Ferro Corporation 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-584
FERRO CORPORATION
(Exact name of registrant as
specified in its charter)
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Ohio
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34-0217820
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(State of Corporation)
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(IRS Employer Identification
No.)
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1000 Lakeside Avenue
Cleveland, OH
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44114
(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
216-641-8580
Securities Registered Pursuant to section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $1.00
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New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the
Act:
91/8% Senior
Notes due January 1, 2009
Series A ESOP Convertible Preferred Stock, without Par
Value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES þ NO o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained here, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerate filer, accelerator
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). YES o NO þ
The aggregate market value of Ferro Corporation Common Stock,
par value $1.00, held by non-affiliates and based on the closing
sale price as of June 30, 2007, was approximately
$1,046,275,000.
On January 31, 2008, there were 43,578,339 shares of
Ferro Corporation Common Stock, par value $1.00 outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Ferro Corporations
2008 Annual Meeting of Shareholders are incorporated into
Part III of this Annual Report on
Form 10-K.
PART I
History,
Organization and Products
Ferro Corporation was incorporated in Ohio in 1919 as an
enameling company. When we use the terms Ferro,
we, us or the Company, we
are referring to Ferro Corporation and its consolidated
subsidiaries unless we indicate otherwise. Today, we are a
leading producer of specialty materials and chemicals that are
sold to a broad range of manufacturers who, in turn, make
products for many end-use markets. In approximately 50
manufacturing sites around the world, we produce the following
types of products:
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Inorganic specialty products High-quality glazes,
frits, enamels, pigments, dinnerware decorations and other
performance materials;
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Organic specialty products Polymer specialty
materials, engineered plastic compounds, pigments, electrolytes,
specialty solvents, and high-potency pharmaceutical active
ingredients, and
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Electronic materials High-performance dielectrics,
conductive pastes, metal powders and polishing materials.
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We refer to our products as performance materials and chemicals
because we formulate them to perform specific functions in the
manufacturing processes and end products of our customers. The
products we develop often are delivered to our customers in
combination with customized technical service. The value of our
products stems from the value they create in actual use. We
develop and deliver innovative products to our customers through
our key strengths in:
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Particle Engineering Our ability to design and
produce very small particles made of a broad variety of
materials, with precisely controlled characteristics of shape,
size and size distribution. We understand how to disperse these
particles within liquid, paste and gel formulations.
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Color and Glass Science Our understanding of the
chemistry required to develop and produce pigments that provide
color characteristics ideally suited to customers
applications. We have demonstrated an ability to provide
glass-based coatings with properties that precisely meet
customers needs in a broad variety of applications.
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Surface Chemistry and Surface Application Technology
Our understanding of chemicals and materials used to develop
products and processes that involve the interface between layers
and the surface properties of materials.
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Product Formulation Our ability to develop and
manufacture combinations of materials that deliver specific
performance characteristics designed to work within
customers particular manufacturing processes.
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We deliver these key technical strengths to our customers in a
way that creates additional value through our integrated
applications support. Our applications support personnel are
involved in our customers material specification and
evaluation, product design and manufacturing process
characterization in order to help customers optimize the
efficient and cost-effective application of our products.
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We divide our operations into eight business units, which
comprise six reportable business segments. We have grouped these
segments by their product group below:
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Inorganic Specialties
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Organic Specialties
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Electronic Materials(3)
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Tile Coating Systems(1)
Porcelain Enamel(1)
Color and Glass Performance
Materials
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Polymer Additives
Specialty Plastics
Pharmaceuticals (2)
Fine Chemicals (2)
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(1) |
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Tile Coating Systems and Porcelain Enamel are combined into one
reportable business segment, Performance Coatings, for financial
reporting purposes. |
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Pharmaceuticals and Fine Chemicals are combined into one
reportable business segment, Other Businesses, for financial
reporting purposes. |
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Electronic Materials segment is its own distinct product group. |
Markets
and Customers
Ferros products are used in a variety of product
applications in markets including:
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Appliances
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Transportation
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Building and renovation
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Electronics
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Household furnishings
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Industrial products
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Packaging
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Pharmaceuticals
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Many of our products are used as coatings on our customers
products, such as glazes and decorations on tile, glass and
dinnerware. Other products are applied as films in products such
as solar cells and other electronic components. Still other
products are added to other ingredients during our
customers manufacturing processes to provide desirable
properties to the end product. Often, our products are a small
portion of the total cost of our customers products, but
they can be critical to the appearance or functionality of those
products.
Our leading customers include manufacturers of tile, major
appliances, construction materials, automobile parts, glass,
bottles, vinyl flooring and wall coverings, multi-layer
capacitors, solar cells, batteries, and pharmaceuticals. Many of
our customers, including makers of major appliances and
automobile parts, purchase materials from more than one of our
business units. Our customer base is well diversified both
geographically and by end market.
We generally sell our products directly to our customers.
However, a portion of our business uses indirect sales channels,
such as distributors, to deliver products to market. In 2007, no
single customer or related group of customers represented more
than 10% of net sales. In addition, none of our reportable
segments is dependent on any single customer or related group of
customers.
Backlog
of Orders and Seasonality
Generally, there is no significant lead time between customer
orders and delivery in any of our business segments. As a
result, we do not consider that the dollar amount of backlogged
orders believed to be firm is material information for an
understanding of our business. We also do not regard any
material part of our business to be seasonal. However, customer
demand has historically been higher in the second quarter when
building and renovation markets are particularly active, and
this quarter is normally the strongest for sales and operating
profit.
Competition
In most of our markets, we have a substantial number of
competitors, none of which is dominant. Due to the diverse
nature of our product lines, no single competitor directly
matches all our product offerings. Our competition
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varies by product and by region, and is based primarily on
price, product quality and performance, customer service and
technical support, and our ability to develop custom products to
meet specific customer requirements.
We are a worldwide leader in the production of glass enamels,
porcelain enamels and ceramic glaze coatings. There is strong
competition in our markets, ranging from large multinational
corporations to local producers. While many of our customers
purchase custom products and formulations from us, our customers
could generally buy from other sources, if necessary.
Raw
Materials and Supplier Relations
Raw materials widely used in our operations include:
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Metal
Oxides:(1)
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Precious and Non-precious
Metals:(3)
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Zinc oxide
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Gold
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Cobalt oxide
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Platinum
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Lead oxide
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Palladium
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Aluminum oxide
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Silver
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Nickel oxide
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Titanium
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Chromium
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Polymers:(2)
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Copper
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Polypropylene
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Bismuth
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Unsaturated polyester
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Lithium
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Polystyrene
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Zinc
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Other Inorganic Materials:
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Other Organic Materials:(4)
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Zircon(1)
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Phthalic anhydride
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Feldspar(1)
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Toluene
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Silica(1)
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Butanol
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Titanium dioxide(2)
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Tallow
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Fiberglass(2)
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Soybean oil
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Boron(3)
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(1) |
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Primarily used by Color and Glass Performance Materials, Tile
Coating Systems and Porcelain Enamel. |
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(2) |
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Primarily used by Specialty Plastics. |
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Primarily used by Electronic Materials, Color and Glass
Performance Materials and Fine Chemicals. |
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Primarily used by Polymer Additives. |
These raw materials make up a large portion of our product costs
in certain of our product lines, and fluctuations in the cost of
raw materials may have a significant impact on the financial
performance of the related businesses. We attempt to pass
through to our customers raw material cost fluctuations,
including those related to precious metals.
We have a broad supplier base and, in many instances, multiple
sources of essential raw materials are available worldwide if
problems arise with a particular supplier. We maintain many
comprehensive supplier agreements for strategic and critical raw
materials. In addition, the magnitude of our purchases provides
for leverage in negotiating favorable conditions for supplier
contracts. We did not encounter raw material shortages in 2007,
but we are subject to volatile raw material costs that can
affect our results of operations.
Environmental
Matters
As part of the production of some of our products, we handle,
process, use and store hazardous materials. As a result of this,
we operate manufacturing facilities that are subject to a broad
array of environmental laws and
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regulations in the countries in which they operate, particularly
for plant wastes and emissions. The costs to comply with complex
environmental laws and regulations are significant and will
continue for the industry and us for the foreseeable future.
These routine costs are expensed as they are incurred. While
these costs may increase in the future, they are not expected to
have a material impact on our financial position, liquidity or
results of operations. We believe that we are in compliance with
the environmental regulations to which our operations are
subject and that, to the extent we may not be in compliance with
such regulations, non-compliance will not have a materially
adverse effect on our financial position, liquidity or results
of operations.
Our policy is to operate our plants and facilities in a manner
that protects the environment and the health and safety of our
employees and the public. We intend to continue to make
expenditures for environmental protection and improvements in a
timely manner consistent with available technology. Capital
expenditures for environmental control were $11.6 million
in 2007, $6.2 million in 2006, and $3.3 million in
2005. These amounts pertain primarily to costs associated with
environmental protection equipment. Although we cannot precisely
predict future environmental capital spending, we do not expect
the costs to have a material impact on our financial position,
liquidity or results of operations.
We also accrue for environmental remediation costs when it is
probable that a liability has been incurred and we can
reasonably estimate the amount. We determine the timing and
amount of any liability based upon assumptions regarding future
events, and inherent uncertainties exist in such evaluations
primarily due to unknown conditions, changing governmental
regulations and legal standards regarding liability, and
evolving technologies. We adjust these liabilities periodically
as remediation efforts progress, the nature and extent of
contamination becomes more certain, or as additional technical
or legal information becomes available.
Research
and Development
We are involved worldwide in research and development activities
relating to new and existing products, services and technologies
required by our customers continually changing markets.
Our research and development resources are organized into
centers of excellence that support our regional and worldwide
major business units. We also conduct research and development
activities at our Posnick Center for Innovative Technology in
Independence, Ohio. These centers are augmented by local
laboratories, which provide technical service and support to
meet customer and market needs of particular geographic areas.
Expenditures for research and development activities for
continuing operations were approximately $36.9 million in
2007, $42.6 million in 2006, and $38.4 million in
2005. Expenditures for individual customer requests for research
and development were not material. During 2008, we expect to
spend approximately $39.9 million on research and
development.
Patents,
Trademarks and Licenses
We own a substantial number of patents and patent applications
relating to our various products and their uses. While these
patents are of importance to us, we do not believe that the
invalidity or expiration of any single patent or group of
patents would have a material adverse effect on our businesses.
Our patents will expire at various dates through the year 2027.
We also use a number of trademarks that are important to our
businesses as a whole or to a particular segment. We believe
that these trademarks are adequately protected.
Employees
At December 31, 2007, we employed 6,275 full-time
employees, including 4,228 employees in our foreign
consolidated subsidiaries and 2,047 in the United States
(U.S.) Total employment decreased 139 in our
foreign subsidiaries and 246 in the U.S. from the prior
year end due to our various restructuring and cost reduction
programs, including the partial closure and subsequent
divestiture of our Electronic Materials facility in
Niagara Falls, New York.
Collective bargaining agreements cover approximately 18.2% of
our U.S. workforce. Approximately 9.3% of the
U.S. employees are affected by labor agreements that expire
in 2008, and we expect to complete renewals of
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these agreements with no significant disruption to the related
businesses. We consider our relations with our employees,
including those covered by collective bargaining agreements, to
be good.
Our employees in Europe have protections afforded them by local
laws and regulations through unions and works councils. Some of
these laws and regulations may affect the timing, amount and
nature of restructuring and cost reduction programs in that
region.
Domestic
and Foreign Operations
Financial information about our domestic and foreign operations
by segment is included herein in Note 17 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
More than 50% of our net sales are outside of the U.S. Our
customers represent more than 30 industries and operate in
approximately 100 countries.
We began international operations in 1927. Our products are
produced and distributed through our subsidiaries in the
following countries:
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Wholly-owned:
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Argentina
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China
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Japan
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Spain
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Australia
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France
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Mexico
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Taiwan
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Belgium
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Germany
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Netherlands
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Thailand
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Brazil
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Italy
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Portugal
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United Kingdom
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Majority-owned and Controlled:
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China
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Italy
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South Korea
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Venezuela
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Indonesia
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Spain
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Thailand
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Our U.S. parent company receives technical service fees
and/or
royalties from many of its foreign subsidiaries. As a matter of
corporate policy, the foreign subsidiaries have historically
been expected to remit a portion of their annual earnings to the
U.S. parent company as dividends. To the extent earnings of
foreign subsidiaries are not remitted to the U.S. parent
company, those earnings are indefinitely re-invested in those
subsidiaries.
Available
Information
Our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
and Current Reports on
Form 8-K,
including any amendments, will be made available free of charge
on our Web site, www.ferro.com, as soon as reasonably practical,
following the filing of the reports with the
U.S. Securities and Exchange Commission (SEC).
Our Corporate Governance Principles, Legal and Ethical Policies,
Guidelines for Determining Director Independence, and charters
for our Audit Committee, Compensation Committee, Finance
Committee, and Governance and Nomination Committee are available
free of charge on our Web site or to any shareholder who
requests them from the Ferro Corporation Investor Relations
Department located at 1000 Lakeside Avenue, Cleveland, Ohio,
44114-1147.
Forward-looking
Statements
Certain statements contained here and in future filings with the
SEC reflect our expectations with respect to future performance
and constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These statements are subject to a variety of
uncertainties, unknown risks and other factors concerning our
operations and the business environment, which are difficult to
predict and are beyond our control.
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Many factors could cause our actual results to differ materially
from those suggested by statements contained in this filing and
could adversely affect our future financial performance. Such
factors include the following:
We depend on reliable sources of raw materials and other
supplies at a reasonable cost, but the availability of these
materials and supplies could be interrupted and/or their prices
could escalate and adversely affect the Companys sales and
profitability.
We purchase many raw materials and supplies that we use to
manufacture our products. Changes in their availability or price
could affect our ability to manufacture enough products to meet
customers demands or to manufacture products profitably.
We try to maintain multiple sources of raw materials and
supplies where practical, but this may not prevent unanticipated
changes in their availability or cost. Significant disruptions
in availability or cost increases could adversely affect our
manufacturing volume or costs, which could negatively affect
product sales or profitability of our operations.
The markets for our products are highly competitive and
subject to intense price competition, and that could adversely
affect the Companys sales and earnings performance.
Our customers typically have multiple suppliers from which to
choose. If we are unwilling or unable to provide products at
competitive prices, and if other factors, such as product
performance and value-added services do not provide an
offsetting competitive advantage, customers may reduce,
discontinue, or decide not to purchase our products. If we could
not secure alternate customers for lost business, our sales and
earnings performance could be adversely affected.
We strive to improve operating margins through sales
growth, price increases, productivity gains, improved purchasing
techniques and restructuring activities, but we may not achieve
the desired improvements.
We work to improve operating profit margins through activities
such as growing sales to achieve increased economies of scale,
increasing prices, improving manufacturing processes, adopting
purchasing techniques that lower costs or provide increased cost
predictability, and restructuring businesses to realize cost
savings. However, these activities depend on a combination of
improved product design and engineering, effective manufacturing
process control initiatives, cost-effective redistribution of
production, and other efforts that may not be as successful as
anticipated. The success of sales growth and price increases
depends not only on our actions but also the strength of
customer demand and competitors pricing responses, which
are not fully predictable. Failure to successfully implement
actions to improve operating margins could adversely affect our
financial performance.
We sell our products into industries where demand has been
unpredictable, cyclical or heavily influenced by consumer
spending.
We sell our products to a wide variety of customers who supply
many different market segments. Many of these market segments,
such as building and renovation, major appliances,
transportation and electronics, are cyclical or closely tied to
consumer demand, which is difficult to predict. Incorrect
forecasts of demand or unforeseen reductions in demand can
adversely affect costs and profitability due to factors such as
underused manufacturing capacity, excess inventory, or working
capital needs. These factors can result in lower profitability.
The global scope of our operations exposes us to risks
related to currency conversion rates and changing economic,
social and political conditions around the world.
In order to support global customers, access regional markets
and compete effectively, our operations are located around the
world. As a result, our operations have additional complexity
from changing economic, social and political conditions in
multiple locations. While we attempt to anticipate these changes
and manage our business appropriately, these changes are often
beyond our control and difficult to forecast. The consequences
of these risks may have significant adverse effects on our
results of operations or financial position.
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We have a growing presence in the Asia-Pacific region
where it can be difficult for a
U.S.-based
company, such as Ferro, to compete lawfully with local
competitors.
Many of our most promising growth opportunities are in the
Asia-Pacific region, especially the Peoples Republic of
China. Although we have been able to compete successfully in
those markets to date, local laws and customs can make it
difficult for a
U.S.-based
company to compete on a level playing field with
local competitors without engaging in conduct that would be
illegal under U.S. law. Our strict policy of observing the
highest standards of legal and ethical conduct may cause us to
lose some otherwise attractive business opportunities to local
competition in the region.
Regulatory authorities in the U.S., European Union and
elsewhere are taking a much more aggressive approach to
regulating hazardous materials, and those regulations could
affect sales of our products.
Hazardous material legislation and regulations can restrict the
sale of products
and/or
increase the cost of producing them. Some of our products are
subject to restrictions under laws or regulations such as
California Proposition 65 or the European Unions
(EU) hazardous substances directive. The EU
REACH registration system became effective
June 1, 2007, and requires us to perform toxicity studies
of the components of some of our products and to register the
information in a central database, increasing the cost of these
products. As a result of these hazardous material regulations,
customers may avoid purchasing some products in favor of
perceived greener, less hazardous or less costly
alternatives. This factor could adversely affect our sales and
operating profits.
Our operations are subject to stringent environmental,
health and safety regulations, and compliance with those
regulations could require us to make significant
investments.
We strive to conduct our manufacturing operations in a manner
that is safe and in compliance with all applicable
environmental, health and safety regulations. Compliance with
changing regulations may require us to make significant capital
investments, incur training costs, make changes in manufacturing
processes or product formulations, or incur costs that could
adversely affect the Companys profitability. These costs
may not affect competitors in the same way due to differences in
product formulations, manufacturing locations or other factors,
and we could be at a competitive disadvantage, which might
adversely affect financial performance.
We depend on external financial resources, and any
interruption in access to capital markets or borrowings could
adversely affect our financial condition.
As of December 31, 2007, the Company had approximately
$526.1 million of short-term and long-term debt with
varying maturities. These borrowings have allowed us to make
investments in growth opportunities and fund working capital
requirements. Our continued access to capital markets is
essential if we are to meet our current obligations as well as
fund our strategic initiatives. An interruption in our access to
external financing could adversely affect our business prospects
and financial condition. See further information regarding the
Companys liquidity in Capital Resources and
Liquidity under Item 7 and in Note 5 to the
consolidated financial statements included under Item 8 of
this Annual Report on
Form 10-K.
Interest rates on some of our borrowings are variable, and
our borrowing costs could be affected adversely by interest rate
increases.
Portions of our debt obligations have variable interest rates.
Generally, when interest rates rise, the Companys cost of
borrowings increases. We estimate, based on the debt obligations
outstanding at December 31, 2007, that a one percent
increase in interest rates would cause interest expense to
increase by approximately $2.6 million annually. Continued
interest rate increases could raise the cost of borrowings and
adversely affect our financial performance. See further
information regarding the Companys interest rates on our
debt obligations in Quantitative and Qualitative
Disclosures about Market Risk under Item 7A and in
Note 5 to the consolidated financial statements included
under Item 8 of this Annual Report on
Form 10-K.
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Many of our assets are encumbered by liens that have been
granted to lenders, and those liens affect our flexibility to
dispose of property and businesses.
Our debt obligations are secured by substantially all of the
Companys assets. These liens could reduce our ability
and/or
extend the time to dispose of property and businesses, as these
liens must be cleared or waived by the lenders prior to any
disposition. These security interests are described in more
detail in Note 5 to the consolidated financial statements
under Item 8 of this Annual Report on
Form 10-K.
We are subject to a number of restrictive covenants under
our credit facilities, and those covenants could affect our
flexibility to fund strategic initiatives.
Our credit facilities contain a number of restrictive covenants
as described in more detail in Note 5 to the consolidated
financial statements under Item 8 of this Annual Report on
Form 10-K.
These covenants include customary operating restrictions that
limit our ability to engage in certain activities, including
additional loans and investments; prepayments, redemptions and
repurchases of debt; and mergers, acquisitions and asset sales.
We are also subject to customary financial covenants including a
leverage ratio and a fixed charge coverage ratio. These
covenants restrict the amount of our borrowings, reducing our
flexibility to fund strategic initiatives. Breaches of these
covenants could become defaults under our credit facilities and
cause the acceleration of debt payments beyond our ability to
pay.
We have significant deferred tax assets, and our ability
to utilize these assets will depend on the Companys future
performance.
To fully realize the carrying value of our net deferred tax
assets, we will have to generate adequate taxable profits in
various tax jurisdictions. As of December 31, 2007, the
Company had $102.8 million of net deferred tax assets,
after a valuation allowance. If the Company does not generate
adequate profits within the time periods required by applicable
tax statutes, the carrying value of the tax assets will not be
realized. If it becomes unlikely that the carrying value of our
net deferred tax assets will be realized, the valuation
allowance may need to be increased in our consolidated financial
statements, adversely affecting results of operations. Further
information on our deferred tax assets is presented in
Note 7 to the consolidated financial statements under
Item 8 of this Annual Report on
Form 10-K.
We are a defendant in several lawsuits that could have an
adverse effect on our financial condition
and/or
financial performance, unless they are successfully
resolved.
We are routinely involved in litigation brought by suppliers,
customers, employees, governmental agencies and others.
Litigation is an inherently unpredictable process and
unanticipated negative outcomes are possible. The most
significant pending litigation is described in
Item 3 Legal Proceedings of this Annual Report
on
Form 10-K.
Our businesses depend on a continuous stream of new
products, and failure to introduce new products could affect our
sales and profitability.
One way that we remain competitive in our markets is by
developing and introducing new and improved products on an
ongoing basis. Customers continually evaluate our products in
comparison to those offered by our competitors. A failure to
introduce new products at the right time that are price
competitive and that provide the features and performance
required by customers could adversely affect our sales, or could
require us to compensate by lowering prices. The result could be
lower sales
and/or lower
profitability.
Employee benefit costs, especially postretirement costs,
constitute a significant element of our annual expenses, and
funding these costs could adversely affect our financial
condition.
Employee benefit costs are a significant element of our cost
structure. Certain expenses, particularly postretirement costs
under defined benefit pension plans and healthcare costs for
employees and retirees, may increase significantly at a rate
that is difficult to forecast and may adversely affect our
financial results, financial condition or cash flows.
10
We are exposed to risks associated with acts of God,
terrorists and others, as well as fires, explosions, wars,
riots, accidents, embargoes, natural disasters, strikes and
other work stoppages, quarantines and other governmental
actions, and other events or circumstances that are beyond our
control.
The Company is exposed to risks from various events that are
beyond its control, which may have significant effects on its
results of operations. While we attempt to mitigate these risks
through appropriate insurance, contingency planning and other
means, we may not be able to anticipate all risks or to
reasonably or cost-effectively manage those risks that we do
anticipate. As a result, our results of operations could be
adversely affected by circumstances or events in ways that are
significant
and/or long
lasting.
The risks and uncertainties identified above are not the only
risks that we face. Additional risks and uncertainties not
presently known to us or that we currently believe to be
immaterial also may adversely affect the Company. If any known
or unknown risks and uncertainties develop into actual events,
these developments could have material adverse effects on our
financial position, results of operations, and cash flows.
|
|
Item 1B
|
Unresolved
Staff Comments
|
None.
Our corporate headquarters offices are located at 1000 Lakeside
Avenue, Cleveland, Ohio. The Company also owns other corporate
facilities, including a centralized research and development
facility, which are located in Independence, Ohio. We own
principal manufacturing plants that range in size from
17,000 sq. ft. to over 500,000 sq. ft.
Plants with more than 250,000 sq. ft. are located in:
Germany; Spain; Penn Yan, New York; and France. The locations of
these principal manufacturing plants by reportable business
segment are as follows:
Performance Coatings U.S.: Cleveland, Ohio. Outside
the U.S.: Argentina, Australia, China, France, Indonesia, Italy,
Mexico, the Netherlands, Spain, Thailand and Venezuela.
Electronic Materials U.S.: Penn Yan, New York; and
South Plainfield, New Jersey. Outside the U.S.: the Netherlands.
Color and Glass Performance Materials U.S.: Toccoa,
Georgia; Orrville, Ohio; and Washington, Pennsylvania. Outside
the U.S.: Australia, China, France, Germany, Mexico, United
Kingdom and Venezuela.
Polymer Additives U.S.: Bridgeport, New Jersey;
Cleveland, Ohio; Walton Hills, Ohio; and Fort Worth, Texas.
Outside the U.S.: Belgium.
Specialty Plastics U.S.: Evansville, Indiana;
Plymouth, Indiana; Edison, New Jersey; and Stryker, Ohio.
Outside the U.S.: the Netherlands and Spain.
Other Businesses U.S.: Waukegan, Illinois; and Baton
Rouge, Louisiana. Outside the U.S.: China
In October 2005, the Dutch government placed a lien on one of
our facilities in the Netherlands as collateral for any future
payment relating to an unresolved environmental claim. In March
2006, as a result of a credit rating downgrade, lenders of the
Companys revolving credit facility, senior notes and
debentures became entitled to security interest in the
Companys and its domestic material subsidiaries real
estate. This security interest was substantially perfected in
April 2006. Ferros current revolving credit and term loan
facility, which was established in June 2006, also shares in
this security interest.
In September 2006, we announced we had begun construction of a
new manufacturing plant at our existing location in Almazora,
Spain. The new plant, which began commercial production in the
third quarter of 2007, includes approximately
125,000 sq. ft. of manufacturing space and produces
colors for the European tile coatings market. In November 2006,
we announced that we would cease production at our Niagara
Falls, New York, manufacturing facility by the end of 2007.
During 2007, we transferred some of its production to other
Ferro production facilities, and in December 2007, sold the
facility.
11
In addition, we lease manufacturing facilities for the
Performance Coatings segment in Brazil and Italy; for the
Electronic Materials segment in Vista, California, Germany and
Japan; for the Color and Glass Performance Materials segment in
Japan, Portugal and Italy; for the Polymer Additives segment in
the United Kingdom; and for the Specialty Plastics segment in
Carpentersville, Illinois. In some instances, the manufacturing
facilities are used for two or more business segments. Leased
facilities range in size from 23,000 sq. ft. to over
300,000 sq. ft. at a plant located in Portugal.
|
|
Item 3
|
Legal
Proceedings
|
In February 2003, we were requested to produce documents in
connection with an investigation by the United States Department
of Justice into possible antitrust violations in the heat
stabilizer industry. In April 2006, we were notified by the
Department of Justice that the Government had closed its
investigation and that the Company was relieved of any
obligation to retain documents that were responsive to the
Governments earlier document request. Before closing its
investigation, the Department of Justice took no action against
the Company or any of its current or former employees. The
Company was previously named as a defendant in several lawsuits
alleging civil damages and requesting injunctive relief relating
to the conduct the Government was investigating. We 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. The
settlement agreement was approved by the United States District
Court for the Eastern District of Pennsylvania in December 2007.
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
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. These payments
include 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. The Company, our deceased former
Chief Executive Officer, our former Chief Financial Officer, and
a former Operating Vice President of the Company 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. 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, and the plaintiffs filed a
Notice of Appeal to the Sixth Circuit Court of Appeals. In
January 2008, the Sixth Circuit Court of Appeals affirmed the
dismissal by the District Court for the Northern District of
Ohio.
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
12
authorities imposed a fine of approximately $0.6 million.
We expect the Belgian authorities also to assess fines for the
alleged conduct, and we estimate the amount of the fines will be
approximately $0.3 million.
In each of February 2007 and February 2008, 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). The aggregate penalty assessment issued by
the NJDEP through November 2007 is $0.4 million. We are in
the process of negotiating an administrative consent order and
compliance schedule to settle these issues with the NJDEP. We
cannot determine the outcome of these settlement negotiations at
this time.
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.
There are various other lawsuits and claims pending against the
Company and its consolidated subsidiaries. In our opinion, the
ultimate liabilities, if any, and expenses resulting from such
lawsuits and claims will not materially affect the consolidated
financial position, results of operations, or cash flows of the
Company.
|
|
Item 4
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of Ferros security
holders during the fourth quarter of 2007.
Executive
Officers of the Registrant
The executive officers of the Company as of February 29,
2008, are listed below, along with their ages and positions held
during the past five years. The year indicates when the
individual was named to the indicated position. No family
relationship exists between any of Ferros executive
officers.
James F. Kirsch 50
Chairman, President and Chief Executive Officer, 2006
President and Chief Executive Officer, 2005
President and Chief Operating Officer, 2004
President, Premix Inc., and President, Quantum Composites Inc.,
manufacturers of thermoset molding compounds, parts and
sub-assemblies
for the automotive, aerospace, electrical and HVAC industries,
2002
W. Thomas Austin 57
Vice President, Operations, 2007
Global Operations Director for Chlor-Vinyls Business, The Dow
Chemical Company, a manufacturer of basic and specialty
chemicals and plastics, 1998 (retired in 2003)
Sallie B. Bailey 48
Vice President and Chief Financial Officer, 2007
Senior Vice President-Finance and Controller, The Timken
Company, an international manufacturer of highly engineered
bearings and alloy steels and provider of related products and
services, 2003
James C. Bays 58
Vice President, General Counsel and Secretary, 2006
Vice President and General Counsel, 2001
Ann E. Killian 53
Vice President, Human Resources, 2005
Vice President, Human Resources, W. W. Holdings, LLC, a
manufacturer and distributor of doors, frames and hardware
products for the commercial construction industry, 2003
13
Michael J. Murry 56
Vice President, Inorganic Specialties, 2006
Vice President, Performance Coatings, 2005
President, Chief Executive Officer, and Director, Catalytica
Energy Systems, Inc., a provider of products that reduce
nitrogen oxides (NOx) emissions for the transportation and power
generation industries, 2003
Barry D. Russell 43
Vice President, Electronic Material Systems, 2006
Group Vice President and General Manager, Electronic Materials,
Honeywell International, a provider of aerospace products and
services; control technologies for buildings, homes, and
industry; turbo chargers; automotive products; and specialty
materials, 2004
Business Director and General Manager, Specialty Additives,
Honeywell International, 2002
Peter T. Thomas 52
Vice President, Organic Specialties, 2006
Vice President, Pharmaceuticals and Fine Chemicals and Polymer
Additives, 2004
Vice President, Pharmaceuticals and Fine Chemicals, 2003
14
PART II
|
|
Item 5
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
Our common stock is listed on the New York Stock Exchange under
the ticker symbol FOE. At January 31, 2008, we had
1,520 shareholders of record for our common stock. The
closing price of the common stock on January 31, 2008, was
$17.68 per share.
The quarterly high and low
intra-day
sales prices and dividends declared per share for our common
stock during 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
First Quarter
|
|
$
|
22.95
|
|
|
$
|
19.30
|
|
|
$
|
0.145
|
|
|
$
|
20.80
|
|
|
$
|
18.60
|
|
|
$
|
0.145
|
|
Second Quarter
|
|
|
25.48
|
|
|
|
19.98
|
|
|
|
0.145
|
|
|
|
20.78
|
|
|
|
15.05
|
|
|
|
0.145
|
|
Third Quarter
|
|
|
26.03
|
|
|
|
17.37
|
|
|
|
0.145
|
|
|
|
18.66
|
|
|
|
13.82
|
|
|
|
0.145
|
|
Fourth Quarter
|
|
|
23.21
|
|
|
|
19.28
|
|
|
|
0.145
|
|
|
|
21.70
|
|
|
|
16.74
|
|
|
|
0.145
|
|
We intend to continue to declare quarterly dividends on our
common stock, however, we cannot make any assurances about the
amount of future dividends, since any future dividends depend on
our cash flow from operations, earnings, financial condition,
capital requirements, and other liquidity matters discussed in
Managements Discussion and Analysis of Financial Condition
and Results of Operations under Item 7 of this Annual
Report on
Form 10-K.
We did not repurchase any of our common stock during the fourth
quarter of 2007.
The chart below compares Ferros cumulative total
shareholder return for the five years ended December 31,
2007, to that of the Standard & Poors 500 Index
and the Standard & Poors MidCap Specialty
Chemicals Index. In all cases, the information is presented on a
dividend-reinvested basis and assumes investment of $100.00 on
December 31, 2002.
COMPARISON
OF FIVE-YEAR
CUMULATIVE TOTAL RETURNS
15
|
|
Item 6
|
Selected
Financial Data
|
The following table presents selected financial data for the
last five years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Net sales
|
|
$
|
2,204,785
|
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
1,843,721
|
|
|
$
|
1,615,598
|
|
(Loss) income from continuing operations
|
|
|
(94,254
|
)
|
|
|
21,092
|
|
|
|
19,113
|
|
|
|
29,101
|
|
|
|
9,285
|
|
Basic (loss) earnings per share from continuing operations
|
|
|
(2.22
|
)
|
|
|
0.47
|
|
|
|
0.42
|
|
|
|
0.65
|
|
|
|
0.18
|
|
Diluted (loss) earnings per share from continuing operations
|
|
|
(2.22
|
)
|
|
|
0.47
|
|
|
|
0.42
|
|
|
|
0.65
|
|
|
|
0.18
|
|
Cash dividends declared per common share
|
|
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
|
|
0.58
|
|
Total assets
|
|
|
1,638,260
|
|
|
|
1,741,602
|
|
|
|
1,676,598
|
|
|
|
1,739,885
|
|
|
|
1,736,448
|
|
Long-term debt, including current portion, and redeemable
preferred stock
|
|
|
538,758
|
|
|
|
601,765
|
|
|
|
568,325
|
|
|
|
521,658
|
|
|
|
553,287
|
|
Fiscal years 2006 and prior have been adjusted for the effects
of the changes in accounting principles for inventory costs and
for major planned overhauls, as described in Note 1 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
In 2002, we sold our Powder Coatings business unit. On
June 30, 2003, we sold our Petroleum Additives business and
our Specialty Ceramics business. For all periods presented, we
report those businesses as discontinued operations. These
divestitures are further discussed in Note 15 to the
consolidated financial statements under Item 8 of this
Annual Report on
Form 10-K.
|
|
Item 7
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
Market conditions were mixed during 2007, with growing demand in
some markets and regions and weak demand in other markets and
regions. Net sales increased 8.0%, primarily as a result of
price increases and favorable changes in foreign currency
exchange rates. Sales growth was the strongest in our Color and
Glass Performance Materials and Performance Coatings segments.
