Ferro Corporation 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
Commission File Number 1-584
FERRO CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
(State of Corporation)
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34-0217820
(IRS Employer Identification No.) |
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1000 Lakeside Avenue
Cleveland, OH
(Address of Principal executive offices)
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44114
(Zip Code) |
216-641-8580
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). YES o NO þ
At April 30, 2008, there were 43,709,995 shares of Ferro Common Stock, par value $1.00,
outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Income
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Three months ended |
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March 31, |
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2008 |
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2007 |
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(Dollars in thousands, |
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except per share amounts) |
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Net sales |
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$ |
607,256 |
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$ |
529,705 |
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Cost of sales |
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493,937 |
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422,925 |
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Gross profit |
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113,319 |
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106,780 |
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Selling, general and administrative expenses |
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78,657 |
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78,757 |
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Restructuring charges |
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4,207 |
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1,531 |
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Other expense (income): |
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Interest expense |
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14,029 |
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17,446 |
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Interest earned |
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(129 |
) |
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(965 |
) |
Foreign currency (gains) losses, net |
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(1,541 |
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511 |
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Miscellaneous expense (income), net |
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1,850 |
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(1,269 |
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Income before taxes |
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16,246 |
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10,769 |
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Income tax expense |
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7,081 |
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4,534 |
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Income from continuing operations |
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9,165 |
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6,235 |
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Loss from discontinued operations, net of tax |
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25 |
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156 |
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Net income |
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9,140 |
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6,079 |
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Dividends on preferred stock |
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227 |
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286 |
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Net income available to common shareholders |
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$ |
8,913 |
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$ |
5,793 |
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Per common share data |
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Basic earnings: |
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From continuing operations |
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$ |
0.21 |
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$ |
0.14 |
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From discontinued operations |
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0.00 |
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0.00 |
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$ |
0.21 |
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$ |
0.14 |
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Diluted earnings: |
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From continuing operations |
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$ |
0.21 |
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$ |
0.14 |
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From discontinued operations |
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0.00 |
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0.00 |
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$ |
0.21 |
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$ |
0.14 |
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Cash dividends declared |
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$ |
0.145 |
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$ |
0.145 |
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See accompanying notes to condensed consolidated financial statements.
3
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Dollars in thousands) |
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ASSETS
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Current assets |
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Cash and cash equivalents |
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$ |
11,395 |
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$ |
12,025 |
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Accounts and trade notes receivable, net |
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269,696 |
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245,369 |
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Note receivable from Ferro Finance Corporation |
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27,376 |
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29,577 |
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Inventories |
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309,752 |
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262,799 |
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Deferred income taxes |
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17,423 |
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15,764 |
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Other receivables |
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48,264 |
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33,419 |
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Other current assets |
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7,246 |
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8,239 |
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Total current assets |
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691,152 |
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607,192 |
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Other assets |
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Property, plant and equipment, net |
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538,203 |
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519,959 |
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Goodwill |
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290,299 |
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291,070 |
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Amortizable intangible assets, net |
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8,964 |
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9,071 |
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Deferred income taxes |
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101,896 |
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100,935 |
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Other non-current assets |
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111,870 |
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110,033 |
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Total assets |
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$ |
1,742,384 |
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$ |
1,638,260 |
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities |
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Loans payable and current portion of long-term debt |
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$ |
15,744 |
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$ |
5,444 |
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Accounts payable |
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313,289 |
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269,591 |
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Income taxes |
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14,260 |
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Accrued payrolls |
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34,372 |
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26,415 |
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Accrued expenses and other current liabilities |
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102,791 |
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108,882 |
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Total current liabilities |
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480,456 |
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410,332 |
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Other liabilities |
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Long-term debt, less current portion |
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522,065 |
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520,645 |
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Postretirement and pension liabilities |
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144,507 |
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140,988 |
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Deferred income taxes |
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10,753 |
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9,848 |
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Other non-current liabilities |
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62,634 |
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56,644 |
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Total liabilities |
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1,220,415 |
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1,138,457 |
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Minority interests |
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9,770 |
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9,896 |
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Series A convertible preferred stock (approximates redemption value) |
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12,952 |
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13,623 |
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Shareholders equity |
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Common stock |
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52,323 |
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52,323 |
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Paid-in capital |
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164,034 |
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166,391 |
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Retained earnings |
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470,306 |
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468,190 |
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Accumulated other comprehensive income (loss) |
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12,000 |
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(7,765 |
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Common shares in treasury, at cost |
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(199,416 |
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(202,855 |
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Total shareholders equity |
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499,247 |
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476,284 |
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Total liabilities and shareholders equity |
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$ |
1,742,384 |
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$ |
1,638,260 |
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See accompanying notes to condensed consolidated financial statements.
4
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statement of Shareholders Equity and Comprehensive Income (Loss)
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Accumulated |
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Total |
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Common Shares |
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Other |
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Share- |
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in Treasury |
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Common |
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Paid-in |
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Retained |
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Comprehensive |
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holders |
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Shares |
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Amount |
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Stock |
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Capital |
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Earnings |
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Income (Loss) |
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Equity |
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(In thousands) |
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Balances at December 31, 2007 |
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8,753 |
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$ |
(202,855 |
) |
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$ |
52,323 |
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$ |
166,391 |
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$ |
468,190 |
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$ |
(7,765 |
) |
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$ |
476,284 |
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Net income |
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9,140 |
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9,140 |
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Other comprehensive income, net of tax: |
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Foreign currency translation
adjustments |
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21,529 |
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21,529 |
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Postretirement benefit liability adjustments |
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(375 |
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(375 |
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Raw material commodity swap
adjustments |
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848 |
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848 |
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Interest rate swap adjustments |
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(2,603 |
) |
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(2,603 |
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Total comprehensive income |
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28,539 |
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Cash dividends: |
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Common |
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(6,292 |
) |
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(6,292 |
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Preferred |
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(227 |
) |
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(227 |
) |
Income tax benefits |
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|
11 |
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11 |
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Stock-based compensation transactions |
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(216 |
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|
3,439 |
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(2,368 |
) |
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|
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|
1,071 |
|
Adjustment to initially apply FAS No. 158
as of January 1, 2008 |
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(505 |
) |
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366 |
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(139 |
) |
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Balances at March 31, 2008 |
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8,537 |
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$ |
(199,416 |
) |
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$ |
52,323 |
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$ |
164,034 |
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$ |
470,306 |
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$ |
12,000 |
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$ |
499,247 |
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See accompanying notes to condensed consolidated financial statements.
5
Ferro Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
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Three months ended |
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March 31, |
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2008 |
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2007 |
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(Dollars in thousands) |
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Cash flows from operating activities |
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Net income |
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$ |
9,140 |
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$ |
6,079 |
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Depreciation and amortization |
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19,036 |
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21,779 |
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Precious metals deposits |
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69,673 |
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Accounts and trade notes receivable, inventories, and accounts payable |
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(17,563 |
) |
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(20,036 |
) |
Other changes in current assets and liabilities, net |
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(77 |
) |
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(10,729 |
) |
Other adjustments, net |
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|
427 |
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(2,977 |
) |
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Net cash provided by continuing operations |
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|
10,963 |
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|
63,789 |
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Net cash (used for) provided by discontinued operations |
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(25 |
) |
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12 |
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Net cash provided by operating activities |
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10,938 |
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|
63,801 |
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Cash flows from investing activities |
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Capital expenditures for plant and equipment |
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(15,262 |
) |
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(12,811 |
) |
Proceeds from sale of assets and businesses |
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|
148 |
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|
1,964 |
|
Other investing activities |
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|
158 |
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Net cash used for investing activities |
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(15,114 |
) |
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(10,689 |
) |
Cash flows from financing activities |
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Net borrowings (repayments) under short term facilities |
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|
3,688 |
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(5,983 |
) |
Proceeds from revolving credit facility |
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|
180,276 |
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|
190,034 |
|
Proceeds from term loan facility |
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|
55,000 |
|
Principal payments on revolving credit facility |
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(171,878 |
) |
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|
(290,601 |
) |
Principal payments on term loan facility |
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|
(762 |
) |
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|
Proceeds from exercise of stock options |
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|
6,128 |
|
Cash dividends paid |
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|
(6,519 |
) |
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|
(6,529 |
) |
Other financing activities |
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|
(1,802 |
) |
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|
(863 |
) |
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|
Net cash provided by (used for) financing activities |
|
|
3,003 |
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|
|
(52,814 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
543 |
|
|
|
258 |
|
|
|
|
|
|
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|
(Decrease) increase in cash and cash equivalents |
|
|
(630 |
) |
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|
556 |
|
Cash and cash equivalents at beginning of period |
|
|
12,025 |
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|
16,985 |
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Cash and cash equivalents at end of period |
|
$ |
11,395 |
|
|
$ |
17,541 |
|
|
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Cash paid during the period for: |
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Interest |
|
$ |
16,836 |
|
|
$ |
20,173 |
|
Income taxes |
|
$ |
4,178 |
|
|
$ |
3,698 |
|
See accompanying notes to condensed consolidated financial statements.
