended December 31, 2006,
and thus not included in the diluted shares outstanding.
|
|
17.
|
Reporting
for Segments
|
The Company has six reportable segments: Performance Coatings,
Electronic Materials, Color and Glass Performance
Materials, Polymer Additives, Specialty Plastics and Other
Businesses. We have combined our Tile Coating Systems and
Porcelain Enamel business units into one reportable segment,
Performance Coatings, based on their similar economic and
operating characteristics. We have also combined two of our
segments, Pharmaceuticals and Fine Chemicals, because they do
not meet the quantitative thresholds for separate disclosure.
The accounting policies of our segments are consistent with
those described in the summary of significant accounting
policies found in Note 1. We measure segment income for
internal reporting purposes as net operating profit before
interest and taxes. Segment income excludes unallocated
corporate expenses and charges associated with restructuring and
cost reduction programs.
79
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
We have presented net sales to external customers by segment in
the table below. Sales between segments were not material:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
538,385
|
|
|
$
|
488,467
|
|
|
$
|
466,461
|
|
Electronic Materials
|
|
|
444,463
|
|
|
|
355,676
|
|
|
|
388,264
|
|
Color and Glass Performance
Materials
|
|
|
387,540
|
|
|
|
359,613
|
|
|
|
355,894
|
|
Polymer Additives
|
|
|
313,500
|
|
|
|
300,563
|
|
|
|
280,199
|
|
Specialty Plastics
|
|
|
271,307
|
|
|
|
279,119
|
|
|
|
265,000
|
|
Other businesses
|
|
|
86,330
|
|
|
|
98,867
|
|
|
|
87,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated sales
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below are each segments income and reconciliations to
income before taxes from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
42,094
|
|
|
$
|
31,600
|
|
|
$
|
23,880
|
|
Electronic Materials
|
|
|
35,129
|
|
|
|
13,463
|
|
|
|
33,220
|
|
Color and Glass Performance
Materials
|
|
|
43,345
|
|
|
|
38,879
|
|
|
|
37,128
|
|
Polymer Additives
|
|
|
10,986
|
|
|
|
18,533
|
|
|
|
(911
|
)
|
Specialty Plastics
|
|
|
14,535
|
|
|
|
13,387
|
|
|
|
9,621
|
|
Other businesses
|
|
|
5,674
|
|
|
|
2,175
|
|
|
|
3,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income
|
|
|
151,763
|
|
|
|
118,037
|
|
|
|
106,455
|
|
Unallocated expenses
|
|
|
(65,328
|
)
|
|
|
(47,969
|
)
|
|
|
(37,606
|
)
|
Interest expense
|
|
|
(64,427
|
)
|
|
|
(46,919
|
)
|
|
|
(41,993
|
)
|
Interest earned
|
|
|
4,466
|
|
|
|
538
|
|
|
|
887
|
|
Foreign currency
|
|
|
(1,040
|
)
|
|
|
(1,284
|
)
|
|
|
(3,035
|
)
|
Gain on sale of businesses
|
|
|
67
|
|
|
|
69
|
|
|
|
5,195
|
|
Miscellaneous net
|
|
|
87
|
|
|
|
1,600
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes from
continuing operations
|
|
$
|
25,588
|
|
|
$
|
24,072
|
|
|
$
|
31,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have not allocated the restructuring charges that we incurred
in 2006 to individual segment income. Of the total restructuring
charges incurred of $23.1 million, $0.9 million
related to the Performance Coatings segment, $16.5 million
related to the Electronic Materials segment $4.1 million
related to the Color and Glass Performance Materials
segment and $1.6 million related to the Specialty Plastics
segment.
80
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
The following table details depreciation and amortization
expense by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
14,543
|
|
|
$
|
13,283
|
|
|
$
|
13,315
|
|
Electronic Materials
|
|
|
18,565
|
|
|
|
19,303
|
|
|
|
19,837
|
|
Color and Glass Performance
Materials
|
|
|
9,581
|
|
|
|
10,385
|
|
|
|
11,501
|
|
Polymer Additives
|
|
|
10,765
|
|
|
|
10,637
|
|
|
|
10,591
|
|
Specialty Plastics
|
|
|
3,841
|
|
|
|
4,226
|
|
|
|
4,518
|
|
Other businesses
|
|
|
5,585
|
|
|
|
7,311
|
|
|
|
5,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment depreciation and
amortization
|
|
|
62,880
|
|
|
|
65,145
|
|
|
|
64,826
|
|
Unallocated
|
|
|
16,621
|
|
|
|
9,678
|
|
|
|
10,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation
and amortization
|
|
$
|
79,501
|
|
|
$
|
74,823
|
|
|
$
|
75,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets primarily consist of trade accounts receivable,
inventories, and property, plant and equipment intangibles.