Sales also increased in our Electronic Materials and Polymer
Additives segments, and declined in Specialty Plastics. Sales in
the Electronic Materials segment were affected by weak customer
demand for dielectric materials in the first half of the year,
but demand was stronger in the last two quarters of 2007. Demand
for products from our Polymer Additives and Specialty Plastics
segments was affected by reduced demand from North American
customers who serve the residential housing, appliance and
automotive markets.
Beyond fundamental product demand, the factors that most
influenced 2007 results included the following:
|
|
|
|
|
Increased and volatile raw material costs, and our inability to
raise selling prices to maintain our profitability,
|
|
|
|
Cost control initiatives, including costs associated with
restructuring programs, and
|
|
|
|
Unplanned manufacturing costs required to improve production
processes, meet product specification requirements or recover
from equipment malfunctions and operating errors.
|
Prices for a number of raw materials increased significantly
during the year, including bismuth, chrome oxide, cobalt,
lithium carbonate, nickel, polypropylene, soybean oil, and
tallow. These increases contributed to increased manufacturing
costs for the year. In some cases, because of the rapid pace of
these costs increases, we instituted
16
product price surcharges to provide more rapid price
adjustments. While these surcharges generally allow us to pass
specific raw material cost increases through to customers, they
do not generally allow us to maintain our gross margin as a
percent of sales as costs increase. During the year, we were
also able to reformulate some products with alternatives that
used less costly raw materials. In some cases, we also employed
hedging and other procurement strategies to mitigate the effects
of higher raw material costs.
Selling, general and administrative (SG&A) costs increased
at a rate less than the increase in our sales. As a result,
SG&A expense as a percent of sales declined in 2007
compared with 2006.
An impairment charge related to goodwill and other long-lived
assets in our polymer additives and pharmaceuticals businesses
was recorded during 2007. The impairment in the polymer
additives business was triggered by the cumulative negative
effect on earnings of a cyclical downturn in certain of the
business primary
U.S.-based
end markets, including housing and automobiles; anticipated
additional product costs due to recent hazardous material
legislation and regulations, such as the newly enacted European
Union REACH registration system, which requires
chemical suppliers to perform toxicity studies on the components
of their products and to register certain information; and
higher forecasted capital expenditures related to the business.
The impairment charge in the pharmaceutical business is
primarily the result of the longer time necessary to transition
the business from a supplier of food supplements and additives
to a supplier of high-value pharmaceutical products and services.
Restructuring charges continued in 2007, primarily related to
manufacturing rationalization in our inorganic materials
manufacturing operations in Europe and our electronic materials
production capacity in the United States.
Interest expense declined in 2007 compared with 2006. During the
first quarter of 2007 we were able to eliminate most of the
requirement for cash deposits related to the precious metals
used in our products. This reduced our borrowing requirements,
and drove the decline in interest expense for the year. The
decline in cash deposits also lowered interest income for the
year.
Income before income taxes declined in 2007 compared with 2006.
The decline was primarily driven by the impairment charges,
increased SG&A expense and lower interest earned, partially
offset by lower interest expense and restructuring charges.
The 2007 loss from continuing operations was driven by the
impairment charge recorded in the fourth quarter.
During 2007, balance sheet debt declined as both long-term debt
and loans payable and current portion of long-term debt
declined. The decline was driven by the reduction of borrowing
required for cash deposits for precious metals, increased
accounts payable and lower inventories, partially offset by
increased net trade receivables. Cash deposits were eliminated
during the year, a decline of $70.1 million from the end of
2006. The reduction in cash deposits and inventory, and the
increase in accounts payable contributed to increased net cash
provided by operating activities. Also during 2007, capital
expenditures increased by $17.0 million to
$67.6 million, as we invested for plant maintenance,
current and anticipated sales growth and in projects related to
our manufacturing rationalization programs in the United States
and Europe.
Outlook
General economic conditions continue to be mixed, depending on
the region and applications addressed. Demand from markets in
the United States that are related to residential housing,
automobiles and appliances is expected to continue to be weak,
as it has been since late 2006. This weakness is expected to
continue at least through the first half of 2008, and will
continue to negatively affect sales, particularly in our
Specialty Plastics, Polymer Additives, Color and Glass
Performance Materials, and Performance Coatings segments.
In December 2007, we experienced unexpected operational issues
at our Bridgeport, New Jersey, organic chemicals manufacturing
facility, resulting in a temporary interruption of production
and added costs related to scrapped product and wastewater
treatment. Production interruptions related to restarting the
plants wastewater treatment capability continued into the
first quarter of 2008 and are expected to result in incremental
pretax costs and expenses of approximately $2.0 million
during the first quarter. Normal manufacturing production has
resumed at the site.
17
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.
Results
of Operations
Comparison
of the years ended December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Net sales
|
|
$
|
2,204,785
|
|
|
$
|
2,041,525
|
|
|
$
|
163,260
|
|
|
|
8.0
|
%
|
Cost of sales
|
|
|
1,788,122
|
|
|
|
1,625,880
|
|
|
|
162,242
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
416,663
|
|
|
|
415,645
|
|
|
|
1,018
|
|
|
|
0.2
|
%
|
Gross margin percentage
|
|
|
18.9
|
%
|
|
|
20.4
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
319,065
|
|
|
|
305,211
|
|
|
|
13,854
|
|
|
|
4.5
|
%
|
Impairment charges
|
|
|
128,737
|
|
|
|
|
|
|
|
128,737
|
|
|
|
|
|
Restructuring charges
|
|
|
16,852
|
|
|
|
23,146
|
|
|
|
(6,294
|
)
|
|
|
(27.2
|
)%
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
59,690
|
|
|
|
64,427
|
|
|
|
(4,737
|
)
|
|
|
(7.4
|
)%
|
Interest earned
|
|
|
(1,505
|
)
|
|
|
(4,466
|
)
|
|
|
2,961
|
|
|
|
(66.3
|
)%
|
Foreign currency losses, net
|
|
|
1,254
|
|
|
|
1,040
|
|
|
|
214
|
|
|
|
20.6
|
%
|
Loss (gain) on sale of businesses
|
|
|
1,348
|
|
|
|
(67
|
)
|
|
|
1,415
|
|
|
|
(2,111.9
|
)%
|
Miscellaneous expense (income), net
|
|
|
540
|
|
|
|
(87
|
)
|
|
|
627
|
|
|
|
720.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(109,318
|
)
|
|
|
26,441
|
|
|
|
(135,759
|
)
|
|
|
(513.4
|
)%
|
Income tax (benefit) expense
|
|
|
(15,064
|
)
|
|
|
5,349
|
|
|
|
(20,413
|
)
|
|
|
(381.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(94,254
|
)
|
|
|
21,092
|
|
|
|
(115,346
|
)
|
|
|
(546.9
|
)%
|
Loss from discontinued operations, net of tax
|
|
|
(225
|
)
|
|
|
(472
|
)
|
|
|
247
|
|
|
|
(52.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(94,479
|
)
|
|
$
|
20,620
|
|
|
$
|
(115,099
|
)
|
|
|
(558.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(2.23
|
)
|
|
$
|
0.46
|
|
|
$
|
(2.69
|
)
|
|
|
(584.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from continuing operations grew by 8.0% in 2007, driven by
improved pricing and favorable changes in foreign currency
exchange rates. Changes in exchange rates contributed somewhat
less than half of the increase in sales. Sales growth in Europe,
Asia and Latin America was partially offset by a decline of less
than one percent in sales in the United States.
Gross profit increased slightly in 2007 compared with 2006,
although the increase in gross profit was limited by increased
cost of sales, which grew at a faster rate than sales primarily
due to increased raw material costs. As a result, gross margin
percentage declined for the year. Gross profit was reduced by
$7.9 million in 2007 primarily as a result of charges for
accelerated depreciation and other costs associated with our
manufacturing rationalization programs. In addition, gross
profit was negatively impacted by unplanned manufacturing costs
due to temporary interruptions in operations at our
manufacturing facilities in South Plainfield, New Jersey, and
Bridgeport, New Jersey, and increased costs required to address
product specification requirements at our Evansville, Indiana,
specialty plastics manufacturing location. Higher precious metal
prices during 2007 reduced our gross margin percentage, because
increases in precious metal prices are generally passed through
to customers with minimal gross profit contribution. Gross
profit was reduced by $4.6 million in 2006 primarily as a
result of charges for manufacturing rationalization activities.
Selling, general and administrative (SG&A) expenses
increased by 4.5% in 2007. SG&A expense as a percent of
sales declined to 14.5% of sales in 2007 from 15.0% of sales in
2006. Charges of $12.2 million were included in the 2007
SG&A expense, primarily related to settlement agreements
with plaintiffs in civil lawsuits related to the
18
alleged antitrust violations in the heat stabilizer industry
(see Note 8 to the consolidated financial statements),
other legal settlements and divestment activities. During 2006,
SG&A expense included $8.1 million for charges
primarily related to accounting investigation and restatement
activities, and a settlement loss that resulted in a lump sum
payment to the beneficiary of Ferros deceased former Chief
Executive Officer, partially offset by benefits from changes to
our postretirement benefit programs.
An impairment charge of $128.7 million related to goodwill
and other long-lived assets was recorded in 2007 related to our
polymer additives and pharmaceuticals businesses. The impairment
in the polymer additives business was primarily the result of
the cumulative negative effect on earnings of a cyclical
downturn in certain of the business primary
U.S.-based
end markets, including housing and automobiles; anticipated
additional product costs due to recent hazardous material
legislation and regulations, such as the newly enacted European
Union REACH registration system, which requires
chemical suppliers to perform toxicity studies on the components
of their products and to register certain information; and
higher forecasted capital expenditures related to the business.
The impairment charge in the pharmaceutical business was
primarily the result of the longer time necessary to transition
the business from a supplier of food supplements and additives
to a supplier of high-value pharmaceutical products and
services. There were no impairment charges in 2006.
Restructuring charges of $16.9 million were recorded in
2007, primarily associated with our manufacturing
rationalization activities in the Performance Coatings and Color
and Glass Performance Materials segments in Europe and our
Electronic Materials segment in the United States. Restructuring
charges of $23.1 million in 2006 were primarily related to
the same manufacturing rationalization activities.
Interest expense declined in 2007 primarily as a result of lower
debt levels and lower interest rates resulting from the
renegotiation of our credit facilities and accounts receivables
securitization program during the second quarter. The lower debt
levels were driven by the elimination of cash deposits for
precious metals, which occurred during the first half of the
year. The 2007 interest expense included a $2.0 million
write-off of unamortized fees associated with an unused portion
of our term loan arrangements. Interest expense in 2006 included
a $2.5 million write-off of fees and discounts related to
certain of our debentures that were repaid in July and August
2006 and previously unamortized fees related to our former
revolving credit facility. Interest earned declined in 2007 as a
result of lower cash deposits for precious metals.
Net foreign currency transaction losses were $1.3 million
in 2007, up $0.2 million from 2006. We manage foreign
currency risks in a wide variety of foreign currencies
principally by entering into forward contracts to mitigate the
impact of currency fluctuations on transactions arising from
international trade. The carrying values of these contracts are
adjusted to market value and the resulting gains or losses are
charged to income or expense in the period.
During 2007, we recognized a loss of $1.3 million on the
sale of businesses related to an industrial ceramics business
that operated in our Niagara Falls, New York, manufacturing
facility.
During 2007, net taxes were a benefit of $15.1 million, or
13.8% of the loss before income taxes, compared to an expense of
$5.3 million or 20.2% of income before taxes in 2006. The
primary reason for the change was a loss before income taxes in
2007 compared to income in 2006, an impairment charge in 2007
where a partial tax benefit was recorded on the charge, a net
increase in our valuation allowance due to a determination that
it is more likely than not certain deferred tax assets will not
be realized, an additional allowance for unremitted earnings
from foreign subsidiaries no longer considered indefinitely
reinvested, and a statutory change to a lower tax rate in
Germany affecting our deferred tax assets.
There were no new businesses included in discontinued operations
in 2007. We recorded a loss of $0.2 million, net of taxes,
in 2007 related to post-closing matters associated with
businesses we sold in previous years.
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Segment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
609,285
|
|
|
$
|
538,385
|
|
|
$
|
70,900
|
|
|
|
13.2
|
%
|
Electronic Materials
|
|
|
469,885
|
|
|
|
444,463
|
|
|
|
25,422
|
|
|
|
5.7
|
%
|
Color & Glass Performance Materials
|
|
|
445,709
|
|
|
|
387,540
|
|
|
|
58,169
|
|
|
|
15.0
|
%
|
Polymer Additives
|
|
|
334,492
|
|
|
|
313,500
|
|
|
|
20,992
|
|
|
|
6.7
|
%
|
Specialty Plastics
|
|
|
261,956
|
|
|
|
271,307
|
|
|
|
(9,351
|
)
|
|
|
(3.4
|
)%
|
Other Businesses
|
|
|
83,458
|
|
|
|
86,330
|
|
|
|
(2,872
|
)
|
|
|
(3.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment sales
|
|
$
|
2,204,785
|
|
|
$
|
2,041,525
|
|
|
$
|
163,260
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
37,965
|
|
|
$
|
42,718
|
|
|
$
|
(4,753
|
)
|
|
|
(11.1
|
)%
|
Electronic Materials
|
|
|
32,785
|
|
|
|
35,136
|
|
|
|
(2,351
|
)
|
|
|
(6.7
|
)%
|
Color & Glass Performance Materials
|
|
|
48,222
|
|
|
|
43,512
|
|
|
|
4,710
|
|
|
|
10.8
|
%
|
Polymer Additives
|
|
|
10,755
|
|
|
|
10,947
|
|
|
|
(192
|
)
|
|
|
(1.8
|
)%
|
Specialty Plastics
|
|
|
15,116
|
|
|
|
14,629
|
|
|
|
487
|
|
|
|
3.3
|
%
|
Other Businesses
|
|
|
9,146
|
|
|
|
5,674
|
|
|
|
3,472
|
|
|
|
61.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
153,989
|
|
|
$
|
152,616
|
|
|
$
|
1,373
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. Sales
increased in Performance Coatings as a result of growth in sales
of tile and porcelain enamel products. Driving the increased
sales were increased prices and favorable changes in foreign
currency exchange rates. Sales increased in all regions, led by
growth in Europe. Operating income declined primarily as a
result of higher raw material costs, including cobalt, lithium
carbonate and nickel, as well as higher manufacturing costs and
lower manufacturing volumes that were not fully recovered
through improved pricing.
Electronic Materials Segment Results. Sales
grew in Electronic Materials as a result of improved customer
demand in the second half of the year. Demand for dielectric
materials, which had been weak in the first half of the year,
recovered in the second half. Demand for conductive pastes used
by customers who manufacture solar cells was particularly strong
in the second half of the year. The primary drivers for the
increased sales were increased market demand, higher precious
metal prices and favorable changes in foreign currency exchange
rates. Sales increases were primarily in Asia and Europe, while
sales in the United States were slightly lower. Operating income
declined as a result of higher raw material costs that were not
fully offset by the positive effects of increased manufacturing
volume. In addition, in April 2007, production was temporarily
interrupted at our South Plainfield, New Jersey, manufacturing
plant to address operational and safety concerns. This
production interruption added approximately $3.0 million to
manufacturing costs for the year.
Color and Glass Performance Materials Segment
Results. Sales increased as a result of growth in
glass coatings and performance pigment materials. The positive
effects of higher product pricing and favorable changes in
foreign currency exchange rates were the primary drivers of the
sale growth. Sales increased in all regions, led by growth in
Europe. Operating income increased mainly as a result of higher
prices, partially offset by higher raw material costs, including
bismuth, chrome oxide, cobalt and lead oxide.
Polymer Additives Segment Results. Sales grew
during 2007 despite the negative effects of weakness in demand
from North American residential housing, appliance and
automotive markets. Sales increased in both the United States
and Europe, the segments two primary sales regions.
Increased product pricing and favorable changes in foreign
currency exchange rates more than offset the effects of lower
manufacturing volumes during the year. Operating income declined
slightly, primarily as a result of higher raw material costs and
costs associated with an unplanned manufacturing interruption,
largely offset by improved prices and cost and expense reduction
programs. Polypropylene, tallow and soybean oil were three of
the raw materials that increased sharply during
20
2007. Operating income was negatively affected by an unexpected
operational issue at our Bridgeport, New Jersey, manufacturing
plant. Because of an accidental discharge of product into the
plants
on-site
watewater treatment facility, we incurred unplanned costs of
approximately $2.3 million during the 2007 fourth quarter,
including the costs of scrapped product and added wastewater
treatment.
Specialty Plastics Segment Results. Sales
declined primarily as a result of weak demand from customers who
make products used in residential housing, automotive and
appliance markets in the United States. This weak demand
resulted in lower sales in the United States, which were
partially offset by sales growth in Europe. Partially offsetting
the effects of lower volumes were increased product pricing and
favorable changes in foreign currency exchange rates. Sales of
plastic colorants increased during 2007, while sales of filled
and reinforced plastics declined. Operating income increased as
a result of improved pricing and lower selling, general and
administrative expenses, partially offset by higher raw material
costs and the negative effects of lower manufacturing volume.
Operating income was also reduced by added costs required to
address product specification issues at our Evansville, Indiana,
plant.
Other Businesses Segment Results. Sales
declined primarily due to lower sales of pharmaceutical
products, partially offset by higher sales of fine chemical
products. Sales were lower in the United States, which is the
primary market for these products, although sales of fine
chemicals did increase in Asia. Operating income was higher as a
results of a product mix change to higher value pharmaceutical
products and higher volumes of fine chemical products, which
more than offset the effects of lower average selling prices.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Geographic Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
943,249
|
|
|
$
|
951,215
|
|
|
$
|
(7,966
|
)
|
|
|
(0.8
|
)%
|
International
|
|
|
1,261,536
|
|
|
|
1,090,310
|
|
|
|
171,226
|
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total geographic revenues
|
|
$
|
2,204,785
|
|
|
$
|
2,041,525
|
|
|
$
|
163,260
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales declined in the United States, driven by lower regional
sales in the Specialty Plastics and Electronic Materials
segments. These declines were partially offset by increased
U.S. sales in Color and Glass Performance Materials and
Performance Coatings. International sales increased in Europe,
Asia and Latin America. The international sales increases were
distributed across all segments.
21
Comparison
of the years ended December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Net sales
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
159,220
|
|
|
|
8.5
|
%
|
Cost of sales
|
|
|
1,625,880
|
|
|
|
1,495,403
|
|
|
|
130,477
|
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
415,645
|
|
|
|
386,902
|
|
|
|
28,743
|
|
|
|
7.4
|
%
|
Gross margin percentage
|
|
|
20.4
|
%
|
|
|
20.6
|
%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
305,211
|
|
|
|
310,056
|
|
|
|
(4,845
|
)
|
|
|
(1.6
|
)%
|
Restructuring charges
|
|
|
23,146
|
|
|
|
3,677
|
|
|
|
19,469
|
|
|
|
529.5
|
%
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
64,427
|
|
|
|
46,919
|
|
|
|
17,508
|
|
|
|
37.3
|
%
|
Interest earned
|
|
|
(4,466
|
)
|
|
|
(538
|
)
|
|
|
(3,928
|
)
|
|
|
730.1
|
%
|
Foreign currency losses, net
|
|
|
1,040
|
|
|
|
1,284
|
|
|
|
(244
|
)
|
|
|
(19.0
|
)%
|
Gain on sale of businesses
|
|
|
(67
|
)
|
|
|
(69
|
)
|
|
|
2
|
|
|
|
(2.9
|
)%
|
Miscellaneous income, net
|
|
|
(87
|
)
|
|
|
(1,600
|
)
|
|
|
1,513
|
|
|
|
94.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
26,441
|
|
|
|
27,173
|
|
|
|
(732
|
)
|
|
|
(2.7
|
)%
|
Income tax expense
|
|
|
5,349
|
|
|
|
8,060
|
|
|
|
(2,711
|
)
|
|
|
(33.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
21,092
|
|
|
|
19,113
|
|
|
|
1,979
|
|
|
|
10.4
|
%
|
Loss from discontinued operations, net of tax
|
|
|
(472
|
)
|
|
|
(868
|
)
|
|
|
396
|
|
|
|
(45.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,620
|
|
|
$
|
18,245
|
|
|
$
|
2,375
|
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.46
|
|
|
$
|
0.40
|
|
|
$
|
0.06
|
|
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales from continuing operations grew by 8.5% in 2006, driven
primarily by improved pricing and product mix throughout the
world. Improved volumes in Europe and Latin America were offset
by volume declines in North America and Asia. On a
consolidated basis, favorable changes in foreign exchange rates
increased sales by less than one percent.
Gross profit increased during 2006, compared with 2005. The
increase in gross profit was the result of higher sales, and
prices that increased more than the aggregate increase in raw
material costs. Gross margin percentage, defined as gross profit
as a percentage of sales, declined in 2006, compared with 2005,
as a result of accelerated depreciation costs and higher
precious metal prices. Gross profit was reduced by
$4.6 million in 2006 as a result of costs associated with
our manufacturing rationalization programs. Higher precious
metal costs also contributed to the decline in gross margin
percentage because changes in precious metal prices are
generally passed through to customers without gross margin
contribution.
Selling, general and administrative (SG&A) costs decreased
by $4.8 million during 2006, while SG&A expenses as a
percent of revenues declined from 16.5% to 15.0% during the
year. Charges of $8.2 million, primarily related to the
accounting investigation and restatement, were recorded as part
of SG&A expense during 2006. These charges were
$2.3 million less than the amount recorded in 2005. This
reduction in 2006 SG&A expense was partially offset by
other expense increases required to support the growth in sales,
particularly in our Electronic Materials business. During the
first quarter of 2006, we announced changes to some of our
postretirement benefit programs. Certain employees who had been
participating in our largest defined benefit program stopped
accruing benefit service after March 31, 2006. In addition,
we limited eligibility for retiree medical and life insurance
coverage to those employees who were 55 years of age or
older with 10 or more years of service as of December 31,
2006. Benefits under these programs will be available only to
those employees who retire by December 31, 2007, after
having advised us of their retirement plans by March 31,
2007. These changes resulted in a one-time benefit of
$5.0 million in the second quarter of 2006. Offsetting this
benefit was a $4.9 million settlement loss from a
22
nonqualified benefit retirement plan, related primarily to a
lump sum payment to the beneficiary of Ferros deceased
former Chief Executive Officer.
Restructuring charges of $23.1 million were recorded in
2006, primarily associated with the consolidation and closing of
some of our manufacturing assets in our Performance Coatings and
Color and Glass Performance Materials segments in Europe and our
Electronic Materials segment in the United States.
Interest expense was higher in 2006 as a result of increased
debt levels and higher interest rates. Our total borrowings were
increased, in part, as a result of higher cash deposit
requirements on precious metal consignment arrangements. These
deposits increased from $19.0 million at the end of 2005 to
$70.1 million at the end of 2006. We expect that these
deposit requirements will be less in 2007, as a result of our
regaining current status on financial reporting and our efforts
to negotiate more favorable terms from participants in our
consignment programs. Borrowings also increased as a result of
other increased working capital requirements used to support
higher sales levels. During 2006, inventories increased to
$269.2 million from $229.0 million in 2005. Net
receivables increased to $220.9 million from
$182.4 million in the prior year. Also included in the 2006
interest expense are charges of $2.5 million associated
with previously unamortized fees and discounts related to
certain of our debentures that were repaid in July and August
2006 and previously unamortized fees related to our former
revolving credit facility.
Interest earned during 2006 increased to $4.5 million from
$0.5 million in 2005 primarily as a result of interest
earned on cash deposits associated with our precious metal
consignments.
Net foreign currency losses were largely unchanged from 2005 to
2006. We manage foreign currency risks in a wide variety of
foreign currencies principally by entering into forward
contracts to mitigate the impact of currency fluctuations on
transactions arising from international trade. The carrying
values of these contracts are adjusted to market value and the
resulting gains or losses are charged to income or expense in
the period.
In 2006, we recognized a $0.4 million gain on the sale of
our interest in Chilches Materials SA, an unconsolidated
affiliate, and a $0.3 million loss from the liquidation of
Ferro Toyo Company Limited, a consolidated subsidiary.
Net miscellaneous income from continuing operations was
$0.1 million in 2006, compared with income of
$1.6 million in 2005. Within net miscellaneous income
during 2006, we recorded a gain of $2.4 million for a legal
settlement in a class action lawsuit for price fixing in the
rubber chemicals industry. In addition, we recorded a loss of
$2.5 million associated with
mark-to-market
supply contracts, mainly for natural gas. During 2005, we
recorded a gain of $3.1 million associated with supply
contracts and we recorded a loss on the sale of assets,
primarily as a result of sales in the United States, Italy
and China.
For the year, taxes on continuing income were $5.3 million,
or 20.2% of income, compared to $8.1 million or 29.7% of
income in 2005. The primary reason for the decrease in 2006 was
a net decrease in our valuation allowance due to our
determination that it is more likely than not certain deferred
assets would be realized, and a tax rate change in the
Netherlands affecting our deferred income taxes. The decrease
was partially offset by an allowance for unremitted earnings
from foreign subsidiaries no longer considered indefinitely
reinvested.
There were no new businesses included in discontinued operations
in 2006. We recorded a loss of $0.5 million, net of taxes,
in 2006 related to post-closing matters associated with
businesses we sold in previous years.
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Segment Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
538,385
|
|
|
$
|
488,467
|
|
|
$
|
49,918
|
|
|
|
10.2
|
%
|
Electronic Materials
|
|
|
444,463
|
|
|
|
355,676
|
|
|
|
88,787
|
|
|
|
25.0
|
%
|
Color & Glass Performance Materials
|
|
|
387,540
|
|
|
|
359,613
|
|
|
|
27,927
|
|
|
|
7.8
|
%
|
Polymer Additives
|
|
|
313,500
|
|
|
|
300,563
|
|
|
|
12,937
|
|
|
|
4.3
|
%
|
Specialty Plastics
|
|
|
271,307
|
|
|
|
279,119
|
|
|
|
(7,812
|
)
|
|
|
(2.8
|
)%
|
Other Businesses
|
|
|
86,330
|
|
|
|
98,867
|
|
|
|
(12,537
|
)
|
|
|
(12.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment sales
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
159,220
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings
|
|
$
|
42,718
|
|
|
$
|
32,553
|
|
|
$
|
10,165
|
|
|
|
31.2
|
%
|
Electronic Materials
|
|
|
35,136
|
|
|
|
14,113
|
|
|
|
21,023
|
|
|
|
149.0
|
%
|
Color & Glass Performance Materials
|
|
|
43,512
|
|
|
|
39,216
|
|
|
|
4,296
|
|
|
|
11.0
|
%
|
Polymer Additives
|
|
|
10,947
|
|
|
|
18,383
|
|
|
|
(7,436
|
)
|
|
|
(40.5
|
)%
|
Specialty Plastics
|
|
|
14,629
|
|
|
|
14,698
|
|
|
|
(69
|
)
|
|
|
(0.5
|
)%
|
Other Businesses
|
|
|
5,674
|
|
|
|
2,175
|
|
|
|
3,499
|
|
|
|
160.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
152,616
|
|
|
$
|
121,138
|
|
|
$
|
31,478
|
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. Sales
grew in Performance Coatings as a result of improved pricing
across the business and improved volumes in the tile coatings
portion of the business. Sales growth was strong in North
America, Europe and Latin America, while overall sales in Asia
declined modestly. Growth in Asia was negatively impacted by
natural gas supply issues in Indonesia, which affected both our
own and our customers manufacturing operations. Favorable
currency exchange rates also contributed to the sales increase
for the year. Operating income increased during 2006 primarily
because pricing was increased in excess of raw material cost
increases. In addition, the mix of products was more favorable,
particularly in our porcelain enamel business.
Electronic Materials Segment Results. Sales in
Electronic Materials were sharply higher for the year due to
strong customer demand for metal pastes for solar cells and
materials for multilayer capacitors, compared with 2005 when
customers demand was weak for capacitor materials in the
first half of the year. In addition, higher precious metals
prices, which are passed through to customers, contributed to
the sales increase. Sales increased in North America, Asia
and Europe. Operating income increased as a result of the
combination of improved volume, product mix, pricing and lower
manufacturing costs. These improvements more than offset
increases in raw material costs and increased product
development expense.
Color and Glass Performance Materials Segment
Results. Sales in Color and Glass Performance
Materials increased primarily as a result of improved pricing.
Sales growth was the strongest in Europe, and sales also grew in
Latin America and Asia. Sales were relatively flat in North
America. Operating income increased as improved pricing more
than offset increased raw material costs.
Polymer Additives Segment Results. Sales in
Polymer Additives increased for the year, although the growth
rate was negatively impacted by weak demand in North America
during the fourth quarter. This weakness was mainly due to
reduced customer demand for products used in residential
construction. For the year, improved pricing and product mix
more than offset declines in volume. Sales increases in Europe
were partially offset by declines in North America. Segment
income declined for the year. Although price increases exceeded
raw material cost increases for the year, these increases were
not enough to offset lower volumes and increased manufacturing
costs, resulting in a decline in segment income.
Specialty Plastics Segment Results. Sales
declined in Specialty Plastics primarily as a result of weakness
in the North American market during the second half of the year.
During that period, customer demand related to
U.S. residential construction and automotive production
declined, leading to lower sales volume. Although prices
24
increased, they did not increase enough to offset the lower
volume. Despite the lower volume, operating income increased due
to price increases, lower manufacturing costs and lower
SG&A expenses, which together more than offset raw material
cost increases.
Other Businesses Segment Results. Sales
declined in Other Businesses primarily as a result of lower
volumes of pharmaceutical products driven by a product mix
change from food additives and supplements to higher-value
active pharmaceutical ingredients and other high-purity
pharmaceuticals. Sales of fine chemical products increased in
2006 compared with 2005. Sales declined in the United States,
which is the primary market for these products. Operating income
increased primarily as a result of an increase in product prices
resulting from the mix shift to higher-priced pharmaceutical
products and lower manufacturing costs, partially offset by
increased raw material costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Geographic Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
951,215
|
|
|
$
|
925,895
|
|
|
$
|
25,320
|
|
|
|
2.7
|
%
|
International
|
|
|
1,090,310
|
|
|
|
956,410
|
|
|
|
133,900
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total geographic revenues
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
$
|
159,220
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales increased in the United States, driven by increases in
Electronic Materials and Performance Coatings. These increases
were partially offset by U.S. sales declines in Polymer
Additives and Specialty Plastics. International sales increases
occurred in Europe, Asia and Latin America and were primarily
within the Performance Coatings, Color and Glass Performance
Materials and Performance Coatings segments.
Summary
of Cash Flows for the years ended December 31, 2007, 2006
and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
144,579
|
|
|
$
|
70,944
|
|
|
$
|
21,381
|
|
Net cash used for investing activities
|
|
|
(62,033
|
)
|
|
|
(68,718
|
)
|
|
|
(35,814
|
)
|
Net cash (used for) provided by financing activities
|
|
|
(88,717
|
)
|
|
|
(3,035
|
)
|
|
|
18,137
|
|
Effect of exchange rate changes on cash
|
|
|
1,211
|
|
|
|
381
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(4,960
|
)
|
|
$
|
(428
|
)
|
|
$
|
3,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities. Cash flows from
operating activities increased $73.6 million from 2006 to
2007. The net loss in 2007 as compared to the net income in 2006
was more than offset by noncash impairment charges in 2007 and
increased noncash depreciation and amortization charges. The
increase in cash flows from operating activities benefited by
$121.1 million from the elimination of deposit requirements
under the Companys precious metals consignment program.
Other positive changes related to accounts and trade notes
receivable, inventories and accounts payable, resulted from
ongoing efforts to minimize working capital requirements, and
totaled $95.5 million. Offsets to these positive changes
included reduced proceeds from the domestic asset securitization
program of $109.3 million after large draws in 2006. In
addition, there were unfavorable changes of $17.1 million
in deferred income taxes, $23.3 million in other working
capital items, and $14.9 million in other reconciling items.
Comparing 2006 to 2005, the increase in net cash provided by
operating activities was driven by the increase in net income of
$2.4 million, supplemented by increased proceeds from the
asset securitization program of $101.9 million, an increase
in non-cash restructuring charges of $15.8 million and
changes in other working capital items of $15.5 million.
The other reconciling items primarily had positive impacts to
operating cash flows and related to deferred income taxes,
retirement benefits and increased depreciation expense of
$4.7 million primarily due to accelerated depreciation.
Offsetting these positive cash flow items were increased changes
in deposit requirements under the Companys precious metals
consignment program of $40.0 million, increased changes in
inventories of $26.6 million, and increased changes in
accounts receivable of $18.6 million. The increase
25
in inventory levels was primarily due to a discrete build in
inventory levels and increases to raw material prices from
suppliers. Accounts receivable increased due to higher net sales.
Investing activities. Capital expenditures
increased $7.8 million from 2005 to 2006 and
$17.0 million from 2006 to 2007. The primary reasons for
the increase in capital spending included the construction of a
freestanding,
state-of-the-art
plant in Spain that produces colors for the European tile
market, increased investment in the Companys manufacturing
facilities in the Asia-Pacific region, projects related to our
manufacturing rationalization programs in the United States and
Europe, and investments to support current and anticipated sales
growth. In 2006, the Company invested an additional
$25.0 million in Ferro Finance Corporation, a wholly-owned
unconsolidated subsidiary, in connection with an amendment of
the asset securitization agreement.
Financing activities. In 2006, we entered into
an agreement with a group of lenders for a $700 million
credit facility, which replaced the former revolving credit
facility that would have expired later that year. In 2007, we
amended the credit facility, increasing it to $750 million.
It now consists of a five-year, $300 million multi-currency
senior revolving credit facility and a six-year,
$450 million senior term loan facility. In 2007, we had net
repayments of these facilities of $62.1 million, while in
2006, we had net borrowings of $36.9 million, for a net
decrease in our rate of borrowing of $99.0 million. In
2005, we had net borrowings of $48.4 million from these
facilities, so the net decrease in 2006 in our rate of borrowing
was $11.5 million. In addition, we paid $1.8 million
in 2007 to amend the facility and $16.2 million in 2006 to
establish and use the facility, while in 2005 we did not pay any
debt issue costs. We also continued to pay dividends on our
common stock at our historical quarterly rate of $0.145 per
share, totaling $25.1 million in 2007.
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 December 31,
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
December 31, 2007, we had borrowed $13.9 million of
the revolving credit facility and had $277.5 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
December 31, 2007, we had borrowed $302.0 million in
term loans. The Company is required to make quarterly principal
payments of $0.8 million from January 2008 to July 2011,
quarterly principal payments of $72.6 million from October
2011 to April 2012, and a final payment of $72.6 million in
June 2012.
At December 31, 2007, we were in compliance with the
covenants of the Amended Credit Facility.
Senior
Notes
At December 31, 2007, we had $200.0 million principal
amount outstanding under senior notes, which are due
January 31, 2009, and we were in compliance with the
covenants under their indentures.
