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 September 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
(State of Corporation)
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34-0217820
(IRS Employer Identification No.) |
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1000 Lakeside Avenue
Cleveland, OH
(Address of Principal executive offices)
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44114
(Zip Code) |
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
October 31, 2007, there were 43,515,015 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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Nine months ended |
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September 30, |
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September 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 |
|
$ |
550,701 |
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|
$ |
500,573 |
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$ |
1,634,064 |
|
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$ |
1,544,218 |
|
Cost of sales |
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450,553 |
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401,853 |
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1,319,609 |
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1,226,758 |
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Gross profit |
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100,148 |
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98,720 |
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314,455 |
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317,460 |
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Selling, general and administrative expenses |
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71,069 |
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74,116 |
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234,212 |
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231,955 |
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Restructuring charges |
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5,826 |
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7,689 |
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Other expense (income): |
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Interest expense |
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14,488 |
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16,818 |
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46,220 |
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48,155 |
|
Interest earned |
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|
(271 |
) |
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|
(971 |
) |
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|
(1,425 |
) |
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(2,741 |
) |
Foreign currency transactions, net |
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|
(10 |
) |
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|
166 |
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|
924 |
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|
706 |
|
Miscellaneous (income) expense, net |
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(13 |
) |
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|
428 |
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|
(399 |
) |
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3,070 |
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Income before income taxes |
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|
9,059 |
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8,163 |
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27,234 |
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36,315 |
|
Income tax expense |
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|
3,472 |
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|
2,694 |
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10,814 |
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11,938 |
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Income from continuing operations |
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5,587 |
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|
5,469 |
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16,420 |
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24,377 |
|
Loss (income) from discontinued operations,
net of tax |
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2 |
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(62 |
) |
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|
216 |
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|
405 |
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Net income |
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5,585 |
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5,531 |
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16,204 |
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23,972 |
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Dividends on preferred stock |
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252 |
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310 |
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797 |
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955 |
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Net income available to common shareholders |
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$ |
5,333 |
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$ |
5,221 |
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$ |
15,407 |
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$ |
23,017 |
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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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$ |
0.12 |
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$ |
0.12 |
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$ |
0.36 |
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$ |
0.55 |
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From discontinued operations |
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0.00 |
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0.00 |
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0.00 |
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(0.01 |
) |
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$ |
0.12 |
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$ |
0.12 |
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$ |
0.36 |
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$ |
0.54 |
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Diluted earnings: |
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From continuing operations |
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$ |
0.12 |
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$ |
0.12 |
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$ |
0.36 |
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$ |
0.55 |
|
From discontinued operations |
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0.00 |
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|
0.00 |
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|
0.00 |
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(0.01 |
) |
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$ |
0.12 |
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$ |
0.12 |
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$ |
0.36 |
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$ |
0.54 |
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Cash dividends declared |
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$ |
0.145 |
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$ |
0.145 |
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$ |
0.435 |
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$ |
0.435 |
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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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|
September 30, |
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December 31, |
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2007 |
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2006 |
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|
(Dollars in thousands) |
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ASSETS |
Current assets |
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Cash and cash equivalents |
|
$ |
25,821 |
|
|
$ |
16,985 |
|
Accounts and trade notes receivable, net |
|
|
236,362 |
|
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|
220,899 |
|
Note receivable from Ferro Finance Corporation |
|
|
22,887 |
|
|
|
16,083 |
|
Inventories |
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|
280,044 |
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|
269,234 |
|
Deposits for precious metals |
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|
70,073 |
|
Deferred income taxes |
|
|
12,086 |
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|
12,291 |
|
Other current assets |
|
|
40,189 |
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25,877 |
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Total current assets |
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617,389 |
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|
631,442 |
|
Other assets |
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Property, plant and equipment, net |
|
|
535,713 |
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|
526,802 |
|
Goodwill and other intangible assets, net |
|
|
406,461 |
|
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|
406,340 |
|
Deferred income taxes |
|
|
93,791 |
|
|
|
94,490 |
|
Other non-current assets |
|
|
107,110 |
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|
82,528 |
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Total assets |
|
$ |
1,760,464 |
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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 |
|
$ |
11,515 |
|
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$ |
10,764 |
|
Accounts payable |
|
|
266,236 |
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|
237,018 |
|
Income taxes |
|
|
|
|
|
|
8,951 |
|
Accrued payrolls |
|
|
32,073 |
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|
33,164 |
|
Accrued expenses and other current liabilities |
|
|
86,470 |
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|
91,150 |
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Total current liabilities |
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|
396,294 |
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|
381,047 |
|
Other liabilities |
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Long-term debt, less current portion |
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524,863 |
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|
581,654 |
|
Postretirement and pension liabilities |
|
|
185,770 |
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|
194,427 |
|
Deferred income taxes |
|
|
17,762 |
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|
11,037 |
|
Other non-current liabilities |
|
|
63,326 |
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|
21,599 |
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Total liabilities |
|
|
1,188,015 |
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|
1,189,764 |
|
Series A convertible preferred stock |
|
|
14,198 |
|
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|
16,787 |
|
Shareholders equity |
|
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Common stock |
|
|
52,323 |
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|
52,323 |
|
Paid-in capital |
|
|
163,074 |
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|
158,504 |
|
Retained earnings |
|
|
585,377 |
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|
600,638 |
|
Accumulated other comprehensive loss |
|
|
(41,838 |
) |
|
|
(65,138 |
) |
Common shares in treasury, at cost |
|
|
(200,685 |
) |
|
|
(211,276 |
) |
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|
Total shareholders equity |
|
|
558,251 |
|
|
|
535,051 |
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|
|
|
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|
Total liabilities and shareholders equity |
|
$ |
1,760,464 |
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|
$ |
1,741,602 |
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|
|
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|
|
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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 |
|
|
Retained |
|
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Comprehensive |
|
|
holders |
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Shares |
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Amount |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,204 |
|
|
|
|
|
|
|
16,204 |
|
Other comprehensive income
(loss), net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Foreign currency
translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
28,183 |
|
|
|
28,183 |
|
Postemployment benefit
liability adjustments |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140 |
) |
|
|
(140 |
) |
Raw material commodity
swap adjustments |
|
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|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
(1,903 |
) |
|
|
(1,903 |
) |
Interest rate swap adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,840 |
) |
|
|
(2,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,504 |
|
Cash dividends: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,773 |
) |
|
|
|
|
|
|
(18,773 |
) |
Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(797 |
) |
|
|
|
|
|
|
(797 |
) |
Income tax benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
38 |
|
Transactions involving benefit plans |
|
|
(644 |
) |
|
|
10,591 |
|
|
|
|
|
|
|
4,570 |
|
|
|
|
|
|
|
|
|
|
|
15,161 |
|
Adjustment to initially apply FIN
No. 48 as of January 1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,933 |
) |
|
|
|
|
|
|
(11,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2007 |
|
|
8,814 |
|
|
$ |
(200,685 |
) |
|
$ |
52,323 |
|
|
$ |
163,074 |
|
|
$ |
585,377 |
|
|
$ |
(41,838 |
) |
|
$ |
558,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
|
|
|
|
Adjusted |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,204 |
|
|
$ |
23,972 |
|
Depreciation and amortization |
|
|
63,825 |
|
|
|
59,030 |
|
Precious metals deposits |
|
|
70,073 |
|
|
|
(74,250 |
) |
Accounts and trade notes receivable, inventories, and accounts payable |
|
|
13,696 |
|
|
|
(75,233 |
) |
Note receivable from Ferro Finance Corportion |
|
|
(6,804 |
) |
|
|
82,173 |
|
Other changes in current assets and liabilities, net |
|
|
(27,964 |
) |
|
|
6,923 |
|
Other adjustments, net |
|
|
(7,701 |
) |
|
|
(6,843 |
) |
|
|
|
|
|
|
|
Net cash provided by continuing operations |
|
|
121,329 |
|
|
|
15,772 |
|
Net cash used for discontinued operations |
|
|
(48 |
) |
|
|
(867 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
121,281 |
|
|
|
14,905 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Capital expenditures for property, plant and equipment |
|
|
(43,247 |
) |
|
|
(33,602 |
) |
Proceeds from sale of assets and businesses |
|
|
2,704 |
|
|
|
6,430 |
|
Cash
investment in Ferro Finance Corporation |
|
|
|
|
|
|
(25,000 |
) |
Other investing activities |
|
|
551 |
|
|
|
(105 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(39,992 |
) |
|
|
(52,277 |
) |
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Net repayments under short-term credit facilities |
|
|
(740 |
) |
|
|
(468 |
) |
Proceeds from revolving credit facility |
|
|
592,167 |
|
|
|
966,200 |
|
Proceeds from term loan facility |
|
|
55,000 |
|
|
|
250,000 |
|
Principal payments on revolving credit facility |
|
|
(700,864 |
) |
|
|
(994,600 |
) |
Principal payments on term loan facility |
|
|
(2,287 |
) |
|
|
|
|
Extinguishment of debentures |
|
|
|
|
|
|
(155,000 |
) |
Debt issue costs paid |
|
|
(1,783 |
) |
|
|
(15,804 |
) |
Proceeds from exercise of stock options |
|
|
9,217 |
|
|
|
2,196 |
|
Cash dividends paid |
|
|
(19,570 |
) |
|
|
(19,439 |
) |
Other financing activities |
|
|
(4,442 |
) |
|
|
(2,308 |
) |
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities |
|
|
(73,302 |
) |
|
|
30,777 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
849 |
|
|
|
(202 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
8,836 |
|
|
|
(6,797 |
) |
Cash and cash equivalents at beginning of period |
|
|
16,985 |
|
|
|
17,413 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
25,821 |
|
|
$ |
10,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
46,925 |
|
|
$ |
48,710 |
|
Income taxes |
|
$ |
11,387 |
|
|
$ |
8,607 |
|
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 nine
months ended September 30, 2007, are not necessarily indicative of the results expected in
subsequent quarters or for the full year.