Other assets primarily include cash, deferred taxes and pension
assets. Total assets at December 31 by segment are detailed
below:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
387,185
|
|
|
$
|
339,838
|
|
Electronic Materials
|
|
|
384,696
|
|
|
|
382,855
|
|
Color and Glass Performance
Materials
|
|
|
264,420
|
|
|
|
249,001
|
|
Polymer Additives
|
|
|
241,846
|
|
|
|
235,508
|
|
Specialty Plastics
|
|
|
95,112
|
|
|
|
98,632
|
|
Other businesses
|
|
|
119,561
|
|
|
|
117,417
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
1,492,820
|
|
|
|
1,423,251
|
|
Unallocated assets
|
|
|
240,117
|
|
|
|
245,293
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
1,732,937
|
|
|
$
|
1,668,544
|
|
|
|
|
|
|
|
|
|
|
81
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
Each segments goodwill and other intangible assets at
December 31 are detailed below:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
|
|
|
|
|
|
|
Goodwill and other intangible
assets
|
|
$
|
45,652
|
|
|
$
|
46,778
|
|
Accumulated amortization
|
|
|
(319
|
)
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
Total Performance Coatings
|
|
|
45,333
|
|
|
|
46,415
|
|
Electronic Materials
|
|
|
|
|
|
|
|
|
Goodwill and other intangible
assets
|
|
|
181,547
|
|
|
|
183,019
|
|
Accumulated amortization
|
|
|
(18,340
|
)
|
|
|
(16,282
|
)
|
|
|
|
|
|
|
|
|
|
Total Electronic Materials
|
|
|
163,207
|
|
|
|
166,737
|
|
Color and Glass Performance
Materials
|
|
|
|
|
|
|
|
|
Goodwill and other intangible
assets
|
|
|
69,590
|
|
|
|
70,015
|
|
Accumulated amortization
|
|
|
(2,766
|
)
|
|
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
Total Color and
Glass Performance Materials
|
|
|
66,824
|
|
|
|
67,249
|
|
Polymer Additives
|
|
|
|
|
|
|
|
|
Goodwill and other intangible
assets
|
|
|
82,185
|
|
|
|
81,822
|
|
Accumulated amortization
|
|
|
(9,030
|
)
|
|
|
(8,970
|
)
|
|
|
|
|
|
|
|
|
|
Total Polymer Additives
|
|
|
73,155
|
|
|
|
72,852
|
|
Specialty Plastics
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
20,803
|
|
|
|
20,750
|
|
Accumulated amortization
|
|
|
(3,813
|
)
|
|
|
(3,813
|
)
|
|
|
|
|
|
|
|
|
|
Total Specialty Plastics
|
|
|
16,990
|
|
|
|
16,937
|
|
Other businesses
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
42,001
|
|
|
|
42,268
|
|
Accumulated amortization
|
|
|
(1,170
|
)
|
|
|
(1,792
|
)
|
|
|
|
|
|
|
|
|
|
Total other businesses
|
|
|
40,831
|
|
|
|
40,476
|
|
|
|
|
|
|
|
|
|
|
Total consolidated intangible
assets, net
|
|
$
|
406,340
|
|
|
$
|
410,666
|
|
|
|
|
|
|
|
|
|
|
82
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
We have detailed each segments expenditures for long-lived
assets, including acquisitions, in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
17,646
|
|
|
$
|
13,927
|
|
|
$
|
12,942
|
|
Electronic Materials
|
|
|
7,256
|
|
|
|
6,816
|
|
|
|
3,608
|
|
Color and Glass Performance
Materials
|
|
|
6,378
|
|
|
|
4,548
|
|
|
|
4,754
|
|
Polymer Additives
|
|
|
7,084
|
|
|
|
3,665
|
|
|
|
4,667
|
|
Specialty Plastics
|
|
|
2,271
|
|
|
|
2,335
|
|
|
|
3,214
|
|
Other Businesses
|
|
|
8,090
|
|
|
|
9,354
|
|
|
|
9,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment expenditures for
long-lived assets
|
|
|
48,725
|
|
|
|
40,645
|
|
|
|
39,054
|
|
Unallocated
|
|
|
1,890
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated expenditures
for long-lived assets
|
|
$
|
50,615
|
|
|
$
|
42,825
|
|
|
$
|
39,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We sell our products throughout the world and we attribute sales
to countries based on the country where we generate the customer
invoice. No other single country other than the
U.S. represents greater than 10% of our net sales. We have
detailed net sales by geographic region in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
951,215
|
|
|
$
|
925,895
|
|
|
$
|
899,973
|
|
International
|
|
|
1,090,310
|
|
|
|
956,410
|
|
|
|
943,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of our operations in countries other than the
U.S. owns greater than 10% of consolidated long-lived
assets. We have detailed long-lived assets that consist of
property, plant and equipment, goodwill and intangibles by
geographic region at December 31 in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
576,357
|
|
|
$
|
604,769
|
|
|
$
|
626,813
|
|
International
|
|
|
356,785
|
|
|
|
337,036
|
|
|
|
384,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
933,142
|
|
|
$
|
941,805
|
|
|
$
|
1,011,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.
|
Related
Party Transactions
|
We had the following transactions with our unconsolidated
affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
7,659
|
|
|
$
|
5,132
|
|
|
$
|
19,354
|
|
Purchases
|
|
|
5,229
|
|
|
|
5,573
|
|
|
|
6,374
|
|
Dividends and interest received
|
|
|
1,590
|
|
|
|
1,069
|
|
|
|
147
|
|
Commissions and royalties received
|
|
|
136
|
|
|
|
292
|
|
|
|
352
|
|
Commissions and royalties paid
|
|
|
130
|
|
|
|
191
|
|
|
|
|
|
83
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
A Ferro Director, Mr. Weisser, is the Chairman and Chief
Executive Officer of Bunge Limited and another Ferro Director,
Mr. Bulkin, also serves on the board of Bunge Limited.
Mr. Weisser is also a member of the board of directors of
International Paper Company. We made the following purchases
from these companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Bunge Limited
|
|
$
|
12,473
|
|
|
$
|
11,187
|
|
|
$
|
14,285
|
|
International Paper Company
|
|
|
1,105
|
|
|
|
1,146
|
|
|
|
1,269
|
|
Accounts payable related to these purchases were
$0.2 million at December 31, 2006, and less than
$0.1 million at December 31, 2005. At
December 31, 2006, we were committed to purchases of
$4.1 million from Bunge Limited and $0.2 million from
International Paper Company.
We guaranteed the borrowing facilities of an unconsolidated
affiliate for 2.4, which was outstanding at
December 31, 2005. This guarantee ended in October 2006.
|
|
19.
|
Summarized
Financial Information of Unconsolidated Affiliates Accounted For
Under the Equity Method
|
We participate in several joint ventures that are located in
Spain, Italy, South Korea and Thailand through investments in
the common stock of affiliated companies. As of
December 31, 2006, our percentage of ownership interest in
these affiliates ranges from 36% to 50%. Because we exert
significant influence over the affiliates, but we do not control
them, our investments have been accounted for under the equity
method and their results and financial position are not
consolidated.
In May 2006, we sold a 20% owned, $1.2 million investment
in a joint venture in Spain for cash proceeds of
$1.6 million. We recorded the resulting pre-tax gain of
$0.4 million in miscellaneous income, net in the
consolidated statement of income. We have included the results
of this joint ventures operations in investment income and
the summarized condensed income statement information presented
below up to the date of the sale.
We recorded the following amounts of investment income from
these equity method investments in miscellaneous
income-net:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
2006
|
|
$
|
2,442
|
|
2005
|
|
|
2,506
|
|
2004
|
|
|
1,672
|
|
The combined balance of our equity method investments at
December 31 totaled:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
2006
|
|
$
|
13,253
|
|
2005
|
|
|
12,702
|
|
The income that we record for these investments is equal to our
proportionate share of the affiliates income and our
investments are equal to our proportionate share of the
affiliates shareholders equity based upon our
84
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
ownership percentage. Below we have summarized condensed income
statement and balance sheet information for the combined equity
method investees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
72,976
|
|
|
$
|
77,697
|
|
|
$
|
75,187
|
|
Gross profit
|
|
|
18,808
|
|
|
|
20,316
|
|
|
|
18,566
|
|
Income from continuing operations
|
|
|
7,841
|
|
|
|
8,877
|
|
|
|
7,008
|
|
Net income
|
|
|
5,479
|
|
|
|
5,987
|
|
|
|
5,202
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
44,213
|
|
|
$
|
44,530
|
|
Non-current assets
|
|
|
23,315
|
|
|
|
27,948
|
|
Current liabilities
|
|
|
25,528
|
|
|
|
28,690
|
|
Non-current liabilities
|
|
|
4,070
|
|
|
|
6,315
|
|
New
Credit Facility
In January 2007, we borrowed $55 million of our term loan
facility and used the proceeds to reduce borrowings under our
revolving credit facility. We also cancelled the remaining
unused term loan commitment of $145 million, which was
reserved to finance the potential accelerated payment of the
senior notes, since the default under the senior notes was no
longer continuing. As a result of canceling the remaining
commitment, we will write off $2.0 million of deferred fees
related to the term loan facility in the first quarter of 2007.