26
Off
Balance Sheet Arrangements
Receivables 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
December 31, 2007, Ferro had received net proceeds of
$54.6 million for outstanding receivables, and the balance
of Ferros note receivable from FFC was $29.6 million.
In addition, we maintain several international programs to sell
trade accounts receivable, primarily without recourse. The
commitments supporting this program can be withdrawn at any time
and totaled $80.8 million at December 31, 2007. The
amount of outstanding receivables sold under the international
programs was $42.1 million at December 31, 2007.
Consignment and Customer Arrangements for Precious
Metals. In the production of some of our
products, we use precious metals, primarily silver, platinum and
palladium for Electronic Materials products and gold for Color
and Glass Performance Materials products. We obtain most
precious metals from financial institutions under consignment
agreements with terms of one year or less. The financial
institutions retain ownership of the precious metals and charge
us fees based on the amounts we consign. These fees were
$3.7 million for 2007. 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 also
process precious metals owned by our customers. At
December 31, 2007, we had on hand $148.3 million of
precious metals owned by financial institutions, measured at
fair value.
Bank Guarantees and Standby Letters of
Credit. At December 31, 2007, the Company
had bank guarantees and standby letters of credit issued by
financial institutions, which totaled $17.7 million. These
agreements primarily relate to Ferros insurance programs
and foreign tax payments.
Other
Financing Arrangement
We maintain other lines of credit to provide global flexibility
for Ferros short-term liquidity requirements. These
facilities are uncommitted lines for our international
operations and totaled $30.7 million at December 31,
2007. The unused portions of these lines provided
$28.9 million of additional liquidity at December 31,
2007.
Liquidity
Requirement
Our liquidity requirements primarily include debt service,
purchase commitments, working capital requirements, capital
investments, postretirement obligations and dividend payments.
We expect to meet these requirements through cash provided by
operating activities and availability under existing or
replacement credit facilities. Ferros level of debt and
debt service requirements could have important consequences to
its business operations and uses of cash flows.
27
The Companys aggregate amount of obligations for the next
five years and thereafter is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Totals
|
|
|
|
(Dollars in thousands)
|
|
|
Loans payable to banks
|
|
$
|
954
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
954
|
|
Senior notes
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,857
|
|
|
|
|
|
|
|
|
|
|
|
13,857
|
|
Term loan facility
|
|
|
3,050
|
|
|
|
3,050
|
|
|
|
3,050
|
|
|
|
74,916
|
|
|
|
217,884
|
|
|
|
|
|
|
|
301,950
|
|
Other long-term notes
|
|
|
218
|
|
|
|
185
|
|
|
|
162
|
|
|
|
116
|
|
|
|
87
|
|
|
|
|
|
|
|
768
|
|
Obligations under capital leases
|
|
|
1,951
|
|
|
|
1,661
|
|
|
|
1,636
|
|
|
|
1,234
|
|
|
|
1,234
|
|
|
|
5,853
|
|
|
|
13,569
|
|
Obligations under operating leases
|
|
|
17,880
|
|
|
|
7,665
|
|
|
|
5,572
|
|
|
|
3,723
|
|
|
|
3,071
|
|
|
|
11,468
|
|
|
|
49,379
|
|
Purchase commitments
|
|
|
20,911
|
|
|
|
3,226
|
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,964
|
|
|
$
|
215,787
|
|
|
$
|
11,866
|
|
|
$
|
93,846
|
|
|
$
|
222,276
|
|
|
$
|
17,321
|
|
|
$
|
606,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash required for interest costs in 2007 was $56.9 million.
We expect that the amount for 2008 will not be substantially
different, but the actual amount depends on interest rates on
our variable-rate debt and our overall debt levels.
We pay taxes as part of our normal operations as a profitable
company. The amount of taxes we pay depends on a variety of
factors described in more detail in Critical Accounting Policies
below. However, the principal factors are the level of our
profitability and the countries in which we earn our taxable
income. We have paid and expect to continue to pay taxes for the
foreseeable future. Under Financial Accounting Standards Board
(FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, (FIN No. 48),
we anticipate that between $5.0 and $9.0 million of
liabilities for unrecognized tax benefits may be settled or
reversed within the next 12 months. These reversals or
payments will result from settlements with foreign tax
authorities or expiration of the applicable statute of
limitations period. Due to the high degree of uncertainty
regarding the timing of potential future cash flows with these
liabilities, we are unable to make a reasonably reliable
estimate of the amount and period in which these liabilities
might be paid or reversed in years beyond 2008.
We expect to contribute approximately $38.5 million to our
post employment benefit plans in 2008. Over the four-year period
from 2009 through 2012, we may be required to contribute an
additional $130.9 million to these plans. We determined
these funding amounts based on the minimum contributions
required under various applicable regulations in each respective
country. Actual contributions also depend on the future funded
status of the plans and on the amount of employee contributions.
Critical
Accounting Policies and Their Application
When we prepare our consolidated financial statements we are
required to make estimates and assumptions that affect the
amounts we report in the consolidated financial statements and
footnotes. We consider the policies discussed below to be more
critical than other policies because their application requires
our most subjective or complex judgments. These estimates and
judgments arise because of the inherent uncertainty in
predicting future events. Management has discussed the
development, selection and disclosure of these policies with the
Audit Committee of the Board of Directors.
Inventories
We value inventory at the lower of cost or market, with cost
determined utilizing the
first-in,
first-out (FIFO) method. 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. 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,
28
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 $11.0 million and increased retained
earnings, net of income tax effects, by $6.8 million as of
January 1, 2005.
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.
Environmental
Liabilities
Our manufacturing facilities are subject to a broad array of
environmental laws and regulations in the countries in which
they operate. The costs to comply with complex environmental
laws and regulations are significant and will continue for the
foreseeable future. We expense these recurring costs as they are
incurred. While these costs may increase in the future, they are
not expected to have a material impact on our financial
position, liquidity or results of operations.
We also accrue for environmental remediation costs when it is
probable that a liability has been incurred and we can
reasonably estimate the amount. We determine the timing and
amount of any liability based upon assumptions regarding future
events. Inherent uncertainties exist in such evaluations
primarily due to unknown conditions, changing governmental
regulations and legal standards regarding liability, and
evolving technologies. We adjust these liabilities periodically
as remediation efforts progress or as additional technical or
legal information becomes available. Because of these inherent
uncertainties with respect to environmental remediation costs,
potential liabilities could increase significantly from the
$5.9 million recorded as of December 31, 2007, due to
adverse changes in circumstances.
At December 31, 2007, our consolidated balance sheet
included an accrued liability for environmental remediation
costs of $5.9 million compared with $5.5 million at
December 31, 2006. Of the $5.9 million accrued
liability at December 31, 2007, approximately 18.3% was
reserved for facilities outside of the U.S. Of the amounts
accrued, $1.3 million at December 31, 2007, and
$1.1 million at December 31, 2006, related to six
Superfund sites.
Income
Taxes
The breadth of our operations and complexity of income tax
regulations require us to assess uncertainties and make
judgments in estimating the ultimate amount of income taxes we
will pay. The final income taxes we pay are based upon many
factors, including existing income tax laws and regulations,
negotiations with taxing authorities in various jurisdictions,
outcomes of tax litigation and resolution of disputes arising
from federal, state, and international income tax audits. The
resolution of these uncertainties may result in adjustments to
our income tax assets and liabilities in the future.
Deferred income taxes result from differences between the
financial and tax basis of our assets and liabilities and we
adjust our deferred income tax assets and liabilities for
changes in income tax rates and income tax laws when changes are
enacted. We record valuation allowances to reduce deferred
income tax assets when it is more likely than not that a tax
benefit will not be realized. Significant judgment is required
in evaluating the need for and the magnitude of appropriate
valuation allowances against deferred income tax assets. The
realization of these assets is dependent on generating future
taxable income, our ability to carry back or carry forward net
operating losses and credits to offset taxable income in a prior
year, as well as successful implementation of various tax
strategies to generate taxable income where net operating losses
or credit carryforwards exist. In evaluating our
29
ability to realize the deferred income tax assets, we rely
principally on forecasted taxable income using historical and
projected future operating results, the reversal of existing
temporary differences and the availability of tax planning
strategies.
We earn a significant portion of our pre-tax income outside the
U.S. Many of these
non-U.S. tax
jurisdictions have statutory income tax rates that are lower
than that in the U.S. Because we carry a majority of our
debt in the U.S., we also have significant cash needs in the
U.S. to service this debt. As a result, it is necessary for
us to perform significant tax and treasury planning and analysis
to determine the best actions to achieve the goals of meeting
our U.S. cash needs, while also reducing our worldwide
taxable income. In this tax and treasury planning, we consider
future taxable income in the U.S. and
non-U.S. jurisdictions,
future cash needs in the U.S., and the timing and amount of
dividend repatriations. Our ability to balance future taxable
income and cash flows between the U.S. and foreign
locations depends on various strategies, such as the charging of
management fees for intercompany services, transfer pricing,
intercompany royalties, intercompany sales of technologies and
intellectual property, and choosing between allowable tax
methods.
Pension
and Other Postretirement Benefits
We sponsor defined benefit plans in the U.S. and many
countries outside the U.S., and we also sponsor retiree medical
benefits for a segment of our salaried and hourly work force
within the U.S. The U.S. pension plans represent
approximately 65% of pension plan assets, 61% of benefit
obligations and 40% of net periodic pension cost. The
measurement dates used to determine pension and other
postretirement benefit measurements are
September 30th for the U.S. plans and
December 31st for the plans outside the U.S.
The assumptions we use in actuarial calculations for these plans
have a significant impact on benefit obligations and annual net
periodic benefit costs. We meet with our actuaries annually to
discuss key economic assumptions used to develop these benefit
obligations and net periodic costs. In accordance with
U.S. GAAP, actual results that differ from the assumptions
are accumulated and amortized over future periods and,
therefore, affect expense recognized and obligations recorded in
future periods.
We determine the discount rate for the U.S. pension and
retiree medical plans based on a bond model. Using the pension
plans projected cash flows, the bond model considers all
possible bond portfolios that produce matching cash flows and
selects the portfolio with the highest possible yield. These
portfolios are based on bonds with a quality rating of AA or
better under either Moodys or S&P. The discount rates
for the
non-U.S. plans
are based on a yield curve method, using AA-rated bonds
applicable in respective capital markets. The duration of each
plans liabilities is used to select the rate from the
yield curve corresponding to the same duration. We then round
the resulting yields to the nearest 25 basis points.
We calculate the expected return on assets at the beginning of
the year for defined benefit plans as the weighted-average of
the expected return for the target allocation of the principal
asset classes held by each of the plans. Our target asset
allocation percentages are 30% bonds and 70% equity securities
for U.S. plans and 63% bonds, 30% equity securities, and 7%
other investments for
non-U.S. plans.
In determining the expected returns, we consider both historical
performance and an estimate of future long-term rates of return.
The resulting expected returns are then rounded to the nearest
25 basis points. The actual rate of return in 2007 was
11.6% for U.S. plans and 1.0% for
non-U.S. plans.
Future actual pension expense will depend on future investment
allocation and performance, changes in future discount rates and
various other factors related to the population of participants
in the Companys pension plans.
All other assumptions are reviewed periodically by our actuaries
and us and may be adjusted based on current trends and
expectations as well as past experience in the plans.
30
The following table provides the sensitivity of net annual
periodic benefit costs for our pension plans, including a
U.S. nonqualified retirement plan, and the retiree medical
plan to a 25-basis-point decrease in both the discount rate and
asset return assumption:
|
|
|
|
|
|
|
|
|
|
|
|
|
25-Basis-Point Decrease
|
|
|
25-Basis-Point Decrease
|
|
in Asset Return
|
|
|
in Discount Rate
|
|
Assumption
|
|
|
(Dollars in thousands)
|
|
U.S. pension plans
|
|
$
|
1,033
|
|
|
$
|
737
|
|
U.S. retiree medical plan
|
|
|
(54
|
)
|
|
|
|
|
Non-U.S.
pension plans
|
|
|
582
|
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,561
|
|
|
$
|
1,129
|
|
|
|
|
|
|
|
|
|
|
The following table provides the rates used in the assumptions
and the changes between 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Discount rate used to measure benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
|
6.05
|
%
|
|
|
5.90
|
%
|
|
|
0.15
|
%
|
U.S. retiree medical plan
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
|
|
|
%
|
Non-U.S.
pension plans
|
|
|
4.69
|
%
|
|
|
4.34
|
%
|
|
|
0.35
|
%
|
Discount rate used to measure benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
|
6.49
|
%
|
|
|
6.05
|
%
|
|
|
0.44
|
%
|
U.S. retiree medical plan
|
|
|
6.10
|
%
|
|
|
5.90
|
%
|
|
|
0.20
|
%
|
Non-U.S.
pension plans
|
|
|
5.56
|
%
|
|
|
4.69
|
%
|
|
|
0.87
|
%
|
Expected return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. pension plans
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
%
|
Non-U.S.
pension plans
|
|
|
4.95
|
%
|
|
|
4.63
|
%
|
|
|
0.32
|
%
|
Changes in the rates used in these assumptions reflect changes
in the underlying bond and equity yields.
The amortization of net actuarial unrecognized gains or losses
is a component of net periodic cost. These gains or losses
result from the difference between actual and assumed results
and from changes in actuarial assumptions. At December 31,
2007, our U.S. and
non-U.S. pension
plans, including the nonqualified retirement plan, and our
U.S. retiree medical plan had unrecognized net losses of
$65.2 million. We will recognize these unrecognized net
losses in net periodic cost in future years, with an estimated
$6.1 million being recognized in 2008.
Our overall net periodic benefit cost for all defined benefit
plans decreased $9.0 million from 2006 to 2007. Costs
declined by $4.3 million due to changes we made in 2006 to
our largest defined benefit plan, which covers certain salaried
and hourly employees in the United States. The affected
employees stopped accruing benefit service after March 31,
2006, and now receive benefits in the Companys defined
contribution plan that previously covered only
U.S. salaried employees hired after 2003. We also benefited
by $3.0 million from higher expected returns on plan assets
primarily due to higher asset balances resulting from company
contributions, actual returns, and currency effects in 2006.
Various restructuring activities resulted in net curtailment
gains of $3.0 million, which were nearly offset by special
termination benefit costs of $2.2 million.
In 2007, we recorded net curtailment gains of $2.8 million
related to closing our Niagara Falls, New York, manufacturing
facility and $0.3 million related to European restructuring
activities in Italy and recorded a net curtailment loss of
$0.1 million related to freezing or eliminating benefits at
several U.S. plants. We also recorded costs of
$2.2 million for special termination benefits from other
European restructuring activities that will result in closing
the Companys Rotterdam, Netherlands, manufacturing
facility by the end of the second quarter of 2008.
Our U.S. plans use a September 30th measurement
date. FASB 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)
will require us to change the measurement date to
December 31st beginning with the 2008 fiscal year.
Expense for the gap period from September 30th to
December 31st will be recognized as an adjustment to
retained earnings as of January 1, 2008.
31
Restructuring
and Cost Reduction Programs
During 2006 and 2007, 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
businesses, and therefore, there may be supplemental provisions
for new plan initiatives as well as changes in estimates to
amounts previously recorded, as payments are made, or actions
are completed. Significant restructuring programs are described
below. The majority of initiatives begun in 2005 and prior are
substantially completed. Certain programs that were initiated in
2006 continued in 2007.
In total, we recorded $16.9 million, $23.1 million and
$3.7 million of pre-tax restructuring charges in 2007, 2006
and 2005, respectively. All of the 2005 charges related to
severance benefits for employees affected by plant closings or
capacity reduction, as well as various personnel in
administrative or shared service functions. The 2007 and 2006
charges included both termination benefits and asset writedowns.
We estimated accruals for termination benefits based on various
factors including length of service, contract provisions, local
legal requirements, projected final service dates, and salary
levels. We also analyzed the carrying value of long-lived assets
and recorded estimated accelerated depreciation through the
anticipated end of the useful life of the assets affected by the
restructuring. In all likelihood, this accelerated depreciation
will result in reducing the net book value of those assets to
zero at the date operations cease. While we believe that changes
to our estimates are unlikely, the accuracy of our estimates
depends on the successful completion of numerous actions. Delays
in moving continuing operations to other facilities or increased
cash outlays will increase our restructuring costs to such an
extent that it could have a material impact on the
Companys results of operations, financial position, or
cash flows. Other events, for example, a delay in completion of
construction of new facilities, may also delay the resulting
cost savings.
For the European restructurings initiated in 2006, we
established a goal of $40.0 million to $50.0 million
in annual cost savings by the end of 2009, with the full
benefits realized in 2010. The initial phase of restructuring
efforts began in July 2006 and targeted our Performance Coatings
and Color and Glass Performance Materials segments in our
European operations with an annual cost savings goal of
$10.0 million. This restructuring should result in
significant manufacturing efficiencies and will contribute to
increased production capacity to support our revenue growth. The
current action consists of a consolidation of our Cassiglie,
Italy, manufacturing operations and administrative functions
into Spain. In addition, we announced a plan to consolidate
certain decoration and color manufacturing operations from
Frankfurt, Germany, to Colditz, Germany, with an annual cost
savings goal of $4.0 million. We are in consultation with
various works councils regarding the effects of these
restructuring programs. We estimate the total termination
benefits for the 150 employees affected by the European
restructuring to be approximately $4.7 million to
$4.9 million. We recorded $3.1 million and
$3.9 million of termination benefits related to these
actions during 2007 and 2006, and we expect to record an
additional $0.8 million to $1.0 million in 2008. We
also recorded $3.0 million of impairment charges for
equipment made obsolete due to this plan.
32
A second restructuring program initiated in 2006 involved our
Electronic Materials segment and resulted in the sale of our
manufacturing facilities in Niagara Falls, New York, in December
2007. This action is expected to result in annual cost reduction
of approximately $7.5 million. As part of the restructuring
activities, we redistributed a portion of the production at that
facility to other existing Electronic Materials manufacturing
facilities and reduced our workforce by 131 employees. Of
the employees who were terminated, 115 were represented by a
union, and we negotiated with the union to determine their
termination benefits as the result of the closing. We believe
that the total estimated restructuring costs will be
approximately $21.6 million. In the table below, we have
summarized the charges recorded during 2007 and 2006 and the
2008 estimated future charges to be incurred related to this
action:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated for
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Asset impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,021
|
|
Intellectual property
|
|
|
|
|
|
|
|
|
|
|
3,503
|
|
Termination benefits
|
|
|
800
|
|
|
|
(2,100
|
)
|
|
|
1,531
|
|
Other
|
|
|
2,929
|
|
|
|
1,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,729
|
|
|
$
|
(907
|
)
|
|
$
|
16,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2007, we announced an additional phase of our
European manufacturing restructuring with an annual cost savings
of $18.0 million. This phase will include the closure of
the Rotterdam, Netherlands, facility as part of our program to
discontinue the porcelain enamel frit manufacturing at this site
and consolidate production in other European facilities. We
anticipate Rotterdam to cease production in the third quarter of
2008 and reduce the workforce by 84 employees. Total
restructuring charges for this site of $23.6 million are
anticipated, in addition to $0.5 million of inventory
write-downs. In 2007, we recorded $11.8 million of these
charges for employee severance costs, pension expense for
accelerated benefits and asset impairments, future minimum lease
obligations and other costs. We anticipate restructuring charges
of approximately $8.5 million for employee severance costs
and $3.3 million of future minimum lease obligations will
be accrued by year end 2008.
Revenue
Recognition
We recognize sales typically when we ship goods to our customers
and when all of the following criteria are met:
|
|
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
The selling price is fixed and determinable;
|
|
|
|
Collection is reasonably assured; and
|
|
|
|
Title and risk of loss has passed to our customers.
|
Because we sell our many products throughout the world, we use
varying sales and payment terms as agreed to with our customers.
In the U.S., our standard payment terms vary by industry and
business unit, but are generally 30 to 60 days. Substantial
amounts of our consolidated revenues are derived from foreign
countries and in many of those countries the standard payment
terms are longer than those prevalent in the U.S. In order
to ensure the revenue recognition in the proper period, we
review material sales contracts for proper cut-off based upon
the business practices and legal requirements of each country.
For sales of products containing precious metals, we report
gross revenues with a separate display of cost of sales to
arrive at gross profit. We record revenues this way because we
act as the principal in the transactions we enter into and take
title and the risks and rewards of ownership of the inventory we
process, although the timing of when we take title to the
inventory during the production process may vary.
The amount of shipping and handling fees invoiced to our
customers at the time our product is shipped is included in net
sales. Shipping and handling fees included in net sales were
$44.9 million in 2007 and $38.4 million in 2006.
Credit memos issued to customers for sales returns, discounts
allowed and sales adjustments are recorded when they are
incurred as a reduction of sales. We use estimated allowances to
provide for future sales returns and
33
adjustments in order to record revenues in the proper accounting
period and to state the related accounts receivable at their net
realizable value. We estimate these allowances based upon
historical sales return and adjustment rates. Actual allowances
may be more or less than the amount we estimate. In the past,
these differences have not been material and we do not expect
any material differences in the future.
Additionally, we provide certain of our customers with incentive
rebate programs to promote customer loyalty and encourage
greater product sales. We accrue customer rebates over the
rebate periods based upon estimated attainments of the
provisions in the rebate agreements using available information
and record these rebate accruals as reductions of sales. We
incurred $2.6 million of customer rebates in 2007 and
$4.0 million in 2006. We do not expect customer rebates to
increase significantly in future periods.
Valuation
of Goodwill
While goodwill is no longer amortized, we review goodwill for
impairment each year on a measurement date of October 31st.
We estimate the fair value of each reporting unit that has
goodwill using the weighted average of both the income approach
and the market approach, which we believe provides a reasonable
estimate of the reporting units fair value. The income
approach is a discounted cash flow model, which uses projected
cash flows attributable to the reporting unit, including an
allocation of certain corporate expenses. We use historical
results and trends and our projections of market growth,
internal sales efforts, input cost movements, and cost reduction
opportunities to estimate future cash flows. Using a risk
adjusted, weighted average
cost-of-capital,
we discount the cash flow projections to the measurement date.
The market approach estimates a price reasonably expected to be
realized from the sale of the reporting units based on a
comparison to similar businesses. If the fair value of any of
the units were determined to be less than its carrying value,
including the allocation of certain corporate assets and
liabilities, we would proceed to the second step and obtain
comparable market values or independent appraisals of its net
assets to determine the amount of any impairment.
Our estimates of fair value can be affected by a variety of
factors. Reductions in actual or projected growth or
profitability due to unfavorable market conditions in our
business units, or significant increases in previous levels of
capital spending, could lead to the impairment of any related
goodwill. Additionally, an increase in inflation, interest rates
or the risk adjusted weighted-average cost of capital could also
lead to a reduction in the value of one or more of our business
units and therefore lead to the impairment of goodwill.
Due to the cumulative negative effect on earnings of a cyclical
downturn in certain of the primary
U.S.-based
end markets, including housing and automobile parts, of our
polymer additives business; anticipated additional product costs
resulting from recent hazardous material legislation and
regulations, such as the newly enacted European Union
REACH registration system, which requires chemical
suppliers to perform toxicity studies of the components of their
products and to register certain information; and higher
forecasted capital expenditures for this business, we were
required to record an impairment of the goodwill related to our
polymer additives business. Additionally, in our pharmaceutical
business, primarily due to the result of a longer time to
transition the business from a supplier of food supplements and
additives to a supplier of high-value pharmaceutical products
and services, we recorded an impairment of goodwill. In 2006 and
2005, the fair value exceeded the carrying value, and therefore,
it was not necessary to obtain independent appraisals.
Assessment
of Long-Lived Assets
Our long-lived assets also include property, plant and equipment
and amortizable intangible assets. We depreciate property, plant
and equipment on a straight-line basis over the estimated useful
lives of the assets. We continually assess these long-lived
assets for the appropriateness of their estimated useful lives.
When circumstances indicate that there has been a reduction in
the economic useful life of an asset or an asset group, we
revise our estimates. In 2007 and 2006, we shortened our
estimates of the useful lives for several asset groups due to
our restructuring activities.
We also review property, plant and equipment and amortizable
intangibles for impairment whenever events or circumstances
indicate that the undiscounted net cash flows to be generated by
their use and eventual disposition are less than the
assets recorded value. In the event of impairment, we
recognize a loss for the excess of the recorded value of the
asset over its fair value. The long-term nature of these assets
requires that we estimate cash inflows and
34
outflows for several years into the future and only take into
consideration technological advances known at the time of
impairment.
In 2007, the circumstances described above, relating to the
impairment of goodwill in the Polymer Additives segment and in
the pharmaceutical products component of our Other Businesses
segment, also resulted in the recognition of an impairment of
the property plant and equipment in both segments. The fair
values determined during the review of goodwill were used to
measure the amount of impairment on the fixed assets. We
recorded as impairment charges $6.8 million in the Polymer
Additives segment and $16.3 million in the Other Businesses
segment.
Due to depressed conditions in the electronics industry in 2005,
we specifically evaluated our electronics assets in Holland.
Also in 2005, we evaluated our Italian tile and Belgian polymer
additives manufacturing assets because of sluggish market
conditions in these regions. In each situation, we concluded
that the assets were not impaired. In 2007 and 2006, we recorded
impairment charges for both property, plant and equipment and
intangible assets due to restructuring activities.
Derivative
Financial Instruments
We use derivative financial instruments in the normal course of
business to manage our exposure to fluctuations in interest
rates, foreign currency exchange rates, commodity prices, and
precious metal prices. The accounting for derivative financial
instruments can be complex and require significant judgments.
Generally, the derivative financial instruments that we use are
not complex and quoted market prices are available through
financial institutions. We do not engage in speculative
transactions for trading purposes. Financial instruments,
including derivative financial instruments, expose us to
counterparty credit risk for non-performance. We manage our
exposure to counterparty credit risk through minimum credit
standards and procedures to monitor concentrations of credit
risk. We enter into these derivative financial instruments with
major reputable multinational financial institutions.
Accordingly, we do not anticipate counter-party default. We
continuously evaluate the effectiveness of derivative financial
instruments designated as hedges to ensure that they are highly
effective. In the event the hedge becomes ineffective, we
discontinue hedge treatment.
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. At
December 31, 2007, $8.1 million of losses remained in
accumulated other comprehensive income (loss).
We manage foreign currency risks in a wide variety of foreign
currencies principally by entering into forward contracts to
mitigate the impact of currency fluctuations on transactions
arising from international trade. Our objective in entering into
these forward contracts is to preserve the economic value of
non-functional currency cash flows. Our principal foreign
currency exposures relate to the Euro, the British Pound
Sterling, the Japanese Yen, and the Chinese Yuan. We mark these
forward contracts to fair value at the end of each reporting
period and recognize the resulting gains or losses as other
income or expense from foreign currency transactions. We
recorded
mark-to-market
gains from forward currency contracts of $0.4 million in
2007 and
mark-to-market
losses of $0.8 million in 2006. The amounts of gains or
losses we record depend on a variety of factors including the
notional amount of the forward contracts entered into and the
fluctuation of the underlying currency exchange rates. We do not
expect any change in our foreign currency risk policies or in
the nature of the transactions we enter into to mitigate foreign
currency risk.
Our exposure to market risk from commodity prices relate
primarily to commodity raw materials and energy used in the
production of a portion of our products. We purchase portions of
our energy requirements, including natural gas and electricity,
under fixed price contracts to reduce the volatility of cost
changes. For contracts entered into prior to April 2006, we
marked these contracts to fair value and recognized the
resulting gains or losses as miscellaneous income or expense,
respectively. We recognized
mark-to-market
gains of $0.4 million in 2007 and
mark-to-market
losses of $2.6 million in 2006. Beginning April 2006, we
designated new energy contracts as normal purchase contracts,
which are not marked to market. Due to the designation of these
contracts as normal purchase contracts, we do not expect to
recognize
mark-to-market
gains or losses in future periods. Our purchase
35
commitments for energy under normal purchase contracts at
December 31, 2007, were $16.7 million for
1.2 million MBTU of natural gas and $1.0 million for
12.8 million KWh of electricity.
We also manage a portion of our exposure to market risk for
changes in the pricing of certain raw material commodities using
derivative instruments. We hedge our exposure principally
through swap arrangements that allow us to fix the price of the
commodities for future purchases. These swap arrangements are
settled in cash at their maturities. We mark these contracts to
fair value and recognize the resulting gains or losses as other
comprehensive income. After the contracts mature and the
materials are sold, the gains and losses are recognized as a
part of cost of sales. We recognized net gains of
$1.5 million in 2007 and $5.3 million in 2006 in cost
of sales related to these swaps. At December 31, 2007,
$2.1 million of losses remained in accumulated other
comprehensive income (loss) and inventories. We do not expect
any change in our commodity risk policies or in the nature of
the transactions we enter into to mitigate commodity market risk.
Precious metals (primarily silver, gold, platinum and palladium)
represent a significant portion of raw material costs in our
Electronic Materials and our Color and Glass Performance
Materials products. Sometimes when an order for these products
is placed, the customer requests a fixed price for the precious
metals content. In these instances, we enter into a fixed price
sales contract to establish the cost for the customer at the
estimated future delivery date. At the same time, we enter into
a forward purchase arrangement with a precious metals supplier
to completely cover the value of the fixed price sales contract.
U.S. precious metal contracts entered into prior to
November 2007 and all
non-U.S. precious
metal contracts are marked to fair value at the end of each
reporting period, and the resulting gains or losses are
recognized as miscellaneous income or expense, respectively. We
recognized $0.6 million of net gains in 2007 and
$0.1 million of net losses in 2006. Beginning November
2006, we designated new U.S. precious metal contracts as
normal purchase contracts, which are not marked to market. Our
purchase commitment for precious metals under normal purchase
contracts at December 31, 2007, was $6.9 million for
0.5 million troy ounces.
Impact
of 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. In February 2008, the FASB issued a staff position
that delays the effective date of FAS No. 157 for all
non-financial assets and liabilities, except for those
recognized or disclosed at least annually. Except for this delay
for non-financial assets and liabilities, 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 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 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 have elected to use the
September 30, 2007, measurement of assets and benefit
obligations to calculate the fiscal year 2008 expense. Expense
for the gap period from September 30 to December 31 will be
recognized as of January 1, 2008 as a charge of
$0.8 million to retained earnings and a credit of
$0.3 million to accumulated other comprehensive income.
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
36
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 (EITF)
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.
In December 2007, the FASB issued Statement No. 141(R),
Business Combinations,
(FAS No. 141(R)) and Statement
No. 160, Noncontrolling Interests in Consolidated
Financial Statements, (FAS No. 160).
These statements change the way that companies account for
business combinations and noncontrolling interests (e.g.,
minority interests). Both standards are to be applied
prospectively for fiscal years beginning after December 15,
2008. However, FAS No. 160 requires entities to apply
the presentation and disclosure requirements retrospectively to
comparative financial statements. In 2008, we will
retrospectively reclassify the amount of minority interests in
consolidated subsidiaries to equity and separately report the
amount of net income or loss attributable to minority interests.
|
|
Item 7A
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our exposure to market risks is generally limited to
fluctuations in interest rates, foreign currency exchange rates,
and costs of raw materials and energy.
Our exposure to interest rate risk arises from our debt
portfolio. We manage this risk by controlling the mix of fixed
versus variable-rate debt after considering the interest rate
environment and expected future cash flows. 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, and hedge our
currency exposure.
We are subject to cost changes with respect to our raw materials
and energy purchases. We attempt to mitigate raw materials cost
increases through product 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 from our
suppliers. 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.
U.S. precious metal contracts entered into prior to
November 2007 and all
non-U.S. precious
metal contracts are marked to fair value at the end of each
reporting period, and the resulting gains or losses are
recognized as miscellaneous income or expense, respectively.
Beginning in November 2007, we designated new U.S. precious
metal contracts as normal purchases which are not marked to
market. Our purchase commitment for precious metals under normal
purchase contracts at December 31, 2007, was
$6.9 million for 0.5 million troy ounces. In addition,
we purchase portions of our natural gas and electricity
requirements under fixed price contracts to reduce the
volatility of these costs. For energy 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 energy contracts as normal purchase contracts, which are not
marked to market. Our purchase commitments for energy under
normal purchase contracts at December 31, 2007, were
$16.7 million for 1.2 million MBTU of natural gas and
$1.0 million for 12.8 million KWh of electricity.
37
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:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Variable-rate debt and utilization of asset securitization
program:
|
|
|
|
|
|
|
|
|
Change in annual interest expense from 1% change in interest
rates
|
|
$
|
2,636
|
|
|
$
|
4,797
|
|
Fixed-rate debt:
|
|
|
|
|
|
|
|
|
Carrying amount
|
|
$
|
200,404
|
|
|
$
|
200,281
|
|
Fair value
|
|
$
|
205,705
|
|
|
$
|
206,399
|
|
Change in fair value from 1% increase in interest rate
|
|
$
|
(1,929
|
)
|
|
$
|
(5,240
|
)
|
Change in fair value from 1% decrease in interest rate
|
|
$
|
1,957
|
|
|
$
|
5,413
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
150,000
|
|
|
$
|
|
|
Carrying amount and fair value
|
|
$
|
(8,109
|
)
|
|
$
|
|
|
Change in fair value from 1% increase in interest rate
|
|
$
|
5,000
|
|
|
$
|
|
|
Change in fair value from 1% decrease in interest rate
|
|
$
|
(5,181
|
)
|
|
$
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
142,638
|
|
|
$
|
121,430
|
|
Carrying amount and fair value
|
|
$
|
(268
|
)
|
|
$
|
(640
|
)
|
Change in fair value from 10% appreciation of U.S. dollar
|
|
$
|
(1,402
|
)
|
|
$
|
(1,142
|
)
|
Change in fair value from 10% depreciation of U.S. dollar
|
|
$
|
1,714
|
|
|
$
|
1,396
|
|
Raw material commodity swaps:
|
|
|
|
|
|
|
|
|
Notional amount (in metric tons of base metals)
|
|
|
1,171
|
|
|
|
2,004
|
|
Carrying amount and fair value
|
|
$
|
(1,499
|
)
|
|
$
|
1,939
|
|
Change in fair value from 10% change in forward prices
|
|
$
|
507
|
|
|
$
|
1,003
|
|
Precious metals forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount (in troy ounces)
|
|
|
159,648
|
|
|
|
183,264
|
|
Carrying amount and fair value
|
|
$
|
755
|
|
|
$
|
192
|
|
Change in fair value from 10% change in forward prices
|
|
$
|
612
|
|
|
$
|
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
|
|
38
|
|
Item 8
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Ferro Corporation
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of
Ferro Corporation and subsidiaries (the Company) as
of December 31, 2007 and 2006, and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the
three years in the period ended December 31, 2007. Our
audits also included the financial statement schedule listed in
the index at Item 15. These consolidated financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Ferro Corporation and subsidiaries as of December 31, 2007
and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
As discussed in Note 1 to the consolidated financial
statements, effective January 1, 2007, the Company adopted
Financial Accounting Standards Board (FASB) Staff
Position No. AUG AIR-1, Accounting for Planned
Maintenance Activities, and elected to change its costing
method for its inventories costed under the lower of cost or
market using the
last-in,
first-out (LIFO) method to the
first-in,
first-out (FIFO) method, and as a result,
retrospectively, adjusted the 2006 and 2005 consolidated
financial statements for these changes. Also as discussed in
Note 1 to the consolidated financial statements, effective
January 1, 2007, the Company adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
and, effective in 2006, the Company adopted Statement of
Financial Accounting Standard (SFAS)
No. 123(R), Share-Based Payment, and the recognition
and disclosure provisions of SFAS No. 158,
Employers Accounting for Defined Pension and Other
Postretirement Plans.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 29, 2008,
expressed an adverse opinion on the Companys internal
control over financial reporting because of a material weakness.