Interest earned in the three and nine months ended September 30, 2006, of $1.0 million and
$2.7 million, respectively, was reclassified from miscellaneous expense (income), net, and is shown
separately in the condensed consolidated statements of income.
2. Accounting Methods Adopted in the Nine Months Ended September 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 September 30, 2007 |
|
|
Computed |
|
|
Change to |
|
|
Reported |
|
|
|
under LIFO |
|
|
FIFO |
|
|
under FIFO |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
550,701 |
|
|
$ |
|
|
|
$ |
550,701 |
|
Cost of sales |
|
|
451,518 |
|
|
|
(965 |
) |
|
|
450,553 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
99,183 |
|
|
|
965 |
|
|
|
100,148 |
|
Selling, general and administrative expenses |
|
|
71,069 |
|
|
|
|
|
|
|
71,069 |
|
Restructuring charges |
|
|
5,826 |
|
|
|
|
|
|
|
5,826 |
|
Other expense |
|
|
14,194 |
|
|
|
|
|
|
|
14,194 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,094 |
|
|
|
965 |
|
|
|
9,059 |
|
Income tax expense |
|
|
3,282 |
|
|
|
190 |
|
|
|
3,472 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
4,812 |
|
|
|
775 |
|
|
|
5,587 |
|
Loss from discontinued operations, net of tax |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,810 |
|
|
|
775 |
|
|
|
5,585 |
|
Dividends on preferred stock |
|
|
252 |
|
|
|
|
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
4,558 |
|
|
$ |
775 |
|
|
$ |
5,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.12 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.12 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.10 |
|
|
$ |
0.02 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
|
|
Computed |
|
|
Change to |
|
|
Reported |
|
|
|
under LIFO |
|
|
FIFO |
|
|
under FIFO |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
1,634,064 |
|
|
$ |
|
|
|
$ |
1,634,064 |
|
Cost of sales |
|
|
1,321,205 |
|
|
|
(1,596 |
) |
|
|
1,319,609 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
312,859 |
|
|
|
1,596 |
|
|
|
314,455 |
|
Selling, general and administrative expenses |
|
|
234,212 |
|
|
|
|
|
|
|
234,212 |
|
Restructuring charges |
|
|
7,689 |
|
|
|
|
|
|
|
7,689 |
|
Other expense |
|
|
45,320 |
|
|
|
|
|
|
|
45,320 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
25,638 |
|
|
|
1,596 |
|
|
|
27,234 |
|
Income tax expense |
|
|
10,389 |
|
|
|
425 |
|
|
|
10,814 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
15,249 |
|
|
|
1,171 |
|
|
|
16,420 |
|
Loss from discontinued operations, net of tax |
|
|
216 |
|
|
|
|
|
|
|
216 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
15,033 |
|
|
|
1,171 |
|
|
|
16,204 |
|
Dividends on preferred stock |
|
|
797 |
|
|
|
|
|
|
|
797 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
14,236 |
|
|
$ |
1,171 |
|
|
$ |
15,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.33 |
|
|
$ |
0.03 |
|
|
$ |
0.36 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.33 |
|
|
$ |
0.03 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.33 |
|
|
$ |
0.03 |
|
|
$ |
0.36 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.33 |
|
|
$ |
0.03 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2006 |
|
|
|
Originally |
|
|
Change to |
|
|
Adoption of |
|
|
|
|
|
|
Reported |
|
|
FIFO |
|
|
AUG AIR-1 |
|
|
Adjusted |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
500,573 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
500,573 |
|
Cost of sales |
|
|
401,923 |
|
|
|
(168 |
) |
|
|
98 |
|
|
|
401,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
98,650 |
|
|
|
168 |
|
|
|
(98 |
) |
|
|
98,720 |
|
Selling, general and administrative expenses |
|
|
74,116 |
|
|
|
|
|
|
|
|
|
|
|
74,116 |
|
Other expense |
|
|
16,441 |
|
|
|
|
|
|
|
|
|
|
|
16,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,093 |
|
|
|
168 |
|
|
|
(98 |
) |
|
|
8,163 |
|
Income tax expense |
|
|
2,663 |
|
|
|
62 |
|
|
|
(31 |
) |
|
|
2,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
5,430 |
|
|
|
106 |
|
|
|
(67 |
) |
|
|
5,469 |
|
Income from discontinued operations, net of tax |
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
5,492 |
|
|
|
106 |
|
|
|
(67 |
) |
|
|
5,531 |
|
Dividends on preferred stock |
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
5,182 |
|
|
$ |
106 |
|
|
$ |
(67 |
) |
|
$ |
5,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.12 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.12 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.12 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.12 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.12 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.12 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
Originally |
|
|
Change to |
|
|
Adoption of |
|
|
|
|
|
|
Reported |
|
|
FIFO |
|
|
AUG AIR-1 |
|
|
Adjusted |
|
|
|
(Dollars in thousands, except per share amounts) |
|
Net sales |
|
$ |
1,544,218 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,544,218 |
|
Cost of sales |
|
|
1,226,771 |
|
|
|
66 |
|
|
|
(79 |
) |
|
|
1,226,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
317,447 |
|
|
|
(66 |
) |
|
|
79 |
|
|
|
317,460 |
|
Selling, general and administrative expenses |
|
|
231,955 |
|
|
|
|
|
|
|
|
|
|
|
231,955 |
|
Other expense |
|
|
49,190 |
|
|
|
|
|
|
|
|
|
|
|
49,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
36,302 |
|
|
|
(66 |
) |
|
|
79 |
|
|
|
36,315 |
|
Income tax expense |
|
|
11,943 |
|
|
|
(25 |
) |
|
|
20 |
|
|
|
11,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
24,359 |
|
|
|
(41 |
) |
|
|
59 |
|
|
|
24,377 |
|
Loss from discontinued operations, net of tax |
|
|
405 |
|
|
|
|
|
|
|
|
|
|
|
405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
23,954 |
|
|
|
(41 |
) |
|
|
59 |
|
|
|
23,972 |
|
Dividends on preferred stock |
|
|
955 |
|
|
|
|
|
|
|
|
|
|
|
955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
22,999 |
|
|
$ |
(41 |
) |
|
$ |
59 |
|
|
$ |
23,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.55 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.55 |
|
From discontinued operations |
|
|
(0.01 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.54 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.55 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.55 |
|
From discontinued operations |
|
|
(0.01 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.54 |
|
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
|
Computed |
|
|
Change to |
|
|
Reported |
|
|
|
under LIFO |
|
|
FIFO |
|
|
under FIFO |
|
|
|
(Dollars in thousands) |
|
ASSETS |
Current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
263,727 |
|
|
$ |
16,317 |
|
|
$ |
280,044 |
|
Deferred income taxes |
|
|
18,126 |
|
|
|
(6,040 |
) |
|
|
12,086 |
|
Other current assets |
|
|
325,259 |
|
|
|
|
|
|
|
325,259 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
607,112 |
|
|
|
10,277 |
|
|
|
617,389 |
|
Other assets |
|
|
1,143,075 |
|
|
|
|
|
|
|
1,143,075 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,750,187 |
|
|
$ |
10,277 |
|
|
$ |
1,760,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES and SHAREHOLDERS EQUITY |
Current liabilities |
|
$ |
396,294 |
|
|
$ |
|
|
|
$ |
396,294 |
|
Other liabilities |
|
|
791,721 |
|
|
|
|
|
|
|
791,721 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,188,015 |
|
|
|
|
|
|
|
1,188,015 |
|
Series A convertible preferred stock |
|
|
14,198 |
|
|
|
|
|
|
|
14,198 |
|
Shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
575,100 |
|
|
|
10,277 |
|
|
|
585,377 |
|
Other shareholders equity |
|
|
(27,126 |
) |
|
|
|
|
|
|
(27,126 |
) |
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
547,974 |
|
|
|
10,277 |
|
|
|
558,251 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,750,187 |
|
|
$ |
10,277 |
|
|
$ |
1,760,464 |
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 |
|
|
|
Computed |
|
|
Change to |
|
|
Reported |
|
|
|
under LIFO |
|
|
FIFO |
|
|
under FIFO |
|
|
|
(Dollars in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,033 |
|
|
$ |
1,171 |
|
|
$ |
16,204 |
|
Depreciation and amortization |
|
|
63,825 |
|
|
|
|
|
|
|
63,825 |
|
Precious metals deposits |
|
|
70,073 |
|
|
|
|
|
|
|
70,073 |
|
Accounts and trade notes receivable, inventories, and
accounts payable |
|
|
15,292 |
|
|
|
(1,596 |
) |
|
|
13,696 |
|
Note receivable from Ferro Finance Corporation |
|
|
(6,804 |
) |
|
|
|
|
|
|
(6,804 |
) |
Other changes in current assets and liabilities, net |
|
|
(27,964 |
) |
|
|
|
|
|
|
(27,964 |
) |
Other adjustments, net |
|
|
(8,126 |
) |
|
|
425 |
|
|
|
(7,701 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations |
|
|
121,329 |
|
|
|
|
|
|
|
121,329 |
|
Net cash used for discontinued operations |
|
|
(48 |
) |
|
|
|
|
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
121,281 |
|
|
|
|
|
|
|
121,281 |
|
Cash flows from investing activities |
|
|
(39,992 |
) |
|
|
|
|
|
|
(39,992 |
) |
Cash flows from financing activities |
|
|
(73,302 |
) |
|
|
|
|
|
|
(73,302 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
849 |
|
|
|
|
|
|
|
849 |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
8,836 |
|
|
|
|
|
|
|
8,836 |
|
Cash and cash equivalents at beginning of period |
|
|
16,985 |
|
|
|
|
|
|
|
16,985 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
25,821 |
|
|
$ |
|
|
|
$ |
25,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2006 |
|
|
|
Originally |
|
|
Change to |
|
|
Adoption of |
|
|
|
|
|
|
Reported |
|
|
FIFO |
|
|
AUG AIR-1 |
|
|
Adjusted |
|
|
|
(Dollars in thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,954 |
|
|
$ |
(41 |
) |
|
$ |
59 |
|
|
$ |
23,972 |
|
Depreciation and amortization |
|
|
59,030 |
|
|
|
|
|
|
|
|
|
|
|
59,030 |
|
Precious metals deposits |
|
|
(74,250 |
) |
|
|
|
|
|
|
|