6
Ferro Corporation and Consolidated Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
Ferro Corporation (Ferro, we, us or the Company) prepared these unaudited condensed
consolidated financial statements of Ferro Corporation and its consolidated subsidiaries in
accordance with accounting principles generally accepted in the United States of America
(U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. GAAP for complete financial statements and, therefore, should be read in
conjunction with the consolidated financial statements and related notes included in our Annual
Report on Form 10-K for the year ended December 31, 2007. The preparation of financial statements
in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the timing
and amount of assets, liabilities, equity, revenues and expenses reported and disclosed. Actual
amounts could differ from our estimates, resulting in changes in revenues or costs that could have
a material impact on the Companys results of operations, financial position, or cash flows. In
our opinion, we made all adjustments that are necessary for a fair presentation, and those
adjustments are of a normal recurring nature unless otherwise noted. Due to differing business
conditions, our various initiatives, and some seasonality, the results for the three months ended
March 31, 2008, are not necessarily indicative of the results expected in subsequent quarters or
for the full year.
2. Accounting Standards Adopted in the Three Months Ended March 31, 2008
On January 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurements, (FAS
No. 157), FASB Staff Position No. FAS 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement Under Statement 13, (FSP No. FAS 157-1), and FASB
Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, (FSP No. FAS 157-2). 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, but does not
require any new fair value measurements. FSP No. FAS 157-1 excludes FASB Statement No. 13,
Accounting for Leases, (FAS No. 13) as well as other accounting pronouncements that address fair
value measurement on lease classification or measurement under FAS No. 13 from the scope of FAS
No. 157. FSP No. FAS 157-2 delays the effective date of FAS No. 157 for all nonrecurring fair
value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning
after November 15, 2008. The portions of these pronouncements that were not delayed were adopted
prospectively, and their adoption reduced the disclosed fair value of our borrowings under the
revolving credit and term loan facilities and reduced the carrying value of our interest rate
swaps. We are currently evaluating the impact on our consolidated financial statements of adopting
the deferred portions of these pronouncements on January 1, 2009.
On January 1, 2008, we adopted the measurement provisions of 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). The measurement provisions require
companies to measure defined benefit plan assets and obligations as of the annual balance sheet
date. Previously, we used 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 is recognized as of January 1, 2008, as a charge of $0.5 million, net
of tax, to retained earnings and a credit of $0.4 million, net of tax, to accumulated other
comprehensive income.
On January 1, 2008, we adopted FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No. 115, (FAS
No. 159). This statement permits us to choose, at specified election dates, to measure eligible
items at fair value (the fair value option). For items for which the fair value option has been
elected, we would report unrealized gains and losses in earnings at each subsequent reporting date
and recognize up-front costs and fees in earnings as incurred. We have not elected to measure any
eligible items at fair value, and we do not have any current plans to do so. Therefore, adoption
of FAS No. 159 did not have an effect on our consolidated financial statements.
On January 1, 2008, we adopted Emerging Issues Task Force 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
7
increase to paid-in capital. Previously, we recognized this income tax benefit as an increase
to retained earnings. Beginning in 2008, we report this income tax benefit as an increase to
paid-in capital.
3. Newly Issued Accounting Pronouncements
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
an amendment of ARB No. 51, (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 2009, 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.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133, (FAS No. 161). This Statement
requires enhanced disclosures about an entitys derivative and hedging activities. This Statement
is effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. We do not expect the
adoption of FAS No. 161 to have a material impact on our consolidated financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets, (FSP No. FAS 142-3). This pronouncement amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.
FSP No. FAS 142-3 is to be applied prospectively and is effective for financial statements issued
for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are
currently evaluating its effect on our financial statements.
4. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Raw materials |
|
$ |
91,849 |
|
|
$ |
74,659 |
|
Work in process |
|
|
49,158 |
|
|
|
41,640 |
|
Finished goods |
|
|
168,745 |
|
|
|
146,500 |
|
|
|
|
|
|
|
|
Total |
|
$ |
309,752 |
|
|
$ |
262,799 |
|
|
|
|
|
|
|
|
In the production of some of our products, we use precious metals, some of which we obtain
from financial institutions under consignment agreements with terms of one year or less. The
financial institutions retain ownership of the precious metals and charge us fees based on the
amounts we consign. These fees were $1.0 million and $1.0 million for the three months ended
March 31, 2008 and 2007, respectively, and were charged to cost of sales. We had on hand
$173.8 million at March 31, 2008, and $148.3 million at December 31, 2007, of precious metals owned
by financial institutions, measured at fair value based on market prices for identical assets.
5. Property, Plant and Equipment
Property, plant and equipment is reported net of accumulated depreciation of $742.0 million at
March 31, 2008, and $713.5 million at December 31, 2007.
8
6. Financing and Long-term Debt
Loans payable and current portion of long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Loans payable to banks |
|
$ |
4,902 |
|
|
$ |
954 |
|
Current portion of long-term debt |
|
|
10,842 |
|
|
|
4,490 |
|
|
|
|
|
|
|
|
Total |
|
$ |
15,744 |
|
|
$ |
5,444 |
|
|
|
|
|
|
|
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
$200,000 Senior Notes, 9.125%, due January 1, 2009 * |
|
$ |
199,727 |
|
|
$ |
199,636 |
|
Revolving credit facility |
|
|
22,255 |
|
|
|
13,857 |
|
Term loan facility |
|
|
301,188 |
|
|
|
301,950 |
|
Capitalized lease obligations |
|
|
9,019 |
|
|
|
8,924 |
|
Other notes |
|
|
718 |
|
|
|
768 |
|
|
|
|
|
|
|
|
|
|
|
532,907 |
|
|
|
525,135 |
|
Less current portion |
|
|
(10,842 |
) |
|
|
(4,490 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
522,065 |
|
|
$ |
520,645 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Net of unamortized discounts. |
Credit Rating
At March 31, 2008, the Companys senior credit rating was B1, with a positive outlook, by
Moodys Investor Services, Inc. (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, consisting of a multi-currency senior revolving credit facility and a senior term loan
facility. In 2007, we cancelled the unused portion of the term loan facility and amended the
credit facility (the Amended Credit Facility). At March 31, 2008, the Amended Credit Facility
consisted of a $300 million revolving credit facility, which matures in 2011, and a $305 million
term loan facility, which matures in 2012. As part of the agreement, we can request an increase of
$50 million in the revolving credit facility. We had $269.1 million at March 31, 2008, and
$277.5 million at December 31, 2007, available under the revolving credit facility, after
reductions for standby letters of credit secured by this facility. In 2007, we began making
periodic principal payments on the term loans. We are required to make minimum quarterly principal
payments of $0.8 million from April 2008 to July 2011. During the last year of the loans life, we
are required to repay the remaining balance of the term loans in four quarterly installments.
Currently, those last four payments will be $71.0 million each. In addition to the minimum
quarterly payments, each April we may be required to make an additional principal payment. The
amount of this additional payment is dependent on the Companys leverage and certain cash flow
metrics. Any additional payment that is required reduces, on a dollar-for-dollar basis, the amount
due in the last four quarterly payments. In April 2008, we made a term loan principal payment of
$7.2 million, consisting of the $0.8 million minimum quarterly payment and a $6.4 million
additional principal payment.
The interest rates under the Amended Credit Facility are equal to the sum of (A) either (1)
LIBOR or (2) the higher of the Federal Funds Rate plus 0.5% or the Prime Rate and (B) for the
revolving credit facility, a variable margin based on the Companys leverage, or for the term loan
facility, a fixed margin. As part of the 2007 amendments, $175 million of
9
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 2007. These swap
agreements effectively fixed the interest rate through June 2011 on $150 million of borrowings
under the term loan facility. The average interest rate for revolving credit borrowings was 4.8%
at March 31, 2008, and 6.5% at December 31, 2007, and the effective interest rate for term loan
borrowings after adjusting for the interest rate swaps was 7.0% at March 31, 2008, and 7.2% at
December 31, 2007.
Senior Notes
The senior notes are due January 1, 2009. We continue to classify the senior notes as
noncurrent liabilities, because we have both the intention to refinance them in a way that would
extend their maturity beyond one year and the ability to do so through availability under our
revolving credit facility. The senior notes are redeemable at our option at any time for the
present value of the principal amount then outstanding plus the unpaid interest through maturity.
The senior notes are
redeemable at the option of the holders only upon a change in control of the Company combined
with a rating by either Moodys or S&P below investment grade as defined in the indenture.
Currently, the ratings by Moodys and S&P of the senior notes are below investment grade.
Receivable Sales Programs
We have several programs to sell, on an ongoing basis, pools of our trade accounts receivable.
These programs accelerate cash collections at favorable financing costs and help us manage the
Companys liquidity requirements. In our largest program, we sell substantially all of Ferros
U.S. trade accounts receivable to Ferro Finance Corporation (FFC), a wholly-owned unconsolidated
qualified special purpose entity (QSPE). FFC finances its acquisition of trade receivable assets
by issuing beneficial interests in (securitizing) the receivables to multi-seller receivables
securitization companies (the Conduits) for proceeds of up to $100.0 million. Ferro had received
net proceeds of $67.3 million at March 31, 2008, and $54.6 million at December 31, 2007, for
outstanding receivables. FFC and the Conduits have no recourse to Ferros other assets for failure
of debtors to pay when due, as the assets transferred are legally isolated in accordance with the
U.S. bankruptcy laws. Ferro, on behalf of FFC and the Conduits, provides normal collection and
administration services for the trade accounts receivable sold.