/s/
Deloitte &
Touche LLP
Cleveland, Ohio
February 29, 2008
39
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
|
|
|
(Note 1)
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
2,204,785
|
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
Cost of sales
|
|
|
1,788,122
|
|
|
|
1,625,880
|
|
|
|
1,495,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
416,663
|
|
|
|
415,645
|
|
|
|
386,902
|
|
Selling, general and administrative expenses
|
|
|
319,065
|
|
|
|
305,211
|
|
|
|
310,056
|
|
Impairment charges
|
|
|
128,737
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
16,852
|
|
|
|
23,146
|
|
|
|
3,677
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
59,690
|
|
|
|
64,427
|
|
|
|
46,919
|
|
Interest earned
|
|
|
(1,505
|
)
|
|
|
(4,466
|
)
|
|
|
(538
|
)
|
Foreign currency losses, net
|
|
|
1,254
|
|
|
|
1,040
|
|
|
|
1,284
|
|
Loss (gain) on sale of businesses
|
|
|
1,348
|
|
|
|
(67
|
)
|
|
|
(69
|
)
|
Miscellaneous expense (income), net
|
|
|
540
|
|
|
|
(87
|
)
|
|
|
(1,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(109,318
|
)
|
|
|
26,441
|
|
|
|
27,173
|
|
Income tax (benefit) expense
|
|
|
(15,064
|
)
|
|
|
5,349
|
|
|
|
8,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(94,254
|
)
|
|
|
21,092
|
|
|
|
19,113
|
|
Loss from discontinued operations, net of tax
|
|
|
(225
|
)
|
|
|
(472
|
)
|
|
|
(868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(94,479
|
)
|
|
|
20,620
|
|
|
|
18,245
|
|
Dividends on preferred stock
|
|
|
(1,035
|
)
|
|
|
(1,252
|
)
|
|
|
(1,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(95,514
|
)
|
|
$
|
19,368
|
|
|
$
|
16,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
42,926
|
|
|
|
42,394
|
|
|
|
42,309
|
|
Incremental common shares attributable to stock options,
performance shares, deferred stock units, and convertible
preferred stock
|
|
|
|
|
|
|
28
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding
|
|
|
42,926
|
|
|
|
42,422
|
|
|
|
42,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(2.22
|
)
|
|
$
|
0.47
|
|
|
$
|
0.42
|
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2.23
|
)
|
|
$
|
0.46
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(2.22
|
)
|
|
$
|
0.47
|
|
|
$
|
0.42
|
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2.23
|
)
|
|
$
|
0.46
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
40
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
Adjusted
|
|
|
|
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,025
|
|
|
$
|
16,985
|
|
Accounts and trade notes receivable, net
|
|
|
245,369
|
|
|
|
220,899
|
|
Note receivable from Ferro Finance Corporation
|
|
|
29,577
|
|
|
|
16,083
|
|
Inventories
|
|
|
262,799
|
|
|
|
269,234
|
|
Deposits for precious metals
|
|
|
|
|
|
|
70,073
|
|
Deferred income taxes
|
|
|
15,764
|
|
|
|
12,291
|
|
Other receivables
|
|
|
33,419
|
|
|
|
19,610
|
|
Other current assets
|
|
|
8,239
|
|
|
|
6,267
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
607,192
|
|
|
|
631,442
|
|
Other assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
519,959
|
|
|
|
526,802
|
|
Goodwill
|
|
|
291,070
|
|
|
|
396,190
|
|
Amortizable intangible assets, net
|
|
|
9,071
|
|
|
|
10,150
|
|
Deferred income taxes
|
|
|
100,935
|
|
|
|
94,490
|
|
Other non-current assets
|
|
|
110,033
|
|
|
|
82,528
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,638,260
|
|
|
$
|
1,741,602
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Loans payable and current portion of long-term debt
|
|
$
|
5,444
|
|
|
$
|
10,764
|
|
Accounts payable
|
|
|
269,591
|
|
|
|
237,018
|
|
Income taxes
|
|
|
|
|
|
|
8,951
|
|
Accrued payrolls
|
|
|
26,415
|
|
|
|
33,164
|
|
Accrued expenses and other current liabilities
|
|
|
108,882
|
|
|
|
91,150
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
410,332
|
|
|
|
381,047
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
520,645
|
|
|
|
581,654
|
|
Postretirement and pension liabilities
|
|
|
140,988
|
|
|
|
194,427
|
|
Deferred income taxes
|
|
|
9,848
|
|
|
|
11,037
|
|
Other non-current liabilities
|
|
|
56,644
|
|
|
|
12,749
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,138,457
|
|
|
|
1,180,914
|
|
Minority interests
|
|
|
9,896
|
|
|
|
8,850
|
|
Series A convertible preferred stock (approximates
redemption value)
|
|
|
13,623
|
|
|
|
16,787
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
52,323
|
|
|
|
52,323
|
|
Paid-in capital
|
|
|
166,391
|
|
|
|
158,504
|
|
Retained earnings
|
|
|
468,190
|
|
|
|
600,638
|
|
Accumulated other comprehensive loss
|
|
|
(7,765
|
)
|
|
|
(65,138
|
)
|
Common shares in treasury, at cost
|
|
|
(202,855
|
)
|
|
|
(211,276
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
476,284
|
|
|
|
535,051
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,638,260
|
|
|
$
|
1,741,602
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
41
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Unearned
|
|
|
Share-
|
|
|
|
In Treasury
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Compen-
|
|
|
holders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)(a)
|
|
|
sation
|
|
|
Equity
|
|
|
|
(In thousands, except per share data)
|
|
|
Balances at December 31, 2004
Adjusted (Note 1)
|
|
|
10,185
|
|
|
$
|
(223,516
|
)
|
|
$
|
52,323
|
|
|
$
|
162,912
|
|
|
$
|
613,524
|
|
|
$
|
(67,683
|
)
|
|
$
|
(7,292
|
)
|
|
$
|
530,268
|
|
Net income Adjusted (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,245
|
|
|
|
|
|
|
|
|
|
|
|
18,245
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,769
|
)
|
|
|
|
|
|
|
(38,769
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,518
|
)
|
|
|
|
|
|
|
(9,518
|
)
|
Other adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,062
|
)
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,447
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,447
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,490
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,490
|
)
|
Income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
Stock-based compensation transactions
|
|
|
(215
|
)
|
|
|
2,421
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
1,169
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
Adjusted (Note 1)
|
|
|
9,970
|
|
|
|
(221,095
|
)
|
|
|
52,323
|
|
|
|
163,074
|
|
|
|
605,874
|
|
|
|
(115,990
|
)
|
|
|
(6,123
|
)
|
|
|
478,063
|
|
Net income Adjusted (Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,620
|
|
|
|
|
|
|
|
|
|
|
|
20,620
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,468
|
|
|
|
|
|
|
|
33,468
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,858
|
|
|
|
|
|
|
|
15,858
|
|
Other adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,448
|
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,649
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,649
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,252
|
)
|
Income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Stock-based compensation transactions
|
|
|
(512
|
)
|
|
|
9,819
|
|
|
|
|
|
|
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,372
|
|
Reclassification to initially apply FAS No. 123R as of
January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,123
|
)
|
|
|
|
|
|
|
|
|
|
|
6,123
|
|
|
|
|
|
Adjustment to initially apply FAS No. 158 as of
December 31, 2006, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
Adjusted (Note 1)
|
|
|
9,458
|
|
|
|
(211,276
|
)
|
|
|
52,323
|
|
|
|
158,504
|
|
|
|
600,638
|
|
|
|
(65,138
|
)
|
|
|
|
|
|
|
535,051
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,479
|
)
|
|
|
|
|
|
|
|
|
|
|
(94,479
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,167
|
|
|
|
|
|
|
|
39,167
|
|
Postretirement benefit liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,589
|
|
|
|
|
|
|
|
25,589
|
|
Raw material commodity swap adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,161
|
)
|
|
|
|
|
|
|
(2,161
|
)
|
Interest rate swap adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,222
|
)
|
|
|
|
|
|
|
(5,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,106
|
)
|
Cash dividends(b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,051
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,051
|
)
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,035
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,035
|
)
|
Income tax benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Stock-based compensation transactions
|
|
|
(705
|
)
|
|
|
8,421
|
|
|
|
|
|
|
|
7,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,308
|
|
Adjustment to initially apply FIN No. 48 as of
January 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,933
|
)
|
|
|
|
|
|
|
|
|
|
|
(11,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
8,753
|
|
|
$
|
(202,855
|
)
|
|
$
|
52,323
|
|
|
$
|
166,391
|
|
|
$
|
468,190
|
|
|
$
|
(7,765
|
)
|
|
$
|
|
|
|
$
|
476,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Accumulated translation
adjustments were $35,510, $(3,657), and $(37,125), accumulated
postretirement benefit liability adjustments were $(36,869),
$(62,458), and $(79,340), accumulated raw material commodity
swap adjustments were $(1,184), $977, and $72, and accumulated
interest rate swap adjustments were $(5,222), $-0-, and $-0- at
December 31, 2007, 2006 and 2005, respectively.
|
|
(b)
|
|
Dividends per share of common stock
were $0.58 for 2007, 2006, and 2005. Dividends per share of
convertible preferred stock were $3.25 for 2007, 2006, and 2005.
|
See accompanying notes to consolidated financial statements.
42
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
|
|
|
(Note 1)
|
|
|
(Note 1)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(94,479
|
)
|
|
$
|
20,620
|
|
|
$
|
18,245
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
225
|
|
|
|
472
|
|
|
|
868
|
|
Loss (gain) on sale of assets and businesses
|
|
|
1,175
|
|
|
|
(1,626
|
)
|
|
|
948
|
|
Depreciation and amortization
|
|
|
87,476
|
|
|
|
79,501
|
|
|
|
74,823
|
|
Impairment charges
|
|
|
128,737
|
|
|
|
|
|
|
|
|
|
Noncash restructuring charges
|
|
|
3,259
|
|
|
|
15,795
|
|
|
|
|
|
Provision for allowance for doubtful accounts
|
|
|
706
|
|
|
|
1,452
|
|
|
|
1,799
|
|
Retirement benefits
|
|
|
(16,533
|
)
|
|
|
(13,826
|
)
|
|
|
(20,345
|
)
|
Deferred income taxes
|
|
|
(30,468
|
)
|
|
|
(13,391
|
)
|
|
|
(7,993
|
)
|
Changes in current assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and trade notes receivable
|
|
|
(5,306
|
)
|
|
|
(25,921
|
)
|
|
|
(7,357
|
)
|
Note receivable from Ferro Finance Corporation
|
|
|
(13,494
|
)
|
|
|
95,842
|
|
|
|
(6,071
|
)
|
Inventories
|
|
|
20,714
|
|
|
|
(29,701
|
)
|
|
|
(3,062
|
)
|
Deposits for precious metals
|
|
|
70,073
|
|
|
|
(51,073
|
)
|
|
|
(11,100
|
)
|
Other receivables and other current assets
|
|
|
(12,812
|
)
|
|
|
(197
|
)
|
|
|
9,129
|
|
Accounts payable
|
|
|
9,681
|
|
|
|
(14,826
|
)
|
|
|
(17,595
|
)
|
Accrued expenses and other current liabilities
|
|
|
(1,737
|
)
|
|
|
8,990
|
|
|
|
(3,694
|
)
|
Other operating activities
|
|
|
(2,582
|
)
|
|
|
(481
|
)
|
|
|
(5,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
144,635
|
|
|
|
71,630
|
|
|
|
23,167
|
|
Net cash used for discontinued operations
|
|
|
(56
|
)
|
|
|
(686
|
)
|
|
|
(1,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
144,579
|
|
|
|
70,944
|
|
|
|
21,381
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for plant and equipment of continuing
operations
|
|
|
(67,634
|
)
|
|
|
(50,615
|
)
|
|
|
(42,825
|
)
|
Acquisitions, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(1,908
|
)
|
Cash adjustments to purchase price of prior acquisition
|
|
|
|
|
|
|
1,790
|
|
|
|
|
|
Proceeds from the sale of assets and businesses
|
|
|
4,850
|
|
|
|
5,130
|
|
|
|
9,287
|
|
Cash investment in Ferro Finance Corporation
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
|
|
Other investing activities
|
|
|
751
|
|
|
|
(23
|
)
|
|
|
(368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(62,033
|
)
|
|
|
(68,718
|
)
|
|
|
(35,814
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) under short-term loans payable to
banks
|
|
|
(6,857
|
)
|
|
|
1,334
|
|
|
|
(2,119
|
)
|
Proceeds from former revolving credit facility
|
|
|
|
|
|
|
461,900
|
|
|
|
949,867
|
|
Proceeds from revolving credit facility
|
|
|
779,630
|
|
|
|
697,929
|
|
|
|
|
|
Proceeds from term loan facility
|
|
|
55,000
|
|
|
|
250,000
|
|
|
|
|
|
Principal payments on former revolving credit facility
|
|
|
|
|
|
|
(648,000
|
)
|
|
|
(901,482
|
)
|
Principal payments on revolving credit facility
|
|
|
(893,726
|
)
|
|
|
(569,976
|
)
|
|
|
|
|
Principal payments on term loan facility
|
|
|
(3,050
|
)
|
|
|
|
|
|
|
|
|
Extinguishment of debentures
|
|
|
|
|
|
|
(155,000
|
)
|
|
|
|
|
Debt issue costs
|
|
|
(1,783
|
)
|
|
|
(16,234
|
)
|
|
|
|
|
Cash dividends
|
|
|
(26,086
|
)
|
|
|
(25,901
|
)
|
|
|
(25,937
|
)
|
Proceeds from exercise of stock options
|
|
|
9,843
|
|
|
|
4,168
|
|
|
|
1,849
|
|
Other financing activities
|
|
|
(1,688
|
)
|
|
|
(3,255
|
)
|
|
|
(4,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities
|
|
|
(88,717
|
)
|
|
|
(3,035
|
)
|
|
|
18,137
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,211
|
|
|
|
381
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(4,960
|
)
|
|
|
(428
|
)
|
|
|
3,474
|
|
Cash and cash equivalents at beginning of period
|
|
|
16,985
|
|
|
|
17,413
|
|
|
|
13,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,025
|
|
|
$
|
16,985
|
|
|
$
|
17,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
56,911
|
|
|
$
|
62,980
|
|
|
$
|
44,092
|
|
Income taxes
|
|
$
|
15,721
|
|
|
$
|
10,687
|
|
|
$
|
9,487
|
|
See accompanying notes to consolidated financial statements.
43
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2007, 2006 and 2005
|
|
1.
|
Our
Business and Summary of Significant Accounting
Policies
|
Our
Business
Ferro Corporation (Ferro, we,
us or the Company) produces performance
materials for a broad range of manufacturers in diversified
industries throughout the world. Our products are classified as
performance materials, rather than commodities, because they are
formulated to perform specific and important functions both in
the manufacturing processes and in the finished products of our
customers. We use inorganic chemical processes, polymer science
and materials science to develop and produce these performance
materials. Performance materials require a high degree of
technical service on an individual customer basis. The value of
our products stems from the results and performance they achieve
in actual use. We manage our diverse businesses through eight
business units that are differentiated from one another by
product type. We have grouped these segments by their product
group below:
|
|
|
|
|
Inorganic Specialties
|
|
Organic Specialties
|
|
Electronic Materials
|
|
Tile Coating Systems
|
|
Polymer Additives
|
|
|
Porcelain Enamel
|
|
Specialty Plastics
|
|
|
Color and Glass Performance
|
|
Pharmaceuticals
|
|
|
Materials
|
|
Fine Chemicals
|
|
|
We produce our products principally in the United States
(U.S.) and Europe, but we also operate manufacturing
plants in Latin America and the Asia-Pacific region.
Ferro sells its products directly to customers or through the
use of agents or distributors throughout the world. A large
portion of our products are sold in the U.S. and Europe,
however, we also sell to customers in strategically important
Latin America and Asia-Pacific regions. Our customers use our
products to manufacture building and renovation, automotive,
household appliance and furnishing, transportation, electronic,
and industrial products.
Principles
of Consolidation
Our consolidated financial statements include the accounts of
the parent company and the accounts of subsidiary businesses in
which we own majority and controlling interests. When we
consolidate our financial statements we eliminate investments,
common stock and paid-in capital accounts, and intercompany
transactions, accounts and profits. When we exert significant
influence over an investee but do not control it, we account for
the investment and the investment income using the equity
method. These investments are reported in the other non-current
assets section of our balance sheet. When we acquire a
subsidiary that is consolidated, its financial results are
included in our consolidated financial statements from the date
of the acquisition.
We sell substantially all of our domestic trade accounts
receivable to Ferro Finance Corporation (FFC). FFC
is a wholly-owned unconsolidated qualified special purpose
entity (QSPE). We do not consolidate FFC because FFC:
|
|
|
|
|
Is demonstrably distinct from us;
|
|
|
|
Is permitted only significantly limited activities that we
cannot change;
|
|
|
|
Holds only passive assets that are sold to outside
parties; and
|
|
|
|
May only sell financial assets automatically under specified
conditions that are outside of our control.
|
In addition, we cannot unilaterally cause FFC to liquidate or to
change FFC in such a way that the conditions listed above are no
longer met.
44
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Use of
Estimates and Assumptions in the Preparation of Financial
Statements
We prepare our consolidated financial statements in conformity
with United States Generally Accepted Accounting Principles,
which requires us to make estimates and to use judgments and
assumptions that affect the timing and amount of assets,
liabilities, equity, revenues and expenses recorded and
disclosed. The more significant estimates and judgments relate
to accounts receivable and inventory allowances, environmental
and other contingent liabilities, income taxes, pension and
other postretirement benefits, inventories, restructuring and
cost reduction programs, revenue recognition, valuation of
goodwill and other intangibles, assessment of long-lived assets,
asset retirement obligations, and derivative financial
instruments. Actual outcomes could differ from our estimates,
resulting in changes in revenues or costs that could have a
material impact on the Companys results of operations,
financial position, or cash flows.
Foreign
Currency Translation
The financial results of our operations outside of the
U.S. are recorded in local currencies, which generally are
also the functional currencies for financial reporting purposes.
The results of operations outside of the U.S. are translated
from these local currencies into U.S. dollars using the
average monthly currency exchange rates. We use the average
currency exchange rate for these results of operations as a
reasonable approximation of the results had specific currency
exchange rates been used for each individual transaction. Assets
and liabilities are translated into U.S. dollars using
exchange rates at the balance sheet dates, and we record the
resulting foreign currency translation adjustment as a separate
component of accumulated other comprehensive loss in
shareholders equity.
Foreign currency transaction gains and losses are recorded as
incurred as other expense (income) in the consolidated
statements of operations.
Cash
Equivalents
We consider all highly liquid instruments with original
maturities of three months or less when purchased to be cash
equivalents. These instruments are carried at cost.
Accounts
Receivable and the Allowance for Doubtful Accounts
Ferro sells its products to customers in diversified industries
throughout the world. No customer or related group of customers
represents greater than 10% of net sales or accounts receivable.
We perform ongoing credit evaluations of our customers and
generally do not require collateral. We provide for
uncollectible accounts based on historical experience and
specific circumstances, as appropriate. Customer accounts we
deem to be uncollectible or to require excessive collection
costs are written off against the allowance for doubtful
accounts. Historically, write-offs of uncollectible accounts
have been within our expectations. Detailed information about
the allowance for doubtful accounts is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for doubtful accounts
|
|
$
|
6,519
|
|
|
$
|
7,544
|
|
|
$
|
7,519
|
|
Bad debt (credit) expense
|
|
|
(242
|
)
|
|
|
844
|
|
|
|
256
|
|
45
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Note
Receivable from Ferro Finance Corporation
Ferro holds a note receivable from an unconsolidated subsidiary,
FFC, to the extent that expected cash proceeds from the sales of
accounts receivable to FFC have not yet been received. We
measure the fair value of the note receivable on a monthly basis
using our best estimate of FFCs ability to pay based on
the undiscounted expected future cash collections on the
outstanding accounts receivable sold. Actual cash collections
may differ from these estimates and would directly affect the
fair value of the note receivable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Valuation allowance
|
|
$
|
3,015
|
|
|
$
|
2,702
|
|
|
$
|
3,158
|
|
Bad debt expense
|
|
|
948
|
|
|
|
608
|
|
|
|
1,543
|
|
Inventories
We value inventory at the lower of cost or market, with cost
determined utilizing the
first-in,
first-out (FIFO) method. 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. 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
$11.0 million and increased retained earnings, net of
income tax effects, by $6.8 million as of January 1,
2005.
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.
Property,
Plant and Equipment
We record property, plant and equipment at historical cost. In
addition to the original purchased cost, including
transportation, installation and taxes, we capitalize
expenditures that increase the utility or useful life of
existing assets. For constructed assets, we capitalize interest
costs incurred during the period of construction. We depreciate
property, plant and equipment using the straight-line basis for
financial reporting purposes, generally over the following
estimated useful lives of the assets:
|
|
|
Buildings
|
|
20 to 40 years
|
Machinery and equipment
|
|
5 to 15 years
|
46
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
We expense repair and maintenance costs, including the costs of
major planned overhauls of equipment, as incurred.
We capitalize the costs of computer software developed or
obtained for internal use after the preliminary project stage
has been completed and management, with the relevant authority,
authorizes and commits to funding a computer software project,
and it is probable that the project will be completed and the
software will be used to perform the function intended. External
direct costs of materials and services consumed in developing or
obtaining internal-use computer software, payroll and
payroll-related costs for employees who are directly associated
with the project, and interest costs incurred when developing
computer software for internal use are capitalized.
Capitalization ceases when the project is substantially
complete, generally after all substantial testing is completed.
Training costs and data conversion costs are expensed as
incurred. After capitalization, the software is amortized on a
straight-line basis and is subject to impairment in accordance
with the provisions of Financial Accounting Standard Board
(FASB) Statement No. 144, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of.
We record asset retirement obligations (AROs) as
they are incurred. We record an asset and a liability equal to
the present value of the estimated costs associated with the
retirement of long-lived assets where a legal or contractual
obligation exists and the future costs can be reasonably
estimated. We depreciate the asset over its remaining estimated
useful life and the liability is accreted over time as an
operating expense. We estimate the AROs based on judgment,
taking into consideration the Companys historical
practices, current business intentions, and other relevant
information. In determining the amount of the estimated AROs, we
use an expected value technique based upon potential settlement
dates and related probabilities of settlement.
If we were to abandon or close certain of our facilities,
existing legal obligations would be triggered. Although we have
no current plans to do so, if we close certain operating
facilities, changes to or settlements of the related conditional
AROs could negatively affect the Companys results of
operations and cash flows. At December 31, 2007 and 2006,
estimated liabilities for asset retirement obligations were
$1.1 million and $2.0 million, respectively.
Asset
Impairment
The Companys long-lived assets include property, plant and
equipment, goodwill, and other intangible assets. We review
these assets for impairment whenever events or circumstances
indicate that their carrying values may not be recoverable. The
following are examples of such events or changes in
circumstances:
|
|
|
|
|
An adverse change in the business climate or market price of a
long-lived asset or asset group;
|
|
|
|
An adverse change in the extent or manner in which a long-lived
asset or asset group is used or in its physical
condition; or
|
|
|
|
Current operating losses for a long-lived asset or asset group
combined with a history of such losses or projected or
forecasted losses that demonstrate that the losses will be
continuing.
|
The carrying amount of long-lived assets, including amortizable
intangible assets, is not recoverable if it exceeds the sum of
the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. In the event of impairment,
we recognize a loss for the excess of the recorded value over
fair value. The long-term nature of these assets requires the
estimation of cash inflows and outflows several years into the
future and only takes into consideration technological advances
known at the time of review.
We review goodwill for impairment annually using a measurement
date of October 31st, primarily due to the timing of our annual
budgeting process, or more frequently in the event of an
impairment indicator. The fair value of each reporting unit that
has goodwill is estimated using the weighted average of the
income approach and the market approach, which we believe
provides a reasonable estimate of the reporting units fair
value. The income approach
47
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
is a discounted cash flow model, which uses projected cash flows
attributable to the reporting unit, including an allocation of
certain corporate expenses. We use historical results and trends
and our projections of market growth, internal sales efforts,
input cost movements, and cost reduction opportunities to
estimate future cash flows. Using a risk adjusted, weighted
average
cost-of-capital,
we discount the cash flow projections to the measurement date.
The market approach estimates a price reasonably expected to be
realized from the sale of the reporting units based on a
comparison to similar businesses. If the fair value of any of
the reporting units were determined to be less than its carrying
value, including the allocation of certain corporate assets and
liabilities, we would obtain comparable market values or
independent appraisals of its net assets.
Income
Taxes
We determine income taxes using the liability method of
accounting. Income tax expense includes U.S. and
international income taxes plus the provision for
U.S. taxes on undistributed earnings of international
subsidiaries we have not deemed to be indefinitely reinvested.
Tax credits and other incentives reduce tax expense in the year
the credits are claimed. We recognize deferred tax assets if we
believe it is more likely than not that the assets will be
realized in future years. We record valuation allowances against
deferred tax assets that we believe do not meet the criteria for
realization of more likely than not.
Environmental
Liabilities
As part of the production of some of our products, we handle,
process, use and store hazardous materials. As part of these
routine processes, we expense recurring costs associated with
control and disposal of hazardous materials as they are
incurred. Occasionally we are subject to ongoing, pending or
threatened litigation related to the handling of these materials
or other matters. If, based on available information, we believe
that we have incurred a liability and we can reasonably estimate
the amount, we accrue for environmental remediation and other
contingent liabilities. We disclose material contingencies if
the likelihood of the potential loss is reasonably possible but
the amount is not reasonably estimable.
In estimating the amount to be accrued for environmental
remediation, we use assumptions about:
|
|
|
|
|
Remediation requirements at the contaminated site;
|
|
|
|
The nature of the remedy;
|
|
|
|
Existing technology;
|
|
|
|
The outcome of discussions with regulatory agencies;
|
|
|
|
Other potentially responsible parties at multi-party
sites; and
|
|
|
|
The number and financial viability of other potentially
responsible parties.
|
We actively monitor the status of sites, and, as assessments and
cleanups proceed, we update our assumptions and adjust our
estimates as necessary. Because we are uncertain about the
timing of related payments, we do not discount the estimated
remediation costs.
Unanticipated government enforcement actions, differences in
actual results as compared to expected remediation outcomes,
changes in health, safety or environmental regulations, or
testing requirements could result in higher or lower costs and
changes to our estimates.
Contingencies
We expense contingent items as they are incurred when events
that give rise to the items are probable and the amounts are
reasonably estimable. If a loss contingency is reasonably
possible and the amount of the loss is
48
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
material, we disclose the item. If only a range of possible
losses can be estimated, we record the low end of the range and
disclose the possible range of outcomes. However, if there is a
best estimate of the amount of the loss within the range, we
will record that amount.
Gain contingencies are only recognized when their realization is
assured beyond a reasonable doubt. In December 2006, we received
a $2.4 million settlement in a class action lawsuit for
price-fixing in the rubber chemicals industry. The period
covered under the settlement began in 1995 and ended in 2001. We
recorded this gain in 2006 as miscellaneous income in the
consolidated statements of operations.
Restructuring
and Cost Reduction Programs
We expense costs associated with exit and disposal activities
designed to restructure operations and reduce ongoing costs of
operations when we incur the related liabilities or when other
triggering events occur. After the appropriate level of
management having the authority approves the detailed
restructuring plan, we establish accruals for underlying
activities by estimating employee termination costs. Our
estimates are based upon factors including statutory and union
requirements, affected employees lengths of service,
contract provisions, salary level and health care benefit
choices. As part of our assessment of exit and disposal
activities, we also analyze the carrying value of the affected
long-lived assets for impairment and reductions in the remaining
estimated useful lives.
We believe our estimates and assumptions used to calculate these
restructuring provisions are appropriate, and although we do not
anticipate significant changes, actual costs could differ from
the estimates should we make changes in the nature or timing of
the restructuring plans. The changes in costs, as a result of
the eventual timing and number of employees receiving
termination benefits and the final disposition or closure of the
manufacturing facilities, could have a material impact on the
Companys results of operations, financial position, or
cash flows.
Postretirement
and Other Employee Benefits
We recognize postretirement and other employee benefits as
employees render the services necessary to earn those benefits.
We determine defined benefit pension and other postretirement
benefit costs and obligations with the assistance of actuarial
calculations performed by experts. The calculations and the
resulting amounts recorded in our consolidated financial
statements are affected by assumptions including the discount
rate, expected long-term rate of return on plan assets, the
annual rate of change in compensation for plan-eligible
employees, estimated changes in costs of healthcare benefits,
and other factors. We evaluate the assumptions used on an annual
basis. Postretirement obligations for U.S. employees are
measured each September 30th while these obligations
for foreign employees are measured each December 31st.
Derivative
Financial Instruments and Precious Metals Deposits
As part of our risk management activities, we employ derivative
financial instruments, primarily interest rate swaps, foreign
currency forward contracts, raw material commodity swaps and
precious metals forward contracts, to hedge certain anticipated
transactions, firm commitments, or assets and liabilities
denominated in foreign currencies. We also purchase portions of
our energy and precious metal requirements under fixed price
forward purchase contracts designated as normal purchase
contracts. Under certain circumstances, these contracts require
us to settle the obligations in cash at prevailing market prices.
We record derivatives on our balance sheet as either assets or
liabilities that are measured at fair value. We adjust the fair
value of derivatives that are not hedges through income.
Depending on the nature of the hedge, changes in fair value of
the derivatives are either offset against the changes in the
fair value of assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion
of a derivatives change in value, if any, is immediately
recognized
49
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
in earnings. We use derivatives only to manage well-defined
interest rate, foreign currency and commodity price risks and do
not use derivatives for speculative purposes.
We also obtain precious metals under consignment agreements with
financial institutions for periods of one year or less. These
precious metals are primarily silver, gold, platinum and
palladium and are used in the production of certain products for
our customers. Under these arrangements, the financial
institutions own the precious metals, and accordingly, we do not
report these precious metals as inventory on our consolidated
balance sheet although they physically are in our possession.
These agreements are cancelable by either party at the end of
each consignment period, however, because we have access to a
number of consignment arrangements with available capacity, our
consignment needs can be shifted among the other participating
institutions in order to ensure our supply. In certain cases,
these financial institutions have required cash deposits to
provide additional collateral beyond the value of the underlying
precious metals. The financial institutions charge us fees for
these consignment arrangements, and these fees are recorded as
cost of sales.
Revenue
Recognition
We typically recognize sales when we ship goods to our customers
and when all of the following criteria are met:
|
|
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
The selling price is fixed and determinable;
|
|
|
|
Collection is reasonably assured; and
|
|
|
|
Title and risk of loss has passed to our customers.
|
Because we sell our products throughout the world, we use
varying sales and payments terms as agreed to with our customers
and we do not generally require collateral on accounts
receivable. Substantial amounts of our consolidated revenues are
derived from foreign countries and in many of those countries
the standard payment terms are longer than those prevalent in
the U.S. In order to ensure the revenue recognition in the
proper period, we review material sales contracts for proper
cut-off based upon the business practices and legal requirements
of each country. For sales of products containing precious
metals, we report gross revenues with a separate display of cost
of sales to arrive at gross profit. We record revenues this way
because we act as the principal in the transactions we enter
into and take title and the risks and rewards of ownership of
the inventory we process, although the timing of when we take
title to inventory during the production process may vary.
The amount of shipping and handling fees invoiced to our
customers at the time our product is shipped is included in net
sales. Credit memos issued to customers for sales returns,
discounts allowed and sales adjustments are recorded when they
are incurred as a reduction of sales. We use estimated
allowances to provide for future sales returns and adjustments
in order to record revenues in the proper accounting period and
to state the related accounts receivable at their net realizable
value. We estimate these allowances based upon historical sales
return and adjustment rates.
Additionally, we provide certain of our customers with incentive
rebate programs to promote customer loyalty and encourage
greater product sales. We accrue customer rebates over the
rebate periods based upon estimated attainments of the
provisions in the rebate agreements using available information
and record these rebate accruals as reductions of sales.
Cost
of Sales
We include in cost of sales the purchased cost of raw materials,
and labor and overhead directly associated with the production
process. Cost of sales also includes shipping and handling
costs, financing costs associated with
50
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
precious metals, purchasing and receiving costs, depreciation
and leasing costs of buildings and equipment used in production,
utilities, operating parts and supplies, warehousing costs,
internal transfer costs, other costs of distribution, costs of
hazardous materials control and disposal, physical inventory
adjustments, and obsolescence and rework costs.
Cost of sales is initially recorded using standard costs, which
are generally established at least annually to fully absorb
qualifying production costs into inventory based on normal
production capacity. Production variances related to volume,
rework, and other production inefficiencies are expensed as
incurred. We review manufacturing costs periodically to ensure
that only those costs that clearly relate to production and that
increase the economic utility of the related inventories are
capitalized into inventory. We adjust the standard cost of
inventory at the balance sheet date to actual by applying
material purchase price and the appropriate production variances
most recently incurred.
Selling,
General and Administrative Expenses
Expenses for sales and administrative functions, including
salaries and wages, benefits, stock-based compensation, sales
commissions, bad debt expense, lease costs and depreciation
related to buildings and equipment, and outside services such as
legal, audit and consulting fees, are included in selling,
general and administrative expenses. Certain warehousing costs
amounting to $4.2 million in 2007, $4.0 million in
2006 and $4.2 million in 2005 are also included in selling,
general and administrative expenses.
