Ferro Corporation 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-584
FERRO CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
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34-0217820 |
(State of Corporation)
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(IRS Employer Identification No.) |
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1000 Lakeside Avenue
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44114 |
Cleveland, OH
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(Zip Code) |
(Address of Principal executive offices) |
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216-641-8580
(Telephone Number)
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 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
At
July 31, 2007, there were 43,508,944 shares of Ferro Common Stock, par value $1.00, outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Income
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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Adjusted |
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Adjusted |
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2007 |
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2006 |
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2007 |
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2006 |
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|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
553,658 |
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|
$ |
538,492 |
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|
$ |
1,083,363 |
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$ |
1,043,645 |
|
Cost of sales |
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|
446,131 |
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427,586 |
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869,056 |
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824,905 |
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Gross profit |
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107,527 |
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110,906 |
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214,307 |
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218,740 |
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Selling, general and administrative expenses |
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84,386 |
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78,735 |
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163,143 |
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157,839 |
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Restructuring charges |
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332 |
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1,863 |
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Other expense (income): |
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Interest expense |
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14,286 |
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18,087 |
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31,732 |
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|
31,337 |
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Interest earned |
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|
(189 |
) |
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|
(1,026 |
) |
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|
(1,154 |
) |
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|
(1,770 |
) |
Foreign currency transactions, net |
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|
423 |
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|
219 |
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|
|
934 |
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|
|
540 |
|
Miscellaneous expense (income), net |
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|
883 |
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|
(758 |
) |
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|
(386 |
) |
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2,642 |
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Income before taxes |
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7,406 |
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15,649 |
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18,175 |
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|
28,152 |
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Income tax expense |
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|
2,808 |
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|
5,137 |
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7,342 |
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9,244 |
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Income from continuing operations |
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4,598 |
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|
10,512 |
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|
10,833 |
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|
18,908 |
|
Loss on disposal of discontinued operations,
net of tax |
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58 |
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|
341 |
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|
214 |
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|
467 |
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Net income |
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4,540 |
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|
10,171 |
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10,619 |
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18,441 |
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Dividends on preferred stock |
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259 |
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317 |
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545 |
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|
645 |
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Net income available to common shareholders |
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$ |
4,281 |
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|
$ |
9,854 |
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$ |
10,074 |
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$ |
17,796 |
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Per common share data |
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Basic earnings: |
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From continuing operations |
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$ |
0.10 |
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$ |
0.24 |
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$ |
0.24 |
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$ |
0.43 |
|
From discontinued operations |
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0.00 |
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(0.01 |
) |
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0.00 |
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(0.01 |
) |
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$ |
0.10 |
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$ |
0.23 |
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$ |
0.24 |
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$ |
0.42 |
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Diluted earnings: |
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From continuing operations |
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$ |
0.10 |
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$ |
0.24 |
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$ |
0.24 |
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|
$ |
0.43 |
|
From discontinued operations |
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0.00 |
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(0.01 |
) |
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|
0.00 |
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(0.01 |
) |
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$ |
0.10 |
|
|
$ |
0.23 |
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|
$ |
0.24 |
|
|
$ |
0.42 |
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Cash dividends declared |
|
$ |
0.145 |
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$ |
0.145 |
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$ |
0.29 |
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$ |
0.29 |
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See accompanying notes to condensed consolidated financial statements.
3
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
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Adjusted |
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|
June 30, |
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December 31, |
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2007 |
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2006 |
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|
(Dollars in thousands) |
|
ASSETS |
Current assets |
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|
Cash and cash equivalents |
|
$ |
17,795 |
|
|
$ |
16,985 |
|
Accounts and trade notes receivable, net |
|
|
248,630 |
|
|
|
220,899 |
|
Note receivable from Ferro Finance Corporation |
|
|
30,199 |
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|
16,083 |
|
Inventories |
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|
291,833 |
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|
269,234 |
|
Deposits for precious metals |
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|
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|
70,073 |
|
Deferred income taxes |
|
|
12,593 |
|
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|
12,291 |
|
Other current assets |
|
|
29,718 |
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|
25,877 |
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Total current assets |
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|
630,768 |
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|
631,442 |
|
Other assets |
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Property, plant and equipment, net |
|
|
525,335 |
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|
|
526,802 |
|
Goodwill and other intangible assets, net |
|
|
405,710 |
|
|
|
406,340 |
|
Deferred income taxes |
|
|
91,388 |
|
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|
94,490 |
|
Other non-current assets |
|
|
104,577 |
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|
82,528 |
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Total assets |
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$ |
1,757,778 |
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$ |
1,741,602 |
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LIABILITIES and SHAREHOLDERS EQUITY |
Current liabilities |
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Loans payable and current portion of long-term debt |
|
$ |
22,790 |
|
|
$ |
10,764 |
|
Accounts payable |
|
|
253,589 |
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|
|
237,018 |
|
Income taxes |
|
|
|
|
|
|
8,951 |
|
Accrued payrolls |
|
|
28,695 |
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|
33,164 |
|
Accrued expenses and other current liabilities |
|
|
92,820 |
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|
91,150 |
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Total current liabilities |
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|
397,894 |
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|
381,047 |
|
Other liabilities |
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Long-term debt, less current portion |
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|
536,394 |
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|
581,654 |
|
Postretirement and pension liabilities |
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|
188,459 |
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|
194,427 |
|
Deferred income taxes |
|
|
18,267 |
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|
11,037 |
|
Other non-current liabilities |
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|
58,452 |
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|
21,599 |
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Total liabilities |
|
|
1,199,466 |
|
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|
1,189,764 |
|
Series A convertible preferred stock |
|
|
14,602 |
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|
16,787 |
|
Shareholders equity |
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|
|
|
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|
Common stock |
|
|
52,323 |
|
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|
52,323 |
|
Paid-in capital |
|
|
161,112 |
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|
158,504 |
|
Retained earnings |
|
|
586,309 |
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|
600,638 |
|
Accumulated other comprehensive loss |
|
|
(54,662 |
) |
|
|
(65,138 |
) |
Common shares in treasury, at cost |
|
|
(201,372 |
) |
|
|
(211,276 |
) |
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|
Total shareholders equity |
|
|
543,710 |
|
|
|
535,051 |
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|
|
|
|
|
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|
Total liabilities and shareholders equity |
|
$ |
1,757,778 |
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|
$ |
1,741,602 |
|
|
|
|
|
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|
See accompanying notes to condensed consolidated financial statements.
4
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statement of Shareholders Equity and Comprehensive Income
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Accumulated |
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Total |
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Common Shares |
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Other |
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Share- |
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in Treasury |
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Common |
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Paid-in |
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Retained |
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Comprehensive |
|
|
holders |
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Shares |
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Amount |
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|
Stock |
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|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|
|
(In thousands, except per share data) |
|
Balances at December 31, 2006 -
Adjusted |
|
|
9,458 |
|
|
$ |
(211,276 |
) |
|
$ |
52,323 |
|
|
$ |
158,504 |
|
|
$ |
600,638 |
|
|
$ |
(65,138 |
) |
|
$ |
535,051 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,619 |
|
|
|
|
|
|
|
10,619 |
|
Other comprehensive income (loss),
net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Foreign currency translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,742 |
|
|
|
12,742 |
|
Postemployment benefit
liability adjustments |
|
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(3 |
) |
|
|
(3 |
) |
Raw material commodity swap
adjustments |
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
(1,512 |
) |
|
|
(1,512 |
) |
Interest rate swap adjustments |
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|
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|
|
|
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(751 |
) |
|
|
(751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,095 |
|
Cash dividends: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,496 |
) |
|
|
|
|
|
|
(12,496 |
) |
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(545 |
) |
|
|
|
|
|
|
(545 |
) |
Income tax benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
26 |
|
Transactions involving benefit plans |
|
|
(571 |
) |
|
|
9,904 |
|
|
|
|
|
|
|
2,608 |
|
|
|
|
|
|
|
|
|
|
|
12,512 |
|
Adjustment to initially apply FIN
No. 48 as of January 1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,933 |
) |
|
|
|
|
|
|
(11,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007 |
|
|
8,887 |
|
|
$ |
(201,372 |
) |
|
$ |
52,323 |
|
|
$ |
161,112 |
|
|
$ |
586,309 |
|
|
$ |
(54,662 |
) |
|
$ |
543,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
|
|
|
|
Adjusted |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,619 |
|
|
$ |
18,441 |
|
Depreciation and amortization |
|
|
43,992 |
|
|
|
38,892 |
|
Precious metals deposits |
|
|
70,073 |
|
|
|
(58,000 |
) |
Accounts and trade notes receivable, inventories, and accounts payable |
|
|
(26,190 |
) |
|
|
(59,501 |
) |
Note receivable from Ferro Finance Corporation |
|
|
(14,116 |
) |
|
|
67,735 |
|
Other changes in current assets and liabilities, net |
|
|
(7,367 |
) |
|
|
5,957 |
|
Other adjustments, net |
|
|
(7,149 |
) |
|
|
5,814 |
|
|
|
|
|
|
|
|
Net cash provided by continuing operations |
|
|
69,862 |
|
|
|
19,338 |
|
Net cash used for discontinued operations |
|
|
(45 |
) |
|
|
(766 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
69,817 |
|
|
|
18,572 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Capital expenditures for property, plant and equipment |
|
|
(30,921 |
) |
|
|
(20,829 |
) |
Proceeds from sale of assets and businesses |
|
|
1,964 |
|
|
|
5,606 |
|
Cash investment in affiliate |
|
|
859 |
|
|
|
(25,000 |
) |
Other investing activities |
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(28,098 |
) |
|
|
(40,161 |
) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net borrowings under short term facilities |
|
|
10,850 |
|
|
|
1,136 |
|
Proceeds from revolving credit facility |
|
|
410,295 |
|
|
|
774,000 |
|
Proceeds from term loan facility |
|
|
55,000 |
|
|
|
95,000 |
|
Principal payments on revolving credit facility |
|
|
(507,649 |
) |
|
|
(823,200 |
) |
Principal payments on term loan facility |
|
|
(1,525 |
) |
|
|
|
|
Debt issue costs paid |
|
|
(2,086 |
) |
|
|
(14,402 |
) |
Proceeds from exercise of stock options |
|
|
8,233 |
|
|
|
2,196 |
|
Cash dividends paid |
|
|
(13,041 |
) |
|
|
(12,955 |
) |
Other financing activities |
|
|
(1,325 |
) |
|
|
(1,658 |
) |
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities |
|
|
(41,248 |
) |
|
|
20,117 |
|
Effect of exchange rate changes on cash |
|
|
339 |
|
|
|
(432 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
810 |
|
|
|
(1,904 |
) |
Cash and cash equivalents at beginning of period |
|
|
16,985 |
|
|
|
17,413 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
17,795 |
|
|
$ |
15,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
28,680 |
|
|
$ |
28,081 |
|
Income taxes |
|
$ |
6,774 |
|
|
$ |
4,397 |
|
See accompanying notes to condensed consolidated financial statements.
6
Ferro Corporation and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
Ferro Corporation (Ferro, we, us or the Company) prepared these unaudited condensed
consolidated financial statements of Ferro Corporation and its consolidated subsidiaries in
accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the
consolidated financial statements and related notes included in our Annual Report on Form 10-K for
the year ended December 31, 2006. The preparation of financial statements in conformity with U.S.
GAAP requires us to make estimates and assumptions that affect the timing and amount of assets,
liabilities, equity, revenues and expenses reported and disclosed. Actual amounts 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. In our opinion, we made
all adjustments that are necessary for a fair presentation, and those adjustments are of a normal
recurring nature unless otherwise noted. Due to differing business conditions, our various
initiatives, and some seasonality, the results for the three and six months ended June 30, 2007,
are not necessarily indicative of the results expected in subsequent quarters or for the full year.
Interest earned in the three and six months ended June 30, 2006, of $1.0 million and $1.8
million, respectively, was reclassified from miscellaneous (income) expense, net, and is shown
separately in the condensed consolidated statements of income.
2. Accounting Methods Adopted in the Six Months Ended June 30, 2007
On January 1, 2007, we elected to change our costing method for our inventories not already
costed under the lower of cost or market using the first-in, first-out (FIFO) method, while in
prior years, these inventories were costed under the lower of cost or market using the last-in,
first-out (LIFO) method. The percentage of inventories accounted for under the LIFO method at
December 31, 2006, was 13.8% for U.S. inventories and 6.2% for consolidated inventories. We
believe the FIFO method is preferable as it conforms the inventory costing methods for all of our
inventories to a single method and improves comparability with our industry peers. The FIFO method
also better reflects current acquisition cost of those inventories on our consolidated balance
sheets and enhances the matching of future cost of sales with revenues. In accordance with
Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Correction, all
prior periods presented have been adjusted to apply the new method retrospectively. The effect of
the change in our inventory costing method includes the LIFO reserve and related impact on the
obsolescence reserve. This change increased our inventory balance by $13.7 million and increased
retained earnings, net of income tax effects, by $8.5 million as of January 1, 2006.