Sale
of Land
In January 2007, we completed the sale of land and improvements
in Sao Bernardo do Campo, Brazil, with a net book value of
$0.3 million and received $2.2 million in cash
proceeds. Upon receipt of the cash proceeds we recorded a net of
tax gain of $1.3 million. An additional sale of land in Sao
Bernardo do Campo for proceeds of $0.8 million and a net of
tax gain of $0.4 million is pending approval by the local
environmental authorities of an environmental remediation plan
for the land.
Legal
Proceedings
In late February 2007, we discovered that some of the values
shown on certificates of analysis provided to customers by its
Specialties Plastics business were inaccurate. While we are
uncertain as to when these inaccuracies began or their source,
we believe the material currently being shipped by our Specialty
Plastics business is consistent with the overall quality of past
shipments. We are in the process of compiling historical
physical properties data on products supplied to customers in
the past and will work with the customers to show how the
historical data can be utilized as the basis for establishing
shipping specifications consistent with what those customers
have been receiving.
85
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2006, 2005 and
2004 (Continued)
|
|
21.
|
Quarterly
Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Basic
|
|
|
Diluted
|
|
Quarter
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Earnings
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
461,674
|
|
|
$
|
94,184
|
|
|
$
|
518
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
2
|
|
|
496,626
|
|
|
|
105,111
|
|
|
|
7,923
|
|
|
|
0.18
|
|
|
|
0.18
|
|
3
|
|
|
466,116
|
|
|
|
94,552
|
|
|
|
6,850
|
|
|
|
0.15
|
|
|
|
0.15
|
|
4
|
|
|
457,889
|
|
|
|
89,954
|
|
|
|
985
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,882,305
|
|
|
$
|
383,801
|
|
|
$
|
16,276
|
|
|
$
|
0.35
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
505,153
|
|
|
$
|
107,907
|
|
|
$
|
8,312
|
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
2
|
|
|
538,492
|
|
|
|
110,890
|
|
|
|
10,150
|
|
|
|
0.23
|
|
|
|
0.23
|
|
3
|
|
|
500,573
|
|
|
|
98,650
|
|
|
|
5,492
|
|
|
|
0.12
|
|
|
|
0.12
|
|
4
|
|
|
497,307
|
|
|
|
97,345
|
|
|
|
(3,864
|
)
|
|
|
(0.10
|
)
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,041,525
|
|
|
$
|
414,792
|
|
|
$
|
20,090
|
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly earnings per share amounts do not always add to the
full year amounts due to the averaging of shares.
The fourth quarter of 2006 included after-tax restructuring
charges of $14.3 million or $0.34 basic and diluted
earnings per share.
86
Item 9
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Changes in Accountants. On May 12, 2006,
the Audit Committee dismissed KPMG LLP, which had served as
Ferros auditors for the fiscal year ended
December 31, 2004, and prior years, as the Companys
independent registered public accountants. The audit reports of
KPMG on the consolidated financial statements of Ferro and its
subsidiaries as of and for the years ended December 31,
2004 and December 31, 2003 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting
principles, except that the report for year ended
December 31, 2004, stated that Ferro had restated its
fiscal 2003 consolidated financial statements and stated that
certain liquidity uncertainties facing Ferro raised substantial
doubt about its ability to continue as a going concern.
On May 18, 2006, the Company announced that its Audit
Committee had appointed a new independent registered public
accounting firm to conduct the 2005 audit, subject only to
completion of the new firms customary client acceptance
procedures. On June 5, 2006, the Company announced that
those procedures had been completed and that Deloitte &
Touche LLP had been engaged as the Companys new
independent registered public accountants.
Disagreements with Auditors. There was no
disagreement with Deloitte & Touche LLP on accounting
and financial statement disclosure. The only disagreements that
KPMG communicated to the Audit Committee during the 2003 and
2004 fiscal years or the period from December 31, 2004 to
May 12, 2006 involved the Audit Committees internal
investigation of irregular accounting entries as follows:
In early July 2004, as a result of issues discovered by
management during the performance of certain of the
Companys internal control procedures in connection with
the preparation of the Companys second quarter 2004
financial statements, the Company commenced an internal
investigation into certain potentially inappropriate accounting
entries made in the Companys domestic Polymer Additives
business unit.
Following an initial investigation, management reached the
preliminary conclusion that inappropriate accounting in the
Companys Polymer Additives business unit both overstated
the units historical performance and undermined the
reliability of the units forecasting process. On
July 23, 2004, the Company issued a press release
announcing that the Companys Polymer Additives business
units performance in the second quarter fell short of
expectations and that the Companys Audit Committee had
engaged independent legal counsel (Jones Day) and an independent
public accounting firm (Ernst & Young LLP) to conduct
an investigation under its auspices.
On September 15, 2004, the Company announced it would be
restating certain previously-filed information and reported that
the independent investigation conducted under the auspices of
the Audit Committee had generally confirmed managements
preliminary conclusions reported in the Companys
July 23, 2004, press release. The September 15 release
reported that the investigative team had concluded that all of
the potentially irregular accounting entries were made at the
Polymer Additives business unit and were made without senior
managements knowledge or involvement. The release also
reported that the investigative team concluded that
substantially all of the irregular accounting entries were made
by a subordinate divisional employee who had since left the
Company.
At a meeting of the Audit Committee on September 23, 2004,
KPMG expressed its concern about several emails reviewed during
the initial phase of the investigation and expressed its desire
to have more work done to determine whether those emails raised
additional concerns. In response to KPMGs expressed
concerns, the Audit Committee directed Jones Day and
Ernst & Young to conduct further investigation through
additional email searches, interviews of participants in the
questioned email exchanges and any other person who might have
relevant knowledge, and other documents as they deemed
appropriate.