Research and development expenses are expensed as incurred and
are also included in selling, general and administrative
expenses. Amounts expended for development or significant
improvement of new or existing products, services and techniques
were $36.9 million for 2007, $42.6 million for 2006,
and $38.4 million for 2005.
Comprehensive
Income (Loss)
Comprehensive income (loss) includes charges and credits to
shareholders equity that are not the result of
transactions with shareholders. Our total comprehensive income
(loss) consists of net income or loss, gains and losses on
derivative instruments, unrealized gains and losses on
marketable securities, foreign currency translation adjustments
and minimum pension liability adjustments. The cumulative gains
and losses on derivative instruments, unrealized gains and
losses on marketable securities, foreign currency translation
adjustments and minimum pension liability adjustments are
included in accumulated other comprehensive loss in our
consolidated balance sheets and statements of shareholders
equity.
Reclassifications
We made reclassifications in the prior year consolidated
financial statements to conform the presentation to the current
year. Other receivables of $19.6 million at
December 31, 2006, were reclassified from other current
assets in the consolidated balance sheets. Goodwill of
$396.2 million and other intangible assets, net of
$10.2 million at December 31, 2006, were reclassified
from goodwill and other intangible assets, net in the
consolidated balance sheets. Minority interests of
$8.9 million at December 31, 2006, were reclassified
from other non-current liabilities in the consolidated balance
sheets. Loss (gain) on sale of businesses and loss (gain) on
sale of assets were combined into a single caption in the
consolidated statements of cash flows. Employee termination
costs of $7.4 million in 2005 and $3.7 million in 2004 were
reclassified from restructuring charges to accrued expenses and
other current liabilities in the consolidated statements of cash
flows.
Recently
Adopted Accounting Pronouncements
Prior to January 1, 2006, we accounted for stock-based
compensation under the intrinsic value method. Accordingly, we
did not recognize compensation expense for stock options,
because under the award plans the stock
51
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
option exercise price may not be less than the per share fair
market value of the Companys stock on the date of grant.
Effective January 1, 2006, we adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment,
(FAS No. 123R). We now recognize
compensation expense for stock options over the required
employee service periods. We base stock-based compensation costs
on the estimated grant-date fair value of stock-based awards
that are expected to ultimately vest and adjust expected vesting
rates to actual results as these become known.
Ferros consolidated financial statements for 2006 reflect
the impact of FAS No. 123R. Because we adopted
FAS No. 123R using the modified prospective transition
method, the consolidated financial statements for the prior
periods do not include the impact of FAS No. 123R.
Under the modified prospective transition method, we recognize
compensation expense that includes compensation cost for all
stock-based compensation granted, but not yet vested, as of the
date of adoption, and compensation cost for all stock-based
compensation granted on or subsequent to adoption.
The adoption of FAS No. 123R reduced the
Companys 2006 reported pre-tax income from continuing
operations by $3.0 million and net income by
$2.0 million. The adoption of FAS No. 123R also
reduced basic earnings per share by $0.05 and diluted earnings
per share by $0.05 and required the classification of realized
tax benefits, related to the excess of the deductible
compensation cost over the amount recognized, as a financing
activity rather than as an operating activity in the
consolidated statement of cash flows. Upon the initial adoption
of FAS No. 123R, we reclassified $6.1 million of
unearned stock-based compensation to additional paid-in capital
in the consolidated balance sheet. As required by
FAS No. 123R, we recorded all subsequent stock-based
compensation expense for equity awards to additional paid-in
capital.
The following table contains pro forma disclosures regarding the
effect on Ferros net income and basic and diluted earnings
per share for 2005 had the Company applied a fair value method
of accounting for stock-based compensation in accordance with
FAS No. 123R. For 2005, there was no impact on loss
from discontinued operations of stock-based compensation on a
pro forma basis.
|
|
|
|
|
|
|
(Dollars in thousands,
|
|
|
|
except per share amounts)
|
|
|
Income from continuing operations available to common
shareholders as adjusted
|
|
$
|
17,623
|
|
Add: Stock-based employee compensation expense included in
reported income, net of tax
|
|
|
175
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value methods for all awards, net of tax
|
|
|
(3,353
|
)
|
|
|
|
|
|
Income from continuing operations available to common
shareholders pro forma
|
|
$
|
14,445
|
|
|
|
|
|
|
Basic earnings per share from continuing operations
as adjusted
|
|
$
|
0.42
|
|
Basic earnings per share from continuing operations
pro forma
|
|
$
|
0.34
|
|
Diluted earnings per share from continuing
operations as adjusted
|
|
$
|
0.42
|
|
Diluted earnings per share from continuing
operations pro forma
|
|
$
|
0.34
|
|
For the purpose of computing pro forma income from continuing
operations available to common shareholders, we estimated the
fair value of stock options at their grant date using the
Black-Scholes option pricing model. This model was developed for
use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable, characteristics
that are not present in the Companys option grants.
FASB Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations,
(FIN No. 47) was issued in March 2005 and
is effective for fiscal years ending after December 15,
2005. FIN No. 47 clarifies that the
52
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
term conditional asset retirement obligation as used
in FASB Statement No. 143, Accounting for Asset
Retirement Obligations, refers to an unconditional legal
obligation to perform an asset retirement activity in which the
timing or method of settlement are conditional on a future
event. This obligation should be recognized at its fair value,
if that value can be reasonably estimated. We adopted
FIN No. 47 as of January 1, 2005, and recorded
additional conditional asset retirement obligations of
$0.9 million.
The FASB issued Statement No. 151, Inventory Costs,
(FAS No. 151) in November 2004.
FAS No. 151 is effective for fiscal years beginning
after June 15, 2005, and clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling
costs and wasted material (spoilage). FAS No. 151
requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of
so abnormal. We adopted FAS No. 151 as of
January 1, 2006, and it did not have a material impact on
the results of operations or financial position of the Company.
In 2006, we adopted the recognition and disclosure provisions of
FASB Statement No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans,
(FAS No. 158). As a result of our
adoption of FAS No. 158, we recorded a decrease in
other non-current assets of $1.2 million, an increase in
accrued expenses and other current liabilities of
$6.5 million, a decrease in postretirement and pension
liabilities of $5.2 million, an increase in non-current
deferred tax assets of $3.5 million, and a decrease in
accumulated other comprehensive loss of $1.0 million.
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
$1.9 million and increased retained earnings, net of income
tax effects, by $1.2 million as of January 1, 2005.
On January 1, 2007, we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes,
(FIN No. 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 receivables
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.
53
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
We have presented below the effects of the changes in accounting
principles for inventory costs and for major planned overhauls
for 2007, 2006 and 2005. We have combined financial statement
line items if they were not affected by the changes in
accounting principles.
Condensed
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Computed
|
|
|
Change to
|
|
|
Reported
|
|
|
|
Under LIFO
|
|
|
FIFO
|
|
|
Under FIFO
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
2,204,785
|
|
|
$
|
|
|
|
$
|
2,204,785
|
|
Cost of sales
|
|
|
1,789,925
|
|
|
|
(1,803
|
)
|
|
|
1,788,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
414,860
|
|
|
|
1,803
|
|
|
|
416,663
|
|
Selling, general and administrative expenses
|
|
|
319,065
|
|
|
|
|
|
|
|
319,065
|
|
Impairment charges
|
|
|
128,737
|
|
|
|
|
|
|
|
128,737
|
|
Restructuring charges
|
|
|
16,852
|
|
|
|
|
|
|
|
16,852
|
|
Other expense
|
|
|
61,327
|
|
|
|
|
|
|
|
61,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(111,121
|
)
|
|
|
1,803
|
|
|
|
(109,318
|
)
|
Income tax (benefit) expense
|
|
|
(15,569
|
)
|
|
|
505
|
|
|
|
(15,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(95,552
|
)
|
|
|
1,298
|
|
|
|
(94,254
|
)
|
Loss from discontinued operations, net of tax
|
|
|
(225
|
)
|
|
|
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(95,777
|
)
|
|
|
1,298
|
|
|
|
(94,479
|
)
|
Dividends on preferred stock
|
|
|
(1,035
|
)
|
|
|
|
|
|
|
(1,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(96,812
|
)
|
|
$
|
1,298
|
|
|
$
|
(95,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(2.25
|
)
|
|
$
|
0.03
|
|
|
$
|
(2.22
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2.26
|
)
|
|
$
|
0.03
|
|
|
$
|
(2.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(2.25
|
)
|
|
$
|
0.03
|
|
|
$
|
(2.22
|
)
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2.26
|
)
|
|
$
|
0.03
|
|
|
$
|
(2.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Originally
|
|
|
Change to
|
|
|
Adoption of
|
|
|
|
|
|
|
Reported
|
|
|
FIFO
|
|
|
AUG AIR-1
|
|
|
Adjusted
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
2,041,525
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,041,525
|
|
Cost of sales
|
|
|
1,626,733
|
|
|
|
(984
|
)
|
|
|
131
|
|
|
|
1,625,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
414,792
|
|
|
|
984
|
|
|
|
(131
|
)
|
|
|
415,645
|
|
Selling, general and administrative expenses
|
|
|
305,211
|
|
|
|
|
|
|
|
|
|
|
|
305,211
|
|
Restructuring charges
|
|
|
23,146
|
|
|
|
|
|
|
|
|
|
|
|
23,146
|
|
Other expense
|
|
|
60,847
|
|
|
|
|
|
|
|
|
|
|
|
60,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
25,588
|
|
|
|
984
|
|
|
|
(131
|
)
|
|
|
26,441
|
|
Income tax expense
|
|
|
5,026
|
|
|
|
377
|
|
|
|
(54
|
)
|
|
|
5,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
20,562
|
|
|
|
607
|
|
|
|
(77
|
)
|
|
|
21,092
|
|
Loss from discontinued operations, net of tax
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
(472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
20,090
|
|
|
|
607
|
|
|
|
(77
|
)
|
|
|
20,620
|
|
Dividends on preferred stock
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
18,838
|
|
|
$
|
607
|
|
|
$
|
(77
|
)
|
|
$
|
19,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.45
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
0.47
|
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.44
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.45
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
0.47
|
|
From discontinued operations
|
|
|
(0.01
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.44
|
|
|
$
|
0.02
|
|
|
$
|
0.00
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
Originally
|
|
|
Change to
|
|
|
Adoption of
|
|
|
|
|
|
|
Reported
|
|
|
FIFO
|
|
|
AUG AIR-1
|
|
|
Adjusted
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
1,882,305
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,882,305
|
|
Cost of sales
|
|
|
1,498,504
|
|
|
|
(2,719
|
)
|
|
|
(382
|
)
|
|
|
1,495,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
383,801
|
|
|
|
2,719
|
|
|
|
382
|
|
|
|
386,902
|
|
Selling, general and administrative expenses
|
|
|
310,056
|
|
|
|
|
|
|
|
|
|
|
|
310,056
|
|
Restructuring charges
|
|
|
3,677
|
|
|
|
|
|
|
|
|
|
|
|
3,677
|
|
Other expense
|
|
|
45,996
|
|
|
|
|
|
|
|
|
|
|
|
45,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
24,072
|
|
|
|
2,719
|
|
|
|
382
|
|
|
|
27,173
|
|
Income tax expense
|
|
|
6,928
|
|
|
|
983
|
|
|
|
149
|
|
|
|
8,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
17,144
|
|
|
|
1,736
|
|
|
|
233
|
|
|
|
19,113
|
|
Loss from discontinued operations, net of tax
|
|
|
(868
|
)
|
|
|
|
|
|
|
|
|
|
|
(868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,276
|
|
|
|
1,736
|
|
|
|
233
|
|
|
|
18,245
|
|
Dividends on preferred stock
|
|
|
(1,490
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
14,786
|
|
|
$
|
1,736
|
|
|
$
|
233
|
|
|
$
|
16,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.37
|
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
$
|
0.42
|
|
From discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.35
|
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.37
|
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
$
|
0.42
|
|
From discontinued operations
|
|
|
(0.02
|
)
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.35
|
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Condensed
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Computed
|
|
|
Change to
|
|
|
Reported
|
|
|
|
Under LIFO
|
|
|
FIFO
|
|
|
Under FIFO
|
|
|
|
(Dollars in thousands)
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
246,275
|
|
|
$
|
16,524
|
|
|
$
|
262,799
|
|
Deferred income taxes
|
|
|
21,884
|
|
|
|
(6,120
|
)
|
|
|
15,764
|
|
Other current assets
|
|
|
328,629
|
|
|
|
|
|
|
|
328,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
596,788
|
|
|
|
10,404
|
|
|
|
607,192
|
|
Other assets
|
|
|
1,031,068
|
|
|
|
|
|
|
|
1,031,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,627,856
|
|
|
$
|
10,404
|
|
|
$
|
1,638,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
$
|
410,332
|
|
|
$
|
|
|
|
$
|
410,332
|
|
Other liabilities
|
|
|
728,125
|
|
|
|
|
|
|
|
728,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,138,457
|
|
|
|
|
|
|
|
1,138,457
|
|
Minority interests
|
|
|
9,896
|
|
|
|
|
|
|
|
9,896
|
|
Series A convertible preferred stock
|
|
|
13,623
|
|
|
|
|
|
|
|
13,623
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
457,786
|
|
|
|
10,404
|
|
|
|
468,190
|
|
Other shareholders equity
|
|
|
8,094
|
|
|
|
|
|
|
|
8,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
465,880
|
|
|
|
10,404
|
|
|
|
476,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,627,856
|
|
|
$
|
10,404
|
|
|
$
|
1,638,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
799,867
|
|
|
|
|
|
|
|
|
|
|
|
799,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,182,751
|
|
|
|
|
|
|
|
(1,837
|
)
|
|
|
1,180,914
|
|
Minority interests
|
|
|
8,850
|
|
|
|
|
|
|
|
|
|
|
|
8,850
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Computed
|
|
|
Change to
|
|
|
Reported
|
|
|
|
Under LIFO
|
|
|
FIFO
|
|
|
Under FIFO
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(95,777
|
)
|
|
$
|
1,298
|
|
|
$
|
(94,479
|
)
|
Deferred income taxes
|
|
|
(30,973
|
)
|
|
|
505
|
|
|
|
(30,468
|
)
|
Inventories
|
|
|
22,517
|
|
|
|
(1,803
|
)
|
|
|
20,714
|
|
Other adjustments, net
|
|
|
248,868
|
|
|
|
|
|
|
|
248,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
144,635
|
|
|
|
|
|
|
|
144,635
|
|
Net cash used for discontinued operations
|
|
|
(56
|
)
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
144,579
|
|
|
|
|
|
|
|
144,579
|
|
Cash flows from investing activities
|
|
|
(62,033
|
)
|
|
|
|
|
|
|
(62,033
|
)
|
Cash flows from financing activities
|
|
|
(88,717
|
)
|
|
|
|
|
|
|
(88,717
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1,211
|
|
|
|
|
|
|
|
1,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(4,960
|
)
|
|
|
|
|
|
|
(4,960
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
16,985
|
|
|
|
|
|
|
|
16,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
12,025
|
|
|
$
|
|
|
|
$
|
12,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Originally
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
Change to
|
|
|
Adoption of
|
|
|
|
|
|
|
Reclassification
|
|
|
FIFO
|
|
|
AUG AIR-1
|
|
|
Adjusted
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,090
|
|
|
$
|
607
|
|
|
$
|
(77
|
)
|
|
$
|
20,620
|
|
Deferred income taxes
|
|
|
(13,714
|
)
|
|
|
377
|
|
|
|
(54
|
)
|
|
|
(13,391
|
)
|
Inventories
|
|
|
(28,717
|
)
|
|
|
(984
|
)
|
|
|
|
|
|
|
(29,701
|
)
|
Accrued expenses and other current liabilities
|
|
|
8,859
|
|
|
|
|
|
|
|
131
|
|
|
|
8,990
|
|
Other adjustments, net
|
|
|
85,112
|
|
|
|
|
|
|
|
|
|
|
|
85,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
71,630
|
|
|
|
|
|
|
|
|
|
|
|
71,630
|
|
Net cash used for discontinued operations
|
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
70,944
|
|
|
|
|
|
|
|
|
|
|
|
70,944
|
|
Cash flows from investing activities
|
|
|
(68,718
|
)
|
|
|
|
|
|
|
|
|
|
|
(68,718
|
)
|
Cash flows from financing activities
|
|
|
(3,035
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,035
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(428
|
)
|
|
|
|
|
|
|
|
|
|
|
(428
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
17,413
|
|
|
|
|
|
|
|
|
|
|
|
17,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,985
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
Originally
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
Change to
|
|
|
Adoption of
|
|
|
|
|
|
|
Reclassification
|
|
|
FIFO
|
|
|
AUG AIR-1
|
|
|
Adjusted
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,276
|
|
|
$
|
1,736
|
|
|
$
|
233
|
|
|
$
|
18,245
|
|
Deferred income taxes
|
|
|
(9,125
|
)
|
|
|
983
|
|
|
|
149
|
|
|
|
(7,993
|
)
|
Inventories
|
|
|
(343
|
)
|
|
|
(2,719
|
)
|
|
|
|
|
|
|
(3,062
|
)
|
Accrued expenses and other current liabilities
|
|
|
(3,312
|
)
|
|
|
|
|
|
|
(382
|
)
|
|
|
(3,694
|
)
|
Other adjustments, net
|
|
|
19,671
|
|
|
|
|
|
|
|
|
|
|
|
19,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
23,167
|
|
|
|
|
|
|
|
|
|
|
|
23,167
|
|
Net cash used for discontinued operations
|
|
|
(1,786
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,786
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
21,381
|
|
|
|
|
|
|
|
|
|
|
|
21,381
|
|
Cash flows from investing activities
|
|
|
(35,814
|
)
|
|
|
|
|
|
|
|
|
|
|
(35,814
|
)
|
Cash flows from financing activities
|
|
|
18,137
|
|
|
|
|
|
|
|
|
|
|
|
18,137
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
3,474
|
|
|
|
|
|
|
|
|
|
|
|
3,474
|
|
Cash and cash equivalents at beginning of period
|
|
|
13,939
|
|
|
|
|
|
|
|
|
|
|
|
13,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
17,413
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. In February 2008, the FASB issued a staff position
that delays the effective date of FAS No. 157 for all
non-financial assets and liabilities, except for those
recognized or disclosed at least annually. Except for this delay
for non-financial assets and liabilities, 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 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 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 have elected to use the
September 30, 2007, measurement of assets and benefit
obligations to calculate the fiscal year 2008 expense. Expense
for the gap period from September 30 to December 31 will be
recognized as of January 1, 2008 as a charge of
$0.8 million to retained earnings and a credit of
$0.3 million to accumulated other comprehensive income.
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
60
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
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 (EITF)
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.
In December 2007, the FASB issued Statement No. 141(R),
Business Combinations,
(FAS No. 141(R)) and Statement
No. 160, Noncontrolling Interests in Consolidated
Financial Statements, (FAS No. 160).
These statements change the way that companies account for
business combinations and noncontrolling interests (e.g.,
minority interests). Both standards are to be applied
prospectively for fiscal years beginning after December 15,
2008. However, FAS No. 160 requires entities to apply
the presentation and disclosure requirements retrospectively to
comparative financial statements. In 2008, we will
retrospectively reclassify the amount of minority interests in
consolidated subsidiaries to equity and separately report the
amount of net income or loss attributable to minority interests.
Inventories at December 31st consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Raw materials
|
|
$
|
74,659
|
|
|
$
|
74,160
|
|
Work in process
|
|
|
41,640
|
|
|
|
44,658
|
|
Finished goods
|
|
|
146,500
|
|
|
|
150,416
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
262,799
|
|
|
$
|
269,234
|
|
|
|
|
|
|
|
|
|
|
In the production of some of our products, we use precious
metals, primarily silver for Electronic Materials products and
gold for Color and Glass Performance Materials products. We
obtain some precious metals from financial institutions under
consignment agreements with terms of one year or less. The
financial institutions retain ownership of the precious metals
and charge us fees based on the amounts we consign. These fees
were $3.7 million in 2007, $3.1 million for 2006, and
$1.6 million for 2005, 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 2007. We had on hand $148.3 million at
December 31, 2007, and $120.9 million at
December 31, 2006, of precious metals owned by financial
institutions, measured at fair value.
61
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
3.
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Land
|
|
$
|
41,239
|
|
|
$
|
43,801
|
|
Buildings
|
|
|
253,953
|
|
|
|
257,145
|
|
Machinery and equipment
|
|
|
869,662
|
|
|
|
867,040
|
|
Construction in progress
|
|
|
50,397
|
|
|
|
36,873
|
|
Property, plant and equipment under capital leases
|
|
|
18,166
|
|
|
|
13,380
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
1,233,417
|
|
|
|
1,218,239
|
|
Total accumulated depreciation
|
|
|
(713,458
|
)
|
|
|
(691,437
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
$
|
519,959
|
|
|
$
|
526,802
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense from continuing operations was
$78.8 million for 2007, $69.5 million for 2006, and
$68.4 million for 2005. Noncash investing activities for
capital expenditures, consisting of new capital leases during
the year and unpaid capital expenditure liabilities at year end,
amounted to $16.1 million for 2007, $4.1 million for
2006 and $0.6 million for 2005. Capitalized interest costs
related to property, plant and equipment under construction were
$2.3 million in 2007 and $1.1 million in 2006. The
amount of interest capitalized in 2005 was not material.
The carrying amount of property, plant and equipment is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
asset. Due to the cumulative negative effect on earnings of a
cyclical downturn in certain of the polymer additives
business primary
U.S.-based
end markets, including housing and automobiles; anticipated
additional product costs due to recent hazardous material
legislation and regulations, such as the newly enacted European
Union REACH registration system, which requires
chemical suppliers to perform toxicity studies of the components
of their products and to register certain information; and
higher forecasted capital expenditures related to the business,
we were required to record an impairment of $6.8 million on
the property, plant and equipment. Additionally, in our Other
Businesses segment, primarily due to the result of a longer time
to transition the business from a supplier of food supplements
and additives to a supplier of high-value pharmaceutical
products and services we recorded an impairment of
$16.3 million on the property, plant and equipment in the
pharmaceutical products unit.
In October 2005, the Dutch government placed a lien on one of
the Companys facilities in the Netherlands as collateral
for any future payment relating to an unresolved environmental
claim. Negotiations are ongoing relating to the environmental
issue. We do not believe the ultimate resolution of this matter
will have a material effect on Ferros financial position
or results of operations.
|
|
4.
|
Goodwill
and Other Intangible Assets
|
A summary of goodwill activity follows:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
Balance at December 31, 2005
|
|
$
|
398,320
|
|
Currency translation adjustments
|
|
|
(2,130
|
)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
396,190
|
|
Impairments
|
|
|
(105,653
|
)
|
Currency translation adjustments
|
|
|
533
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
291,070
|
|
|
|
|
|
|
62
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Details of amortizable intangible assets follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
December 31,
|
|
|
|
Economic Life
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Patents
|
|
9-15 years
|
|
|
6,515
|
|
|
|
6,515
|
|
Other
|
|
1-20 years
|
|
|
10,483
|
|
|
|
10,325
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross amortizable intangible assets
|
|
|
|
|
16,998
|
|
|
|
16,840
|
|
Accumulated amortization
|
|
|
|
|
(7,927
|
)
|
|
|
(6,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets, net
|
|
|
|
$
|
9,071
|
|
|
$
|
10,150
|
|
|
|
|
|
|
|
|
|
|
|
|
We test goodwill for impairment annually using October 31st as
our annual assessment date, primarily due to the timing of our
annual budgeting process, or more frequently if we believe
indicators of impairment exist. Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets, requires an assessment consisting of two
steps. In the first step, we test goodwill for impairment by
comparing the fair value of each reporting unit that has
goodwill against its carrying value, including the allocation of
certain corporate assets and liabilities. If the carrying value
of the reporting unit exceeds its fair value, we perform a
second step to measure impairment. As of October 31, 2007,
two reporting units, the polymer additives business and the
pharmaceutical business, which is included in our Other
Businesses segment, had fair values that were less than the
carrying values of their net assets, indicating an impairment of
goodwill.
We estimate the fair values of each reporting unit using the
weighted average of both the income approach and the market
approach, which we believe provides a reasonable estimate of the
reporting units fair value. The income approach is a
discounted cash flow model, which uses projected cash flows
attributable to the reporting unit, including an allocation of
certain corporate expenses. The market approach estimates a
price reasonably expected to be realized from the sale of the
reporting units based on a comparison to similar businesses.
Factors considered in both of these approaches included
projections of our future operating results, anticipated future
cash flows, comparable marketplace data adjusted for our
industry grouping, and the cost of capital.
The impairment in the polymer additives business was triggered
by the cumulative negative effect on operating results of a
cyclical downturn in certain of its primary
U.S.-based
end markets, including housing and automotive; anticipated
additional product costs due to recent hazardous material
legislation and regulations, such as the newly enacted European
Union REACH registration system, which requires
chemical suppliers to perform toxicity studies of the components
of their products and to register certain information; and
higher forecasted capital expenditures for this business. The
impairment of goodwill in the pharmaceutical business was
primarily the result of the longer time necessary to transition
the business from a supplier of food supplements and additives
to a supplier of high-value pharmaceutical products and services.
We recorded an impairment of $73.5 million for the polymer
additives business and $32.2 million for the pharmaceutical
business in 2007. The amounts are included in impairment charges
in the consolidated statements of operations.
As part of our restructuring activities in 2006, we recorded a
restructuring charge of $3.5 million to impair intellectual
property at our Niagara Falls, New York, facility.
63
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
We recorded amortization expense from continuing operations
related to intangible assets and other non-current assets, as
detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Intangibles
|
|
$
|
1,236
|
|
|
$
|
965
|
|
|
$
|
809
|
|
Deferred charges and other non-current assets
|
|
|
7,460
|
|
|
|
9,054
|
|
|
|
5,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense
|
|
$
|
8,696
|
|
|
$
|
10,019
|
|
|
$
|
6,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for intangible assets is expected
to be $1.2 million annually in the years 2008 through 2012.
|
|
5.
|
Financing
and Short-term and Long-term Debt
|
Loans payable and current portion of long-term debt at December
31st consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Loans payable to banks
|
|
$
|
954
|
|
|
$
|
7,440
|
|
Current portion of long-term debt
|
|
|
4,490
|
|
|
|
3,324
|
|
|
|
|
|
|
|
|
|
|
Total loans payable and current portion of long-term debt
|
|
$
|
5,444
|
|
|
$
|
10,764
|
|
|
|
|
|
|
|
|
|
|
The weighted-average interest rate on loans payable to banks was
10.0% at December 31, 2007, and 4.9% at December 31,
2006. These loans are primarily from overdraft facilities.
Long-term debt at December 31st consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
$200,000 Senior notes, 9.125%, due 2009, net of unamortized
discounts
|
|
$
|
199,636
|
|
|
$
|
199,273
|
|
Revolving credit facility
|
|
|
13,857
|
|
|
|
127,953
|
|
Term loan facility
|
|
|
301,950
|
|
|
|
250,000
|
|
Capital lease obligations (see Note 14)
|
|
|
8,924
|
|
|
|
6,744
|
|
Other notes
|
|
|
768
|
|
|
|
1,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
525,135
|
|
|
|
584,978
|
|
Current portion
|
|
|
(4,490
|
)
|
|
|
(3,324
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt, less current portion
|
|
$
|
520,645
|
|
|
$
|
581,654
|
|
|
|
|
|
|
|
|
|
|
64
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
The annual maturities of long-term debt for each of the five
years after December 31, 2007, were as follows:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
2008
|
|
$
|
4,490
|
|
2009
|
|
|
203,983
|
|
2010
|
|
|
4,337
|
|
2011
|
|
|
89,634
|
|
2012
|
|
|
218,722
|
|
Thereafter
|
|
|
3,969
|
|
|
|
|
|
|
Total maturities of long-term debt
|
|
$
|
525,135
|
|
|
|
|
|
|
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 December 31,
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 rates, and increase operating
flexibility. We had $277.5 million at December 31,
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 dollar 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
December 31, 2007, we had borrowed $302.0 million in
term loans. The Company is required to make quarterly principal
payments of $0.8 million from January 2008 to July 2011,
quarterly principal payments of $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
65
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
on the Companys leverage, or for the term loan facility, a
fixed margin. As part of the June 2007 amendments,
$175 million of borrowings under the term loan facility
were restricted to using three-month LIBOR in determining their
interest rates. This change was made in connection with interest
rate swap agreements executed in June 2007. These swap
agreements effectively fixed the interest rate through June 2011
on $150 million of borrowings under the term loan facility.
At December 31, 2007, the average interest rate for
revolving credit borrowings was 6.5%, and the effective interest
rate for term loan borrowings after adjusting for the interest
rate swaps was 7.2%. At December 31, 2006, the average
interest rate was 8.1% for revolving credit borrowings and 8.1%
for term loan borrowings.
The Amended Credit Facility is secured by substantially all of
Ferros assets, generally including 100% of the shares of
the Companys domestic subsidiaries and 65% of the shares
of the foreign subsidiaries directly owned by the domestic
parent company, but excluding trade receivables sold pursuant to
our accounts receivable sales programs. This security interest
is shared with the holders of the Companys senior notes,
as required under their indenture.
The Amended Credit Facility contains customary operating
covenants that limit our ability to engage in certain
activities, including additional loans and investments; creation
of liens; prepayments, redemptions and repurchases of debt; and
mergers, acquisitions and asset sales. We are also subject to
customary financial covenants, including a leverage ratio and a
fixed charge coverage ratio. Failure to satisfy certain of these
covenants, either immediately or within a brief period, would
result in a default. If a default should occur and be continuing
and we have not obtained a waiver, the obligations under the New
Amended Facility may become immediately due and payable at the
option of providers of more than 50% of the credit facility
commitment. At December 31, 2007, we were in compliance
with the covenants of the Amended Credit Facility.
Senior
Notes
The indenture for the senior notes contains operating covenants
that limit our ability to engage in certain activities,
including corporate consolidations, mergers, transfers of
assets, and sale and leaseback transactions. The indenture
contains cross-default provisions with other debt obligations
that exceed $10 million of principal outstanding.
The senior notes are redeemable at our option at any time for
the present value of the principal amount then outstanding plus
unpaid interest through maturity. The senior notes are
redeemable at the option of the holders only upon a change in
control of the Company combined with a rating by either
Moodys or S&P below investment grade as defined in
the indenture. Currently, the rating by S&P of the senior
notes is below investment grade.
Receivables
Sales Programs
We have several programs to sell, on an ongoing basis, pools of
our trade accounts receivable. These programs accelerate cash
collections at favorable financing costs and help us manage the
Companys liquidity requirements. In our largest program,
we sell substantially all of Ferros U.S. trade
accounts receivable to FFC, a wholly-owned unconsolidated QSPE.
FFC finances its acquisition of trade receivable assets by
issuing beneficial interests in (securitizing) the receivables
to multi-seller receivables securitization companies
(conduits) for proceeds of up to
$100.0 million. Ferro had received net proceeds of
$54.6 million and $60.6 million for outstanding
receivables at December 31, 2007 and 2006, respectively.
FFC and the conduits have no recourse to Ferros other
assets for failure of debtors to pay when due as the assets
transferred are legally isolated in accordance with the
U.S. bankruptcy laws. Ferro, on behalf of FFC and the
conduits, provides normal collection and administration services
with respect to the trade accounts receivable sold.
66
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Activity from this program is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Trade accounts receivable sold to FFC
|
|
$
|
985,922
|
|
|
$
|
994,436
|
|
|
$
|
946,187
|
|
Cash proceeds from FFC
|
|
|
971,568
|
|
|
|
1,090,485
|
|
|
|
941,988
|
|
Trade accounts receivable collected and remitted to FFC and the
conduits
|
|
|
977,546
|
|
|
|
1,005,885
|
|
|
|
944,630
|
|
Ferros consolidated balance sheet does not include the
trade receivables sold, but does include a note receivable from
FFC to the extent that cash proceeds from the sales of accounts
receivable to FFC have not yet been received by Ferro.
In June 2006, we amended the program to cure a default that
resulted from a credit rating downgrade, to modify the reporting
requirements to more closely match those in the Amended Credit
Facility, and to extend the program to June 2009. The program
contains operating covenants that limit FFCs ability to
engage in certain activities, including borrowings, creation of
liens, mergers, and investing in other companies. The program
also requires FFC and Ferro to provide periodic financial
statements and reports on the accounts receivable and limits our
ability to make significant changes in receivable collection
practices. In addition, FFC is required to maintain a minimum
tangible net worth. To meet this requirement, we invested an
additional $25 million in FFC in June 2006. The program is
subject to customary termination events, including
non-performance, deterioration in the quality of the accounts
receivable pool, and cross-default provisions with Ferros
Amended Credit Facility and other debt obligations with
principal outstanding of at least $5 million. If a
termination event occurs and is not cured, the program may be
terminated or a third party may be selected to act as
administrator in collecting FFCs accounts receivable.
In addition, we maintain several international programs to sell
trade accounts receivable to financial institutions. The
commitments supporting these programs can be withdrawn at any
time and totaled $80.8 million and $49.2 million at
December 31, 2007 and 2006, respectively. The amount of
outstanding receivables sold under the international programs
was $42.1 million and $33.7 million at
December 31, 2007 and 2006, respectively. Ferro provides
normal collection and administration services with respect to
the trade accounts receivable sold to certain financial
institutions.
Activity from these programs is detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Trade accounts receivable sold to financial institutions
|
|
$
|
182,075
|
|
|
$
|
104,869
|
|
|
$
|
77,703
|
|
Cash proceeds from financial institutions
|
|
|
178,429
|
|
|
|
104,676
|
|
|
|
77,609
|
|
Trade accounts receivable collected and remitted to financial
institutions
|
|
|
84,273
|
|
|
|
53,090
|
|
|
|
34,135
|
|
Other
Financing Arrangements
We maintain other lines of credit to provide global flexibility
for Ferros short-term liquidity requirements. These
facilities are uncommitted lines for our international
operations and totaled $30.7 million and $21.0 million
at December 31, 2007 and 2006, respectively. The unused
portions of these lines provided $28.9 million and
$18.7 million of additional liquidity at December 31,
2007 and 2006, respectively.
67
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
The carrying amounts of the following assets and liabilities
meeting the definition of a financial instrument approximate
their fair values due to the short period to maturity of the
instruments:
|
|
|
|
|
Cash and cash equivalents;
|
|
|
|
Notes receivable;
|
|
|
|
Deposits;
|
|
|
|
Miscellaneous receivables; and
|
|
|
|
Short-term loans payable to banks.
|
Long-term
Debt
The carrying values of borrowings under the Amended Credit
Facility and the former revolving credit facility approximate
their fair values, due to their variable market interest rates.