On January 1, 2007, we also changed our accounting method of accruing for major planned
overhauls. Financial Accounting Standards Board (FASB) Staff Position No. AUG AIR-1, Accounting
for Planned Maintenance Activities, (AUG AIR-1), prohibits our prior policy of accruing for major
planned overhauls in advance of when the actual costs are incurred. Under our new policy, the
costs of major planned overhauls are expensed when incurred. All prior periods presented have been
adjusted to apply the new method retrospectively. Adoption of this accounting pronouncement
decreased our accrued expenses and other current liabilities by $2.2 million and increased retained
earnings, net of income tax effects, by $1.5 million as of January 1, 2006.
On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, (FIN 48). FIN 48 clarifies what criteria must be met prior to recognition of the
financial statement benefit of a position taken or expected to be taken in a tax return. This
interpretation also provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, accounting for income taxes in interim periods, and
income tax disclosures. The adoption of this interpretation decreased the opening balance of
retained earnings by $11.9 million as of January 1, 2007. We have elected to continue to report
interest and penalties as income tax expense.
On January 1, 2007, we also adopted Statement of Financial Accounting Standards 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 a servicing asset or liability
each time it undertakes an obligation to service a financial asset by
7
entering into a servicing contract. We provide collection agent services for our U.S. and
certain international receivable sales programs. The collection agent fees received by the
Company approximate adequate compensation. Therefore, the adoption of FAS No. 156 did not have an
effect on our consolidated financial statements.
We have presented the effects of the changes in accounting principles for inventory costs and
for major planned overhauls for 2007 and 2006 below. We have combined certain financial statement
line items if they were not affected by the changes in accounting principles.
Condensed Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2007 |
|
|
|
Computed |
|
|
Change to |
|
|
Reported |
|
|
|
under LIFO |
|
|
FIFO |
|
|
under FIFO |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
553,658 |
|
|
$ |
|
|
|
$ |
553,658 |
|
Cost of sales |
|
|
446,663 |
|
|
|
(532 |
) |
|
|
446,131 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
106,995 |
|
|
|
532 |
|
|
|
107,527 |
|
Selling, general and administrative expenses |
|
|
84,386 |
|
|
|
|
|
|
|
84,386 |
|
Restructuring charges |
|
|
332 |
|
|
|
|
|
|
|
332 |
|
Other expense |
|
|
15,403 |
|
|
|
|
|
|
|
15,403 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
6,874 |
|
|
|
532 |
|
|
|
7,406 |
|
Income tax expense |
|
|
2,612 |
|
|
|
196 |
|
|
|
2,808 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,262 |
|
|
|
336 |
|
|
|
4,598 |
|
Loss on disposal of discontinued operations, net of tax |
|
|
58 |
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,204 |
|
|
|
336 |
|
|
|
4,540 |
|
Dividends on preferred stock |
|
|
259 |
|
|
|
|
|
|
|
259 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
3,945 |
|
|
$ |
336 |
|
|
$ |
4,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.10 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.10 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.09 |
|
|
$ |
0.01 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2007 |
|
|
|
Computed |
|
|
Change to |
|
|
Reported |
|
|
|
under LIFO |
|
|
FIFO |
|
|
under FIFO |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
1,083,363 |
|
|
$ |
|
|
|
$ |
1,083,363 |
|
Cost of sales |
|
|
869,687 |
|
|
|
(631 |
) |
|
|
869,056 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
213,676 |
|
|
|
631 |
|
|
|
214,307 |
|
Selling, general and administrative expenses |
|
|
163,143 |
|
|
|
|
|
|
|
163,143 |
|
Restructuring charges |
|
|
1,863 |
|
|
|
|
|
|
|
1,863 |
|
Other expense |
|
|
31,126 |
|
|
|
|
|
|
|
31,126 |
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
17,544 |
|
|
|
631 |
|
|
|
18,175 |
|
Income tax expense |
|
|
7,107 |
|
|
|
235 |
|
|
|
7,342 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
10,437 |
|
|
|
396 |
|
|
|
10,833 |
|
Loss on disposal of discontinued operations, net of tax |
|
|
214 |
|
|
|
|
|
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
10,223 |
|
|
|
396 |
|
|
|
10,619 |
|
Dividends on preferred stock |
|
|
545 |
|
|
|
|
|
|
|
545 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
9,678 |
|
|
$ |
396 |
|
|
$ |
10,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.23 |
|
|
$ |
0.01 |
|
|
$ |
0.24 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
$ |
0.01 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.23 |
|
|
$ |
0.01 |
|
|
$ |
0.24 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
$ |
0.01 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 |
|
|
|
Originally |
|
|
Change to |
|
|
Adoption of |
|
|
|
|
|
|
Reported |
|
|
FIFO |
|
|
AUG AIR-1 |
|
|
Adjusted |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
538,492 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
538,492 |
|
Cost of sales |
|
|
427,602 |
|
|
|
56 |
|
|
|
(72 |
) |
|
|
427,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
110,890 |
|
|
|
(56 |
) |
|
|
72 |
|
|
|
110,906 |
|
Selling, general and administrative expenses |
|
|
78,735 |
|
|
|
|
|
|
|
|
|
|
|
78,735 |
|
Other expense |
|
|
16,522 |
|
|
|
|
|
|
|
|
|
|
|
16,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
15,633 |
|
|
|
(56 |
) |
|
|
72 |
|
|
|
15,649 |
|
Income tax expense |
|
|
5,142 |
|
|
|
(21 |
) |
|
|
16 |
|
|
|
5,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
10,491 |
|
|
|
(35 |
) |
|
|
56 |
|
|
|
10,512 |
|
Loss on disposal of discontinued operations,
net of tax |
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
10,150 |
|
|
|
(35 |
) |
|
|
56 |
|
|
|
10,171 |
|
Dividends on preferred stock |
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
9,833 |
|
|
$ |
(35 |
) |
|
$ |
56 |
|
|
$ |
9,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.24 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.24 |
|
From discontinued operations |
|
|
(0.01 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.24 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.24 |
|
From discontinued operations |
|
|
(0.01 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.23 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2006 |
|
|
|
Originally |
|
|
Change to |
|
|
Adoption of |
|
|
|
|
|
|
Reported |
|
|
FIFO |
|
|
AUG AIR-1 |
|
|
Adjusted |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
1,043,645 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,043,645 |
|
Cost of sales |
|
|
824,848 |
|
|
|
234 |
|
|
|
(177 |
) |
|
|
824,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
218,797 |
|
|
|
(234 |
) |
|
|
177 |
|
|
|
218,740 |
|
Selling, general and administrative expenses |
|
|
157,839 |
|
|
|
|
|
|
|
|
|
|
|
157,839 |
|
Other expense |
|
|
32,749 |
|
|
|
|
|
|
|
|
|
|
|
32,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
28,209 |
|
|
|
(234 |
) |
|
|
177 |
|
|
|
28,152 |
|
Income tax expense |
|
|
9,280 |
|
|
|
(87 |
) |
|
|
51 |
|
|
|
9,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
18,929 |
|
|
|
(147 |
) |
|
|
126 |
|
|
|
18,908 |
|
Loss on disposal of discontinued operations,
net of tax |
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
18,462 |
|
|
|
(147 |
) |
|
|
126 |
|
|
|
18,441 |
|
Dividends on preferred stock |
|
|
645 |
|
|
|
|
|
|
|
|
|
|
|
645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
17,817 |
|
|
$ |
(147 |
) |
|
$ |
126 |
|
|
$ |
17,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.43 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.43 |
|
From discontinued operations |
|
|
(0.01 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.42 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.43 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.43 |
|
From discontinued operations |
|
|
(0.01 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.42 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
|
Computed |
|
|
Change to |
|
|
Reported |
|
|
|
under LIFO |
|
|
FIFO |
|
|
under FIFO |
|
|
|
(Dollars in thousands) |
|
ASSETS |
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
276,481 |
|
|
$ |
15,352 |
|
|
$ |
291,833 |
|
Deferred income taxes |
|
|
18,443 |
|
|
|
(5,850 |
) |
|
|
12,593 |
|
Other current assets |
|
|
326,342 |
|
|
|
|
|
|
|
326,342 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
621,266 |
|
|
|
9,502 |
|
|
|
630,768 |
|
Other assets |
|
|
1,127,010 |
|
|
|
|
|
|
|
1,127,010 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,748,276 |
|
|
$ |
9,502 |
|
|
$ |
1,757,778 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES and SHAREHOLDERS EQUITY |
Current liabilities |
|
$ |
397,894 |
|
|
$ |
|
|
|
$ |
397,894 |
|
Other liabilities |
|
|
801,572 |
|
|
|
|
|
|
|
801,572 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,199,466 |
|
|
|
|
|
|
|
1,199,466 |
|
Series A convertible preferred stock |
|
|
14,602 |
|
|
|
|
|
|
|
14,602 |
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
576,807 |
|
|
|
9,502 |
|
|
|
586,309 |
|
Other shareholders equity |
|
|
(42,599 |
) |
|
|
|
|
|
|
(42,599 |
) |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
534,208 |
|
|
|
9,502 |
|
|
|
543,710 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,748,276 |
|
|
$ |
9,502 |
|
|
$ |
1,757,778 |
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
Originally |
|
|
Change to |
|
|
Adoption of |
|
|
|
|
|
|
Reported |
|
|
FIFO |
|
|
AUG AIR-1 |
|
|
Adjusted |
|
|
|
(Dollars in thousands) |
|
ASSETS |
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
254,513 |
|
|
$ |
14,721 |
|
|
$ |
|
|
|
$ |
269,234 |
|
Deferred income taxes |
|
|
18,175 |
|
|
|
(5,615 |
) |
|
|
(269 |
) |
|
|
12,291 |
|
Other current assets |
|
|
349,917 |
|
|
|
|
|
|
|
|
|
|
|
349,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
622,605 |
|
|
|
9,106 |
|
|
|
(269 |
) |
|
|
631,442 |
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
94,662 |
|
|
|
|
|
|
|
(172 |
) |
|
|
94,490 |
|
Other non-current assets |
|
|
1,015,670 |
|
|
|
|
|
|
|
|
|
|
|
1,015,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,732,937 |
|
|
$ |
9,106 |
|
|
$ |
(441 |
) |
|
$ |
1,741,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES and SHAREHOLDERS EQUITY |
Current liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
8,732 |
|
|
$ |
|
|
|
$ |
219 |
|
|
$ |
8,951 |
|
Accrued expenses and other current liabilities |
|
|
93,206 |
|
|
|
|
|
|
|
(2,056 |
) |
|
|
91,150 |
|
Other current liabilities |
|
|
280,946 |
|
|
|
|
|
|
|
|
|
|
|
280,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
382,884 |
|
|
|
|
|
|
|
(1,837 |
) |
|
|
381,047 |
|
Other liabilities |
|
|
808,717 |
|
|
|
|
|
|
|
|
|
|
|
808,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,191,601 |
|
|
|
|
|
|
|
(1,837 |
) |
|
|
1,189,764 |
|
Series A convertible preferred stock |
|
|
16,787 |
|
|
|
|
|
|
|
|
|
|
|
16,787 |
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
590,136 |
|
|
|
9,106 |
|
|
|
1,396 |
|
|
|
600,638 |
|
Other shareholders equity |
|
|
(65,587 |
) |
|
|
|
|
|
|
|
|
|
|
(65,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
524,549 |
|
|
|
9,106 |
|
|
|
1,396 |
|
|
|
535,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,732,937 |
|
|
$ |
9,106 |
|
|
$ |
(441 |
) |
|
$ |
1,741,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2007 |
|
|
|
Computed |
|
|
Change to |
|
|
Reported |
|
|
|
under LIFO |
|
|
FIFO |
|
|
under FIFO |
|
|
|
(Dollars in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,223 |
|
|
$ |
396 |
|
|
$ |
10,619 |
|
Depreciation and amortization |
|
|
43,992 |
|
|
|
|
|
|
|
43,992 |
|
Precious metals deposits |
|
|
70,073 |
|
|
|
|
|
|
|
70,073 |
|
Accounts and trade notes receivable, inventories,
and accounts payable |
|
|
(25,559 |
) |
|
|
(631 |
) |
|
|
(26,190 |
) |
Note receivable from Ferro Finance Corporation |
|
|
(14,116 |
) |
|
|
|
|
|
|
(14,116 |
) |
Other changes in current assets and liabilities, net |
|
|
(7,367 |
) |
|
|
|
|
|
|
(7,367 |
) |
Other adjustments, net |
|
|
(7,384 |
) |
|
|
235 |
|
|
|
(7,149 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations |
|
|
69,862 |
|
|
|
|
|
|
|
69,862 |
|
Net cash used for discontinued operations |
|
|
(45 |
) |
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
69,817 |
|
|
|
|
|
|
|
69,817 |
|
Cash flows from investing activities |
|
|
(28,098 |
) |
|
|
|
|
|
|
(28,098 |
) |
Cash flows from financing activities |
|
|
(41,248 |
) |
|
|
|
|
|
|
(41,248 |
) |
Effect of exchange rate changes on cash |
|
|
339 |
|
|
|
|
|
|
|
339 |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
810 |
|
|
|
|
|
|
|
810 |
|
Cash and cash equivalents at beginning of period |
|
|
16,985 |
|
|
|
|
|
|
|
16,985 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
17,795 |
|
|
$ |
|
|
|
$ |
17,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2006 |
|
|
|
Originally |
|
|
Change to |
|
|
Adoption of |
|
|
|
|
|
|
Reported |
|
|
FIFO |
|
|
AUG AIR-1 |
|
|
Adjusted |
|
|
|
(Dollars in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,462 |
|
|
$ |
(147 |
) |
|
$ |
126 |
|
|
$ |
18,441 |
|
Depreciation and amortization |
|
|
38,892 |
|
|
|
|
|
|
|
|
|
|
|
38,892 |
|
Precious metals deposits |
|
|
(58,000 |
) |
|
|
|
|
|
|
|
|
|
|
(58,000 |
) |
Accounts and trade notes receivable,
inventories, and accounts payable |
|
|
(59,735 |
) |
|
|
234 |
|
|
|
|
|
|
|
(59,501 |
) |
Note receivable from Ferro Finance Corporation |
|
|
67,735 |
|
|
|
|
|
|
|
|
|
|
|
67,735 |
|
Other changes in current assets and liabilities,
net |
|
|
6,094 |
|
|
|
|
|
|
|
(137 |
) |
|
|
5,957 |
|
Other adjustments, net |
|
|
5,890 |
|
|
|
(87 |
) |
|
|
11 |
|
|
|
5,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations |
|
|
19,338 |
|
|
|
|
|
|
|
|
|
|
|
19,338 |
|
Net cash used for discontinued operations |
|
|
(766 |
) |
|
|
|
|
|
|
|
|
|
|
(766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
18,572 |
|
|
|
|
|
|
|
|
|
|
|
18,572 |
|
Cash flows from investing activities |
|
|
(40,161 |
) |
|
|
|
|
|
|
|
|
|
|
(40,161 |
) |
Cash flows from financing activities |
|
|
20,117 |
|
|
|
|
|
|
|
|
|
|
|
20,117 |
|
Effect of exchange rate changes on cash |
|
|
(432 |
) |
|
|
|
|
|
|
|
|
|
|
(432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(1,904 |
) |
|
|
|
|
|
|
|
|
|
|
(1,904 |
) |
Cash and cash equivalents at beginning of period |
|
|
17,413 |
|
|
|
|
|
|
|
|
|
|
|
17,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
15,509 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
3. Newly Issued Accounting Pronouncement
In June 2007, the Emerging Issues Task Force of the FASB reached a consensus on Issue No.