|
|
|
(74,250 |
) |
Accounts and trade notes receivable, inventories,
and accounts payable |
|
|
(75,299 |
) |
|
|
66 |
|
|
|
|
|
|
|
(75,233 |
) |
Note receivable from Ferro Finance Corporation |
|
|
82,173 |
|
|
|
|
|
|
|
|
|
|
|
82,173 |
|
Other changes in current assets and liabilities, net |
|
|
7,009 |
|
|
|
|
|
|
|
(86 |
) |
|
|
6,923 |
|
Other adjustments, net |
|
|
(6,845 |
) |
|
|
(25 |
) |
|
|
27 |
|
|
|
(6,843 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations |
|
|
15,772 |
|
|
|
|
|
|
|
|
|
|
|
15,772 |
|
Net cash used for discontinued operations |
|
|
(867 |
) |
|
|
|
|
|
|
|
|
|
|
(867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
14,905 |
|
|
|
|
|
|
|
|
|
|
|
14,905 |
|
Cash flows from investing activities |
|
|
(52,277 |
) |
|
|
|
|
|
|
|
|
|
|
(52,277 |
) |
Cash flows from financing activities |
|
|
30,777 |
|
|
|
|
|
|
|
|
|
|
|
30,777 |
|
Effect of exchange rate changes on cash and cash
equivalents |
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(6,797 |
) |
|
|
|
|
|
|
|
|
|
|
(6,797 |
) |
Cash and cash equivalents at beginning of period |
|
|
17,413 |
|
|
|
|
|
|
|
|
|
|
|
17,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
10,616 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
10,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
3. Newly Issued Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, (FAS No.157).
FAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods
used for measuring fair value, and expands disclosures about fair value measurements. Accordingly,
FAS No. 157 does not require any new fair value measurements, but will change current practice for
some entities. FAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We will apply this
standard prospectively, as permitted.
In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106,
and 132(R), (FAS No. 158). We are required to adopt the measurement provisions of FAS No. 158 as
of December 31, 2008. The measurement provisions require companies to measure defined benefit plan
assets and obligations as of the balance sheet date. Currently, we use September 30 as the
measurement date for U.S. pension and other postretirement benefits. We are evaluating these
requirements and have not yet determined the impact this may have on our consolidated financial
statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, (FAS No. 159). This statement permits all entities to choose,
at specified election dates, to measure eligible items at fair value (the fair value option). A
business entity should report unrealized gains and losses on items for which the fair value option
has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to
items for which the fair value option is elected shall be recognized in earnings as incurred and
not deferred. FAS No. 159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007. We are currently evaluating the impact of the adoption of this
statement; at this time, we are uncertain as to the impact on our results of operations and
financial position.
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 |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Raw materials |
|
$ |
79,823 |
|
|
$ |
74,160 |
|
Work in process |
|
|
43,206 |
|
|
|
44,658 |
|
Finished goods |
|
|
157,015 |
|
|
|
150,416 |
|
|
|
|
|
|
|
|
Total |
|
$ |
280,044 |
|
|
$ |
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 $0.8 million and $0.8 million for the three months ended
September 30, 2007 and 2006, respectively, and $2.8 million and $2.2 million for the nine months
ended September 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 six months of 2007. We had on hand $126.3 million at September 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 $763.4 million at
September 30, 2007, and $691.4 million at December 31, 2006.
15
6. Financing and Long-term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
$200,000
Senior Notes, 9.125%, due January 2009 * |
|
$ |
199,545 |
|
|
$ |
199,273 |
|
Revolving credit facility |
|
|
19,256 |
|
|
|
127,953 |
|
Term loan facility |
|
|
302,713 |
|
|
|
250,000 |
|
Capital lease obligations |
|
|
6,965 |
|
|
|
6,744 |
|
Other notes |
|
|
1,272 |
|
|
|
1,008 |
|
|
|
|
|
|
|
|
|
|
|
529,751 |
|
|
|
584,978 |
|
Less current portion |
|
|
(4,888 |
) |
|
|
(3,324 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
524,863 |
|
|
$ |
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 September 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 $272.1 million at September 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
financing 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 September 30,
2007, we had borrowed $302.7 million in term loans. The Company is required to make quarterly
principal payments of $0.8 million from October 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 leverage, or for the term loan facility,
a fixed margin. As part of the June 2007 amendments, $175 million of borrowings
16
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 September 30, 2007, the average interest rate for revolving
credit borrowings was 7.4%, and the effective interest rate for term loan borrowings after
adjusting for the interest rate swaps was 7.3%. 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 both a change in control of the Company and 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 $65.5 million at September 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 nine months ended September 30 is detailed below:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Trade accounts receivable sold to FFC |
|
$ |
739,005 |
|
|
$ |
769,580 |
|
Cash proceeds from FFC |
|
|
731,454 |
|
|
|
852,019 |
|
Trade accounts receivable collected and remitted to FFC and the conduits |
|
|
726,553 |
|
|
|
763,519 |
|
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 $85.8 million at September 30, 2007, and $49.2 million at December 31, 2006. The
proceeds from outstanding receivables sold under the international programs were $51.2 million at
September 30, 2007, and $33.7 million at December 31, 2006.
Other Financing Arrangements
In June 2007, we entered into two international variable-rate credit facilities secured by
specific accounts receivable. Beginning in the third quarter, these underlying accounts receivable
are treated as sold and, at September 30, 2007, were included in the above disclosures about our
international programs to sell trade accounts receivable.
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.
17
The carrying amount of the senior notes was $199.5 million at September 30, 2007, and
$199.3 million at December 31, 2006. The fair value of the senior notes was $205.5 million at
September 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 commodities using swap arrangements that allow us to fix the
price of the commodities for future purchases. 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 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 $6.2 million at September 30, 2007.
The notional amounts, carrying amounts of assets (liabilities), and fair values of these
derivative instruments are presented below. Fair values are based on market quotations or third
parties estimated bid prices.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
(Dollars in thousands) |
Interest rate swaps: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
150,000 |
|
|
$ |
|
|
Carrying amount and fair value |
|
$ |
(4,656 |
) |
|
$ |
|
|
Foreign currency forward contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
169,454 |
|
|
$ |
121,430 |
|
Carrying amount and fair value |
|
$ |
(101 |
) |
|
$ |
(640 |
) |
Raw material commodity swaps: |
|
|
|
|
|
|
|
|
Notional amount (in metric tons of base metals) |
|
|
1,595 |
|
|
|
2,004 |
|
Carrying amount and fair value |
|
$ |
(1,043 |
) |
|
$ |
1,939 |
|
Precious metals forward contracts: |
|
|
|
|
|
|
|
|
Notional amount (in troy ounces) |
|
|
554,043 |
|
|
|
183,264 |
|
Carrying amount and fair value |
|
$ |
997 |
|
|
$ |
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 was 39.7% of pre-tax income for the nine months ended September 30, 2007,
and 32.9% of pre-tax income for the nine months ended September 30, 2006. The primary reasons for
the increase in the effective tax rate were the tax effect of restructuring charges, a change in
the mix of income and losses by country, and a relatively high tax cost on 2007 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 nine months 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
18
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.
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 wrongdoing. The settlement agreement must be approved
by the United States District Court for the Eastern District of Pennsylvania. The Company is
vigorously defending the remaining two civil actions alleging antitrust violations in the heat
stabilizer industry, which are in their preliminary stages; therefore, we cannot determine the
outcomes of these lawsuits at this time. We have asserted a claim against the former owner of our
heat stabilizer business of indemnification 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 a plaintiff that opted out of the class of direct purchasers and entered into
a separate settlement agreement with the Company.
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.
In June 2007, the United States District Court for the Northern District of Ohio dismissed the
plaintiffs complaint, after which the plaintiffs appealed the District Court decision to the Sixth
Circuit Court of Appeals. In September 2007, however, the plaintiffs filed a voluntary dismissal,
with prejudice, of their appeal, thus ending this litigation.