The fair value of Ferros senior notes is based on a third
partys estimated bid price. The fair values of other
long-term notes are estimated using present value techniques.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Senior notes
|
|
$
|
199,636
|
|
|
$
|
205,000
|
|
|
$
|
199,273
|
|
|
$
|
205,500
|
|
Other long-term notes
|
|
|
768
|
|
|
|
705
|
|
|
|
1,008
|
|
|
|
899
|
|
Derivative
Instruments
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 through June 2011. We mark these contracts
to fair value and recognize the resulting gains or losses as
other comprehensive income or loss.
We manage foreign currency risks principally by entering into
forward contracts to mitigate the impact of currency
fluctuations on transactions. Our principal foreign currency
exposures relate to the Euro, the British Pound Sterling, the
Japanese Yen, and the Chinese Yuan. The maturities of these
foreign currency forward contracts are consistent with the terms
of the underlying exposures that are generally less than one
year. We do not engage in speculative transactions for trading
purposes. We enter into these forward contracts with major,
reputable, multinational financial institutions. Accordingly, we
do not anticipate counter-party default. We mark these contracts
to fair value at the end of each reporting period and recognize
the resulting gains or losses as other income or expense from
foreign currency transactions.
We hedge a portion of our exposure to changes in the pricing of
certain raw material commodities using derivative instruments.
We hedge our exposure principally through swap arrangements that
allow us to fix the price of the commodities for future
purchases. These swap arrangements are settled in cash at their
maturities. We mark these contracts to fair value and recognize
the resulting gains or losses as other comprehensive income or
loss. After the contracts mature and the materials are sold, the
gains and losses are recognized as a part of cost of sales. At
December 31, 2007, the amount that was expected to be
reclassified into earnings within the next 12 months was
$2.1 million of expense.
Precious metals (primarily silver, gold, platinum and palladium)
represent a significant portion of raw material costs in our
Electronic Materials and our Color and Glass Performance
Materials products. Sometimes when an
68
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
order for these products is placed, the customer requests a
fixed price for the precious metals content. In these instances,
we enter into a fixed price sales contract to establish the cost
for the customer at the estimated future delivery date. At the
same time, we enter into a forward purchase arrangement with a
precious metals supplier to completely cover the value of the
fixed price sales contract. U.S. precious metal contracts
entered into prior to November 2007 and all
non-U.S. precious
metal contracts are marked to fair value at the end of each
reporting period, and the resulting gains or losses are
recognized as miscellaneous income or expense, respectively.
Beginning November 2007, we designated new U.S. precious
metal contracts as normal purchase contracts, which are not
marked to market. Our purchase commitment for precious metals
under normal purchase contracts at December 31, 2007, was
$6.9 million, all for purchases in 2008.
Ferro purchases portions of its energy requirements, including
natural gas and electricity, under fixed price contracts to
reduce the volatility of cost changes. For contracts entered
into prior to April 2006, we marked these contracts to fair
value and recognized the resulting gains or losses as
miscellaneous income or expense, respectively. Beginning April
2006, we designated new energy contracts as normal purchase
contracts, which are not marked to market. Our purchase
commitment for energy under normal purchase contracts was
$17.7 million at December 31, 2007. Purchases under
these contracts are expected to be $13.0 million in 2008,
$3.2 million in 2009 and $1.5 million in 2010.
The notional amount, carrying amount and fair value of these
derivative instruments at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
150,000
|
|
|
$
|
|
|
Carrying amount and fair value
|
|
$
|
(8,109
|
)
|
|
$
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount
|
|
$
|
142,638
|
|
|
$
|
121,430
|
|
Carrying amount and fair value
|
|
$
|
(268
|
)
|
|
$
|
(640
|
)
|
Raw material commodity swaps:
|
|
|
|
|
|
|
|
|
Notional amount (in metric tons of base metals)
|
|
|
1,171
|
|
|
|
2,004
|
|
Carrying amount and fair value
|
|
$
|
(1,499
|
)
|
|
$
|
1,939
|
|
Precious metals forward contracts:
|
|
|
|
|
|
|
|
|
Notional amount (in troy ounces)
|
|
|
159,648
|
|
|
|
183,264
|
|
Carrying amount and fair value
|
|
$
|
755
|
|
|
$
|
192
|
|
Marked-to-market
natural gas forward purchase contracts:
|
|
|
|
|
|
|
|
|
Notional amount (in MBTUs)
|
|
|
|
|
|
|
120,000
|
|
Carrying amount and fair value
|
|
$
|
|
|
|
$
|
(442
|
)
|
69
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Income tax (benefits) expenses are based on our (losses)
earnings from continuing operations before income taxes as
presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
U.S.
|
|
$
|
(135,424
|
)
|
|
$
|
(25,302
|
)
|
|
$
|
(11,409
|
)
|
Foreign
|
|
|
26,106
|
|
|
|
51,743
|
|
|
|
38,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(109,318
|
)
|
|
$
|
26,441
|
|
|
$
|
27,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the liability method of accounting for income taxes, we
determine deferred income tax assets and liabilities based on
the temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts
used for tax purposes. We measure these differences using the
income tax rates and laws that are currently in effect.
Our income tax (benefit) expense from continuing operations
consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(240
|
)
|
Foreign
|
|
|
14,798
|
|
|
|
18,929
|
|
|
|
16,022
|
|
State and local
|
|
|
606
|
|
|
|
(189
|
)
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,404
|
|
|
|
18,740
|
|
|
|
16,053
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(29,994
|
)
|
|
|
(1,723
|
)
|
|
|
(4,534
|
)
|
Foreign
|
|
|
(3,956
|
)
|
|
|
(12,044
|
)
|
|
|
(2,535
|
)
|
State and local
|
|
|
3,482
|
|
|
|
376
|
|
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,468
|
)
|
|
|
(13,391
|
)
|
|
|
(7,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(15,064
|
)
|
|
$
|
5,349
|
|
|
$
|
8,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, income tax expense (benefit) we allocated directly
to shareholders equity is detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Foreign currency translation adjustments
|
|
$
|
2,134
|
|
|
$
|
|
|
|
$
|
|
|
Postretirement benefit liability adjustments
|
|
|
16,348
|
|
|
|
1,085
|
|
|
|
(5,125
|
)
|
Raw material commodity swap adjustments
|
|
|
(1,386
|
)
|
|
|
586
|
|
|
|
38
|
|
Interest rate swap adjustments
|
|
|
(2,887
|
)
|
|
|
|
|
|
|
|
|
Marketable equity security adjustments
|
|
|
|
|
|
|
(214
|
)
|
|
|
(49
|
)
|
Dividends on performance shares
|
|
|
(50
|
)
|
|
|
(45
|
)
|
|
|
(42
|
)
|
Stock options exercised
|
|
|
175
|
|
|
|
(208
|
)
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) allocated to
shareholders equity
|
|
$
|
14,334
|
|
|
$
|
1,204
|
|
|
$
|
(5,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
A reconciliation of the U.S. federal statutory income tax
rate and our effective tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. federal statutory income tax rate
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Goodwill impairment
|
|
|
11.2
|
|
|
|
|
|
|
|
|
|
U.S. tax cost of foreign dividends
|
|
|
6.4
|
|
|
|
28.1
|
|
|
|
5.6
|
|
Adjustment of valuation allowances
|
|
|
4.2
|
|
|
|
(28.3
|
)
|
|
|
0.9
|
|
Net adjustment of prior year accrual
|
|
|
(1.0
|
)
|
|
|
6.7
|
|
|
|
(2.7
|
)
|
ESOP dividend tax benefit
|
|
|
(0.5
|
)
|
|
|
(2.2
|
)
|
|
|
(2.7
|
)
|
Foreign tax rate difference
|
|
|
0.4
|
|
|
|
(11.8
|
)
|
|
|
1.0
|
|
Effect of equity earnings
|
|
|
(0.3
|
)
|
|
|
(3.2
|
)
|
|
|
(3.2
|
)
|
Extraterritorial income exclusion
|
|
|
|
|
|
|
(4.0
|
)
|
|
|
(5.5
|
)
|
Miscellaneous
|
|
|
0.8
|
|
|
|
(0.1
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(13.8
|
)%
|
|
|
20.2
|
%
|
|
|
29.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred tax assets and liabilities at
December 31st were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Pension and other benefit programs
|
|
$
|
49,256
|
|
|
$
|
72,920
|
|
Foreign tax credit carryforwards
|
|
|
35,756
|
|
|
|
38,040
|
|
Foreign net operating loss carryforwards
|
|
|
24,547
|
|
|
|
23,480
|
|
Capitalized research cost
|
|
|
17,809
|
|
|
|
7,875
|
|
Accrued liabilities
|
|
|
15,380
|
|
|
|
8,372
|
|
Other credit carryforwards
|
|
|
8,319
|
|
|
|
8,441
|
|
State net operating loss carryforwards
|
|
|
5,691
|
|
|
|
5,211
|
|
Deferred gain
|
|
|
5,426
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
2,375
|
|
|
|
2,786
|
|
Inventories
|
|
|
932
|
|
|
|
2,669
|
|
Other
|
|
|
6,324
|
|
|
|
3,606
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
171,815
|
|
|
|
173,400
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, equipment and intangibles depreciation and
amortization
|
|
|
44,656
|
|
|
|
68,209
|
|
Unremitted earnings of foreign subsidiaries
|
|
|
12,541
|
|
|
|
6,072
|
|
Other
|
|
|
2,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
60,094
|
|
|
|
74,281
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset before valuation allowance
|
|
|
111,721
|
|
|
|
99,119
|
|
Valuation allowance
|
|
|
(8,906
|
)
|
|
|
(4,023
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
102,815
|
|
|
$
|
95,096
|
|
|
|
|
|
|
|
|
|
|
71
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
We had benefits from state operating loss carryforwards and
foreign operating loss carryforwards for tax purposes, some of
which can be carried forward indefinitely and others expire in
one to twenty years.
We established a valuation allowance due to the uncertainty of
realizing certain state and foreign net operating loss
carryforwards. The overall increase in the valuation allowance
in 2007 was the result of state net operating loss carryforwards
and the loss from Italian branch operations. At
December 31, 2007, $1.4 million of the valuation
allowance related to losses incurred by acquired companies prior
to our purchase, and any future reduction of this portion of the
valuation allowance will be recognized as a reduction of
goodwill and other intangibles, rather than as tax benefits in
the consolidated statements of operations.
At December 31, 2007, we had $36 million in tax
benefits from foreign tax credit carryforwards for tax purposes
that can be carried forward for ten years. In our opinion, it is
more likely than not that the credits will be utilized before
expiration.
We classified net deferred income tax assets as of December 31
as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
15,764
|
|
|
$
|
12,291
|
|
Non-current assets
|
|
|
100,935
|
|
|
|
94,490
|
|
Current liabilities
|
|
|
(4,036
|
)
|
|
|
(648
|
)
|
Non-current liabilities
|
|
|
(9,848
|
)
|
|
|
(11,037
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
102,815
|
|
|
$
|
95,096
|
|
|
|
|
|
|
|
|
|
|
The Company adopted the provisions of FIN No. 48 on
January 1, 2007. As a result of the implementation of FIN
No. 48, the Company recognized an increase of approximately
$11.9 million in the liability for unrecognized tax
benefits, which was accounted for as a reduction to the
January 1, 2007, balance of retained earnings. A
reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
Balance at January 1, 2007
|
|
$
|
47,380
|
|
Additions based on tax positions related to the current year
|
|
|
1,783
|
|
Additions for tax positions of prior years
|
|
|
2,661
|
|
Reductions for tax positions of prior years
|
|
|
(1,401
|
)
|
Reductions as a result of lapse of applicable statute of
limitations
|
|
|
(1,817
|
)
|
Foreign currency translation of non-US dollar denominated
reserves
|
|
|
3,692
|
|
Settlements with taxing authorities
|
|
|
(125
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
52,173
|
|
|
|
|
|
|
At December 31, 2007, the total amount of unrecognized tax
benefits that, if recognized, would affect the effective rate
was $20.8 million. The Company recognizes interest accrued
and penalties related to unrecognized tax benefits as part of
income tax expense. During the year ended December 31,
2007, the Company recognized approximately $0.6 million in
interest, net of tax, and penalties. The Company had accrued
approximately $4.1 million and $3.1 million for the
payment of interest, net of tax, and penalties at
December 31, 2007 and January 1, 2007, respectively.
72
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
We anticipate that between $5.0 and $9.0 million of
liabilities for unrecognized tax benefits, including accrued
interest and penalties, may be settled or reversed within the
next 12 months. The anticipated settlements are due to
foreign tax examinations primarily related to tax reserves
associated with acquisitions. Uncertain tax positions for other
non-U.S. tax
issues are expected to reverse due to the expiration of the
applicable statute of limitations periods.
The Company conducts business globally, and, as a result, the
U.S. parent company or one of its subsidiaries files income
tax returns in the U.S. federal jurisdiction and various
state and foreign jurisdictions. In the normal course of
business, the U.S. parent company and its subsidiaries are
subject to examination by taxing authorities throughout the
world, including Spain, France, Germany, Netherlands, Italy,
Japan, Portugal, and the United Kingdom. With few exceptions, we
are not subject to federal, state, local or
non-U.S. income
tax examinations for years before 2000.
We have provided $12.5 million for deferred income taxes on
approximately $95.8 million of undistributed earnings of
certain foreign subsidiaries. We have not provided deferred
income taxes on undistributed earnings of approximately
$48.8 million, since we intend to indefinitely reinvest the
earnings.
|
|
8.
|
Contingent
Liabilities
|
In February 2003, we were requested to produce documents in
connection with an investigation by the United States Department
of Justice into possible antitrust violations in the heat
stabilizer industry. In April 2006, we were notified by the
Department of Justice that the Government had closed its
investigation and that the Company was relieved of any
obligation to retain documents that were responsive to the
Governments earlier document request. Before closing its
investigation, the Department of Justice took no action against
the Company or any of its current or former employees. The
Company was previously named as a defendant in several lawsuits
alleging civil damages and requesting injunctive relief relating
to the conduct the Government was investigating. We 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. The
settlement agreement was approved by the United States District
Court for the Eastern District of Pennsylvania in December 2007.
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
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. These payments
include 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. The Company, our deceased former
Chief Executive Officer, our former Chief Financial Officer, and
a former Operating Vice President of the Company 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. 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
73
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
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, and the
plaintiffs filed a Notice of Appeal to the Sixth Circuit Court
of Appeals. In January 2008, the Sixth Circuit Court of Appeals
affirmed the dismissal by the District Court for the Northern
District of Ohio.
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.
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
$0.6 million. We expect the Belgian authorities also to
assess fines for the alleged conduct, and we estimate the amount
of the fines will be approximately $0.3 million.
In February 2007, we discovered that some of the values shown on
certificates of analysis provided to customers by a plant in our
Specialty Plastics segment were inaccurate. We 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.
There are various other lawsuits and claims pending against the
Company and its consolidated subsidiaries. In our opinion, the
ultimate liabilities, if any, and expenses resulting from such
lawsuits and claims will not materially affect the consolidated
financial position, results of operations, or cash flows of the
Company.
At December 31, 2007 and 2006, the Company had bank
guarantees and standby letters of credit issued by financial
institutions, which totaled $17.7 million and
$20.8 million, respectively. These agreements primarily
relate to the Ferros insurance programs, 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.
74
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Defined
Benefit Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,232
|
|
|
$
|
6,568
|
|
|
$
|
10,064
|
|
|
$
|
6,434
|
|
|
$
|
6,131
|
|
|
$
|
6,540
|
|
Interest cost
|
|
|
20,105
|
|
|
|
20,395
|
|
|
|
19,741
|
|
|
|
9,606
|
|
|
|
7,949
|
|
|
|
7,420
|
|
Expected return on plan assets
|
|
|
(20,543
|
)
|
|
|
(19,232
|
)
|
|
|
(16,186
|
)
|
|
|
(7,578
|
)
|
|
|
(5,899
|
)
|
|
|
(5,910
|
)
|
Amortization of prior service cost
|
|
|
157
|
|
|
|
136
|
|
|
|
126
|
|
|
|
125
|
|
|
|
121
|
|
|
|
(30
|
)
|
Net amortization and deferral
|
|
|
5,845
|
|
|
|
6,157
|
|
|
|
6,853
|
|
|
|
570
|
|
|
|
1,058
|
|
|
|
877
|
|
Curtailment and settlement effects
|
|
|
532
|
|
|
|
2,565
|
|
|
|
14
|
|
|
|
(374
|
)
|
|
|
(24
|
)
|
|
|
(353
|
)
|
Special termination benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost
|
|
$
|
7,328
|
|
|
$
|
16,589
|
|
|
$
|
20,612
|
|
|
$
|
10,939
|
|
|
$
|
9,336
|
|
|
$
|
8,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.05
|
%
|
|
|
5.90
|
%
|
|
|
6.10
|
%
|
|
|
4.69
|
%
|
|
|
4.34
|
%
|
|
|
4.77
|
%
|
Rate of compensation increase
|
|
|
3.25
|
%
|
|
|
3.43
|
%
|
|
|
3.41
|
%
|
|
|
3.05
|
%
|
|
|
3.09
|
%
|
|
|
3.19
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
4.95
|
%
|
|
|
4.63
|
%
|
|
|
5.26
|
%
|
In 2007, we recorded curtailment losses of $0.3 million
related to closing our Niagara Falls, New York, manufacturing
facility and $0.3 million related to freezing benefits at
several U.S. plants and recorded a curtailment gain of
$0.3 million related to European restructuring activities
in Italy. We also recorded costs of $2.2 million for
special termination benefits from other European restructuring
activities that will result in closing the Companys
Rotterdam, Netherlands, manufacturing facility by the end of the
second quarter of 2008.
In 2006, we announced changes to certain of our defined benefit
pension plans. Employees who had been participating in our
largest U.S. pension plan stopped accruing benefit service
after March 31, 2006. As a result, we recorded a
curtailment gain of $2.5 million. The affected employees
now receive benefits in the Companys defined contribution
plan that previously covered only U.S. salaried employees
hired after 2003. In 2006, we also recorded settlement losses of
$4.9 million in our unfunded nonqualified defined benefit
pension plans, related primarily to a lump sum payment to the
beneficiary of our deceased former Chief Executive Officer.
75
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
340,727
|
|
|
$
|
368,037
|
|
|
$
|
197,582
|
|
|
$
|
175,803
|
|
Service cost
|
|
|
1,232
|
|
|
|
6,568
|
|
|
|
6,434
|
|
|
|
6,131
|
|
Interest cost
|
|
|
20,105
|
|
|
|
20,395
|
|
|
|
9,606
|
|
|
|
7,949
|
|
Amendments
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
(295
|
)
|
Curtailments
|
|
|
(1,214
|
)
|
|
|
(17,120
|
)
|
|
|
137
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
(11,056
|
)
|
|
|
(746
|
)
|
|
|
(914
|
)
|
Special termination benefits
|
|
|
|
|
|
|
|
|
|
|
2,156
|
|
|
|
|
|
Plan participants contributions
|
|
|
12
|
|
|
|
13
|
|
|
|
721
|
|
|
|
659
|
|
Benefits paid
|
|
|
(18,536
|
)
|
|
|
(17,911
|
)
|
|
|
(9,240
|
)
|
|
|
(7,844
|
)
|
Actuarial (gain) loss
|
|
|
(11,401
|
)
|
|
|
(8,199
|
)
|
|
|
(12,562
|
)
|
|
|
(2,962
|
)
|
Exchange rate effect
|
|
|
|
|
|
|
|
|
|
|
17,053
|
|
|
|
19,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
330,925
|
|
|
$
|
340,727
|
|
|
$
|
211,241
|
|
|
$
|
197,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at end of year
|
|
$
|
330,925
|
|
|
$
|
339,126
|
|
|
$
|
197,399
|
|
|
$
|
185,066
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
258,737
|
|
|
$
|
226,480
|
|
|
$
|
143,438
|
|
|
$
|
119,355
|
|
Actual return on plan assets
|
|
|
32,027
|
|
|
|
20,264
|
|
|
|
1,550
|
|
|
|
6,510
|
|
Employer contributions
|
|
|
22,570
|
|
|
|
40,947
|
|
|
|
8,749
|
|
|
|
11,962
|
|
Plan participants contributions
|
|
|
12
|
|
|
|
13
|
|
|
|
721
|
|
|
|
659
|
|
Benefits paid
|
|
|
(18,536
|
)
|
|
|
(17,911
|
)
|
|
|
(9,240
|
)
|
|
|
(7,844
|
)
|
Effect of settlements
|
|
|
|
|
|
|
(11,056
|
)
|
|
|
(746
|
)
|
|
|
(914
|
)
|
Exchange rate effect
|
|
|
|
|
|
|
|
|
|
|
12,334
|
|
|
|
13,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
294,810
|
|
|
$
|
258,737
|
|
|
$
|
156,806
|
|
|
$
|
143,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(36,115
|
)
|
|
$
|
(81,990
|
)
|
|
$
|
(54,435
|
)
|
|
$
|
(54,144
|
)
|
Contributions between measurement date and end of year
|
|
|
135
|
|
|
|
1,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(35,980
|
)
|
|
$
|
(80,920
|
)
|
|
$
|
(54,435
|
)
|
|
$
|
(54,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,861
|
|
|
$
|
575
|
|
Accrued expenses and other current liabilities
|
|
|
(508
|
)
|
|
|
(521
|
)
|
|
|
(2,224
|
)
|
|
|
(1,523
|
)
|
Postretirement and pension liabilities
|
|
|
(35,472
|
)
|
|
|
(80,399
|
)
|
|
|
(54,072
|
)
|
|
|
(53,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(35,980
|
)
|
|
$
|
(80,920
|
)
|
|
$
|
(54,435
|
)
|
|
$
|
(54,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Weighted-average assumptions as of the measurement date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.49
|
%
|
|
|
6.05
|
%
|
|
|
5.56
|
%
|
|
|
4.69
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
3.25
|
%
|
|
|
3.49
|
%
|
|
|
3.05
|
%
|
Pension plans with benefit obligations in excess of plan
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligations
|
|
$
|
330,925
|
|
|
$
|
340,727
|
|
|
$
|
190,652
|
|
|
$
|
180,631
|
|
Plan assets
|
|
|
294,810
|
|
|
|
258,737
|
|
|
|
134,356
|
|
|
|
125,912
|
|
Pension plans with accumulated benefit obligations
in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations
|
|
$
|
330,925
|
|
|
$
|
340,727
|
|
|
$
|
187,876
|
|
|
$
|
170,727
|
|
Accumulated benefit obligations
|
|
|
330,925
|
|
|
|
339,126
|
|
|
|
176,768
|
|
|
|
162,092
|
|
Plan assets
|
|
|
294,810
|
|
|
|
258,737
|
|
|
|
131,827
|
|
|
|
117,790
|
|
Activity and balances in accumulated other comprehensive income
(loss) related to defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
Prior
|
|
|
Net
|
|
|
|
|
|
Prior
|
|
|
Net
|
|
|
|
|
|
|
Service
|
|
|
Gain
|
|
|
|
|
|
Service
|
|
|
Gain
|
|
|
|
|
|
|
Cost
|
|
|
(Loss)
|
|
|
Total
|
|
|
Cost
|
|
|
(Loss)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2006
|
|
$
|
(1,183
|
)
|
|
$
|
(84,317
|
)
|
|
$
|
(85,500
|
)
|
|
$
|
(2,357
|
)
|
|
$
|
(19,974
|
)
|
|
$
|
(22,331
|
)
|
Changes in benefit obligations
|
|
|
|
|
|
|
24,099
|
|
|
|
24,099
|
|
|
|
(100
|
)
|
|
|
5,949
|
|
|
|
5,849
|
|
Amounts reclassified to components of cost
|
|
|
689
|
|
|
|
5,844
|
|
|
|
6,533
|
|
|
|
477
|
|
|
|
292
|
|
|
|
769
|
|
Exchange rate effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
(1,074
|
)
|
|
|
(1,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
(494
|
)
|
|
$
|
(54,374
|
)
|
|
$
|
(54,868
|
)
|
|
$
|
(1,933
|
)
|
|
$
|
(14,807
|
)
|
|
$
|
(16,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amounts to be amortized in 2008
|
|
$
|
(100
|
)
|
|
$
|
(2,212
|
)
|
|
$
|
(2,312
|
)
|
|
$
|
(113
|
)
|
|
$
|
(220
|
)
|
|
$
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We base the expected return on plan assets at the beginning of
the year on the weighted-average expected return for the target
asset allocations of the principal asset categories held by each
plan. In determining the expected return, the Company considers
both historical performance and an estimate of future long-term
rates of return. The Company consults with and considers the
opinion of its actuaries in developing appropriate return
assumptions.
77
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
The Company establishes asset allocation ranges for each major
category of plan assets. The risks inherent in the various asset
categories are considered along with the benefit obligations,
financial status and short-term liquidity needs of the fund. The
target allocation for each major asset category and the actual
weighted average asset allocations at the pension plan
measurement dates were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
Target
|
|
|
|
|
|
Target
|
|
|
|
|
|
|
Allocation
|
|
2007
|
|
2006
|
|
Allocation
|
|
2007
|
|
2006
|
|
Debt Securities
|
|
|
30
|
%
|
|
|
31
|
%
|
|
|
32
|
%
|
|
|
63
|
%
|
|
|
61
|
%
|
|
|
62
|
%
|
Equity Securities
|
|
|
70
|
|
|
|
69
|
|
|
|
68
|
|
|
|
30
|
|
|
|
29
|
|
|
|
29
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
10
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys U.S. pension plans held
424,651 shares of the Companys common stock with a
market value of $8.8 million at both December 31, 2007
and 2006, and received $0.2 million of dividends from the
Companys common stock in 2007, 2006, and 2005.
We expect to contribute approximately $13.0 million to our
U.S. pension plans and $12.1 million to our
non-U.S. pension
plans in 2008.
We estimate that future pension payments, which reflect expected
future service, will be as follows:
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
|
(Dollars in thousands)
|
|
|
2008
|
|
$
|
19,391
|
|
|
$
|
9,485
|
|
2009
|
|
|
19,762
|
|
|
|
11,018
|
|
2010
|
|
|
20,033
|
|
|
|
10,295
|
|
2011
|
|
|
20,567
|
|
|
|
11,354
|
|
2012
|
|
|
21,106
|
|
|
|
11,702
|
|
2013-2017
|
|
|
112,631
|
|
|
|
66,410
|
|
Postretirement
Health Care and Life Insurance Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
512
|
|
|
$
|
690
|
|
|
$
|
799
|
|
Interest cost
|
|
|
3,387
|
|
|
|
3,287
|
|
|
|
3,160
|
|
Amortization of prior service cost
|
|
|
(1,349
|
)
|
|
|
(835
|
)
|
|
|
(558
|
)
|
Net amortization and deferral
|
|
|
|
|
|
|
|
|
|
|
(232
|
)
|
Curtailment and settlement effects
|
|
|
(3,197
|
)
|
|
|
(2,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost
|
|
$
|
(647
|
)
|
|
$
|
689
|
|
|
$
|
3,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.90
|
%
|
|
|
5.90
|
%
|
|
|
6.10
|
%
|
Current trend rate for health care costs
|
|
|
10.10
|
%
|
|
|
9.30
|
%
|
|
|
10.30
|
%
|
Ultimate trend rate for health care costs
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
Year that ultimate trend rate is reached
|
|
|
2017
|
|
|
|
2013
|
|
|
|
2013
|
|
78
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
In 2007, we recorded a curtailment gain of $3.1 million
related to closing our Niagara Falls, New York, manufacturing
facility. In 2006, we limited eligibility for retiree medical
and life insurance coverage for nonunion employees and recorded
a curtailment gain of $2.5 million.
A one-percentage point change in the assumed health care cost
trend rates would have the following effect:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage
|
|
|
1-Percentage
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
|
(Dollars in thousands)
|
|
|
Effect on total of service and interest cost components
|
|
$
|
335
|
|
|
$
|
(296
|
)
|
Effect on postretirement benefit obligation
|
|
|
3,722
|
|
|
|
(3,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
60,475
|
|
|
$
|
59,406
|
|
Service cost
|
|
|
512
|
|
|
|
690
|
|
Interest cost
|
|
|
3,387
|
|
|
|
3,287
|
|
Effect of curtailment
|
|
|
(2,794
|
)
|
|
|
(5,457
|
)
|
Benefits paid
|
|
|
(3,548
|
)
|
|
|
(3,541
|
)
|
Actuarial (gain) loss
|
|
|
(5,109
|
)
|
|
|
6,090
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
52,923
|
|
|
$
|
60,475
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
|
|
|
$
|
|
|
Employer contributions
|
|
|
3,548
|
|
|
|
3,541
|
|
Benefits paid
|
|
|
(3,548
|
)
|
|
|
(3,541
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued costs:
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(52,923
|
)
|
|
$
|
(60,475
|
)
|
Contributions between measurement date and end of year
|
|
|
819
|
|
|
|
788
|
|
Curtailment gain between measurement date and end of year
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(49,721
|
)
|
|
$
|
(59,687
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
(4,554
|
)
|
|
$
|
(4,479
|
)
|
Postretirement and pension liabilities
|
|
|
(45,167
|
)
|
|
|
(55,208
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(49,721
|
)
|
|
$
|
(59,687
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as of December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.10
|
%
|
|
|
5.90
|
%
|
Current trend rate for health care costs
|
|
|
9.40
|
%
|
|
|
10.10
|
%
|
Ultimate trend rate for health care costs
|
|
|
5.20
|
%
|
|
|
5.20
|
%
|
Year that ultimate trend rate is reached
|
|
|
2017
|
|
|
|
2017
|
|
79
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Activity and balances in accumulated other comprehensive income
(loss) related to our postretirement health care and life
insurance benefit plans is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
Net Gain (Loss)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2006
|
|
$
|
4,887
|
|
|
$
|
(1,164
|
)
|
|
$
|
3,723
|
|
Changes in benefit obligations
|
|
|
1,980
|
|
|
|
5,109
|
|
|
|
7,089
|
|
Amounts reclassified to components of cost
|
|
|
(1,349
|
)
|
|
|
|
|
|
|
(1,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
5,518
|
|
|
$
|
3,945
|
|
|
$
|
9,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amounts to be amortized in 2008
|
|
$
|
1,643
|
|
|
$
|
|
|
|
$
|
1,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Medicare Prescription Drug, Improvement and Modernization
Act of 2003 provides subsidies for certain drug costs to
companies that provide coverage that is actuarially equivalent
to the drug coverage under Medicare D. We estimate that future
postretirement health care and life insurance benefit payments
will be as follows:
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
After
|
|
|
|
Medicare Subsidy
|
|
|
Medicare Subsidy
|
|
|
|
(Dollars in thousands)
|
|
|
2008
|
|
$
|
4,978
|
|
|
$
|
4,554
|
|
2009
|
|
|
5,325
|
|
|
|
4,837
|
|
2010
|
|
|
5,194
|
|
|
|
4,697
|
|
2011
|
|
|
5,103
|
|
|
|
4,608
|
|
2012
|
|
|
5,016
|
|
|
|
4,510
|
|
2013-2017
|
|
|
22,070
|
|
|
|
19,873
|
|
Other
Retirement Plans
We also have defined contribution retirement plans covering
certain employees. Our contributions are determined by the terms
of the plans and are limited to amounts that are deductible for
income taxes. The largest plan covers U.S. salaried and
non-bargaining hourly employees. In this plan, the Company
contributes a percentage of eligible employee basic compensation
and also a percentage of employee contributions. Generally,
benefits under these plans vest gradually over a period of five
years from date of employment. The expense applicable to these
plans was $8.5 million, $7.8 million, and
$5.6 million in 2007, 2006, and 2005, respectively.
|
|
10.
|
Serial
Convertible Preferred Stock
|
We are authorized to issue up to 2,000,000 shares of serial
convertible preferred stock without par value. In 1989, Ferro
issued 1,520,215 shares of 7% Series A ESOP
Convertible Preferred Stock (Series A Preferred
Stock) to the Trustee of the Ferro Employee Stock
Ownership Plan (ESOP) at a price of $46.375 per
share for a total consideration of $70.5 million. All
shares of the Series A Preferred Stock have been allocated
to participating individual employee accounts. The Trustee may
redeem the Series A Preferred Stock to provide for
distributions to, loans to, or withdrawals by participants or to
satisfy an investment election provided to participants. The
Company can redeem any or all of the Series A Preferred
Stock at any time. The redemption price is $46.375 per preferred
share plus earned but unpaid dividends as of the date of
redemption. The redemption value approximates the carrying
value. In addition, the Trustee can convert any or all of the
Series A Preferred Stock at any time into Ferro common
stock at a conversion rate of 2.5988 shares of common stock
(adjusted for stock splits) per preferred share.
Each share of Series A Preferred Stock carries one vote,
voting together with the common stock on most matters. The
Series A Preferred Stock accrues dividends at an annual
rate of 7% on shares outstanding. The
80
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
dividends are cumulative from the date of issuance. To the
extent the Company is legally permitted to pay dividends and the
Board of Directors declares a dividend payable, Ferro pays
dividends on a quarterly basis. In the case of liquidation or
dissolution of the Company, the holders of the Series A
Preferred Stock are entitled to receive $46.375 per preferred
share, or $25.00 per preferred share in the event of involuntary
liquidation, plus earned but unpaid dividends, before any amount
is paid to holders of the Companys common stock.
There were 293,766 shares of Series A Preferred Stock
outstanding at December 31, 2007, and 366,415 shares
outstanding at December 31, 2006. The number of shares
redeemed was 72,649 in 2007 (75,856 in 2006 and 47,378 in 2005).
We did not purchase common stock on the open market in 2007,
2006, or 2005. Under our current treasury stock purchase
program, we had remaining authorization to acquire
4,201,216 shares at December 31, 2007. The Amended
Credit Facility limits our ability to purchase shares.
|
|
12.
|
Stock-based
Compensation
|
In November 2006, our shareholders approved the 2006 Long-Term
Incentive Plan (the Plan). The Plans purpose
is to promote the Companys and the shareholders
long-term financial interests and growth by attracting,
retaining and motivating high-quality executives and directors
and aligning their interests with those of our shareholders. The
Plan authorizes us to grant several different types of long-term
incentives including stock options, stock appreciation rights,
restricted shares, performance shares, other common stock-based
awards, and dividend equivalent rights. Unissued authorized
shares or treasury stock may be issued under the Plan.
Generally, Ferro has issued treasury stock to satisfy the common
stock requirements of its long-term incentive plans. The Plan
has an effective date of September 28, 2006, and reserves
3,000,000 common shares for future issuance.