06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, (EITF No.
06-11). EITF No. 06-11 requires that the income tax benefit from dividends that are charged to
retained earnings and paid to employees for nonvested equity shares be recognized as an increase to
paid-in capital. Currently, we recognize this income tax benefit as an increase to retained
earnings. EITF No. 06-11 is to be applied prospectively in fiscal years beginning after December
15, 2007. Beginning in 2008, we will report this income tax benefit as an increase to paid-in
capital.
4. Inventories
As noted in Note 2, effective January 1, 2007, we elected to change our costing method for
selected inventories. We applied this change in accounting principle by adjusting all prior
periods presented retrospectively. Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Raw materials |
|
$ |
84,902 |
|
|
$ |
74,160 |
|
Work in process |
|
|
44,919 |
|
|
|
44,658 |
|
Finished goods |
|
|
162,012 |
|
|
|
150,416 |
|
|
|
|
|
|
|
|
Total |
|
$ |
291,833 |
|
|
$ |
269,234 |
|
|
|
|
|
|
|
|
In the production of some of our products, we use precious metals, some of which we obtain
from financial institutions under consignment agreements with terms of one year or less. The
financial institutions retain ownership of the precious metals and charge us fees based on the
amounts we consign. These fees were $1.0 million and $0.9 million for the three months ended June
30, 2007 and 2006, respectively, and $2.0 million and $1.4 million for the six months ended June
30, 2007 and 2006, respectively, 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. These requirements were eliminated during the first half of 2007.
We had on hand $113.7 million at June 30, 2007, and $120.9 million at December 31, 2006, of
precious metals owned by financial institutions, measured at fair value.
5. Property, Plant and Equipment
Property, plant and equipment is reported net of accumulated depreciation of $733.0 million at
June 30, 2007, and $691.4 million at December 31, 2006.
15
6. Financing and Long-term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
$200,000 Senior Notes, 9.125%, due 2009 * |
|
$ |
199,454 |
|
|
$ |
199,273 |
|
Revolving credit facility |
|
|
30,599 |
|
|
|
127,953 |
|
Term loan facility |
|
|
303,475 |
|
|
|
250,000 |
|
Capital lease obligations |
|
|
6,410 |
|
|
|
6,744 |
|
Other notes |
|
|
841 |
|
|
|
1,008 |
|
|
|
|
|
|
|
|
|
|
|
540,779 |
|
|
|
584,978 |
|
Less current portion |
|
|
(4,385 |
) |
|
|
(3,324 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
536,394 |
|
|
$ |
581,654 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Net of unamortized discounts. |
Credit Rating
In May 2007, Moodys Investor Services, Inc. (Moodys) reassigned a senior credit rating to
the Company after withdrawing its rating in March 2006 due to delays in the filing of financial
statements for 2005 and quarterly statements for 2004 through 2006. At June 30, 2007, the
Companys senior credit rating was B1, with a positive outlook, by Moodys and B+, with a stable
outlook, by Standard & Poors Rating Group (S&P).
Revolving Credit and Term Loan Facilities
In 2006, we entered into an agreement with a group of lenders for a $700 million credit
facility. At that time, the credit facility consisted of a five-year, $250 million multi-currency
senior revolving credit facility and a six-year, $450 million senior term loan facility.
In June 2007, we amended the credit facility (the Amended Credit Facility) primarily to
increase the size of the revolving credit facility by $50 million to $300 million, reduce interest
expense, and increase operating flexibility. We had
$260.7 million at June 30, 2007, and $109.3 million at December 31, 2006, available under the revolving credit facility, 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. With the amendment, we reduced the margins for
borrowings under both the revolving credit and the term loan facilities as compared with the
margins that were in effect prior to the amendment. For the revolving credit facility, as amended,
the variable margin is based on the Companys leverage ratio. Previously, the variable margin was
based on the Companys credit ratings as determined by S&P and Moodys. In addition, the amendment
increased our operating flexibility by increasing the amount of restructuring and manufacturing
rationalization programs permitted, relaxing restrictions on the use of proceeds from asset
dispositions, and modifying covenants related to Ferros leverage ratio and fixed charge coverage
ratio.
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 wrote off to interest expense $2.0 million of deferred fees
related to the term loan facility in the first quarter of 2007. In the second quarter of 2007, we
began making periodic principal payments on the term loans. At June 30, 2007, we had borrowed
$303.5 million in term loans. The Company is required to make quarterly principal payments of $0.8
million from July 2007 to July 2011 and $72.6 million from October 2011 to April 2012 and a final
payment of $72.6 million in June 2012.
The interest rates under the Amended Credit Facility are the sum of (A) 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 the Companys
16
leverage, or for the term loan facility, a fixed margin. As part of the June 2007 amendments,
$175 million of borrowings under the term loan facility were restricted to using three-month LIBOR
in determining their interest rates. This change was made in connection with interest rate swap
agreements executed in June 2007. These swap agreements effectively fixed the interest rate
through June 2011 on $150 million of borrowings under the term loan facility. At June 30, 2007,
the average interest rate for revolving credit borrowings was 6.8%, and the effective interest rate
for term loan borrowings after adjusting for the interest rate swaps was 7.5%. At December 31,
2006, the average interest rate was 8.1% for revolving credit borrowings and 8.1% for term loan
borrowings.
Senior Notes and Debentures
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 ratings by Moodys and S&P of the senior notes are 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 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 (the Conduits) for proceeds of up to $100.0 million. FFC had received
net proceeds of $61.3 million at June 30, 2007, and $60.6 million at December 31, 2006, for
outstanding receivables. 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 agent
services with respect to the trade accounts receivable sold. In June 2007, we amended the program
primarily to reduce its fees and to make Ferros leverage ratio the basis for these fees.
Activity from this program for the six months ended June 30 is detailed below:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Trade accounts receivable sold to FFC |
|
$ |
497,358 |
|
|
$ |
528,834 |
|
Cash proceeds from FFC |
|
|
482,838 |
|
|
|
596,288 |
|
Trade accounts receivable collected and remitted to FFC and the conduits |
|
|
482,138 |
|
|
|
513,388 |
|
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 $61.2 million and $49.2 million at June 30, 2007, and December 31, 2006, respectively.
The amount of outstanding receivables sold under the international
programs was $39.3 million and
$33.7 million at June 30, 2007, and December 31, 2006, respectively.
Other Financing Arrangements
In June 2007, we entered into two international variable-rate credit facilities secured by specific accounts receivable. At June 30, 2007, the commitments under these facilities, which can be withdrawn at any time, totaled $22.3 million, and the borrowings totaled $14.9 million.
7. Financial Instruments
The carrying amounts of borrowings under the Amended Credit Facility approximate their fair
values, due to their variable market interest rates. To reduce our exposure to interest rate
changes on variable-rate debt, we entered into interest rate swap agreements. These swaps
effectively converted $150 million of our variable-rate debt to a fixed rate.
The carrying amount of the senior notes was $199.5 million at June 30, 2007, and $199.3
million at December 31, 2006. The fair value of the senior notes was $205.5 million at June 30,
2007, and $205.5 million at December 31, 2006. The fair value of Ferros senior notes is based on
a third partys estimated bid price.
We manage foreign currency risks principally by entering into forward contracts to mitigate
the impact of currency fluctuations on transactions. We hedge a portion of our exposure to changes
in the pricing of certain raw material
17
commodities principally using swap arrangements that allow
us to fix the price of the commodities for future purchase. When we enter into fixed price sales
contracts for products with precious metal content, we also enter into a forward purchase
arrangement with a precious metals supplier to completely cover the value of the fixed price sales
contract. We also purchase portions of our natural gas requirements under fixed price contracts to
reduce the volatility of cost changes. For gas 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 $7.4 million at June 30, 2007.
The notional amounts, carrying amounts of assets (liabilities), and fair values of these
derivative instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Interest rate swaps: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
150,000 |
|
|
$ |
|
|
Carrying amount and fair value |
|
$ |
(1,231 |
) |
|
$ |
|
|
Foreign currency forward contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
157,018 |
|
|
$ |
121,430 |
|
Carrying amount and fair value |
|
$ |
(281 |
) |
|
$ |
(640 |
) |
Raw material commodity swaps: |
|
|
|
|
|
|
|
|
Notional amount (in metric tons of base metals) |
|
|
1,564 |
|
|
|
2,004 |
|
Carrying amount and fair value |
|
$ |
(1,047 |
) |
|
$ |
1,939 |
|
Precious metals forward contracts: |
|
|
|
|
|
|
|
|
Notional amount (in troy ounces) |
|
|
206,403 |
|
|
|
183,264 |
|
Carrying amount and fair value |
|
$ |
124 |
|
|
$ |
192 |
|
Marked-to-market natural gas forward purchase contracts: |
|
|
|
|
|
|
|
|
Notional amount (in MBTUs) |
|
|
|
|
|
|
120,000 |
|
Carrying amount and fair value |
|
$ |
|
|
|
$ |
(442 |
) |
8. Income Taxes
Income tax expense for the six months ended June 30, 2007, was $7.3 million or 40.4% of
pre-tax income compared with $9.2 million or 32.9% of pre-tax income in the first half of 2006.
The primary reasons for the increase in the effective tax rate were a change in the mix of income
by country and a relatively high level of current year earnings repatriated from outside the United
States.