Also following the 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.
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, of which $3.4 million was paid by the Companys
liability insurer and $0.6 was paid by the Company. The Company and the individual defendants have
expressly denied any wrongdoing. The United States District Court approved the settlement in
September 2007, thus ending this lawsuit.
In September 2007, we entered into a settlement agreement with the U.S. Securities and
Exchange Commission (SEC) related to the SECs investigation of the inappropriate accounting
entries in our Polymer Additives business. As part of the settlement, and without admitting or
denying any wrongdoing, we agreed to the entry of an administrative order by the SEC directing the
Company to cease and desist from committing or causing violations of certain of the reporting
provisions of Federal securities laws and related SEC rules. The SECs order contains no finding of
securities fraud or violation of any
antifraud provision of Federal securities laws or related SEC rules. The Company was not
required to pay any monetary penalty or fine in connection with the resolution of this matter.
19
In October 2004, the Belgian Ministry of Economic Affairs Commercial Policy Division (the
Ministry) served on our Belgian subsidiary a mandate requiring the production of certain
documents related to an alleged cartel among producers of butyl benzyl phthalate (BBP) from 1983
to 2002. Subsequently, German and Hungarian authorities initiated their own national investigations
related to the same allegations. Our Belgian subsidiary acquired its BBP business from Solutia
Europe S.A./N.V. (SOLBR) in August 2000. We promptly notified SOLBR of the Ministrys actions and
requested SOLBR to indemnify and defend the Company 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 in October 2007,
the German authorities imposed a fine of approximately 0.4 million. We expect the Belgian
authorities also to assess fines for the alleged conduct. We cannot predict the amount of the
Belgian fine that will ultimately be assessed and cannot predict the degree to which SOLBR will
indemnify Ferros Belgian subsidiary for these various 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. The faulty
procedures and practices that resulted in the inaccurate values have been investigated and
corrected. We have worked 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 assert claims
relating to this issue, we cannot predict at this time the financial effect of any resulting
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 $17.1 million at September 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 September 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 |
|
$ |
317 |
|
|
$ |
461 |
|
|
$ |
1,663 |
|
|
$ |
1,724 |
|
|
$ |
124 |
|
|
$ |
140 |
|
Interest cost |
|
|
5,026 |
|
|
|
4,973 |
|
|
|
2,359 |
|
|
|
1,891 |
|
|
|
836 |
|
|
|
807 |
|
Expected return on plan assets |
|
|
(5,140 |
) |
|
|
(4,735 |
) |
|
|
(1,871 |
) |
|
|
(1,487 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
39 |
|
|
|
46 |
|
|
|
27 |
|
|
|
36 |
|
|
|
(349 |
) |
|
|
(293 |
) |
Net amortization and deferral |
|
|
1,456 |
|
|
|
1,249 |
|
|
|
148 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
Curtailment and settlement effects |
|
|
|
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
(814 |
) |
|
|
|
|
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
2,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,698 |
|
|
$ |
2,144 |
|
|
$ |
4,515 |
|
|
$ |
2,402 |
|
|
$ |
(203 |
) |
|
$ |
654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 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 |
|
$ |
948 |
|
|
$ |
5,740 |
|
|
$ |
4,888 |
|
|
$ |
5,197 |
|
|
$ |
428 |
|
|
$ |
548 |
|
Interest cost |
|
|
15,083 |
|
|
|
15,422 |
|
|
|
6,937 |
|
|
|
5,556 |
|
|
|
2,554 |
|
|
|
2,481 |
|
Expected return on plan assets |
|
|
(15,392 |
) |
|
|
(14,497 |
) |
|
|
(5,499 |
) |
|
|
(4,366 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
118 |
|
|
|
91 |
|
|
|
82 |
|
|
|
108 |
|
|
|
(935 |
) |
|
|
(542 |
) |
Net amortization and deferral |
|
|
4,405 |
|
|
|
4,908 |
|
|
|
434 |
|
|
|
691 |
|
|
|
|
|
|
|
|
|
Curtailment and settlement effects |
|
|
250 |
|
|
|
2,565 |
|
|
|
|
|
|
|
|
|
|
|
(814 |
) |
|
|
(2,453 |
) |
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
2,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
5,412 |
|
|
$ |
14,229 |
|
|
$ |
9,031 |
|
|
$ |
7,186 |
|
|
$ |
1,233 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. In the
third quarter of 2007, we recorded a net curtailment gain of $0.7 million for other
benefits. In the fourth quarter of 2007, we expect to record additional curtailment gains
of approximately $2.5 million for other benefits, based on the expected timing of employee
terminations. |
|
|
|
|
Restructuring activities that will result in closing one of the Companys Rotterdam, The
Netherlands, manufacturing facilities by the end of the third quarter of 2008. In the third
quarter of 2007, we recorded costs for special termination pension benefits of $2.2 million
related to this closing. In the first half of 2008, we expect to record pension curtailment
gains of approximately $0.1 million, 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.
21
Deferred Stock Units
Under the 2006 Long-Term Incentive Plan (the Plan) we granted our directors 36,700 deferred
stock units during the nine months ended September 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.
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 nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Stock options |
|
$ |
2,333 |
|
|
$ |
2,267 |
|
Performance shares |
|
|
794 |
|
|
|
776 |
|
Deferred stock units |
|
|
505 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,632 |
|
|
$ |
3,043 |
|
|
|
|
|
|
|
|
Grant Information
The following table contains information regarding the stock-based compensation as of and for
the nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Aggregate Grant |
|
Remaining |
|
|
Number of |
|
-Average Grant |
|
Date Fair Value |
|
Service or |
|
|
Shares or |
|
Date Fair Value |
|
of Shares or |
|
Performance |
|
|
Units Granted |
|
per Share or Unit |
|
Units Granted |
|
Period |
|
|
|
|
|
|
|
|
|
|
(Dollars in |
|
(In years) |
|
|
|
|
|
|
|
|
|
|
thousands) |
|
|
|
|
Stock options |
|
|
517,000 |
|
|
$ |
6.24 |
|
|
$ |
3,225 |
|
|
|
3.3 |
|
Performance shares |
|
|
151,600 |
|
|
|
21.88 |
|
|
|
3,316 |
|
|
|
2.4 |
|
Deferred stock units |
|
|
36,700 |
|
|
|
21.50 |
|
|
|
789 |
|
|
|
0.4 |
|
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, since July 2006, 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
22
of our manufacturing operations. During the
nine months ended September 30, 2007, we recorded charges of $1.9 million for our operations in
Spain, Portugal, France and Germany, primarily relating to registration taxes paid and expected employee
termination benefits. 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 $1.1 million of the estimated amounts previously accrued were reversed during
the first quarter. In total, 42 employees were terminated relating to the European consolidation
during the first nine months 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
have transfered some of its production to facilities in Penn Yan, New York, and Uden, The
Netherlands. The closure will impact approximately 150 employees. During the nine months ended
September 30, 2007, we recorded $1.0 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 nine months ended September 30, 2007, primarily associated with
termination benefits affecting 49 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, The
Netherlands, porcelain enamel manufacturing site regarding possible restructuring actions. In
September 2007, we reached an agreement with the Rotterdam Works Council. As a result, the Company
will discontinue porcelain enamel frit manufacturing at its Rotterdam, The Netherlands, facility in
2008 and will consolidate production at other European facilities. This consolidation will result
in a reduction of the workforce by 84 employees. During the nine months ended September 30, 2007,
we recorded $5.4 million in restructuring charges and an additional $0.5 million for inventory
write downs in The Netherlands. These restructuring charges included $2.2 million of pension
expense for accelerated benefits, $1.8 million for employee severance costs, and $1.4 million for
asset impairments and other costs. Restructuring charges are expected
to total $22.7 million with completion anticipated by the end of the third quarter of 2008. We plan to accrue from the fourth
quarter of 2007 through the third quarter of 2008 an additional $12.8 million for employee
severance costs and $4.5 million for future minimum operating lease obligations under a land rights
lease.
Restructuring charges for the nine months ended September 30, 2007, also include $0.2 million
in accrual reversals 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 |
|
|
4,846 |
|
|
|
3,216 |
|
|
|
1,175 |
|
|
|
9,237 |
|
Cash payments |
|
|
(5,528 |
) |
|
|
(895 |
) |
|
|
|
|
|
|
(6,423 |
) |
Reserve adjustments |
|
|
(1,547 |
) |
|
|
34 |
|
|
|
30 |
|
|
|
(1,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007 |
|
$ |
4,501 |
|
|
$ |
2,394 |
|
|
$ |
17,000 |
|
|
$ |
23,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
23
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, cost of sales, or cash flows from investing or financing activities from discontinued
operations in the nine months ended September 30, 2007 or 2006. The loss from discontinued
operations includes ongoing legal and environmental costs directly related to discontinued
operations.
Discontinued operations resulted in the following pre-tax losses (income) and related income
tax benefits (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Pre-tax losses (income) |
|
$ |
4 |
|
|
$ |
(96 |
) |
|
$ |
355 |
|
|
$ |
643 |
|
Tax benefits (expense) |
|
|
2 |
|
|
|
(34 |
) |
|
|
139 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax losses (income) |
|
$ |
2 |
|
|
$ |
(62 |
) |
|
$ |
216 |
|
|
$ |
405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have continuing environmental remediation obligations that are related to these
divestitures, and we have accrued $3.3 million as of September 30, 2007, and $3.1 million as of
December 31, 2006, for these matters.