On October 25, 2004, the Audit Committee met by
teleconference and received the report of Jones Day and
Ernst & Young concerning the expanded email review
requested by KPMG. The investigators reported to the Audit
Committee that they had not found illegal acts or an intent to
commit fraud, but found some evidence of immaterial mistakes in
the timing of recording expenses as required by generally
accepted accounting principles. These findings were reported to
KPMG and, on November 19, 2004, the Audit Committee
concluded that the additional work done by Jones Day and
Ernst & Young indicated no evidence of fraud and no
reasonable need to expand the investigation. KPMG had expressed
disagreement with the investigators findings and the Audit
Committee invited KPMG to provide a written list of any
recommendations it might have and the rationale therefore.
87
Following the November 19, 2004, meeting, Jones Day and
Ernst & Young had discussions with KPMG concerning what
additional investigatory work would be needed to address
KPMGs concerns. In addition, at about the same time the
investigators learned that the former subordinate division
employee who was responsible for the irregular accounting
entries at the Companys Polymer Additives Division was
willing, for the first time, to be interviewed. In that
interview, the former employee confirmed the irregular entries
that the investigators had reported earlier and the fact that he
had made those entries without any knowledge or involvement of
senior management. The employee also raised some suspicions of
irregular accounting entries in another smaller business unit.
In late December 2004, following discussions with the
investigation team, the Chair of the Audit Committee and the
Companys now-deceased Chief Executive Officer met by
teleconference with KPMG. At that meeting, the Audit Committee
Chair advised KPMG that the Audit Committee was willing, as
requested by KPMG, to go forward with further investigation
procedures to determine whether there was a pervasive pattern of
intentional, inappropriate spreading of expenses, emphasized
that independent investigators needed to exercise discretion and
make independent judgments, and emphasized the need to complete
the investigation expeditiously.
On January 18, 2005, in a press release, the Company
reported that KPMG had requested Jones Day and Ernst &
Young to perform additional procedures, including the review of
certain electronic files. In addition, the release disclosed
that the former subordinate division employee had been
interviewed and had confirmed the irregular entries that the
investigators had reported earlier and the fact that he had made
the entries without any knowledge or involvement of senior
management and of the suspicions he had raised about the other
business unit (which were also to be reviewed by the
investigation team).
Jones Day and Ernst & Young delivered their third phase
investigation report to the Audit Committee on March 9,
2005. In that report, the investigators concluded:
|
|
|
|
|
The investigative team did not find evidence of a systemic or
pervasive pattern or practice of managing earnings by
inappropriately spreading expenses over reporting periods or any
other means or conduct that constituted illegal acts,
|
|
|
|
The leadership of Ferros finance organization strives to
apply generally accepted accounting principles and produce
accurate financial records, and
|
|
|
|
All of the individuals potentially responsible for irregular
accounting entries either had resigned before the investigation
started or had been terminated by the Company.
|
On March 15 and April 4, 2005, following delivery of the
Jones Day/Ernst & Young report on the additional
procedures, KPMG advised the Audit Committee that it was
dissatisfied with the conclusions of Jones Day and
Ernst & Young and that it regarded the investigation as
inadequate for its purposes. KPMG indicated that further
investigation would be necessary to constitute a
predicate for an audit report and further that such
further investigation should be undertaken by a new
investigative team.
After further deliberations by the Audit Committee during April
2005, on April 21, 2005, the Company announced that Jones
Day and Ernst & Young had completed the additional
procedures requested by KPMG and reported the
investigators findings. The release also noted that
investigators had again confirmed their earlier conclusions that
substantially all of the irregular entries had been made by the
former subordinate divisional employee and that the entries were
made without any knowledge or involvement of senior management.
The April 21, 2005, press release also reported that,
despite the findings and conclusions of the investigation, KPMG
had advised the Audit Committee that KPMG was unable to conclude
at that time that the investigation was adequate for its
purposes, that KPMG believed further investigation was necessary
to constitute a predicate for its audit of the Companys
financial statements, and that KPMG had proposed that such
investigative work should be undertaken by a new
investigation team. The Companys Audit Committee had
evaluated both KPMGs position and the Jones
Day/Ernst & Young reports relating to the issues raised
by KPMG. On the basis of that evaluation, the Company reported
that the Audit Committee believed it could rely in good faith on
the judgments and conclusions of the independent investigators,
that additional investigation was neither necessary nor
justified, and that the only
88
additional work that was necessary was routine audit
examinations that fell outside the province of the investigation
team.
While the Audit Committee continued to believe its reliance on
the judgments and conclusions of the investigative team was
justified, the April 21, 2005, press release disclosed that
the Audit Committee had responded to KPMGs expressed
concerns in such a way that KPMG would be able to complete its
audit of the Companys financial statements. To that end,
the Audit Committee engaged a second independent investigative
team, consisting of independent legal counsel (Venable LLP) and
independent forensic accountants (Navigant Consulting).
In an October 31, 2005, press release, the Company reported
that the Venable/Navigant team had completed its investigation.
Venable and Navigant reported to the Audit Committee that,
although they found evidence of Ferro accounting personnel
spreading expenses and some other misapplications of generally
accepted accounting principles to achieve internal forecasts,
they did not find that this was done with the intent to affect
reported earnings in a way that misleads the investing public.
The investigators also indicated that, while they found a lax
tone with respect to GAAP compliance among certain former
members of the Companys finance organization, they were
comfortable that the then-current senior management of the
Company, including the Chief Executive Officer and Chief
Financial Officer, set a positive tone with respect to
accounting practices. Consequently, the Venable/Navigant team
concluded that it found no pervasive pattern or practice of
engaging in fraudulent earnings management, that is, the
misapplication of generally accepted accounting principles with
the intent to affect reported earnings in a way that misleads
the investing public.
The Company has authorized KPMG to respond fully to the
inquiries of the successor independent registered public
accounting firm concerning the subject matter of the
disagreements discussed in the preceding paragraphs.
Reportable Events. In managements
assessment of internal controls as of December 31, 2004,
included under Item 9A of the Companys Annual Report
on
Form 10-K
for the fiscal year ended December 31, 2004, management
identified the following material weaknesses of internal control
over financial reporting: (i) inadequately trained and
insufficient numbers of accounting personnel coupled with
insufficient accounting policies and procedures;
(ii) non-adherence to policies and procedures associated
with the financial statement reporting process;
(iii) failure to consistently reconcile and perform timely
reviews of accounting reconciliations, data files and journal
entries; (iv) failure to properly identify and ensure
receipt of agreements for review by accounting personnel; and
(v) failure to consistently review the calculations and
accounting for amounts due to employees under various
compensation plans, and concluded that the Companys
internal control over financial reporting was not effective as
of December 31, 2004. KPMGs report under Item 9A
included KPMGs opinion that managements assessment
was fairly stated in all material respects and that, because of
the effect of the material weaknesses identified by management
described above, the Company had not maintained effective
internal control over financial reporting as of
December 31, 2004.