Activity from this program for the three months ended March 31 is detailed below:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Trade accounts receivable sold to FFC |
|
$ |
261,605 |
|
|
$ |
250,007 |
|
Cash proceeds from FFC |
|
|
263,107 |
|
|
|
246,716 |
|
Trade accounts receivable collected and remitted to FFC and the conduits |
|
|
250,429 |
|
|
|
235,616 |
|
In addition, we maintain several international programs to sell trade accounts receivable,
primarily without recourse. The commitments supporting these programs can be withdrawn at any time
and totaled $87.4 million at March 31, 2008, and $80.8 million at December 31, 2007. The amount of
outstanding receivables sold under the international programs was $42.5 million at March 31, 2008,
and $42.1 million at December 31, 2007. Ferro provides normal collection and administration
services for the trade accounts receivable sold to certain financial institutions.
Activity from these programs for the three months ended March 31 is detailed below:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands) |
Trade accounts receivable sold to financial institutions |
|
$ |
65,543 |
|
|
$ |
31,954 |
|
Cash proceeds from financial institutions |
|
|
64,126 |
|
|
|
32,583 |
|
Trade accounts receivable collected and remitted to financial institutions
for programs where we provide collection and administrative services |
|
|
23,424 |
|
|
|
22,426 |
|
10
7. Financial Instruments
The following financial instruments are measured at fair value for disclosure purposes. The
carrying values of these instruments may or may not be their fair values.
Senior Notes. The carrying amount of the senior notes was $199.7 million at March 31, 2008,
and $199.6 million at December 31, 2007. The fair value of the senior notes was $202.5 million at
March 31, 2008, and $205.0 million at December 31, 2007. The fair value of Ferros senior notes is
based on a third partys estimated bid price.
Revolving credit facility. The carrying amount of the revolving credit facility was
$22.3 million at March 31, 2008, and $13.9 million at December 31, 2007. The fair value of the
revolving credit facility was $20.5 million at March 31, 2008, and $13.9 million at December 31,
2007. The fair value of the revolving credit facility is based on the present value of expected
future cash flows and assumptions about current interest rates. Beginning in 2008 in connection
with the adoption of FAS No. 157, the fair value also reflects assumptions about the
creditworthiness of the Company that market participants would use in pricing the debt.
Term loan facility. The carrying amount of the term loan facility was $301.2 million at
March 31, 2008, and $302.0 million at December 31, 2007. The fair value of the term loan facility
was $276.7 million at March 31, 2008, and
$302.0 million at December 31, 2007. The fair value of the term loan facility is based on the
present value of expected future cash flows and assumptions about current interest rates.
Beginning in 2008 in connection with the adoption of FAS No. 157, the fair value also reflects
assumptions about the creditworthiness of the Company that market participants would use in pricing
the debt.
The following financial instruments are measured and recorded at fair value on a recurring
basis. The inputs to the valuation techniques used to measure fair value are classified into the
following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The carrying amount, fair value, and classification within the fair value hierarchy of these
financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
March 31, |
|
|
at March 31, 2008 |
|
|
December 31, |
|
|
|
2008 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
$ |
47 |
|
|
$ |
|
|
|
$ |
47 |
|
|
$ |
|
|
|
$ |
16 |
|
Raw material commodity swaps |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
Precious metals forward contracts |
|
|
47 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value |
|
$ |
108 |
|
|
$ |
|
|
|
$ |
108 |
|
|
$ |
|
|
|
$ |
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
(12,151 |
) |
|
$ |
|
|
|
$ |
(12,151 |
) |
|
$ |
|
|
|
$ |
(8,109 |
) |
Foreign currency forward contracts |
|
|
(1,031 |
) |
|
|
|
|
|
|
(1,031 |
) |
|
|
|
|
|
|
(284 |
) |
Raw material commodity swaps |
|
|
(477 |
) |
|
|
|
|
|
|
(477 |
) |
|
|
|
|
|
|
(1,499 |
) |
Precious metals forward contracts |
|
|
(71 |
) |
|
|
|
|
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value |
|
$ |
(13,730 |
) |
|
$ |
|
|
|
$ |
(13,730 |
) |
|
$ |
|
|
|
$ |
(9,892 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Interest rate swaps. To reduce our exposure to interest rate changes on variable-rate debt,
we entered into interest rate swap agreements in 2007. These swaps effectively converted $150
million of our variable-rate term loan facility to a fixed rate. We mark these agreements to fair
value and recognize the resulting gains or losses as other comprehensive income or loss. In 2007,
the fair value of the interest rate swaps was based on settlement prices provided by the
counterparties. Beginning in 2008 in connection with the adoption of FAS No. 157, the fair value
of the swaps is based on the present value of expected future cash flows, which reflects
assumptions about current interest rates and the creditworthiness of the Company that market
participants would use in pricing the swaps.
Foreign currency forward contracts. We manage foreign currency risks principally by entering
into forward contracts to mitigate the impact of currency fluctuations on transactions. We mark
these contracts to fair value based on market prices for comparable contracts and recognize the
resulting gains or losses in net foreign currency gains or losses.
Raw material commodity swaps. We hedge a portion of our exposure to changes in the pricing of
certain raw material commodities principally using swap arrangements that allow us to fix the price
of the commodities for future purchases. We mark these contracts to fair value based on market
prices for comparable contracts 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 part of cost of sales.
Precious metals forward contracts. We enter into forward purchase arrangements with precious
metals suppliers to completely cover the value of fixed price sales contracts for products with
precious metal content. Some of these agreements, with purchase commitments totaling $13.8 million
at March 31, 2008, are designated as normal purchase contracts and are not marked to fair value.
We mark the remaining precious metal contracts to fair value based on market prices for comparable
contracts and recognize the resulting gains or losses as miscellaneous income or expense.
8. Income Taxes
Income tax expense for the three months ended March 31, 2008 was $7.1 million or 43.6% of
pre-tax income compared with $4.5 million or 42.1% in the prior-year quarter ended March 2007. The
primary reasons for the increase in the effective tax rate were a change in the mix of income by
country, a relatively high level of current year earnings repatriated from outside the United
States and an increase in the valuation allowance, net of adjustments
to prior year accruals, of $0.6 million.
During the first quarter of 2008, we allocated income tax expense (benefit) directly to
shareholders equity for the following items: $0.5 million for raw material commodity swap adjustments, $(1.4) million for interest
rate swap adjustments, and $0.2 million for the adjustments to initially apply FAS No. 158. During
the first quarter of 2007, we allocated income tax expense (benefit) directly to shareholders
equity for the following items: $0.2 million for postretirement benefit liability adjustments and
$(0.2) million for raw material commodity swap adjustments.
The Company conducts business globally, and, as a result, the U.S. parent company and its
subsidiaries file 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.
9. Contingent Liabilities
In February 2003, we were requested to produce documents in connection with an investigation
by the United States Department of Justice into possible antitrust violations in the heat
stabilizer industry. In April 2006, we were notified by the Department of Justice that the
Government had closed its investigation and that the Company was relieved of any obligation to
retain documents that were responsive to the Governments earlier document request. Before closing
its investigation, the Department of Justice took no action against the Company or any of its
current or former employees. The Company was previously named as a defendant in several lawsuits
alleging civil damages and requesting injunctive relief relating to the conduct the Government was
investigating. We entered into a verbal agreement in June 2007 and a definitive written settlement
agreement in July 2007 with the direct purchasers in one of these class action civil lawsuits
related to alleged antitrust violations in the heat stabilizer industry. 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
12
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. In December 2006, we filed a lawsuit against the
former owner of our heat stabilizer business seeking 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 April 2008,
the United States District Court for the Northern District of Ohio dismissed our lawsuit, and we
have appealed the courts decision to the Sixth Circuit Court of Appeals.
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. In December 2005, the Hungarian authorities imposed a de minimis
fine on our Belgian subsidiary; in October 2007, the German authorities imposed a fine of
approximately $0.6 million; and in April 2008, the Belgian authorities imposed a fine of
approximately $0.3 million. We do not expect further actions from these authorities.
There are various other lawsuits and claims pending against the Company and its consolidated
subsidiaries. In our opinion, the ultimate liabilities, if any, and expenses resulting from such
lawsuits and claims will not materially affect the consolidated financial position, results of
operations, or cash flows of the Company.