On January 1, 2007, we adopted FIN 48. For further information regarding the adoption of FIN
48, refer to Note 2.
As of January 1, 2007, we had unrecognized tax benefits of $47.4 million, which, if
recognized, would have a favorable impact of $23.5 million on income tax expense. We have recorded
accrued interest and penalties related to unrecognized tax benefits totaling $3.7 million at
January 1, 2007. During the first half of 2007, there were no significant changes in the amount of
unrecognized tax benefits. We do not anticipate any significant increase or decrease in the amount
of unrecognized tax benefits within the next twelve months.
The Company conducts business globally, and, as a result, the U.S. parent company or one of
its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. In the normal course of business, the U.S. parent company and its
subsidiaries are subject to examination by taxing authorities. With few exceptions, we are not
subject to federal, state, local or non-U.S. income tax examinations for years before 2000.
18
9. 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 entered into a verbal agreement in June 2007 and a definitive written settlement
agreement in July 2007 with the direct purchasers in one of these class action civil lawsuits
related to alleged antitrust violations in the heat stabilizer industry. Although the Company
decided to bring this matter to a close through settlement, the Company did not admit to any of the
alleged violations and continues to deny any liability. The settlement agreement must be approved
by the United States District Court for the Eastern District of Pennsylvania. During the quarter
ended June 30, 2007, and as a result of the settlement agreement, the Company recorded a reserve of
approximately $6.3 million for a settlement payment of $5.5 million to the direct purchasers and a
settlement payment of approximately $0.8 million to PolyOne Corporation, which opted out of the
class of direct purchasers and entered into a separate settlement agreement with the Company. The
Company is vigorously defending the remaining two civil actions alleging antitrust violations in
the heat stabilizer industry. In addition, the Company believes that it has a claim for
indemnification by the former owner of the Companys heat stabilizer business for the defense of
these lawsuits and any resulting payments by the Company, including the payments of approximately
$6.3 million to the class of direct purchasers and PolyOne Corporation. The remaining two actions
are in their preliminary stages; therefore, 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 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 was based on alleged violations of Federal securities laws. We considered these
allegations to be unfounded and defended this action vigorously. In June 2007, the Court dismissed
the consolidated case without prejudice. While the plaintiffs may appeal this decision, we do not
expect the ultimate outcome of the case to have a material effect on the financial position,
results of operations or cash flows of the Company.
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. This appeal
is currently under consideration by the Sixth Circuit Court of Appeals; therefore, 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
19
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 minimis 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
February 2007, we discovered that some of the values shown on certificates of analysis
provided to customers by a plant in our Specialty Plastics segment were inaccurate. We are working
with the customers of the Specialty Plastics business to provide those customers with products that
meet their performance requirements and are accurately described on the corresponding certificates
of analysis. While it is possible some customers may not accept products with new specifications
or otherwise 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.
The Company had bank guarantees and standby letters of credit issued by financial
institutions, which totaled $17.0 million at June 30, 2007, and $20.8 million at December 31, 2006.
These agreements primarily relate to 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.
10. Retirement Benefits
Information concerning net periodic benefit costs of our U.S. pension plans (including our
unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life
insurance benefit plans for the three months ended June 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans |
|
|
Non-U.S. Pension Plans |
|
|
Other Benefit Plans |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Components of net periodic cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
315 |
|
|
$ |
2,586 |
|
|
$ |
1,633 |
|
|
$ |
1,792 |
|
|
$ |
152 |
|
|
$ |
191 |
|
Interest cost |
|
|
5,029 |
|
|
|
5,144 |
|
|
|
2,318 |
|
|
|
1,874 |
|
|
|
859 |
|
|
|
831 |
|
Expected return on plan assets |
|
|
(5,129 |
) |
|
|
(4,852 |
) |
|
|
(1,837 |
) |
|
|
(1,473 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
39 |
|
|
|
27 |
|
|
|
28 |
|
|
|
35 |
|
|
|
(293 |
) |
|
|
(158 |
) |
Net amortization and deferral |
|
|
1,473 |
|
|
|
1,686 |
|
|
|
145 |
|
|
|
233 |
|
|
|
|
|
|
|
|
|
Curtailment and settlement effects |
|
|
|
|
|
|
2,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,727 |
|
|
$ |
7,006 |
|
|
$ |
2,287 |
|
|
$ |
2,461 |
|
|
$ |
718 |
|
|
$ |
(1,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Information concerning net periodic benefit costs of our U.S. pension plans (including our
unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life
insurance benefit plans for the six months ended June 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans |
|
|
Non-U.S. Pension Plans |
|
|
Other Benefit Plans |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Components of net periodic cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
631 |
|
|
$ |
5,279 |
|
|
$ |
3,225 |
|
|
$ |
3,473 |
|
|
$ |
304 |
|
|
$ |
408 |
|
Interest cost |
|
|
10,057 |
|
|
|
10,449 |
|
|
|
4,578 |
|
|
|
3,665 |
|
|
|
1,718 |
|
|
|
1,674 |
|
Expected return on plan assets |
|
|
(10,252 |
) |
|
|
(9,762 |
) |
|
|
(3,628 |
) |
|
|
(2,879 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
79 |
|
|
|
45 |
|
|
|
55 |
|
|
|
72 |
|
|
|
(586 |
) |
|
|
(249 |
) |
Net amortization and deferral |
|
|
2,949 |
|
|
|
3,659 |
|
|
|
286 |
|
|
|
453 |
|
|
|
|
|
|
|
|
|
Curtailment and settlement effects |
|
|
250 |
|
|
|
2,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
3,714 |
|
|
$ |
12,085 |
|
|
$ |
4,516 |
|
|
$ |
4,784 |
|
|
$ |
1,436 |
|
|
$ |
(620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in net periodic benefit cost is due primarily to the following factors:
|
|
|
A curtailment recognized in the second quarter of 2006 of retirement benefit
accumulations for our largest defined benefit plan, which covers certain salaried and hourly
employees in the United States. The affected employees now receive benefits in the
Companys defined contribution plan that previously covered only U.S. salaried employees
hired after 2003. These changes did not affect current retirees or former employees. |
|
|
|
|
Settlements recognized in the second and third quarters of 2006 of certain
obligations in our U.S. unfunded nonqualified defined benefit retirement plan, related
primarily to a lump sum payment to the beneficiary of our deceased former Chief Executive
Officer. |
|
|
|
|
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, we recorded
a net curtailment loss of $0.3 million for pension benefits related to this closing. We
expect to also record a net curtailment gain for other benefits of $0.7 million in the third
quarter of 2007 and approximately $2.5 million in the fourth quarter of 2007, based on the
expected timing of employee terminations. |
|
|
|
|
A curtailment recognized in the second quarter of 2006 of 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. |
11. Stock-based Compensation
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, (FAS 123R) and therefore measure and recognize compensation expense
for all share-based payment awards made to employees and directors based on estimated fair values.
Deferred Stock Units
Under the 2006 Long-Term Incentive Plan (the Plan) we granted our directors 36,700 deferred
stock units during the six months ended June 30, 2007. Each deferred stock unit represents a
forfeitable share of Ferro common stock. At the end of the deferral period, the deferred stock
units will be converted into nonforfeitable shares of Ferro common stock based upon the recipients
continued service with the Company. The recipients of the deferred stock units are not entitled to
receive dividends during the deferral period. The deferred stock units granted in 2007 have a
deferral period of one year.
21
Because the deferred stock units may only be paid in shares of Ferro common stock, we treated
them as equity awards under the requirements of FAS 123R. We determined the fair value of the
deferred stock units based upon the closing stock price on the date of the grant adjusted downward
for the present value of the dividends that will not be paid to recipients of the deferred stock
units. The related compensation expense is recognized evenly over the deferral period.
Compensation Expense Information
The following table contains the total stock-based compensation expense recorded in selling,
general and administrative expense for the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Stock options |
|
$ |
1,573 |
|
|
$ |
1,499 |
|
Performance shares |
|
|
615 |
|
|
|
301 |
|
Deferred stock units |
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,496 |
|
|
$ |
1,800 |
|
|
|
|
|
|
|
|
Grant Information
The following table contains information regarding the stock-based compensation as of and for
the six month period ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
Aggregate Grant |
|
Remaining |
|
|
Number of |
|
Average Fair |
|
Date Fair Value |
|
Service or |
|
|
Shares or |
|
Value per |
|
of Shares or |
|
Performance |
|
|
Units Granted |
|
Share or Unit |
|
Units Granted |
|
Period |
|
|
|
|
|
|
|
|
|
|
(Dollars in |
|
(In years) |
|
|
|
|
|
|
|
|
|
|
thousands) |
|
|
Stock options |
|
|
517,000 |
|
$ |
6.24 |
|
$ |
3,225 |
|
|
3.6 |
|
Performance shares |
|
|
151,600 |
|
|
21.88 |
|
|
3,316 |
|
|
2.7 |
Deferred stock units |
|
|
36,700 |
|
|
21.50 |
|
|
789 |
|
|
0.7 |
12. 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
portions of our Performance Coatings segment and our Color and Glass Performance Materials segment.
A portion of our Italian manufacturing operations and administrative functions was 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 have reduced our workforce by approximately 60
employees and are evaluating further workforce reductions. We expect these actions to
significantly reduce the cost structure of our manufacturing operations. During the six months
ended June 30, 2007, we recorded charges of $1.6 million for our operations in Spain, Portugal and
France, primarily relating to registration taxes paid and expected employee termination benefits
for additional headcount reductions affecting 10 employees. In March 2007, we reached an agreement
with the Betriebsrat der Ferro GmbH (German Works Council) regarding employee termination benefits
for employees included in the decorative colors consolidation plan. The agreement provides that a
higher number of employees than previously anticipated will participate in a severance plan in
accordance with German laws and regulations. As a result, the timing of the related expense
recognition will occur ratably over future periods, and $1.3 million of the estimated amounts
22
previously accrued were reversed during the first quarter. In total, 42 employees were terminated
relating to the European consolidation during the first half of 2007.
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 150 employees. During the six months ended June 30, 2007, we
recorded $0.7 million of restructuring charges associated with termination benefits, and 62
employees were terminated.
In February 2007 and June 2007, we approved additional restructuring plans for our Specialty
Plastics and Polymer Additives segments. As a result, we recorded $1.0 million of gross
restructuring charges in the six months ended June 30, 2007, primarily associated with termination
benefits affecting 51 employees. We also reversed previously-accrued severance costs of $0.3
million due to changes in contractual benefits.
In May 2007, we initiated discussions with representatives of workers at our Rotterdam,
Netherlands, porcelain enamel manufacturing site regarding possible restructuring actions. No
actions have been taken, and no charges have been recorded at this time.
Restructuring charges for the six months ended June 30, 2007, also include $0.2 million in
accrual adjustments for other cost reduction and restructuring programs prior to 2006.
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, 2006 |
|
$ |
6,730 |
|
|
$ |
39 |
|
|
$ |
15,795 |
|
|
$ |
22,564 |
|
Gross charges |
|
|
3,075 |
|
|
|
478 |
|
|
|
|
|
|
|
3,553 |
|
Cash payments |
|
|
(4,135 |
) |
|
|
(452 |
) |
|
|
|
|
|
|
(4,587 |
) |
Reserve adjustments |
|
|
(1,690 |
) |
|
|
|
|
|
|
|
|
|
|
(1,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2007 |
|
$ |
3,980 |
|
|
$ |
65 |
|
|
$ |
15,795 |
|
|
$ |
19,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We expect to make cash payments to settle the remaining liabilities for employee termination
benefits and other costs primarily over the next twelve months, except where legal or contractual
restrictions prevent us from doing so.
13. Discontinued Operations
Discontinued operations relate to the Powder Coatings, Petroleum Additives and Specialty
Ceramics businesses that we sold in 2002 and 2003. There were no sales, income before taxes or
related tax expense, or cash flows from investing or financing activities from discontinued
operations in the six months ended June 30, 2007 or 2006. The loss on disposal of discontinued
operations includes ongoing legal and environmental costs directly related to discontinued
operations. The disposal of discontinued operations resulted in the following pre-tax losses and
related income tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Pre-tax losses |
|
$ |
95 |
|
|
$ |
542 |
|
|
$ |
351 |
|
|
$ |
743 |
|
Tax benefits |
|
|
37 |
|
|
|
201 |
|
|
|
137 |
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax losses |
|
$ |
58 |
|
|
$ |
341 |
|
|
$ |
214 |
|
|
$ |
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have continuing environmental remediation obligations that are related to these
divestitures, and we have accrued $3.3 million as of June 30, 2007, and $3.1 million as of December
31, 2006, for these matters.