14. Earnings per Share
Details of the calculation of basic and diluted earnings per share are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
Adjusted |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per share amounts) |
|
Basic earnings per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
5,333 |
|
|
$ |
5,221 |
|
|
$ |
15,407 |
|
|
$ |
23,017 |
|
Add back: Loss (gain) from discontinued operations |
|
|
2 |
|
|
|
(62 |
) |
|
|
216 |
|
|
|
405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,335 |
|
|
$ |
5,159 |
|
|
$ |
15,623 |
|
|
$ |
23,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
43,030 |
|
|
|
42,397 |
|
|
|
42,881 |
|
|
|
42,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.36 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
5,333 |
|
|
$ |
5,221 |
|
|
$ |
15,407 |
|
|
$ |
23,017 |
|
Add back: Loss (gain) from discontinued operations |
|
|
2 |
|
|
|
(62 |
) |
|
|
216 |
|
|
|
405 |
|
Plus: Convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,335 |
|
|
$ |
5,159 |
|
|
$ |
15,623 |
|
|
$ |
23,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
43,030 |
|
|
|
42,397 |
|
|
|
42,881 |
|
|
|
42,394 |
|
Assumed conversion of convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed satisfaction of performance share conditions |
|
|
59 |
|
|
|
26 |
|
|
|
54 |
|
|
|
17 |
|
Assumed satisfaction of deferred stock unit conditions |
|
|
24 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
Assumed exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding |
|
|
43,113 |
|
|
|
42,423 |
|
|
|
42,949 |
|
|
|
42,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations |
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.36 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
The convertible preferred shares and the stock options were anti-dilutive for the three and
nine months ended September 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, into the Other businesses
segment, 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.
Net sales to external customers by segment are presented in the table below. Sales between
segments were not material.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Performance Coatings |
|
$ |
153,742 |
|
|
$ |
134,947 |
|
|
$ |
451,058 |
|
|
$ |
397,015 |
|
Electronic Materials |
|
|
116,645 |
|
|
|
104,960 |
|
|
|
338,412 |
|
|
|
335,493 |
|
Color and Glass Performance Materials |
|
|
113,575 |
|
|
|
94,916 |
|
|
|
329,195 |
|
|
|
292,515 |
|
Polymer Additives |
|
|
85,230 |
|
|
|
79,815 |
|
|
|
252,903 |
|
|
|
245,057 |
|
Specialty Plastics |
|
|
62,236 |
|
|
|
65,762 |
|
|
|
198,994 |
|
|
|
209,525 |
|
Other businesses |
|
|
19,273 |
|
|
|
20,173 |
|
|
|
63,502 |
|
|
|
64,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
550,701 |
|
|
$ |
500,573 |
|
|
$ |
1,634,064 |
|
|
$ |
1,544,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Below are each segments income and reconciliations to income before income taxes from
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
Adjusted |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Performance Coatings |
|
$ |
8,449 |
|
|
$ |
11,527 |
|
|
$ |
29,947 |
|
|
$ |
31,937 |
|
Electronic Materials |
|
|
8,522 |
|
|
|
7,261 |
|
|
|
19,534 |
|
|
|
25,895 |
|
Color and Glass Performance Materials |
|
|
11,727 |
|
|
|
8,187 |
|
|
|
39,462 |
|
|
|
32,993 |
|
Polymer Additives |
|
|
3,417 |
|
|
|
4,133 |
|
|
|
10,576 |
|
|
|
11,984 |
|
Specialty Plastics |
|
|
3,586 |
|
|
|
2,087 |
|
|
|
10,961 |
|
|
|
11,937 |
|
Other businesses |
|
|
593 |
|
|
|
754 |
|
|
|
7,982 |
|
|
|
4,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income |
|
|
36,294 |
|
|
|
33,949 |
|
|
|
118,462 |
|
|
|
118,748 |
|
Unallocated expenses |
|
|
(7,215 |
) |
|
|
(9,345 |
) |
|
|
(38,219 |
) |
|
|
(33,243 |
) |
Restructuring charges |
|
|
(5,826 |
) |
|
|
|
|
|
|
(7,689 |
) |
|
|
|
|
Interest expense |
|
|
(14,488 |
) |
|
|
(16,818 |
) |
|
|
(46,220 |
) |
|
|
(48,155 |
) |
Interest earned |
|
|
271 |
|
|
|
971 |
|
|
|
1,425 |
|
|
|
2,741 |
|
Foreign currency transactions, net |
|
|
10 |
|
|
|
(166 |
) |
|
|
(924 |
) |
|
|
(706 |
) |
Miscellaneous income (expense), net |
|
|
13 |
|
|
|
(428 |
) |
|
|
399 |
|
|
|
(3,070 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes from
continuing operations |
|
$ |
9,059 |
|
|
$ |
8,163 |
|
|
$ |
27,234 |
|
|
$ |
36,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
United States |
|
$ |
232,405 |
|
|
$ |
231,531 |
|
|
$ |
710,423 |
|
|
$ |
738,060 |
|
International |
|
|
318,296 |
|
|
|
269,042 |
|
|
|
923,641 |
|
|
|
806,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
550,701 |
|
|
$ |
500,573 |
|
|
$ |
1,634,064 |
|
|
$ |
1,544,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net income for the three months ended September 30, 2007, was $5.6 million, up 1.0% from $5.5
million for the three months ended September 30, 2006. Earnings were little changed as
restructuring charges related to the consolidation of certain of our manufacturing facilities in
Europe and higher income tax expense were offset by lower selling, general and
administrative expenses and lower interest expense.
During the third quarter, net sales increased by 10.0% compared with the prior-year quarter as
a result of higher sales in the Performance Coatings, Color and Glass Performance Materials,
Electronic Materials, and Polymer Additives segments. Sales in the Specialty Plastics and Other
segments declined compared with the third quarter of 2006.
Unit costs for a number of raw materials used in the manufacture of our products, such as
bismuth, cobalt, nickel, soybean oil, and tallow, continued to contribute to increased manufacturing costs
compared with a year ago. In the aggregate, raw material costs per unit produced increased during
the third quarter compared with the third quarter of 2006.
During the third quarter, selling, general and administrative expenses declined as a result of
cost reduction efforts during previous quarters in a number of businesses including Polymer
Additives and Specialty Plastics, lower incentive compensation
accruals, and lower audit fees. Also during the third
quarter, interest expense declined, partially due to lower borrowings, which resulted from the
elimination of cash deposits that were required for precious metals during the third quarter of
2006. Income tax expense increased in the quarter, largely as a
result of the tax effects from restructuring charges recorded in the quarter and the mix of income and losses
by country.
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. Markets outside of the United States are generally strong, and are
expected to remain strong through the rest of 2007. We have seen a recovery in demand for our
Electronic Materials products used by capacitor manufacturers, compared with a reduced level of
demand in the first half 2007, and we expect demand to continue at this improved level for the
remainder of 2007.
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 $0.5 million
in the fourth quarter of 2007.
27
Results of Operations
Comparison of the three months ended September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands, |
|
|
|
|
|
|
|
except per share amounts) |
|
|
|
|
|
Net sales |
|
$ |
550,701 |
|
|
$ |
500,573 |
|
|
$ |
50,128 |
|
|
|
10.0 |
% |
Cost of sales |
|
|
450,553 |
|
|
|
401,853 |
|
|
|
48,700 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
100,148 |
|
|
|
98,720 |
|
|
|
1,428 |
|
|
|
1.4 |
% |
Gross profit percentage |
|
|
18.2 |
% |
|
|
19.7 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
71,069 |
|
|
|
74,116 |
|
|
|
(3,047 |
) |
|
|
(4.1 |
)% |
Restructuring charges |
|
|
5,826 |
|
|
|
|
|
|
|
5,826 |
|
|
|
|
|
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
14,488 |
|
|
|
16,818 |
|
|
|
(2,330 |
) |
|
|
(13.9 |
)% |
Interest earned |
|
|
(271 |
) |
|
|
(971 |
) |
|
|
700 |
|
|
|
(72.1 |
)% |
Foreign currency transactions, net |
|
|
(10 |
) |
|
|
166 |
|
|
|
(176 |
) |
|
|
(106.0 |
)% |
Miscellaneous (income) expense, net |
|
|
(13 |
) |
|
|
428 |
|
|
|
(441 |
) |
|
|
(103.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
9,059 |
|
|
|
8,163 |
|
|
|
896 |
|
|
|
11.0 |
% |
Income tax expense |
|
|
3,472 |
|
|
|
2,694 |
|
|
|
778 |
|
|
|
28.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
5,587 |
|
|
|
5,469 |
|
|
|
118 |
|
|
|
2.2 |
% |
Loss (income) from discontinued operations, net of tax |
|
|
2 |
|
|
|
(62 |
) |
|
|
64 |
|
|
|
(103.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,585 |
|
|
$ |
5,531 |
|
|
$ |
54 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in the quarter ended September 30, 2007, increased by 10.0% from the same quarter in
2006. The sales increase was the result of higher sales in our Performance Coatings, Color and
Glass Performance Materials, Electronic Materials, and Polymer Additives segments. Partially
offsetting this growth was a sales decline in our Specialty Plastics and Other segments. The
primary driver of the increased sales was the combined effect of improved product pricing and
favorable changes in foreign currency exchange rates. Sales growth was the strongest in Europe, and sales
also grew in Asia and Latin America. Sales in the United States increased slightly.