The Company had bank guarantees and standby letters of credit issued by financial
institutions, which totaled $18.2 million at March 31, 2008, and $17.7 million at December 31,
2007. These agreements primarily relate to 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.
10. Retirement Benefits
Information concerning net periodic benefit costs of our U.S. pension plans (including our
unfunded nonqualified plans), non-U.S. pension plans, and postretirement health care and life
insurance benefit plans for the three months ended March 31
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Pension Plans |
|
|
Non-U.S. Pension Plans |
|
|
Other Benefit Plans |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Components of net periodic cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
50 |
|
|
$ |
316 |
|
|
$ |
1,501 |
|
|
$ |
1,592 |
|
|
$ |
16 |
|
|
$ |
152 |
|
Interest cost |
|
|
5,177 |
|
|
|
5,028 |
|
|
|
2,939 |
|
|
|
2,260 |
|
|
|
731 |
|
|
|
859 |
|
Expected return on plan assets |
|
|
(5,663 |
) |
|
|
(5,123 |
) |
|
|
(2,133 |
) |
|
|
(1,791 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
25 |
|
|
|
40 |
|
|
|
24 |
|
|
|
27 |
|
|
|
(411 |
) |
|
|
(293 |
) |
Net amortization and deferral |
|
|
624 |
|
|
|
1,476 |
|
|
|
57 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
Curtailment and settlement effects |
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
213 |
|
|
$ |
1,987 |
|
|
$ |
2,388 |
|
|
$ |
2,229 |
|
|
$ |
336 |
|
|
$ |
718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in net periodic cost is due primarily to restructuring activities related to
closing the Companys Niagara Falls, New York, and Rotterdam, The Netherlands, manufacturing
facilities, the freezing of pension benefits at several U.S. plants, and the limiting of
eligibility for retiree medical and life insurance coverage for nonunion employees. In the first
quarter of 2007, we recorded curtailment losses of $0.3 million for pension benefits related to the
Niagara Falls, New York, closing.
13
11. Stock-Based Compensation
The following table contains the total stock-based compensation expense recorded in selling,
general and administrative expense for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Stock options |
|
$ |
486 |
|
|
$ |
812 |
|
Performance shares |
|
|
45 |
|
|
|
509 |
|
Deferred stock units |
|
|
127 |
|
|
|
111 |
|
Restricted shares |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
699 |
|
|
$ |
1,432 |
|
|
|
|
|
|
|
|
The following table contains information regarding the stock-based compensation as of and for
the three month period ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date |
|
|
|
|
Number of |
|
Weighted- |
|
Fair Value of |
|
Remaining |
|
|
Shares or |
|
Average Fair |
|
Shares or |
|
Service or |
|
|
Units |
|
Value per |
|
Units |
|
Performance |
|
|
Granted |
|
Share or Unit |
|
Granted |
|
Period |
|
|
|
|
|
|
|
|
|
|
(Dollars in |
|
|
|
|
|
|
|
|
|
|
|
|
thousands) |
|
(In years) |
Stock options |
|
|
479,300 |
|
|
$ |
4.18 |
|
|
$ |
2,003 |
|
|
|
3.9 |
|
Performance shares |
|
|
76,825 |
|
|
|
17.26 |
|
|
|
1,326 |
|
|
|
2.9 |
|
Deferred stock units |
|
|
34,200 |
|
|
|
16.69 |
|
|
|
571 |
|
|
|
0.9 |
|
Restricted shares |
|
|
92,400 |
|
|
|
17.26 |
|
|
|
1,595 |
|
|
|
2.9 |
|
The stock-based compensation transaction in shareholders equity consisted of the following
for the three months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares |
|
|
|
|
|
|
in Treasury |
|
|
Paid-in |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
|
(In thousands) |
|
Stock options |
|
|
|
|
|
$ |
427 |
|
|
$ |
59 |
|
Performance shares, net |
|
|
(77 |
) |
|
|
1,390 |
|
|
|
(1,217 |
) |
Deferred stock units |
|
|
|
|
|
|
127 |
|
|
|
|
|
Directors deferred compensation |
|
|
|
|
|
|
(462 |
) |
|
|
462 |
|
Preferred stock conversions |
|
|
(47 |
) |
|
|
243 |
|
|
|
1 |
|
Restricted shares |
|
|
(92 |
) |
|
|
1,714 |
|
|
|
(1,673 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(216 |
) |
|
$ |
3,439 |
|
|
$ |
(2,368 |
) |
|
|
|
|
|
|
|
|
|
|
Restricted Share Awards
Under the 2006 Long-Term Incentive Plan, the Company may award restricted shares of Ferro
common stock. The restricted shares vest in three years from the date of the award and are
forfeited if the recipients employment terminates, except in the case of death or disability.
During the vesting period, the recipient is not entitled to exercise rights pertaining to the
restricted shares, including the right to vote such shares, and dividends on the restricted shares
are deferred without interest. Following the vesting period, the recipient may not dispose of the
shares for two years, without Ferros prior written consent. The first restricted shares were
awarded in 2008.
14
12. Restructuring and Cost Reduction Programs
During 2008, we continued several restructuring programs across a number of our business
segments with the objectives of leveraging our global scale, realigning and lowering our cost
structure and optimizing capacity utilization. The programs are primarily associated with North
America and Europe. Management continues to evaluate our business, and therefore, there may be
supplemental provisions for new plan initiatives as well as changes in estimates to amounts
previously recorded, as payments are made or actions are completed.
In July 2006, we announced that we were restructuring our European operations, including a
portion of our Performance Coatings and Color and Glass Performance Materials segments. This
program affected operations in Spain, Italy, Portugal, France, and Germany. We expect these
actions to significantly reduce the cost structure of our manufacturing operations. As a result of
these activities, since July 2006, we reduced our workforce by approximately 115 employees and are
evaluating further workforce reductions. Revised total anticipated charges through 2009 amount to
$17.3 million. Charges incurred through 2007 amounted to $9.0 million. The first-quarter 2008
restructuring charges include $0.6 million for employee severance costs and $0.1 million of accrual
reversals.
In May 2007, we initiated discussions with representatives of workers at our Rotterdam, The
Netherlands, Porcelain Enamel manufacturing site regarding possible restructuring actions. In
September 2007, we reached an agreement with the Rotterdam Works Council. As a result, the Company
will discontinue porcelain enamel frit manufacturing at its Rotterdam
facility in 2008 and will consolidate production at other European facilities. This
consolidation will result in the reduction of 84 employees. Restructuring charges are expected to
total $25.0 million with completion anticipated by the end of the third quarter 2008. During 2007,
we recorded $11.8 million in restructuring charges and an additional $0.5 million for inventory
write downs included in cost of sales. During the first quarter of 2008, we recorded $1.0 million
for employee severance costs, $1.5 million for future minimum lease obligations and $0.1 million in
other costs.
In November 2007 and March 2008, we initiated additional restructuring plans for our
Performance Coatings and Color and Glass Performance Materials segments. These restructuring plans
will result in the reduction of approximately 84 employees. Total estimated employee termination
charges through 2008 are $5.3 million. During 2007, we recorded total charges of $1.4 million. In
the first quarter of 2008, we recorded $0.7 million of additional restructuring charges.
In February 2008, we announced the closing of a Plastics facility in Aldridge, United Kingdom.
This closure resulted in the reduction of 8 employees at the anticipated cost of $1.1 million.
During the first quarter of 2008, we recorded $0.2 million in severance costs and $0.2 million in
lease termination costs.
We have summarized the activities and accrual balances related to our restructuring and cost
reduction programs below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
|
|
|
|
|
Termination |
|
|
Other |
|
|
|
|
|
|
Benefits |
|
|
Costs |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Balance, December 31, 2007 |
|
$ |
8,381 |
|
|
$ |
1,560 |
|
|
$ |
9,941 |
|
Restructuring charges |
|
|
2,421 |
|
|
|
1,786 |
|
|
|
4,207 |
|
Cash payments |
|
|
(4,336 |
) |
|
|
(348 |
) |
|
|
(4,684 |
) |
Currency translation adjustment |
|
|
500 |
|
|
|
212 |
|
|
|
712 |
|
Non-cash items |
|
|
(82 |
) |
|
|
|
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2008 |
|
$ |
6,884 |
|
|
$ |
3,210 |
|
|
$ |
10,094 |
|
|
|
|
|
|
|
|
|
|
|
We expect to make cash payments to settle the remaining liability for employee termination
benefits and other costs primarily within the next twelve months, except where legal or contractual
restrictions prevent us from doing so.
15
13. Discontinued Operations
Discontinued operations relate to the Powder Coatings, Petroleum Additives and Specialty
Ceramics businesses that we sold in 2002 and 2003. There were no sales, income before taxes or
related tax expense, or cash flows from investing or financing activities from discontinued
operations in the three months ended March 31, 2008 or 2007. The loss from discontinued operations
includes ongoing legal costs and reserve adjustments directly related to discontinued operations.
The loss from discontinued operations resulted in the following pre-tax loss and related income tax
benefit for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Pre-tax loss |
|
$ |
41 |
|
|
$ |
256 |
|
Tax benefit |
|
|
16 |
|
|
|
100 |
|
|
|
|
|
|
|
|
Net of tax loss |
|
$ |
25 |
|
|
$ |
156 |
|
|
|
|
|
|
|
|
We have continuing environmental remediation obligations that are related to these
divestitures, and we had accrued $3.3 million at March 31, 2008, and $3.3 million at December 31,
2007, for these matters.