23
14. Earnings per Share
Details of the calculation of basic and diluted earnings per share are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
Adjusted |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per share amounts) |
|
Basic earnings per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
4,281 |
|
|
$ |
9,854 |
|
|
$ |
10,074 |
|
|
$ |
17,796 |
|
Add back: Loss from discontinued operations |
|
|
58 |
|
|
|
341 |
|
|
|
214 |
|
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,339 |
|
|
$ |
10,195 |
|
|
$ |
10,288 |
|
|
$ |
18,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
42,906 |
|
|
|
42,448 |
|
|
|
42,807 |
|
|
|
42,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
4,281 |
|
|
$ |
9,854 |
|
|
$ |
10,074 |
|
|
$ |
17,796 |
|
Add back: Loss from discontinued operations |
|
|
58 |
|
|
|
341 |
|
|
|
214 |
|
|
|
467 |
|
Plus: Convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,339 |
|
|
$ |
10,195 |
|
|
$ |
10,288 |
|
|
$ |
18,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
42,906 |
|
|
|
42,448 |
|
|
|
42,807 |
|
|
|
42,393 |
|
Assumed conversion of convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed satisfaction of performance share conditions |
|
|
47 |
|
|
|
16 |
|
|
|
51 |
|
|
|
13 |
|
Assumed satisfaction of deferred stock unit conditions |
|
|
14 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
Assumed exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding |
|
|
42,967 |
|
|
|
42,464 |
|
|
|
42,868 |
|
|
|
42,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations |
|
$ |
0.10 |
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The convertible preferred shares and the stock options were anti-dilutive for the three and
six months ended June 30, 2007 and 2006, and thus not included in the diluted shares outstanding.
15. 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 for our
consolidated financial statements in the summary of significant accounting policies contained in
our Annual Report on Form 10-K for the year ended December 31, 2006. 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.
24
Net sales to external customers by segment are presented in the table below. Sales between
segments were not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Performance Coatings |
|
$ |
158,501 |
|
|
$ |
135,959 |
|
|
$ |
297,316 |
|
|
$ |
262,068 |
|
Electronic Materials |
|
|
108,823 |
|
|
|
123,167 |
|
|
|
221,767 |
|
|
|
230,533 |
|
Color and Glass Performance Materials |
|
|
109,920 |
|
|
|
102,987 |
|
|
|
215,620 |
|
|
|
197,599 |
|
Polymer Additives |
|
|
85,160 |
|
|
|
82,519 |
|
|
|
167,673 |
|
|
|
165,242 |
|
Specialty Plastics |
|
|
69,797 |
|
|
|
72,039 |
|
|
|
136,758 |
|
|
|
143,763 |
|
Other businesses |
|
|
21,457 |
|
|
|
21,821 |
|
|
|
44,229 |
|
|
|
44,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
553,658 |
|
|
$ |
538,492 |
|
|
$ |
1,083,363 |
|
|
$ |
1,043,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below are each segments income and reconciliations to income before taxes from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
Adjusted |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Performance Coatings |
|
$ |
10,815 |
|
|
$ |
11,319 |
|
|
$ |
21,498 |
|
|
$ |
20,410 |
|
Electronic Materials |
|
|
4,929 |
|
|
|
10,353 |
|
|
|
11,012 |
|
|
|
18,634 |
|
Color and Glass Performance Materials |
|
|
12,668 |
|
|
|
12,035 |
|
|
|
27,735 |
|
|
|
24,806 |
|
Polymer Additives |
|
|
4,053 |
|
|
|
3,307 |
|
|
|
7,159 |
|
|
|
7,851 |
|
Specialty Plastics |
|
|
4,236 |
|
|
|
4,059 |
|
|
|
7,375 |
|
|
|
9,850 |
|
Other businesses |
|
|
3,698 |
|
|
|
1,651 |
|
|
|
7,389 |
|
|
|
3,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income |
|
|
40,399 |
|
|
|
42,724 |
|
|
|
82,168 |
|
|
|
84,799 |
|
Unallocated expenses |
|
|
(17,258 |
) |
|
|
(10,553 |
) |
|
|
(31,004 |
) |
|
|
(23,898 |
) |
Restructuring charges |
|
|
(332 |
) |
|
|
|
|
|
|
(1,863 |
) |
|
|
|
|
Interest expense |
|
|
(14,286 |
) |
|
|
(18,087 |
) |
|
|
(31,732 |
) |
|
|
(31,337 |
) |
Interest earned |
|
|
189 |
|
|
|
1,026 |
|
|
|
1,154 |
|
|
|
1,770 |
|
Foreign currency transactions, net |
|
|
(423 |
) |
|
|
(219 |
) |
|
|
(934 |
) |
|
|
(540 |
) |
Miscellaneous (expense) income, net |
|
|
(883 |
) |
|
|
758 |
|
|
|
386 |
|
|
|
(2,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes from continuing
operations |
|
$ |
7,406 |
|
|
$ |
15,649 |
|
|
$ |
18,175 |
|
|
$ |
28,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We sell our products throughout the world, and we attribute sales to the country from which we
generate the customer invoice. We have detailed net sales by geographic region in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
United States |
|
$ |
239,612 |
|
|
$ |
257,858 |
|
|
$ |
478,018 |
|
|
$ |
506,529 |
|
International |
|
|
314,046 |
|
|
|
280,634 |
|
|
|
605,345 |
|
|
|
537,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
553,658 |
|
|
$ |
538,492 |
|
|
$ |
1,083,363 |
|
|
$ |
1,043,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Subsequent Events
The Company was previously named as a defendant in several lawsuits alleging civil damages and
requesting injunctive relief relating possible antitrust violations in the heat stabilizer
industry. We entered into a verbal agreement in June 2007
25
and a definitive written settlement
agreement in July 2007 with the direct purchasers in one of these class action civil lawsuits
related to alleged antitrust violations in the heat stabilizer industry. Although the Company
decided to bring this matter to a close through settlement, the Company did not admit any of the
alleged violations and continues to deny any liability. The settlement agreement must be approved
by the United States District Court for the Eastern District of Pennsylvania. During the quarter
ended June 30, 2007, and as a result of the settlement agreement, the Company recorded a reserve of
approximately $6.3 million for a settlement payment of $5.5 million to the direct purchasers and a
settlement payment of approximately $0.8 million to PolyOne Corporation, which opted out of the
class of direct purchasers and entered into a separate settlement agreement with the Company.
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net income for the three months ended June 30, 2007, declined to $4.5 million from $10.2
million for the three months ended June 30, 2006. Earnings declined primarily as a result of
increased manufacturing costs, higher selling, general and administrative expenses due to an
increased reserve related to litigation settlements, and increased miscellaneous expense, partially
offset by improvements in price and product mix and lower interest expenses.
During the second quarter, net sales increased by 2.8% compared with the prior years quarter
as a result of higher sales in the Performance Coatings, Color and Glass Performance Materials, and
Polymer Additives segments. Sales in Electronic Materials and Specialty Plastics declined compared
with the second quarter of 2006.
Costs for a number of raw materials used in the manufacture of our products, such as bismuth,
cobalt, nickel, and tallow, continued to contribute to increased manufacturing costs compared with
a year ago. In the aggregate, raw material costs increased during the quarter compared with the
second quarter of 2006.
During
the second quarter of 2007, our interest expense declined partially
due to lower borrowings, which resulted from the elimination
of cash deposits for precious metals. During the second quarter of
2006, interest expense was also higher due to the write-off of previously unamortized fees and
discounts related to our debentures that were repaid and our former revolving credit facility.
Outlook
General market conditions continue to be mixed. Markets in the United States that are related
to residential housing, automobiles and appliances are expected to continue a pattern of weak
demand that began in the second half of 2006. This market weakness is expected to affect sales
volume in our Specialty Plastics, Polymer Additives, Color and Glass Performance Materials, and
Performance Coatings segments. We have also seen weakness in demand from our customers in the
capacitor industry who are supplied by our Electronic Materials segment. The demand from capacitor
manufacturers is expected to recover during the second half of 2007 as these customers have
completed their inventory reductions, and normal demand patterns are expected to resume. Markets
outside the United States are generally strong, with particular strength continuing in Europe.
We expect to continue to record charges associated with our current and future restructuring
programs, particularly related to our rationalization of the manufacturing assets in our European
operations. Interest expense is expected to decline from prior year periods, primarily as a result
of lower deposit requirements on precious metals.
In February 2007, we discovered that some of the values shown on certificates of analysis
provided to customers in our Specialty Plastics business were inaccurate. The faulty procedures
and practices that resulted in the inaccurate values discovered at our Evansville, Indiana,
manufacturing facility, have been investigated and corrected. However, the corrective actions will
require us to incur additional raw material and manufacturing costs of approximately $1 million per
quarter through 2007, and we will have limited ability to recover these costs through increased
prices.
27
Results of Operations
Comparison of the three months ended June 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands, |
|
|
|
|
|
|
|
except per share amounts) |
|
|
|
|
|
Net sales |
|
$ |
553,658 |
|
|
$ |
538,492 |
|
|
$ |
15,166 |
|
|
|
2.8 |
% |
Cost of sales |
|
|
446,131 |
|
|
|
427,586 |
|
|
|
18,545 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
107,527 |
|
|
|
110,906 |
|
|
|
(3,379 |
) |
|
|
(3.0 |
)% |
Gross profit percentage |
|
|
19.4 |
% |
|
|
20.6 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
84,386 |
|
|
|
78,735 |
|
|
|
5,651 |
|
|
|
7.2 |
% |
Restructuring charges |
|
|
332 |
|
|
|
|
|
|
|
332 |
|
|
|
|
|
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
14,286 |
|
|
|
18,087 |
|
|
|
(3,801 |
) |
|
|
(21.0 |
)% |
Interest earned |
|
|
(189 |
) |
|
|
(1,026 |
) |
|
|
837 |
|
|
|
(81.6 |
)% |
Foreign currency transactions, net |
|
|
423 |
|
|
|
219 |
|
|
|
204 |
|
|
|
93.2 |
% |
Miscellaneous expense (income), net |
|
|
883 |
|
|
|
(758 |
) |
|
|
1,641 |
|
|
|
(216.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
7,406 |
|
|
|
15,649 |
|
|
|
(8,243 |
) |
|
|
(52.7 |
)% |
Income tax expense |
|
|
2,808 |
|
|
|
5,137 |
|
|
|
(2,329 |
) |
|
|
(45.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,598 |
|
|
|
10,512 |
|
|
|
(5,914 |
) |
|
|
(56.3 |
)% |
Loss on disposal of discontinued operations, net of tax |
|
|
58 |
|
|
|
341 |
|
|
|
(283 |
) |
|
|
(83.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,540 |
|
|
$ |
10,171 |
|
|
$ |
(5,631 |
) |
|
|
(55.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.10 |
|
|
$ |
0.23 |
|
|
$ |
(0.13 |
) |
|
|
(56.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the quarter ended June 30, 2007, increased by 2.8% from the same quarter in 2006
to $553.7 million, the highest quarterly sales we have ever recorded. The sales increase was the
result of higher sales in our Performance Coatings, Color and Glass Performance Materials, and
Polymer Additives segments. Partially offsetting this growth were sales declines in the Electronic
Materials and Specialty Plastics segments. The primary driver of the sales increase was favorable
changes in foreign exchange rates, while improvements in price and product mix and reduced volume
were largely offsetting. Sales growth was strongest in Europe, and sales also grew in Asia and
Latin America. Sales declined in the United States, largely as a result of lower shipments from
our North American manufacturing sites for electronic materials products.
Gross profit declined in the second quarter of 2007 compared with the second quarter of 2006.
Gross profit was reduced by $1.9 million in the second quarter of 2007 as a result of charges
associated with our manufacturing rationalization programs. During the quarter, we temporarily
interrupted production at a manufacturing site in South Plainfield, New Jersey, in order to address
operational and safety concerns. This site has resumed operations, but the interruption of
manufacturing resulted in unrecovered manufacturing costs and other added costs during the quarter.
In addition, higher precious metal prices reduced our gross margin, as a percentage of sales,
because increases in precious metal prices are generally passed through to customers with minimal
gross margin contribution.
Selling, general and administrative (SG&A) expenses increased by $5.5 million during the
quarter, primarily driven by a reserve established for settlement agreements with plaintiffs in
civil lawsuits related to alleged antitrust violations in the heat
stabilizer industry. (See Note 9 to the condensed consolidated
financial statements.) The
reserve increased SG&A expenses by $6.3 million for the quarter. Additional charges of $1.5
million, primarily related to legal expenses connected with manufacturing issues at our Evansville,
Indiana, plastics plant and executive severance expenses, were recorded during the second quarter
of 2007. Charges of $1.6 million were recorded in the second quarter of 2006, mainly related to
accounting investigation and restatement activities. As a percentage of sales, SG&A expense
increased from 14.6% in 2006 to 15.2% in 2007.