Gross profit increased slightly in the third quarter of 2007 compared with the third quarter
of 2006. Gross profit was reduced by $0.5 million in the third quarter of 2007 primarily as a
result of charges for accelerated depreciation and other costs
related to our manufacturing rationalization programs. Higher costs for raw materials, including higher precious metal prices, increased cost of sales
and limited the increase in gross profit. Precious metal costs are generally passed through to
customers with minimal gross profit contribution. Cost of sales was also increased by changes in
foreign currency exchange rates and by the effects of natural gas supply disruptions in Asia and
Latin America.
Selling,
general and administrative (SG&A) expenses declined
$3.0 million during the third
quarter, primarily as a result of previous expense reduction activities, particularly in our
Specialty Plastics and Electronic Materials segments, lower incentive
compensation accruals, and lower audit fees. During the third quarter of 2006, SG&A expense included charges of $0.4
million related to organizational initiatives and an accounting investigation and restatement.
Restructuring charges of $5.8 million were recorded in the third quarter of 2007, primarily
related to our plan to discontinue manufacturing porcelain enamel frit at our Rotterdam, The
Netherlands, facility in 2008.
28
Interest expense declined during the three months ending September 30, 2007, compared to the
third quarter of 2006, primarily as a result of lower borrowing levels. Our borrowing requirements
were reduced by the elimination of cash deposits for the precious metals used in the manufacture of
certain of our products. In addition, we have realized lower interest expense due to interest rate
reductions on our revolving credit facility and term loans. Interest earned declined in the third
quarter primarily as a result of the elimination of cash deposits for precious metals.
Income tax expense was 38.3% of pre-tax income for the three months ended September 30, 2007,
compared with 33.0% of pre-tax income for the prior-year period. The primary reasons for the
change in the effective tax rate were the tax effect resulting from restructuring charges recorded
in the third quarter of 2007, a change in the mix of income and losses by country, and a relatively
high tax cost on 2007 earnings repatriated from outside the United States.
There were no new businesses included in discontinued operations in the third quarter of 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Segment Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
153,742 |
|
|
$ |
134,947 |
|
|
$ |
18,795 |
|
|
|
13.9 |
% |
Electronic Materials |
|
|
116,645 |
|
|
|
104,960 |
|
|
|
11,685 |
|
|
|
11.1 |
% |
Color and Glass Performance Materials |
|
|
113,575 |
|
|
|
94,916 |
|
|
|
18,659 |
|
|
|
19.7 |
% |
Polymer Additives |
|
|
85,230 |
|
|
|
79,815 |
|
|
|
5,415 |
|
|
|
6.8 |
% |
Specialty Plastics |
|
|
62,236 |
|
|
|
65,762 |
|
|
|
(3,526 |
) |
|
|
(5.4 |
)% |
Other
businesses |
|
|
19,273 |
|
|
|
20,173 |
|
|
|
(900 |
) |
|
|
(4.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
550,701 |
|
|
$ |
500,573 |
|
|
$ |
50,128 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
8,449 |
|
|
$ |
11,527 |
|
|
$ |
(3,078 |
) |
|
|
(26.7 |
)% |
Electronic Materials |
|
|
8,522 |
|
|
|
7,261 |
|
|
|
1,261 |
|
|
|
17.4 |
% |
Color and Glass Performance Materials |
|
|
11,727 |
|
|
|
8,187 |
|
|
|
3,540 |
|
|
|
43.2 |
% |
Polymer Additives |
|
|
3,417 |
|
|
|
4,133 |
|
|
|
(716 |
) |
|
|
(17.3 |
)% |
Specialty Plastics |
|
|
3,586 |
|
|
|
2,087 |
|
|
|
1,499 |
|
|
|
71.8 |
% |
Other businesses |
|
|
593 |
|
|
|
754 |
|
|
|
(161 |
) |
|
|
(21.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,294 |
|
|
$ |
33,949 |
|
|
$ |
2,345 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. Sales increased in Performance Coatings due to higher
sales of tile coatings and porcelain enamel products. The sales increase was driven by improved
pricing, as well as favorable changes in foreign currency exchange rates.
Regionally, sales growth was the strongest in Europe and Asia. Sales in North America were little
changed from the prior-year period. Operating income declined during the third quarter of 2007
primarily as a result of lower manufacturing volume of porcelain
enamel products, higher raw material costs, and manufacturing costs that were not fully offset by
higher product pricing.
Electronic Materials Segment Results. Sales increased in the Electronic Materials segment
primarily as a result of increased sales of our advanced materials, including our conductive
materials for solar cells. Demand for our dielectric materials, which had been weak in the first
half of 2007, recovered to more normal levels in the third quarter. Sales increased in Asia and
Europe, driven primarily by increased sales of conductive pastes. Operating income increased
during the quarter
as a result of higher manufacturing volume and lower manufacturing costs, combined with lower
selling, general and administrative expenses, all of which more than offset higher raw material
costs.
29
Color and Glass Performance Materials Segment Results. Sales increased in Color and Glass
Performance Materials due to the combination of the effects of higher volumes, improved product
pricing and product mix, and favorable foreign currency exchange rates. Sales grew in Europe,
North America, Asia and Latin America. Operating income grew primarily as a result of improved
product pricing, partially offset by higher raw material costs.
Polymer Additives Segment Results. Sales increased in Polymer Additives as a result of
improved product pricing and favorable changes in foreign currency
exchange rates. Sales increased in both the United States and Europe. Weak demand from U.S.
residential housing continued to negatively affect the volume of products sold, but this was offset
by demand from customers serving other markets. Operating income declined from the prior year
primarily due to raw materials cost increases, particularly tallow and soybean oil costs, which
were not fully offset by product price increases.
Specialty Plastics Segment Results. Sales declined in Specialty Plastics during the third
quarter of 2007, primarily as a result of lower volumes, which were only partially offset by
improved product prices and by favorable foreign currency exchange rates. The
lower sales were primarily the result of weaker demand from customers who manufacture products used
in residential construction, appliance and automotive applications. Sales of reinforced plastic
products declined while sales of plastic colorants increased. Sales declined in North America and
increased in Europe. Operating income increased from the prior-year period primarily as the result
of higher product pricing and restructuring activities in prior quarters that lowered selling,
general and administrative expenses. The negative effects of lower manufacturing volume and higher
raw material costs partially offset these improvements to operating income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Geographic Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
232,405 |
|
|
$ |
231,531 |
|
|
$ |
874 |
|
|
|
0.4 |
% |
International |
|
|
318,296 |
|
|
|
269,042 |
|
|
|
49,254 |
|
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
550,701 |
|
|
$ |
500,573 |
|
|
$ |
50,128 |
|
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
were flat in the United States, as higher sales in the Color and Glass
Performance Materials and Polymer Additives segments were offset by lower U.S. sales for the
Specialty Plastics segment. International sales increased the most in Europe, where sales
increased due to a combination of the positive effects of improved price and product mix, and
favorable changes in exchange rates. Sales also grew in Asia, primarily driven by increased sales
in the Electronic Materials, Performance Coatings, and Color and Glass Performance Materials
segments.
30
Comparison of the nine months ended September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands, |
|
|
|
|
|
|
|
except per share amounts) |
|
|
|
|
|
Net sales |
|
$ |
1,634,064 |
|
|
$ |
1,544,218 |
|
|
$ |
89,846 |
|
|
|
5.8 |
% |
Cost of sales |
|
|
1,319,609 |
|
|
|
1,226,758 |
|
|
|
92,851 |
|
|
|
7.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
314,455 |
|
|
|
317,460 |
|
|
|
(3,005 |
) |
|
|
(0.9 |
)% |
Gross profit percentage |
|
|
19.2 |
% |
|
|
20.6 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
234,212 |
|
|
|
231,955 |
|
|
|
2,257 |
|
|
|
1.0 |
% |
Restructuring charges |
|
|
7,689 |
|
|
|
|
|
|
|
7,689 |
|
|
|
|
|
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
46,220 |
|
|
|
48,155 |
|
|
|
(1,935 |
) |
|
|
(4.0 |
)% |
Interest earned |
|
|
(1,425 |
) |
|
|
(2,741 |
) |
|
|
1,316 |
|
|
|
(48.0 |
)% |
Foreign currency transactions, net |
|
|
924 |
|
|
|
706 |
|
|
|
218 |
|
|
|
30.9 |
% |
Miscellaneous (income) expense, net |
|
|
(399 |
) |
|
|
3,070 |
|
|
|
(3,469 |
) |
|
|
(113.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
27,234 |
|
|
|
36,315 |
|
|
|
(9,081 |
) |
|
|
(25.0 |
)% |
Income tax expense |
|
|
10,814 |
|
|
|
11,938 |
|
|
|
(1,124 |
) |
|
|
(9.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
16,420 |
|
|
|
24,377 |
|
|
|
(7,957 |
) |
|
|
(32.6 |
)% |
Loss from discontinued operations, net of tax |
|
|
216 |
|
|
|
405 |
|
|
|
(189 |
) |
|
|
(46.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,204 |
|
|
$ |
23,972 |
|
|
$ |
(7,768 |
) |
|
|
(32.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.36 |
|
|
$ |
0.54 |
|
|
$ |
(0.18 |
) |
|
|
(33.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales increased in the nine months ended September 30, 2007, by 5.8% compared with the
same period in 2006. The sales increase was driven by higher sales in the Performance Coatings and
Color and Glass Performance Materials segments, partially offset by a decline in the Specialty
Plastics segment. Improved product pricing, along with favorable foreign currency
exchange rates, were primarily responsible for the increased sales. These factors were partially
offset by the effects of lower manufacturing 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 residential housing, appliance and automotive markets.