14. Earnings per Share
Details of the calculation of basic and diluted earnings per share for the three months ended
March 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, |
|
|
|
except per share amounts) |
|
Basic earnings per share computation: |
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
8,913 |
|
|
$ |
5,793 |
|
Add back: Loss from discontinued operations |
|
|
25 |
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
$ |
8,938 |
|
|
$ |
5,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
43,160 |
|
|
|
42,708 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share computation: |
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
8,913 |
|
|
$ |
5,793 |
|
Add back: Loss from discontinued operations |
|
|
25 |
|
|
|
156 |
|
Plus: Convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,938 |
|
|
$ |
5,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
43,160 |
|
|
|
42,708 |
|
Assumed exercise of stock options |
|
|
|
|
|
|
|
|
Assumed satisfaction of performance share conditions |
|
|
75 |
|
|
|
55 |
|
Assumed satisfaction of deferred stock unit conditions |
|
|
3 |
|
|
|
5 |
|
Assumed conversion of convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding |
|
|
43,238 |
|
|
|
42,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations |
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
16
15. Comprehensive Income
The components of comprehensive income for the three months ended March 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Net income |
|
$ |
9,140 |
|
|
$ |
6,079 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
21,529 |
|
|
|
6,900 |
|
Postretirement benefit liability adjustments |
|
|
(375 |
) |
|
|
263 |
|
Raw material commodity swap adjustments |
|
|
848 |
|
|
|
(391 |
) |
Interest rate swap adjustments |
|
|
(2,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
28,539 |
|
|
$ |
12,851 |
|
|
|
|
|
|
|
|
16. Reporting for Segments
The Company has six reportable segments: Performance Coatings, Electronic Materials, Color and
Glass Performance Materials, Polymer Additives, Specialty Plastics and Other businesses. We have
combined our Tile Coating Systems and Porcelain Enamel business units into one reportable segment,
Performance Coatings, based on their similar economic and operating characteristics. We have also
combined two of our segments, Pharmaceuticals and Fine Chemicals, because they do not meet the
quantitative thresholds for separate disclosure.
The accounting policies of our segments are consistent with those described for our
consolidated financial statements in the summary of significant accounting policies contained in
our Annual Report on Form 10-K for the year ended December 31, 2007. We measure segment income for
internal reporting purposes as net operating profit before interest and taxes. Segment income
excludes unallocated corporate expenses and charges associated with restructuring and cost reduction programs. Unallocated corporate expenses primarily consist of corporate employment costs and professional services.
Net sales to external customers by segment for the three months ended March 31 are presented
in the table below. Sales between segments were not material:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Performance Coatings |
|
$ |
160,792 |
|
|
$ |
138,815 |
|
Electronic Materials |
|
|
140,993 |
|
|
|
112,944 |
|
Color and Glass Performance Materials |
|
|
128,840 |
|
|
|
105,700 |
|
Polymer Additives |
|
|
92,311 |
|
|
|
82,513 |
|
Specialty Plastics |
|
|
61,793 |
|
|
|
66,961 |
|
Other Businesses |
|
|
22,527 |
|
|
|
22,772 |
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
607,256 |
|
|
$ |
529,705 |
|
|
|
|
|
|
|
|
17
Below are each segments income and reconciliations to income before taxes from continuing
operations for the three months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Performance Coatings |
|
$ |
9,480 |
|
|
$ |
10,683 |
|
Electronic Materials |
|
|
8,749 |
|
|
|
6,083 |
|
Color and Glass Performance Materials |
|
|
15,436 |
|
|
|
15,067 |
|
Polymer Additives |
|
|
2,719 |
|
|
|
3,106 |
|
Specialty Plastics |
|
|
1,487 |
|
|
|
3,139 |
|
Other Businesses |
|
|
3,845 |
|
|
|
3,691 |
|
|
|
|
|
|
|
|
Total segment income |
|
|
41,716 |
|
|
|
41,769 |
|
Unallocated corporate expenses |
|
|
7,054 |
|
|
|
13,746 |
|
Restructuring charges |
|
|
4,207 |
|
|
|
1,531 |
|
Other expense, net |
|
|
14,209 |
|
|
|
15,723 |
|
|
|
|
|
|
|
|
Income before income taxes from continuing operations |
|
$ |
16,246 |
|
|
$ |
10,769 |
|
|
|
|
|
|
|
|
We sell our products throughout the world, and we attribute sales to countries based on the
country where we generate the customer invoice. We have detailed net sales by geographic region
for the three months ended March 31 in the table below:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
United States |
|
$ |
252,274 |
|
|
$ |
238,406 |
|
International |
|
|
354,982 |
|
|
|
291,299 |
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
607,256 |
|
|
$ |
529,705 |
|
|
|
|
|
|
|
|
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net income for the three months ended March 31, 2008, was $9.1 million, up 50.4% from $6.1
million in the first three months of 2007. Earnings increased primarily as a result of higher
sales that resulted in increased gross profit, lower interest expense, a gain from foreign currency
transactions and lower selling, general and administrative expenses. These increases were
partially offset by higher restructuring expenses.
In the quarter, net sales increased by 14.6% as a result of higher sales in Electronic
Materials, Color and Glass Performance Materials, Performance Coatings and Polymer Additives.
Sales in Specialty Plastics and Other Businesses declined from the first quarter of 2007.
Raw material costs increased in the quarter, compared with the prior-year period, resulting in
gross profit growing more slowly than sales. Cost increases affected materials such as bismuth,
cobalt, chrome, soybean oil, and tallow that are used in many of our products. Increased precious
metal prices also increased sales and the cost of goods sold, as precious metal costs are generally
passed through to customers with minimal gross profit contribution.
Selling, general and administrative (SG&A) expense was essentially flat in the first quarter
of 2008. Combined with the higher sales, SG&A declined to 13.0% of sales, compared with 14.9% in
the first quarter of 2007. Selling, general and administrative costs increased primarily as a
result of changes in foreign currency exchange rates, offset by the beneficial effects of prior
restructuring and other expense reduction efforts across the business and favorable litigation
developments.
Interest expense declined in the three months ending March 31, 2008, compared with the first
three months of 2007 as a result of lower average borrowing levels and lower interest rates. In
addition, in the first quarter of 2007, we recorded a $2.0 million write-off of unamortized fees
associated with an unused portion of our term loan arrangements.
Inventories, accounts receivable and accounts payable increased in the first three months of
2008, as a result of the higher sales in the quarter and the effects of changes in foreign currency
exchange rates.
Outlook
Economic conditions continue to be mixed, with an outlook for slower general economic growth
in most markets. Markets in the United States that are related to residential housing, automobiles
and automotive parts, and appliances are expected to continue a pattern of weak demand that existed
in 2007. This market weakness is expected to affect the volume of products sold in our Specialty
Plastics, Polymer Additives, Color and Glass Performance Materials, and Performance Coatings
segments. Markets outside of the United States are generally stronger, although rates of growth
are expected to be lower than levels experienced in 2007.
We expect to continue to record charges associated with our current and future restructuring
programs, particularly related to our rationalization of the manufacturing assets in our European
operations.
Factors that could adversely affect the Companys future financial performances are contained
within Risk Factors included under Item 1A in the Companys Annual Report on Form 10-K for the
year ended December 31, 2007.
19
Results of Operations
Comparison of the three months ended March 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands, |
|
|
|
|
|
|
except per share amounts) |
|
|
|
|
Net sales |
|
$ |
607,256 |
|
|
$ |
529,705 |
|
|
$ |
77,551 |
|
|
|
14.6 |
% |
Cost of sales |
|
|
493,937 |
|
|
|
422,925 |
|
|
|
71,012 |
|
|
|
16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
113,319 |
|
|
|
106,780 |
|
|
|
6,539 |
|
|
|
6.1 |
% |
Gross profit percentage |
|
|
18.7 |
% |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
78,657 |
|
|
|
78,757 |
|
|
|
(100 |
) |
|
|
(0.1 |
%) |
Restructuring charges |
|
|
4,207 |
|
|
|
1,531 |
|
|
|
2,676 |
|
|
|
174.8 |
% |
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
14,029 |
|
|
|
17,446 |
|
|
|
(3,417 |
) |
|
|
(19.6 |
%) |
Interest earned |
|
|
(129 |
) |
|
|
(965 |
) |
|
|
836 |
|
|
|
(86.6 |
%) |
Foreign currency (gains) losses, net |
|
|
(1,541 |
) |
|
|
511 |
|
|
|
(2,052 |
) |
|
|
(401.6 |
%) |
Miscellaneous expense (income), net |
|
|
1,850 |
|
|
|
(1,269 |
) |
|
|
3,119 |
|
|
|
(245.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
16,246 |
|
|
|
10,769 |
|
|
|
5,477 |
|
|
|
50.9 |
% |
Income tax expense |
|
|
7,081 |
|
|
|
4,534 |
|
|
|
2,547 |
|
|
|
56.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
9,165 |
|
|
|
6,235 |
|
|
|
2,930 |
|
|
|
47.0 |
% |
Loss on disposal of discontinued operations, net of tax |
|
|
25 |
|
|
|
156 |
|
|
|
(131 |
) |
|
|
(84.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,140 |
|
|
$ |
6,079 |
|
|
$ |
3,061 |
|
|
|
50.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.21 |
|
|
$ |
0.14 |
|
|
$ |
0.07 |
|
|
|
50.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales in the quarter ended March 31, 2008, increased by 14.6%, driven by increased product
pricing and favorable changes in foreign exchange rates. Volume contributed modestly
to sales growth in the quarter, with higher sales volumes in Electronic Materials, Performance
Coatings and Color and Glass Performance Materials partially offset by the effects of lower sales
volumes in Polymer Additives and Specialty Plastics. Sales grew in all regions, led by growth in
Asia and Europe.