During the course of the Venable/Navigant investigation, on
October 26, 2005, KPMG requested that senior Company
financial personnel review entries that had been made during the
period being restated by one former and one current member of
the Companys finance function so as to be able to provide
KPMG with management representations concerning those entries.
The report of KPMG on the consolidated financial statements of
the Company for the years ended December 31, 2003 and
December 31, 2004 included in the
Form 10-K
for the fiscal year ended December 31, 2004 stated, as
described above, that the Company restated its fiscal 2003
consolidated financial statements. Representatives of KPMG will
not attend the 2007 Annual Meeting.
Item 9A
Controls and Procedures
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
The Companys management, under the supervision and with
the participation of the Chief Executive Officer and the Chief
Financial Officer, evaluated the effectiveness of the design and
operation of the Companys disclosure controls and
procedures, as defined in Exchange Act
Rule 13a-15(e),
as of December 31, 2006. Based on that evaluation and the
material weaknesses noted below, management concluded that the
disclosure controls and procedures were not effective as of
December 31, 2006.
89
Additional procedures were performed in order for management to
conclude with reasonable assurance that the Companys
consolidated financial statements contained in this Annual
Report on
Form 10-K
present fairly, in all material respects, the Companys
financial position, results of operations and cash flows for the
periods presented.
|
|
(b)
|
Managements
Report on Internal Control over Financial Reporting
|
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in Exchange Act
Rule 13a-15(f).
The Companys internal control system is a process designed
by, or under the supervision of, the Companys principal
executive and principal financial officers, or persons
performing similar functions, and effected by the Companys
board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles (U.S. GAAP).
The Companys internal control over financial reporting
includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets; provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
U.S. GAAP, and that receipts and expenditures are being
made only in accordance with the authorization of its management
and directors; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition use
or disposition of the Companys assets that could have a
material effect on its consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2006. In making this assessment, the Company
used the control criteria framework of the Committee of
Sponsoring Organizations of the Treadway Commission published in
its report entitled Internal Control Integrated
Framework. As a result of its assessment, management
identified material weaknesses in the Companys internal
control over financial reporting. Based on the weaknesses
identified as described below, management concluded that the
Companys internal control over financial reporting was not
effective as of December 31, 2006. Deloitte &
Touche LLP, the independent registered public accounting firm
that audited the Companys consolidated financial
statements, has issued an audit report on managements
assessment of, and the effectiveness of, the Companys
internal control over financial reporting as of
December 31, 2006. This report appears in Item 9A(d).
A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in a more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
As a result of its assessment, management identified the
following material weaknesses in internal control over financial
reporting as of December 31, 2006:
|
|
|
|
|
The Company did not maintain a sufficient complement of
personnel with an appropriate level of knowledge to consistently
perform independent secondary reviews over complex and
non-routine accounting matters, such as share-based
compensation, employee benefit obligations, derivatives, asset
retirement obligations, and restructuring activities. This
control weakness resulted in more than a remote likelihood that
a material misstatement would not be prevented or detected by
management before SEC filing deadlines.
|
|
|
|
The Company did not have in place adequate formal policies and
procedures coupled with a lack of sufficient resources with
appropriate expertise in the Corporate tax function to
effectively account for, oversee and review the Companys
accounting for income taxes. This control weakness resulted in
more than a remote likelihood that a material misstatement would
not be prevented or detected by management.
|
90
|
|
(c)
|
Changes
in Internal Control over Financial Reporting and Other
Remediation
|
During 2006, the Company continued remediation activities that
materially improved, or were reasonably likely to improve, the
Companys internal control over financial reporting. During
the quarter ended December 31, 2006, the following
activities were taken in response to material weaknesses and
significant deficiencies identified by management:
|
|
|
|
|
Conducted an in-person training session for regional controllers
and corporate financial reporting staff; topics covered included
revenue recognition, accounting for inventory variances, repairs
and maintenance, derivatives, restructuring activities,
postretirement benefits, and income taxes;
|
|
|
|
Continued refinement, expansion, and communication of the
Accounting Policies and Procedures manual; updates included,
among others, issuance of policies on Postretirement Employee
Benefits, Valuation of Long-Lived Assets/Asset Impairments and
Accounting for Restructuring Activities, as well as the
development and deployment of a standardized accounting period
closing checklist;
|
|
|
|
Developed more robust policies and procedures for improved
control over user access and program changes to the
Companys information technology systems;
|
|
|
|
Enhanced the process and controls relating to the collection and
reconciliation of supplementary information to support financial
reporting requirements;
|
|
|
|
Established and began use of standardized general ledger
accounts to enable more streamlined reconciliation process for
amounts relating to postretirement benefits and restructuring
activities; and
|
|
|
|
Began implementation efforts on the upgrade of the current
consolidation system to a newer, more efficient package
featuring enhanced control capabilities.
|
Except as disclosed above, there were no changes in internal
control during the quarter ended December 31, 2006, that
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.
|
|
(d)
|
Report of
Independent Registered Public Accounting Firm
|
To the Board of Directors and Shareholders of
Ferro Corporation
Cleveland, Ohio
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting (Item 9A(b)), that Ferro Corporation
and subsidiaries (the Company) did not maintain
effective internal control over financial reporting as of
December 31, 2006, because of the effect of the material
weaknesses identified in managements assessment, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
Companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the Companys board of directors, management, and other
personnel to provide reasonable assurance
91
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in a more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
The following material weaknesses were identified and included
in managements assessment as of December 31, 2006:
|
|
|
|
|
The Company did not maintain a sufficient complement of
personnel with an appropriate level of knowledge to consistently
perform independent secondary reviews over complex and
non-routine accounting matters, such as share-based
compensation, employee benefit obligations, derivatives, asset
retirement obligations, and restructuring activities. This
control weakness resulted in more than a remote likelihood that
a material misstatement would not be prevented or detected by
management before SEC filing deadlines.
|
|
|
|
The Company did not have in place adequate formal policies and
procedures coupled with a lack of sufficient resources with
appropriate expertise in the Corporate tax function to
effectively account for, oversee and review the Companys
accounting for income taxes. This control weakness resulted in
more than a remote likelihood that a material misstatement would
not be prevented or detected by management.
|
These material weakness were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2006, of
the Company, and this report does not affect our report on such
financial statements and financial statement schedule.
In our opinion, managements assessment that the Company
did not maintain effective internal control over financial
reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Also, in our opinion, because of the effect of the
material weaknesses described above on the achievement of the
objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting
as of December 31, 2006, based on the criteria established
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2006, of
the Company and our report dated March 1, 2007, expressed
an unqualified opinion on those financial statements and
financial statement schedule and included an explanatory
paragraph regarding the Companys adoption of Statement of
Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, and the recognition
and disclosure provisions of SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, in 2006.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
March 1, 2007
Item 9B
Other Information
None.