Gross profit declined during the first nine months of 2007 compared with the first nine months
of 2006. During the first three quarters of 2007, gross profit was reduced by $4.7 million of
charges primarily related to our manufacturing rationalization programs. Gross profit was also
negatively impacted by the interruption of manufacturing operations at our South Plainfield, New
Jersey, manufacturing location, where operations were temporarily suspended to address operational
issues and safety concerns. In addition, gross profit was reduced by added costs that were
required to address quality issues at our Evansville, Indiana, manufacturing facility. Higher precious metal prices reduced our
gross margin, as a percentage of sales, because increases in precious metal costs are generally
passed through to customers with minimal gross margin contribution.
Selling,
general and administrative (SG&A) expenses increased by $2.3 million during the
first three quarters 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 expense in the first nine months of 2007 by $6.3 million. Additional charges of $2.2 million,
primarily related to legal expenses connected with manufacturing issues at our Evansville, Indiana,
plastics facility, business divestiture activities and executive severance expenses, were included
in SG&A expense during the first nine months of 2007. These increases were partially offset by
expense control initiatives. Charges of $6.8 million were included in SG&A expense in the
31
first nine months of 2006, mainly related to accounting investigation and restatement
activities. As a percentage of sales, SG&A expense declined to
14.3% in the first nine months of
2007 from 15.0% in 2006.
Restructuring
charges of $7.7 million were recorded in the first nine months of 2007,
primarily related to our European manufacturing rationalization programs in our Performance
Coatings and Color and Glass Performance Materials segments and our restructuring programs in the
Electronic Materials segment in the United States.
Interest expense declined in the first nine months of 2007, primarily as a result of lower
borrowing levels in the second and third quarters. The lower borrowing levels were largely the
result of renegotiating our consignment agreements for precious metals and elimination of
requirements for cash deposits. During the first three quarters of 2007, interest expense included
a $2.0 million write-off of unamortized financing fees associated with the cancelled portion of our term loan
arrangements. During the first three quarters 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 nine months ended September 30, 2007, was $0.4 million compared
with miscellaneous expense of $3.1 million in the first nine 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 nine months of 2007 compared with a loss of $3.3
million in the first nine months of 2006.
Income tax expense was 39.7% of pre-tax income for the nine months ended September 30, 2007,
and 32.9% of pre-tax income for the nine months ended September 30, 2006. The primary reasons for
the increase in the effective tax rate were the tax effect of restructuring charges, a change in
the mix of income and losses by country, and a relatively high tax cost on 2007 earnings
repatriated from outside the United States.
There were no new businesses included in discontinued operations in the first nine months of
2007. We recorded a loss of $0.2 million, net of taxes, in the first three quarters related to
post-closing matters associated with businesses we sold in previous years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Segment Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
451,058 |
|
|
$ |
397,015 |
|
|
$ |
54,043 |
|
|
|
13.6 |
% |
Electronic Materials |
|
|
338,412 |
|
|
|
335,493 |
|
|
|
2,919 |
|
|
|
0.9 |
% |
Color and Glass Performance Materials |
|
|
329,195 |
|
|
|
292,515 |
|
|
|
36,680 |
|
|
|
12.5 |
% |
Polymer Additives |
|
|
252,903 |
|
|
|
245,057 |
|
|
|
7,846 |
|
|
|
3.2 |
% |
Specialty Plastics |
|
|
198,994 |
|
|
|
209,525 |
|
|
|
(10,531 |
) |
|
|
(5.0 |
)% |
Other businesses |
|
|
63,502 |
|
|
|
64,613 |
|
|
|
(1,111 |
) |
|
|
(1.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,634,064 |
|
|
$ |
1,544,218 |
|
|
$ |
89,846 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
29,947 |
|
|
$ |
31,937 |
|
|
$ |
(1,990 |
) |
|
|
(6.2 |
)% |
Electronic Materials |
|
|
19,534 |
|
|
|
25,895 |
|
|
|
(6,361 |
) |
|
|
(24.6 |
)% |
Color and Glass Performance Materials |
|
|
39,462 |
|
|
|
32,993 |
|
|
|
6,469 |
|
|
|
19.6 |
% |
Polymer Additives |
|
|
10,576 |
|
|
|
11,984 |
|
|
|
(1,408 |
) |
|
|
(11.7 |
)% |
Specialty Plastics |
|
|
10,961 |
|
|
|
11,937 |
|
|
|
(976 |
) |
|
|
(8.2 |
)% |
Other businesses |
|
|
7,982 |
|
|
|
4,002 |
|
|
|
3,980 |
|
|
|
99.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
118,462 |
|
|
$ |
118,748 |
|
|
$ |
(286 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 increased product pricing and favorable changes in foreign exchange rates compared with the first nine months of 2006. The sales increases
32
were partially offset by the effects of lower manufacturing volume. Sales growth was the
greatest in Europe, although all regions recorded increased sales. In the United States, sales
growth was slowed by weakness in demand from appliance and residential construction applications.
Operating income declined during the first nine months of 2007 primarily as a result of increased
costs of raw materials, the effects of lower manufacturing volumes, and higher manufacturing costs,
partially offset by product price increases.
Electronic Materials Segment Results. Sales increased slightly in the first nine months of
2007 as lower sales in the beginning of the period were more than offset by improved sales in the
third quarter. During the first half of the year, demand was weaker from customers who buy our
dielectric powders to manufacture capacitors, however this demand has now recovered to more normal
levels. Demand for conductive pastes used in the manufacture of solar cells continued to grow.
Sales growth in Europe and Asia was nearly offset by sales declines in the United States during the
first nine months of 2007. Operating income declined as a result of the impact of lower
manufacturing volumes 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 changes in foreign currency
exchange rates, improved volume, and improved product pricing. Sales increased in
all regions, with the largest sales increases coming from Europe. Operating income improved
primarily as a result of improved product pricing partially offset by increased raw material costs.
Polymer Additives Segment Results. Sales increased in Polymer Additives during the first
three quarters of 2007. Sales grew in the United States and Europe, but the growth in the United
States was constrained somewhat by weak demand from residential housing and automotive
applications. Sales growth was primarily from improved product pricing, partially
offset by the effects of lower manufacturing volume. Operating income declined compared with the
first nine months of 2006 as a result of lower manufacturing volume and higher raw material costs,
partially offset by lower manufacturing costs, higher product pricing, and lower selling, general
and administrative expenses.
Specialty Plastics Segment Results. Sales declined during the first nine months 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 declined in our filled and
reinforced plastics and our liquid coatings and dispersions products. This decline was partially
offset by growth in sales of our plastic colorants products. Operating income declined as a result
of the effects of lower manufacturing volume and higher raw materials costs, partially offset by
increased product pricing and lower selling, general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Geographic Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
710,423 |
|
|
$ |
738,060 |
|
|
$ |
(27,637 |
) |
|
|
(3.7 |
)% |
International |
|
|
923,641 |
|
|
|
806,158 |
|
|
|
117,483 |
|
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,634,064 |
|
|
$ |
1,544,218 |
|
|
$ |
89,846 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales declined in the United States, primarily driven by lower sales in the Specialty Plastics
and Electronic Materials segments. These sales declines were partially offset by increased sales
in the Polymer Additives, Color and Glass Performance Materials, and Performance Coatings segments.
International sales increased in all regions, with the greatest growth in Europe, where sales
increased due to a combination of the positive effects of improved price and product mix and
favorable changes in exchange rates. The increase was the result of international sales growth in
all segments, led by Performance Coatings and Color and Glass Performance Materials.
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
121,281 |
|
|
$ |
14,905 |
|
|
$ |
106,376 |
|
|
|
713.7 |
% |
Net cash used for investing activities |
|
|
(39,992 |
) |
|
|
(52,277 |
) |
|
|
12,285 |
|
|
|
(23.5 |
)% |
Net cash (used for) provided by financing activities |
|
|
(73,302 |
) |
|
|
30,777 |
|
|
|
(104,079 |
) |
|
|
(338.2 |
)% |
Effect of exchange rate changes on cash |
|
|
849 |
|
|
|
(202 |
) |
|
|
1,051 |
|
|
|
(520.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
$ |
8,836 |
|
|
$ |
(6,797 |
) |
|
$ |
15,633 |
|
|
|
(230.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities improved by $106.4 million in the first nine months of
2007 over the same period in 2006. Changes in deposits under our precious metals consignment
program provided $144.3 million of improvement. In the first nine months of 2007, we received $70.1
million of these deposits from financial institutions, while in the first nine months of 2006, we
placed $74.2 million on deposit under this program. Cash flows were also improved $88.9 million
from net reductions in the working capital elements of accounts and trade notes receivable,
inventories, and accounts payable. These improvements were offset by $89.0 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 $12.3 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 $104.1 million, of which $122.8 million
related to changes in borrowing activity. In the first nine months of 2007, we used cash to reduce
our debt by $56.7 million. In the first nine months of 2006, we borrowed $66.1 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 September 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 September 30, 2007, we
had borrowed $19.3 million of the revolving credit facility and had $272.1 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 September 30, 2007, we had borrowed $302.7 million in term loans. The Company is
required to make quarterly principal payments of $0.8 million from October 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.