Gross profit was higher in the first quarter of 2008 as a result of higher sales and
manufacturing cost reduction programs, partially offset by higher raw material costs. Gross profit
was reduced by $0.2 million in the quarter as a result of accelerated depreciation charges
associated with our manufacturing rationalization programs. Charges, primarily for manufacturing
rationalization activities, reduced gross profit by $2.2 million in the first three months of 2007.
During the first quarter of 2008 we also incurred additional costs of approximately $3.3 million
associated with the manufacturing interruption that occurred at our Bridgeport, New Jersey,
manufacturing plant in December 2007. These costs are included in the results for the Polymer
Additives segment. Gross margin, as a percent of sales, was negatively impacted by higher raw
material costs, including precious metal costs, which are generally passed through to customers
with minimal gross profit contribution.
Selling, general and administrative (SG&A) expenses declined to 13.0% of sales in the first
quarter from 14.9% of sales in the first quarter of 2007. SG&A expense increased primarily as a
result of changes in foreign currency exchange rates. This increase was offset as a result of
previous expense reduction efforts across our businesses, a favorable variation in period health
care costs and lower pension expense resulting from previously implemented benefit plan changes.
During the first quarter of 2008, SG&A expense included a net benefit of $0.4 million, primarily
from favorable litigation developments, partially offset by expenses related to corporate development activities. Charges
of $0.3 million, primarily related to corporate development activities, were included in the 2007 first quarter
SG&A expense.
20
Restructuring charges of $4.2 million were recorded in the first three months of 2008,
compared with charges of $1.5 million in the first quarter of 2007. The 2008 charges were
primarily related to our manufacturing rationalization activities in our Performance Coatings and
Color and Glass Performance Materials segments in Europe.
Interest expense was lower in the three months ended March 31, 2008. In the first quarter of
2007, we recorded a non-recurring $2.0 million write-off of unamortized fees associated with an
unused portion of our term loan arrangements. In the first quarter of 2008, our average borrowing
levels were lower and the interest rate on our revolving credit facility was lower than in the
prior-year period.
Miscellaneous expense was $1.9 million in the first three months of 2008, compared with
miscellaneous income of $1.3 million in the prior-year period. We recorded expenses of $0.8
million on forward contracts during the first quarter of 2008, mostly related to precious metals.
In the first quarter of 2007, we recorded income of $0.5 million related to forward contracts. The
first quarter of 2007 also included a $1.9 million gain on the sale of property, which did not
recur in 2008.
Income tax expense for the three months ended March 31, 2008 was $7.1 million or 43.6% of
pre-tax income compared with $4.5 million or 42.1% in the prior-year quarter ended March 2007. The
primary reasons for the increase in the effective tax rate were a change in the mix of income by
country and a relatively high level of current year earnings repatriated from outside the United
States.
There were no new businesses included in discontinued operations in the first quarter of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Segment Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
160,792 |
|
|
$ |
138,815 |
|
|
$ |
21,977 |
|
|
|
15.8 |
% |
Electronic Materials |
|
|
140,993 |
|
|
|
112,944 |
|
|
|
28,049 |
|
|
|
24.8 |
% |
Color & Glass Performance Materials |
|
|
128,840 |
|
|
|
105,700 |
|
|
|
23,140 |
|
|
|
21.9 |
% |
Polymer Additives |
|
|
92,311 |
|
|
|
82,513 |
|
|
|
9,798 |
|
|
|
11.9 |
% |
Specialty Plastics |
|
|
61,793 |
|
|
|
66,961 |
|
|
|
(5,168 |
) |
|
|
(7.7 |
%) |
Other Businesses |
|
|
22,527 |
|
|
|
22,772 |
|
|
|
(245 |
) |
|
|
(1.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment sales |
|
$ |
607,256 |
|
|
$ |
529,705 |
|
|
$ |
77,551 |
|
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings |
|
$ |
9,480 |
|
|
$ |
10,683 |
|
|
$ |
(1,203 |
) |
|
|
(11.3 |
%) |
Electronic Materials |
|
|
8,749 |
|
|
|
6,083 |
|
|
|
2,666 |
|
|
|
43.8 |
% |
Color & Glass Performance Materials |
|
|
15,436 |
|
|
|
15,067 |
|
|
|
369 |
|
|
|
2.4 |
% |
Polymer Additives |
|
|
2,719 |
|
|
|
3,106 |
|
|
|
(387 |
) |
|
|
(12.5 |
%) |
Specialty Plastics |
|
|
1,487 |
|
|
|
3,139 |
|
|
|
(1,652 |
) |
|
|
(52.6 |
%) |
Other Businesses |
|
|
3,845 |
|
|
|
3,691 |
|
|
|
154 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income |
|
$ |
41,716 |
|
|
$ |
41,769 |
|
|
$ |
(53 |
) |
|
|
(0.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Coatings Segment Results. Sales increased in Performance Coatings due to
higher sales of tile coatings and porcelain enamel products. The sales increase was driven by
higher volume and favorable changes in foreign currency exchange rates, partially offset by a less
favorable mix of products. Sales grew in Europe, Asia and Latin America and declined in the United
States. Operating income declined during the first quarter, as the result of lower income from
porcelain enamel products. For the quarter, the effects of higher raw material costs and lower
sales volume in porcelain enamel offset the positive effects of higher product prices and
increased tile coatings sales volume.
Electronic Materials Segment Results. Sales grew in Electronic Materials reflecting
continued robust demand for metal pastes and powders and, to a lesser extent, surface finishing
materials, and favorable changes in foreign currency exchange rates. Sales growth was the greatest
in Asia and the United States, while sales declined in Europe, primarily as a result of
21
lower sales
of dielectric materials sourced from our European manufacturing site. Operating income increased
as a result of the positive effects of higher sales volumes, a more favorable product mix
and benefits from prior-period manufacturing restructuring activities.
Color and Glass Performance Materials Segment Results. Sales increased in Color and
Glass Performance Materials as a result of higher sales of glass coatings and performance pigment
materials. The primary drivers of the increased sales were favorable foreign currency exchange
rates, product price increases, and higher volumes. Sales were higher in all regions, led by
increases in Europe and the United States. Operating income increased as a result of higher
product prices that were largely offset by higher raw material costs.
Polymer Additives Segment Results. Sales increased in the Polymer Additives segment
primarily as a result of higher product pricing and favorable changes in foreign exchange rates,
partially offset by the effects of lower volumes. Sales increased in the United States and Europe,
the segments two primary sales regions. Operating income declined from the prior-year quarter.
During the first quarter of 2008, the business incurred costs of approximately $3.3 million
resulting from an accidental discharge of product into the wastewater treatment facility at our
Bridgeport, New Jersey, manufacturing location. The initial discharge occurred in December 2007,
and the remediation costs continued into the first quarter of 2008. We do not expect any
additional costs in future periods related to this incident. During the quarter, product pricing
positively contributed to operating income, although the effects were partially offset by increased
raw material costs.
Specialty Plastics Segment Results. Sales declined in the Specialty Plastics segment
primarily as a result of weak demand in the United States, particularly from customers in the
automotive parts and appliance industries. As a result of the weak demand, volume declined. The
resulting negative effect on sales was not fully offset by improved product pricing. Sales
declined in each of the segments product lines, compared with the prior-year period. Operating
income declined as a result of the lower sales volume and increased raw material costs,
partially offset by increased product pricing. Lower manufacturing costs and SG&A expenses also
contributed positively to operating income.
Other Businesses Segment Results. Sales declined slightly in the Other Businesses
segment as a result of lower sales of pharmaceutical products. Sales of fine chemicals increased
compared with the first quarter of 2007. The sales decline occurred in the United States, while
sales in Asia increased. Operating income increased primarily as a result of improved pricing of
our fine chemicals products and lower costs in our pharmaceutical manufacturing, partially offset
by raw material costs increases in our fine chemicals business, and product mix changes and volume
declines in multiple product areas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Geographic Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
252,274 |
|
|
$ |
238,406 |
|
|
$ |
13,868 |
|
|
|
5.8 |
% |
International |
|
|
354,982 |
|
|
|
291,299 |
|
|
|
63,683 |
|
|
|
21.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
607,256 |
|
|
$ |
529,705 |
|
|
$ |
77,551 |
|
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales increased in all regions in the first quarter of 2008. In the United States, sales
increased in the Electronic Materials, Color and Glass Performance Materials and Polymer Additives
segments. Sales in the United States declined in the Specialty Plastics, Performance Coatings and
Other Businesses segments. International sales increased in Asia, Europe and Latin America. The
international sales increases were distributed across all segments, led by the Performance
Coatings, Color and Glass Performance Materials and Electronic Materials segments.