Previous incentive plans authorized various types of long-term
incentives, including stock options, stock appreciation rights,
performance shares and common stock awards. No further grants
may be made under these previous plans. However, any outstanding
awards or grants made under these plans will continue until the
end of their specified terms. Stock options granted under the
previous plans have terms of 10 years and performance share
awards granted under those plans have terms of three years.
Stock options, performance shares and deferred stock units are
the only grant types currently outstanding. These are discussed
separately below because of the significant differences between
the grant types.
Stock
Options
General
Information
The Compensation Committee of the Board of Directors (the
Committee) awards stock options under the Plan and
generally grants stock options during regularly scheduled
meetings. The exercise price of stock options granted may not be
less than the per share fair market value of the Companys
common stock on the date of the grant. Stock options have a term
of 10 years and vest evenly over four years on the
anniversary of the grant date. The normal vesting period is used
for retirement eligible employees. In the case of death,
retirement or change in control, the stock options become 100%
vested and exercisable.
Stock
Option Valuation Model and Method Information
We estimate the fair value of each stock option on the date of
grant using the Black-Scholes option pricing model that uses the
assumptions noted in the following table. We use judgment in
selecting these assumptions
81
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
because they may significantly impact the timing and amount of
compensation expense and we base our judgments primarily on
historical data.
When appropriate, we adjust the historical data for
circumstances that are not likely to occur in the future. We
adjust the assumptions each year based upon new information.
We estimate stock option forfeitures based upon historical
employee termination rates. The following table details the
estimation method and the ranges of assumptions used for
differing grants of stock options:
|
|
|
|
|
|
|
Assumption
|
|
Estimation Method
|
|
Range
|
|
Expected life, in years
|
|
Historical stock option exercise experience
|
|
|
6.25 to 8.20
|
|
Risk-free interest rate
|
|
Yield of U.S. Treasury Bonds with remaining life equal to
expected life of the stock option
|
|
|
3.50% to 5.94%
|
|
Expected volatility
|
|
Historical daily price observations of the Companys common
stock over a period equal to the expected life of the stock
option
|
|
|
28.07% to 37.30%
|
|
Expected dividend yield
|
|
Historical dividend rate at the date of grant
|
|
|
2.18% to 3.00%
|
|
Stock
Option Activity Information
A summary of the stock option activity for 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In years)
|
|
|
(Dollars in
|
|
|
|
|
|
|
|
|
|
|
|
|
thousands)
|
|
|
Outstanding at January 1, 2007
|
|
|
4,857,675
|
|
|
$
|
22.20
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
517,000
|
|
|
|
21.99
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(490,645
|
)
|
|
|
20.06
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(644,622
|
)
|
|
|
22.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
4,239,408
|
|
|
|
22.36
|
|
|
|
5.0
|
|
|
$
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
3,239,401
|
|
|
|
22.68
|
|
|
|
4.0
|
|
|
|
963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2007
|
|
|
4,106,345
|
|
|
|
22.39
|
|
|
|
4.9
|
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The per share weighted-average grant-date fair value of stock
options granted during the year was $6.24 in 2007, $5.93 in
2006, and $5.17 in 2005.
We calculated the aggregate intrinsic value in the table above
by subtracting the total pretax difference between our common
stocks closing fair market value per share on the last
trading day of the year and the stock option exercise price for
each grant and that result by the number of shares that would
have been received by the option holders had they exercised all
their
in-the-money
stock options. At December 31, 2007, there were
1.1 million
82
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
in-the-money
stock options. We do not record the aggregate intrinsic value
for financial accounting purposes, and the value changes daily
based on the changes in the fair market value of our common
stock.
Information related to the stock options exercised follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Proceeds from the exercise of stock options
|
|
$
|
9,843
|
|
|
$
|
4,169
|
|
|
$
|
1,849
|
|
Intrinsic value of stock options exercised
|
|
|
947
|
|
|
|
577
|
|
|
|
533
|
|
Income tax benefit related to stock options exercised
|
|
|
333
|
|
|
|
202
|
|
|
|
181
|
|
A summary of the status of the Companys nonvested stock
options as of December 31, 2007, and changes during 2007,
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2007
|
|
|
1,214,354
|
|
|
$
|
5.93
|
|
Granted
|
|
|
517,000
|
|
|
|
6.24
|
|
Vested
|
|
|
(453,722
|
)
|
|
|
5.95
|
|
Forfeited
|
|
|
(277,625
|
)
|
|
|
6.21
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
1,000,007
|
|
|
|
6.01
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Expense Information
A summary of the amounts recorded and to be recorded related to
stock-based compensation related to stock options for 2007
follows:
|
|
|
|
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
Compensation expense recorded in selling, general and
administrative expenses
|
|
$
|
2,363
|
|
Total fair value of stock options vested
|
|
|
2,698
|
|
Unrecognized compensation cost related to stock options
|
|
|
4,057
|
|
Expected weighted-average recognition period for unrecognized
compensation, in years
|
|
|
2.4
|
|
During 2007, we recorded deferred income tax benefits related to
compensation expense for stock options of $0.8 million. We
elected the simplified transition method for accounting for the
income tax effects of share-based payment awards.
Performance
Shares
General
Information
We maintain multiple performance share awards whereby these
awards, expressed as shares of the Companys common stock,
are earned only if the Company meets specific performance
targets over a three-year period. The grants have a duration of
three years, and we establish a new grant each year. Therefore,
there are three grants outstanding at a given point in time. On
the grant date, we issue restricted common stock to the
participants and a trustee holds the shares for the benefit of
the participants until the end of the performance period. During
the performance period, participants have voting rights and
receive dividends on the restricted common shares.
We pay half of the value of any earned performance shares in
cash and half in unrestricted common shares. The portions of the
awards that will be paid in cash are treated as liabilities, and
therefore, we remeasure our liability,
83
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
and the related compensation expense, at the balance sheet date
based upon the fair value of the Companys common stock. We
treat the awards that are settled with common stock as equity
awards, and therefore, the amount of stock-based compensation we
record over the performance period is equal to the fair value on
the grant date. The compensation expense for all performance
share awards is adjusted for the achievement of the performance
share awards performance conditions based upon our best
estimate using available facts and circumstances.
Performance
Share Award Information
In the following table, we have identified the potential number
of common shares that may be issued and the common stock price
on the date of each grant. For the portion of the awards that
are treated as liabilities, the awards were remeasured using the
common stock closing market price of $20.73 at December 31,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
Potential Number
|
|
|
Weighted-Average
|
|
|
Potential Future
|
|
|
|
Potential Number
|
|
|
of Shares at
|
|
|
Common
|
|
|
Stock-Based
|
|
|
|
of Shares at
|
|
|
December 31,
|
|
|
Stock Price at
|
|
|
Compensation
|
|
Plan
|
|
Grant Date
|
|
|
2007
|
|
|
Grant Date
|
|
|
Expense
|
|
|
|
(In thousands, except per share amounts)
|
|
|
2005 2007
|
|
|
127,900
|
|
|
|
85,500
|
|
|
$
|
19.39
|
|
|
$
|
|
|
2006 2008
|
|
|
271,200
|
|
|
|
225,600
|
|
|
|
18.03
|
|
|
|
1,032
|
|
2007 2009
|
|
|
131,600
|
|
|
|
118,400
|
|
|
|
21.99
|
|
|
|
804
|
|
The potential compensation expense is reduced during the
performance period by forfeitures and non-attainment of
performance conditions. However, actual compensation expense
related to the grants may be greater than the amount in the
table above because the plan allows for us to pay up to 200% of
the grant date value if the Companys performance goals are
exceeded. Conversely, the actual compensation expense related to
the grants may be lower than the amount in the table if the
Companys performance goals are not met.
At December 31, 2007, we estimated each plans average
achievement percentage as follows:
|
|
|
|
|
|
|
Achievement
|
|
Plan
|
|
Percentage
|
|
|
2005 2007
|
|
|
21.5
|
%
|
2006 2008
|
|
|
60.0
|
%
|
2007 2009
|
|
|
45.0
|
%
|
Stock-Based
Compensation Expense Information
A summary of the amounts recorded and to be recorded related to
stock-based compensation related to the performance share awards
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Compensation expense recorded in selling, general and
administrative expenses
|
|
$
|
1,018
|
|
|
$
|
1,224
|
|
|
$
|
(511
|
)
|
Estimated future compensation cost
|
|
|
1,836
|
|
|
|
2,603
|
|
|
|
321
|
|
The expected recognition period for the estimated future
compensation cost was 2.0 years for 2007, 2006 and 2005. As
of December 31, 2007, the Company had accrued
$1.1 million of compensation related to the performance
share awards. During 2007, we recorded deferred income tax
benefits related to compensation expense for performance share
awards of $0.4 million.
84
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Deferred
Stock Units
General
Information
Under the Plan, the Company may award deferred stock units
(DSUs), expressed as shares of the Companys
common stock, to non-employee directors of the Company. For
accounting purposes, the awards are treated as if they were
stock compensation. The DSUs vest in one year from the date of
the award and are forfeited in the event the recipient is no
longer serving as a director, except in the case of retirement,
death or disability. The first DSUs were awarded in 2007.
Deferred
Stock Unit Activity Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Award-date
|
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at January 1, 2007
|
|
|
|
|
|
$
|
|
|
Awarded
|
|
|
36,700
|
|
|
|
22.06
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,800
|
)
|
|
|
21.99
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
32,900
|
|
|
|
22.07
|
|
|
|
|
|
|
|
|
|
|
The per share weighted-average award-date fair value of the DSUs
awarded in 2007 was $21.50. Compensation expense recorded in
selling, general and administrative expenses for DSUs was
$0.6 million in 2007, and the unrecognized compensation
cost was $0.1 million at December 31, 2007. We also
recorded deferred tax benefits related to compensation expense
for DSUs of $0.2 million in 2007.
Directors
Deferred Compensation
The Company has established the Ferro Corporation Deferred
Compensation Plan for Non-employee Directors, permitting its
non-employee directors to voluntarily defer all or a portion of
their compensation. The voluntarily deferred amounts are placed
in individual accounts in a benefit trust known as a rabbi
trust and invested in the Companys common stock with
dividends reinvested in additional shares. All disbursements
from the trust are made in the Company common stock. The
Company has applied the provisions of EITF Issue
No. 97-14,
Accounting for Deferred Compensation Arrangements Where
Amounts Earned are Held in A Rabbi Trust and Invested.
The stock held in the rabbi trust is classified as treasury
stock in shareholders equity and the deferred compensation
obligation that is required to be settled in shares of
Companys common stock is classified as
paid-in
capital. At December 31, 2007, there were
152,262 shares, valued at $3.1 million, held by the
rabbi trust.
85
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Stock-based
Compensation Transactions in Shareholders
Equity
The stock-based compensation transactions in shareholders
equity consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
|
in Treasury
|
|
|
Paid-in
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
|
(In thousands)
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
(110
|
)
|
|
$
|
1,655
|
|
|
$
|
303
|
|
Performance shares, net
|
|
|
4
|
|
|
|
(931
|
)
|
|
|
(556
|
)
|
Preferred stock conversions
|
|
|
(109
|
)
|
|
|
1,697
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(215
|
)
|
|
$
|
2,421
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
(232
|
)
|
|
$
|
4,080
|
|
|
$
|
3,299
|
|
Performance shares, net
|
|
|
(95
|
)
|
|
|
2,016
|
|
|
|
(1,952
|
)
|
Preferred stock conversions
|
|
|
(185
|
)
|
|
|
3,723
|
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(512
|
)
|
|
$
|
9,819
|
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
(497
|
)
|
|
$
|
8,399
|
|
|
$
|
3,360
|
|
Performance shares, net
|
|
|
(25
|
)
|
|
|
(215
|
)
|
|
|
978
|
|
Deferred stock units
|
|
|
|
|
|
|
|
|
|
|
632
|
|
Directors deferred compensation
|
|
|
|
|
|
|
(3,127
|
)
|
|
|
3,127
|
|
Preferred stock conversions
|
|
|
(183
|
)
|
|
|
3,364
|
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(705
|
)
|
|
$
|
8,421
|
|
|
$
|
7,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Restructuring
and Cost Reduction Programs
|
During 2006 and 2007, 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
businesses, and therefore, there may be supplemental provisions
for new plan initiatives as well as changes in estimates to
amounts previously recorded, as payments are made or actions are
completed.
In July 2006, we announced that we were restructuring our
European operations, including a portion of our Performance
Coatings and Color and Glass Performance Materials segments. A
portion of our Italian manufacturing operations and
administrative functions was consolidated with Spain, where
additional production capacity was constructed. Additionally, we
consolidated our decorative colors production, primarily from
Frankfurt, Germany, to Colditz, Germany. As a result of these
activities, since July 2006, we reduced our workforce by
approximately 109 employees and are evaluating further
workforce reductions. We expect these actions to significantly
reduce the cost structure of our manufacturing operations. Total
anticipated charges through 2009 amount to $18.9 million.
In 2006, we recorded $4.9 million in restructuring charges
for these activities. During 2007, we recorded $5.2 million
of charges for our operations in Spain, Italy, Portugal and
France, of which $4.0 million related to our Performance
Coatings segment and $1.2 million related to our Color and
Glass Performance Materials segment. The 2007 restructuring
charges include $3.1 million for employee severance costs,
86
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
$2.0 million for asset impairments and $0.1 million of
other costs. 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 of 2007. In total,
107 employees were terminated relating to the European
consolidation during 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
ceased production at our Niagara Falls, New York, manufacturing
facility in December 2007 and transferred some of its production
to facilities in Penn Yan, New York, and Uden, Netherlands. The
closure impacted 131 employees. Total anticipated charges
through 2008 amount to $21.6 million. In 2006, we recorded
$16.1 million in restructuring charges for these
activities. During 2007, we recorded $0.9 million of net
credits, consisting of pension curtailment gains of
$2.8 million, charges of $0.8 million related to
employee terminations benefits and other costs of
$1.1 million, including repairs, equipment relocation fees,
and professional fees.
In February 2007, June 2007 and November 2007, we approved
additional restructuring plans for our Performance Coatings,
Color and Glass Performance Materials, Polymer Additives, and
Specialty Plastics segments. Total estimated employee
termination charges through 2008 are $7.8 million. As a
result, we recorded $2.7 million of gross restructuring
charges during 2007. A total of 101 employees were
terminated during 2007. The company estimates an additional
30 employees will be terminated.
In May 2007, we initiated discussions with representatives of
workers at our Rotterdam, 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, Netherlands,
facility in 2008 and will consolidate production at other
European facilities. This consolidation will result in a
reduction of 84 employees. Restructuring charges are
expected to total $23.6 million with completion anticipated
by the end of the third quarter of 2008. During 2007, we
recorded $11.8 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,
$6.8 million for employee severance costs, and
$2.8 million for asset impairments and other costs,
primarily for pensions and lease obligations. In 2008, we plan
to accrue an additional $8.5 million for employee severance
costs and $3.3 million for future minimum operating lease
obligations under a land rights lease.
Restructuring charges for the year ended December 31, 2007,
also include $0.8 million in accrual adjustments for other
cost reduction and restructuring programs prior to 2006.
87
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
We have summarized the activities and accruals related to our
restructuring and cost reduction programs below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Other
|
|
|
Asset
|
|
|
|
|
|
|
Benefits
|
|
|
Costs
|
|
|
Impairment
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2004
|
|
$
|
4,897
|
|
|
$
|
976
|
|
|
$
|
|
|
|
$
|
5,873
|
|
Restructuring charges
|
|
|
3,677
|
|
|
|
|
|
|
|
|
|
|
|
3,677
|
|
Cash payments
|
|
|
(6,342
|
)
|
|
|
(910
|
)
|
|
|
|
|
|
|
(7,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
2,232
|
|
|
|
66
|
|
|
|
|
|
|
|
2,298
|
|
Restructuring charges
|
|
|
7,351
|
|
|
|
|
|
|
|
15,795
|
|
|
|
23,146
|
|
Non-cash items
|
|
|
|
|
|
|
|
|
|
|
(15,795
|
)
|
|
|
(15,795
|
)
|
Cash payments
|
|
|
(2,853
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
(2,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
6,730
|
|
|
|
39
|
|
|
|
|
|
|
|
6,769
|
|
Restructuring charges
|
|
|
11,013
|
|
|
|
2,580
|
|
|
|
3,259
|
|
|
|
16,852
|
|
Non-cash items
|
|
|
1,863
|
|
|
|
380
|
|
|
|
(3,259
|
)
|
|
|
(1,016
|
)
|
Cash payments
|
|
|
(11,225
|
)
|
|
|
(1,439
|
)
|
|
|
|
|
|
|
(12,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
8,381
|
|
|
$
|
1,560
|
|
|
$
|
|
|
|
$
|
9,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash items include foreign currency translation adjustments.
We expect to make cash payments to settle the remaining
liability for employee termination benefits and other costs
primarily over the next twelve months, except where legal or
contractual restrictions prevent us from doing so.
We did not incur any restructuring charges for discontinued
operations in 2007, 2006, or 2005.
Rent expense for all operating leases was $20.2 million in
2007, $14.9 million in 2006, and $14.5 million in
2005. Amortization of assets recorded under capital leases is
recorded as depreciation expense.
The Company has a number of capital lease arrangements relating
primarily to buildings and production equipment. Assets held
under capitalized leases and included in property, plant and
equipment at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Gross amounts capitalized:
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
3,100
|
|
|
$
|
3,100
|
|
Equipment
|
|
|
15,066
|
|
|
|
10,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,166
|
|
|
|
13,380
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
(1,589
|
)
|
|
|
(1,511
|
)
|
Equipment
|
|
|
(9,614
|
)
|
|
|
(7,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,203
|
)
|
|
|
(8,628
|
)
|
|
|
|
|
|
|
|
|
|
Net assets under capital leases
|
|
$
|
6,963
|
|
|
$
|
4,752
|
|
|
|
|
|
|
|
|
|
|
88
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
At December 31, 2007, future minimum lease payments under
all non-cancelable leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
|
(Dollars in thousands)
|
|
|
2008
|
|
$
|
1,951
|
|
|
$
|
17,880
|
|
2009
|
|
|
1,661
|
|
|
|
7,665
|
|
2010
|
|
|
1,636
|
|
|
|
5,572
|
|
2011
|
|
|
1,234
|
|
|
|
3,723
|
|
2012
|
|
|
1,234
|
|
|
|
3,071
|
|
Thereafter
|
|
|
5,853
|
|
|
|
11,468
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
13,569
|
|
|
$
|
49,379
|
|
|
|
|
|
|
|
|
|
|
Less amount representing executory costs
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
|
13,526
|
|
|
|
|
|
Less amount representing imputed interest
|
|
|
4,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
8,924
|
|
|
|
|
|
Less current portion
|
|
|
1,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations at December 31, 2006
|
|
$
|
7,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Discontinued
Operations
|
Discontinued operations relate to the Powder Coatings, Petroleum
Additives and Specialty Ceramics businesses that we sold in 2002
and 2003. There were no sales, income before taxes or related
tax expense, or cash flows from investing or financing
activities from discontinued operations in any of the years
presented. The loss from discontinued operations includes
ongoing legal and environmental costs directly related to these
discontinued operations.
Discontinued operations resulted in the following pre-tax losses
and related income tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Pre-tax losses
|
|
$
|
369
|
|
|
$
|
738
|
|
|
$
|
1,423
|
|
Tax benefits
|
|
|
144
|
|
|
|
266
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of tax losses
|
|
$
|
225
|
|
|
$
|
472
|
|
|
$
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have continuing environmental remediation obligations that
are related to these divestitures, and we have accrued
$3.3 million as of December 31, 2007, and
$3.1 million as of December 31, 2006, for these
matters. The estimated amounts we have accrued are based on our
assessment of the nature and extent of the soil
and/or
groundwater contamination and the remedial actions we expect to
perform. In some cases, we have agreed to the required remedial
actions with the relevant governmental authorities and we have
based our estimates of the costs to remediate upon those
actions. Where alternative technologies exist to remediate a
contaminated site, we have determined our estimates of the costs
to remediate based on the technologies that we are most likely
to use.
89
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
16.
|
(Loss)
earnings per Share
|
Details of the calculations of basic and diluted (loss) earnings
per share follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands,
|
|
|
|
except per share amounts)
|
|
|
Basic (loss) earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(95,514
|
)
|
|
$
|
19,368
|
|
|
$
|
16,755
|
|
Add back: Loss from discontinued operations
|
|
|
225
|
|
|
|
472
|
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(95,289
|
)
|
|
$
|
19,840
|
|
|
$
|
17,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
42,926
|
|
|
|
42,394
|
|
|
|
42,309
|
|
Basic (loss) earnings per share from continuing operations
|
|
$
|
(2.22
|
)
|
|
$
|
0.47
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders
|
|
$
|
(95,514
|
)
|
|
$
|
19,368
|
|
|
$
|
16,755
|
|
Add back: Loss from discontinued operations
|
|
|
225
|
|
|
|
472
|
|
|
|
868
|
|
Plus: Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(95,289
|
)
|
|
$
|
19,840
|
|
|
$
|
17,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
42,926
|
|
|
|
42,394
|
|
|
|
42,309
|
|
Assumed exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
36
|
|
Assumed satisfaction of performance share conditions
|
|
|
|
|
|
|
28
|
|
|
|
|
|
Assumed satisfaction of deferred stock unit conditions
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding
|
|
|
42,926
|
|
|
|
42,422
|
|
|
|
42,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share from continuing operations
|
|
$
|
(2.22
|
)
|
|
$
|
0.47
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share reflects the potential
dilution that could occur if stock options, preferred stock or
other share-based awards were exercised or converted into common
stock. The dilutive effect is computed using the treasury stock
method, which assumes that the hypothetical proceeds from
exercise or conversion are used by the Company to purchase
common stock at the average market price during the period. The
incremental shares (the difference between shares assumed to be
issued versus purchased), to the extent they would have been
dilutive, are included in the denominator of the diluted (loss)
earnings per share calculation. Options to purchase
4.5 million, 5.1 million, and 4.1 million shares
of common stock, performance shares of 0.5 million,
0.3 million, and -0-, and preferred stock convertible into
0.8 million, 1.0 million, and 1.2 million shares
of common stock for 2007, 2006 and 2005, respectively, were
antidilutive or unearned and therefore excluded from the
computation of diluted earnings per share.
|
|
17.
|
Reporting
for Segments
|
The Company has six reportable segments: Performance Coatings,
Electronic Materials, Color and Glass Performance Materials,
Polymer Additives, Specialty Plastics and Other Businesses. We
have combined our Tile Coating Systems and Porcelain Enamel
business units into one reportable segment, Performance
Coatings, based on their similar economic and operating
characteristics. We have also combined two of our business
units, Pharmaceuticals and Fine Chemicals, into one reportable
segment, Other Businesses, because they do not meet the
quantitative thresholds for separate disclosure.
90
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
The accounting policies of our segments are consistent with
those described in the summary of significant accounting
policies found in Note 1. We measure segment income for
internal reporting purposes as net operating profit before
interest and taxes. Segment income excludes unallocated
corporate expenses, primarily corporate employment costs and
professional services, and charges associated with impairments,
restructuring and cost reduction programs.
We have presented net sales to external customers by segment in
the table below. Sales between segments were not material:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
609,285
|
|
|
$
|
538,385
|
|
|
$
|
488,467
|
|
Electronic Materials
|
|
|
469,885
|
|
|
|
444,463
|
|
|
|
355,676
|
|
Color and Glass Performance Materials
|
|
|
445,709
|
|
|
|
387,540
|
|
|
|
359,613
|
|
Polymer Additives
|
|
|
334,492
|
|
|
|
313,500
|
|
|
|
300,563
|
|
Specialty Plastics
|
|
|
261,956
|
|
|
|
271,307
|
|
|
|
279,119
|
|
Other Businesses
|
|
|
83,458
|
|
|
|
86,330
|
|
|
|
98,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated sales
|
|
$
|
2,204,785
|
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below are each segments income and reconciliations to
(loss) income before taxes from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
37,965
|
|
|
$
|
42,718
|
|
|
$
|
32,553
|
|
Electronic Materials
|
|
|
32,785
|
|
|
|
35,136
|
|
|
|
14,113
|
|
Color and Glass Performance Materials
|
|
|
48,222
|
|
|
|
43,512
|
|
|
|
39,216
|
|
Polymer Additives
|
|
|
10,755
|
|
|
|
10,947
|
|
|
|
18,383
|
|
Specialty Plastics
|
|
|
15,116
|
|
|
|
14,629
|
|
|
|
14,698
|
|
Other Businesses
|
|
|
9,146
|
|
|
|
5,674
|
|
|
|
2,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income
|
|
|
153,989
|
|
|
|
152,616
|
|
|
|
121,138
|
|
Unallocated corporate expenses
|
|
|
56,391
|
|
|
|
42,182
|
|
|
|
44,292
|
|
Impairment charges
|
|
|
128,737
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
16,852
|
|
|
|
23,146
|
|
|
|
3,677
|
|
Other expense, net
|
|
|
61,327
|
|
|
|
60,847
|
|
|
|
45,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes from continuing operations
|
|
$
|
(109,318
|
)
|
|
$
|
26,441
|
|
|
$
|
27,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
We do not allocate restructuring charges to individual segment
income. Restructuring charges related to the following segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
13,469
|
|
|
$
|
914
|
|
|
$
|
3,205
|
|
Electronic Materials
|
|
|
(929
|
)
|
|
|
16,488
|
|
|
|
|
|
Color and Glass Performance Materials
|
|
|
4,105
|
|
|
|
4,127
|
|
|
|
|
|
Polymer Additives
|
|
|
|
|
|
|
|
|
|
|
304
|
|
Specialty Plastics
|
|
|
207
|
|
|
|
1,617
|
|
|
|
|
|
Other Businesses
|
|
|
|
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring charges
|
|
$
|
16,852
|
|
|
$
|
23,146
|
|
|
$
|
3,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details depreciation and amortization
expense by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
17,854
|
|
|
$
|
14,543
|
|
|
$
|
13,283
|
|
Electronic Materials
|
|
|
18,444
|
|
|
|
18,565
|
|
|
|
19,303
|
|
Color and Glass Performance Materials
|
|
|
11,228
|
|
|
|
9,581
|
|
|
|
10,385
|
|
Polymer Additives
|
|
|
11,033
|
|
|
|
10,765
|
|
|
|
10,637
|
|
Specialty Plastics
|
|
|
3,705
|
|
|
|
3,841
|
|
|
|
4,226
|
|
Other Businesses
|
|
|
6,112
|
|
|
|
5,585
|
|
|
|
7,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment depreciation and amortization
|
|
|
68,376
|
|
|
|
62,880
|
|
|
|
65,145
|
|
Unallocated depreciation and amortization
|
|
|
19,100
|
|
|
|
16,621
|
|
|
|
9,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization
|
|
$
|
87,476
|
|
|
$
|
79,501
|
|
|
$
|
74,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets primarily consist of trade accounts receivable,
inventories, property, plant and equipment, and intangible
assets. Unallocated assets primarily include cash and cash
equivalents, deferred taxes and assets related to uncertain tax
positions. Total assets at December 31 by segment are detailed
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
444,226
|
|
|
$
|
390,493
|
|
Electronic Materials
|
|
|
361,637
|
|
|
|
384,837
|
|
Color and Glass Performance Materials
|
|
|
288,951
|
|
|
|
268,960
|
|
Polymer Additives
|
|
|
154,154
|
|
|
|
243,388
|
|
Specialty Plastics
|
|
|
94,826
|
|
|
|
100,302
|
|
Other Businesses
|
|
|
76,126
|
|
|
|
119,561
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
1,419,920
|
|
|
|
1,507,541
|
|
Unallocated assets
|
|
|
218,340
|
|
|
|
234,061
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
1,638,260
|
|
|
$
|
1,741,602
|
|
|
|
|
|
|
|
|
|
|
92
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
Each segments goodwill at December 31 is detailed below:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
45,269
|
|
|
$
|
45,333
|
|
Electronic Materials
|
|
|
152,081
|
|
|
|
153,367
|
|
Color and Glass Performance Materials
|
|
|
68,078
|
|
|
|
66,513
|
|
Polymer Additives
|
|
|
|
|
|
|
73,156
|
|
Specialty Plastics
|
|
|
17,045
|
|
|
|
16,990
|
|
Other Businesses
|
|
|
8,597
|
|
|
|
40,831
|
|
|
|
|
|
|
|
|
|
|
Total consolidated goodwill
|
|
$
|
291,070
|
|
|
$
|
396,190
|
|
|
|
|
|
|
|
|
|
|
We have detailed each segments expenditures for long-lived
assets, including acquisitions, in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Performance Coatings
|
|
$
|
17,900
|
|
|
$
|
17,646
|
|
|
$
|
13,927
|
|
Electronic Materials
|
|
|
13,866
|
|
|
|
7,256
|
|
|
|
6,816
|
|
Color and Glass Performance Materials
|
|
|
10,591
|
|
|
|
6,378
|
|
|
|
4,548
|
|
Polymer Additives
|
|
|
7,925
|
|
|
|
7,084
|
|
|
|
3,665
|
|
Specialty Plastics
|
|
|
1,300
|
|
|
|
2,271
|
|
|
|
2,335
|
|
Other Businesses
|
|
|
9,025
|
|
|
|
8,090
|
|
|
|
9,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment expenditures for long-lived assets
|
|
|
60,607
|
|
|
|
48,725
|
|
|
|
40,645
|
|
Unallocated expenditures for long-lived assets
|
|
|
7,027
|
|
|
|
1,890
|
|
|
|
2,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated expenditures for long-lived assets
|
|
$
|
67,634
|
|
|
$
|
50,615
|
|
|
$
|
42,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We sell our products throughout the world and we attribute sales
to countries based on the country where we generate the customer
invoice. No other single country other than the
U.S. represents greater than 10% of our net sales. We have
detailed net sales by geographic region in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
943,249
|
|
|
$
|
951,215
|
|
|
$
|
925,895
|
|
International
|
|
|
1,261,536
|
|
|
|
1,090,310
|
|
|
|
956,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,204,785
|
|
|
$
|
2,041,525
|
|
|
$
|
1,882,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None of our operations in countries other than the
U.S. owns greater than 10% of consolidated long-lived
assets. We have detailed long-lived assets that consist of
property, plant and equipment, goodwill, and amortizable
intangible assets by geographic region at December 31 in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
443,856
|
|
|
$
|
576,357
|
|
|
$
|
604,769
|
|
International
|
|
|
376,244
|
|
|
|
356,785
|
|
|
|
337,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
820,100
|
|
|
$
|
933,142
|
|
|
$
|
941,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
18.
|
Related
Party Transactions
|
We had the following transactions with our unconsolidated
affiliates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Sales
|
|
$
|
9,727
|
|
|
$
|
7,659
|
|
|
$
|
5,132
|
|
Purchases
|
|
|
5,573
|
|
|
|
5,229
|
|
|
|
5,573
|
|
Dividends and interest received
|
|
|
702
|
|
|
|
1,590
|
|
|
|
1,069
|
|
Commissions and royalties received
|
|
|
132
|
|
|
|
136
|
|
|
|
292
|
|
Commissions and royalties paid
|
|
|
227
|
|
|
|
130
|
|
|
|
191
|
|
A Ferro Director, Mr. Bulkin, and a former Ferro Director,
Mr. Weisser, serve on the board of Bunge Limited. We made the
purchases from Bunge Limited of $14.2 million in 2007,
$12.5 million in 2006, and $11.2 million in 2005.
Accounts payable related to these purchases were
$3.2 million at December 31, 2007, and
$0.2 million at December 31, 2006. At
December 31, 2007, we were committed to purchases of
$1.0 million in 2008 from Bunge Limited.
|
|
19.
|
Summarized
Financial Information of Unconsolidated Affiliates Accounted For
Under the Equity Method
|
We participate in several joint ventures that are located in
Spain, Italy, South Korea and Thailand through investments in
the common stock of affiliated companies. As of
December 31, 2007, our percentage of ownership interest in
these affiliates ranges from 36% to 50%. Because we exert
significant influence over the affiliates, but we do not control
them, our investments have been accounted for under the equity
method and their results and financial position are not
consolidated.
In May 2006, we sold a 20% owned, $1.2 million investment
in a joint venture in Spain for cash proceeds of
$1.6 million. We recorded the resulting pre-tax gain of
$0.4 million in miscellaneous expense (income), net in the
consolidated statements of operations. We have included the
results of this joint ventures operations in investment
income and the summarized condensed income statement information
presented below up to the date of the sale.
Investment income from these equity method investments, which is
reported in miscellaneous expense (income), net was
$2.5 million in 2007, $2.4 million in 2006, and
$2.5 million in 2005. The combined balance of our equity
method investments was $15.4 million at December 31,
2007, and $13.3 million at December 31, 2006.
The income that we record for these investments is equal to our
proportionate share of the affiliates income and our
investments are equal to our proportionate share of the
affiliates shareholders equity based upon our
ownership percentage. Below we have summarized condensed income
statement and balance sheet information for the combined equity
method investees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
|
Net sales
|
|
$
|
67,894
|
|
|
$
|
72,976
|
|
|
$
|
77,697
|
|
Gross profit
|
|
|
18,475
|
|
|
|
18,808
|
|
|
|
20,316
|
|
Income from continuing operations
|
|
|
8,284
|
|
|
|
7,841
|
|
|
|
8,877
|
|
Net income
|
|
|
5,667
|
|
|
|
5,479
|
|
|
|
5,987
|
|
94
FERRO
CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
ended December 31, 2007, 2006 and
2005 (Continued)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Current assets
|
|
$
|
50,677
|
|
|
$
|
44,213
|
|
Non-current assets
|
|
|
25,371
|
|
|
|
23,315
|
|
Current liabilities
|
|
|
28,046
|
|
|
|
25,528
|
|
Non-current liabilities
|
|
|
4,348
|
|
|
|
4,070
|
|
|
|
20.
|
Quarterly
Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Basic
|
|
|
Diluted
|
|
Quarter
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
Income (Loss)
|
|
|
Earnings (Loss)
|
|
|
Earnings (Loss)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
2006 Adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
505,153
|
|
|
$
|
107,834
|
|
|
$
|
8,270
|
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
2
|
|
|
538,492
|
|
|
|
110,906
|
|
|
|
10,171
|
|
|
|
0.23
|
|
|
|
0.23
|
|
3
|
|
|
500,573
|
|
|
|
98,720
|
|
|
|
5,531
|
|
|
|
0.12
|
|
|
|
0.12
|
|
4
|
|
|
497,307
|
|
|
|
98,185
|
|
|
|
(3,352
|
)
|
|
|
(0.08
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,041,525
|
|
|
$
|
415,645
|
|
|
$
|
20,620
|
|
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
529,705
|
|
|
$
|
106,780
|
|
|
$
|
6,079
|
|
|
$
|
0.14
|
|
|
$
|
0.14
|
|
2
|
|
|
553,658
|
|
|
|
107,527
|
|
|
|
4,540
|
|
|
|
0.10
|
|
|
|
0.10
|
|
3
|
|
|
550,701
|
|
|
|
100,148
|
|
|
|
5,585
|
|
|
|
0.12
|
|
|
|
0.12
|
|
4
|
|
|
570,721
|
|
|
|
102,208
|
|
|
|
(110,683
|
)
|
|
|
(2.48
|
)
|
|
|
(2.48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,204,785
|
|
|
$
|
416,663
|
|
|
$
|
(94,479
|
)
|
|
$
|
(2.23
|
)
|
|
$
|
(2.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Quarterly earnings per share amounts do not always add to the
full year amounts due to the averaging of shares.