34
At September 30, 2007, we were in compliance with the covenants of the Amended Credit
Facility.
Senior Notes and Debentures
At September 30, 2007, we had $200.0 million principal amount outstanding under senior notes,
which are due in January 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 September 30, 2007, FFC had
received net proceeds of $65.5 million for outstanding receivables, and the balance of Ferros note
receivable from FFC was $22.9 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 $85.8 million at September 30, 2007. The proceeds from outstanding receivables sold
under the international programs were $51.2 million at September 30, 2007.
Consignment 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 six months of 2007. At September 30, 2007, we had on hand $126.3 million of precious metals
owned by financial institutions, measured at fair value.
Bank Guarantees and Standby Letters of Credit. At September 30, 2007, the Company had bank
guarantees and standby letters of credit issued by financial institutions, which totaled
$17.1 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. Beginning in the third quarter, these underlying accounts receivable
are treated as sold and, at September 30, 2007, were included in the above disclosures about our
international programs to sell trade accounts receivable.
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 September 30,
2007, we had recognized approximately $24.4 million of long-term tax assets and $37.1 million of
long-term tax liabilities, which could be settled more than one year in the future.
35
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.
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.
36
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 $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 Pronouncements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements, (FAS No.157).
FAS No. 157 defines fair value, establishes a framework and gives guidance regarding the methods
used for measuring fair value, and expands disclosures about fair value measurements. Accordingly,
FAS No. 157 does not require any new fair value measurements, but will change current practice for
some entities. FAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We will apply this
standard prospectively, as permitted.
In September 2006, the FASB issued Statement No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106,
and 132(R), (FAS No. 158). We are required to adopt the measurement provisions of FAS No. 158 as
of December 31, 2008. The measurement provisions require companies to measure defined benefit plan
assets and obligations as of the balance sheet date. Currently, we use September 30 as the
measurement date for U.S. pension and other postretirement benefits. We are evaluating these
requirements and have not yet determined the impact this may have on our consolidated financial
statements.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, (FAS No. 159). This statement permits all entities to choose,
at specified election dates, to measure eligible items at fair value (the fair value option). A
business entity should report unrealized gains and losses on items for which the fair value option
has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to
items for which the fair value option is elected shall be recognized in earnings as incurred and
not deferred. FAS No. 159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007. We are currently evaluating the impact of the adoption of this
statement; at this time, we are uncertain as to the impact on our results of operations and
financial position.
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 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 hedge a portion of our exposure to changes in
the pricing of certain raw material commodities through swap arrangements that allow us to fix the
pricing of the commodities for future purchases. 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 cover the value of the fixed price sales contract. 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 $6.2 million at September 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:
|
|
|
|
|
|
|
|
|
|
|
September 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 |
|
$ |
2,958 |
|
|
$ |
4,797 |
|
Fixed-rate debt: |
|
|
|
|
|
|
|
|
Carrying amount |
|
$ |
(200,934 |
) |
|
$ |
(200,281 |
) |
Fair value |
|
$ |
(206,739 |
) |
|
$ |
(206,399 |
) |
Change in fair value from 1% increase in interest rate |
|
$ |
(2,406 |
) |
|
$ |
(3,668 |
) |
Change in fair value from 1% decrease in interest rate |
|
$ |
2,446 |
|
|
$ |
3,755 |
|
Interest rate swaps: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
150,000 |
|
|
$ |
|
|
Carrying amount and fair value |
|
$ |
(4,656 |
) |
|
$ |
|
|
Change in fair value from 1% increase in interest rate |
|
$ |
5,196 |
|
|
$ |
|
|
Change in fair value from 1% decrease in interest rate |
|
$ |
(5,395 |
) |
|
$ |
|
|
Foreign currency forward contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
169,454 |
|
|
$ |
121,430 |
|
Carrying amount and fair value |
|
$ |
(101 |
) |
|
$ |
(640 |
) |
Change in fair value from 10% appreciation of U.S. dollar |
|
$ |
(3,420 |
) |
|
$ |
(1,142 |
) |
Change in fair value from 10% depreciation of U.S. dollar |
|
$ |
4,180 |
|
|
$ |
1,396 |
|
Raw material commodity swaps: |
|
|
|
|
|
|
|
|
Notional amount (in metric tons of base metals) |
|
|
1,595 |
|
|
|
2,004 |
|
Carrying amount and fair value |
|
$ |
(1,043 |
) |
|
$ |
1,939 |
|
Change in fair value from 10% change in forward prices |
|
$ |
814 |
|
|
$ |
1,003 |
|
Precious metals forward contracts: |
|
|
|
|
|
|
|
|
Notional amount (in troy ounces) |
|
|
554,043 |
|
|
|
183,264 |
|
Carrying amount and fair value |
|
$ |
997 |
|
|
$ |
192 |
|
Change in fair value from 10% change in forward prices |
|
$ |
1,064 |
|
|
$ |
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
Evaluation of Disclosure Controls and Procedures
Ferro is committed to maintaining disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the U.S. Securities and
Exchange Commissions rules and forms, and that such information is accumulated and communicated to
its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) of the Exchange Act, Ferro has carried out an evaluation, under
the supervision and with the participation of its management, including its Chief Executive Officer
and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures. The evaluation examined those disclosure controls and procedures as of
September 30, 2007, the end of the period covered by this report. As described below, we have
taken measures to improve our internal controls and procedures; however, there has not been
adequate time for us to conclude that the material weaknesses in the Companys internal control
over financial reporting described below have been fully remediated. Therefore, Ferros management,
including its Chief Executive Officer and its Chief Financial Officer, has concluded that, as of
September 30, 2007, Ferros disclosure controls and procedures were not effective.
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
As of December 31, 2006, we identified the following material weaknesses in internal control
over financial reporting:
|
|
|
The Company did not maintain a sufficient complement of personnel with an appropriate
level of knowledge to consistently perform independent secondary reviews over complex and
non-routine accounting matters. |
|
|
|
|
The Company did not have in place adequate formal policies and procedures and also had
a lack of sufficient resources with appropriate expertise in the Corporate tax function
to effectively account for, oversee and review the Companys accounting for income taxes. |
We have taken measures to improve the effectiveness of our internal control over financial
reporting and to address the material weaknesses described above. The following process and control
improvements are changes in our internal control over financial reporting during the three months
ended September 30, 2007, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. We will continue to assess our disclosure
controls and procedures and will take any further actions that we deem necessary.
|
|
|
The Company has hired additional experienced accounting professionals to increase the
depth and experience of the Companys finance and accounting staff, thereby providing
more expertise and knowledge to review accounting literature and other technical
materials and providing the appropriate personnel to perform independent secondary
reviews of complex and non-routine transactions. |
|
|
|
|
The Company contracted with an independent accounting firm to provide additional
expertise to the Corporate tax function, assist in the development of policies and
procedures, and assist in the accounting for and review of the Companys income taxes. |
|
|
|
|
The Company developed a comprehensive business information systems strategy intended
to convert multiple legacy systems into one Enterprise Resource Planning (ERP)
platform. The financial control environment benefits will include, but are not limited
to, reducing the risks associated with multiple system interfaces, improving access
controls within and between multiple systems, improving the integration of our sales,
finance and accounting information systems, improving the accuracy of our revenue
reporting, reducing the number of manual transactions, and increasing the transparency of
financial information. As of September 30, 2007, the |
40
|
|
|
Company has successfully upgraded its financial consolidation software and the
parent-company general ledger system as part of this strategy. |
41
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
None.
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. |
42
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: November 8, 2007 |
|
|
|
|
|
|
|
|
|
|
|
/s/ James F. Kirsch |
|
|
|
|
|
|
|
|
|
James F. Kirsch
Chairman, President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
|
Date: November 8, 2007 |
|
|
|
|
|
|
|
|
|
|
|
/s/ Sallie B. Bailey |
|
|
|
|
|
|
|
|
|
Sallie B. Bailey
Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
43
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
(91/8% 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.
44
|
10.1 |
|
Ferro Corporation Deferred Compensation Plan for Executive Employees. (Reference
is made to Exhibit 10.1 to Ferro Corporations Current Report on Form 8-K, filed
September 24, 2007, which Exhibit is incorporated here by reference.) |
|
|
10.2 |
|
Ferro Corporation Deferred Compensation Plan for Non-Employee Directors.
(Reference is made to Exhibit 10.2 to Ferro Corporations Current Report on Form 8-K,
filed September 24, 2007, which Exhibit is incorporated here by reference.) |
|
|
10.3 |
|
Ferro Corporation Supplemental Defined Benefit Plan for Executive Employees.
(Reference is made to Exhibit 10.3 to Ferro Corporations Current Report on Form 8-K,
filed September 24, 2007, which Exhibit is incorporated here by reference.) |
|
|
10.4 |
|
Ferro Corporation Supplemental Defined Contribution Plan for Executive Employees.
(Reference is made to Exhibit 10.4 to Ferro Corporations Current Report on Form 8-K,
filed September 24, 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. |
45