92
PART III
Item 10
Directors and Executive Officers of the
Registrant
The information on Ferros directors is contained under the
heading Election of Directors of the Proxy Statement
for Ferro Corporations 2007 Annual Meeting of Shareholders
and is incorporated here by reference. The information about the
Audit Committee and the Audit Committee financial expert is
contained under the heading Corporate Governance-Audit
Committee of the Proxy Statement for Ferro
Corporations 2007 Annual Meeting of Shareholders and is
incorporated here by reference. Information on Ferros
executive officers is contained under the heading
Executive Officers of the Registrant in Part 1
of this Annual Report on
Form 10-K.
Information regarding Section 16(a) filing is contained
under the subheading Section 16(a) Beneficial
Ownership Reporting Compliance of the Proxy Statement for
Ferro Corporations 2007 Annual Meeting of Shareholders and
is incorporated here by reference.
Ferro has adopted a series of policies dealing with business and
ethics. These policies apply to all Ferro Directors, officers
and employees. A summary of these policies may be found on
Ferros Web site and the full text of the policies is
available in print, free of charge, by writing to: General
Counsel, Ferro Corporation, 1000 Lakeside Avenue, Cleveland,
Ohio
44114-1147,
USA. Exceptions, waivers and amendments of those policies may be
made, if at all, only by the Audit Committee of the Board of
Directors, and, in the event any such exceptions, waivers or
amendments are granted, a description of the change or event
will be posted on Ferros Web site (www.ferro.com) within
four business days. Ferro maintains a worldwide hotline that
allows employees throughout the world to report confidentially
any detected violations of these legal and ethical conduct
policies consistent with local legal requirements and subject to
local legal limitations.
Item 11
Executive Compensation
The information on executive compensation is contained under the
heading Information Concerning Executive Officers of
the Proxy Statement for Ferro Corporations 2007 Annual
Meeting of Shareholders and is incorporated here by reference.
|
|
Item 12
|
Security
Ownership of Certain Beneficial Owners and Management, and
Related Shareholder Matters
|
The information contained under the headings Stock
Ownership by Director, Executive Officers and Employees
and Stock Ownership by Other Major Shareholders of
the Proxy Statement for Ferro Corporations 2007 Annual
Meeting of Shareholders is incorporated here by reference.
The numbers of shares issued and available for issuance under
Ferros equity compensation plans as of December 31,
2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to
|
|
|
|
|
|
Number of Shares
|
|
|
|
Be Issued on
|
|
|
Weighted Average
|
|
|
Remaining Available
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
for Future Issuance
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Under Equity
|
|
Equity Compensation Plan
|
|
and Other Awards
|
|
|
and Other Awards
|
|
|
Compensation Plans(1)
|
|
|
Approved by Ferro Shareholders(2)
|
|
|
4,780,675 shares
|
|
|
$
|
22.15
|
|
|
|
3,417,925 shares(4
|
)
|
Not Approved by Ferro
Shareholders(3)
|
|
|
101,780 shares
|
|
|
$
|
24.96
|
|
|
|
0 shares
|
|
Total
|
|
|
4,882,455 shares
|
|
|
$
|
22.23
|
(5)
|
|
|
3,417,925 shares
|
|
|
|
|
(1) |
|
Excludes shares listed in the second column. |
|
(2) |
|
Includes options issued under the Companys Stock Option
Plan and 2003 Long-Term Incentive Compensation Plan. |
|
(3) |
|
Includes options granted in excess of 100,000 shares to the
Chief Executive Officer and phantom units issued under the
Companys Executive Employee Deferred Compensation Plan and
Supplemental Executive Defined Contribution Plan. |
93
|
|
|
(4) |
|
Shares are only available under the 2006 Long-Term Incentive
Plan and may be issued as stock options, stock appreciation
rights, restricted shares, performance shares, and other common
stock-based awards. |
|
(5) |
|
Weighted-average exercise price of outstanding options; excludes
phantom units. |
A description follows of the material features of each plan that
was not approved by Ferro shareholders:
|
|
|
|
|
Stock Options. On February 11, 2002 and
February 9, 2001, respectively, the Board granted
Mr. Ortino, then our Chief Executive Officer, 155,000 and
122,000 options to purchase shares. Of this amount, options for
100,000 shares each year were granted under the 1985
Employee Stock Option Plan approved by shareholders and the
remaining options were approved and granted by the Board from
available treasury shares. The options granted in 2002 have an
exercise price of $25.50 and the options granted in 2001 have an
exercise price of $23.60. Both grants have a maximum term of ten
years and vest evenly over four years on the anniversary of the
grant date.
|
|
|
|
Executive Employee Deferred Compensation
Plan. The Executive Employee Deferred
Compensation Plan allows participants to defer up to 75% of
annual base salary and up to 100% of incentive cash bonus awards
and cash performance share payouts. Participants may elect to
have all or a portion of their deferred compensation accounts
deemed to be invested in shares of Ferro Common Stock, and
credited with hypothetical appreciation, depreciation, and
dividends. When distributions are made from this Plan in respect
of such shares, the distributions are made in actual shares of
Ferro Common Stock.
|
|
|
|
Supplemental Executive Defined Contribution
Plan. The Supplemental Executive Defined
Contribution Plan allows participants to be credited annually
with matching and basic pension contributions that they would
have received under the Companys 401(k) plan except for
the applicable IRS limitations on compensation and
contributions. Contributions vest at 20% for each year of
service, are deemed invested in Ferro Common Stock and earn
dividends. Distributions are made in Ferro Common Stock or in
cash.
|
Item 13
Certain Relationships and Related Transactions
There are no relationships or transactions that are required to
be reported.
Item 14
Principal Accountant Fees and Services
The information contained under the heading Fees of
the Proxy Statement for Ferro Corporations 2007 Annual
Meeting of Shareholders is incorporated here by reference.
94
PART IV
Item 15
Exhibits and Financial Statement Schedules
The following documents are filed as part of this Annual Report
on
Form 10-K:
(a) The consolidated financial statements of Ferro
Corporation and its subsidiaries contained in Part II,
Item 8 of this Annual Report on
Form 10-K:
|
|
|
|
|
Consolidated Statements of Income for the years ended
December 31, 2006, 2005 and 2004;
|
|
|
|
Consolidated Balance Sheets at December 31, 2006 and 2005;
|
|
|
|
Consolidated Statements of Shareholders Equity and
Comprehensive Income for the years ended December 31, 2006,
2005 and 2004;
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004; and
|
|
|
|
Notes to Consolidated Financial Statements
|
(b) Schedule II Valuation and Qualifying
Accounts and Reserves for the years ended December 31,
2006, 2005, and 2004, contained on page 97 of this Annual
Report on
Form 10-K.