28
Restructuring charges of $0.3 million were recorded in the second quarter of 2007, primarily
related to our manufacturing rationalization activities in our Performance Coatings and Color and
Glass Performance Materials segments in Europe and our Electronic Materials segment in the United
States. There were no restructuring charges recorded in the second quarter of 2006.
Interest expense was lower in the three months ended June 30, 2007, compared with the second
quarter of 2006. Interest expense in the second quarter of 2006 included a $2.5 million write-off
of unamortized fees and discounts associated with our debentures that were repaid in 2006 and
previously unamortized fees associated with our former revolving credit facility. The 2007 second
quarter interest expense also declined as a result of lower borrowings, compared with the second
quarter of 2006. As a result of renegotiated agreements, cash deposits for precious metals were
eliminated during the first half of 2007. Because the reduction in the deposits occurred primarily
at the end of the first quarter, the full benefit of the reduction on our interest expense was not
realized until the current quarter. In addition, we renegotiated our term loan and revolving
credit agreements during the quarter, which resulted in lower interest rates during a portion of
the quarter. Because these new agreements were effective for only a portion of the second quarter,
the full benefit of the lower interest rates was not realized in the quarter ended June 30, 2007.
Interest earned declined in the second quarter of 2007 compared with the prior year period as
a result of the elimination of cash deposits for precious metals.
Miscellaneous expense for the second quarter of 2007 was $0.9 million, compared with
miscellaneous income of $0.8 million in the second quarter of 2006. The primary driver of the
second quarter change in miscellaneous expense (income) was a decline of $0.7 million in gains on
property disposals compared with the second quarter of 2006.
Income tax expense was 37.9% of pre-tax income for the three months ended June 30, 2007, and
32.9% of pre-tax income for the three months ended June 30, 2006. The primary reasons for the
change in the effective tax rate are a change in the mix of income by country and a relatively high
level of current year earnings repatriated from outside the United States.
There were no new businesses included in discontinued operations in the quarter ended June 30,
2007. We recorded a loss of $0.1 million, net of taxes, in the second quarter related to
post-closing matters associated with businesses we sold in previous years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Segment Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
158,501 |
|
|
$ |
135,959 |
|
|
$ |
22,542 |
|
|
|
16.6 |
% |
Electronic Materials |
|
|
108,823 |
|
|
|
123,167 |
|
|
|
(14,344 |
) |
|
|
(11.6 |
)% |
Color and Glass Performance Materials |
|
|
109,920 |
|
|
|
102,987 |
|
|
|
6,933 |
|
|
|
6.7 |
% |
Polymer Additives |
|
|
85,160 |
|
|
|
82,519 |
|
|
|
2,641 |
|
|
|
3.2 |
% |
Specialty Plastics |
|
|
69,797 |
|
|
|
72,039 |
|
|
|
(2,242 |
) |
|
|
(3.1 |
)% |
Other |
|
|
21,457 |
|
|
|
21,821 |
|
|
|
(364 |
) |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
553,658 |
|
|
$ |
538,492 |
|
|
$ |
15,166 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
10,815 |
|
|
$ |
11,319 |
|
|
$ |
(504 |
) |
|
|
(4.5 |
)% |
Electronic Materials |
|
|
4,929 |
|
|
|
10,353 |
|
|
|
(5,424 |
) |
|
|
(52.4 |
)% |
Color and Glass Performance Materials |
|
|
12,668 |
|
|
|
12,035 |
|
|
|
633 |
|
|
|
5.3 |
% |
Polymer Additives |
|
|
4,053 |
|
|
|
3,307 |
|
|
|
746 |
|
|
|
22.6 |
% |
Specialty Plastics |
|
|
4,236 |
|
|
|
4,059 |
|
|
|
177 |
|
|
|
4.4 |
% |
Other |
|
|
3,698 |
|
|
|
1,651 |
|
|
|
2,047 |
|
|
|
124.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40,399 |
|
|
$ |
42,724 |
|
|
$ |
(2,325 |
) |
|
|
(5.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Performance Coatings Segment Results. Sales increased in Performance Coatings due to
increased sales of both tile coatings and porcelain enamel products. The sales increase was driven
by improved price and product mix, as well as favorable changes in foreign exchange rates.
Increased sales volume also contributed modestly to the sales growth within the segment.
Regionally, sales growth was strongest in Europe and Asia. In North America, sales grew despite
generally soft demand from appliance and residential construction applications. Operating income
declined during the second quarter of 2007 primarily as a result of the combination of increased
raw material costs, manufacturing costs and operating expense increases that were not fully
recovered through improved pricing.
Electronic Materials Segment Results. Sales declined in the Electronic Materials segment
primarily as a result of weak demand for our dielectric materials and silver powders. The
inventory reductions by customers who purchase our dielectric materials for use in the manufacture
of capacitors, which began in the first quarter of 2007, continued to depress sales in the second
quarter. Demand for silver powders was reduced due to inventory reductions at manufacturers of
plasma display applications. Growth in our sales of conductive pastes to customers who manufacture
solar cells partially offset the sales decline in dielectric materials and silver powders. Product
sales declined in the United States and Asia. Increased sales of products from Europe partially
offset this decline. Operating income declined as a result of the impact of lower sales and a
temporary interruption of manufacturing activities at our South Plainfield, New Jersey,
manufacturing site. Operations at this site, which were suspended in April to address operational
issues and safety concerns, have resumed.
Color and Glass Performance Materials Segment Results. Sales increased in Color and Glass
Performance Materials as a result of a combination of favorable exchange rate changes and improved
sales volume, with improved prices and product mix contributing to a lesser degree. Sales growth
was realized in Europe, North America, Asia and Latin America. Operating income improved primarily
as a result of increased pricing, partially offset by increased raw materials costs.
Polymer Additives Segment Results. Sales increased in Polymer Additives compared with the
second quarter of 2006. Sales increased in the United States, which accounts for the majority of
the segments sales, and in Europe. Improved price and product mix was the primary driver of the
sales increase, partially offset by lower volume. During the quarter, operating income improved as
a result of increased product pricing and lower selling, general and administrative expenses,
partially offset by increases in raw material costs.
Specialty Plastics Segment Results. Sales declined in Specialty Plastics during the second
quarter of 2007, primarily as a result of lower volume and a less favorable price and product mix,
partially offset by favorable exchange rate changes. Sales were lower in the United States as a
result of weaker demand from customers who manufacture products used in residential construction,
appliance and automotive applications. Sales in Europe increased and were able to offset a portion
of the lower U.S. sales. Sales of our plastic colorants increased, while sales of filled and
reinforced plastics, gel coats and other colors declined. Operating income increased as a result
of the effects of improved pricing and lower selling, general and administrative expenses,
partially offset by higher raw material costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Geographic Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
239,612 |
|
|
$ |
257,858 |
|
|
$ |
(18,246 |
) |
|
|
(7.1 |
)% |
International |
|
|
314,046 |
|
|
|
280,634 |
|
|
|
33,412 |
|
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
553,658 |
|
|
$ |
538,492 |
|
|
$ |
15,166 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales declined in the United States, driven by lower sales in the Electronic Materials and
Specialty Plastics segments. These declines were partially offset by sales increases in
Performance Coatings, Polymer Additives, and Color and Glass Performance Materials segments.
International sales increased the most in Europe, where sales increased as a result of favorable
changes in exchange rates, pricing and product mix, and volume. Additional increases were recorded
in the Asian and Latin American regions, driven primarily by pricing and product mix changes. The
international sales increase was driven primarily by sales growth in the Performance Coatings,
Color and Glass Performance Materials, Polymer Additives, Specialty Plastics and Electronic
Materials segments.
30
Comparison of the six months ended June 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands, |
|
|
|
|
|
|
|
except per share amounts) |
|
|
|
|
|
Net sales |
|
$ |
1,083,363 |
|
|
$ |
1,043,645 |
|
|
$ |
39,718 |
|
|
|
3.8 |
% |
Cost of sales |
|
|
869,056 |
|
|
|
824,905 |
|
|
|
44,151 |
|
|
|
5.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
214,307 |
|
|
|
218,740 |
|
|
|
(4,433 |
) |
|
|
(2.0 |
)% |
Gross profit percentage |
|
|
19.8 |
% |
|
|
21.0 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
163,143 |
|
|
|
157,839 |
|
|
|
5,304 |
|
|
|
3.4 |
% |
Restructuring charges |
|
|
1,863 |
|
|
|
|
|
|
|
1,863 |
|
|
|
|
|
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
31,732 |
|
|
|
31,337 |
|
|
|
395 |
|
|
|
1.3 |
% |
Interest earned |
|
|
(1,154 |
) |
|
|
(1,770 |
) |
|
|
616 |
|
|
|
(34.8 |
)% |
Foreign currency transactions, net |
|
|
934 |
|
|
|
540 |
|
|
|
394 |
|
|
|
73.0 |
% |
Miscellaneous (income) expense, net |
|
|
(386 |
) |
|
|
2,642 |
|
|
|
(3,028 |
) |
|
|
(114.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
18,175 |
|
|
|
28,152 |
|
|
|
(9,977 |
) |
|
|
(35.4 |
)% |
Income tax expense |
|
|
7,342 |
|
|
|
9,244 |
|
|
|
(1,902 |
) |
|
|
(20.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
10,833 |
|
|
|
18,908 |
|
|
|
(8,075 |
) |
|
|
(42.7 |
)% |
Loss on disposal of discontinued
operations, net of tax |
|
|
214 |
|
|
|
467 |
|
|
|
(253 |
) |
|
|
(54.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,619 |
|
|
$ |
18,441 |
|
|
$ |
(7,822 |
) |
|
|
(42.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.24 |
|
|
$ |
0.42 |
|
|
$ |
(0.18 |
) |
|
|
(42.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the six months ended June 30, 2007, increased by 3.8% from the same period in
2006. The sales increase was the result of higher sales in our Performance Coatings, Color and
Glass Performance Materials, and Polymer Additives segments. Sales declined in Electronic
Materials and Specialty Plastics. Favorable foreign currency exchange rates, higher prices, and
improved product mix were primarily responsible for the sales increase. These positive factors were
partially offset by lower volume. Sales growth was strongest in Europe, and sales also grew in
Asia and Latin America. Sales declined in the United States, largely as a result of weakness in
demand from the electronics, residential housing, appliance, and automotive markets.
Gross profit declined during the first six months of 2007 compared with the first six months
of 2006. Gross profit was reduced by $4.1 million in the first half of 2007 as a result of charges
associated with our manufacturing rationalization programs. Gross profit was also negatively
impacted by the interruption of manufacturing operations at our South Plainfield, New Jersey,
manufacturing location. Operations at the plant were temporarily suspended to address operational
issues and safety concerns. In addition, higher precious metal prices reduced our gross margin,
as a percentage of sales, because increases in precious metal prices are generally passed through
to customers with minimal gross margin contribution.
Selling, general and administrative (SG&A) expenses increased by $5.2 million during the first
half of 2007, primarily driven by a reserve established for settlement agreements with plaintiffs
in civil lawsuits related to alleged antitrust violations in the heat stabilizer industry. (See Note 9 to the condensed consolidated
financial statements.) The
reserve increased SG&A expenses in the first half of 2007 by $6.3 million. Additional charges of
$2.0 million, primarily related to legal expenses connected with manufacturing issues at our
Evansville, Indiana, plastics plant, business divestiture activities and executive severance
expenses, were included in SG&A expense during the first six months of 2007. Charges of $6.3
million were included in SG&A expense in the first six months of 2006, mainly related to accounting
investigation and restatement activities. As a percentage of sales, SG&A expense declined to 15.0%
in the first six months of 2007 from 15.1% in 2006.
Restructuring charges of $1.9 million were recorded in the first six months of 2007, primarily
related to our manufacturing rationalization activities in our Performance Coatings and Color and
Glass Performance Materials segments in
31
Europe and our Electronic Materials segment in the United
States. There were no restructuring charges recorded in the first half of 2006.
Interest expense was slightly higher in the six months ended June 30, 2007, primarily as a
result of higher average borrowing levels and higher interest rates on our debt in the first
quarter. Interest expense declined from the first quarter to the second quarter of 2007 as a
result of declining debt levels. The declining debt levels were primarily the result of
renegotiation of our consignment arrangements for precious metals and elimination of requirements
for cash deposits. During the first half of 2007, interest expense included a $2.0 million
write-off of unamortized fees associated with the cancelled portion of our term loan arrangements.