22
Summary
of Cash Flows for the three months ended March 31, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
$ Change |
|
|
% Change |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
10,938 |
|
|
$ |
63,801 |
|
|
$ |
(52,863 |
) |
|
|
(82.9 |
%) |
Net cash used for investing activities |
|
|
(15,114 |
) |
|
|
(10,689 |
) |
|
|
(4,425 |
) |
|
|
41.4 |
% |
Net cash provided by (used for) financing activities |
|
|
3,003 |
|
|
|
(52,814 |
) |
|
|
55,817 |
|
|
|
(105.7 |
%) |
Effect of exchange rate changes on cash
and cash equivalents |
|
|
543 |
|
|
|
258 |
|
|
|
285 |
|
|
|
110.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
$ |
(630 |
) |
|
$ |
556 |
|
|
$ |
(1,186 |
) |
|
|
(213.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities decreased by $52.9 million in the first quarter of 2008
compared with the same quarter of 2007. In the first quarter of 2007, we received $69.7 million of
deposits held by financial institutions under our precious metals consignment program. Deposit
requirements were eliminated during 2007. Operating cash flows benefited from $13.1 million of
other changes in working capital, primarily related to increases in accounts payable in the first
quarter of 2008 and payments reducing accrued liabilities in the comparable 2007 period.
Cash used for investing activities increased by $4.4 million, primarily due to higher capital
expenditures of $2.5 million and lower proceeds from sales of assets and liabilities of
$1.8 million.
Cash flows from financing activities increased by $55.8 million, of which $62.9 million
related to changes in borrowing activity. In the first quarter of 2008, we borrowed $11.3 million,
while in the prior-year quarter, we used cash to reduce our debt by $51.6 million. The first
quarter of 2007 also included $6.1 million in proceeds to the Company from the exercise of stock
options.
Capital Resources and Liquidity
Credit Rating
At March 31, 2008, 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, consisting of a multi-currency senior revolving credit facility and a senior term loan
facility. In 2007, we cancelled the unused portion of the term loan facility and amended the
credit facility (the Amended Credit Facility). At March 31, 2008, the Amended Credit Facility
consisted of a $300 million revolving credit facility, which matures in 2011, and a $305 million
term loan facility, which matures in 2012. As part of the agreement, we can request an increase of
$50 million in the revolving credit facility. At March 31, 2008, we were in compliance with the
covenants of the Amended Credit Facility.
At March 31, 2008, we had borrowed $22.3 million of the revolver and had $269.1 million
available, after reductions for standby letters of credit secured by this facility. At March 31,
2008, we had borrowed $301.2 million in term loans. In 2007, we began making periodic principal
payments on the term loans. We are required to make minimum quarterly principal payments of
$0.8 million from April 2008 to July 2011. During the last year of the loans life, we are
required to repay the remaining balance of the term loans in four quarterly installments.
Currently, those last four payments will be $71.0 million each. In addition to the minimum
quarterly payments, each April we may be required to make an additional principal payment. The
amount of this additional payment is dependent on the Companys leverage and certain cash flow
metrics. Any additional payment that is required reduces, on a dollar-for-dollar basis, the amount
due in the last four quarterly
payments. In April 2008, we made a term loan principal payment of $7.2 million, consisting of
the $0.8 million minimum quarterly payment and a $6.4 million additional principal payment.
23
Senior Notes and Debentures
At March 31, 2008, we had $200.0 million principal amount outstanding under senior notes, and
we were in compliance with the covenants under their indentures. The senior notes are due
January 1, 2009. We continue to classify the senior notes as noncurrent liabilities, because we
have both the intention to refinance them in a way that would extend their maturity beyond one year
and the ability to do so through availability under our revolving credit facility.
Off Balance Sheet Arrangements
Receivable Sales Programs. We sell, on an ongoing basis, substantially all of Ferros U.S.
trade accounts receivable under an asset securitization program. This program, which expires in
2009, accelerates cash collections at favorable financing costs and helps us manage the Companys
liquidity requirements. We sell these trade accounts receivable to Ferro Finance Corporation
(FFC), a wholly-owned unconsolidated qualified special purpose entity (QSPE). FFC finances its
acquisition of trade receivable assets by issuing beneficial interests in (securitizing) the
receivables to multi-seller receivables securitization companies (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 March 31, 2008, Ferro had
received net proceeds of $67.3 million for outstanding receivables, and the balance of Ferros note
receivable from FFC was $27.4 million.
In addition, we maintain several international programs to sell trade accounts receivable,
primarily without recourse. The commitments supporting these programs can be withdrawn at any time
and totaled $87.4 million at March 31, 2008. The amount of outstanding receivables sold under the
international programs was $42.5 million at March 31, 2008.
Consignment and Customer Arrangements for Precious Metals. In the production of some of our
products, we use precious metals, primarily silver for Electronic Materials products and gold for
Color and Glass Performance Materials products. We obtain most precious metals from financial
institutions under consignment agreements with terms of one year or less. The financial
institutions retain ownership of the precious metals and charge us fees based on the amounts we
consign. At March 31, 2008, we had on hand $173.8 million of precious metals owned by financial
institutions, measured at fair value.
Bank Guarantees and Standby Letters of Credit. At March 31, 2008, the Company and its
subsidiaries had bank guarantees and standby letters of credit issued by financial institutions,
which totaled $18.2 million. These agreements primarily relate to Ferros insurance programs,
potential environmental remediation liabilities, and foreign tax payments.
Other Financing Arrangements
In addition, the Company maintains other lines of credit and receivable sales programs to
provide global flexibility for the Companys liquidity requirements. Most of these facilities are
uncommitted lines for the Companys international operations.
Liquidity Requirement
Our liquidity requirements primarily include debt service, purchase commitments, working
capital requirements, capital investments, postretirement obligations and dividend payments.
Ferros level of debt and debt service requirements could have important consequences to its
business operations and uses of cash flows. However, the liquidity available under our revolving
credit agreement, along with liquidity from other financing arrangements, available cash flows from
operations, and asset sales, should allow the Company to meet its funding requirements and other
commitments.
We
assess on an ongoing basis our portfolio of businesses, as well as
our financial and capital structure, to ensure that we have
sufficient capital and liquidity to meet our strategic objectives. As
part of this process, from time to time we evaluate the possible
divestiture of businesses that are not critical to our core strategic
objectives and, where appropriate, pursue the sale of such
businesses. We also evaluate and pursue acquisition opportunities
that we believe will enhance our strategic position. We generally
announce publicly divestiture and acquisition transactions only when
we have entered into definitive agreements relating to those
transactions.
Critical Accounting Policies and Their Application
There are no material changes to our critical accounting policies described in Critical
Accounting Policies within Item 7 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2007.
24
Newly Adopted Accounting Standards
On January 1, 2008, we adopted FASB Statement No. 157, Fair Value Measurements, (FAS
No. 157), FASB Staff Position No. FAS 157-1, Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement Under Statement 13, (FSP No. FAS 157-1), and FASB
Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, (FSP No. FAS 157-2). 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, but does not
require any new fair value measurements. FSP No. FAS 157-1 excludes FASB Statement No. 13,
Accounting for Leases, (FAS No. 13) as well as other accounting pronouncements that address fair
value measurement on lease classification or measurement under FAS No. 13 from the scope of FAS
No. 157. FSP No. FAS 157-2 delays the effective date of FAS No. 157 for all nonrecurring fair
value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning
after November 15, 2008. The portions of these pronouncements that were not delayed were adopted
prospectively, and their adoption reduced the disclosed fair value of our borrowings under the
revolving credit and term loan facilities and reduced the carrying value of our interest rate
swaps. We are currently evaluating the impact on our consolidated financial statements of adopting
the deferred portions of these pronouncements on January 1, 2009.
On January 1, 2008, we adopted the measurement provisions of 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). The measurement provisions require
companies to measure defined benefit plan assets and obligations as of the annual balance sheet
date. Previously, we used 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 is recognized as of January 1, 2008, as a charge of $0.5 million, net
of tax, to retained earnings and a credit of $0.4 million, net of tax, to accumulated other
comprehensive income.
On January 1, 2008, we adopted FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No. 115, (FAS No.
159). This statement permits us to choose, at specified election dates, to measure eligible items
at fair value (the fair value option). For items for which the fair value option has been
elected, we would report unrealized gains and losses in earnings at each subsequent reporting date
and recognize up-front costs and fees in earnings as incurred. We have not elected to measure any
eligible items at fair value, and we do not have any current plans to do so. Therefore, adoption
of FAS No. 159 did not have an effect on our consolidated financial statements.
On January 1, 2008, we adopted Emerging Issues Task Force 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.
Previously, we recognized this income tax benefit as an increase to retained earnings. Beginning
in 2008, we report this income tax benefit as an increase to paid-in capital.
Newly Issued Accounting Pronouncements
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
an amendment of ARB No. 51, (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 2009, 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.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133, (FAS No. 161). This Statement
requires enhanced disclosures about an entitys derivative and hedging activities. This Statement
is effective for financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages, but does not
25
require, comparative disclosures for earlier periods at initial adoption. We do not expect
the adoption of FAS No. 161 to have a material impact on our consolidated financial statements.
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets, (FSP No. FAS 142-3). This pronouncement amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.
FSP No. FAS 142-3 is to be applied prospectively and is effective for financial statements issued
for fiscal years beginning after December 15, 2008, with early adoption prohibited. We are
currently evaluating its effect on our financial statements.