All other schedules have been omitted because the material is
not applicable or is not required as permitted by the rules and
regulations of the U.S. Securities and Exchange Commission,
or the required information is included in the consolidated
financial statements.
(c) The exhibits listed in the Exhibit Index beginning
on page 98 of this Annual Report on
Form 10-K.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 1, 2007
FERRO CORPORATION
James F. Kirsch
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form 10-K
has been signed below by the following persons on behalf of the
Registrant and in their indicated capacities as of the
1st day of March 2007.
|
|
|
|
|
/s/ James
F. Kirsch
James
F. Kirsch
|
|
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Sallie
B. Bailey
Sallie
B. Bailey
|
|
Vice President and Chief Financial
Officer
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
/s/ Michael
H. Bulkin
Michael
H. Bulkin
|
|
Director
|
|
|
|
/s/ Sandra
Austin Crayton
Sandra
Austin Crayton
|
|
Director
|
|
|
|
/s/ Jennie
S. Hwang
Jennie
S. Hwang
|
|
Director
|
|
|
|
/s/ William
B. Lawrence
William
B. Lawrence
|
|
Director
|
|
|
|
/s/ Michael
F. Mee
Michael
F. Mee
|
|
Director
|
|
|
|
Perry
W. Premdas
|
|
Director
|
|
|
|
/s/ William
J. Sharp
William
J. Sharp
|
|
Director
|
|
|
|
/s/ Dennis
W. Sullivan
Dennis
W. Sullivan
|
|
Director
|
|
|
|
/s/ Alberto
Weisser
Alberto
Weisser
|
|
Director
|
96
FERRO
CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years
Ended December 31, 2006, 2005, and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
to Other
|
|
|
|
|
|
at End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(Thousands of dollars)
|
|
|
Allowance for Doubtful
Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(649
|
)(b)
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
7,519
|
|
|
|
1,452
|
|
|
|
|
|
|
|
2,076
|
(a)
|
|
$
|
7,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
747
|
(b)
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
9,244
|
|
|
|
1,799
|
|
|
|
|
|
|
|
2,777
|
(a)
|
|
$
|
7,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(560
|
)(b)
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
9,020
|
|
|
|
3,650
|
|
|
|
(314
|
)(c)
|
|
|
3,672
|
(a)
|
|
$
|
9,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Repairs and
Maintenance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244
|
)(b)
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
2,894
|
|
|
|
4,105
|
|
|
|
|
|
|
|
4,700
|
|
|
$
|
2,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226
|
(b)
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
2,461
|
|
|
|
4,453
|
|
|
|
|
|
|
|
3,794
|
|
|
$
|
2,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149
|
)(b)
|
|
|
|
|
Year ended December 31, 2004
|
|
$
|
3,091
|
|
|
|
3,341
|
|
|
|
|
|
|
|
4,120
|
|
|
$
|
2,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Accounts written off, less recoveries. |
|
(b) |
|
Adjustment with respect to differences in rates of exchange. |
|
(c) |
|
Acquisitions and divestitures. |
97
EXHIBIT INDEX
The following exhibits are filed with this report or are
incorporated here by reference to a prior filing in accordance
with
Rule 12b-32
under the Securities and Exchange Act of 1934.
Exhibit:
|
|
|
|
|
|
3
|
|
|
Articles of Incorporation and
by-laws
|
|
3
|
.1
|
|
Eleventh Amended Articles of
Incorporation. (Reference is made to Exhibit 3(a) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)
|
|
3
|
.2
|
|
Certificate of Amendment to the
Eleventh Amended Articles of Incorporation of Ferro Corporation
filed December 28, 1994. (Reference is made to
Exhibit 3(b) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)
|
|
3
|
.3
|
|
Certificate of Amendment to the
Eleventh Amended Articles of Incorporation of Ferro filed
June 19, 1998. (Reference is made to Exhibit 3(c) to
Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)
|
|
3
|
.4
|
|
Amended Code of Regulations.
(Reference is made to Exhibit 10.01 to Ferro
Corporations Current Report on
Form 8-K,
filed November 8, 2006, which Exhibit is incorporated here
by reference.)
|
|
4
|
|
|
Instruments defining rights of
security holders, including indentures
|
|
4
|
.1
|
|
The rights of the holders of
Ferros Debt Securities issued and to be issued pursuant to
an Indenture between Ferro and J. P. Morgan Trust Company,
National Association
(successor-in-interest
to Chase Manhattan Trust Company, National Association) as
Trustee, are described in the Indenture, dated March 25,
1998. (Reference is made to Exhibit 4(b) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)
|
|
4
|
.1.1
|
|
Pledge and Security Agreement,
dated as of June 6, 2006, made by Ferro Corporation and
each U.S. Subsidiary, as Grantors, in favor of J. P. Morgan
Trust Company, National Association, as Trustee, for the benefit
of the Trustee and the Holders under the Indentures. (Reference
is made to Exhibit 10.3 to Ferro Corporations Current
Report on
Form 8-K,
filed June 12, 2006, which Exhibit is incorporated here by
reference.)
|
|
4
|
.1.2
|
|
Collateral Sharing Agreement,
dated as of June 6, 2006, among National City Bank, as
Collateral Agent under the Credit Agreement, J.P. Morgan
Trust Company, National Association, as Trustee under the
Indentures, and Ferro Corporation and each other Person listed
on the signature pages, as Obligors. (Reference is made to
Exhibit 10.4 to Ferro Corporations Current Report on
Form 8-K,
filed June 12, 2006, which Exhibit is incorporated here by
reference.)
|
|
4
|
.2
|
|
Officers Certificate dated
December 20, 2001, pursuant to Section 301 of the
Indenture dated as of March 25, 1998, between the Company
and J. P. Morgan Trust Company, National Association (the
successor-in-interest
to Chase Manhattan Trust Company, National Association), as
Trustee (excluding exhibits thereto).
|
|
4
|
.3
|
|
Form of Global Note
(91/8% Senior
Notes due 2009).
|
|
|
|
|
The Company agrees, upon request,
to furnish to the U.S. Securities and Exchange Commission a
copy of any instrument authorizing long-term debt that does not
authorize debt in excess of 10% of the total assets of the
Company and its subsidiaries on a consolidated basis.
|
|
10
|
|
|
Material Contracts
|
|
10
|
.1
|
|
Ferro Corporation Employee Stock
Option Plan.
|
|
10
|
.2
|
|
Ferro Corporation 2003 Long-Term
Incentive Compensation Plan. (Reference is made to
Exhibit A of Ferro Corporations Proxy Statement dated
March 26, 2003, which Exhibit is incorporated here by
reference.)
|
|
10
|
.3
|
|
Ferro Corporation 2006 Long-Term
Incentive Plan (Reference is made to Exhibit 3.01 to Ferro
Corporations Current Report on
Form 8-K,
filed November 8, 2006, which Exhibit is incorporated here
by reference.)
|
98
|
|
|
|
|
|
10
|
.4
|
|
Form of Indemnification Agreement.