During the first half of 2006, interest expense included a $2.5 million write-off of fees and
discounts from our debentures that were repaid in 2006 and previously unamortized fees related to
our former revolving credit facility.
Miscellaneous income for the six months ended June 30, 2007, was $0.4 million compared with
miscellaneous expense of $2.6 million in the first six months of 2006. The change in miscellaneous
income (expense) was primarily due to a gain of $0.4 million associated with marked-to-market
supply contracts in the first half of 2007 compared with a loss of $3.2 million in the first half
of 2006. In addition, gains on the disposal of property increased by $1.4 million in the first
half of 2007 compared with the first half of 2006.
Income tax expense was 40.4% of pre-tax income for the six months ended June 30, 2007, and
32.9% of pre-tax income for the six months ended June 30, 2006. The primary reasons for the
increase in the effective tax rate were a change in the mix of income by country and a relatively
high level of current year earnings repatriated from outside the United States.
There were no new businesses included in discontinued operations in the first six months of
2007. We recorded a loss of $0.2 million, net of taxes, in the first half related to post-closing
matters associated with businesses we sold in previous years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Segment Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
297,316 |
|
|
$ |
262,068 |
|
|
$ |
35,248 |
|
|
|
13.4 |
% |
Electronic Materials |
|
|
221,767 |
|
|
|
230,533 |
|
|
|
(8,766 |
) |
|
|
(3.8 |
)% |
Color and Glass Performance Materials |
|
|
215,620 |
|
|
|
197,599 |
|
|
|
18,021 |
|
|
|
9.1 |
% |
Polymer Additives |
|
|
167,673 |
|
|
|
165,242 |
|
|
|
2,431 |
|
|
|
1.5 |
% |
Specialty Plastics |
|
|
136,758 |
|
|
|
143,763 |
|
|
|
(7,005 |
) |
|
|
(4.9 |
)% |
Other |
|
|
44,229 |
|
|
|
44,440 |
|
|
|
(211 |
) |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,083,363 |
|
|
$ |
1,043,645 |
|
|
$ |
39,718 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
21,498 |
|
|
$ |
20,410 |
|
|
$ |
1,088 |
|
|
|
5.3 |
% |
Electronic Materials |
|
|
11,012 |
|
|
|
18,634 |
|
|
|
(7,622 |
) |
|
|
(40.9 |
)% |
Color and Glass Performance Materials |
|
|
27,735 |
|
|
|
24,806 |
|
|
|
2,929 |
|
|
|
11.8 |
% |
Polymer Additives |
|
|
7,159 |
|
|
|
7,851 |
|
|
|
(692 |
) |
|
|
(8.8 |
)% |
Specialty Plastics |
|
|
7,375 |
|
|
|
9,850 |
|
|
|
(2,475 |
) |
|
|
(25.1 |
)% |
Other |
|
|
7,389 |
|
|
|
3,248 |
|
|
|
4,141 |
|
|
|
127.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,168 |
|
|
$ |
84,799 |
|
|
$ |
(2,631 |
) |
|
|
(3.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. Sales increased in Performance Coatings due to
increased sales of both tile coatings and porcelain enamel products. The sales increases were
driven by improved price and product mix, as well as favorable changes in foreign exchange rates.
Regionally, sales growth was strongest outside the United States, with growth in Europe, Asia and
Latin America. In North America, growth was slower as a result of weaker demand from appliance and
32
residential construction applications. Operating income increased during the first six months of
2007 primarily as a result of increased pricing, partially offset by higher raw material and
manufacturing costs.
Electronic Materials Segment Results. Sales declines in the Electronic Materials segment were
primarily driven by weaker demand for dielectric materials and silver powders, as customers began
reducing inventory during the first quarter and continued weak ordering patterns during the second
quarter of 2007. Demand for conductive pastes used in solar cells continued to be strong, but this
only partially offset the declines in sales of dielectric materials and silver powders. The sales
decline was greatest in products sold from the United States. Sales of products from Asia
declined, while sales from Europe increased. Operating income declined as a result of the impact
of lower sales and as a result of a temporary interruption of manufacturing activities at our South
Plainfield, New Jersey, manufacturing site. Operations at this site, which were suspended in April
to address operational issues and safety concerns, have resumed.
Color and Glass Performance Materials Segment Results. Sales increased in Color and Glass
Performance Materials as a result of a combination of favorable exchange rate changes, improved
volume, improved pricing and favorable product mix. Europe, Latin America and Asia contributed to
the sales increase, while sales in the United States declined slightly. Operating income improved
primarily as a result of increased pricing, partially offset by increased raw materials costs.
Polymer Additives Segment Results. Sales increased in Polymer Additives compared with the
first six months of 2006. Sales in Europe and the United States increased, but sales growth in the
United States was constrained by weak demand from residential housing and automotive applications.
Sales growth was driven primarily from price increases, partially offset by volume declines.
During the first six months of 2007, operating income declined as a result of lower volume and
higher raw material costs, which were partially offset by higher prices, lower manufacturing costs
and lower selling, general and administrative expenses. During the period, increases in product
prices more than offset increases in raw material costs, but were not sufficient to fully offset
the effects of volume declines.
Specialty Plastics Segment Results. Sales declined in Specialty Plastics during the first
half of 2007, primarily as a result of weak demand from U.S. customers who manufacture products
used in residential construction, appliance and automotive applications. Sales and manufacturing
volume declined in our filled and reinforced plastics products, as well as in our liquid coatings
and dispersions products. This decline was partially offset by increased sales of our plastic
colorant products. Operating income declined as a result of the effects of lower volume and higher
raw material costs which, together, were greater than the operating income benefits from price
increases and lower selling, general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Geographic Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
478,018 |
|
|
$ |
506,529 |
|
|
$ |
(28,511 |
) |
|
|
(5.6 |
)% |
International |
|
|
605,345 |
|
|
|
537,116 |
|
|
|
68,229 |
|
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,083,363 |
|
|
$ |
1,043,645 |
|
|
$ |
39,718 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales declined in the United States, primarily driven by lower sales in the Electronic Materials
and Specialty Plastics segments. These declines were partially offset by sales increases in
Performance Coatings and, to a lesser extent, in Polymer Additives. International sales increased
in all regions, with the greatest growth in Europe and smaller gains in Asia and Latin America.
The international sales increase was driven primarily by sales growth in the Performance Coatings,
Color and Glass Performance Materials, Specialty Plastics, Polymer Additives, and Electronic
Materials segments.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
69,817 |
|
|
$ |
18,572 |
|
|
$ |
51,245 |
|
|
|
275.9 |
% |
Net cash used for investing activities |
|
|
(28,098 |
) |
|
|
(40,161 |
) |
|
|
12,063 |
|
|
|
(30.0 |
)% |
Net cash (used for) provided by financing activities |
|
|
(41,248 |
) |
|
|
20,117 |
|
|
|
(61,365 |
) |
|
|
(305.0 |
)% |
Effect of exchange rate changes on cash |
|
|
339 |
|
|
|
(432 |
) |
|
|
771 |
|
|
|
(178.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
810 |
|
|
$ |
(1,904 |
) |
|
$ |
2,714 |
|
|
|
(142.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities improved by $51.2 million in the first half of 2007 over
the same period in 2006. Changes in deposits under our precious metals consignment program
provided $128.1 million of improvement. In the first half of 2007, we received $70.1 million of
these deposits from financial institutions, while in the first half of 2006, we placed $58.0
million on deposit under this program. This improvement was offset by $81.9 million from changes
in the balance of the note receivable from FFC related to our asset securitization program.
Cash used for investing activities decreased by $12.1 million. In June 2006, the Company
invested an additional $25.0 million in FFC in connection with the June 2006 amendment of the asset
securitization agreement.
Cash flows used in financing activities increased by $61.4 million, of which $80.0 million
related to changes in borrowing activity. In the first half of 2007, we used cash to reduce our
debt by $33.0 million. In the first six months of 2006, we borrowed $47.0 million in order to
finance the deposits for precious metals noted above and other working capital needs such as
accounts receivable and inventories.
Capital Resources and Liquidity
Credit Rating
In May 2007, Moodys Investor Services, Inc. (Moodys) reassigned a senior credit rating to
the Company after withdrawing its rating in March 2006 due to delays in the filing of financial
statements for 2005 and quarterly statements for 2004 through 2006. At June 30, 2007, the
Companys senior credit rating was B1, with a positive outlook, by Moodys and B+, with a stable
outlook, by Standard & Poors Rating Group (S&P).
Revolving Credit and Term Loan Facility
In 2006, we entered into an agreement with a group of lenders for a $700 million credit
facility. At that time, the credit facility consisted of a five-year, $250 million multi-currency
senior revolving credit facility and a six-year, $450 million senior term loan facility.
In June 2007, we amended the credit facility (the Amended Credit Facility) and increased the
size of the revolving credit facility by $50 million to $300 million. At June 30, 2007, we had
borrowed $30.6 million of the revolving credit facility and had $260.7 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.
In January 2007, we borrowed $55 million of our term loan facility and used the proceeds to
reduce borrowings under our 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. In the second quarter of 2007, we began making periodic principal payments on the term
loans. At June 30, 2007, we had borrowed $303.5 million in term loans. The Company is required to
make quarterly principal payments of $0.8 million from July 2007 to July 2011 and $72.6 million
from October 2011 to April 2012 and a final payment of $72.6 million in June 2012.
At June 30, 2007, we were in compliance with the covenants of the Amended Credit Facility.
34
Senior Notes and Debentures
At June 30, 2007, we had $200.0 million principal amount outstanding under senior notes, which
are due in 2009, and we were in compliance with the covenants under their indentures.
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, which expires in
2009, 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 (the 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. At June 30, 2007, FFC had received
net proceeds of $61.3 million for outstanding receivables, and the balance of Ferros note
receivable from FFC was $30.2 million.
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 $61.2 million at June 30, 2007. The amount of outstanding receivables sold under the
international programs was $39.3 million at June 30, 2007.
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. 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. These requirements were
eliminated during the first half of 2007. At June 30, 2007, we had on hand $113.7 million of
precious metals owned by financial institutions, measured at fair value.
Bank Guarantees and Standby Letters of Credit. At June 30, 2007, the Company had bank
guarantees and standby letters of credit issued by financial institutions, which totaled $17.0
million. These agreements primarily relate to Ferros insurance programs, potential environmental
remediation liabilities, and foreign tax payments.
Other Financing Arrangements
In June 2007, we entered into two international variable-rate credit facilities secured by specific accounts receivable. At June 30, 2007, the commitments under these facilities, which can be withdrawn at any time, totaled $22.3 million, and the borrowings totaled $14.9 million.
In addition, the Company maintains other lines of credit to provide global flexibility for the
Companys liquidity requirements. Most of these facilities are uncommitted lines for the Companys
international operations.
Uncertain Tax Positions
Adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, (FIN 48) as of January 1, 2007, did not materially impact the
Companys liquidity. We do not have significant assets or liabilities related to uncertain tax
positions that are expected to be settled in the next twelve months. However, at June 30, 2007, we
had recognized approximately $23.5 million of long-term tax assets and $35.0 million of long-term
tax liabilities, which could be settled more than one year in the future.
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. However, the liquidity available under our
revolving credit agreement, along with liquidity from other financing arrangements, available
cash flows from operations, and asset sales, should allow the Company to meet its funding
requirements and other commitments.
35
Critical Accounting Policies
A detailed description of our critical accounting policies is contained in Critical
Accounting Policies within Item 7 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2006.
As described below and elsewhere in this quarterly report, we changed our method of valuing
selected inventories. Because of this change, the description of the accounting policy regarding
our method of valuing our inventories contained in our Annual Report on Form 10-K for the year
ended December 31, 2006, should now state the following:
Inventories
We value inventory at the lower of cost or market, with cost determined utilizing the
first-in, first-out (FIFO) method.
We periodically evaluate the net realizable value of inventories based primarily upon
their age, but also upon assumptions of future usage in production, customer demand and market
conditions. Inventories have been reduced to the lower of cost or realizable value by
allowances for slow moving or obsolete goods. If actual circumstances are less favorable than
those projected by management in its evaluation of the net realizable value of inventories,
additional write-downs may be required. Slow moving, excess or obsolete materials are
specifically identified and may be physically separated from other materials, and we rework or
dispose of these materials as time and manpower permit.
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.