Risk Factors
Certain statements contained here and in future filings with the SEC reflect the Companys
expectations with respect to future performance and constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are subject to a variety of
uncertainties, unknown risks and other factors concerning the Companys operations and business
environment, which are difficult to predict and are beyond the control of the Company. A detailed
description of such uncertainties, risks and other factors is contained under the heading Risk
Factors of Item 1A in the Companys Annual Report on Form 10-K for the year ended December 31,
2007.
26
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risks is generally limited to fluctuations in interest rates, foreign
currency exchange rates, and costs of raw materials and 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 objective is to limit variability in
earnings, cash flows and overall borrowing costs caused by changes in interest rates, while
preserving operating flexibility.
We operate internationally and enter into transactions denominated in foreign currencies.
These transactions expose us to gains and losses arising from exchange rate movements between the
dates foreign currencies are recorded and the dates they are settled. We manage this risk by
entering into forward currency contracts that offset these gains and losses.
We are also subject to cost changes with respect to our raw materials and 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. We also enter into forward purchase arrangements with
precious metals suppliers to completely cover the value of fixed price sales contracts for products
with precious metal content. Some of these precious metals agreements, with purchase commitments
totaling $13.8 million at March 31, 2008, are designated as normal purchase contracts and are not
marked to market. In addition, we purchase portions of our natural gas and electricity
requirements under fixed price contracts to reduce the volatility of these costs. These energy
contracts are designated as normal purchase contracts, are not marked to market, and had purchase
commitments totaling $19.8 million at March 31, 2008.
27
The notional amounts, net 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:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(Dollars in thousands, |
|
|
except as noted) |
Variable-rate debt and utilization of asset securitization program: |
|
|
|
|
|
|
|
|
Change in annual interest expense from 1% change in interest rates |
|
$ |
2,920 |
|
|
$ |
2,636 |
|
Fixed-rate debt: |
|
|
|
|
|
|
|
|
Carrying amount |
|
$ |
200,445 |
|
|
$ |
200,404 |
|
Fair value |
|
$ |
203,161 |
|
|
$ |
205,705 |
|
Change in fair value from 1% increase in interest rate |
|
$ |
(1,446 |
) |
|
$ |
(1,929 |
) |
Change in fair value from 1% decrease in interest rate |
|
$ |
1,463 |
|
|
$ |
1,957 |
|
Interest rate swaps: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
150,000 |
|
|
$ |
150,000 |
|
Carrying amount and fair value |
|
$ |
(12,151 |
) |
|
$ |
(8,109 |
) |
Change in fair value from 1% increase in interest rate |
|
$ |
4,465 |
|
|
$ |
5,000 |
|
Change in fair value from 1% decrease in interest rate |
|
$ |
(4,609 |
) |
|
$ |
(5,181 |
) |
Foreign currency forward contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
166,994 |
|
|
$ |
142,638 |
|
Carrying amount and fair value |
|
$ |
(984 |
) |
|
$ |
(268 |
) |
Change in fair value from 10% appreciation of U.S. dollar |
|
$ |
(1,062 |
) |
|
$ |
(1,402 |
) |
Change in fair value from 10% depreciation of U.S. dollar |
|
$ |
1,298 |
|
|
$ |
1,714 |
|
Raw material commodity swaps: |
|
|
|
|
|
|
|
|
Notional amount (in metric tons of base metals) |
|
|
1,532 |
|
|
|
1,171 |
|
Carrying amount and fair value |
|
$ |
(463 |
) |
|
$ |
(1,499 |
) |
Change in fair value from 10% change in forward prices |
|
$ |
718 |
|
|
$ |
507 |
|
Precious metals forward contracts: |
|
|
|
|
|
|
|
|
Notional amount (in troy ounces) |
|
|
63,285 |
|
|
|
159,648 |
|
Carrying amount and fair value |
|
$ |
(24 |
) |
|
$ |
755 |
|
Change in fair value from 10% change in forward prices |
|
$ |
360 |
|
|
$ |
612 |
|
28
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Ferro is committed to maintaining disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the U.S. Securities and
Exchange Commissions rules and forms, and that such information is accumulated and communicated to
its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) of the Exchange Act, Ferro has carried out an evaluation, under
the supervision and with the participation of its management, including its Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure
controls and procedures. The evaluation examined those disclosure controls and procedures as of
March 31, 2008, the end of the period covered by this report. We have taken measures to improve our
internal controls and procedures; however, there has not been adequate time for us to conclude that
the material weakness in the Companys internal control over financial reporting described in our
Annual Report on Form 10-K for the year ended December 31, 2007, has been fully remediated.
Therefore, Ferros management, including its Chief Executive Officer and its Chief Financial
Officer, has concluded that, as of March 31, 2008, Ferros disclosure controls and procedures were
not effective.
Additional procedures were performed in order for management to conclude with reasonable
assurance that the Companys condensed consolidated financial statements contained in this
Quarterly Report on Form 10-Q present fairly, in all material respects, the Companys financial
position, results of operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
During the first quarter of 2008, there were no material changes in our internal controls or
in other factors that materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
29
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The information on legal proceedings contained in Note 9 to the condensed consolidated
financial statements is incorporated here by reference.
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.
Item 1A. Risk Factors
There are no material changes to the risk factors disclosed in the Companys Annual Report on
Form 10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The exhibits listed in the attached Exhibit Index are filed pursuant to Item 6 of Form 10-Q.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Date: May 6, 2008 |
FERRO CORPORATION
(Registrant)
|
|
|
/s/ James F. Kirsch
|
|
|
James F. Kirsch |
|
|
Chairman, President and Chief Executive Officer
(Principal Executive Officer) |
|
|
Date: May 6, 2008
|
|
|
|
|
|
|
|
|
/s/ Sallie B. Bailey
|
|
|
Sallie B. Bailey |
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
31
EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated here by reference to a
prior filing in accordance with Rule 12b-32 under the Securities and Exchange Act of 1934.
Exhibit:
3 |
|
Articles of Incorporation and by-laws |
|
3.1 |
|
Eleventh Amended Articles of Incorporation. (Reference is made to Exhibit 3(a) to Ferro
Corporations Annual Report on Form 10-K for the year ended December 31, 2003, which Exhibit
is incorporated here by reference.) |
|
3.2 |
|
Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro
Corporation filed December 28, 1994. (Reference is made to Exhibit 3(b) to Ferro Corporations
Annual Report on Form 10-K for the year ended December 31, 2003, which Exhibit is incorporated
here by reference.) |
|
3.3 |
|
Certificate of Amendment to the Eleventh Amended Articles of Incorporation of Ferro filed
June 19, 1998. (Reference is made to Exhibit 3(c) to Ferro Corporations Annual Report on Form
10-K for the year ended December 31, 2003, which Exhibit is incorporated here by reference.) |
|
3.4 |
|
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 Ferros Debt Securities issued and to be issued pursuant to an
Indenture between Ferro and J. P. Morgan Trust Company, National Association
(successor-in-interest to Chase Manhattan Trust Company, National Association) as Trustee, are
described in the Indenture, dated March 25, 1998. (Reference is made to Exhibit 4(b) to Ferro
Corporations Annual Report on Form 10-K for the year ended December 31, 2003, which Exhibit
is incorporated here by reference.) |
|
4.2 |
|
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. |
32
10 |
|
Material Contracts |
|
10.1 |
|
Purchase Agreement, dated as of April 1, 2008, among Ferro Color & Glass Corporation, Ferro
Pfanstiehl Laboratories, Inc. and Ferro Corporation. (Reference is made to Exhibit 10.1 to
Ferro Corporations Current Report on Form 8-K, filed April 7, 2008, which Exhibit is
incorporated here by reference.) |
|
10.2 |
|
Amended and Restated Purchase and Contribution Agreement, dated as of April 1, 2008, between
Ferro Corporation and Ferro Finance Corporation. (Reference is made to Exhibit 10.2 to Ferro
Corporations Current Report on Form 8-K, filed April 7, 2008, which Exhibit is incorporated
here by reference.) |
|
10.3 |
|
Second Amended and Restated Receivables Purchase Agreement, dated as of April 1, 2008, among
Ferro Finance Corporation, as Seller, and CAFCO, LLC, as the Investor, and Citibank, N.A., as
a Bank, and Citicorp North America, Inc., as the Agent, and Ferro Color & Glass Corporation
and Ferro Pfanstiehl Laboratories, Inc., as Originators, and Ferro Corporation, as Collection
Agent and Originator. (Reference is made to Exhibit 10.3 to Ferro Corporations Current Report
on Form 8-K, filed April 7, 2008, which Exhibit is incorporated here by reference.) |
|
10.4 |
|
Purchase Agreement, dated March 21, 2008, between Ferro (Holland) B.V. and Brix Houwelingen
Projecten XVIII B.V. (Reference is made to Exhibit 10.1 to Ferro Corporations Current Report
on Form 8-K, filed March 26, 2008, which Exhibit is incorporated here by reference.) |
|
31.1 |
|
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
|
31.2 |
|
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
|
32.1 |
|
Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350. |
|
32.2 |
|
Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350. |
33