(Reference is made to Exhibit 10(f) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.5
|
|
Employment Agreement between Ferro
Corporation and James F. Kirsch. (Reference is made to
Exhibit 10.1 to Ferro Corporations Current Report on
Form 8-K,
filed October 19, 2004, which Exhibit is incorporated here
by reference.)*
|
|
10
|
.6
|
|
Form of Change in Control
Agreement. (Reference is made to Exhibit 10(h) to Ferro
Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.7
|
|
Schedule II listing the
officers with whom Ferro had entered into change in control
agreements which were effective during
and/or
subsequent to 2006.*
|
|
10
|
.8
|
|
Ferro Corporation Supplemental
Executive Defined Contribution Plan. (Reference is made to
Exhibit 10(j) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.8.1
|
|
Amendment to the Supplemental
Defined Contribution Plan*
|
|
10
|
.9
|
|
Ferro Corporation Executive
Employee Deferred Compensation Plan. (Reference is made to
Exhibit 10(k) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.10
|
|
Ferro Corporation Supplemental
Executive Defined Benefit Plan. (Reference is made to
Exhibit 10(l) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.11
|
|
Ferro Corporation Deferred
Compensation Plan for Non-Employee Directors.*
|
|
10
|
.11.1
|
|
Ferro Corporation Deferred
Compensation Plan for Non-Employee Directors
Trust Agreement.*
|
|
10
|
.11.2
|
|
First Amendment to Ferro
Corporation Deferred Compensation Plan for Non-Employee
Directors.*
|
|
10
|
.11.3
|
|
Amendment to the Deferred
Compensation Plan for Non-Employee Directors.*
|
|
10
|
.12
|
|
Separation Agreement and Release
between Ferro Corporation and Dale G. Kramer. (Reference is made
to Exhibit 10(n) to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.13
|
|
Separation Agreement and Release
between Ferro Corporation and M. Craig Benson. (Reference is
made to Exhibit 10(o) to Ferro Corporations Annual
Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.14
|
|
Employment Transition Agreement
between Ferro Corporation and Thomas M. Gannon. (Reference is
made to Exhibit 10.1 to Ferro Corporations Current
Report on
Form 8-K,
filed October 26, 2006, which Exhibit is incorporated here
by reference.)*
|
|
10
|
.15
|
|
Amended and Restated Receivables
Purchase Agreement, dated as of June 29, 2006, among Ferro
Finance Corporation as Seller, CAFCO, LLC as Investor, Citibank,
N.A. as a Bank, Citicorp North America, Inc. as Agent, Ferro
Electronic Materials, Inc. as an Originator, and Ferro
Corporation as Collection Agent and an Originator. (Reference is
made to Exhibit 10.2 to Ferro Corporations Current
Report on
Form 8-K,
filed July 6, 2006, which Exhibit is incorporated here by
reference.)
|
|
10
|
.15.1
|
|
Amendment No. 1 to Amended
and Restated Receivables Purchase Agreement, dated as of
October 16, 2006, among Ferro Finance Corporation as
Seller, CAFCO, LLC as Investor, Citicorp North America, Inc. as
Agent, Ferro Electronic Materials, Inc. as an Originator, and
Ferro Corporation as Collection Agent and an Originator.
|
|
10
|
.16
|
|
Amendment to Purchase and
Contribution Agreement, dated as of June 29, 2006, among
Ferro Corporation, Ferro Electronic Materials, Inc. and Ferro
Finance Corporation. (Reference is made to Exhibit 10.1 to
Ferro Corporations Current Report on Form 8-K, filed
July 6, 2006, which Exhibit is incorporated here by
reference.)
|
|
10
|
.16.1
|
|
Amendment to Purchase and
Contribution Agreement, dated October 16, 2006, between
Ferro Corporation and Ferro Electronic Materials, Inc. as
Sellers and Ferro Finance Corporation as Purchaser.
|
99
|
|
|
|
|
|
10
|
.17
|
|
Credit Agreement, dated as of
June 6, 2006, among Ferro Corporation and Certain of its
Designated Subsidiaries from time to time party hereto, as
Borrowers, Various Financial Institutions and Other Persons from
time to time party hereto, as Lenders, Credit Suisse, Cayman
islands Branch, as Term Loan Administrative Agent, National City
Bank, as Revolving Loan Administrative Agent, and KeyBank
National Association, as Documentation Agent. (Reference is made
to Exhibit 10.1 to Ferro Corporations Current Report
on
Form 8-K,
filed June 12, 2006, which Exhibit is incorporated here by
reference.)
|
|
10
|
.17.1
|
|
Pledge and Security Agreement,
dated as of June 6, 2006, made by Ferro Corporation and
each U.S. Subsidiary, as Grantors, in favor of National
City Bank, as Collateral Agent. (Reference is made to
Exhibit 10.2 to Ferro Corporations Current Report on
Form 8-K,
filed June 12, 2006, which Exhibit is incorporated here by
reference.)
|
|
10
|
.17.2
|
|
Collateral Sharing Agreement,
dated as of June 6, 2006, among National City Bank, as
Collateral Agent under the Credit Agreement, J.P. Morgan
Trust Company, National Association, as Trustee under the
Indentures, and Ferro Corporation and each other Person listed
on the signature pages, as Obligors. (Reference is made to
Exhibit 10.4 to Ferro Corporations Current Report on
Form 8-K,
filed June 12, 2006, which Exhibit is incorporated here by
reference.)
|
|
12
|
|
|
Ratio of Earnings to Fixed Charges
and Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends.
|
|
21
|
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
23
|
.2
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
31
|
.1
|
|
Certification of Principal
Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
|
|
31
|
.2
|
|
Certification of Principal
Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
|
|
32
|
.1
|
|
Certification of Principal
Executive Officer Pursuant to 18 U.S.C. 1350.
|
|
32
|
.2
|
|
Certification of Principal
Financial Officer Pursuant to 18 U.S.C. 1350.
|
|
|
|
* |
|
Indicates management contract or compensatory plan, contract or
arrangement in which one or more Directors
and/or
executives of Ferro Corporation may be participants. |
100