Beginning in June 2007, we hedge a portion of our exposure to interest rate changes by
entering into interest rate swap agreements. As a result, the description of the accounting policy
regarding derivative financial instruments should include the following paragraph:
Our exposure to interest rate changes arises from our debt agreements with variable
market interest rates. We hedge a portion of this exposure by entering into interest rate
swap agreements. We mark these swaps to fair value and recognize the resulting gains or
losses as other comprehensive income. These swaps are settled quarterly in cash, and the net
interest paid or received is effectively recognized as interest expense.
Newly Adopted Accounting Methods
On January 1, 2007, we elected to change our costing method for our inventories not already
costed under the lower of cost or market using the FIFO method, while in prior years, these
inventories were costed under the lower of cost or market using the last-in, first-out (LIFO)
method. The percentage of inventories accounted for under the LIFO method for U.S. inventories and
consolidated inventories was 13.8% and 6.2%, respectively, at December 31, 2006. We adopted the
new and preferable method of accounting for these inventories because the FIFO method conforms the
inventory costing methods to a single method for all of our inventories and improves comparability
with our industry peers. The FIFO method also better reflects current acquisition cost of those
inventories on our consolidated balance sheets and enhances the matching of future revenues with
cost of sales. All prior periods presented have been adjusted to reflect the new method
retrospectively. The newly adopted accounting pronouncement increased our inventory balance by
$14.7 million and $13.7 million and increased retained earnings, net of income tax effects, by $9.1
million and $8.5 million as of January 1, 2007 and 2006, respectively. Because of this change in
accounting principle, inventory values at future balance sheet dates should reflect the most
current prices we pay for the underlying inventory quantities.
On January 1, 2007, we also changed our accounting method of accruing for major planned
overhauls. FASB Staff Position No. AUG AIR-1, Accounting for Planned Maintenance Activities,
prohibits our prior policy of accruing for major planned overhauls in advance of when the actual
costs are incurred. Under our new policy, the costs of major planned overhauls are expensed when
incurred. All prior periods presented have been adjusted to reflect the new method
retrospectively. Adoption of this accounting pronouncement decreased our accrued expenses and
other current liabilities by
36
$2.1 million and $2.2 million and increased retained earnings, net of
income tax effects, by $1.4 million and $1.5 million as of January 1, 2007 and 2006, respectively.
On January 1, 2007, we adopted FIN 48, which clarifies what criteria must be met prior to
recognition of the financial statement benefit of a position taken or expected to be taken in a tax
return. This interpretation also provides guidance on de-recognition of income tax assets and
liabilities, classification of current and deferred income tax assets and liabilities, accounting
for interest and penalties associated with tax positions, accounting for income taxes in interim
periods, and income tax disclosures. The adoption of this interpretation decreased the opening
balance of retained earnings by $11.9 million as of January 1, 2007. We have elected to continue
to report interest and penalties as income tax expense.
On January 1, 2007, we also adopted Statement of Financial Accounting Standards 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 a servicing asset or liability
each time it undertakes an obligation to service a financial asset by entering into a servicing
contract. We provide collection agent services for our U.S. and certain international receivable
sales programs. The collection agent fees received by the Company approximate adequate
compensation. Therefore, the adoption of FAS No. 156 did not have an affect on our consolidated
financial statements.
Newly Issued Accounting Pronouncement
In June 2007, the Emerging Issues Task Force of the FASB reached a consensus on Issue No.
06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards, (EITF No.
06-11). EITF No. 06-11 requires that the income tax benefit from dividends that are charged to
retained earnings and paid to employees for nonvested equity shares be recognized as an increase to
paid-in capital. Currently, we recognize this income tax benefit as an increase to retained
earnings. EITF No. 06-11 is to be applied prospectively in fiscal years beginning after December
15, 2007. Beginning in 2008, we will report this income tax benefit as an increase to paid-in
capital.
Risk Factors
Certain statements contained here and in future filings with the SEC reflect the Companys
expectations with respect to future performance and constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are subject to a variety of
uncertainties, unknown risks and other factors concerning the Companys operations and business
environment, which are difficult to predict and are beyond the control of the Company. A detailed
description of such uncertainties, risks and other factors is contained under the heading Risk
Factors of Item 1A in the Companys Annual Report on Form 10-K for the year ended December 31,
2006.
37
Item 3. 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. To reduce our exposure to interest rate changes on
variable-rate debt, we entered into interest rate swap agreements. These swaps effectively convert
a portion of our variable-rate debt to a fixed rate. Our overall objective is to limit variability
in earnings, cash flows and overall borrowing costs caused by changes in interest rates, while
preserving operating flexibility.
We operate internationally and enter into transactions denominated in foreign currencies.
These transactions expose us to gains and losses arising from exchange rate movements between the
dates foreign currencies are recorded and the dates they are settled. We manage this risk by
entering into forward currency contracts that 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 through product reformulations,
price increases, and other productivity improvements. 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 gas 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 $7.4
million at June 30, 2007.
38
The notional amounts, carrying amounts of assets (liabilities), and fair values associated
with our exposure to these market risks and sensitivity analyses about potential gains (losses)
resulting from hypothetical changes in market rates are presented below:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Variable-rate debt and utilization of receivable sales programs: |
|
|
|
|
|
|
|
|
Change in annual interest expense from 1% change in interest rates |
|
$ |
3,031 |
|
|
$ |
4,797 |
|
Fixed-rate debt: |
|
|
|
|
|
|
|
|
Carrying amount |
|
$ |
(200,295 |
) |
|
$ |
(200,281 |
) |
Fair value |
|
$ |
(206,250 |
) |
|
$ |
(206,399 |
) |
Change in fair value from 1% increase in interest rate |
|
$ |
(2,833 |
) |
|
$ |
(3,668 |
) |
Change in fair value from 1% decrease in interest rate |
|
$ |
2,887 |
|
|
$ |
3,755 |
|
Interest rate swaps: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
150,000 |
|
|
$ |
|
|
Carrying amount and fair value |
|
$ |
(1,231 |
) |
|
$ |
|
|
Change in fair value from 1% increase in interest rate |
|
$ |
5,380 |
|
|
$ |
|
|
Change in fair value from 1% decrease in interest rate |
|
$ |
(5,596 |
) |
|
$ |
|
|
Foreign currency forward contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
157,018 |
|
|
$ |
121,430 |
|
Carrying amount and fair value |
|
$ |
(281 |
) |
|
$ |
(640 |
) |
Change in fair value from 10% appreciation of U.S. dollar |
|
$ |
(1,820 |
) |
|
$ |
(1,142 |
) |
Change in fair value from 10% depreciation of U.S. dollar |
|
$ |
2,224 |
|
|
$ |
1,396 |
|
Raw material commodity swaps: |
|
|
|
|
|
|
|
|
Notional amount (in metric tons of base metals) |
|
|
1,564 |
|
|
|
2,004 |
|
Carrying amount and fair value |
|
$ |
(1,047 |
) |
|
$ |
1,939 |
|
Change in fair value from 10% change in forward prices |
|
$ |
895 |
|
|
$ |
1,003 |
|
Precious metals forward contracts: |
|
|
|
|
|
|
|
|
Notional amount (in troy ounces) |
|
|
206,403 |
|
|
|
183,264 |
|
Carrying amount and fair value |
|
$ |
124 |
|
|
$ |
192 |
|
Change in fair value from 10% change in forward prices |
|
$ |
486 |
|
|
$ |
465 |
|
Marked-to-market natural gas forward purchase contracts: |
|
|
|
|
|
|
|
|
Notional amount (in MBTUs) |
|
|
|
|
|
|
120,000 |
|
Carrying amount and fair value |
|
$ |
|
|
|
$ |
(442 |
) |
Change in fair value from 10% change in forward prices |
|
$ |
|
|
|
$ |
78 |
|
39
Item 4. Controls and Procedures
A discussion of the Companys Controls and Procedures is contained under Item 9A in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006, which is incorporated
here by reference.
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 June 30, 2007. Based on that evaluation, management concluded that the disclosure
controls and procedures were not effective as of June 30, 2007.
Additional procedures were performed in order for management to conclude with reasonable
assurance that the Companys condensed consolidated financial statements contained in this
Quarterly Report on Form 10-Q present fairly, in all material respects, the Companys financial
position, results of operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
During the second quarter of 2007, there were no material changes in our internal controls or
in other factors that materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
40
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The information on legal proceedings contained in Note 9 to the condensed consolidated
financial statements is incorporated here by reference.
On February 13, 2007, the New Jersey Department of Environmental Protection (NJDEP)
issued an administrative order and notice of civil administrative penalty assessment to the Company
for alleged violations at our Bridgeport, New Jersey, facility of the NJDEP laws and regulations
regarding water discharge requirements pursuant to the New Jersey Water Pollution Control Act
(WPCA). We have requested an adjudicatory hearing with NJDEP in order to negotiate a settlement,
and we are currently awaiting a response from NJDEP. We cannot determine the outcome of these
settlement negotiations at this time, but we do not expect the ultimate outcome of this penalty
assessment and any associated expenses to have a material effect on the financial position, results
of operations or cash flows of the Company.
In March 1997, the Company, as a potentially responsible party, filed a notice of intention to
comply with the remediation of a federal Superfund site owned by Waste Disposal, Inc., located in
Santa Fe Springs, California. The United States Environmental Protection Agency and the California
Environmental Protection Agency oversaw the remediation of the site, which was completed in 2004,
and are overseeing the continuing operation and maintenance of the site. There is a remaining
liability to fund operations and maintenance costs through 2034. We have agreed to pay $0.9 million
to fully settle our liability associated with this site.
Item 1A. Risk Factors
There are no changes to the risk factors disclosed in the Companys Annual Report on Form 10-K
for the year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
No change.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on April 27, 2007, there were a total of 41,086,385
shares represented either in person or by proxy. The shareholders elected three Directors to the
Ferro Corporation Board of Directors, Michael H. Bulkin, Michael F. Mee, and Perry W. Premdas, to
serve on the Board until the meeting in the year 2010. The results of the voting for Directors
were as follows:
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld Authority |
Michael H. Bulkin
|
|
|
40,146,021 |
|
|
940,364 |
Michael F. Mee
|
|
|
40,318,297 |
|
|
768,088 |
Perry W. Premdas
|
|
|
40,303,218 |
|
|
783,167 |
The terms of office for Sandra Austin Crayton, Jennie S. Hwang, Ph.D., James F. Kirsch,
William B. Lawrence, William J. Sharp, and Dennis W. Sullivan continued after the meeting.
In June 2007, the Ferro Corporation Board of Directors voted to increase its membership to ten
and elected Richard J. Hipple to serve as a Director of the Company.
Item 5. Other Information
None.
Item 6. Exhibits
|
|
The exhibits listed in the attached Exhibit Index are filed pursuant to Item 6 of Form 10-Q. |
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
FERRO CORPORATION
(Registrant) |
|
|
Date: August 8, 2007 |
|
|
|
|
|
|
/s/ James F. Kirsch
|
|
|
James F. Kirsch |
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer) |
|
|
Date: August 8, 2007
|
|
|
|
|
|
|
/s/ Sallie B. Bailey
|
|
|
Sallie B. Bailey |
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
42
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated herein 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). (Reference is made to
Exhibit 4.2 to Ferro Corporations Annual Report on Form 10-K for the year ended December
31, 2006, which Exhibit is incorporated here by reference.) |
|
|
4.3 |
|
Form of Global Note (9½% Senior Notes due 2009). (Reference is made to Exhibit 4.3
to Ferro Corporations Annual Report on Form 10-K for the year ended December 31, 2006,
which Exhibit is incorporated here by reference.) |
|
|
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. |
43
|
10.1 |
|
Amendment to the Purchase and Contribution Agreement, dated June 5, 2007, 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 June 11, 2007, which Exhibit is incorporated here by reference.) |
|
|
10.2 |
|
Amendment to the Amended and Restated Receivables Purchase Agreement, dated June 5,
2007, among Ferro Corporations, Ferro Electronic materials Inc., Citicorp North America,
Inc., CAFCO, LLC and Citibank, N.A. (Reference is made to Exhibit 10.2 to Ferro
Corporations Current Report on Form 8-K, filed June 11, 2007, which Exhibit is
incorporated here by reference.) |
|
|
10.3 |
|
Amended and Restated Credit Agreement, dated June 8, 2007, among Ferro; certain of
Ferros subsidiaries; Credit Suisse, as term loan administrative agent; National City
Bank, as revolving loan administrative agent and collateral agent; KeyBank National
Association, as documentation agent; Citigroup Global Markets, Inc., as syndication
agent; and various financial institutions as lenders. (Reference is made to Exhibit 10.3
to Ferro Corporations Current Report on Form 8-K, filed June 11, 2007, which Exhibit is
incorporated here by reference.) |
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. |
44