The fourth quarter of 2006 included pre-tax restructuring
charges of $23.1 million. Pre-tax restructuring charges in
2007 were $1.5 million in the first quarter,
$0.3 million in the second quarter, $5.8 million in
the third quarter and $9.3 million in the fourth quarter.
The fourth quarter of 2007 also included pre-tax impairment
charges of $128.7 million.
95
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Item 9
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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Changes in Accountants. On May 12, 2006,
the Audit Committee dismissed KPMG LLP, which had served as
Ferros auditors for the fiscal year ended
December 31, 2004, and prior years, as the Companys
independent registered public accountants. The audit reports of
KPMG on the consolidated financial statements of Ferro and its
subsidiaries as of and for the years ended December 31,
2004 and December 31, 2003 did not contain an adverse
opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting
principles, except that the report for year ended
December 31, 2004, stated that Ferro had restated its
fiscal 2003 consolidated financial statements and stated that
certain liquidity uncertainties facing Ferro raised substantial
doubt about its ability to continue as a going concern.
On May 18, 2006, the Company announced that its Audit
Committee had appointed a new independent registered public
accounting firm to conduct the 2005 audit, subject only to
completion of the new firms customary client acceptance
procedures. On June 5, 2006, the Company announced that
those procedures had been completed and that
Deloitte & Touche LLP had been engaged as the
Companys new independent registered public accountants.
Disagreements with Auditors. There was no
disagreement with Deloitte & Touche LLP on accounting
and financial statement disclosure. The only disagreements that
KPMG communicated to the Audit Committee during the 2003 and
2004 fiscal years or the period from December 31, 2004 to
May 12, 2006 involved the Audit Committees internal
investigation of irregular accounting entries as follows:
In early July 2004, as a result of issues discovered by
management during the performance of certain of the
Companys internal control procedures in connection with
the preparation of the Companys second quarter 2004
financial statements, the Company commenced an internal
investigation into certain potentially inappropriate accounting
entries made in the Companys domestic Polymer Additives
business unit.
Following an initial investigation, management reached the
preliminary conclusion that inappropriate accounting in the
Companys Polymer Additives business unit both overstated
the units historical performance and undermined the
reliability of the units forecasting process. On
July 23, 2004, the Company issued a press release
announcing that the Companys Polymer Additives business
units performance in the second quarter fell short of
expectations and that the Companys Audit Committee had
engaged independent legal counsel (Jones Day) and an independent
public accounting firm (Ernst & Young LLP) to conduct
an investigation under its auspices.
On September 15, 2004, the Company announced it would be
restating certain previously-filed information and reported that
the independent investigation conducted under the auspices of
the Audit Committee had generally confirmed managements
preliminary conclusions reported in the Companys
July 23, 2004, press release. The September 15 release
reported that the investigative team had concluded that all of
the potentially irregular accounting entries were made at the
Polymer Additives business unit and were made without senior
managements knowledge or involvement. The release also
reported that the investigative team concluded that
substantially all of the irregular accounting entries were made
by a subordinate divisional employee who had since left the
Company.
At a meeting of the Audit Committee on September 23, 2004,
KPMG expressed its concern about several emails reviewed during
the initial phase of the investigation and expressed its desire
to have more work done to determine whether those emails raised
additional concerns. In response to KPMGs expressed
concerns, the Audit Committee directed Jones Day and
Ernst & Young to conduct further investigation through
additional email searches, interviews of participants in the
questioned email exchanges and any other person who might have
relevant knowledge, and other documents as they deemed
appropriate.
On October 25, 2004, the Audit Committee met by
teleconference and received the report of Jones Day and
Ernst & Young concerning the expanded email review
requested by KPMG. The investigators reported to the Audit
Committee that they had not found illegal acts or an intent to
commit fraud, but found some evidence of immaterial mistakes in
the timing of recording expenses as required by generally
accepted accounting principles. These findings were reported to
KPMG and, on November 19, 2004, the Audit Committee
concluded that the additional work done by Jones Day and
Ernst & Young indicated no evidence of fraud and no
reasonable need to expand the investigation. KPMG had expressed
disagreement with the investigators findings and the Audit
Committee invited KPMG to provide a written list of any
recommendations it might have and the rationale therefore.
96
Following the November 19, 2004, meeting, Jones Day and
Ernst & Young had discussions with KPMG concerning
what additional investigatory work would be needed to address
KPMGs concerns. In addition, at about the same time the
investigators learned that the former subordinate division
employee who was responsible for the irregular accounting
entries at the Companys Polymer Additives Division was
willing, for the first time, to be interviewed. In that
interview, the former employee confirmed the irregular entries
that the investigators had reported earlier and the fact that he
had made those entries without any knowledge or involvement of
senior management. The employee also raised some suspicions of
irregular accounting entries in another smaller business unit.
In late December 2004, following discussions with the
investigation team, the Chair of the Audit Committee and the
Companys now-deceased Chief Executive Officer met by
teleconference with KPMG. At that meeting, the Audit Committee
Chair advised KPMG that the Audit Committee was willing, as
requested by KPMG, to go forward with further investigation
procedures to determine whether there was a pervasive pattern of
intentional, inappropriate spreading of expenses, emphasized
that independent investigators needed to exercise discretion and
make independent judgments, and emphasized the need to complete
the investigation expeditiously.
On January 18, 2005, in a press release, the Company
reported that KPMG had requested Jones Day and Ernst &
Young to perform additional procedures, including the review of
certain electronic files. In addition, the release disclosed
that the former subordinate division employee had been
interviewed and had confirmed the irregular entries that the
investigators had reported earlier and the fact that he had made
the entries without any knowledge or involvement of senior
management and of the suspicions he had raised about the other
business unit (which were also to be reviewed by the
investigation team).
Jones Day and Ernst & Young delivered their third
phase investigation report to the Audit Committee on
March 9, 2005. In that report, the investigators concluded:
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The investigative team did not find evidence of a systemic or
pervasive pattern or practice of managing earnings by
inappropriately spreading expenses over reporting periods or any
other means or conduct that constituted illegal acts,
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The leadership of Ferros finance organization strives to
apply generally accepted accounting principles and produce
accurate financial records, and
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All of the individuals potentially responsible for irregular
accounting entries either had resigned before the investigation
started or had been terminated by the Company.
|
On March 15 and April 4, 2005, following delivery of the
Jones Day/Ernst & Young report on the additional
procedures, KPMG advised the Audit Committee that it was
dissatisfied with the conclusions of Jones Day and
Ernst & Young and that it regarded the investigation
as inadequate for its purposes. KPMG indicated that
further investigation would be necessary to
constitute a predicate for an audit report and further
that such further investigation should be undertaken by a
new investigative team.
After further deliberations by the Audit Committee during April
2005, on April 21, 2005, the Company announced that Jones
Day and Ernst & Young had completed the additional
procedures requested by KPMG and reported the
investigators findings. The release also noted that
investigators had again confirmed their earlier conclusions that
substantially all of the irregular entries had been made by the
former subordinate divisional employee and that the entries were
made without any knowledge or involvement of senior management.
The April 21, 2005, press release also reported that,
despite the findings and conclusions of the investigation, KPMG
had advised the Audit Committee that KPMG was unable to conclude
at that time that the investigation was adequate for its
purposes, that KPMG believed further investigation was necessary
to constitute a predicate for its audit of the Companys
financial statements, and that KPMG had proposed that such
investigative work should be undertaken by a new
investigation team. The Companys Audit Committee had
evaluated both KPMGs position and the Jones
Day/Ernst & Young reports relating to the issues
raised by KPMG. On the basis of that evaluation, the Company
reported that the Audit Committee believed it could rely in good
faith on the judgments and conclusions of the independent
investigators, that additional investigation was neither
necessary nor justified, and that the only
97
additional work that was necessary was routine audit
examinations that fell outside the province of the investigation
team.
While the Audit Committee continued to believe its reliance on
the judgments and conclusions of the investigative team was
justified, the April 21, 2005, press release disclosed that
the Audit Committee had responded to KPMGs expressed
concerns in such a way that KPMG would be able to complete its
audit of the Companys financial statements. To that end,
the Audit Committee engaged a second independent investigative
team, consisting of independent legal counsel (Venable LLP) and
independent forensic accountants (Navigant Consulting).
In an October 31, 2005, press release, the Company reported
that the Venable/Navigant team had completed its investigation.
Venable and Navigant reported to the Audit Committee that,
although they found evidence of Ferro accounting personnel
spreading expenses and some other misapplications of generally
accepted accounting principles to achieve internal forecasts,
they did not find that this was done with the intent to affect
reported earnings in a way that misleads the investing public.
The investigators also indicated that, while they found a lax
tone with respect to GAAP compliance among certain former
members of the Companys finance organization, they were
comfortable that the then-current senior management of the
Company, including the Chief Executive Officer and Chief
Financial Officer, set a positive tone with respect to
accounting practices. Consequently, the Venable/Navigant team
concluded that it found no pervasive pattern or practice of
engaging in fraudulent earnings management, that is, the
misapplication of generally accepted accounting principles with
the intent to affect reported earnings in a way that misleads
the investing public.
The Company has authorized KPMG to respond fully to the
inquiries of the successor independent registered public
accounting firm concerning the subject matter of the
disagreements discussed in the preceding paragraphs.
Reportable Events. In managements
assessment of internal controls as of December 31, 2004,
included under Item 9A of the Companys Annual Report
on
Form 10-K
for the fiscal year ended December 31, 2004, management
identified the following material weaknesses of internal control
over financial reporting: (i) inadequately trained and
insufficient numbers of accounting personnel coupled with
insufficient accounting policies and procedures;
(ii) non-adherence to policies and procedures associated
with the financial statement reporting process;
(iii) failure to consistently reconcile and perform timely
reviews of accounting reconciliations, data files and journal
entries; (iv) failure to properly identify and ensure
receipt of agreements for review by accounting personnel; and
(v) failure to consistently review the calculations and
accounting for amounts due to employees under various
compensation plans, and concluded that the Companys
internal control over financial reporting was not effective as
of December 31, 2004. KPMGs report under Item 9A
included KPMGs opinion that managements assessment
was fairly stated in all material respects and that, because of
the effect of the material weaknesses identified by management
described above, the Company had not maintained effective
internal control over financial reporting as of
December 31, 2004.
During the course of the Venable/Navigant investigation, on
October 26, 2005, KPMG requested that senior Company
financial personnel review entries that had been made during the
period being restated by one former and one current member of
the Companys finance function so as to be able to provide
KPMG with management representations concerning those entries.
The report of KPMG on the consolidated financial statements of
the Company for the years ended December 31, 2003 and
December 31, 2004 included in the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004 stated, as
described above, that the Company restated its fiscal 2003
consolidated financial statements. Representatives of KPMG are
not expected to attend the 2008 Annual Meeting.
98
Item 9A
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The Companys management, under the supervision and with
the participation of the Chief Executive Officer and the Chief
Financial Officer, evaluated the effectiveness of the design and
operation of the Companys disclosure controls and
procedures, as defined in Exchange Act
Rule 13a-15(e),
as of December 31, 2007. Based on that evaluation and the
material weaknesses noted below, management concluded that the
disclosure controls and procedures were not effective as of
December 31, 2007.
Managements
Annual Report on Internal Control over Financial
Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in Exchange Act
Rule 13a-15(f).
The Companys internal control system is a process designed
by, or under the supervision of, the Companys principal
executive and principal financial officers, or persons
performing similar functions, and effected by the Companys
board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles (U.S. GAAP).
The Companys internal control over financial reporting
includes policies and procedures that pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets; provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
U.S. GAAP, and that receipts and expenditures are being
made only in accordance with the authorization of its management
and directors; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use
or disposition of the Companys assets that could have a
material effect on its consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2007. In making this assessment, the Company
used the control criteria framework of the Committee of
Sponsoring Organizations of the Treadway Commission published in
its report entitled Internal Control Integrated
Framework. As a result of its assessment, management
identified a material weakness in the Companys internal
control over financial reporting. Based on the weakness
identified as described below, management concluded that the
Companys internal control over financial reporting was not
effective as of December 31, 2007.
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that, there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
As a result of its assessment, management identified the
following material weakness in internal control over financial
reporting as of December 31, 2007:
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The Company did not maintain effective controls over user access
rights to its financial application systems. Specifically, the
control deficiencies detected were: an inadequate design of
access security policies and procedures; inadequate design of
system segregation of duties requirements; and insufficient
monitoring of user access to the related financial transactions
and data. This resulted in an environment where certain
personnel could have unmonitored access to financial systems and
data beyond that required to perform their individual job
responsibilities. The Company has concluded that these control
deficiencies, when aggregated, result in a reasonable
possibility that a material misstatement of the Companys
annual or interim consolidated financial statements will not be
prevented or detected on a timely basis. These control
deficiencies did not result in adjustments to the 2007 annual or
interim consolidated financial statements. Accordingly,
management has determined that this condition constitutes a
material weakness.
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99
Deloitte & Touche LLP, the independent registered public
accounting firm that audited the Companys consolidated
financial statements, has issued an attestation report on the
Companys internal control over financial reporting as of
December 31, 2007, which is included herein.
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Ferro Corporation
Cleveland, Ohio
We have audited Ferro Corporations and subsidiaries
(the Companys) internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
that risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weakness has been identified and included
in managements assessment:
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The Company did not maintain effective controls over user access
rights to its financial application systems. Specifically, the
control deficiencies detected were: an inadequate design of
access security policies and procedures; inadequate design of
system segregation of duties requirements; and insufficient
monitoring of user access to the related financial transactions
and data. This resulted in an environment where certain
personnel could have unmonitored access to financial systems and
data beyond that required to perform their individual job
responsibilities. The Company has concluded that these control
deficiencies, when
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100
aggregated, result in a reasonable possibility that a material
misstatement of the Companys annual or interim
consolidated financial statements will not be prevented or
detected on a timely basis. These control deficiencies did not
result in adjustments to the 2007 annual or interim consolidated
financial statements.
This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2007, of
the Company and this report does not affect our report on such
financial statements and financial statement schedule.
In our opinion, because of the effect of the material weakness
identified above on the achievement of the objectives of the
control criteria, the Company has not maintained effective
internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2007, of
the Company and our report dated February 29, 2008
expressed an unqualified opinion on those financial statements
and financial statement schedule and included an explanatory
paragraph concerning the adoption of new accounting standards in
2007 and 2006 and a change in accounting principle in 2007.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
February 29, 2008
Changes
in Internal Control over Financial Reporting and Other
Remediation
During 2007, the Company continued remediation activities that
materially improved, or are reasonably likely to improve, the
Companys internal control over financial reporting. During
the quarter ended December 31, 2007 there were changes in
internal control that materially affected or are reasonably
likely to materially affect, the Companys internal control
over financial reporting. The following changes were undertaken:
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Established Information Solutions (I.S.) Governance
Committee to provide corporate oversight for corporate I.S.
strategies and prioritize and approve I.S. initiatives,
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Established and resourced the Director of I.S. Governance
position to provide oversight and guidance of various I.S.
project initiatives,
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Initiated a project to centralize the control and maintenance of
the Companys financial system master files, including
Customer, Vendor and Material master files,
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Implemented tools and procedures to monitor access to master
files and critical transactions on a quarterly basis,
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Initiated a project to reduce user access to the Companys
financial application systems,
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Initiated projects to migrate several legacy system-based
financial systems to the corporate SAP financial system, to
provide for better control capabilities and visibility,
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101
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Conducted in-person training sessions for regional controllers
and the corporate financial reporting staff on various technical
GAAP issues,
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Continued the refinement, expansion, and communication of
Accounting Policies and Procedures, particular in areas
involving complex or technical accounting,
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Enhanced the Corporate Tax group with resources, both full time
associates and consultants, to assist in the tax accounting
process,
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Implemented software applications to facilitate more accurate
and complete reporting of income tax obligations, and
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Improved communication channels between the corporate tax
department and the financial reporting department to improve the
accuracy and reliability of data used for income tax reporting.
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Item 9B Other
Information
None.
102
PART III
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Item 10
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Directors,
Executive Officers and Corporate Governance
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The information on Ferros directors is contained under the
heading Election of Directors of the Proxy Statement
for Ferro Corporations 2008 Annual Meeting of Shareholders
and is incorporated here by reference. The information about the
Audit Committee and the Audit Committee financial expert is
contained under the heading Corporate Governance-Board
Committees-Audit Committee of the Proxy Statement for
Ferro Corporations 2008 Annual Meeting of Shareholders and
is incorporated here by reference. Information on Ferros
executive officers is contained under the heading
Executive Officers of the Registrant in Part 1
of this Annual Report on
Form 10-K.
Section 16(a) filing information is contained under the
subheading Section 16(a) Beneficial Ownership
Reporting Compliance of the Proxy Statement for Ferro
Corporations 2008 Annual Meeting of Shareholders and is
incorporated here by reference.
Ferro has adopted a series of policies dealing with business and
ethics. These policies apply to all Ferro Directors, officers
and employees. A summary of these policies may be found on
Ferros Web site and the full text of the policies is
available in print, free of charge, by writing to: General
Counsel, Ferro Corporation, 1000 Lakeside Avenue, Cleveland,
Ohio
44114-1147,
USA. Exceptions, waivers and amendments of those policies may be
made, if at all, only by the Audit Committee of the Board of
Directors, and, in the event any such exceptions, waivers or
amendments are granted, a description of the change or event
will be posted on Ferros Web site (www.ferro.com) within
four business days. Ferro maintains a worldwide hotline that
allows employees throughout the world to report confidentially
any detected violations of these legal and ethical conduct
policies consistent with local legal requirements and subject to
local legal limitations.
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Item 11
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Executive
Compensation
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The information on executive compensation is contained under the
headings Executive Compensation Discussion &
Analysis and 2007 Executive Compensation of
the Proxy Statement for Ferro Corporations 2008 Annual
Meeting of Shareholders and is incorporated here by reference.
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Item 12
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Security
Ownership of Certain Beneficial Owners and Management, and
Related Shareholder Matters
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The information contained under the headings Stock
Ownership by Director, Executive Officers and Employees
and Stock Ownership by Other Major Shareholders of
the Proxy Statement for Ferro Corporations 2008 Annual
Meeting of Shareholders is incorporated here by reference.
The numbers of shares issued and available for issuance under
Ferros equity compensation plans as of December 31,
2007, were as follows:
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Number of Shares to
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Number of Shares
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Be Issued on
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Weighted Average
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Remaining Available
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Exercise of
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Exercise Price of
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for Future Issuance
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Outstanding Options,
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Outstanding Options,
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Under Equity
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Equity Compensation Plan
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and Other Awards
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and Other Awards
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Compensation Plans(1)
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Approved by Ferro Shareholders(2)
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4,162,408 shares
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$
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22.32
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2,367,950 shares
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(4)
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Not Approved by Ferro Shareholders(3)
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92,313 shares
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$
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24.96
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0 shares
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Total
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4,254,731 shares
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$
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22.36
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2,367,950 shares
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(1) |
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Excludes shares listed in the second column. |
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(2) |
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Includes options issued under the Companys Stock Option
Plan and 2003 Long-Term Incentive Compensation Plan. |
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(3) |
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Includes options granted in excess of 100,000 shares to the
Chief Executive Officer and phantom units issued under the
Companys Executive Employee Deferred Compensation Plan and
Supplemental Executive Defined Contribution Plan. |
103
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(4) |
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Shares are only available under the 2006 Long-Term Incentive
Plan and may be issued as stock options, stock appreciation
rights, restricted shares, performance shares, and other common
stock-based awards. |
A description follows of the material features of each plan that
was not approved by Ferro shareholders:
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Stock Options. On February 11, 2002 and
February 9, 2001, respectively, the Board granted
Mr. Ortino, then our Chief Executive Officer, 155,000 and
122,000 options to purchase shares. Of this amount, options for
100,000 shares each year were granted under the 1985
Employee Stock Option Plan approved by shareholders and the
remaining options were approved and granted by the Board from
available treasury shares. The options granted in 2002 have an
exercise price of $25.50 and the options granted in 2001 have an
exercise price of $23.60. Both grants have a maximum term of ten
years and vested evenly over four years from the grant date.
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Executive Employee Deferred Compensation
Plan. The Ferro Corporation Deferred Compensation
Plan for Executive Employees allows participants to defer up to
75% of annual base salary and up to 100% of incentive cash bonus
awards and cash performance share payouts. Participants may
elect to have all or a portion of their deferred compensation
accounts deemed to be invested in shares of Ferro Common Stock,
and credited with hypothetical appreciation, depreciation, and
dividends. When distributions are made from this Plan in respect
of such shares, the distributions are made in actual shares of
Ferro Common Stock.
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Supplemental Executive Defined Contribution
Plan. The Ferro Corporation Supplemental Defined
Contribution Plan for Executive Employees allows participants to
be credited annually with matching and basic pension
contributions that they would have received under the
Companys 401(k) plan except for the applicable IRS
limitations on compensation and contributions. Contributions
vest at 20% for each year of service, are deemed invested in
Ferro Common Stock and earn dividends. Distributions are made in
Ferro Common Stock or in cash.
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Item 13
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Certain
Relationships and Related Transactions, and Director
Independence
|
There are no relationships or transactions that are required to
be reported. The information about director independence is
contained under the heading Corporate
Governance Director Independence of the Proxy
Statement for Ferro Corporations 2008 Annual Meeting of
Shareholders and is incorporated here by reference.
|
|
Item 14
|
Principal
Accountant Fees and Services
|
The information contained under the heading Appointment of
Independent Registered Public Accounts of the Proxy
Statement for Ferro Corporations 2008 Annual Meeting of
Shareholders is incorporated here by reference.
104
PART IV
|
|
Item 15
|
Exhibits
and Financial Statement Schedules
|
The following documents are filed as part of this Annual Report
on
Form 10-K:
|
|
|
|
(a)
|
The consolidated financial statements of Ferro Corporation and
its subsidiaries contained in Part II, Item 8 of this
Annual Report on
Form 10-K:
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005;
|
|
|
|
Consolidated Balance Sheets at December 31, 2007 and 2006;
|
|
|
|
Consolidated Statements of Shareholders Equity and
Comprehensive Income (Loss) for the years ended
December 31, 2007, 2006 and 2005;
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005; and
|
|
|
|
Notes to Consolidated Financial Statements
|
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|
|
|
(b)
|
Schedule II Valuation and Qualifying Accounts
and Reserves for the years ended December 31, 2007, 2006,
and 2005, contained on page 107 of this Annual Report on
Form 10-K.
All other schedules have been omitted because the material is
not applicable or is not required as permitted by the rules and
regulations of the U.S. Securities and Exchange Commission,
or the required information is included in the consolidated
financial statements.
|
|
|
|
|
(c)
|
The exhibits listed in the Exhibit Index beginning on
page 108 of this Annual Report on
Form 10-K.
|
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
FERRO CORPORATION
James F. Kirsch
Chairman, President and Chief Executive Officer
Date: February 29, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this Annual Report on
Form 10-K
has been signed below by the following persons on behalf of the
Registrant and in their indicated capacities as of the
29th day of February 2008.
|
|
|
|
|
/s/ James
F. Kirsch
James
F. Kirsch
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ Sallie
B. Bailey
Sallie
B. Bailey
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
/s/ Nicholas
Katzakis
Nicholas
Katzakis
|
|
Chief Accounting Officer
(Principal Accounting Officer)
|
|
|
|
/s/ Michael
H. Bulkin
Michael
H. Bulkin
|
|
Director
|
|
|
|
/s/ Sandra
Austin Crayton
Sandra
Austin Crayton
|
|
Director
|
|
|
|
/s/ Richard
J. Hipple
Richard
J. Hipple
|
|
Director
|
|
|
|
/s/ Jennie
S. Hwang
Jennie
S. Hwang
|
|
Director
|
|
|
|
/s/ William
B. Lawrence
William
B. Lawrence
|
|
Director
|
|
|
|
/s/ Michael
F. Mee
Michael
F. Mee
|
|
Director
|
|
|
|
/s/ Perry
W. Premdas
Perry
W. Premdas
|
|
Director
|
|
|
|
/s/ William
J. Sharp
William
J. Sharp
|
|
Director
|
|
|
|
/s/ Dennis
W. Sullivan
Dennis
W. Sullivan
|
|
Director
|
106
FERRO
CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years
Ended December 31, 2007, 2006, and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions Charged
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
(Reductions Credited) to
|
|
|
|
|
|
Adjustment for
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
Differences in
|
|
|
at End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Exchange Rates
|
|
|
Period
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for Possible Losses on Collection of Accounts and
Trade Notes Receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
7,544
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
(1,430
|
)
|
|
|
647
|
|
|
$
|
6,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
7,519
|
|
|
|
844
|
|
|
|
|
|
|
|
(1,468
|
)
|
|
|
649
|
|
|
$
|
7,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
9,244
|
|
|
|
256
|
|
|
|
|
|
|
|
(1,234
|
)
|
|
|
(747
|
)
|
|
$
|
7,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Possible Losses on Collection of Note
Receivable from Ferro Finance Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
2,702
|
|
|
|
948
|
|
|
|
|
|
|
|
(635
|
)
|
|
|
|
|
|
$
|
3,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
3,158
|
|
|
|
608
|
|
|
|
|
|
|
|
(1,064
|
)
|
|
|
|
|
|
$
|
2,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
2,388
|
|
|
|
1,543
|
|
|
|
|
|
|
|
(773
|
)
|
|
|
|
|
|
$
|
3,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance on Net Deferred Tax Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
4,023
|
|
|
|
4,644
|
|
|
|
545
|
|
|
|
(469
|
)
|
|
|
163
|
|
|
$
|
8,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
9,651
|
|
|
|
(5,800
|
)
|
|
|
|
|
|
|
|
|
|
|
172
|
|
|
$
|
4,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
$
|
8,163
|
|
|
|
1,698
|
|
|
|
|
|
|
|
2
|
|
|
|
(212
|
)
|
|
$
|
9,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
EXHIBIT INDEX
The following exhibits are filed with this report or are
incorporated here by reference to a prior filing in accordance
with
Rule 12b-32
under the Securities and Exchange Act of 1934.
Exhibit:
|
|
|
|
|
|
3
|
|
|
Articles of Incorporation and by-laws
|
|
3
|
.1
|
|
Eleventh Amended Articles of Incorporation of Ferro Corporation.
(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 29, 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 Corporation filed June 23, 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
|
|
Ferro Corporation Code of Regulations. (Reference is made to
Exhibit 3.01 to Ferro Corporations Current Report on
Form 8-K,
filed November 8, 2006, which Exhibit is incorporated here
by reference.)
|
|
4
|
|
|
Instruments defining rights of security holders, including
indentures
|
|
4
|
.1
|
|
The rights of the holders of Ferro Corporations Debt
Securities issued and to be issued pursuant to an Indenture
between Ferro Corporation 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
|
.2
|
|
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
|
.3
|
|
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
|
.4
|
|
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
|
.5
|
|
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.
|
|
10
|
|
|
Material Contracts
|
|
10
|
.1
|
|
Amended and Restated Credit Agreement, dated June 8, 2007,
among Ferro; certain of Ferros subsidiaries; Credit
Suisse, as term loan administrative agent; National City Bank,
as revolving loan administrative agent and collateral agent;
KeyBank National Association, as documentation agent; Citigroup
Global Markets, Inc., as syndication agent; and various
financial institutions as lenders. (Reference is made to
Exhibit 10.3 to Ferro Corporations Current Report on
Form 8-K,
filed June 11, 2007, which Exhibit is incorporated here by
reference.)
|
108
|
|
|
|
|
|
10
|
.2
|
|
Pledge and Security Agreement, dated as of June 6, 2006,
made by Ferro Corporation and each U.S. Subsidiary, as Grantors,
in favor of National City Bank, as Collateral Agent. (Reference
is made to Exhibit 10.2 to Ferro Corporations Current
Report on
Form 8-K,
filed June 12, 2006, which Exhibit is incorporated here by
reference.)
|
|
10
|
.3
|
|
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.)
|
|
10
|
.4
|
|
Purchase and Contribution Agreement, dated as of
September 28, 2000, among Ferro Corporation, Ferro
Electronic Materials, Inc. and Ferro Finance Corporation, as
amended by the first amendment dated June 29, 2006.
(Reference is made to Exhibit 10.1 (the agreement
immediately follows the amendment dated as of June 29,
2006) to Ferro Corporations Current Report on
Form 8-K,
filed July 6, 2006, which Exhibit is incorporated here by
reference.)
|
|
10
|
.5
|
|
Amendment to Purchase and Contribution Agreement, dated as of
June 29, 2006, among Ferro Corporation, Ferro Electronic
Materials, Inc. and Ferro Finance Corporation. (Reference is
made to Exhibit 10.1 to Ferro Corporations Current
Report on
Form 8-K,
filed July 6, 2006, which Exhibit is incorporated here by
reference.)
|
|
10
|
.6
|
|
Amendment to Purchase and Contribution Agreement, dated
October 16, 2006, among Ferro Corporation and Ferro
Electronic Materials, Inc. as Sellers and Ferro Finance
Corporation as Purchaser. (Reference is made to
Exhibit 10.16.1 to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2006, which Exhibit is
incorporated here by reference.)
|
|
10
|
.7
|
|
Amendment to the Purchase and Contribution Agreement, dated
June 5, 2007, among Ferro Corporation, Ferro Electronic
Materials Inc. and Ferro Finance Corporation. (Reference is made
to Exhibit 10.1 to Ferro Corporations Current Report
on
Form 8-K,
filed June 11, 2007, which Exhibit is incorporated here by
reference.)
|
|
10
|
.8
|
|
Amended and Restated Receivables Purchase Agreement, dated as of
June 29, 2006, among Ferro Finance Corporation as Seller,
CAFCO, LLC as Investor, Citibank, N.A. as a Bank, Citicorp North
America, Inc. as Agent, Ferro Electronic Materials, Inc. as an
Originator, and Ferro Corporation as Collection Agent and an
Originator. (Reference is made to Exhibit 10.2 to Ferro
Corporations Current Report on
Form 8-K,
filed July 6, 2006, which Exhibit is incorporated here by
reference.)
|
|
10
|
.9
|
|
Amendment No. 1 to Amended and Restated Receivables
Purchase Agreement, dated as of October 16, 2006, among
Ferro Finance Corporation as Seller, CAFCO, LLC as Investor,
Citicorp North America, Inc. as Agent, Ferro Electronic
Materials, Inc. as an Originator, and Ferro Corporation as
Collection Agent and an Originator. (Reference is made to
Exhibit 10.15.1 to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2006, which Exhibit is
incorporated here by reference.)
|
|
10
|
.10
|
|
Amendment to the Amended and Restated Receivables Purchase
Agreement, dated June 5, 2007, among Ferro Corporations,
Ferro Electronic materials Inc., Citicorp North America, Inc.,
CAFCO, LLC and Citibank, N.A. (Reference is made to
Exhibit 10.2 to Ferro Corporations Current Report on
Form 8-K,
filed June 11, 2007, which Exhibit is incorporated here by
reference.)
|
|
10
|
.11
|
|
Ferro Corporation Employee Stock Option Plan. (Reference is made
to Exhibit 10.1 to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2006, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.12
|
|
Ferro Corporation 2003 Long-Term Incentive Compensation Plan.
(Reference is made to Exhibit A of Ferro Corporations
Proxy Statement dated March 26, 2003, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.13
|
|
Ferro Corporation 2006 Long-Term Incentive Plan (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.)*
|
|
10
|
.14
|
|
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.)*
|
109
|
|
|
|
|
|
10
|
.15
|
|
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
|
.16
|
|
Ferro Corporation Deferred Compensation Plan for Non-Employee
Directors Trust Agreement. (Reference is made to
Exhibit 10.11.1 to Ferro Corporations Annual Report
on
Form 10-K
for the year ended December 31, 2006, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.17
|
|
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
|
.18
|
|
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.)*
|
|
10
|
.19
|
|
Employment Agreement between Ferro Corporation and James F.
Kirsch. (Reference is made to Exhibit 10.1 to Ferro
Corporations Current Report on
Form 8-K,
filed October 19, 2004, which Exhibit is incorporated here
by reference.)*
|
|
10
|
.20
|
|
Form of Indemnification Agreement. (Reference is made to
Exhibit 10(f) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2003, which Exhibit is
incorporated here by reference.) (James F. Kirsch is the only
officer that is party to an indemnification agreement with Ferro
Corporation.)*
|
|
10
|
.21
|
|
Form of Change in Control Agreement. (Reference is made to
Exhibit 10(h) to Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.) (The following executives have
change in control agreements with Ferro Corporation: Sallie B.
Bailey, James C. Bays, Ann E. Killian, James F. Kirsch, Michael
J. Murry, Barry D. Russell and Peter T. Thomas)*
|
|
10
|
.22
|
|
Separation Agreement and Release between Ferro Corporation and
M. Craig Benson. (Reference is made to Exhibit 10(o) to
Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.23
|
|
Separation Agreement and Release between Ferro Corporation and
Dale G. Kramer. (Reference is made to Exhibit 10(n) to
Ferro Corporations Annual Report on
Form 10-K
for the year ended December 31, 2004, which Exhibit is
incorporated here by reference.)*
|
|
10
|
.24
|
|
Employment Transition Agreement between Ferro Corporation and
Thomas M. Gannon. (Reference is made to Exhibit 10.1 to
Ferro Corporations Current Report on
Form 8-K,
filed October 26, 2006, which Exhibit is incorporated here
by reference.)*
|
|
12
|
|
|
Ratio of Earnings to Fixed Charges and Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
|
|
21
|
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
31
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
|
|
31
|
.2
|
|
Certification of Principal Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a).
|
|
32
|
.1
|
|
Certification of Principal Executive Officer Pursuant to
18 U.S.C. 1350.
|
|
32
|
.2
|
|
Certification of Principal Financial Officer Pursuant to
18 U.S.C.1350.
|
|
|
|
* |
|
Indicates management contract or compensatory plan, contract or
arrangement in which one or more Directors and/or executives of
Ferro Corporation may be participants. |
110